Tracey Cheek posted an articleIs a Business Jet Lease Right for You? see more
NAFA member, Keith Hayes with PNC Aviation Finance discusses business jet leases.
Has the aircraft lease market changed since the Great Recession? What are the popular lease types available to business jet owners? AvBuyer spoke with PNC’s Keith Hayes to discuss how leases can benefit certain companies and individuals.
Keith Hayes began a lengthy career in the finance sector with GE Capital in 1985, having joined straight out of college. Starting as an internal auditor, he held several roles within the company transitioning into a credit role and then into a sales/finance role covering a multitude of asset types.
In 2004 he joined the GE Corporate Aircraft group as the National Sales Manager and has been in the aviation finance sector ever since. Today as the National Sales Manager for PNC Aviation Finance, he is well placed to offer insights into the Business Aviation finance market. He is based at the company’s Boise, Idaho offices.
AvBuyer spoke with Keith to discuss the types of leases commonly available to prospective business jet owners; trends in the aircraft lease market; and advice to buyers considering lease as an option for their next business jet purchase.
AvBuyer: How has the aircraft lease market developed/changed over the past few years? Do you foresee further change in the short- to medium-term?
Hayes: The biggest changes have taken place post-recession. Prior to the recession, a lot of aircraft were leased under 10- to 12-year leases with flexibility for the lessee to terminate early within years 4-6 of the lease.
Following the recession, when aircraft values began to plummet, lessees generally found they were ‘under water’ in their leases. Many had no choice but to continue to lease the airplanes until the end of the lease term before returning them to the lessor (the bank).
This was not a positive experience for the lessee or the lessor. Due to the challenges associated with selling the returned aircraft, many lessors stopped offering lease products altogether. Others, PNC Aviation Finance included, continued to offer the product and, now that aircraft values are stabilizing (along with the recent changes in the tax laws), lessors are seeing an uptick in lease activity.
Looking ahead, there are changes taking place in certain accounting rules coming into effect in 2019 and 2020 that will cause leasing to not be as advantageous for financial reporting purposes.
Among the changes is a requirement from the Financial Accounting Standards Board for organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, and to provide disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.
However, we believe aircraft leasing will continue to be a value-added structure for certain owners.
AvBuyer: We’re hearing various forecasts of continued growth in the new and used aircraft sales marketplace during 2019. Would you expect to see aircraft leasing influence the aircraft sales trends over the coming year? If so, how?
Hayes: I have always said that financing does not drive the behaviour of aircraft owner. The average aircraft owner changes their airplane every four-to-five years regardless of whether they paid cash, financed or leased their airplane.
Some would argue that when banking ‘became tight’ during the last recession, aircraft sales were impacted, but I question if this was truly a factor. Cash has been, and continues to be, the number one method of paying for an airplane.
But as the global economy continues to thrive, I anticipate our industry will continue to grow; as companies and wealthy individuals continue to have opportunities to deploy cash into high-return assets, they will elect to finance or lease as opposed to paying cash for a ‘non-earning’ asset. Meanwhile, the lease versus finance question typically is driven by the owner’s tax appetite or financial reporting needs, not simply the drive to buy or not buy.
AvBuyer: For those weighing-up whether a lease is right for them, what are the common lease options, and what type of aircraft owner is each tailored to?
Hayes: In short, there are two types of leases: A tax-oriented operating lease (in which the lessor owns the airplane for Federal Income Tax purposes); and a synthetic lease (in which the lessee owns the plane for Federal Income Tax purposes).
Typically, an owner may enter a synthetic lease for a variety of reasons, including deferral of state sales tax and/or financial reporting and off-balance sheet treatment. Under a synthetic lease, the lessee would have full availability of all tax benefits for Federal Income Tax purposes.
Meanwhile, an owner may enter a tax-oriented operating lease for the same benefits realized in a synthetic lease but, most likely, they would do so because they cannot fully utilize the tax benefits.
There are a number of reasons why this would be the case including their level of personal use, passive versus active income, carrying forward of net operating losses, and more. Under a tax-oriented operating lease, the tax benefits are ‘passed’ to the lessor, and the lessor in return offers a lower cost of funds to the lessee.
Commonly, these tax-oriented leases are structured with eight- to ten-year terms with early buy-out options at a point determined by the lessee.
AvBuyer: For those considering whether an aircraft lease is the route they want to take into aircraft ownership, what are the most important things for them to understand?
Hayes: There are a number of variables an owner would want to keep in the front of their minds when leasing an aircraft.
While the documentation process for a lease (versus that for a loan) is not overly complicated, there are certain conditions you want to make sure are ‘market’ ones, including the return provisions, usage provisions and reporting requirements.
Additionally, the inclusion of an early buyout in the lease is an option the lessor may or may not offer. It is up to the individual lessee and their specific requirements to decide if this option is important.
Also worth considering, some lessors have a tax appetite while others do not. The lessee should recognize a lower cost of funds which can be analysed through the early buy-out in exchange for passing the tax benefits to the lessor. If it appears the rate of return is equivalent to debt financing, it could mean the lessor has no tax appetite.
Lastly, in many states, sales tax is paid on the rentals via use tax (as opposed to upfront payment). This can result in a significant deferral and, in some cases, avoidance of sales tax altogether (i.e. if the lease is terminated at an early buyout point and the airplane is then sold, the use tax on the remaining rental is potentially avoided).
This article was originally published on AvBuyer on January 7, 2019.
Tracey Cheek posted an articleWhat to Ask When Your Aircraft Lease is Expiring see more
NAFA member, Steve Day, with Global Jet Capital, offers insights on what questions you should ask when your aircraft lease arrangement is coming to an end.
1. Should I stay in my current aircraft?
If you like your aircraft and it continues to fit into your business goals, it may be very easy to extend your lease to retain the same plane.
The advantages of sticking with your current aircraft are obvious including retaining the same staff and (likely) the same hangar space, no need for additional certifications, and no new maintenance requirements—the list goes on.
Not only that, you’ll probably be looking at minimal, if any, additional capital outlay as you move into the extended agreement. You may even be able to roll in some additional upgrades and improvements.
That adds to the peace of mind you’ll have when you stay with something that’s been working well for you.
A lease extension can also be a useful stop-gap measure if you’re not ready to transition. If you don’t have a plan in place or things are in a state of flux, a lease extension can help you find time to regroup.
Let’s assume you want to move into a new aircraft, but the model you want won’t be available until a year after your lease expires. A flexible financing partner will work with you to create terms that will accommodate your timeframe and move you into the new lease seamlessly.
2. How does my transition plan fit into my business goals?
Perhaps recent tax changes have made you take a closer look at your approach to aviation. Perhaps your current aircraft is no longer meeting your needs. Perhaps you’re expanding into new jurisdictions. There’s certainly no guarantee that your aircraft needs will be identical to what they were when you first signed a lease that’s due to expire soon. But change is rarely a simple proposition.
Larger aircraft don’t just come with a higher price tag—they also come with different operator certification requirements, maintenance needs, more expensive insurance and higher costs for hangar space.
Together, those new requirements can be a larger-than-estimated drain on cash flow and time.
Smaller aircraft, while typically less expensive, can create their own logistical struggles. Even changing where you’ll be keeping your aircraft can be a minefield. A holistic and proactive approach to transition goes a long way towards preventing budgetary surprises, and experienced operating lease providers can be a big help during this process.
3. Do I have a conceptual transition plan?
If the answer isn’t yes, you may be in for some turbulence. To leverage the flexibility advantages of leasing, a proactive approach to transition is key. If you don’t start planning early, especially if the aircraft you’re considering could take more than a year to deliver, you might be setting yourself up for problems as the end of the term draws near.
In the best case scenario, a prepared lessee can move from one aircraft into another with minimal issue and little to no overlap or gaps in lease terms.
In the worst case scenario, an unprepared lessee can find him or herself without an aircraft due to production availability of new aircraft, or difficulty finding the right plane—which can create huge logistical problems.
Alternatively, the unprepared lessee might find him or herself paying for, maintaining and managing two aircraft at once while the initial contract wraps up.
That’s why it’s generally a good idea to start making your transition plan 18 months before the end of the lease if you’re planning on leasing a new aircraft. If you’re planning on leasing a used aircraft, 6-12 months should be sufficient.
4. What obligations will I be responsible for as I move out of this lease?
Most lease obligations aren’t solely financial or limited to regular lease payments. Obligations to manage, insure, maintain and store the aircraft you’re leasing are important components of lease agreements, and can be a large component of the overall expenses.
In addition, the return conditions specified in the lease will come with its own obligations – specifically written to protect the expected value of the returned asset.
If you’re unprepared, you might find yourself blindsided, or underbudgeted as the lease term ends.
You’ll find that an experienced lessor should be flexible in order to maintain an ongoing relationship, even if it’s a pre-expiration move into a different aircraft. In such cases, it’s usually possible to amend or extend the existing contract as necessary.
Early termination accommodations also exist, and they don’t necessarily have to come with a hefty penalty. Speak directly with your lessor and clearly articulate your needs and concerns as you plan your transition to find out what may be possible for you.
5. What kind of obligations am I getting into if I transition to a new lease?
Not all contracts are created equal. Depending on the experience of the lessor and how the agreement is structured, your obligations may be reasonable—or they may be draconian. Lessors that are focused on the corporate aviation market, typically take the time to fully understand their customer’s needs.
They manage their business models with a long-term view. They’re much more likely to structure transactions that are truly win/win agreements.
Both financial and non-financial obligations (maintenance, operation, etc.) affect the expenses, so it’s important to fully understand what you’re in for with a new lease and plan accordingly.
If you’re looking for a flexible operating lease that meets your requirements with minimal bureaucracy, you’ll likely want to consider a partner that has the expertise and market presence that cultivates customized solutions for its clients.
For more information, visit Global Jet Capital.
This article was originally published by AvBuyer on May 9, 2018.