aviation insurance

  • NAFA Administrator posted an article
    7 Avoidable Mistakes in Acquiring a Bizjet see more

    NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, LLP, discusses mistakes to avoid when acquiring a private jet aircraft.  

    Acquiring a private jet aircraft is fraught with the potential to make expensive mistakes. Yet, a qualified aviation team can help a purchaser achieve optimal results by avoiding these seven missteps:

    GOING IT ALONE

    Assembling the right aviation team admittedly entails some cost and initial effort. But most purchasers quickly realize that buying a jet is not like buying a car, real estate, or other assets. Rather, a jet purchase or lease is complex and requires the assistance of aviation experts who excel in the subject matter and interact seamlessly on a deliberate closing schedule. Tax-intensive, cross-border, and novel purchases may require additional expertise beyond the core team members described below.

    Aircraft broker. Purchasers buy aircraft solo, and that can work out. However, a purchaser might suffer buyer’s remorse or experience negative outcomes such as unnecessarily incurring taxes on the purchase. A skilled broker focuses on the purchaser’s needs and wants, knows the “market,” identifies the best available aircraft for the purchaser, and negotiates business and other terms with the team.

    Consultants and pilots. Various consultants perform visual and record inspections, appraise aircraft, supervise pre-buy inspections, organize flight departments (Part 91-private aircraft operations), provide insights into choosing Part 135 managers (commercial/charter use), and may provide broker services. Pilots may support, perform, or lead on some tasks but must collaborate with the other team members.

    Aviation lawyer. Aviation law is challenging, so non-aviation counsel should not act alone in aircraft purchases. Instead, they should hire an experienced aviation legal team that understands and regularly structures acquisitions amid conflicting tax, regulatory, liability, risk management, choice of owner entity, and other complex rules. They must also regularly draft and negotiate aviation-specific agreements and, importantly, have even broader financing expertise than just aircraft loans and leases.

    Aviation insurance broker. The aviation insurance market is no place for a generalist broker. Aviation insurance brokers know how to navigate aircraft insurance markets and negotiate complex policy terms. 

    Escrow agent and FAA counsel. With few exceptions, purchasers and sellers should use escrow agents, comprised of escrow companies and FAA lawyers. These agents hold and disburse funds, collect and file documents at the FAA, register interests and parties on the International Registry, and may issue title insurance. FAA counsel can also offer legal advice, write title opinions, and draft multiple documents.

    NOT SELECTING THE RIGHT AIRCRAFT 

    Despite the unquestionable benefits of owning or leasing a whole jet aircraft, notably during Covid-19, a prospective purchaser should first rule out other workable options to fly privately, such as chartering or buying a fractional share of a jet. After that, a purchaser should concentrate first on the aircraft/user’s “mission” before deciding on which new or used whole aircraft to buy or lease.

    Generally, the term “mission” is aviation speak for a purchaser’s effort to identify aircraft that will serve all or at least most of the private travel the purchaser envisions. When completed, the mission profile informs the search by purchasers and their brokers in today’s active market with numerous jet makes and models for sale.

    NOT PLANNING FOR TAXES BEFORE SIGNING AN LOI

    Private jets attract the interest of tax authorities at the federal, state, and local levels. Before signing a letter of intent () to acquire a jet, if possible, a purchaser should use accountants and lawyers to develop tax minimization strategies and structures under federal tax law, including the use of bonus depreciation and other business deductions, state sales/use tax laws, and local property laws. Solid planning may be slower than purchasers expect but failing to do so can wreak tax and financial havoc. 

    NOT CREATING A LEGAL OR STRONG AIRCRAFT OWNERSHIP/OPERATING STRUCTURE

    A purchaser should determine the person or entity, often an , that will own the jet, and then structure the operations of the jet in compliance with the s. An owner that violates the s invites FAA scrutiny and, sometimes, enforcement litigation by the FAA or the U.S. Department of Justice, easily causing owners to incur sky-high legal fees. 

    One of the most common problems stems from illegal charters, which take various forms. One rampant violation occurs when Part 91 operators lease their aircraft to many unrelated travelers, which is really a fake charter operation. Another violation often occurs when an LLC with no business enterprise operates the aircraft it owns or leases. The FAA views these flight operations as creating an illegal “flight department company.” When structured improperly, neither the leasing nor the LLC operator (allegedly) holds mandatory FAA certifications as commercial operators under the FARs. 

    Owners also frequently believe the same  provides a liability shield for its owners (members) from third-party liability claims. However, in general, the LLC will not protect the owners from any lawsuit or liability that may ensue from illegal aircraft flight operations or violations of federal or state laws. Although insurance helps mitigate this risk, it is a false premise that insurance suffices or will respond to alleged liability. More risk mitigation structuring and financial exposure analysis can pay off.

    SKIPPING AIRCRAFT INSPECTIONS

    Although I have seen prospective purchasers bypass independent inspections in buying a new or used aircraft, that omission has led to surprises or disputes without an adequate legal remedy. Purchasers typically arrange a visual inspection of a jet and a review of its records.

    If all goes well, an agreed maintenance facility then performs a pre-buy inspection, an in-depth aircraft checkup, and delivers an inspection report to the parties. This report identifies discrepancies that a seller usually fixes before the purchaser accepts or rejects the jet and closes the purchase. Leaving out this step is at best unwise. Beware—finding a facility and completing an inspection may push beyond a closing schedule. 

    NOT EXPLORING AIRCRAFT MANAGEMENT ARRANGEMENTS EARLY AND OFTEN

    Aircraft management companies hold the life of jet owners and passengers in their hands. These companies differ significantly in size, experience, and services. It is critical to conduct due diligence on at least two companies covering safety, service, transparency, integrity, pricing, and FAA status. Choosing based solely on the lowest cost or a referral may needlessly raise personal, asset, and operational risks. 

    A purchaser that does not consult a manager during an initial jet inspection may forfeit valuable hands-on knowledge about the operations and maintenance of the subject aircraft. In contract negotiations, a purchaser, with certain team members, should secure balanced terms in such key areas as safety practices, including Covid-19 protocols, expense controls, travel scheduling, and services provided. 

    NOT CONSIDERING FINANCING BEFORE SIGNING A PURCHASE AGREEMENT

    Even if a purchaser intends to buy a jet with cash, it is still worthwhile to inquire about leasing or borrowing to finance a jet acquisition before signing a purchase agreement. Most purchasers earn far more from their investments or businesses than the current very low rates. It is ideal to close a lease or loan at the purchase date, but either financing can occur later. Using a non-aviation lender or lessor is feasible, but may result in higher transaction fees, slower negotiations, and sub-optimal terms. 

    CONCLUSION

    With the support of an experienced aviation team, a purchaser can complete a simple or complicated acquisition of a business jet smoothly and correctly. As aircraft deal activity rises amid Covid-19 safety concerns, it is worth understanding where mistakes can occur and how to prevent them.

    This article was originally published by AINonline on November 13, 2020.

  • NAFA Administrator posted an article
    NAFA Webinar: Continuing Rise in Insurance Prices see more

    Continuing Rise in Insurance Prices 

    Meet our Moderator and Panelists:

    Gil Wolin, Publisher, Business Aviation Advisor Magazine.

    Ed Bolen, President and CEO, NBAA (National Business Aviation Association) 

    Pete Bunce, President and CEO, GAMA (General Aviation Manufacturers Association)

    Tim Obitts, President & CEO, NATA (National Air Transportation Association)

    Mark Baker, President, AOPA (Aircraft Owners and Pilots Association)

    This NAFA webinar originally aired on October 15, 2020.

  • NAFA Administrator posted an article
    Aircraft Insurance Considerations in a Tightening Insurance Market see more

    NAFA member, Amanda Applegate, Partner with Aerlex Law Group, discusses aircraft insurance claims in a tightening insurance market.

    The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.

    As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.

    It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

    There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.

    As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

    The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.

    When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.

    In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.

    This article was originally published in BusinessAir Magazine, March 2020, Volume 30, No. 3 on May 12, 2020.

  • Tracey Cheek posted an article
    Hot Topics for Bizav in 2020 see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares the top-five challenges in business aviation for 2020.  

    The U.S. finished 2019 at the top of the world of business aircraft transactions and it is well-positioned to continue its leadership this year. Of course, every year presents important challenges and there are five that I believe will affect many aircraft owners, lessors, lenders, managers, insurance and buy/sell brokers, technical consultants, and other industry participants in 2020. Here are my top-five challenges for this year:

    ETHICAL BUSINESS TRANSACTIONS

    The International Aircraft Dealers Association (IADA) expects its member brokers and other aircraft transaction professionals to abide by professional standards and ethics rules under IADA’s code of ethics. To put its standards into practice, among other steps, IADA admits new members under an accreditation process administered by an independent outside firm.

    IADA is far from alone in its important efforts. By issuing its statement regarding ethical conduct, the National Air Transportation Association (NATA) strongly asserts that every member company should use these guidelines to enforce high levels of ethical behavior, safety, integrity, accountability, and respect for others. NATA urges its diverse general aviation members to use these guidelines to enforce compliance and deter wrongdoing. Further, NBAA published ethical business aviation transactions guidelines to establish core ethics and business conduct standards in transactions between buyers and sellers of business aircraft products and services.

    It’s no secret that some industry participants believe others act outside such ethical guidelines. Still, each person has a new opportunity in 2020 to renew his or her efforts to play by the applicable rules urged on them by their respective associations regardless of inconsistent or questionable behavior of others.

    ILLEGAL CHARTERS

    After seeing the FAA take multiple actions against illegal charters in 2019, you might conclude that illegal charter operations will be unstoppable in 2020. Not so.

    In my experience, most charter and on-demand flight services operate legally, will happily demonstrate their capabilities, and explain how they comply with the FARs. Unfortunately, other operators test the limits or flat out operate illegally in violation of the FARs.

    The FAA focuses on safety and enforces the FARs. Two big buckets of rules in the FARs, among others, cover legal operation of business aircraft: private flight operations under FAR Part 91 and commercial or on-demand flight operations under FAR Part 135.

    A Part 135-compliant operator must obey stringent operational, training, and other rules designed to assure passenger safety. Part 91, not so much; an operator has fewer requirements under the FARs in part because they do not, if in compliance, transport persons or property for compensation or hire as permitted for certified operators under Part 135.

    Anyone, including prospective passengers, can help curb illegal flight operations in 2020 by doing modest diligence on charter operations you observe or might use. For example, as a prospective passenger, you can potentially identify violators, reporting your concerns to the FAA and taking your charter business elsewhere. NATA’s website posts a hotline telephone number for customers or others to report violators.

    One tell-tale sign of a potential problem might appear if the price of a flight is much lower than one provided by another operator. Although that may be good news for your wallet, it might also reveal an illegal operation that lowers its prices to edge out operators that incur higher costs to comply with FAR Part 135.

    If a charter operator tells you, or you discover, that you, and not the charter operator, will exercise “operational control” of the flight, that is a red flag warning of a potential illegal charter operation under the FARs. Operational control means you will be responsible for the initiation, conduct, and termination of the flight (14 CFR 1.1), a position that puts you in the personal liability hotseat should certain things go wrong with the flight.

    For more, NATA and NBAA offer valuable materials on illegal charter operations.

    Although a bit different than illegal charter, I have seen and discussed with many colleagues illegal private operations under Part 91 categorically called “flight department companies.” Often taking the form of limited liability companies (LLCs), LLC members sometimes erroneously believe that the LLC, which has no business enterprise, can operate its aircraft and receive “compensation” from family, friends, associates, or others that “borrow” or “use” the LLC’s aircraft.

    Compensation is a very broad term in the FAA’s view and occurs in many ways, including when passengers share expenses or reimburse the LLC for aircraft operating costs. With very limited exceptions, these flight operations are illegal, prohibited under the FARs, and subject to FAA enforcement action.

    Expect both illegal charter and flight department company operations to be on the FAA’s radar in 2020, likely more so than you have ever seen before.

    BONUS DEPRECIATION AND OTHER TAX PLANNING

    A buyer committed to purchasing an aircraft should make a New Year’s resolution to analyze primary tax aspects of owning, operating, and storing the aircraft, and tax minimization structures, ideally, before signing a letter of intent to buy an aircraft. This analysis should at least cover federal income, state sales/use, and local property taxes to calculate the total tax costs of, or potential tax write-offs with respect to, acquisition and ownership of an aircraft.

    Typically, clients start with questions on claiming 100 percent “bonus depreciation,” which continues to be available in 2020. For this year, the Tax Cuts and Jobs Act of 2017 allows aircraft owners, with limitations for personal use, temporarily to take 100 percent bonus depreciation deductions on new and preowned aircraft against gross income if the taxpayer uses the aircraft in its trade or business or for production of income. (For more, see AINsight: Maximize Aircraft Bonus Depreciation in 2019 and AINsight: 100% Depreciation and Aircraft Personal Use.)

    Early in the buying experience, many buyers also express an understandable aversion to paying any property, sales, or use tax—and often believe they can avoid these taxes entirely. It is imperative to consider recent changes in law and tax rates that came into effect on January 1 and how to eliminate or reduce these taxes.

    To advance your planning, determine the expected storage/hangar location(s), project the use outside of the aircraft’s home state, and consider various structures to lease your aircraft. Also, determine if or when local tax law imposes an annual property tax on the aircraft for possible tax planning relating to the location of your aircraft on that date. Using all this information, talk with your advisors for structures and strategies that may defer, allocate, eliminate, or otherwise minimize the property, sales, and use taxes.

    Once a purchase closes, always keep accurate, clear, complete, and contemporaneous records on relevant tax-oriented facts for all federal, state, and local tax authorities. Don’t wait for an audit letter to update your books.

    ADS-B OUT PRIVACY

    The ADS-B technology mandate, which became effective January 1, has great merit for safety, flight communications accuracy, and other reasons.

    However, private third-parties can—using inexpensive, commercially available receivers—pick up the aircraft’s broadcast of its unique ICAO address and thereby capture information directly from ADS-B transmissions that an aircraft operator might prefer to remain confidential. Such information includes an aircraft’s identification, altitude, GPS positional data, and velocity.

    To address these privacy concerns, ADS-B operators should quickly evaluate and, if using 1090-MHz ADS-B equipment, decide whether to participate in the FAA’s Privacy ICAO Address (PIA) program, starting this month. In December, the FAA established an application process for operators to use and periodically change temporary ICAO aircraft addresses that aren’t tied to an operator in the Civil Aviation Registry (CAR).

    The PIA program is limited to U.S. domestic operations to avoid potential conflicts with other ICAO member states that currently do not offer this capability. That means privacy breaches might still occur on flight operations outside the U.S.

    The PIA program differs from the FAA’s new Limiting Aircraft Data Displayed (LADD) program. Operators that do not wish to allow the FAA to share aircraft data the FAA receives, including tail number, call sign, and flight number, can submit LADD requests via FAA’s dedicated LADD website. The LADD program, which replaces the Block Aircraft Registry Request (BARR) program, does not impact the ADS-B broadcast data, which, as noted, transmits information directly to capable receivers.

    For maximum privacy domestically in the U.S., sign up for both the PIA and LADD programs.

    INSURANCE TURBULENCE FOR OWNERS, OPERATORS, LESSORS, AND LENDERS 

    If you plan to buy or renew insurance coverage in 2020, buckle up. Plagued by years of huge payouts and financial losses, some insurers have exited the market, resulting in reduced liability insurance capacity for all aircraft and much higher premiums (anecdotally, 20 percent to up to 300 percent of 2019 rates).

    The best operators should still be able to maintain or even improve coverage in 2020 at higher premiums provided their insurers agree that the customers have a stellar safety record, outstanding training programs, and experienced pilots with high hours in the type of aircraft insured by the carrier. The story is different for single-pilot, owner/operated aircraft or new pilots who might not be able to find insurance at any price or, if insurance is available, must accept reduced liability limits at higher premiums than in 2019.

    Lenders and lessors might have a different predicament. From transactional activity in 2019, it seems financiers generally required and successfully obtained yesteryear’s high liability insurance limits. In 2020, lenders and lessors may have to ease back on their demands for such high liability insurance levels and concentrate more on property damage coverage.

    In supporting this easing, lenders and lessors can point to a 2018 federal law amendment that might facilitate approving transactions with reduced liability insurance limits. Under 49 U.S. Code § 44112, Limitation of liability, Congress provided a preemptory shield of business aircraft lessors and lenders from personal injury and property damage liability if they do not have possession or control over the aircraft at the time of the accident.

    Customers should contact specialized aviation insurance brokers well before signing a purchase agreement in 2020, to allow much more time than the week before closing to find insurance with the best terms and lowest cost. (For more, see AINsight: Limiting Risk as Liability Insurance Tightens.)

    CONCLUSION 

    Amid the many challenges that business aviation will face in 2020, rather than debate the topics above for long, it is more important to take action now and throughout the new decade for the benefit of clients, customers, and colleagues involved in the business aviation industry. Will you take action and suggest others do too?

    This article was originally published by AINonline on January 10, 2020.

     

  • Tracey Cheek posted an article
    Limiting Risk as Liability Insurance Tightens see more

    NAFA member, David G. Mayer, Partner with Shackelford, Bowen, McKinley & Norton, LLP, shares what you need to know about liability insurance.

    If you think you can call your insurance broker and secure aircraft insurance just days before you close an aircraft purchase or renew liability coverage, think again. Insurance companies have changed the underwriting game after more than a decade of losing money.

    In the last two years, many underwriters have exited aviation insurance while the remaining carriers have tightened up underwriting standards, reduced coverage limits, and increased premiums for liability coverage. These changes have impacted nearly all insureds in some fashion, including many receiving invoices with substantial premium increases. Worse still, owner-pilot and single-pilot aircraft have nearly run out of gas in finding adequate or any liability insurance coverage.

    This tightening aircraft insurance market requires aircraft owners and operators to allow significant lead time to search for insurance when buying an aircraft or renewing existing policies. In addition, legal entity structuring and contractual agreements designed to mitigate the risk of personal liability have become more important as insurance underwriters clamp down.

    Liability insurance typically applies to, and is often purchased by, an aircraft owner or operator as the “named insured.” The insurance indemnifies, or pays for, liability of the named insured and, when included in policies, other parties, identified as “additional insureds,” that have an interest in the aircraft or related liability risks. The obligation of the insurer to pay for potential losses is referred to generally as the “duty to indemnify” insureds. The insurance indemnifies for bodily injury, including death, incurred by someone other than the named or additional insured. Coverage should respond when claims arise out of the ownership, maintenance or use of the insured aircraft. For example, liability coverage should respond to a crash on takeoff or a collision of two aircraft on an airport ramp.

    Problems Illustrated

    To help put market challenges in context, consider two hypothetical situations.

    In the first case, a flight department operates for Big Co., a corporation with significant business operations that is owned privately by one family (Big Co.). The flight department employs professional pilots. Big Co. operates its aircraft under FAR Part 91. The fleet consists of three large cabin and three light jets. One pilot usually operates the light jets.

    Big Co. carried $300 million per occurrence in liability coverage in 2018 but at renewal in 2019, Big Co. could only obtain $100 million per occurrence for the light jets. Big Co. kept the high limits on the large cabin aircraft but absorbed a 25 percent premium increase.

    The carrier informed Big Co. that the light jets dragged down the original insurance limits and warned Big Co. that, in the next renewal into 2021, the underwriter may be able to insure the light jets only if Big Co. operates them with two pilots.

    In the second case, a prospective aircraft owner, an ultra-high-net-worth individual (UHNWI), formed an LLC of which HW is the sole member/owner. The UHNWI client signed an aircraft purchase agreement to buy a $5 million preowned turboprop from the manufacturer but could only secure $1 million of liability coverage at a surprisingly high premium. When the client agreed with the underwriter that a professional pilot would fly the aircraft for a year while the client developed skills and knowledge on how to operate the aircraft, the insurer reluctantly increased coverage to $5 million. The client originally planned to buy 10 times that coverage.

    Strategies

    As the aviation insurance market tightens, many, but not all, owners and operators seeking coverage will either pay higher premiums or be unable to purchase adequate or any coverage. In this new reality, potential owners or operators should engage, or continue to use, a specialized aviation insurance broker (not general lines brokers) to assist in purchasing, modifying or renewing coverage.

    Waiting too long to transact with carriers is hazardous in today’s market as illustrated in the Big Co. and UHNWIsituations, as underwriters seem to be circumspect about accepting or renewing certain underwriting risks, especially for single pilot aircraft. The broker should act as a trusted advisor, exhibit deep knowledge of underwriter capacity and focus quickly on policy provisions that exist or must be modified to optimize protection of the particular aircraft owner or operator.

    In addition to an insurer’s “duty to indemnify” discussed above, insurers also have a “duty to defend” their insureds against liability claims for which potential coverage may arise under a liability insurance policy. The duty to defend is significant, financially and legally, for an insured. Even a small incident can run up significant legal fees regardless of the insurance coverage limits or disposition of the claim.

    For this reason, even low limit liability policy coverage may have significant value to an insured when the insurer and not the insured foots the legal bill.

    However, it’s critical to know when the insurance company can stop paying legal fees, which varies based on the circumstances, policy terms and state law. At that point, the insurance company may be out but the burden to pay legal bills may continue for an owner or operator such as Big Co. or the UHNWI client.

    Legal Steps To Mitigate Liability Risk

    For insureds facing payment demands for successful claims in excess of policy limits, claimants may, and will almost certainly attempt to, overcome legal barriers so they can tap into an owner’s or operator’s personal assets. However, certain structures or contractual strategies may mitigate risk for owners and operators.

    Choice of the Right Owner/Operator Entity. Deeply rooted in state law, various types of entities, if properly structured and managed, can mitigate personal liability of aircraft owners and operators, including certain LLCs, corporations and trusts.

    • LLCs. Private aircraft owners widely believe that LLCs that have no function other than to own their aircraft will shield them from personal liability. In the UHNWI client’s case, they are the sole LLC member. Claimants will almost certainly sue the UHNWI and the LLC and, with a money judgment in hand, seek to pierce the LLC veil and force the UHNWI personally to pay for damages in excess of insurance coverage. This risk is particularly acute if the UHNWI exercises operational control of the aircraft or if liability arises concurrently with a violation of the FARs (see “AINsight: Piercing the Aircraft LLC Veil”). Variations on LLC structures and proper legal management of the LLC company might reinforce its shield against a claimant.
    • Corporations. In the Big Co. example, Big Co. is a corporation, which like other corporations, is designed under state law to shield its shareholders from third party claims against Big Co. However, Big Co., as the aircraft owner, might still be liable for claims in excess of insurance. And the payment by Big Co. itself could, of course, reduce the value of Big Co. to the family that owns it. Placing aircraft in an affiliated company with a lower shareholder value might provide more protection for Big Co. itself and preserve more of the net worth of the family owners.
    • Trusts. Three types of trusts deserve mention, two of which might provide some protection against liability claims. A “statutory trust,” which is a creature of state statutes, protects beneficial owners from liability like shareholders of a corporation. An “irrevocable trust,” often created for estate planning and tax purposes, might protect its beneficiaries from claims because the beneficiary does not own, and claimants should not therefore be able to access, the trust assets as a result of the beneficiary’s liability. A “grantor trust,” often used for compliance with the FARs or asset management, is a pure “pass-through entity” for a beneficiary and is very unlikely to afford any protection to the beneficiary from third-party claims.

    Operate under Part 135. In both examples of Big Co. and the UHNWI client, the owners operate under Part 91 where each of them maintains “operational control” under the FARs. As such, they have direct responsibility for the flights and potential liability for their actions as operators. By contrast, if Big Co. or the UHNWI hires a Part 135 on demand air carrier, the air carrier exercises operational control and thereby takes responsibility for liability arising from the flight’s initiation, conduct, and termination under its air operator certificate.

    Although Big Co. might mitigate its risk of liability by hiring a Part 135 operator, the UHNWI intends to fly his or her own aircraft under Part 91 only. The UHNWI, therefore, needs to look even more closely at other structures to protect themselves against liability in excess of insurance limits, assuming insurance is even available.

    By hiring a Part 135 operator, Big Co. can also access the fleet insurance policy of the operator with more comprehensive coverage including acceptable liability limits. Before signing on to the fleet coverage, Big Co. should investigate whether Big Co. can separately procure superior insurance.

    Contractual Indemnification and Waivers. If an owner or operator does not hire a Part 135 operator or cannot purchase adequate liability insurance, the owner or operator can try to spread risk to other potential claimants by obtaining contractual indemnities from them that connects to that party’s insurance.

    To make this work, the party that indemnifies the owner or operator, such as the UHNWI or Big Co., must modify that party’s insurance policy to obtain a blanket contractual liability coverage through and with the approval of the underwriter—not an easy task.

    Even if the insurance company rejects contractual liability inclusion, an insured can still reduce exposure by asking third parties to waive their rights and claims against the insured in selected circumstances. For example, the UHNWI might try to obtain a liability waiver from their passengers or fuel suppliers (assuming the UHNWI’s compliance with the FARs).

    Conclusion

    In today’s aviation insurance market, underwriters have hit the brakes on issuing cheap and unprofitable aircraft insurance policies. No longer can owners and operators wait until the last moment before aircraft delivery or a renewal date to place, renew or modify aircraft insurance. Quite to the contrary, owners and operators should continuously monitor insurance placement, legal structuring and contractual negotiations to mitigate risk or allocate liability among appropriate parties.

    Many aspects of private aviation transactions benefit from using industry experts to guide owners and operators. It is clear that insurance, regulatory, and transaction expertise in the current insurance market is not optional.

    This article was originally published by AINonline on November 8, 2019.

  • Tracey Cheek posted an article
    Aircraft Insurance Considerations In A Tightening Insurance Market see more

    NAFA member Amanda Applegate, Partner with Aerlex Law Group, discusses what to consider when deciding on aviation insurance coverage.

    The recent uptick in insurance claims in the commercial airline world and in general aviation have caused a tightening of the aviation insurance market. As a result, many of my clients are seeing an increase in insurance premiums, limitations on conditions previously granted, and in some cases are unable to obtain the amount of liability coverage they would like to procure.

    As a result of the price increases, some of my clients have been seeking alternative insurance for their aircraft. However, as with all insurance, not all insurance providers and policies are the same. It is important for owners to identify an aviation insurance broker who can explain the different types of coverage available and the exclusions that may limit that coverage. Recently my client was comparing two policies and focusing on the annual premium instead of what amounts and types of coverage were provided for the annual premium. It turned out that certain amounts of coverage under the liability policies were very different, thus reinforcing the need to focus not just on the annual premium when comparing policies.

    It is important to find one qualified broker and allow that broker to canvass the market. It is bad practice to have multiple brokers shopping the market for coverage for the same aircraft. In fact, it may make it impossible for any broker to obtain quotations or binding coverage.

    There is a rating system for insurers and it is important for owners to know and understand that rating system. The A.M. Best rating reflects an insurance company’s financial strength and its ability to meet contractual obligations. The rating categories range from A++ to F (in liquidation). Providers with less than an “A-” Best rating generally should not be considered, and many established brokers will not offer insurance with a lower rating. Owners should also know and understand what exclusions apply to the insurance contract.

    As is the case with all insurance policies, it is important to have the coverage you need when you need it. Coverage in aviation policies may vary if the aircraft is modified, flight crew qualifications change, normal routes of travel are changed, or travel outside the United States takes place. Before changing flight crews, modifying training programs or traveling outside the country, be sure to check the policy and check with your broker. There have been too many cases where a policy was not in effect due to a change in business practices or travel areas.

    The basic types of aviation insurance coverage are physical damage to the aircraft (hull insurance) and aircraft liability insurance. Hull insurance provides for payment to the owner of the aircraft for physical loss of or damage to the aircraft, including engines, propellers, instruments and equipment usually and ordinarily attached to the aircraft. Liability insurance covers the liability to others for bodily injury and property damage resulting from the ownership or use of the aircraft. Most liability policies offer coverage for the defense of lawsuits brought against the insured resulting from a covered peril, even if the suit is groundless. The amount of liability coverage, including any deductible, will depend on the owner’s risk tolerance and factors such as the number of passenger seats in the aircraft, average passenger load, passenger profile, number of pilots, pilot qualifications and any umbrella policy.

    When owning or operating an aircraft, the aircraft owner/operator often enters into agreements related to the aircraft, including, but not limited to, lender documents, time share agreements, dry leases, pilot services agreements, management services agreements and hangar agreements. It is important to understand the insurance requirements under all of these agreements and prior to execution, the agreements should be reviewed and approved by the insurance provider to make sure that there will not be an issue with any claim as a result of the agreement executed for the ancillary services.

    In a tightening insurance market, it is understandable that an aircraft owner/operator would focus primarily on premium costs when selecting aviation insurance. However, in the long run, an aircraft owner/operator would be better served obtaining the best available policy with appropriate liability limits, and fully understanding the terms and exclusions of the policy, rather than waiting until after an occurrence to focus on such details- by then it may be too late.

    This article was originally published by Aerlex Law Group in BusinessAir Magazine, the Latest, on October 16, 2019.

  • Tracey Cheek posted an article
    Wings Insurance Joins National Aircraft Finance Association see more

    FOR IMMEDIATE RELEASE

    EDGEWATER, Md. – Nov. 11, 2019 – National Aircraft Finance Association (NAFA) is pleased to announce that Wings Insurance has recently joined its professional network of aviation service providers. 

    “NAFA members form a network of aviation finance services who diligently and competently operate with integrity and objectivity throughout the world. We’re excited to welcome Wings to our growing organization as we head to our 50th anniversary,” said Jim Blessing, president of NAFA.

    Wings Insurance is one of the largest aviation risks-only insurance brokers in the country, maintaining five office locations in the USA (Daytona Beach, Cleveland, Minneapolis, Chicago and Denver) and a customer base of over 2500 clients. The company’s aviation insurance reach encompasses every state in the USA along with global insurance placements in most EU, Middle East and Asian locales.

    Wings Insurance began in 1984, specializing in aviation insurance on a regional level. Since inception, the business has experienced a steady rate of growth, and almost 35 years later they offer global insurance solutions through a world-wide network of solution providers with over 100 years of combined aviation insurance experience.

    With their hands-on background in both the aviation and insurance industries, Wings has the resources to help their clients make informed decisions, whether it involves purchasing, financing, tax, legal, transitions or recurrent training. The company aims to provide the best coverages at the lowest price point available and solidify long-term partnerships through responsive customer service, creativity, and integrity. Wings is also one of only three International Aircraft Dealers Association (IADA) endorsed insurance brokerage firms. 

    Much like NAFA, Wings Insurance is dedicated to the highest quality of service to their clients and business associates – delivered with a sense of friendliness and individual pride. Wings and NAFA are committed to fostering industry knowledge and leading-edge technology throughout the aviation industry.

    For more information about Wings Insurance, visit nafa.aero/companies/wings-insurance.

    About NAFA:  

    The National Aircraft Finance Association (NAFA) is a non-profit corporation dedicated to promoting the general welfare of individuals and organizations providing aircraft financing and loans secured by aircraft; to improving the industry's service to the public; and to providing our members with a forum for education and the sharing of information and knowledge to encourage the financing, leasing and insuring of general aviation aircraft. For more information about NAFA, visit NAFA.aero.

  • Tracey Cheek posted an article
    Aircraft Insurance Trends Upward - “A change is gonna come…” see more

    Competition among underwriters has kept aviation insurance rates low for more than a decade – unsustainably low. That’s why those good times have come to an end, resulting in fewer insurers, tighter underwriting standards, and more scrutiny of pilot experience and training – creating today’s hard market with increased rates.

    But that’s history. What’s in the cards for 2020 – and beyond – and what can you do to hold the line on increased overhead cost?

    Stephen P. Johns, LL Johns Aviation Insurance, and John Brogan, USAIG president, discuss the market and give you some helpful advice in Aircraft Insurance Trends Upward.

    When there’s more to be said than space and copy deadlines allow, you can rely on the Business Aviation Advisor “Above and Beyond” podcast series to get you the information you need, enabling you to make the most of your aviation investments.

    Thanks for reading – and listening!

    This article was originally published by Business Aviation Advisor on October 29, 2019.

  • Tracey Cheek posted an article
    Aircraft Insurance Rates Take Off: Upward Trend in 2018, First in 16 Years see more

    NAFA member Stephen P. Johns, CIC, President of LL Johns Aviation Insurance, discusses the upward trend in aircraft insurance rates.

    In early 2018, most buyers began hearing that their aircraft insurance rates would be increasing for the first time in years. Rate increases of 3-5% for operators with clean loss records were common, and 15% for those who’d had claims. By the end of 2018, claims-free operators were seeing 10-15% rate increases, and those with claims history even higher.

    What Precipitated the Rise?

    After some upward movement in 2000-2001, the events of 9/11 had a significant impact on rates, especially on war-risk pricing and availability. One business jet operator watched premiums rise from $59,000 in December 2000 to more than $113,000 in December 2002. 

    By early 2003, rates began to plateau and then trend downward.  For much of the aviation industry, the ensuing “soft market” – rate reductions and broadening of coverages – continued uninterrupted for almost 16 years.

    From 2005 through 2010, the number of insurers providing aviation insurance in the U.S. grew from 9 to more than 20. These new entrants were not new to the insurance business – most were sizeable companies electing to enter the aviation segment. As new and longer-standing aviation insurers scrambled to gain and maintain market-share, rates fell, limits increased, contract language broadened, and underwriting disciplines relaxed.  

    Why the excess capacity in the aviation insurance market during the last decade? Is it the faltering economy and stock market that caused investors seeking a safe haven to infuse capital in the market? Is it that better technology and improved safety systems have resulted in safer operations and reduced claims?    

    Whatever the reasons, rates were reduced to artificially low levels, unsustainable over time. In 2018, six reinsurance companies and a number of underwriting companies pulled out of the market. Those remaining are consistently seeking rate increases, limit reductions, and tightening of underwriting standards.

    And it’s not only the rates that are changing. Underwriters also are becoming more judicious with limits offered and other policy provisions. Since it’s now harder to hire and retain pilots, underwriters are giving more scrutiny to pilot experience and training.  There’s a move back toward the “12 month motion based simulator” training requirements that were non-negotiable in the 80s and 90s.

    What Can You Expect in 2019?

    The hard market will remain and rates will continue to increase for most operators, at the rate of 15% or more. The potential loss of market share will begin to test the resolve of the insurance companies and determine whether these increases will continue throughout the year.   

    Back to that operator whose premium nearly doubled from 2000 to 2002. While he’d benefited from the “soft market,” by December 2018, he was paying less than $44,000 in premium for the same coverage limits. If this aircraft operator’s rate increases by the expected 15%, he still will be at only $50,600, approximately 15% below the rate level he paid in 2000.

    What Can You Do? 

    Even top flight departments with no claims should expect some upward movement in rates, so budget accordingly. Particularly if your operation has a loss history, start the renewal process early – about 120 days before policy expiration – providing updated information on the aircraft, pilot hours and training, and evidence of the safety and professionalism of your operation. This gives your broker time to approach new markets on your behalf, or to suggest you stay long-term with one underwriter, as there are costs other than the premium to consider.  

    As Colin Powell once said, “Bad news isn’t wine. It doesn’t get better with age.” An experienced and trusted broker with good underwriter relationships will help you navigate the process. 

    Finally, keep the increases in perspective. While no buyer likes to see prices going up, it’s remarkable that aircraft insurance in 2019 may cost less than it did in 2000!

    This article was originally published by Business Aviation Advisor on March 1, 2019.

  • Tracey Cheek posted an article
    NAFA member, Neil Book, President and CEO of JSSI, talks to Anthony Harrington, with BAM. see more

    NAFA member, Neil Book, President and CEO of Jet Support Services, Inc. (JSSI), talks to Anthony Harrington with Business Aviation Magazine.

    Q: Your big announcement at EBACE was the acquisition of Conklin & de Decker. Can you comment on the logic that guided the deal?

    NB: There is a very real need in this market for easier access to data and more transparency for aircraft operators and owners. Conklin & de Decker’s mission, as they define it  themselves,  is to arm operators  and owners  with information. Their product set is all about helping the general aviation industry to make more informed decisions around the purchase, operation and sale of aircraft, by providing objective and impartial information. They’ve been doing this for 35 years, so they bring a layer of credible data and a level of customer service that is very consistent with our own culture. 

    The starting point for the deal was the launch of our advisory services platform last year, and the early success that we have had with it. This acquisition will be the first of many as we grow the strength and depth of our services business. There is no doubt that Conklin & de Decker is a tremendous bolt-on acquisition for us. 

    It is worth emphasizing that JSSI’s growth, prior to this, has been entirely organic. This is our first strategic acquisition and we are actively looking for more. 

    Q: How do you see the advisory service side? Does it simply strengthen the JSSI brand and add to the service set you provide or do you see it growing into a significant revenue earner in its own right?

    NB: I think it will absolutely generate significant revenue and earnings, or we wouldn't pursue it. I also believe that it only strengthens the JSSI brand if we deliver a high quality product. We strive to be the best at what we do and if we do not provide the highest quality product, it could have a negative brand impact. 

    On the Conklin side, we have a strong technology team, led by our newly named CIO, Jake Gerstein. I’m confident we’ll be able to relaunch Conklin’s platform with even better data, features, and a more global focus. 

    Q: Both the engine and airframe OEMs are going down a similar route, deploying sensor data beamed directly to operations centres for maintenance purposes. Is this competition for your platform?

    NB: I don’t see OEM real-time data being competition. I’m  confident we can help operators better disseminate and understand that information. We cover every single make and model of aircraft and have been doing so for the last 30 years. We are sitting on a massive amount of maintenance data. This, coupled with operating data from the 2,000 aircraft we support and Conklin’s database, will allow us to deliver a product that helps operators. Ultimately, the market will decide. 

    Q: There is an issue in the market at the moment with the very mixed skill sets of appraisers and valuers, some of whom are very good and others who produce very questionable figures. How do you see this playing with your platform?

    NB: I can’t speak for the entire market, but we take a lot of pride in the integrity of our appraisals. We just hired our eighth ASA-certified appraiser, Rich Thompson, and believe that our technical expertise really sets us apart. This service to date has been very geographically fragmented. Many banks have to partner with a number of different appraisers around the world, and, as you say, this can have very mixed results. The beauty of working with JSSI is that we have our people in key locations around the globe and this leads to a level of consistent and high quality work that our customers appreciate. 

    Q: How is the business doing, generally? 

    NB: Business is performing great and we’re having a lot of fun. We are seeing growth in every region around the world. Flight hours are up generally across the globe, so having 2018 turn into a strong flight-hours year is a very good barometer of the health of the industry. 

    Q: July and August have seen a considerable spike in both rhetoric and actions around protectionism and punitive tariff increases, raising the probability of trade wars weakening global 
    GDP. Do you see this as a significant threat?

    NB: I can’t opine on a theoretical trade war at this point and what impact that will have on our business or global GDP. I am highly confident, however, that business jets are a critical tool to the global economy and will continue to be so. 

    Q: How interesting is the insurance market for JSSI?

    NB: We’re working with two of the largest aviation insurance companies, who have made the choice to outsource their engine claims to JSSI. You have to remember that we manage in excess of 8,000 different maintenance events per year. When an engine claim is filed, we step in and perform a detailed analysis of the event. We determine the insurance company’s responsibility and we direct the work to the facility that is in a position to deliver the best turn-around time, highest quality work and the best pricing. And, of course, we audit the invoices when they come in. Our work has driven significant cost savings for the insurer, which ultimately helps the operators. 

    Q: How big is this market for JSSI?

    NB: We’re focused on the “tier one” insurers today and believe this can be a significant business for us. 

    Q: Over the last two years you have expanded JSSI’s remit to include smaller commercial airlines. How is that working out?

    NB: We have been really pleased with our success in this regional airline market. Since launching the program, we’ve enrolled five regionals and have a very robust pipeline. This year is already the strongest we’ve had through nearly three quarters and we do not anticipate it slowing down.

    This article was originally published in the Autumn 2018 issue of Business Aviation Magazine.

     

  • Tracey Cheek posted an article
    Aviation Finance Report 2018 see more

    2018 marks one decade since the global economic downturn brought an abrupt end to the prosperity the business aviation industry had been experiencing. OEMs had been riding a bubble of exuberant prosperity that saw a record 1,317 business jet deliveries in 2008, but that changed swiftly.

    At NBAA’s annual convention in October of that year, the usually bustling show floor took on the atmosphere of a funeral home lobby, with small groups discussing in hushed tones the latest financial market casualties. Before the crash, the super-heated business jet market had some models of used large-cabin jets selling at a premium, above new list price, to those who felt they couldn’t wait for their slot in the production backlog. That dynamic had many industry financiers scrambling to make deals as fast as they could, in many cases requiring borrowers to put forward little to no down payments, leaving the lenders shielded by only the seemingly unassailable value of the jets themselves. In the words of one industry veteran, “If you had a phone, you got a loan.”

    That frenzy might have lulled some experienced lenders into a false sense of security, which manifested itself in their relaxing loan criteria. It also attracted many inexperienced lenders to the market, drawn by the seemingly depreciation-proof aircraft assets. “Before the crisis, business aviation was essentially a perpetually growing industry,” explained Donald Walsh, senior vice president for business aviation with Stonebriar Commercial Finance, adding that aircraft values had to that point proved resilient across economic cycles. “The corresponding sense of safety was reflected in investment decisions, [and] in the quest for growth, many finance providers, banks and non-banks, stretched and expanded into each other’s space. For a while, overheated capital and aircraft markets camouflaged the risks. But once the crisis hit, the industry was suddenly retrenching, capital seized, and prices fell at unprecedented levels.”

    Many aircraft buyers during those frothy times soon found themselves underwater as private jet values tumbled in the aftermath of the recession. What was once so coveted became easily available, as owners looked to unload their aircraft for a variety of reasons, ranging from personal or corporate financial distress, to the resulting decline in flying hours as companies looked to conserve cash.

    The percentage of business jets for sale worldwide hit a high-water mark of 17.67 percent of the fleet in July of 2009, according to statistics from industry data provider JetNet. Many finance providers suddenly found their lending portfolios cratered with aircraft that were in some cases worth half of their previous value.

    “Throughout the period, lessors experienced residual write downs on their lease portfolios, lenders were forced to write off losses in their loan portfolio, and others either exited aviation financing or cut back substantially,” said Rudy Tenore, president of V2 Aviation Consultants. “The larger and more established lenders weathered the crisis and continued to provide financing alternatives.”

    With their aircraft worth less than what was owed on them, some borrowers simply parked their jets and walked away, leaving the lenders to clean up the mess. “The crisis and its ensuing impact on the business aviation market reminded everyone that business aircraft are depreciating assets that do, in fact, lose value over time, ” said Ford Von Weise, director and head of global aircraft finance at Citi Private Bank. “Business aircraft values experienced a huge asset price bubble that the crisis quickly deflated and taught everyone that business aircraft values are just as volatile as [those of] other financial asset classes.”

    With an abundance of used aircraft flooding the market, the airframers slashed production accordingly, with the total annual deliveries of new business jets not exceeding 874 in any year since that banner 2008 output.

    Even a decade later, the effects on the aviation finance industry have not entirely faded. “There are a few financiers who are still living with the multi-year transactions that were booked in the run-up to the financial crisis,” explained Michael Kahmann, principal at Kahmann Consulting. “For lessors, this is seen in residual positions that exceed fair market value and an attendant requirement to re-lease aircraft rather than sell and immediately recognize the residual loss.” For loans, he noted the equivalent would be balloons that are greater than fair market value and therefore require “re-writes” to bleed down the banks’ book position over time.​

    A DIFFERENT TIME, A DIFFERENT MARKET

    Today, the business aviation landscape is much different. That swollen preowned inventory has dropped nearly in half, to less than 9 percent, according to JetNet. Prevailing wisdom has long demarcated 10 percent as the dividing line between a seller’s and a buyer’s market. Indeed, those plentiful young, used bargains that were present in the market just a few years ago are now gone. That has led to the long hoped-for stabilization in prices. “That’s really where we see the recovery today,” said Paul Cardarelli, JetNet’s vice president of sales, at NBAA’s annual convention in October. “It’s trending to be an increasingly strengthening seller’s market.”

    Used aircraft inventory, along with economic factors such as gross domestic product, corporate profits, and wealth creation, have long been tied to the health of the industry. Business jet deliveries have historically been tied to leading economic indicators such as the U.S. GDP and the Dow Jones Industrial Average, and using that metric, new aircraft deliveries are lagging. The U.S. has now had 35 consecutive quarters of GDP growth, while the Dow reached 26,000 for the first time in January, and saw a peak of 26,828 in early October. The Standard and Poor’s 500 hit the 2,900 mark for the first time this past summer. The U.S. unemployment rate, which hit 10 percent in October 2009, has steadily declined since then, reaching a nearly 50-year low of 3.7 percent in September. “We are finally beginning to see a sustained recovery in business aviation aircraft values that is reflective of the overall very strong economy,” said Citi’s Von Weise. “While some in the industry believed that the old metrics used to assess the health of the industry were no longer relevant, aircraft values did not increase in lockstep with the GDP, equity markets, and other historically linked indices.”

    While those once-strong correlations may have frayed somewhat over the past decade, they can’t yet be disregarded entirely, according to Kirsten Bartok, managing partner of AirFinance. “They do still apply; however, what we now see is the industry is truly global,” she told AIN, adding that while the U.S. currently accounts for more than half of the overall business aircraft market, it can’t support the industry alone. “If one economy stumbles, that can impact global unit sales, especially for new aircraft. While the U.S. economy can be strong, if the Russian economy stumbles, if we see an Asian economic flu, or the commodities tumble, that does impact sales.”​

    CASH IS KING

    Cash remains the preferred method for purchases of jets in the U.S. According to JetNet data, of the more than 2,350 FAA-recorded business jet transactions over the past year, little more than one-fifth involved financing, down considerably from the 40 percent-plus seen in the years before the economic downturn. After that point, aviation financing became more restrictive as lenders tightened their loan criteria. “During this period, buyers found themselves having a very hard time finding financing, which pushed them to use cash,” said Wayne Starling, the former senior vice president and national sales manager for PNC Aviation Finance, who was recently named as executive director of the International Aircraft Dealers Association (IADA). “That moved the cash buyers to the highest percentage of all times. Today, if you take enough time, you can find a financing program to assist you to buy almost any type and age aircraft you want.”

    “Many business jet buyers pay cash because even though aircraft are expensive acquisitions, the price is still insignificant to their profile,” said Stonebriar’s Walsh. “It also simplifies the closing process and potentially adds negotiating power. For the ones that do consider financing but don’t need to finance, whether pre- or post-closing, the decision usually comes down to an optimal use of cash analysis.”

    The trend of using cash for aircraft purchases accelerated in the aftermath of the economic downturn. “With interest rates at historic lows over the past 10 years, cash acquisitions were running as high as 75 percent,” explained Tenore, an industry veteran with more than a quarter century of experience. “Currently in a rising interest rate environment and a strong equity market, cash is being redirected into investment opportunities and other capital expenditures.” As result he added, there has been an increasing level of demand for financing and refinancing requests of late.” Another trend that is increasing, according to many in the aircraft finance industry, is customers closing the deal in cash, and then seeking financing at their leisure.

    For those qualified customers, there are still plenty of eager lenders. “Financing is coming back in vogue as business people realize there is plenty of financing available,” noted Sam Harris, president of Jetloan Capital, who sees the pendulum swinging to the point where it may once again reach the 50-50 balance between cash and financing, last seen in the fourth quarter of 2004.

    Liquidity is present in the market and funding is readily available from a variety of sources including the traditional major lending banks, smaller regional banks, and new companies that have carved out a niche specializing in aviation finance. “Many of the larger banks tend to view aviation finance as a means to attract and retain high-net-worth clients, explained David Labrozzi, chief operating officer with Global Jet Capital, which entered the market in 2014 and acquired GE Capital’s Americas business aircraft portfolio the following year. “Although there continues to be substantial liquidity in the market, when it comes to business aviation finance, banks have continued to adjust their business models to focus on relationship banking through corporate and ultra-high-net-worth clients,” he told AIN. “In some ways liquidity is more focused in this regard and allows a benefit and credibility to aviation-focused non-bank lenders.”

    While some long-time major financiers such as GE, CIT, and Element have left aviation finance, some new players are entering the arena, attracted by the recent rebound in sales activity and prices. “It’s only in the past 18 to 24 months we have seen new lenders previously not in the aircraft finance space start to explore the market,” said Marc Yahr, vice president with L&L International, an aircraft brokerage that also provides financing through a partnership with CMG Capital.

    “There are several new lenders in the industry as financial institutions continue to search for ways to diversify their balance sheets,” agreed Robert Kent, president of Scope Aircraft Finance, adding that barriers to entry are high for a bank that does not have the requisite expertise. “Borrowers are justifiably leery of putting their faith in an inexperienced provider.”

    “Occasionally we see a smaller regional bank tiptoe into the small-to-midsize space, but there hasn’t been a new [major] entrant since Global Jet Capital,” said Bartok. “With the exit of CIT, Element, and GE, the overall effect is we still have fewer lenders.” She attributes the hesitancy of some lenders to enter the market to new capital requirements and the need to show regulators evidence of liquidity.

    As an example of a smaller lender, there is Seacoast National, a Florida-based community bank with nearly a century of history. It moved into the aircraft finance arena fairly recently, expanding its marine and recreational vehicle loan division due to customer demand in the mid-2000 boom years. The company, which just joined the National Aircraft Finance Association (NAFA), survived the downturn and remains active in the aviation finance market.

    “Our typical customers are high-net-worth business owners or professionals and small-to-medium-size corporations who are looking to purchase these assets,” explained Phillip Bartholomew, the bank’s yacht and aircraft finance specialist. “Our loans are typically up to about $9 million, which encompasses a huge percentage of the aircraft sales market.” He said the company manages to compete against the major aircraft financiers in the mid-Atlantic, the Northeast, and Europe by understanding the market for the collateralized asset and the customer’s needs.

    “We don’t have a one-size-fits-all loan program,” Bartholomew noted. “Instead we spend a great deal of time earlier in the conversation trying to decide what’s going to work best for the customer and then crafting a solution for them.”​

    THE CURRENT CLIMATE

    While long term loans and little-to-no down payments that were hallmarks of the pre-downturn era have largely disappeared in the years following, very secure borrowers can still find virtually any terms they want. “Since the crisis, the average term seems to have settled in around five years,” Walsh told AIN. “Before the crisis, seven to ten years was common.”

    He noted that down payments and amortization periods can vary quite a bit depending on the transaction merits. “As a ballpark, 90 percent-plus advance, with a 20-year amortization is possible for a superior credit profile, and a 75 percent-plus advance with a 10 year-plus amortization could be expected for an asset-based structure,” which involves confidence in the asset (aircraft) value, the aircraft manager, and the structure of the deal as the primary form of repayment or exit strategy, rather than the wealth of the client, which is how banks generally underwrite.

    In the Federal Reserve Bank’s most recent quarterly survey of senior loan officers, more than 17 percent of the respondents noted that they had somewhat eased their commercial and industrial loan standards for large and middle market firms (those with annual sales totaling $50 million or more) over the past three months, as compared to the just 1.4 percent that reported they had somewhat tightened their standards.

    For smaller firms with sales of under $50 million, 3 percent of the lenders said they tightened their loan application standards, as opposed to the more than 10 percent, which indicated they had eased their criteria. In terms of the spread of loan rates over their institution’s cost of funds, for loans to large and midsize firms, 42 percent of the bank officials said they had narrowed the gap somewhat, making the lending terms more attractive to potential borrowers, while 10 percent reported increasing the spread.

    “The financing market has once again become very competitive with many lenders reducing loan covenant requirements and offering extremely competitive interest rate spreads, combined with very high loan to value [ratios],” stated Von Weise, who is also the president of NAFA.

    Another change from the pre-downturn era is that the time it takes to arrange financing has generally lengthened as lenders face much more scrutiny of their deals. What was once a matter of days has increased now to several weeks in most cases, to even months, as the lenders satisfy their anti-money-laundering and know-your-client (KYC) guidelines. For lenders, the regulatory penalties for making a mistake on a client’s trustworthiness can be severe.

     While it is not a regulated bank, Global Jet Capital, which specializes in operating leases, still must adhere to those regulatory standards, especially because half its clients are outside the U.S. The company uses a network of third-party researchers to investigate the finances of potential clients abroad. “It gets a little dicey, but the work has got to be done,” Labrozzi told the audience at the JetNet iQ Summit in June.

    Keith Hayes, senior vice president and national sales manager for PNC Aviation Finance, speaking at the annual JetNet iQ Summit this past summer, described how some customers will work with a broker for months to locate a suitable airplane, sign a pre-buy letter of intent, and go through the pre-buy inspections before thinking closely about how they will pay for it. “Then they come to us and say can we get financing on it, we need to close in two weeks,” he said. “Quite often, especially with our asset-based product, we can do that. But under a fully underwritten transaction, it’s very difficult.”

    With the level of financial scrutiny now required, most lenders wish to be involved sooner rather than later in the process, which will contribute to a more trouble-free closing. “We add the most value when we’re engaged early,” said Joseph DiLallo, head of corporate aircraft finance and leasing with BMO Harris Equipment Finance. “Once we have the borrower’s financial statements and details on the jet, we can typically propose within a week and close within a month.”

    For all lenders, the elephant in the room remains residual values. “Anyone who says they can predict long-term residual values with any level of certainty is not being truthful,” said Tenore. “All of the industry experts badly missed their targets during the last economic downturn.” He explained that the variables that can influence residual values are numerous and beyond the industry’s control. “Obviously, the longer you project out, the less the accuracy in the forecast. Add in geopolitical risk, economic downturns, new technologies, a restrictive regulatory environment, and an unprecedented event such as a major OEM bankruptcy, and residual value forecasting becomes very difficult,” he told AIN.

    The past decade was marked by precipitous depreciation of aircraft residual values, the curve for which, at least for some models, has finally begun to flatten. “There are recent developments to suggest we are entering a more stable atmosphere,” said Walsh, noting that over the past 12 to 18 months the preowned market has rebounded as international buyers have become educated about the value of used aircraft and U.S. buyers are more willing to consider purchasing a previously foreign-operated aircraft.

    PNC’s Hayes agreed that while the depreciation spiral has slowed on some aircraft (large-cabin, young, and U.S.-registered), he isn’t ready to make any blanket assumptions of residual values. “I think you truly have to look at every single deal, every single plane, every single age of the plane and make the determination based on that asset.” He told AIN that 2018 is shaping up to be a banner year for the company, which has closed more transactions annually since 2009 than any other aviation finance company in the U.S. and that this year’s activity is as high as its ever been in period since the downturn.

    “People are concerned about what is going to happen in 2019,” Hayes said. “As the used market drops down to single-digit inventory levels and you get past the U.S.-registered fleet to aircraft with less desirable pedigrees, and as used prices begin to rise in some cabin sizes, at some point used aircraft buyers will take a more serious look at buying new aircraft.”

    As the pool of young, pre-owned aircraft continues to dwindle, the criteria of what constitutes an “old” aircraft has not changed in the minds of many lenders. “From my perspective, age is a guideline but should not be viewed as a redline for lending or not,” said Kahmann. “To me, an old business jet is and always has been primarily one that will be difficult to remarket if repossession is required.”

    While most prefer to lend on jets 15 years old or younger, there are always exceptions. “There’s more to it than just age,” said DiLallo. “While our guideline keeps us focused on zero- to 15-year-old jets, there are some five- or 10-year-old jets we won’t finance, and certain 16- to 18-year-old jets that we may be comfortable with, based on the specifics of a particular jet and the specifics of the particular borrower.” Buyers may feel that such aircraft are bargains in the current market and in many cases won’t seek financing, but should they do so, lenders will make sure they are properly insulated.

    “Financing risk levels increase on older aircraft for a number of reasons, including but not limited to higher maintenance costs, regulatory restrictions, and new and more efficient replacement models,” said Allen Qualey, senior advisor and president emeritus of 1st Source Bank’s specialty finance group. “In cases when they are financed, terms of the financing are less attractive.”

    Another looming concern for older aircraft is the U.S. mandate for ADS-B equipage, which will take place at the end of 2019. According to MRO provider Duncan Aviation, as of the beginning of October, only 52 percent of the U.S.-registered business jet fleet had been upgraded to ADS-B compliance, while only 30 percent of turboprops had been so equipped.

     “I think this is an issue that perhaps has not been fully appreciated by financial institutions, either with respect to lending requirements on new deals or with respect to managing transactions in those institution’s portfolios,” said Bartok. “The growing realization seems to be that there may not be enough maintenance slots remaining over the next 15 months to accommodate all of the planes that need these technical upgrades, and as a result, a lot of planes will either be grounded or operated in a suboptimal fashion after the deadline passes.”

    Given those options, experienced lenders are taking proactive steps. “We closely monitor every jet, and every borrower in our portfolio,” said DiLallo. “For every jet we have financed, or consider financing, the jet is either already NextGen-compliant or there is an agreed-upon plan and timing to become compliant.”

    Once again, as new lenders move back into the periphery of the market, some see old habits beginning to creep back in. “I don’t think as an industry we have learned much, as memories fade and newcomers who have no experience jump in with both feet without doing their homework,” Qualey told AIN.

    “Some lenders have begun to go back to the same inappropriate long amortizations and light down payments that caused problems after 2001 and again after 2008,” said Kent. “Each cycle, as the market heats up, lenders begin to make concessions as they chase loan volume.”

    IADA’s Starling offered a warning to potential lenders: “Do not get caught up in trying to win business by out-structuring a deal outside what your guidelines are,” he said. “If losing one deal is going to create a major problem for you, then you probably already have a problem.”

    APPRECIATION FOR DEPRECIATION?

    At the end of December 2017, the Tax Cuts and Jobs Act went into effect, and in addition to slashing the tax rate for corporations, it increased and extended bonus depreciation for business aircraft through 2026, and expanded its benefits to include used aircraft that meet the appropriate criteria.

    Aircraft placed in service after September 27, 2017 could be eligible for 100 percent expensing, according to Troy Rolf, an attorney with GKG Law. He notes that for qualified aircraft placed in service on or after January 1, 2023, the bonus depreciation rate under the Act will be reduced and phased out over a number of years according to the following schedule:

    • 80 percent for qualified property placed in service after December 31, 2022 and before January 1, 2024
    • 60 percent after December 31, 2023 and before January 1, 2025
    • 40 percent after December 31, 2024 and before January 1, 2026
    • 20 percent after December 31, 2025 and before January 1, 2027
    • and 0 percent (bonus expires) for aircraft placed in service after December 31, 2026.

    Some have attributed this act to helping spur the recent preowned boom. “The IRS rule changes, namely the ability for a 100 percent write-off against earnings for new and preowned aircraft purchases, has provided a further boost and is contributing to the sustainability of the recovery,” said Walsh.

    Others believe the results are yet to be seen. “If someone could use the [depreciation] tax benefits before, they can use them now, and if they couldn’t use them before, they can’t use them now,” said Keith Hayes, senior vice president and national sales manager for PNC Aviation Finance. “We have had a lot of discussions and think there will be a lot of activity in the fourth quarter, driven by the requirements of bonus depreciation and the longer time it has taken this year to do the tax analysis, driven by the changes in the law that accompanies the purchasing decision.”

    Before making their decision on depreciation, buyers have some important factors to consider, according to Nel Stubbs, vice president at industry research and data-provider Conklin & de Decker. “While this may sound like a good tax break to an aircraft buyer, the question remains, can I take this 100 percent deduction on my tax return?” she said. “Some things that should be considered when asking this question are, is the aircraft ordinary and necessary and can the buyer meet the 50 percent qualified business use of the aircraft for subsequent years?” Stubbs added that there may be heightened IRS attention on the business’s tax return that could trigger an audit as well. “Remember: just because the 100 percent bonus depreciation is available, this large of a write-off in one year may not be for everyone and the modified accelerated cost recovery system (MACRS) depreciation schedule may be the better option for the buyer.”

    This report was originally published on AINonline on November 21, 2018.