NAFA Administrator posted an articleAINsight: 5 Incentives To Finance Business Aircraft see more
NAFA member, David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, shares five important incentives when financing your next business jet.
The business aviation industry has encountered intense downdrafts this year connected to the Covid-19 pandemic. Ironically, the same forces have increased certain charter flights, spurred newcomer acquisitions of whole and fractional shares in aircraft, and highlighted the value of business aviation.
Concurrently, the August 27 issue of JetNet iQ Pulse revealed significant untapped interest in borrowing or leasing (financing) to make aircraft acquisitions, stating: “Since the onset of the Covid-19 pandemic and amongst respondents with an opinion, about two-thirds indicate that they plan to use some sort of financing to acquire their next new aircraft.”
Understanding Today’s Aircraft Finance Markets
A few brief insights into the two dominant types of aircraft financing, “true leases” and secured loans, will help understand the interest in financing jet aircraft in a market typically dominated by cash purchases.
A true aircraft lease is a transfer by an owner/lessor of the right to possession and use of the aircraft to a lessee for a lease term in return for rent and other consideration/value. In a true lease, the lessor provides 100 percent financing by purchasing the aircraft and leasing it to the lessee.
Lessors expect the lessee to return the aircraft to the lessor at lease expiration, buy it during or at the end of the lease term, or renew the lease. Lessees enjoy the corresponding rights to drop off the aircraft to the lessor and walk away (after meeting the aircraft return conditions), purchasing the aircraft, and renewing the lease.
A typical aircraft secured loan requires a borrower to grant a “security interest”– a lien –on an aircraft to the lender/secured party to secure the borrower’s payment or performance obligations under the loan documents. A lender does not own the aircraft; it just has an interest in the aircraft as collateral.
Customers typically borrow between 50 percent and 80 percent of the price of the aircraft and make up the difference with the customers’ cash or, for refinancing, the value of the equity in the aircraft. These percentages fluctuate up or down for different lenders and loan structures, with a relatively few lenders advancing up to 100 percent loan to the value of the aircraft agreeing to a term of up to 20-years.
Five Incentives To Finance Business Jets
Most customers in the U.S. have at least five incentives to finance their next (or first) aircraft:
• Cheap money. The Federal Reserve (FR) recently announced a policy shift that the FR will average inflation rates to allow about a 2 percent inflation rate before increasing interest rates to tame the inflation. The FRprojects that interest rates will remain near zero for years to come. Financiers should, for the foreseeable future, offer customers very low rates consistent with the FR action.
• No to low cash outlay. Many potential customers should readily appreciate that, rather than stroking a check for a new or used jet, they can more prudently or profitably use their cash elsewhere in their businesses for capital expenditures, investments, or, particularly during the pandemic, working capital.
• Tax write-offs. If the lessor adheres to applicable federal tax law, including the lessor’s maintenance of residual value under the federal true lease guidelines, the lessor may be entitled to claim bonus depreciation on the new or used leased aircraft per the Tax Cuts and Jobs Act of 2017.
In a loan transaction, the borrower, as the owner, may be entitled to bonus depreciation of the aircraft and other tax write-offs allowed under the Coronavirus Aid, Relief, and Economic Security Act plus bonus depreciation despite some personal use of the aircraft.
• Lessor/lender competition. Most aircraft lenders and lessors compete aggressively on interest rates or lease economics to win business to the extent consistent with their respective business models, regulatory constraints, and internal credit policies. However, financiers will, except for the most creditworthy customers, expect customers to sign documentation that contains strong covenants, defaults, and other restrictive terms on aircraft and business operations.
• Customized lease and loan structures. Structuring lease and loans constitute an integral part of competition among financiers. To facilitate planning and cost management of aircraft operations, a lessor can, within tax and other limits, create flexible structures that contain fixed and variable rents, options to purchase the aircraft during the lease term or at lease expiration, terminate the lease during the lease term or renew the lease term at lease expiration.
Lenders can offer various loan structures that drive down periodic loan payments and achieve other customer goals. These loans might include a payment term of five to 12 years, asset-based financing (that primarily relies on aircraft value for re-payment), one large “balloon” or total principal payment at the end of the loan term, 10- to 20-year amortization periods, interest-only structures, and limited personal guarantees. Borrowers should negotiate early payoff rights so they can, at will, exit the relationship, refinance the aircraft loan, or use available cash to pay off the loan.
Though cash is king for many aircraft buyers, up to 70 percent of potential business aircraft owners or operators intend to finance the acquisition of their next new aircraft. The same should roughly be true for anyone interested in acquiring a used aircraft.
Such financing can afford these potential customers cheap interest/rent rates, no or low cash use, and an immediate opportunity to buy or lease aircraft. For the business aviation industry, any boost in transaction volume this year, prompted by an expansion of financing, would be most welcome and perhaps generate a little optimism for a better 2021.
This article was originally published in AINonline on September 11, 2020.
NAFA Administrator posted an articleHow Creative Thinking Closes Deals see more
NAFA member, Jetcraft's Pascal Bachmann, discusses closing deals in the business aviation industry during COVID-19.
If you want to survive and thrive in turbulent times, you need to be flexible, inventive and tenacious. The business aviation industry is no exception. It requires clever thinking to close major deals during Covid-19.
Bringing buyers and aircraft together safely for viewings during lockdown has been a challenge, but it’s hard for clients to place a deposit on a multi-million-dollar private jet they haven’t seen in person. In some cases, we’ve used high-resolution photos and video to bring the viewing experience to the customer. In others, we’ve flown the aircraft directly to the buyer’s hometown for a viewing.
I’m proud to say that Jetcraft recently facilitated the closing of a US-based Embraer Legacy 450 aircraft in a record-breaking seven days. This is not typical, though. Every deal is different, and whatever logistical challenges we face, they can be overcome with a little imagination. A complex European sale of a Dassault Falcon 7X, which closed on April 1, is one such example.
NAVIGATING A COMPLEX CLOSING DURING COVID-19
Firstly, we needed to find crew who could drive to Geneva, where the 7X was located, and make the arrangements to ensure those pilots could enter Switzerland. The buyer also wanted to paint the aircraft after closing, so we had to find an FBO open and able to carry out the work.
Our initial plan to close the deal in Guernsey became impractical when coronavirus struck and a 14-day quarantine was imposed on anyone landing there. I’m not saying it’s not nice to spend two weeks on that beautiful island, but understandably the buyer didn’t want their new jet to be stuck there after closing.
We found a second possible location, which might have worked with clever manoeuvring of crew across international borders, but we needed a confirmed tax ruling from the authorities, who were shut down and wouldn’t respond.
By now, we were considering a bit of everything, including closing in international airspace, which would have been possible but not ideal from a tax perspective. Clients might want to use this option in future, though, especially if Covid-19 border restrictions remain in place
We finally found a closed airport in the buyer’s home country, so we had to arrange for the facility to open, and firefighters to be present, to be able to land the jet and complete the deal there.
We still faced the challenge of retrieving aircraft documents from an OEM service center in another country. With minimal staff working at the facility, even finding keys to the archive doors took longer than usual. I was so frustrated, I nearly jumped in my car and drove there to get the paperwork myself!
We were determined never to be beaten. At every stage of the transaction, our team persevered, and had the vision to find a creative solution.
NAVIGATING A SEVEN-DAY CLOSING DURING COVID-19
Considering the complexity of the Falcon 7X closing, how did our sales team move so quickly to close the Embraer Legacy 450 aircraft in seven days?
The aircraft (part of our owned inventory) was new, so no further inspections were needed ahead of the sale. We took the lead in flying the jet to the buyer in the US for initial viewing.
It always takes two parties to close a deal. Both our team and the cash buyer did everything promised to secure the sale quickly. This kind of mutual commitment is priceless.
Throughout the Covid-19 lockdown, demand to buy or upgrade private jets has remained. There are definitely challenges in meeting those requests – if we’re bringing a European aircraft to the US, for example, we need European pilots for the test flight after going through the ‘C’ check. But it’s easier to move aircraft around the US than Europe because there aren’t border closings between states, so we’re repositioning some of our jets there for viewings.
With an experienced and creative sales team in place, aircraft trading can continue wherever you are, even in a lockdown, while keeping all parties healthy and safe and following the guidance of authorities. Miracles take time, but we can usually manage the impossible within 24 hours.
This article was originally published by Jetcraft on June 29, 2020.
Tracey Cheek posted an articleBusiness Aviation Industry Set To Grow In Size, Scale And Strength Over The Next Five Years see more
NAFA member Chad Anderson, President of Jetcraft, discusses the two major differences between this year's market forecast and those from previous years.
Last month we released our 5-Year New & Pre-Owned Business Aviation Market Forecast – the first report of its kind to take a precise, comparative and quantified look at both types of aircraft transactions.
Aside from introducing pre-owned market predictions, we’ve updated our overarching methodology as compared to previous reports, making it even more precise. We’ve shifted to a five-year rather than a 10-year outlook, to better reflect the current aircraft ownership experience, and adjusted the overall population of aircraft analyzed to more closely align with our expertise. Furthermore, we’ve classified new deliveries as transactions only from date of entry into service and retrospectively normalized classifications prior to 2012, when all aircraft built were considered new deliveries. Finally, we’ve leveraged more of our own transaction data for a truly consolidated outline of how we see the industry behaving.
The findings show that our industry will continue to grow in size, scale and strength over the next five years, hitting nearly $30bn per year in revenue by 2023 – a remarkable figure. This is the first time a value like this has ever been assigned to the industry. We also expect to see the business aviation fleet grow by 12.1% in that time frame.
The forecast predicts continued and significant growth in the pre-owned industry, with an expected 11,765 transactions over the next five years, totaling $61bn in value. By 2023, we forecast four times as many pre-owned transactions vs. new deliveries, primarily due to the growing value proposition of these aircraft. Maintenance capabilities are increasing, and we are seeing greater accessibility, rapidity and cost-efficiency of high-quality refurbishment. This is resulting in higher demand for older or out-of-production aircraft, including amongst buyers who previously exclusively bought new models. Our forecast reveals that the average aircraft retirement age is now 32 years – nearly a decade older than previously thought.
We continue to see a shift towards large aircraft types in both new and pre-owned markets worldwide. Buyers are looking for larger and longer-range models and as a result of this, manufacturers are focusing on producing aircraft almost entirely in the midsize segment and above.
New unit deliveries are predicted to stay flat throughout the forecast period whilst generating higher revenues, due to the increase in large aircraft transactions. Over the next five years, we’ll see many more customers turn towards large jets rather than light jets, as the needs of business travelers evolve on a more global scale.
On behalf of the team at Jetcraft, I am honored and excited to have produced the very first new and pre-owned business aviation market forecast, stemming from our 55 years’ experience in connecting buyers and sellers across the world. We hope you find it useful, interesting and insightful and we welcome your comments, questions and feedback.
To download the full 2019 5-Year New & Pre-Owned Business Aviation Market Forecast, visit www.jetcraft.com/knowledge/market-forecast.
View video here.
This article was originally published by Jetcraft on June 28, 2019.