Top 5 Myths About Business Aircraft Operating Leases see more
NAFA member, Global Jet Capital, explains myths commonly associated with business aircraft operating leases.
There are more options today for accessing a business aircraft than ever before: from charter, to fractional ownership, to operating leases, to traditional financing. When dealing with large, highly-regulated assets that could cost tens of millions—or more—to own, weighing the options to find what makes sense for your specific requirements can be difficult. To make navigating the sometimes-complex landscape of business aviation a little easier, we’re going to clear up five common myths around operating leases—and explain some of the advantages of this frequently misunderstood financing option:
1. OPERATING LEASES ARE TOO RESTRICTIVE—IT’S BETTER TO OWN.
Operating leases let you keep your aircraft for the duration of the lease, which means consistently using your crew, being able to leave your personal effects on board, and enjoying the experience of ownership while putting your capital to better use. Some restrictions on customization that could potentially impact residual value and other usual lease terms apply, but limitations fall within normal patterns of ownership. With the right lessor, you can expect contract terms that are flexible and fit your unique needs, which make the experience of having an operating lease feel anything but restrictive.
Additionally, an operating lease with a predictable term makes disposition as simple as turning the aircraft back over to the lessor at end of lease—no additional planning or contingencies needed. Compare that to attempting to sell an aircraft when it’s time to upgrade or make changes to your operations. From hiring a broker, to waiting for months (or even years, in extreme cases) to find a buyer, to paying the costs of maintenance, insurance, and storage in the meantime, you may be looking at millions lost in the process.
2. YOU’RE STUCK IN A CONTRACT WITH AN OPERATING LEASE, WHICH MAKES IT INCONVENIENT WHEN YOUR BUSINESS CHANGES.
It’s true that operating leases are contractual, while owning a business aircraft outright is not. But, contracts can be created that adjust easily to a changing mission—including allowing for moves to larger or smaller aircraft, the option to extend, or the option to prematurely end the lease altogether. With the right financing partner, you can expect a flexible, custom-tailored contract that feels right.
In fact, ownership may have risks and limitations that exceed the limitations of a contractual obligation in an operating lease. If a major uptick in your international markets means that your newly purchased mid-range aircraft is no longer up to the task of supporting your business goals, you bear the risk of waiting a long time to sell with capital tied up in an asset that doesn’t suit your needs. When you’re finally able to sell and need to purchase a new business aircraft with a longer range, you’re looking at a potentially lengthy process to secure traditional financing from a lender, coupled with a much larger capital outlay than the refundable security deposit for a lease.
3. OPERATING LEASES MAKE SENSE IN BAD RESALE MARKETS OR WHEN INTEREST RATES ARE HIGH, BUT NOT WHEN RESALE VALUE IS STRONG OR WHEN INTEREST RATES ARE LOW.
Even if there is a strong resale market or low interest rates when you choose to purchase an aircraft, consider the risk that you’re taking on with the large outlay of an aircraft purchase. Traditional financing typically requires large down payments and due to volatile geo-political situations, emerging technology, and the natural realities of market fluctuation, there’s no guarantee that a strong resale market for your aircraft will be there when you choose to sell. That low interest rate environment may be gone, which won’t help entice buyers to purchase your pre-owned aircraft. In the meantime, you may have paid more for a depreciating asset.
Operating leases eliminate residual value risk and provide predicable costs for the duration of the lease. Budgeting stays precise, liquidity stays high, and the future becomes clearer. The resale market doesn’t come with any guarantees—an operating lease contract does.
4. OPERATING LEASES ARE ONLY FOR CERTAIN KINDS OF AIRCRAFT. YOU CAN’T JUST GET WHATEVER YOU WANT.
Whether you have your eye on a new or pre-owned aircraft, or if the pre-owned aircraft you’re interested in is a little older than what you would typically expect for a leasing arrangement, there are very few limitations to what can be obtained with an operating lease today.
Specialists in business aviation financing like Global Jet Capital look to spread risk across a large portfolio, encompassing aircraft from every major manufacturer, every global market, and a variety of age ranges.
5. YOU CAN ONLY ACHIEVE PRIVACY BY PURCHASING AN AIRCRAFT, NOT LEASING.
If privacy is important to you, a leased aircraft may actually provide an additional layer of anonymity. An operating lease reduces visibility to an aircraft’s end user, as the public records of the FAA identify the lessor as the owner of the aircraft, giving you greater privacy.
This article originally appeared in Business Jet Traveler, February 2021.
Business Aviation: An Enduring Value Proposition see more
NAFA member, Shawn Vick, Chairman and CEO of Global Jet Capital, was featured in the August 2020 issue of JetNet iQ Pulse, a digital report published by JETNET that provides up-to-date information and unique insight on the state of the business aviation market.
Within the “Business Aviation: An Enduring Value Proposition” segment of the issue (page 3), Vick shares his insight on fact-based assessments and industry introspection. He discusses how the effects of the COVID-19 shutdowns translate to the business aviation market. Additionally, he claims that the result of suppressed production and transaction activity during this time can be seen in inventory levels that remain around 10 percent, a range considered healthy for a global fleet of 22,000 business jets. In comparison, over the course of 2008, inventory levels averaged over 15 percent. Finally, he encourages teams to “use this period of uncertainty and its associated business slowdown to take a close look at our respective business for areas of improvement ranging from supplier agreements, operating systems, go to market and brand strategies, to employee engagement”.
Read the full article here.
Sounding Board: Five Minutes With Shawn Vick, Global Jet Capital Chairman, CEO see more
NAFA member, Shawn Vick, Chairman and CEO of Global Jet Capital, discusses business aviation.
Shawn Vick is the chairman and CEO of Global Jet Capital, which helps corporations and individuals with the leasing and financing of new and pre- owned business jets. Vick has held leadership positions at British Aerospace, Gulfstream Aerospace, Bombardier, Landmark Aviation and Hawker Beechcraft. He is also a partner and member of the investment committee for AE Industrial Partners, a private equity firm. And he is a private pilot.
Q. At the National Business Aviation Association Convention & Exhibition in October, Global Jet Capital had been having a banner year with an increase in the leasing and financing of business aircraft. Things changed suddenly with the COVID-19 pandemic. What is happening in the pre-owned market today?
A. Leading up to March the pre-owned market–frankly the entire transaction market, new or pre-owned–was performing well when compared to the same period last year. Activity began to slow late in the first quarter as the virus took hold and demanded everyone’s attention. I think the beginning of this story is now well understood. Global reaction to the virus resulted in a fundamental shutdown of the world’s economies and business aviation was no different. As we sit here today, in the middle of May, flight activity is beginning to pick up–which is a very good sign. Transaction activity remains slow but has not ceased, and we feel there are a lot of owners and operators sitting tight right now waiting to see how this situation evolves. Despite the uncertainty, one thing is very clear–business aviation in the context of a global pandemic will be the most desired form of transportation as the world begins to get back to work.
Q. What is your focus now?
A. Since the beginning of this crisis, we’ve been primarily focused on the health and well-being of our employees. This began in February with the shutdown of our Hong Kong office and a full review of our disaster recovery plan, which includes a chapter on managing the business remotely. Since that time our Zurich, Danbury, [Connecticut]; Boca Raton, [Florida]; and Mexico City offices closed, and we have all been working remotely. While it’s been far from ideal, with the support of our video conferencing platform it’s been surprisingly efficient. We’ve also been using this “pause” in industry activity to focus attention on internal operating efficiency projects, including the transition to a new operating platform and commercial excellence initiatives. With respect to our current portfolio, we’ve naturally been paying very close attention and I’m happy to report the portfolio is performing very well. From a new business perspective, we entered 2020 with a very healthy backlog fueled by a new predelivery payment financing product we launched last year. As the crisis took hold, we managed to close several deals that were in late stages, and we are currently working with a number of clients on lease renewals and extensions. Moving forward, we are now beginning to explore reopening offices and getting our employees back to work in the safest way possible and in line with local government guidelines.
Q. What do you see for business aviation in the near term?
A. I think the answer to that question lies in the duration and severity of the financial disruption, and I’m not sure anyone has a crystal ball right now. But if the disruption is limited and we are heading in the right direction in the July/August time frame, with the economy beginning to rebound and the unemployment rate falling, I think that bodes well for our industry. These aircraft are as precious as they’ve ever been, particularly when one’s safety and security are a priority and you factor in social distancing. I think the bottom line is quite simple: If you can afford these assets, you’re going to keep these assets–and if you don’t have one and you can afford one, you’re likely going to acquire one.
Q. What about aircraft values?
A. I really think it’s too soon to say, but there is data we can look at for guidance, likely the most important of which comes from the OEM production environment. Most industry analysts are predicting a drop in new deliveries in the 30% range, meaning roughly 450 deliveries this year versus the original projections that were well above 700. And, it’s important to note, these are supply side forecasts at this stage–not demand side. As difficult as this is for the entire ecosystem, it may well act as a guardrail against significant devaluation. Also, we are not seeing a rash of distressed sales or a spike in new aircraft being listed for sale. In fact, these numbers have been coming down in recent weeks. Our sense is that owners and operators understand the value of these assets in this new context and are sitting tight as the situation unfolds.
Q. How does this downturn compare to the recession of 2008 and 2009?
A. It’s interesting that so much of the speculation is based on comparisons with 2008, when there is not much correlation. In 2008 the cause of the economic disruption was widespread failures in the banking systems that put the capital markets in a state of seizure. Right now, we’re dealing with the impact of a global pandemic. In comparison to 2008, government reaction and intervention has been swift and expansive. From an industry perspective, OEM production has been curtailed in a disciplined fashion to protect people–but the by-product is protection of backlogs and ultimately aircraft values. This is clearly a different environment.
Q. What about the health of the business aircraft manufacturers?
A. If you look at the impact of the Great Recession, several of the manufacturers got caught between a rock and a hard place with an almost instantaneous shutdown of market demand coupled with long supply chain agreements that were difficult to contractually modify. They really had no choice but to drive new product into a down market. Today, as a result of those lessons learned, the OEMs and the entire supply chain is far more agile. At this stage, this is a supply side problem resulting from shutdowns and furloughs across the entire ecosystem designed to stall the spread of the pandemic. From my perspective, everybody went into this situation together and everybody’s going to come out of it together.
Q. What do you foresee as the split in demand from the North American and international markets?
A. During the buildup leading to the Great Recession, the market shifted from being heavily dominated by the U.S. to a 60-40% international versus domestic split. Everyone thought that was going to be the new normal as the BRIC countries [Brazil, Russia, India and China] flourished. But as we now know, due to a variety of internal and external factors, with exception to China, the BRICs have not dominated the global economy as once predicted. The result, in term of business aircraft, is that over the past decade we’ve seen a dramatic shift back to U.S. dominance of this market. This dominance will likely ebb and flow to some extent over time, but there’s not a lot of data to support a major shift back to international dominance.
Q. Are there any concerns on the international front?
A. The sooner we can get through our current trade dispute with our largest trading partner and sit down at the table and have productive, meaningful and material discussions rather than throwing sticks and stones at each other and turning this pandemic into a political discussion, I think the better off we’ll all be. I also believe that will ease tensions, creating a more positive environment for the global cooperation that will be required to get the world’s economy working gain. I’m off my soapbox.
Q. How has aircraft financing changed or not changed so far?
A. Unlike the Great Recession, where the global banking system suffered from a near-complete lack of liquidity and the capital markets seized up, the banking system right now is in good shape. Liquidity is sound and capital is available. Despite this, lenders are being very cautious for the time being. This is completely in line with the overall industry “pause” that we are all experiencing. The aircraft financing industry will continue to monitor the overall economic environment and the health of the business jet market in order to better understand the impact this disruption is having on demand and, more importantly, aircraft values. Let’s face it: Finance and uncertainty do not coexist very well, and you could argue that we are currently at a point of maximum uncertainty. As the impact of the pandemic becomes clearer and key market indicators related to supply and demand settle into a new normal, the aircraft financing industry will follow suit.
This article was originally published by Molly McMillin of Aviation Week on May 18, 2020.
Global Jet Capital Q1 2020 Market Briefing see more
NAFA member, Global Jet Capital, shares their Q1 2020 Market Briefing.
Q1 2020 can be looked at as two separate stories. Leading up to the World Health Organization’s (WHO) announcement on March 11 that COVID-19 was an official pandemic, most key business aviation metrics were in good shape when measured against Q1 2019. Following the WHO announcement and ensuing social distancing measures, the industry entered into a forced hiatus, negatively impacting flight operations, aircraft production, and deal flow. We are now in a period of uncertainty that looks to continue through the second quarter.
Overall, key business jet market indicators were mixed in Q1 2020.
- Business jet operations declined 9.7 percent compared to the same period last year, a trend that had started internationally in late Q4 2019 and accelerated globally late in Q1 2020.
While OEM backlogs remain healthy, a mix of shutdowns and furloughs across the production ecosystem led industry forecasters to reduce supply side forecasts between 25-50%. While difficult for everyone in the industry, this unusual dynamic may act as a guardrail on aircraft values as the full impact of the pandemic plays out.
While inventories, as measured by the percentage of the active fleet for sale, have been inching up since Q1 2019, they ended Q1 2020 below 10%. This is a historically sound position. Furthermore, to date, there has not been a major increase in new aircraft being listed for sale.
The overall fleet continues to show signs of aging, with 55% of the fleet now greater than 13 years in age. While there is evidence that operators are flying aircraft longer, these data suggest a growing need for fleet renewal.
- There is evidence that the business jet market was undergoing a fleet renewal before the outbreak of COVID-19. Operators were retiring older aircraft in response to mandated upgrade requirements, while new deliveries led to a modest increase in younger aircraft in the fleet.
- Overall, new and pre-owned transactions for the quarter were down 6.7 percent by unit volume and 16.4 percent by dollar volume versus the same period last year. Most of the drop-off was felt in March as the industry hit the “pause” button.
- Residual values experienced modest declines in Q1 2020 as model-by-model volatility continued.
Looking ahead, the full effect of the coronavirus on the market remains unknown, although speculative comparisons to 2008 and the impact of the Great Recession are rampant.
The current environment demonstrates some important differences to 2008, however. The cause of the economic disruption is a virus, not widespread failures in financial regulation. Banking systems and capital markets are not in a state of seizure. Government reaction and intervention has been swift and expansive. OEM production has been curtailed in a disciplined fashion to protect backlogs and ultimately aircraft values. This is clearly a different environment.
Special Feature on the Global Economy
The following commentary comes from Jason Thomas, Managing Director and Head of Global Research for The Carlyle Group, one of Global Jet Capital’s investors.
When people don’t work, shop or travel, it shows in the economic data. March’s economic collapse continued in April with implied growth rates deeply negative across virtually every Indicator we track. Yet, when measured relative to March 31, a slow and uneven recovery in China and the first signs of life in Europe caused our (i.e., the Carlyle Group’s) forward-looking index to rise despite further deterioration in U.S. data.
Officially, the U.S. economy contracted at a -4.8% annualized rate in Q1-2020, a remarkable result considering that official data were consistent with 2% annualized growth through the first 10 of the quarter’s 13 weeks. Our data suggest real consumption fell - 32% annually in April, as spending on experiences (travel, tourism, events, etc.) and big-ticket goods fell to a fraction of pre-crisis levels. The drop in industrial and logistics volumes appears less steep, but energy development is in free fall.
Despite worse U.S. data, U.S. stocks rebounded sharply over the month, with the S&P 500 up by 33% from its March lows and forward price-to-earnings ratios 13% above their February peak. While much of this may be explained by the scale of announced fiscal and monetary policy support, improving public health data also play a role. The level of the S&P 500 has risen in lockstep with the decline in new COVID-19 cases (new infections net of recoveries) and projected U.S. COVID-19 mortalities.
Ironically, the improvement in public health data may have come at the expense of the private health sector. The sharp decline in non- essential medical, surgical, and dental procedures subtracted 2.25 percentage points from U.S. GDP in Q1-2020, a result that implies that revenues at private health care providers and clinics are suffering every bit as much as those in the retail, energy, or airline sectors. Our data suggest U.S. health care hiring is down -15% over the course of the pandemic.
While investors may be looking past the “lockdown” and focused instead on the reopening, business managers are taking a more cautious tac. Our proprietary data point to another leg down in the labor market, with hiring intentions off significantly across virtually every sector of the economy. The initial boom in grocery, delivery and logistics hiring has subsided as those businesses have scaled up to meet demand. Overall, job postings have declined by -40% over the past six weeks and capex budgets have been cut by -18%. Cancellation of jobs, projects, and equipment purchases signals that management teams are preparing for a future that looks far less sanguine than the one pictured by stock market investors.
The only economy where hiring intentions increased over the past month was Italy’s.There were other signs of life in Europe: more workplaces were open and more work trips occurred, contributing to more electricity consumption and better manufacturing numbers. In many European economies, more retail establishments were open at the end of April than the end of March. Online sales continue to grow rapidly.
Despite these hopeful signs, the euro zone economy continues to contract at even more dramatic rates than those observed in the U.S., with a -14% annualized fall in Q1-2020 GDP and an implied annualized decline in April retail sales of nearly -40%. Unfortunately, the economies hardest hit by the virus, Italy and Spain, will also be among the most impacted by any travel restrictions that extend into summer given tourism’s ~15% contribution to GDP.
China continues to recover at a pace that looks either remarkably fast or frustratingly slow depending on your point of view. Over a span of six weeks, China went from fully locked down to operating at 95% of capacity – an impressive achievement. Rather than experience setbacks in April, the economy consolidated these gains with over 98% of retail locations in operation, an impressive 34% rebound in logistics volumes, and ongoing improvement in real estate markets. To detractors, the Chinese economy looks soft. Declines in retail foot traffic, air travel, and subway ridership all point to skittish consumers worried about a “second wave” of infections.
Interestingly, the same concerns that depress transit ridership also bolster auto sales. After declining by -80% in February and - 40% last month, auto sales in China dropped by just -7% in April relative to the same month last year. An 11% annual increase in Beijing auto traffic relative to April 2019 also suggests auto demand has risen measurably. Overall retail sales continue to contract on an annual basis but at a much slower rate than observed a month ago.
The effect of India’s lockdown was evident in the April data. Equipment sales fell at a -34% annual rate, suggesting that the economy is in the midst of its worst performance since the 1991 reforms.
This report was originally published by Global Jet Capital on May 12, 2020.
Tracey Cheek posted an articleGlobal Jet Capital’s Q4 2019 Quarterly Business Aviation Market Report see more
NAFA member, Global Jet Capital, shares their quarterly business jet market briefing.
Global Jet Capital’s Q4 2019 Quarterly Market Briefing covers the state of the aviation market for new and pre-owned business jets in 2019. Additionally, this report provides an overview of overall economic conditions, business jet flight operations, pre-owned and new market conditions, business jet transactions, and changes in aircraft residual values.
This report includes the following insights:
- Led by new deliveries, the business jet transaction market stabilized in the second half of 2019 after a weak first half
- Despite threats to trade, economic growth remained slow and steady while consumer confidence and low unemployment served to reassure many business jet market participants
- New deliveries refreshed a jet fleet that has been aging since the end of the financial crisis
- As the overall market stabilized, inventories continued to increase, but at lower rates in Q4 than earlier in the year
- Overall average residual values remained stable in 2018 and 2019, but model by model volatility continued, particularly in the heavy jet segment towards the end of 2019
- Sustainability will become increasingly important to the industry, which is now developing new techniques and technologies to offset and reduce carbon emissions
Click here to download the full report.
This report was originally published by Global Jet Capital on February 11, 2020.
Tracey Cheek posted an articleGlobal Jet Capital Reveals Importance of Financing in Driving Shift to Larger Aircraft see more
NAFA member, Global Jet Capital, estimates the value of financing biz jets almost $23bn!
New analysis from Global Jet Capital, a global leader in financial solutions for business aircraft, has revealed the important role financing is playing in driving the growth in business aviation.
Since the beginning of 2016, Global Jet Capital estimates that there have been over 8,600 new and used business aircraft transacted around the globe, with the value of financing used to support those purchases totaling almost $23bn. Notably, over 60% of that financing, some $14bn, has been towards acquisitions of new and used large/heavy aircraft.
This financing has helped increase the proportion of larger aircraft within the global fleet. Since 2016 the total number of mid-sized aircraft around the world has fallen by 8%, or 415 planes. However, these aircraft have been almost exactly replaced in number by larger models as the heavy/large jet segment has grown by 419 aircraft, a 6% increase.
As the average purchase value of new aircraft in this larger segment was over $48.2m between 2016-2018, compared to an average of $12.5m for the balance of the market, this focus on larger aircraft provides a significant boost to the overall industry. Indeed, the overall value of deliveries of new large or heavy jets since 2016 totals $26.4bn, compared to a total figure of $14.3bn for the balance of the market.
Global Jet Capital estimates that operating leases to the value of over $5bn are held against new and used aircraft transacted since 2016. The company has seen a significant increase in inquiries for operating leases, with clients attracted by advantages including flexibility and reduction in residual risk. Global Jet Capital expects to see growth in operating leases of over the coming five years, helping drive further aircraft acquisition.
Of all global regions, only Africa has seen a drop in the size of its large aircraft fleet with a 2% decrease since 2016. The Middle East has remained static over this period, while all other regions have seen growth, the most significant in Latin America and the Caribbean, North America and Asia Pacific (with 8%, 7% and 6% increases respectively). North America has witnessed the largest increase in real terms, adding 317 aircraft to its large and heavy fleet, consolidating its position as the global leader for business jets.
Dave Labrozzi, chief operating officer at Global Jet Capital said: “The figures provide a clear focus of where we are seeing expansion in the sector, and the importance of financing in supporting industry growth. The flexibility afforded by operating leases is especially beneficial in helping clients move on to higher value new model aircraft without having to remarket their existing aircraft.
“There are significant long-term advantages in increasing the number of larger business jets in the global fleet. These obviously provide greater capacity per aircraft and therefore offer the benefits of business aviation to a wider population, something which can be particularly important for corporate owners. In addition, the increasing importance in developing new international trade links is resulting in growing demand for aircraft able to undertake longer distances to destinations which may not currently be well served by commercial airlines.”
This article was originally published by Global Jet Capital on October 17, 2018.