All posts tagged 'Finance'

Pre-owned Update

By: Bryan A. Comstock
www.ainonline.com

Finding a pricing floor for many models has been as elusive as the search for Atlantis, but recent market action is giving hope to underwater sellers. The typical summer plumping of inventory never occurred this year, setting the stage for what could be an active wave of buying in the final quarter. 

Retail transactions in the pre-owned segment are up over the same year-ago period among light and medium jets and about even with where they were last year in the large category. While a one-year look back might not provide enough incentive to do cartwheels, consider that you would have to look back at the peak years of 2006 and 2007 to find numbers close to the current level of sales.

A possible explanation for the noticeable uptick is the extremely attractive pricing that has swept through the market year after excruciating year and which may only now be close to a tipping point. Though buyers surfacing now are certainly not late to the party, it may take longer to sift through markets already plucked of their low-hanging fruit.

Seriously, Challenger 604s and GIVs for less than $5 million? Yes! While you might be looking at 10,000 or more hours in the logs, there are non-project aircraft that can be bought for a song. Of course, such low pricing on large-cabin aircraft compresses pricing not only on predecessor models but also on smaller segment markets, such as the super-mids and mid-cabins. G200s, Hawkers, Citations, Learjets are just deals waiting for a buyer. Any upside pop in consumer confidence (be it from QE3 or the upcoming election) could see fourth-quarter numbers eclipse quarter-over-quarter figures for the peak years. The resetting of these asset prices, coupled with the larger number of choices today, is the only way this could be possible. Despite inventory trending down over about 500 aircraft since 2009 (even as the fleet has increased), collectively just over 13 percent of the worldwide fleet is for sale.

Pressure on Newer Inventory

Once a buyer begins to apply his own parameters, however, the field of wings may diminish. For example, for a buyer wanting a 2000 or newer model, the percentage figure drops below 9 percent. If that buyer doesn’t want to look beyond North America, choices drop another 2 percent. A European buyer wanting to buy on home soil has even fewer options in terms of the sheer number to choose from, but twice as many in percentage terms when compared with the U.S. In Europe, 298 aircraft fall into the 2000 or newer grouping compared with 437 in North America. A buyer in today’s market should not overlook any offerings in Europe, as the glutted market appears to offer fertile shopping grounds.

Take the Citation Excel, for example, a popular midsize that saw its fleet size grow to more than 370 before a new and improved version came along. Still a well sought after aircraft, it shows up with only 8 percent of its fleet for sale, but half of the 30 are in Europe and only 11 in North America. The successor model exemplifies the point further. Equally popular, the XLS offers 21 for sale. Only six of them are based in North America and more than half are in Europe. Perhaps not as surprising is the Falcon 2000, where European and North American supply is even at eight, with only two others located outside these two areas. The Challenger 605 is just one more example. Of the 17 for sale at present, nine are based in Europe, four in Asia, three in North America, plus one delivery position.

The take-away here is that with more than 2,500 aircraft for sale worldwide it shouldn’t matter where you shop as there are plenty of deals to go around, and in the past several years we haven’t seen anyone raise the price of an aircraft that has been on the market. In addition, with such fertile hunting grounds, buyers seem less emotionally engaged than at other times. If a seller isn’t market priced, the buyer will explore the many other options that are available. While indicators imply that some model types have reached the bottom of the market, that doesn’t mean prices are going to shoot up anytime soon and buyers still have the decided edge at the negotiation table. Even the most popular of aircraft have absorption rates extending beyond a year.

(Image Credit: www.ainonline.com)

There's Money For Aircraft Deals, You Just Have To Know How To Ask For It.

This article was written with the aid of Joseph Dini of Air Credit Alliance.

ABBA was a Swedish pop music group who had quite a number of hits in the 1970s. At one point, they had album sales outside of the US exceeding that of the Beatles. One of their songs had a chorus of

“Money, Money, Money, it’s a rich man’s world”

If you are looking to finance an aircraft, it may seem to you that the only ones getting financing don’t need it; that there is no money for aircraft deals. That statement is only partially true. There is money out there, but not for crazy aircraft deals. Crazy aircraft deals are as follows:

  • No 100% financing. No interest only with a big balloon payment, either. Too risky for the banks to even consider.
  • No "trust me, I'm good for it" loans. You may know someone famous, or rich, or rich and famous. It will take more than your word for the bank to lend money.  Banks need verification.
  • No old airplanes. There is still a glut of used aircraft on the market. The last ones moving generally are the oldest aircraft. Rule of thumb: the aircraft age at the end of the deal must not exceed 20 years. So if you want a 5 year loan, the aircraft must be no older than age 15 at the start.

This “no old planes” is very true in the turbine world, and even in the piston market banks are loathe to take a risk on a stable, popular piston.

What you need for a loan or a lease of an aircraft are the good old fashioned banking requirements of Credit, Character, Collateral, and Capacity.

When I use the term "bank" I mean that to cover all financial institutions that are (still) in the market of leasing and loaning money for business aircraft.  You need to prove that the deal works for the bank.

Credit. You need to demonstrate that you have the finances to acquire and operate the aircraft. Complete fiscal disclosure is needed. You need to show that your Assets exceed your Liabilities and that your Assets are able to survive an economic downturn.

Character. Who are you? Reliable, dependable, salt-of-the-earth type character counts.  If you (or your own business) has a bankruptcy history, don’t plan on financing. Consistent creditworthiness needs to be demonstrated. If your record matches that of Lindsey Lohan, then you'd better pay cash.

Collateral. No 100% financing means both a down payment and sufficient cash or cash-equivalents to secure the aircraft. Today, as a rule of thumb, you will need 20% down payment on a new business jet. As the aircraft gets older, you will be asked to come up with a larger down payment. For a 10-15 year old business jet, 50% down is not unexpected. Same for pistons, expect a sizeable down payment. You may also need to post a security deposit for a lease as well as be required to pay down the loan should your aircraft value deteriorate to an unacceptable level during the loan period.  In the event you want to sell the aircraft, this is in your benefit as you will be maintaining equity in your aircraft.

Capacity. Can you afford to not only make the payments, but also pay the bills to operate the aircraft and still pay your other debts, too? 

In all of the above, relationships matter.  If you have a significant long-term history with a bank, they should be your first stop for all financing issues. They know you, your character, and your credit history and should be able to make the best deal to secure your business.

Leasing follows similar requirements. One plus in today's market is that short term leases (two to three years) may have more attractive rates as the banks are still looking to unload aircraft. Three to ten years is a typical lease duration.  If you do not have significant business use of the aircraft, a lease may be a better deal as the bank can make use of the tax depreciation of the aircraft. Remember, plan carefully with a lease. Exiting a lease early is easy, just pay off the remaining lease payments! You may wish to negotiate for an early buy-out option if you think you may not make the full lease term.

You will need a stack of paperwork at least a high as the tail of the aircraft!

  1. Historical financial and tax information (may include your spouse too for an individual)
  2. Credit and bank references
  3. Aircraft purchase agreement
  4. Information on the seller (or dealer-broker)
  5. Used aircraft deals may be helped if there is a pre-purchase inspection already done

This is all very much like applying for your mortgage.

The rate you will get on a loan or lease will be in proportion to both what the bank’s cost of money is, the risk they see in the deal, plus their need to cover expected or historical losses, and taxes.  Today, money is cheap for the banks, but their risk tolerance is low.  If you want to check out some of the financial institutions in the aviation business, head over to the Globalair.com - Finance Directory

So the money is there, you just have to qualify. In 2008, aircraft lending was like a community college, almost everybody got in! Today, they are more like an Ivy League School. When looking for a loan or lease, be ready to discuss your finances, and remember that the banker you know may be your new best friend!  So if you have your best friend in hand and ready to buy or lease an aircraft Globlair.com offers a great place to start looking for "Aircraft for Sale" or "Aircraft for Lease".  Who knows some of them may even have Owner Financing!

Do you have any thoughts and/or suggestions regarding the Financing of capital assets (Aircraft).  What are your experiences?  The only way we learn from mistakes

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