All Aviation Articles By Darryl Abbey

Aircraft Financing: A Return to Sanity

Two years ago, if you were interested in purchasing an aircraft and wanted to finance a portion of the acquisition cost, the world was your oyster. Low down payments, extended loan terms of 20 years or more, minimal credit verification all added up to a great deal for buyers in a marketplace full of competition. Much like the home mortgage market or commercial finance world, capital was available and, seemingly, as long as you had a pulse, someone was willing to offer you a loan.

We all know what happened in October 2008: the financial world was turned upside down. Financial markets were faced with the imploding real estate bubble, commercial and secondary market capital providers like Bear Stearns, Merrill Lynch and many retail lenders, big and small, teetered on the brink of ruination. Many fell over the edge. In the aircraft world, lenders retracted and in some cases, exited the market place. Buyers retracted, watching the values plummet to record lows and waiting for the market to hit bottom. Some owners were forced to sell their aircraft whether they wanted to or not.

All of these and many more factors resulted in a fractured aircraft sales and finance market with a huge volume of aircraft for sale, few buyers and even fewer opportunities to finance acquisitions.

Now as we approach mid 2010, we see that the worst of the economic storm seems to have passed and the world of aircraft sales, purchases and financing seems to be returning to a calmer state. I do not mean that these markets have returned to the craziness of 2008 but the phoenix does seem to be rising from, or at least poking its head out of, the ashes.

Aircraft prices seem to have bottomed out and some sources even indicate that the single engine aircraft actually seem to be gaining value (up from the 30% or 40% loss of value that took place in 2009). Finance opportunities are rebounding as well. Although there are far fewer banks and finance companies willing to write aircraft loans, the ones that remain seem to be willing to extend credit, and here is the big difference, provided that more stringent underwriting criteria are met.

The entities that are willing to underwrite aircraft loans generally fall into two categories: 1) Small or medium sized financial institutions who, as a general rule, did not suffer from a high volume of non-performing aircraft loans or 2) Large financial institutions for whom aircraft finance is a less significant portion of their credit related business and who, thanks in no small part to the stabilizing impact of TARP funds, had the ability to absorb them more easily. Regardless of which of these two categories they fall into, the number of aircraft finance entities in the market in 2010 is dramatically smaller.

So, let’s say that you have been watching the aircraft sales market and carefully shepherding your capital for the last eighteen months waiting for the perfect price on the aircraft of your dreams. Having found your prize, you now are interested in financing a portion of the purchase price. What should you do and what should you expect?

You can use an aircraft finance broker or, in some cases, go directly to the actual lender. Some industry groups have associated finance plans and the internet can be a useful tool in determining who to talk to. You will likely find that you will need to make a down payment of at least 15% of the value of the aircraft (more if you anticipate any commercial use of the ship, that the duration of the loan will not exceed twenty years and that you will need to have a strong credit score (FICO), good liquidity and good cash flow. Lenders will look long and hard at financial statements, tax returns, credit reports and/or other documents so it is in your best interest to have all these types of documents ready and know where you stand financially before beginning the loan application process.

If you have not recently checked your credit score, do so. Most states allow you to obtain a free credit report annually. Personally, I think it is a good idea for most of us to check our credit score with all three major credit-reporting agencies at least once a year. In this day of potential identity theft, it is wise to make sure that the only person affecting your credit score is you. If, during the course of your personal credit review, you uncover something that is or appears to be incorrect, address it immediately with the credit agency. Remember, financial institutions occasionally make errors when they report to the credit agencies but it is up to you to see that they are corrected. Historical delinquency issues related to mortgage and installment debt payments are now critical issues impacting financing of luxury items. You should be prepared to expound on any delinquency circumstance that may be reflected on your credit bureau. Such items may not turn out be an automatic disqualifier but will likely impact any finance terms if offered. If you are disputing any creditors reporting, have that documentation available in advance.

Make sure that you can demonstrate to the lender that you will be able to repay the loan, even if unforeseen circumstances arise. Cooperate with them by doing what is needed to demonstrate your credit worthiness for the loan requested and ability to repay it in accordance with the agreed upon terms. After all the financial woes we have been through, lenders are not likely to offer you a loan based solely on your winning smile and steady pulse.

Whatever you do, use common sense. Ask friends and colleagues who have recently (within the past few months) financed an aircraft who they used. Call finance brokers and/or lenders and ask questions. Make sure you are comfortable that the individual and entity you are dealing with has experience in lending, can help you through the transaction efficiently and, most importantly, deal with you in an honest and helpful manner.

I've Had an Aircraft Accident: What Do I Do?

Most pilots will go through their entire flying lives without ever having an accident or incident involving an aircraft. That is a wonderful testament to the quality of pilots flying in America today as well as the quality of the aircraft which they operate. Most pilots work very hard at maintaining the skills necessary to avoid aircraft accidents. That includes proper initial and recurrent training, adequate and effective aircraft maintenance programs and, depending on the type of aircraft and type of operations, participation in a Safety Management Systems or a full ISBAO program as commitment to safety of flight.

However, we are all vulnerable to the whims of fate or development of a fault tree that leads to something which we try our best to avoid: an accident. The cause might be a sudden downdraft or cross-wind burst just prior to landing, an unexpected runway incursion, a slight depression in the taxiway or a catastrophic systems failure. There are possibilities lurking out there that, try our best, we may not be able to foresee or overcome.

Hopefully, you will never have to experience an event of this type; certainly not one of a catastrophic nature. The old saw of "bent metal is always better than broken bones" never rang more true. Accidents involving injury (or worse) can become extremely complex and are best dealt with by medical, legal, FAA/NTSB and or insurance professionals. It is not the intent of this article to deal with those events.

What this article is intended to address is the incident in which your aircraft is damaged, for some unforeseen or unexpected reason, and you need to interact with your insurance carrier to file a claim, get your aircraft repaired and start flying again.

Aircraft Insurance, like other types of property /casualty insurance, is based on the principle of indemnity: In exchange for the premium paid, the insurance carrier will make you whole in the event of a loss (subject to deductibles, exclusions, terms and conditions). This does not mean that your insurance carrier will pay to replace your steam gauges with the latest glass panel or "zero-time" your engine. The spirit of the insurance contract is to put you in the same condition you were in prior to the accident. The wording of you aircraft insurance policy may seem complex but, given a little effort on the part of the policy holder (a couple of hours to read the policy) and a broker or underwriter willing to answer questions, it is relatively easy to understand. Like your auto insurance policy, your aircraft insurance functions in a pretty straight forward manner.

So, what are the basic and appropriate steps you need to take in the event of an accident involving your aircraft?

If you have an accident, you need to:

1) Report the accident

As soon as possible, report the event to your broker or insurance carrier and, if the event is significant to warrant it, the FAA or NTSB. Some insurance carriers will provide you with direct reporting channels (via phone or e-mail) but, if you have an insurance broker you should contact them first if at all possible as they are your advocate in all insurance matters.

In preparation for this initial report make sure you have the important facts. Use "Who, What, Where, When and How" as a guide. You will need to provide date, time location, description of events leading to the accident, who was PIC, SIC and any passengers onboard, description of the damage to your aircraft as well as damage to any other aircraft and to any persons or property not in your aircraft (including on the ground or other in-motion or in-flight aircraft). You may have to provide additional information subsequent to the initial report but your broker and/or insurance carrier will advise you of what you should provide and to whom.

2) Capture the event and damage

If possible, take photos of the scene of the event. Carrying a disposable camera in your emergency bag on the aircraft is a good idea (remember to check periodically and replace if needed). Memorializing the physical location, the amount and scope of damage, weather conditions and other important factors on film or digital media can be a valuable resource.

Prepare a written statement. While it may be difficult to slow your mind down after an accident, it can be beneficial to prepare a personal account of what happened and how it occurred from your perspective. The most difficult part of this written statement is to remember to use only the facts as you know them. Do not speculate, guess, assume, pre-suppose or interpret. Just record the event as it unfolded to you and try to include as many facts as possible (time, weather conditions, airspeed, attitude, altitude, heading, aircraft performance, traffic, etc.). You may choose to, or be required to, share this statement with others so just stick to the facts.

3) Protect your aircraft from further damage

Depending on the location and severity of the event, you may need to wait for the FAA/NTSB, state or local or other authorities or your insurance carrier to authorize movement of you aircraft to a secure area. However, if the damage is minor, it maybe your responsibility to see that the aircraft is moved to a location where weather or other conditions will not cause or contribute to additional damage. If this is the case, make sure that the location (preferably a controlled environment) is secure but accessible to both you and your insurance claims person. In most cases, a local FBO or repair shop can provide a good, secure location until such time as you and your insurer are ready to have the repairs made.

4) Cooperate with your Insurance Carrier

Unlike the reputation of some other aspects of the insurance world, aircraft insurers, for the most part, want to work with you to ensure that your aircraft is repaired and returned to you in an efficient and timely manner. If the aircraft is deemed to be a total loss, the insurer wants to pay you, close the claim and deal with the salvage.
Like you, your insurance carrier understands that the claim will not improve with age so they want to treat you fairly, in accordance with the terms and conditions of your insurance policy, and get the repairs made or payment made as expeditiously as possible. Providing the claims adjuster with the information he or she needs to get the repairs completed and the claim settled will only get you back in the air sooner.

5) Use a repair shop that you trust

While the accident may not have occurred at your home base, you still have the ability to decide where, within reason, you want to have the repairs made.
Depending on the amount of damage, you may be able to work with your insurance carrier to ferry the aircraft to your preferred repair facility, be it the manufacturer or your home FBO. If the repairs are minor enough to have fixed locally and you choose to do so, ask around about the quality of work performed by the facility that you are considering. If there is more than one shop on the field, find the one with the best reputation and check their prices with the insurance carrier. Even if the carrier balks at the repair cost, you might find it worthwhile to contribute toward the repair if you know it will be top notch. After all, you want your ship back in the best shape you can get it.

6) Consider this a learning experience.

Once you have had an accident, affected the repairs and are ready to fly again, ask yourself, "What can I learn from this experience?"

The answer may be that you can learn many things including that you need more frequent recurrent training, better quality training or training of a different sort. It could also be that you need to pay more attention to the upkeep and maintenance of your aircraft including the quality of the work performed by your preferred shop. A good mechanic takes pride in his work
and should not be unhappy to show you what has been done and explain why. It may be his or her name that goes in the maintenance log book and they may have responsibility for the service or repair work performed but you are flying in the aircraft and, potentially, staking your life on their work so check it out.

No one wants you to have an aircraft accident or incident. If you do, however, remember that you buy insurance coverage for just such an event. Your insurance policy does have limitations and may not cover certain things after a loss (like certain types of damage excluded by the policy, diminution of value and damage within the deductible amount) and your insurer may require you to do certain things after a loss but you should view your insurance carrier as a partner in this process.

If you stay informed as to what coverage your aircraft insurance policy provides, use your insurance broker as your advocate and intermediary (part of the service for which you pay them) and stay actively involved in the process, you can help make an unfortunate situation as least painful as possible.


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