All Aviation Articles By David Wyndham

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

Three Tips For Effective Communication

I grew up in Dover, New Hampshire. Most locals tended to drop the letter R when it was at the end of a word. So I was from “Dovah,  New Hampshah.” We were not as bad as our neighbors from Boston (“Pahhhhk the cahhhh”), but you could see the influence. As I aged, traveled, and lived in different areas, the letter R returned.  Other than a raised eyebrow or two, the dropped R never really caused a problem with communicating. 

Within the cockpit, we need to speak clearly and concisely so that any pilot or controller can understand what is said. "Taxi to Runway 18" is not clearance to taxi onto runway 18. In the business world, we also need to communicate clearly. Major decisions can go awry because of misunderstandings. 

Aviation, like other professions, comes with its own tech-speak. Abbreviations and jargon can shorten sentences but can also cause confusion. Mention MSG-3 to the director of maintenance and you get conversation about maintenance philosophies. Mention that to an executive and they may think it is an ingredient in Chinese take-out. NPV gets a blank stare from the pilot and a smile from the CFO. As long as we stay within our discipline, communication can be tough enough, but when the pilot, the executive, the lawyer and the CFO sit down, things can easily be misunderstood or worse. Guess who we need for a successful aircraft acquisition?

The whole point with communication is to understand and be understood. Here are three tips to get everyone on the same page. 

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Explain it to me like I'm an eight-year old. 

Eliminate the jargon, or explain it. Jargon only serves to exclude people who aren't in the club and can easily make someone feel resentment over being left out. BFL is not a football league in Belgium. While replacing BFL with "runway needed for take-off" isn't 100% technically correct, it does get the point across. Don't dumb it down, just be clear. Simplicity works.  

Stay focused. 

With regards to an aircraft selection or recommendation, make sure you focus on the requirements for getting an aircraft. If the aircraft is for business use, make sure that all the requirements connect the aircraft with the corporate mission. Why do we need this non-stop range, why do we need this cabin size, why this many seats? The answer to these aircraft questions needs to end up at why you need the aircraft in the first place. 

Keep it short. 

Lincoln's Gettysburg address was 268 words. I know the lawyers don't/won't/can't do this, but in general, brevity helps with communications. When you communicate with individuals with different skill sets, keeping it straightforward keeps everyone on the same page. Did you ever read a seven page email? I know I never did and never will. A seven page report might be too short. A two page summary is too long. Brevity is using just enough words to convey the point.

We routinely work with the aviation department and the executive team at the same time. The pilot understands the technical information regarding why we are recommending a certain aircraft. The executive team understands why the recommendations make business sense. The cost and financial analysis needs to pass the scrutiny of the CFO. 

"I know that you believe you understand what you think I said, but I'm not sure you realize that what you heard is not what I meant." Robert McCloskey 

 

Find aircraft for sale listings and pilot resources for U.S. airports on GlobalAir.com.

2011 Business Aviation Outlook

2011 Outlook

New Year’s Eve was an early night for me. I was fighting off a nasty cold and despite the intake of grape-related products, ran out of energy before 2011 said hello.  But as I didn’t sleep much either, I guess I was awake for the New Year. With some drugs in my blood, the cold’s effects are waning as I write this. If my outlook for 2011 is a bust, I will claim it is the after-effects of decongestants!

2010 was a year of what I’ll call a stagnant recovery. Economic signs were generally positive. The US stock markets finished 2010 with double digit gains versus 2009. NASADQ was the biggest gain up almost 17% over the year. However, rising corporate profits and stock indices have not resulted in job gains here in the US.

Business aviation is tied in with corporate profits, so that much bodes well for our industry in 2011. Aircraft sales are expected to be (relatively) strong for the last quarter of 2010 if the December activity of aviation tax and legal folks are any sign. Flight hours flown seems to be on the rise as well as charter activity. But again, new jobs and rehires are not showing strength just yet.

So here go my picks for 2011:

Business aviation activity will continue to show steady, but slow, growth. I think aircraft sales will slowly increase here in the US, be flat in most of Europe, and show some strong growth in the Middle East and Asia. As with the past several years, I think more than half of the new aircraft sales will be outside the US.  So for US-based aircraft brokers with International experience, this should be a better year for you.

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Used aircraft values will stabilize. Popular, newer models will likely show some appreciation as the correct for being under-valued. Older business aircraft values will be stable. I don’t look for any appreciation in first generation business jets as these low prices are the new normal.

As one banker said to me about aircraft age, 15 is the new 20. In other words, financial institutions will continue to be wary of lending substantial amounts on older aircraft. Full disclosure and down payments will continue to be required as credit is available to the well qualified.

Fuel prices will rise considerably in 2011. Crude is inching to $100 per barrel. While some have forecasted up to $150 per barrel for this year, others think the increases will be much lower. So $6 to $7 per gallon may be on the near horizon. This will have negative effects on business aviation as I doubt budgets are increased for many operators. So if you don’t have a wallet full of fuel discount cards, better sign up now! And don’t forget to
use Max-Trax to map out your fuel stops en route.

Jobs. I don’t see a lot of hiring in new manufacturing within aviation. The OEM’s are still hurting and will be very cautious in re-hiring employees until they start getting a solid order book. Even with Bonus Depreciation here in the US that is still a ways off. MRO’s should see a good year as operators that have put off maintenance and refurbishments need to have the work done. That should bode well for jobs in that sector.  As flight hours pick up, that should mean more jobs in the cockpit. Again, I suspect companies will be cautious and slow to re-hire. Do more with less is the mantra for aviation managers (again) this year.

So what does this mean for the typical operator? I hate to repeat myself, but managing and controlling your costs will be job #1. Which means that you will need to understand your costs, track your costs, and budget wisely. I hope we can be a help.

Tips To Maintain Your Aircraft's Value

It is a process, not an event.

First off, maintain the aircraft.

A well-maintained aircraft will always have a higher residual value than one that is not. Well-maintained in this case refers to an aircraft that is maintained beyond what the minimum regulatory standards require. Airworthiness is related to safety, not value. 

Being well-maintained means more than keeping up with the required inspections and component overhauls. It means the aircraft has its equipment in functioning order, non-critical wear and tear items are taken care of, and cosmetics are recognized as important, too. There may be optional service bulletins that add to the functionality and maintainability of the aircraft. These optional service bulletin items should be chosen with maintainability and mission effectiveness in mind.

The aircraft exterior should be kept clean and polished. Interior comfort and convenience items need to be maintained in good working order and updated as required. A clean aircraft is not only more appealing, but problems and issues are spotted earlier and thus, may be easier and less costly to remedy. Paint and interior should be kept in good condition continuously, not just in the week prior to putting your aircraft up for sale.

The best ones to maintain the aircraft, if possible, are your own in-house maintenance staff. A well-trained, dedicated maintenance staff is your first and best opportunity to keep the aircraft in top condition. Your choice of a major MRO (Maintenance, Repair and Overhaul) facility is important as well. Picking an MRO is more than just going with the lowest bidder. The MRO must have the knowledge and skills to perform the required maintenance, and when necessary, troubleshoot and repair your aircraft. They must do so in a manner that inspires confidence in their work. They do this by meeting schedules, communicating regularly, and by returning your aircraft in such good condition that follow-up work is minimal, if at all required. In-house maintenance plus an MRO with a top reputation for your aircraft type is a one-two combination for maintaining your aircraft value.

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Maintain the aircraft records.

Maintenance records are the health record of your aircraft. Detail beyond "Required inspection complied with" helps with maintaining your aircraft value by providing a written record of the quality of your aircraft. When I see my physician for my annual checkup, I want to hear more than "looking good, see you next year." What is my weight, blood pressure, cholesterol, etc? The aircraft maintenance records not only need to be a true and exact representation of your aircraft, they are also the written proof as to the quality of the maintenance. This is the tool to use to communicate the health of your aircraft to your maintenance staff, MRO, and any future buyer. Missing and incomplete maintenance records call into question even the basic airworthiness of an aircraft. 

Be careful with upgrades.

As aircraft age and the production numbers get sufficiently high in number, there are always third party companies that seek to enhance the aircraft in terms of functionality, performance or looks. When evaluating an aftermarket upgrade for your aircraft, you need to consider the impact on the aircraft's value. 

Does this upgrade represent a step forward in technology closer or equal to that of a new variant? If the current production models have a particular feature that is also offered as an upgrade to your model, then that likely adds value to your aircraft. An example might be upgrading your old avionics to the current production model's avionics suite. 

Is it something that is going to be commonly accepted by most buyers? One-of-a-kind is great in art, but not with production aircraft! If your aircraft is one of a few upgraded with a particular modification, then where or who will be able to work on it? Why isn't that feature more commonly requested or installed?

While first and foremost, an upgrade has to make sense for you and your aircraft mission, you also need to be aware of its impact on the future value of your aircraft. 

A clean, well-maintained aircraft will tend to be more reliable in its day-to-day use. Along with its records, this will speak volumes to a future buyer that they are indeed getting a quality aircraft.

(When) Will Business Jet Values Recover?

The 2010 NBAA Annual Meeting finished up less than two weeks ago. For the most part it was a success. At our booth on the convention floor, we saw a lot of good, quality traffic. People were generally upbeat. From talking with folks all year long, and especially at NBAA, here are a few comments on where aircraft values may be headed.

Big Iron. Global business jets are recovering, if they are newer. At the top, the GV/G550/ Global Express families currently show about 4% of the active fleet as “for sale” according to AMSTAT. Vref shows that values flattened out over the summer and have started to drop a bit in recent months, but with a low number for sale, I’d say the market for this category has hit recovery mode.

Long range business jets, they are not doing quite as well as their big brothers and sisters. The Falcon 900EX shows 7% of the active fleet for sale and for the G450, it has 4% of the active fleet for sale. The Challenger 604 shows 11% for sale while the newer Challenger 605 shows 4% of the fleet for sale. So while numbers for sale are getting tight, values in this big cabin/long range market have not recovered (yet). As you look at older models in this category, the numbers (as a percent of the active fleet) increase, and values tend to show less of a recovery. In general, older big cabin and long range business jet values have not showed signs of a recovery.

Super mid-size values remain soft, but again the numbers for sale show a tightening up in the market. For the Challenger 300, 8% of the active fleet is currently listed for sale.  Challenger 300/ G200 values are flat as are Citation X and Falcon 50EX values.

Midsize jet values like the Hawker 800XP family, Lear 60, Citation 650s are flat. Percentages of their active fleet for sale are in the 12 – 22% range. Again, I am not seeing any recovery here yet.

[more]Small jets: percentages of the fleet for sale vary by model. In general, newer models have a smaller percentage of the active fleet for sale. Overall, this market is still soft and values have not shown much of a broad recovery. Values are bouncing around at the bottom. Again, popular, newer models are doing better than older models.

For business jet values, the newer, bigger aircraft are leading the way with a soft recovery. Anecdotally, I’d say this is likely to continue. With a relative tightening up in the number for sale, values will strengthen for these jets in the coming year.

As you move down in size, things are not as healthy for residual values. While a general recovery is under way, it will take longer for values to recover, but only for the newer models.

For business jets older than 10-15 years of age, I just don’t see a lot of evidence of a recovery in terms of sales and residual values. I do not have confidence that the situation will see much improvement for these older jets. I think that what you see in residual values for the older business jets is the new normal. Why?

·     Banks are not into lending for older business jets. They do not want the residual value risk for a 20 year old aircraft, nor do they wish to sell it if it comes back to them after lease end or a default. Yes, you can get financing, but with impeccable credit and a significant down payment. 

·     The market recovery seems to be led by sales outside the US. In recent years, more and more new business jets were being sold outside of the US. These markets are no longer “dumping grounds” for the aging business jet. The can afford and want the newer models.

·     The last several business boom cycles saw a large increase in aircraft production rates. Thus, the used aircraft buyer tends to have a large number of relatively new aircraft to choose from.

By most economic prognostications, it will take 12-24 months for the recovery. Some global regions are well into a recovery while others lag behind. The supply of used aircraft will take time to draw down. Meanwhile new deliveries will continue to occur. I don’t see enough growth forecast to generate the market demand to clear out the older business jets’ inventories. Theese older jets will continue to age. I do not think their values will recover with many of the oldest business jets only maintaining their salvage value.

I've seen Richard Aboulafia of the Teal Group present his firm's aviation sales forecast on several occasions. As he said one time, "If you don't like my forecast, feel free to make one up on your own." So don't worry so much about the future, but just take care of today. If you need a jet, go get one. If you need to sell your current jet, go get a good broker to represent you.  

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