The Art and Science of Aircraft Financing
When purchasing or financing an aircraft, it’s essential to determine the aircraft’s value. To do so, the specific aircraft is reviewed in detail, and comparable transactions of similar makes and models are considered. Lenders will loan a percentage of purchase price or book/appraised value, whichever is less. This is the case whether you are considering a term loan or a finance lease. Understanding how aircraft value is determined is essential to ensure you are not over-paying.
Determining the Value: Essential Considerations for Aircraft Lenders
The heart of the matter lies in how aircraft lenders calculate the value of an airplane. “What’s It Worth?” remains a fundamental question for anyone considering how to finance an aircraft. The core factors aircraft financiers consider when setting up airplane financing rates are threefold: the plane’s make and model, its age, and its condition.
The Make and Model of the Aircraft
When valuing an aircraft, you start with the make and model. Makes and models with a robust pre-owned re-sale markets are the most desirable to lenders, and tend to hold their value best.
The Age of The Aircraft
The age of the airplane is a big factor in value. With piston aircraft, age isn’t a big factor. With jets and twin turboprops, it is. That’s partly because turbine aircraft have much more complicated operational systems, and they can become outdated more quickly. Availability of parts and maintenance is a factor. You may have heard that it’s not possible to finance a jet older than 20 years old. That’s not true. There are simply fewer financing choices, and rates and terms may be less favorable than they would be for newer aircraft.
Condition of the Aircraft
There are many things to consider regarding condition:
- Has the aircraft been well maintained? Are the maintenance records well kept and up to date? For jets, is the aircraft on digital maintenance tracking? That’s a plus.
- Are there gaps in the service history?
- How up-to-date are the avionics?
- For jets, is the aircraft on an engine maintenance program? That’s usually required by banks, although there can be some exceptions.
- Have all Airworthiness Directives been complied with?
- What is the condition of the paint and interior?
- How much time is on the aircraft and the engines? This directly affects value.
- Are there any major maintenance events that are overdue, coming due, or complied with? Overdue or coming large maintenance events can be a value deduction, whereas recently completed large maintenance events can add value.
- Is there any major damage history?
- Has the aircraft been exposed to damaging elements? Has it been stored in a climate-controlled hangar? Has it been exposed to sea air or salt water or dessert sands?
Valuation Tools
There are a couple of industry-standard aircraft valuation tools, such as Vref and Bluebook. These are subscription services that allow you to input year, make, model, total time, engine time, and upgrades, and then they churn out a value.
These tools are great at providing guidance on value, but they are only as accurate as the person inputting the information. They also rely on recent purchase and sale information to generate values based on current comps. In a rapidly changing market, it can be hard for the databases to keep up.
Appraisers are another option to determine value. Banks often require formal appraisals for aircraft selling for more than $1mm, and buyers always have the option of obtaining an appraisal when there is a discrepancy between purchase price and the lender’s valuation. Appraisers are plugged into the current market and can consider much more detailed data and comparisons than Vref or Bluebook can.
Demystifying Options for Aircraft Loan Financing
Acquiring an airplane, whether for commercial or personal use, can seems like an overwhelming endeavor, but The Aircraft Lenders is here to help. There are a number of financing options to consider.
- Traditional Term Loans: This is the most popular aircraft finance option, wherein you borrow money and pay it back in monthly payments over a fixed period. Common term lengths are 15 or even 20 years, but those are usually only available for aircraft purchases of $5mm and under, for Part 91 use.
- Term Loans with a Balloon: In many cases, especially for charter aircraft or $5- million-plus purchases, lenders will structure loans with a 5-year term and a longer amortization. After the 5th year, the borrower will need to pay off the balloon or refinance.
- Refinancing Options: Primarily used to leverage better interest rates or loan terms, or to finance a balloon payment or even an upgrade to the aircraft such as an engine overhaul, avionics upgrades, installation of wifi, or paint and interior.
- Leases: These are usually reserved for businesses. They offer 100% financing and require that all payments on the lease be made if you want to pay off the lease.
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- With leases, the lender often retains title, so that impacts depreciation possibilities. Terms and amortizations are typically shorter than for term loans.
- 100% financing means leases can be a good choice for those trying to preserve capital expenditures.
- Operating leases are another option. These are equivalent to “renting” the aircraft for a monthly fee for a fixed time period. The lessor retains title.
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Making The Right Choice
With various options at hand for aircraft loan financing, navigating the aviation finance landscape can appear overwhelming. The Aircraft Lenders can help guide you through the process, from initial aircraft valuation to pre-evaluation of financials, to loan approval, to closing.
