The utilization of business aviation has grown in popularity as both individuals and companies recognize the benefits of safety, comfort, and time savings that business aircraft offer. This realization prompts them to explore aircraft acquisition options if chartering an aircraft is not feasible. However, when potential business aircraft users begin evaluating suitable aircraft in terms of new or pre-owned assets, capacity, range, and price, they should also consider financing options to make an informed decision. This is because cash flow plays a critical role in both the acquisition and the operational life cycle of the business aircraft.
Companies that fail to assess financing options properly may either be unable to acquire the appropriate aircraft financing or have to endure the burden of expensive financing that is difficult to manage over the operational period. In this blog, we will discuss various financing options and outline the advantages and disadvantages of each option. Before we jump into that, let’s first take a look at the benefits of reviewing financial options before embarking on the aircraft acquisition process.
Benefits of Owning a Business Aircraft
- Liquidity:
Purchasing business aircraft can require a significant amount of capital during the acquisition phase, ranging from $2 million to $70 million, depending on the size and type of aircraft. Financing options, such as debt or lease, can reduce the initial capital outflow by up to 80% for both new and pre-owned aircraft.
- A higher return on equity:
By financing an aircraft through debt or lease, companies can free up to 80% of their equity for deployment in other businesses that offer a higher return on equity than the cost of aircraft finance.
- On or off-balance sheet transactions:
Asset-heavy companies may choose to finance an aircraft through debt or finance lease to keep it on their books and benefit from depreciation. On the other hand, companies with an asset-light strategy may prefer operating lease finance for off-balance sheet transactions.
- Manage life-cycle costs and risks:
Lease financing can offer greater flexibility for changing aircraft in response to business needs compared to debt financing. Although generally more expensive than debt financing, financing options can be used to balance cost and flexibility in managing life-cycle costs and risks.
Financing Options for Business Aircraft
There are three major factors that influence aircraft financing rates and the extent of the loan. These factors are:
- New or pre-owned aircraft:
Financing options are typically more readily available and cost-effective for new aircraft compared to pre-owned ones. New aircraft come with manufacturer warranties and predictable residual risks, making them less risky for financing institutions. This results in lower financing costs and upfront deposits.
Acquiring a pre-owned aircraft presents challenges, such as the need for thorough technical due diligence to assess the asset quality and maintenance history.
- Creditworthiness of the acquirer:
Engaging with financial institutions early on allows for the evaluation of the company’s risk profile and creditworthiness. Typical finance processing may require extensive documentation, which can affect the qualification of the aircraft acquirer and impact the cost of capital, structure, and tenure of financing.
The four most commonly preferred business aircraft financing structures are:
- Structured debt finance:
A secured loan structure in which a lender provides a loan to a company to purchase an aircraft from a manufacturer or seller (for pre-owned). The loan is secured by a mortgage or other security interest over the aircraft. The company has owned the aircraft from the beginning, and the asset is included on the balance sheet of the company.
- Operating lease:
The lessor purchases the aircraft from the manufacturer (if new) or seller (if pre-owned) and leases it to the lessee. The lessee does not own the aircraft and makes payments to the aircraft owner to use it.
- Finance lease:
The lessor purchases the aircraft and leases it to the lessee, who shows the aircraft as an asset on their balance sheet and receives depreciation benefits. The lessee has an option or obligation to purchase the asset at the end of the lease period.
- ECA financing:
Export Credit Agencies (ECAs) are export-import banks that directly finance or guarantee loans for the purchase of aircraft by foreign buyers. ECA financing typically has a financial lease structure and may involve an Orphan SPV structure. This option is attractive for purchasing new, especially large, aircraft if the owner qualifies.
Factors to Consider and Common Mistakes to Avoid When Financing a Business Aircraft
When selecting an airplane, prioritize the needs of your business over wants. While the speed, size, range, and cost of Citation X may be appealing, it may not be necessary if your travel needs primarily involve regional trips of less than 600 nm with a small group of 2-3 passengers. In such a case, a new TBM or PC-12 with sufficient space, useful load, and range would be a more suitable option. Additionally, these aircraft models would be more cost-effective in terms of hourly rates and maintenance expenses, with a block time difference of fewer than 20 minutes.
Avoid becoming emotionally invested in an aircraft purchase. It can be tempting to fall in love with a particular plane based on its paint scheme or interior, but if, during the pre-buy inspection, you discover significant deferred maintenance, it is best to consider other options. Deducting the cost of maintenance from the purchase price may seem like a simple solution, but it is better to choose a well-maintained aircraft instead. Investing in necessary repairs, repainting, and refurbishing is less costly and less stressful in the long run than dealing with a plane that is frequently unavailable due to repairs.
It may be tempting to rely on a Financial Advisor or Banker from a large financial institution to arrange business aircraft financing for your purchase, as they have knowledge of your financial situation. However, it is advisable to seek assistance from an aircraft finance broker with expertise in aviation financing and relationships with multiple lenders. A broker can assess your financial situation, aircraft choice, and usage and provide you with the most competitive financing options available. This approach can save you time and money in the long run.
Do not overlook or cut corners on a pre-buy inspection. Even if you have found an ideal aircraft that has been owned and managed by a Fortune 500 company with an extensive flight department and is attractively priced, do not skip the pre-buy inspection. You may be tempted to forgo the inspection or only require airworthy items to be fixed as part of your letter of intent, especially if the seller’s broker indicates multiple interested parties. However, the only way to accurately determine the costs associated with your aircraft purchase is through a comprehensive pre-buy inspection.
To prevent delays and avoidable expenses, promptly provide your input to your financial advisors. To streamline the process, delegate responsibilities to your CPA for financial requests, your mechanic for obtaining aircraft details, and possibly your admin to oversee all designated tasks. Remember that time is money, and delays can harm the deal. If you are unable to keep up with requests, seek assistance from others and hold the seller and experts accountable for their commitments.
Do not procrastinate when applying for financing. Waiting until a week or two before closing can limit your options and may result in being unable to obtain financing in time. Even if you have worked with a familiar finance broker or lender who is knowledgeable about your financial situation, it is possible that the latest acquisition requires a new lender. Therefore, it is advisable to begin the financing process early to ensure that you have adequate time to evaluate various lenders and obtain the best financing option for your needs.
Preparing for the Financing Process
- Begin early:
Start early when selecting a financial plan for your aircraft. Engaging with financial institutions takes more time than anticipated, so it is best to avoid last-minute financing issues when you find the ideal aircraft.
- Model cash flows to choose debt versus loan:
Engage an aviation financial consultant and work with your accountant to model your cash flows using debt or lease financing options. Simulate interest rates, tenure, balloon payments, and charter revenue to determine the most suitable financing option.
- Use existing relationships and credit ratings to get better deals:
Your existing banking network knows your creditworthiness, which helps in securing better financing deals. Use your banking references and company ratings to negotiate for better terms and rates.
- Use aviation lawyers and consultants to understand proposal technicalities and associated risks:
Aircraft acquisition is a complex process. Engage experienced consultants to help you make informed decisions and navigate intricate structures of activities.
- Negotiate:
Reach out to multiple financing companies for options and conduct due diligence calls to fully understand their proposals. Once you have decided on the financing structure, negotiate with financiers for better rates, tenures, and other leverage points.
- Close:
Move quickly on financial and legal matters when closing an aircraft deal. Choose the financing option that best fits your business and cash flows, and close the deal. A strong financing option often provides leverage over other buyers when purchasing a good aircraft.
- Conclusion
At this point, you should have an idea of the benefits of the right finance package. The information above emphasizes how financing can provide valuable options for the right aircraft buyer. However, buyers must consider their aircraft needs and forecasted cash flow. As the economy strengthens and financing institutions become more willing to lend money, they will introduce new financing models that attract eligible buyers who would have otherwise preferred a cash purchase.
Shearwater Global Capital is a comprehensive, independent, and direct aircraft finance company committed to delivering personalized financing solutions to clients worldwide.
Our team boasts years of professional experience, including overseeing finance teams for large banks and managing aviation investment funds for a global investment advisory firm. As a specialty asset-based finance company, Shearwater Global offers unparalleled aircraft financing options because we are not bound by the bank or large financial institution regulations. Our funding primarily comes from private investors.
At Shearwater Global, we prioritize flexibility and tailor deals to meet our client’s specific needs. We are well-versed in the complexities of aircraft finance and possess an in-depth understanding of potential issues.
Our objective is to provide aircraft for your aspirations, regardless of the type of aircraft, whether it is a jet, military training aircraft, or turboprop. We strive to deliver the right loan to unlock the limitless possibilities in the aviation industry.
