Lenders Loosening Up With Aircraft Purchase Loans

Do you ever dream of joining the business elite and flying to business meetings in your own private jet? There’s a ray of hope for those who can’t afford to plop down millions in cash for a shiny, new set of wings. After a period of tight credit, banks are starting to lend again to borrowers purchasing private planes. But the strings attached to the financing, as well as concerns about the economy and appearing too extravagant during tough times, keep many prospective buyers tethered to the ground. Much like real estate lending, aircraft financing has entered a period of a new normal. Lenders say they prefer to finance new aircraft rather than used planes, and they’re focused on the borrower and their ability to repay the loan. “Now you do want your borrower to have some skin in the game and (paying off the principal) starts earlier,” said Edgar Murcia, private bank manager for the Western U.S. for BNY Mellon Wealth Management. Business jets offer time-savings, the ability to fly to multiple cities in one day to conduct business, and the ability to reach smaller airports not serviced by commercial airlines. They also come at a price that keeps casual lookers out of the game. A new, entry-level business jet such as a Cessna Citation Mustang or an Embraer Phenom 100 can cost about $3 million, according to the Aircraft Bluebook. A medium-sized jet can range between $13 million and $15 million; a long-range jet, such as a Gulfstream 350, can cost $32 million. The cost of a used aircraft shaves millions off the sale price. Financing professionals say they have noticed that demand for aircraft loans is showing a slight uptick — recognition that a small pool of professionals see the value in having a private jet for corporate use— though many remain shy to make the investment. “People are looking for clarity of where the economy is going before they buy a $3 million jet,” Paul Nolta, a senior vice president in the large corporate and aircraft finance group at JPMorgan Chase. Aircraft sales hit the brakes in fall 2008, and since then, sales have rolled forward very slowly. The business aviation outlook released by Honeywell estimates deliveries of between 600 to 650 new aircraft globally in 2011, a decrease from the 732 new aircraft delivered in 2010. The used jet market remains challenging in the near-term but shows modest improvement, the forecast concluded. The Valley region has long been a hub for business aviation activity, even if today there are fewer newcomers. There are more than 200 turbine aircraft, which often are used for business purposes, based at Van Nuys, Bob Hope and Camarillo airports. Van Nuys Airport, the busiest general aviation airport in the world, had 182 turbine jets based there as of 2010. At Bob Hope Airport in Burbank, there are currently about 41 private jets. Companies owning aircraft with recent flights to the area include Dole Foods, Gared Graphics, a Camarillo manufacturer of folding cartons and boxes, and Zaken Corp., a seller of surplus consumer products based in Thousand Oaks. The Banker’s View As with any type of lending these days, banks are careful about who gets approved for financing of an aircraft. If the borrower is an individual, institutions will look at credit worthiness and ability to pay back the loan. If the borrower is a company, there is close examination of the company’s balance sheet and cash flow. This is a marked difference from the pre-recession years when banks didn’t even ask for a down payment on an aircraft. Mike Nichols, vice president of operations, education and economics at the National Business Aviation Association, said borrowers shouldn’t expect to shop around to multiple lenders and find a great interest rate at great terms. Nor will they be able to wait until the last minute to secure financing. “Now they should get pre-approval even before they start shopping for the airplane,” Nichols said. Despite the new dynamics in aircraft lending, there are other factors banks must consider before making a lending decision. Merrill Lynch Private Wealth Advisors, for instance, looks at how an aircraft fits into the business or personal lifestyle of the borrower and then tailors the financing,” said Richard Jones, managing director – investment for Merrill Lynch. Officials at BNY Mellon Wealth Management said when assessing new borrowers, the firm follows a long-held practice of determining if they meet the underwriting standards. The firm’s underwriters understand aircraft, the costs associated with ownership and put together the most attractive financing option possible, Murcia said. While BNY Mellon prefers to finance newer aircraft, a 10- or 15-year-old-aircraft would not be a deal breaker, Murcia said. In the end, it is the relationship with the lending institution that will determine the terms a borrower receives, said Nichols, of the NBAA. In a close relationship, the bank will be more willing to finance a used aircraft. In a non-relationship, a newer aircraft would be of more interest because of the uncertainty of what will happen to the plane’s value, Nichols said. All-cash aircraft sales less ‘hassle’ Aircraft brokers say cash deals are rather common, as many buyers have the means and desire to avoid the lending process altogether. Ken McInturff, of L.A. Jet Sales in Van Nuys, said it has been three years since he last sold a jet to a buyer with financing. With stricter lending guidelines in place, he doesn’t expect to see that reverse. “It has turned a lot of people off, because they do not have the cash,” McInturff said. “If they (the banks) do not finance (people) do not buy.” Ben Marcus, a co-owner of JetAVIVA, a broker for small jets in Santa Monica, also finds that buyers are paying for planes in cash because they have it available. “Even with rates being low, people did not want to go through the hassle of applying and having an aircraft appraised if it was not going to be successful,” Marcus said. Owning an airplane, however, is just one option open to time-crunched executives. If business travel is limited, there are jet cards that allow professionals a set number of hours of access to a private jet. For an executive who flies between 50 hours and 100 hours a year, fractional ownership — having a percentage stake — gives flexibility to fly and is more cost effective than full-out ownership, Jones said.