Buy Or Lease? Financing Your Private Jet
The private jet business is growing again. After the 2020 recession where the future of aviation was uncertain, the tides have changed and people all over the world are on the move again, writes Rachel Smith.
Especially after the pandemic, wealthy people have come to realise the value of a commodity like a private jet. Escaping the long lines, the waiting times, and the overall potentially stressful experience that traveling can be, traveling on a personal aircraft is being appreciated once again. However, given the substantial cost of an airliner, before acquiring one, you must put the pros and cons head to head and assess the future operation’s viability.
BUYING YOUR OWN PRIVATE JET
If you’re looking for freedom and flexibility when you travel, the single best way to accomplish that is by buying your private airplane. While there are certainly pros to having your personal jet, one con that is usually overlooked is the operational cost. When you own a jet, you have to take into account the pilots’ salary, insurance, maintenance, as well as many other details that come with jet operation. On top of that, a private airliner can set you back dozens of millions and few people in the world can make an outright purchase in cash. Before deciding which model could be the right choice, consider a few ways you could finance your business jet airplane.
1. Traditional loan - Buying an aircraft can always be done by requesting a traditional loan. Like a loan to a house, for instance, an aircraft loan can have a fixed or variable rate. Some institutions give you the option of a hybrid between fixed and floating rates, with a “swap” option. You can choose from a shorter-term loan (as short as 30 months) with lower fixed rates, which can be beneficial with the current market trends, or opt for a longer period of up to 240 months, through which you can proceed to amortise as you may.
2. Asset-based loan - A type of option that has seen its popularity skyrocket this century is the asset-based loan. If you’re looking to buy an aircraft without the need to disclose finances or make guarantees, this is the way to go. However, only a select few organisations make this product available. The major benefits this type of loan has to offer include:
• Non-recourse - The lender will retain possession of the good it lent in case the borrower defaults, but no further compensation will be sought out.
• Limited to non-existent guarantees - If you’re buying on behalf of a company that has a limit on debt or guarantees, this aspect of asset-based loans is paramount.Also, in case it’s a multiple partners acquisition, it is a frequent scenario having owners not wanting to guarantee another partner’s debt.
• No disclosures - With asset-bond loans, there is no need to provide financial records, whether it’s personal or from a privately owned company. This brings a level of swiftness to the financing aspect of the acquisition that will translate to lower levels of stress throughout the process. 3. Lease - Finally, as an alternative to purchasing an aircraft, there is always the option to lease a jet. This is already a common practice among businesses in the automotive vehicle department. The same rules apply to aviation where organisations or individuals might opt for leasing for several reasons such as cash flow limitations, tax implications, or accounting. Aircraft leases differ depending mainly on tax considerations:
• Non-tax lease - In this lease form, the one who owns the jet for fiscal purposes is the lessee. A person, or company, will use the aircraft for business alone and will get tax benefits doing so.
• Tax lease - The lessor is the owner of the jet for tax purposes. The company performing the lease will therefore realise the tax benefits, including depreciation of the asset. In this case, and because the lessee is not the fiscal owner of the jet, they are offered better interest rates.
Depending on where you’re applying for the loan, conditions will vary. From country to country, the lender will request different collaterals. Just as stated before under the asset-based loan, a bank will, in this case, be backed up by a valuable asset which could be the airplane itself in case the borrower defaults. Although conditions may vary, one thing can be expected from across the whole spectrum of lenders: they will be biased towards jurisdictions that comply with the Cape Town Convention. This serves them as a guarantee to regain property of the aircraft and its parts if an incident were to happen.
Time frame - One factor to note about financing is how long most institutions finance an aircraft for. Generally speaking, the jet business financing industry points to a 5-10 year window, with the most typical duration being between 5 and 7 years. Lenders often look at the asset’s age as a means to assess how long they want the loan to take. A brand new model with state-of-the-art technology and engineering will be more appealing to a bank or lender than an older jet with dated features. Risk is always present when a loan is being processed, and the aviation business is no exception. Aircraft’s age - Buying a used aircraft might have implications as well. Pre-owned might have its advantages to the buyer, but in the eyes of the lender, the risk is higher.
A jet with a certain age might be financed only for a couple of years and not more, while aircraft whose hour-count exceeds 10,000 hours might not get financed at all. If by chance, you find a lender that finances your purchase, chances are you’ll be paying premium rates for it as well. Lenders will often look into the market and analyse the loan feasibility by checking spare parts availability and the total number of assets produced. Before buying, you must also take into account the maintenance records the aircraft boasts. Lenders will favour reputable maintenance companies with a clean track record over a shady operations history that might hide a few complications down the road. Finally, when opting for leasing, the lessor often looks into the market to assess the value of the asset, comparing it to the same aircraft type on the market at the time. That way, conditions and premiums will be determined.
INTEREST RATES FOR JET FINANCING
Interest rates are always an individual stat. Jurisdiction, lender, borrower, down payment, the asset itself, are just a few of the factors that can greatly influence the credit conditions. Interest rates, therefore, can go anywhere from 3.5% up to 7%, or even higher at times.
Given that aircraft finance is seen as a high risk, a significant down payment is often in the order of business. If the borrower wants to attain a better interest rate, it is not uncommon for lenders to ask for a 30% down payment, which is aligned with higher credit risk operations. It might be advantageous to opt for a fixed rate when the interest rates are lower. This is usually the option that guarantees the borrower maximum cash flow (which is the objective when negotiating any finance deal). However, a loan can always be refinanced if needed. If a special opportunity is on the table, borrowers can opt for variable rates that can always be switched through fixed-rate transactions. If the market were to suddenly become unstable, they can obtain a swap.
By going through the fixed and floating costs of owning an aircraft and managing an aviation operation annually, and coming to terms that buying or leasing an aircraft is the better option for you, the next step is choosing between a lender that gives you the best financing conditions possible. The two key aspects you must take into account when applying for financing are: Type of loan - Choosing between traditional loan, asset-based, or lease can make a significant difference to your cash flow. Going through all the possibilities and opting for the right one will do wonders for your finances in the long run. Choosing the right asset to acquire - Buying the right airplane for your operation is essential. Picking between a brand new aircraft and a pre-owned airplane will greatly change the financing conditions. Checking the airplane history and its maintenance in case it’s an older airplane will do wonders when you’re presenting the asset to a potential lender or lessor. With those two factors taken care of, you’ll be just a few steps away from the freedom that owning a private jet can bring. EG