Alternatives to Flying Commercial? Buy Or Lease Your Own Jet
Corporate and personal aviation has returned for many passengers in the U.S., after being grounded, or at least staled, in the wake of the Great Recession. Rising financial markets, growing corporate earnings, a strong U.S. dollar, and increasing consumer and business confidence are driving demand for private aircraft.
Across the country, private aircraft flight hours are up, charter aircraft use is up, and private aircraft inventory is looking better than it did a decade ago. In Indiana, the number of private aircraft owned is around 150.
Faced with crowded airports, jammed-packed commercial aircraft and delays, affluent individuals and corporate executives alike are increasingly turning to private aviation to relieve the time constraints and delays of commercial flying and to take advantage of the myriad of smaller airfields located closer to their final destinations.
For business needs in and out of Indiana, the time could be right for individuals or companies to consider owning or leasing their own aircraft. Before calling an airplane broker and kicking the tires, consider these three financing options:
Traditional Loans - No different than your smaller purchases - like houses, cars and boats - your traditional aircraft loan can be fixed rate or floating rate, with a loan amount up to 100% of value. Some financial institutions offer a hybrid which features a floating rate loan with the option to buy a “swap.” In other words, you can lock in your rate and benefit from early payoff and interest rate increases; not a bad idea in a rising rate environment. Traditional loans can be structured for as short as 48 months or as long as 120 months with amortizations as long as 240 months. Just keep in mind, the longer the terms, the higher the interest rate.
Asset Based Loans - Over the last fifteen years, this type of financing – lending against the value of certain assets of the borrower, including the aircraft - has become an increasingly popular option for individuals and businesses seeking aircraft ownership without making financial disclosures or guarantees. Loan down payments can be as low as 20% of the aircraft value. Only a select number of organizations offer this product, but it has a number of benefits, including:
- No financial disclosure or covenants - Truly hassle-free asset based financing. No need to forward years of tax returns and K-1’s or to disclose financials of a privately owned company
- No or limited personal guaranties - This may be very important for companies that have bonding requirements or covenants limiting the amount of debt or guaranties than a company may incur. There may be partners involved in the ownership and the owners may be unwilling to sign on the other partner’s debt
- Non-recourse - If the borrower defaults, the lender can seize the plane, but cannot seek out the borrower for any further compensation.
Aircraft Leases - As with other types of large equipment, businesses as well as individuals may elect to lease 100% of the aircraft value as an alternative to purchasing. An individual or business may have multiple reasons to lease instead of purchase, including cash flow considerations, federal income tax considerations, sales tax considerations and accounting treatment. There are several types of leases with the choice often determined by how the aircraft will be used:
- Non Tax Lease - The individual or entity leasing the plane (lessee) owns the asset for tax purposes. Typically, this option is put in place for off-balance sheet treatment. The lessee will use the aircraft only for business and has an “appetite” for tax depreciation, therefore, can take advantage of the tax benefits.
- Tax Lease - The lessor (the bank or other entity granting the lease) owns the asset for tax purposes, realizing the tax benefits such as the depreciation of the aircraft. Because the lessor takes the tax benefit, the lessee is typically offered a more favorable interest rate.
Where do you start the journey to find a lender? Often, borrowers start their financing search where they have an existing banking relationship. However, that may not always be your best financial option.
General aviation industry knowledge should be a critical criteria for your lender. For example, does your lender have expertise with the FAA requirements? Are they aware of new regulations on the horizon that could impact your purchase? Does your lender have an established specialty in aircraft financing or only do an aircraft loan every once in a while at the request of a marquee customer? Is the lender credentialed with key trade associations like the National Business Aviation Association (NBAA), National Aircraft Resale Association (NARA), or and National Aircraft Finance Association (NAFA)? If you don’t know, aircraft brokers and dealers, aviation attorneys and aircraft managers are a good source for referrals and recommendations.
Mary Jo Dusel is senior vice president of PNC Aviation Finance for Indiana.