What’s the Aircraft Financing Outlook in 2022?

AvBuyer’s Matt Harris asked David Hudak of 1st Source Bank’s Aircraft Finance Division for his insights into the market for financing private airplanes. How did the market develop during 2021, and what will the financing industry look like in 2022? Find out here…

Matt Harris  |  06th January 2022
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    Matt Harris
    Matt Harris

    Matt Harris is Commissioning Editor for AvBuyer. He is an experienced General and Business Aviation...

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    Businessman speaking on cell phone outside private jet

    Considered a leading source for aircraft financing, 1st Source Bank’s history stretches further back than aviation itself. Established 158 years ago in 1863, aircraft financing has been offered by 1st Source for more than 35 years.

    Today, the Aircraft Finance Division at 1st Source can accommodate more than 300 transactions annually, with the main focus currently being the turboprop and jet markets across the United States, Mexico and Brazil. Nevertheless, the bank will actively finance turbine helicopters, too.

    “The total value of our aircraft financing portfolio is in the mid-nine-figures range, via traditional loan terms,” David Hudak tells AvBuyer as he sits down to discuss the market.

    Mr. Hudak (pictured left) graduated from Indiana University with a degree in accounting, and began his career financing construction equipment in 1990 before accepting an opportunity to work at 1st Source Bank as a Senior Credit Underwriter in 1995. The position was within the Specialty Finance Group of the bank, focusing on aircraft and other verticals.

    “My career included several promotions through the credit group that always had me closely tied to underwriting aircraft transactions,” he explains. In early 2020, upon the retirement of a long-time colleague and friend, Hudak was presented with the opportunity to lead the Aircraft Finance Group.

    “We have a seasoned team of professionals consisting of Relationship Sales Officers, Credit Underwriters, and Loan Operations, focused solely on financing an aircraft purchase,” he says. Indeed, with offices across the US, most of 1st Source’s aircraft finance sales professionals are pilots.

    “We help our clients realize their dreams through a service model of distinctive convenience, straight talk, and sound advice that always keeps their best long-term interests in mind,” he explains.

    Having outlined both his and his Group’s expertise in the industry, Hudak shared insights and outlooks on the aircraft finance market as a feverish year in the Business Aviation industry came to a close…

    AvBuyer: Can you sum up the market for aircraft financing during 2021? How did it change over the course of the year?

    DH: Since the summer of 2020, the market has been robust. 2021 saw a continuation of what we saw in the second half of 2020 when the market took-off and demand accelerated. We continue to see an increase in opportunities across all segments of the industry, as well as some challenges and stresses with the lack of quality inventory available for sale.

    Over the past year, we have noticed two major changes to the market: There has been an increasing number of clients asking to be pre-approved while they look for the right aircraft that meets their mission; and transactions are moving at an accelerated speed in comparison to previous years.

    Despite record low availability of pre-owned aircraft for sale, and rising interest and inflation rates, we continue to see a high volume of business through new acquisitions and refinancing opportunities.

    AvBuyer:  We’ve heard so much about how the market for pre-owned business jets heated up following the initial Covid-19 lockdown. Was there a corresponding uptick in applications for financing, and who were they coming from? First-time buyers, repeat customers, fractional and charter operators, or a combination?

    DH: With the Covid-19 shutdown in March 2020 came a lull in activity. At that time, we were providing deferrals, working through various government programs, and providing comfort and counsel to clients who needed assistance in the face of the unknown.

    In August 2020, we began to see an uptick in applications coming from all facets of the industry, leading to a record month for closing and funding levels in December 2020.

    We have seen our fair share of first-time buyers (as a percentage of the total applications increase). But more importantly, our ability to serve and advocate for our clients has led to increased opportunities with both new clients and repeat customers.

    Additionally, we have had our share of unqualified buyers attempting to acquire aircraft above their means.

    AvBuyer:  Regarding today’s pre-owned inventory, there is plenty of talk suggesting that many of the aircraft remaining on the market are older jets and turboprops, perhaps with higher, or nearer-term maintenance requirements. Does this impact the appetites of the top aircraft financing companies to lend? If so, what can buyers do to optimize their chance of being approved for a loan?

    DH: The critical piece to this equation is to ensure you don’t skip a step in the acquisition process. Make sure you go through with a pre-purchase inspection.

    Customers should always be patient in their buying process, no matter what the economic environment is. Few banks really know aircraft well, and those that do will provide helpful advice to customers so they can navigate the purchasing process, effectively and efficiently.

    Good aircraft will still enter the market, but will tend to sell quicker. We have seen many off-market aircraft sold. We realize the market is moving fast and aircraft are going off-market as quickly as they come on to it, but due diligence upfront will reduce – or altogether remove – the chance of surprises.

    Additionally, understanding the pedigree of the aircraft is important. Understanding the prior ownership, and where it has been based can matter greatly.

    Incidentally, if a client paid cash for their aircraft purchase in order to take ownership in 2021 and then looks to finance it in 2022, a pre-loan inspection is part of our due-diligence. The available pool of used aircraft to lend on has become saturated with older, less-desirable aircraft. When the market corrects itself, I expect that the value of these types of aircraft will decrease substantially.

    AvBuyer:  One market analyst recently said that after more than a decade of flat deliveries from the business jet manufacturers, the next two-or-three years could see a significant increase in the number of shipments being made. Is the aircraft financing industry ready to finance a couple of hundred additional aircraft, should that happen?

    DH: If this does happen there is plenty of liquidity in the market today to handle the needs of the industry, including here at 1st Source Bank.

    Aircraft financiers would welcome the shift to a portfolio comprised of newer, more technologically- and fuel-efficient aircraft. 

    Money is readily available to lend, but paying too much for a higher-time or older aircraft doesn’t make much sense.

    The more measured increases in production that have been publicly announced will not have a significant impact on the overall market size, and the financing industry can easily handle those increases. The ability to service the client in a timely manner will be key.

    Some items of concern would be that 1) the aircraft manufacturers typically have long lead-cycles, thereby needing time to make significant increases in production; 2) supply chain challenges may continue for an unknown length of time; and 3) there may be changes in tax law that could have an impact on purchasing a new aircraft.

    AvBuyer:  What is your outlook for the aircraft financing market in 2022?

    DH: Covid-19, while detrimental in many ways, has created more appreciation and demand for the safety and convenience of private aircraft. Quality aircraft availability will be the issue.

    2021 burned through whatever cushion there was in the market, in terms of clean, good quality pre-owned jets and turboprops for sale. With lower inventory levels today, we may see a lesser deal volume in 2022, and continued upward pressure on both aircraft pricing and loan interest rates.

    Availability will likely be an ongoing issue, along with a shortage of pilots and qualified technicians to meet the demand in the market. However, the need to remain safe and healthy, along with the convenience offered by private airplanes, will continue to drive more interest in private aircraft finance.

    Some new owners who recently entered the market may decide to sell once they become more familiar with the true cost of aircraft ownership, which may help a little with the stress on current inventory levels.

    AvBuyer:  …Speaking of which, if a first-time buyer is considering a first step into aircraft ownership during 2022, what would you advise them if financing is the route they intend to take?

    DH: Start the process early, and take a patient, knowledgeable approach. Be prepared, and educated, on the nuances of buying and owning an aircraft. This includes assembling a team of professionals who are experts in the Business Aviation market.

    Working with a strong broker/dealer, aviation tax professional, aviation-focused attorney, as well as a dedicated aviation lending source, makes a difference in reducing the headaches, and executing the purchase properly. 

    In this time of scarce pre-owned aircraft inventory and rising values, working with a dedicated aviation partner, such as 1st Source, through the buying process will limit the chances of lost deposit funds, undue down-payments, and surprise non-approvals.

    As it relates to financing an aircraft, compiling a full financial package – including financial statements on your business (both tax returns and accountant-prepared statements); financial statements on the owners/individuals; tax returns; detailed personal financial statement (including bank/brokerage statements to support liquidity); and being prepared to tell us about yourself – helps greatly with response times.

    Knowing your customer rules is critical in banking. And the more you share upfront, the better it will be for your aircraft financing needs.

    More information from www.1stsource.com/business/specialty-financing/specialty-financing/aircraft-and-helicopter

    Read more BizAv market insights on AvBuyer.com

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