- 17 Jul 2023
- Gerrard Cowan
- Finance - BizAv
Many business jet owners plan to hire out their aircraft to help offset operating costs, but how could this impact their plans for financing? Gerrard Cowan speaks to the experts to learn more...Back to Articles
Aircraft are not cheap. They cost a lot of money even when they’re not in use, notes Roman Pavlicek, Chief Financial Officer of Czech Republic-based ABS Jets, which offers a wide range of aircraft management and chartering services to clients in Europe and beyond.
“There are always fixed costs to be paid whether the aircraft is in active operation or not. These include costs such as basic maintenance, crew payroll, training, insurance, parking, various systems subscriptions, and more,” he says.
The chartering decision is based partly on the aircraft owner’s personal plans (how often they expect to use the aircraft themselves for leisure or business purposes, and if this could conflict with chartering plans and terms), and whether they’re happy for other people to use their aircraft given the potential for additional wear-and-tear.
There are also technical questions to consider, Pavlicek adds, such as the aircraft age and flight hours, the aircraft’s operational reliability, maintenance demands, and so on. “All of this could lead to higher or lower chartering intentions,” he says.
In general, the finance provider will mainly focus on safe cashflow related to the aircraft, Pavlicek adds. It is up to the individual user to establish if they need to finance the aircraft.
For those who choose the finance route, though, one potential limitation could relate to the amount of flight hours flown during a certain period, since too many could influence the later resale value, he suggests.
“Every deal with a finance provider will write its own story. There will be a lot of details to be shared” – all of which will culminate in a financing deal or not. Expert advice is essential, says Pavlicek. “An asset as complex as an aircraft requires due diligence relating to technical matters and its paperwork.”
Financing for an aircraft that will be chartered out is normally reserved for creditworthy, high-net-worth individuals and corporations who plan to use it themselves for less than 150 hours per year, thus having extra capacity, aviation analyst Brian Foley says.
Covenants, restrictions and limitations are likely from the lender on the maximum number of charter hours, which could be capped at 150-200 hours per year, for instance.
“Exceeding this amount could trigger additional compensatory rent to the lender,” Foley adds. “This is because the extra charter usage increases airframe hours and cycles, which directly affects the lender’s residual value assumptions and must be controlled.”
Adam Meredith, President of AOPA Aviation Finance, agrees that while chartering can be a good option for buyers of pre-owned aircraft, “if the buyer is not regularly using the aircraft for, say, at least 50-100 hours per year, they should not expect charter to make up the financial shortfall”.
It is critical to pick the right charter partner and to have an airplane that is desirable for charter operations, he adds. “If you do want to charter the plane, consider the operator you will place the aircraft with, their reputation and their experience in chartering out aircraft similar to yours.”
Most lenders will set some form of limitation for charter, and many will not allow it, Meredith highlights. It is therefore critical to discuss this upfront when you begin the financing process.
“Those that do allow charter will likely require an additional amount down, typically at least 10-15% more, but dependent on the age, condition and type of aircraft,” he explains. “They will also require a shorter amortization (also dependent on the same factors), typically half of what you’d otherwise be able to attain but also largely driven by how much usage you and the charter operator predict the aircraft will have in a given year.”
It's vital to seek help from a lender or finance broker with expertise in financing the aircraft involved, Meredith stresses. “Bring up the fact you will be chartering the plane out in the open immediately to save everyone time.
“These transactions can frequently get done and structured, but the terms and conditions are much less standard and thus less predictable compared to an aircraft without charter use.
“Be prepared to discuss who the charter operator is, what their experience in chartering is, and how many hours you anticipate chartering out versus flying for yourself,” he summarizes.
Mike Smith, President of Scope Aviation Finance, a provider of a wide range of financing options and a member of the National Aircraft Finance Association (NAFA) also picks up on the additional hours that charter usage incurs on the engines/airframe, impacting its residual value.
“A prudent loan structure considers this residual impact and will include either a higher-down payment or shorter amortization, perhaps a combination of both,” he says. “Expect the lender to consider a revised structure on the loan from what one would traditionally see on non-charter use aircraft.”
Keith Hayes, Vice President & National Sales Manager at PNC Aviation Finance, warns business jet owners never to depend on chartering to make payments or cover ownership expenses.
“Even if chartering isn’t needed to offset expenses, pursuing charters may put the aircraft into a high usage scenario, which in a less-than-desirable lending environment could lead to financial institutions being wary of the investment.”
Some financiers might have restrictions on who the charter relationship will be with, he adds, while other restrictions that could arise could include “an edict of no charter usage at all, or restrictions on the ratio of charter hours versus personal/business usage hours.”
Nel Stubbs, Director of Jet Support Services, Inc (JSSI) Advisory Services, a member of NAFA, says that while a Part 135 certificate provides an opportunity to share in the revenue from third-party charter flights, there are additional expenses to consider, including management fees, pilot training, and the cost of putting the aircraft on the certificate.
“Increasing hours and cycles on the aircraft could mean that certain maintenance events will be pulled forward, and depending on the expected number of third-party charter flights, the aircraft may not always be available to the aircraft owner,” she highlights. There could be a tax benefit, though it is vital to seek qualified expertise in this area, she added.
Chris Miller, Managing Partner at JSSI Aviation Capital, meanwhile, says that before making a decision, owners should consider calculating their actual net cash flow per charter hour against the projected depreciation per flight hour, though he notes that predicting actual depreciation per flight hour is difficult.
“In general, older yet reliable aircraft are typically best positioned to generate more cash per charter flight than the associated depreciation.”
According to Miller, JSSI Aviation Capital focuses on the current and residual value of the aircraft, rather than the creditworthiness of the client. “If a client offers their aircraft for charter we will require Engine and APU programs and the loan would amortize faster due to increased utilization and added wear-and-tear.”
It’s important to consider a wide range of options for funding, Jean de Looz, Head of Americas at MySky says. MySky provides a spend management platform for Business Aviation.
Net worth is one thing, he adds, but banks always want to see liquidity. Earlier in his career, when de Looz was selling aircraft, he says he “saw multiple prospects with net-worths of $500m-$1bn, but no liquidity, so no financing was given”.
But what if you have already secured financing and are now considering chartering? Brandon Greene, Senior Vice President, Fleet Development, FlyExclusive (which provides a range of chartering and fractional ownership services) says owners In this position should first review their security agreement, which will note any restrictions regarding utilization, charter, areas of operation and so on.
Importantly, it’s vital to be open with a lender as early on as possible, he adds. “Many lenders are receptive to an owner chartering the aircraft, some are not,” Greene emphasizes.
“The best suggestion would be to review your security agreement and speak to your lender.”
More information from:
ABS Jets: www.absjets.com
AOPA Aircraft Finance: https://finance.aopa.org
PNC Aviation Finance: www.pnc.com
Scope Aviation Finance: www.scopeair.com