What’s the Aircraft Financing Outlook for 2024?

Rising interest rates, supply chain challenges and wars in Europe and the Middle East have created a turbulent time for the global economy. What has this meant for aviation finance? Gerrard Cowan learns what the industry experts are expecting in 2024...

Gerrard Cowan  |  11th December 2023
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    Gerrard Cowan
    Gerrard Cowan

    Gerrard Cowan is a freelance journalist who focuses on aerospace and finance. In addition to his regular...

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    What are the aircraft financing trends in 2024

    According to Brian Macbean, AOPA Aviation Finance’s Director of Credit and Sales, while the aircraft market is subject to macroeconomic conditions there is often a lag between changes in other markets and the aviation sector.

    “If things are steady on a macro level, the aircraft market will likely follow the same path,” he says. “If we see drastic changes in other major asset values (real estate, for example) which are sustained over time, we can expect to see changes filter into the aircraft market as well.

    “Keeping an eye on the economy as a whole will give aircraft buyers an indication of what to expect in the aircraft market in the coming months.”

    A Reasonable Baseline for 2024 Expectations...

    The main trend of 2023 was a general slowing of the market, Macbean says, primarily as a response to anticipated moves by the US Federal Reserve.

    “The cost of funds for lenders increased in 2023, and there may continue to be a slight increase into early 2024. That being said, the expectation is that costs will not rise as quickly, or comparatively as high as they did in 2023 – so the current market condition is a reasonable baseline for 2024 expectations.”

    Aircraft financing in 2024 is expected to follow a similar trend as in 2023, Macbean adds. Lenders will be watching their balance sheets and risk tolerance closely but are not expected to make major policy or program changes.

    “What this means is that some lenders will be less willing to make an exception on a borrower or an aircraft, but the underlying requirements for qualification will remain relatively constant,” he adds. “For those in a strong financial condition, financing will be readily available.”

    2023 Has Seen Some Changes...

    “The end of the year is traditionally a time of deal-making in the world of aviation,” notes Chris Lee, President of the Aircraft Division at 1st Source Bank. “OEMs and dealers want to sell their inventory.

    “In the US, buyers want to purchase an aircraft and enter it into service prior to year-end to take advantage of accelerated depreciation.

    “From budgets to vacations, no matter the reason, many tend to simply push off the decision to the end of the year prior to making the commitment,” he observes, adding that 2023 has seen some changes...

    Longer backlogs at OEMs have impacted the ability of buyers to obtain a new delivery prior to year-end. And aircraft dealers are starting to see opportunities to buy certain aircraft and are taking advantage of their aircraft credit lines for the first time in years.

    Accelerated depreciation has also changed, Lee highlights: the tax benefits have been lowered to 80%, from 100% in 2022. On top of that, “the US market has seen the Fed’s effect on interest rates in 2023”.

    A spokesperson for the National Aircraft Finance Association (NAFA) also points to the change in bonus depreciation, highlighting that the benefit will be further reduced to 60% in 2024, then 40% in 2025 and 20% in 2026, before hitting 0% in 2027.

    Feedback from NAFA’s bank members suggests that financing for borrowers located in the US should continue to be readily available in the coming year. “Our members continue to finance new and pre-owned jets and turboprop aircraft,” the spokesperson says.

    “We expect major themes to continue, those being attention to lending against appraised fair market values, Patriot Act compliance, and strong due diligence.”

    Stabilized Lending Rates in 2024

    Most buyers who speak with FLYING Finance are not overly concerned about the bonus depreciation reduction, according to Preston Holland, Chief Commercial Officer at the aviation finance specialist.

    Holland expects 2024 to see stabilized rates in the US, as the Federal Reserve looks to a soft landing on the economy and financed jet transactions rise. “More capital markets are beginning to understand the gaps in the market, and are looking to fill it,” he adds, pointing in particular to jets between five and 15 years old in the $10-$20m range, “which historically has been a challenging price point to secure good financing terms”.

    Holland expects Business Aviation to be viewed as an increasingly attractive asset class for those seeking yield in 2024.

    “Typically, you are dealing with an incredibly creditworthy buyer and your capital is backed by an asset that has high residual value,” he says. 

    “As aircraft pricing cools off and new aircraft supply comes back online, I anticipate more capital entering the space, which is a great thing for buyers. The more selection you have of capital sources, the more competitive the rates and terms will be.”

    Since 2020, sellers have been cautious to put supply onto the market, holding onto their jets for longer than they usually would. “As we enter 2024, keep an eye on inventory, because as it comes online there will be some deals to be had where it was very challenging to get a good deal on a jet for the last three years,” Holland highlights.

    “Once you're ready to make the purchase, ensure that you have all of your documentation ready with financial statements, tax returns, and K-1s so that you can move quickly when a good deal comes around.”

    Reach out to Finance Partners Early

    Ramy Sidhom, Head of PNC Aviation Finance, says the aviation industry in 2023 continued to be impacted by low inventory, supply chain disruption, ongoing economic uncertainty, and rising interest rates.

    While he expects those issues to continue into 2024, he adds that new aircraft values remain strong as demand pushes deliveries on some models into 2027. “Because of this, buyers are increasingly hesitant to move out of their current aircraft, as that may leave them with limited options while they’re looking for an acceptable upgrade.

    “Additionally, the geopolitical landscape could slow the Large Cabin Jet industry as international travel and charter options tighten.”

    Sidhom notes clients are still looking to finance in many cases as they seek to conserve available cash.

    “As we move into 2024, we anticipate availability to increase in the used market, primarily in older aircraft and smaller cabin sizes,” he says. “Pricing in this market may come down if the hyper-inflation of the past few years begins to return to more normal levels.”

    Industry data suggests pre-owned inventory will increase in 2024 compared with 2023, which will be followed by a six- to-nine-month window of pricing adjustments. “It is important to note that pricing returning to normal levels is by no means a claim for ‘fire sales’, but more methodical adjustments to normal aircraft depreciation standards,” Sidhom adds.

    Supplies, labor and parts issues may delay deals, he warns, and “With tight inventory and long waits for new aircraft to come off the assembly line, being proactive is more critical now than ever before. 

    “Savvy buyers should be partnering with experts to get the process underway and to ensure it runs as smoothly and efficiently as possible,” he says. “For used aircraft, labor shortages in the industry are causing longer-than-normal waits for line items crucial in the acquisition process, such as pre-purchase inspections and sale-dependent repairs.”

    While buyers should seek out experienced partners in all aspects of the aircraft acquisition process, Sidhom says they should additionally reach out to financing contacts early in the process.

    “During the financing process, time is of the essence,” he emphasizes. “Having the pre-work done can put buyers in a stronger position to close when the right aircraft comes along.”

    A Growing Impact of Sustainability on Financing?

    Aimee Talbert Nardini, Director of Marketing at Global Jet Capital, believes that the interest rate environment remains uncertain, largely dependent on the global economy and the response of central banks. However, the business aircraft finance specialist does not expect a major shift away from financing over the next 12 months.

    “Higher interest rates may in fact add to demand for aircraft financing since many businesses will want to maintain access to their capital,” she reckons.

    While Global Jet Capital does not expect any material change in 2024, it believes that sustainability should be a potential focus. “Our view is that the collaboration of regulators, industry bodies and key players within the industry will develop a framework over time for transition to the desired end state,” Talbert Nardini highlights.

    “As new rules and requirements are adopted, they will enter the decision criteria of financiers.” 

    As has been highlighted by the other experts, Talbert Nardini says operators should have an open dialogue with their lender, engage and consult a range of experts, and engage with a finance partner early on.

    “It is common to be approached as a financier later in the process, such as after a Letter of Intent (LOI) has been signed and the borrower or lessees are seeking to close in a matter of weeks,” she says. “While Global Jet Capital has successfully closed in such a timeframe, prospective buyers and lessees would be better served engaging with a finance partner sooner, rather than later.”

    Financing Will Continue to be Available on Popular Aircraft

    With the historic rule of thumb that if the number of aircraft ‘for sale’ is more than 10% of the active fleet it can be seen as a buyer’s market, while less than 10% is a seller’s market, Lee highlights that many make/model inventory levels currently rest below 10%.

    However, this is beginning to change, Lee observes. “We have seen some select models get close to, and exceed, 10% for the first time in the past three years.

    “The number of pre-owned jets for sale on the market at the end of September 2023 is more than double a year ago. Some call that directional move a softening of the market, but in context it is more of a normalization of a historically strong market.”

    For 2024, clients expect a further return to normality in terms of availability, he says, while “aircraft financing will continue to be available on popular aircraft models and years.”

    How to be Best Prepared for Financing in 2024...

    “The best preparation is understanding”, Macbean asserts. Regardless of the current market conditions, understanding your needs as an aircraft buyer will afford you the greatest chance of meeting them.

    “Identify your mission, and which aircraft will fit that mission best,” he adds. “Align the aircraft and mission with your financial position in terms of up-front and continuing costs throughout your anticipated ownership timeframe.

    “When it comes to financing, consulting with professionals will give you the understanding of how to align your mission, aircraft, and finances with a lender that will meet your needs,” he concludes.

    More information from:
    1st Source Bank: www.1stsource.com
    AOPA Aviation Finance: https://finance.aopa.org
    FLYING Finance: https://flyingfinance.com
    Global Jet Capital: www.globaljetcapital.com
    PNC Aviation Finance: www.pnc.com

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