As much of the business aviation community has felt- the past few years have been extraordinarily good in terms of sales- backlogs and new product development. Forecasts for the next 10-years indicated at worst a coming flattening in the growth curve for a couple of years before the market resumes its bullish ways. The National Aircraft Finance Association (NAFA) has also felt the effects ...
Ten Questions For NAFA
Aircraft Finance: Immune from effects of mortgage and market unsteadiness?
As much of the business aviation community has felt- the past few years have been extraordinarily good in terms of sales- backlogs and new product development. Forecasts for the next 10-years indicated at worst a coming flattening in the growth curve for a couple of years before the market resumes its bullish ways.
The National Aircraft Finance Association (NAFA) has also felt the effects of that growth. For one- members’ businesses are also booming- attracting more players to the core activity of financing major corporate aircraft purchases. As a result- NAFA picked up more than 30 new members in the past year- a growth rate of nearly 30 percent.
But lately news from other business segments has served to destabilize the confidence of consumers and businesses- in turn undercutting previously bullish expectations across the economy at large. An apparent crisis in the sub-prime mortgage market helped contribute to dramatically higher foreclosure rates- pushing down home values which puts further pressure on borderline borrowers and- in particular- speculative building and flipping.
In turn- new construction has taken a hit and consumers have- after seeing energy and health-care prices increase dramatically faster and higher than concomitant gains in the cost-of-living index- started pulling back on borrow-and-spend habits – which- in turn- is starting to impact auto and truck sales- consumer purchases and casual dining decisions- and even housing starts.
And then- in September- the monthly employment report brought an unexpected reversal in jobs growth – with thousands of jobs actually lost when more than 100-000 new jobs was the expectation.
So what does this all mean to the business of selling and financing corporate jets? That’s part of what we ask this month in a ‘Ten Questions Interview’ with Michael T. Amalfitano- in his second year as president of the National Aircraft Finance Association.
NAFA’s aforementioned membership jump came largely before the worst of the above news came into focus over the summer. And many people are not convinced that even a mild recession is imminent – which means businesses are unlikely to change their long-term plans just yet.
Amalfitano brings to bear his expertise as a Sr. Vice President- Division Executive for Banc of America Leasing in the company’s Dallas Corporate Aircraft Finance office- and his time in aircraft finance in the years prior – as well as what he’s learned as NAFA’s president.
Interest rates fluctuations- market unsteadiness- global markets – what do these and other items mean to the world of business aircraft finance? These are among the topics we put to Michael T. Amalfitano in his NAFA role.
WAS: About a year ago inflation and the prospects of an interest-rate hike by the Federal Reserve was an underlying buzz in finance circles. This year a crisis in mortgage financing feeds widespread worries of a looming recession. Does this latest financial fear hold any significant concerns for cutting into the availability of credit for business aircraft purchases?
Amalfitano: Yes- there are concerns. Given the fact that capital has exited the financial markets in general- banks and finance companies are more cautious with their product offerings for aircraft purchases. There has been an increased number of finance-contingent aircraft purchase requests because buyers want to be certain that capital is available prior to committing monies to hold an aircraft- especially as aircraft costs have increased to record levels.
In addition- with OEM lead times on new shipments out 2–5 years depending on make and model- the need for progress payment financing is heightened. This raises concern over future volatility of interest rates- the impact on the cost of funds as credit spreads widen- and more restrictive terms and conditions placed on the financing structure to protect the capital of the bank or finance company.
And though the market remains extremely active in terms of overall aircraft finance requests- banks and finance companies are beginning to tighten the reins on capital.
WAS: Overall- how is the availability of funds for aircraft purchases compared to a year ago?
Amalfitano: In general- there are more funds available simply due to the increased number of financial institutions that have entered the market over the past few years. However- we were recently starting to see equity investment firms and new venture capital companies invest funds into the market. These late entrants into this “bull” market of aviation may also be the first to exit if the expected return on capital is diminished by recent fluctuations in the global debt market.
WAS: Also harking back to last year- we talked about the dynamics of the pre-owned aircraft for sale market and you mentioned how most financial companies sought to avoid or limit their exposure in older models. Today’s pre-owned market seems as dynamic as ever thanks to the continuing evolution of upgrade opportunities. Does an older aircraft with modernized avionics and panels hold any better appeal for finance companies?
Amalfitano: No- not really. There is an increasing flight to quality across the board. Buyers and lenders alike want to invest in the most technologically advanced state-of-the-art aviation products and services available in the market. In most cases the age and condition of aircraft still tend to drive the decision to invest in a particular asset.
Of course- for clients with strong credit profiles- existing bank relationships and properly structured transactions- there are always exceptions; especially on an aircraft that has a long history of value retention.
When it comes to investing in aircraft based upon the modernization in avionics or enhanced upgrades to airframe or engines- it remains limited to select makes and models and the strength of the credit.
WAS: We’re told that upgrading and improving existing aircraft continues to be a growth area- both in terms of the number of people opting to improve an existing business jet aircraft- and in terms of the options available: From the finance side- does this seem to be an expanding area?
Amalfitano: Potentially- yes. What’s driving aircraft improvements are that clients have to wait so long for new aircraft shipments from the aircraft manufacturers. Backlog and lead times have lengthened to record levels and there are less and less high-end- high-quality- pre-owned aircraft available in the market. This forces clients to extend the life of their existing aircraft until their new order is delivered.
This does present banks and finance companies with restructuring and refinance opportunities to help clients bridge the gap to their next aircraft purchase. And- with the industry growth forecasts ahead- this area may expand.
WAS: Your message to members on the NAFA website notes the membership growth the association experienced in the past year. To what do you attribute this growth - more players or more existing players who see the benefits of membership?
Amalfitano: Both. There are definitely more players. We have experienced growth in both Member (banks- aircraft leasing- and aviation finance related companies) and Associate Member (aircraft dealers and brokers- and products and service providers) sectors. However- there has also been an increase in existing players. More and more companies realize the benefits of working with NAFA members.
The quality of the products- the access to experienced financial and aviation professionals- and a sincere effort to provide value to the business community are attracting players to NAFA. We have raised the bar on our educational seminars and announced the introduction of a scholarship program at this year’s annual conference in an effort to invest in the next generation of aircraft finance professionals.
It is all about good people doing good things for the right reasons within an industry that we all share a passion for- driving continued growth and success.
WAS: The nation recently observed the sixth anniversary of the terror attacks of Sept. 11- 2001- and- on the same day- the Department of Homeland Security announced plans to tighten controls on private aircraft entering and leaving U.S. airspace. Have the increased security and aviation emergency requirements of the past six years added any complications or considerations to the process of financing a corporate aircraft from the lender’s perspective?
Amalfitano: Yes. There are many more factors to consider as the global demands for aircraft and aircraft financing expand. From the U.S. Patriot Act to Cape Town and the International Registry- lenders certainly have more due diligence requirements to process the financing of a corporate aircraft.
In the past- banks and finance companies could simply manage within GAP- FASB- and IRS guidelines- as well as the FAA requirements. Today- in addition to the strict adherence to these financial- aviation tax- aircraft accounting- and aviation standards- lenders must consider the implications of more restricted and regulated controls related to the use- location- access- recovery- and corporate aircraft insurance of their financed aircraft within more challenging global markets.
Attention to “Know Your Customer” criteria- more in-depth background checks on principal owners- and greater due diligence on how and where the aircraft will be operated are needed to ensure compliance with these new controls- in addition to the traditional credit and cash flow requirements.
WAS: Can a strong relationship between a dealer or broker and an aircraft finance business benefit the buyer in ways that would make them want to look for any such partnerships or alliances?
Amalfitano: Absolutely. Clients seek the best product offerings and often there are enhanced benefits from working with strategic alliance partners. There is a higher degree of confidence clients feel when they realize that a particular aircraft dealer or broker has a strong relationship with an aircraft finance company. All parties better understand the deliverable capabilities- expectations are properly set- and timelines can be met with much greater certainty due to the familiarity the partners have with the process and closing documentation.
In addition- some alliances actually only offer certain product features when working together. These relationships can afford clients a better value proposition from both an aviation and financial perspective.
WAS: We’ve seen lending terms become more generous at the low end of the general aviation market- as finance firms offer longer terms for new and used aircraft for sale alike – sometimes up to 20 years- with 15 and 10 years common. Have terms changed appreciably for corporate aircraft – and what is a typical finance period for a company investing in a business jet?
Amalfitano: For the most part- finance tenors have not appreciably changed over the years. Clients are always seeking the longest term- highest financed amount- and the lowest rate. What has helped lenders get comfortable with offering longer terms is the stability of the aircraft values. It is all about the aircraft.
Some of the older high time aircraft should not be financed over these longer terms- regardless of the finance amount. The newer more technologically advanced aircraft should see more offerings of long-term financing.
There is greater access to aircraft valuation data and a better understanding of the depreciation factors impacting aircraft values which allows for more confidence in future aircraft values. And as a lender’s experience grows they better understand the dynamics in the market that drive the decisions on long tenor investments. The most experienced lenders know when to extend terms and when to rein them in.
WAS: With so much of the growth in business aviation coming from the fractional operations- we wondered whether traditional aircraft finance companies are playing a role in financing that segments growth – and- if so- about how much?
Amalfitano: Interestingly- there are not many aircraft finance companies that actually lend into the fractional share market. For the most part- there are a lot of cash buyers with only a few bank lenders servicing this sector.
It appears that the real growth has been driven by the introduction of the jet card and membership programs that have fueled new buyers- coupled with the improved product offerings and aircraft access from the fractional ownership share providers. They are offering better aircraft as they continue to capture backlog of new generation aircraft from the OEM and broader logistics across a global market.
WAS: What- from the finance industry’s perspective- would most threaten the growth business aviation has enjoyed for the past several years?
Amalfitano: Historically there are three leading indicators to growth in business aviation: a growing economy with strong corporate profits and individual wealth; an increasing GDP; and the size and composition of used aircraft inventories.
The finance and aviation community closely monitors all three dynamics but the one that has always- and will continue to most threaten business aviation is the overall strength of the economy as evidenced by corporate profitability and individual wealth. As the tide of these waters moves so does business aviation.
WAS: Thanks- Michael!