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Blog for May 9th 2011

No Hope for Middle Markets?

In our offices- we’re seeing a lot of movement in the large corporate jet market and the smaller- newer jets and turboprops. But those older- mid-sized cabin aircraft just don’t seem to be recovering like the others. At first I just thought this was a lag in demand- and it very well could be. However- lately I’ve become more and more convinced that it probably has to do just as much with financing as with the slightly outdated avionics and lack of fuel efficiency.

Companies- at least in the United States- seem to be more cash rich than ever before. Foreign buyers of large jets are ultra high net worth individuals or global corporations. Almost none of these buyers complete their purchases with financing as part of the deal. One of my colleagues reported that 30 of his 32 transactions last year were cash deals. Only one of ours last year went through a bank—and the bank that wrote the note was also the bank that was selling the plane on a repossession. The bottom line is cash is king. Financing takes a long time- requires a lot more documentation than ever before- and is harder to obtain.

Most of the large traditional aircraft lenders are being selective with the profile of aircraft for which they are giving loans. A few won’t look at anything with an airframe older than 10 years. Several have formulas based on the age of the aircraft coupled with the duration of the loan. It seems that all of them are granting loans a little more liberally than 18 months ago.

However- one source of loans for small and mid-sized companies (who are the target market for the small and mid-sized- lower-entry-point aircraft) is still lagging very heavily. According to my banker friends- roughly 50 percent of the small local banks with whom these business owners have long-term relationships are operating under cease and desists from the banking fallout. The regional banks are eyeing some of the small banks and therefore not as focused on building out aircraft lending lines of business. This has left a gaping hole in the economy of pre-owned aircraft sales.

As I like to tell my employees (and my kids- for that matter)- I’d rather hear solutions than problems- so here’s mine. At a recent National Aircraft Finance Association (nafa.aero) conference- I was told there’s probably a home for every reasonable aircraft loan request- and sometimes the best way to find one is through an aircraft finance broker. Check out NAFA’s website or give us a call for a list of those we recommend.

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