AVIATION FINANCE REPORT 2015 U.S. economy. With that tightening of The rising dollar and declining aircraft residual values the labor market, more competition for workers should translate to rising are proving to be a drag on the industry’s recovery wages, which would further stimulate the U.S. economy.” www.ainonline.com by Curt Epstein Despite the brightening economic picture in the U.S., for many the With the economic downturn now bellwethers such as the stock mar- wounds from the downturn inspire seven years in the rear-view mirror, the ket indexes reached record levels in caution in the decision-making pro- U.S. economy has continued its slow but late May, when the Dow Jones Indus- cesses. In this economic expansion, steady recovery this year, reaching, in trial Average hit 18,312 and the S&P notes Wayne Starling, senior vice pres- the eyes of most of the world, an envi- 500 peaked at 2,131. Likewise, unem- ident and national sales manager for able streak of 22 consecutive quarters of ployment has dropped from a high of PNC Aviation Finance, “companies expansion. But the strengthening of the 10 percent in October 2009 to nearly and individuals have retained more U.S. dollar has placed a chill on the inter- half that now. “We continue to reduce cash, deferred capital expenditures and national business jet market, which is still the slack in the labor market that has deferred investment in plant, property dealing with the effects of declining air- persisted since the great recession,” and equipment” to a greater extent than craft residual values. noted Gus Faucher, senior economist in previous recoveries. Through the first half of the year, at the PNC Financial Services Group. However, “that fear is fading and will the U.S. gross domestic product rose “I think by the spring we should be continue to fade as we get farther and 3.9 percent, a substantial jump from 1.2 back to full employment [defined as 5 farther away from the great recession,” percent the previous year. Economic percent or less unemployment] in the Faucher told AIN. “The conditions for © 2015 AIN Publications. All Rights Reserved. For Reprints go to AVIATION FINANCE REPORT 2015 concern to both buyers and lenders. “For aircraft leases closed at the peak New/Pre-owned Business Jet Full Retail Sale Transactions U.S. FAA Financial Documents, Financed vs. Cash* of the market in 2006 to 2008, asset val- ues have eroded sharply, forcing banks 100% to ‘mark to market’ aircraft residuals, 90% contributing to embedded losses,” said 80% Michael Amalfitano, Stonebriar’s exec- utive vice president and senior manag- 70% ing director of business aviation, and 60% the former head of Bank of America’s 50% corporate aircraft portfolio. 40% “Our traditional wisdom used to say 30% that these airplanes lost three percent of 20% their value a year, but that’s not the real- 10% START OF ECONOMIC MELTDOWN ity any more,” said Jay Mesinger, CEO 0 of Colo.-based J. Mesinger Corporate 8 1 2 5 8 2 3 3 4 4 5 0 0 1 5 6 6 7 7 9 9 0 0 1 1 2 2 3 3 4 4 0 ’ ‘1 ‘1 ‘1 ‘1 ‘1 ‘1 ‘0 ‘1 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 ‘1 ‘1 ‘1 ‘1 ‘0 ‘0 ‘0 ‘0 ‘0 ‘0 Jet Sales. “A consensus of smart indus- 4 2 4 2 4 2 2 4 2 4 2 4 2 4 2 2 4 2 4 2 4 2 4 2 4 2 4 4 2 2 4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q try people today would say that it will lose Analysis by AvData 10 percent the day you fly it off the lot Data based on the 4 quarter total moving average. FINANCED *CASH *FAA registries without debt instruments or lease are presumed to be cash. and for the next four to five years it will lose seven percent a year.” Beyond that he business capital spending overall remain not recovered to pre-downturn lev- believes the value will drop by 5 percent pretty good. We have low borrowing els. “While I often hear that new lend- each year thereafter. costs, and banks are becoming more ers have entered the market, I think the Those dwindling residual values have willing to extend credit.” In the Federal reality may be that lenders who pulled played a role in operators’ holding onto Reserve Bank’s July survey of senior loan back in the [financial] crisis are re-enter- aircraft longer. According to industry officers on bank lending practices, more ing,” said Ford von Weise, director and data provider JetNet’s IQ Survey of oper- than 45 percent of the large U.S. bank head of Citi Private Bank’s global air- ators, the average length of time a buyer respondents reported they had some- craft finance division. of a new business jet will keep the airplane what eased the spread of loan rates over While new regulations are forcing has risen to more than five years today the bank’s cost of funds for large and the large banks to focus more sharply from 3.7 years in 2005. For purchasers of middle-market companies [those with on borrowers’ credit, von Weise said used jets the average term of ownership annual sales of $50 million or more]. Of “we are seeing more competition in this has grown to 3.2 years from 2.1 years. those that had eased terms for lending, end of the market through pressure on more than 95 percent indicated that more spreads, loan-to-values and other deal Cash Up Front, Finance Later aggressive competition from other banks terms.” As some lenders, such as GE Roughly 74 percent of all private jet pur- or nonbank lenders was at least some- Capital (see article on facing page), have chases in the U.S. were paid for with cash, what important in that decision. left the market, others have entered, according to an analysis of documents www.ainonline.com “The jet finance and leasing space such as Global Jet Capital and Stone- filed with the FAA through the first three is more fragmented now,” said Joseph briar Commercial Finance. quarters of the year by JetNet’s AvData DiLallo, head of corporate aviation For many of the traditional lend- division. Strict interpretation of the filings finance and leasing at BMO Harris ers, the effects of the downturn and shows that number has remained relatively Equipment Finance. “Until just a few the resulting declines in aircraft val- consistent over the years. Many attribute years ago, two major financiers dom- ues are still evident in their portfolios. companies’ and wealthy individuals’ pref- inated the leasing market in the U.S.; A 10-year financing deal signed at the erence for spending cash to a lack of suit- today that same space is shared more peak of the superheated market period able investment opportunities. Stronger evenly by a half-dozen or so active les- of 2007-2008, when the OEMs deliv- economic growth “would provide buy- sors.” With the recent increase in U.S. ered nearly 2,500 new bizjets and air- ers with proven alternatives for deploy- corporate flight activity, smaller play- craft values reached an apex, will be ing cash in their business,” noted Michael ers such as local and regional banks staining the books for at least another Kahmann, managing director and group have once again joined the major lend- year or two, and the declining resid- head CIT Business Aircraft Finance. ers, though some in the industry lament ual aircraft values, likely nowhere near “Therefore, we think the ‘cash is king’ that the number of lenders and the where they were predicted to be when phenomenon is closely linked to a lack of level of competition for loans still has the deal was signed, are an enduring good investment alternatives.” © 2015 AIN Publications. All Rights Reserved. For Reprints go to AVIATION FINANCE REPORT 2015 What is unknown is how many of Annual Average Inventories of Pre-owned Jets those aircraft buyers sought and received Compared with Annual New Business Jet Shipments post-purchase financing that would skew (2005-2015) the statistics for cash transactions. “Cash may not be king,” said James Simp- son, managing director for aviation and 3,000 marine finance with First Republic Bank. 3,025 “As I often tell people, use your cash for 2,500 appreciating assets, use leverage for depre- 2,268 2,588 2,460 ciating assets like aircraft. By using lever- age, the financing process keeps clients 2,000 2,332 2,281 close to residual values and asset decay, and gives them a realistic view of future 1,500 aircraft values.” 1,673 1,661 In the aftermath of the downturn, as prices of used aircraft tumbled, 1,315 1,000 many buyers have elected to use cash to expedite the buying process on what Annual New Jet Shipments/Pre-owned Jets Available Annual New Jet Shipments/Pre-owned Jets 500 750 they believe to be a good deal. “We 696 672 678 722 710-725 see some people paying cash and then financing at their leisure so they don’t feel rushed,” said Allen Qualey, senior 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 advisor and president emeritus of 1st Source Bank’s specialty finance group.