Residual values remain crucial factor for financiers says industry report
A review about business aviation has found that stabilization of residual values and sustainable global economic growth will be the most important factors for growth of the industry between 2013 and 2016.
The report titled “Business Aircraft – Gaining Altitude * From Recession to Recovery: Aircraft Transactions Build Momentum Despite Industry Challenges” was commissioned by the Equipment Leasing & Finance Foundation, which commissioned lawyer David Mayer, a partner at Shackleford, Melton & McKinley, to conduct the industry survey.
After the financial crisis, residual values and orders for certain aircraft types dropped significantly. Lenders have become wary of financing business jets as result of this dramatic fall changes, which has made it difficult for some customers to source capital.
“For financiers, the most important drivers of growth of financing opportunities from now through 2016 consist of the stabilization and predictability of residual/collateral values coupled with sustainable growth in GNP and corporate profits,” says Mayer.
The 122-page report addresses the lingering effects of the recession as well as focuses on new challenges facing the market. Information was gathered over a 10-month period through extensive surveys of financiers and end-users, as well as from interviews with industry leaders.
Mayer’s findings show a split between the availability of capital for top-half jets (aircraft larger than super-midsize with a new-build value of more than $25 million) and bottom half aircraft (aircraft smaller than super-midsize, with a new-build value of less than $25 million.).
While funding is mostly available in all aircraft segments, where the transaction is primarily based on the value of the asset – as in a lease or secured loan – customers are finding that residual risk can block credit approvals. As a result, many financiers are declining leases or loans except for large cabin and super long-range aircraft less than 10 years old and a significantly lower loan-to-value.
“This reluctance has already started to ease for certain asset-savvy lessors as customers push for more leasing to shift residual value risk to financiers,” says Mayer.
As a result, US-based regional and local banks are filling the funding-gap, working with relationship clients to retain or win further business. Mayer says this trend has occurred faster than he anticipated.
But even as capital returns to the market, corporates are concerned about the public’s understanding of business aviation. “End-users, brokers and others express significant concern with public misperceptions of purchasing, leasing and operating corporate jets,” says Mayer. “According to the study findings, end-users regard these opinions as a top five challenge through 2016, but will nonetheless continue to use private aircraft as business tools without deviation from their regular missions,” says Mayer.
One of the most harmful impediments to sustainable growth for business aviation is the potential imposition of user fees in the US, according to Mayer. “User fees would, if instituted, pose a serious economic and regulatory burden on general aviation, including business jets, according to feedback from most respondents,” he says
While top-half jets users (such as super-high wealth individuals) and financiers appear less concerned about the initial $100 fee per flight, the general aviation have indicated that the fees would have dire consequences such as diminishing aircraft use and slashing related business revenue.
“The study is designed to provide useful, original and lasting content to financiers, owners, buyers, lessees, consultants and operators from today through 2016, including transactional, regulatory, accounting, tax and risk management issues of the type that I frequently address in my law practice,” says Mayer. “There will be no lack of challenges in each of the areas covered by the study in the future.”