Opinion: ExecuJet may find customer finance profitable, but it will also be scary
[nonmember]ExecuJet’s decision to offer customer financing is a brave one. But it could work.::join::[/nonmember][ismember]
ExecuJet’s decision to offer customer financing is a brave one. But it could work. It knows that the demand is there. Many buyers do not want to give personal guarantees particularly and others – particularly in Africa – are struggling to find cash.
But customer finance is inherently risky. First, the company is in danger of only getting customers that banks do not want leaving it with a terrible portfolio (particularly if its salespeople are arguing customer’s cases hard). Second, although it is a new product line, it significantly leverages ExecuJet’s exposure to the business aviation rather than diversifying the business.
ExecuJet’s solution is to keep loan-to-values to below 50% and remove as much asset risk as possible by managing and maintaining the aircraft itself. It will be a lot closer to the metal than any bank or leasing company ever gets. It is also launching when aircraft are cheap.
As Dermot Desmond, its majority owner, is underwriting the scheme it doesn’t have the risk of banks pulling financing, triggering LTVs or raising financing costs. This has happened to operators in the past.
Like everything in aviation, ExecuJet needs to play the cycle. If it is content to jump in when aircraft are low and not compete with financiers when the market is overheated it could work well. Being a lender or lessor of last resort can be very profitable, particularly if you syndicate deals in good markets.
McDonnell Douglas Finance was the most profitable part of the aircraft manufacturer and commercial aircraft leasing companies – which enter deals planning to re-market aircraft at some point – can generate good returns. It will be interesting to see how much of ExecuJet’s portfolio ends up as operating leases.
Desmond understands the importance of timing. He has been very successful in businesses ranging from brokerages to online gaming but one of his best deals was in aviation. Dermott was prepared to buy London City Airport for £23.5 million in 1995 when Canary Wharf was bankrupt and no one thought the airport would work. He sold 11 years later for £750 million.