Searching for silver linings at the NAFA conference


NAFA’s conference took place at the JW Marriott Starr Pass hotel nestling in the Tucson Mountains.

A silver strike near Quijotoa, Arizona spurred stagecoach driver Richard Starr to pioneer a route through the Tucson Mountains to the mine in the 1880s. Nearly 150 years later, financial specialists hit his trail to JW Marriott Starr Pass hotel to attend the National Aviation Finance Association (NAFA) 52nd Annual Conference.

Not silver but sustainable business aviation dominated the two-day event at the resort amid the tall saguaro cacti. Prickly topics under discussion included the health of the US economy, particularly the impact of high interest rates, the disillusion of some first-time buyers and business aviation under attack.

But there was more gain than pain when it came to the upbeat assessment of the US economy from Gus Faucher, chief economist, PNC Financial Services Group. Without minimising the impact of high interest rates, which could (but not necessarily will) pitch the US economy into recession, Faucher highlighted positive factors likely to lead to steady growth this year and into 2025.

“The US economy is in very good shape right now,” he said. “The economy is 8% larger than it was before the pandemic. Some 22m jobs were lost due to the pandemic but those have been regained and another 8-9m jobs added to where we were before the pandemic.” Strong labour markets underpin consumer spending power, which was driving broad-based economic growth across the US, he added.

Returning rates to 2%

But there are reasons for pessimism. The “inverted yield curve” – meaning short-term interest rates were higher than long-term interest rates – was often associated with recessions. Faucher estimated the likelihood of a US recession at about 35%. However, he felt confident that the Federal Reserve would be successful in returning rates to its goal of 2% from their current level of just over 5%.

“There is likely to be slower growth this year but still growth,” he summarised. “Spending will continue to support growth in 2024, with the Fed cutting rates later this year for technical reasons [partly to cool wage growth] starting in July and in 2025. That will support growth this year and into 2025.”

Interest rates are affecting the decision to buy aircraft but not in the obvious way of affecting decision-making, said Shawn Dinning, senior partner, Dallas Jet International. “I don’t see a situation where a prospective buyer or borrower is looking at rates and saying, ‘I can’t afford this deal’. We are not seeing a delay in decisions to buy. About 70% of our business lately has been cash.”

But interest rates are affecting the core business of his clients – principals and corporations. “We do a lot of multi-family-type real estate companies and two years ago they were printing money, now they went from a nice positive cash flow position to bleeding hundreds of thousands if not millions of dollars because of interest rates,” said Dinning. In some cases, owners need the liquidity on the airplane. “They have to prioritise, so the airplane gets the axe,” he added.

On a more positive note, he said: “Demand continues to surprise me in a good way and it’s keeping up with this increase in inventory in a pretty good way.”

‘More transactions in Q1’

Wayne Starling, executive director of International Aircraft Dealers Association (IADA) agreed. “There were more transactions in the first quarter of this year than there were in the first quarter of last year,” he said, based on his association’s latest report.

But Johnny Foster, president and CEO, OGARAJETS reported growing frustration and disappointment among first-time buyers. Before the pandemic, almost every year consistently, first-time buyers accounted for about 5% of the purchases of aircraft. But that figure rose to 38% of buyers between 2020 and 2022, he said.

They came into the market, often buying legacy aircraft with the promise of bonus depreciation and excessive demand for charter. “Now we are hearing and seeing these first-time buyers are disenfranchised with the model because their aircraft is not flying 600 or 1,000 hours a year [through charter]. It’s flying 100 hours a year,” he said. “And their pilots’ salaries have tripled over the past three years, and they are now being told they have to have three pilots instead of two pilots.”

These frustrations were compounded by their first main maintenance event, which “has caught many by surprise”. The legacy aircraft that cost only $2m or $3m to buy could be facing inspection costs of half a million dollars, said Foster.

‘Full-scale attack’

From disappointment to hostility. Business aviation is under “full-scale attack” and not just in Europe, warned Ed Bolen, president and CEO, National Business Aviation Association. “There is an effort to find ways to disparage our industry which is not consistent with data and our strategy. We see it in a lot of ways,” he said. Examples include the February 21st announcement by the Internal Revenue Service (IRS) that it intended to step up its aircraft owner audits.

Other examples cited were the five-fold increase in fuel tax over five years and the plan for longer depreciation periods. Combating these and other threats would rely on a coordinated industry response and lobbying policy-maker, he said. Not least via the NBAA’s Climbing.Fast campaign.

Speaking to CJI after his presentation, Bolen set out his goals for the end of the decade. “By 2030, we will be ready to answer the SAF Challenge of 3bn gallons produced in the US,” he said. We would like to see operators continue to look for ways to operate even more sustainably.” That means looking at good quality offset programmes and book-and-claim options. “And we are working hard to introduce advanced air mobility and hybrid solutions and the effectiveness of our air traffic integration.”

Despite challenges facing business aviation – not least high interest rates, supply chain difficulties and the shortage of pilots, airframe and powerplant technicians – the industry can look forward to a bright future as wealth generation and transfer continue to fuel demand, according to speakers.

Stephen Friedrich, chief commercial officer, Embraer summed up the reasons for optimism: “Over the next 20 years, we are going to see a $73trn wealth transfer from Boomers to Generation X and Millennials – and that is only just beginning. This is in addition to [aircraft] purchases by corporate flight departments and private individuals.”

Back in the 19th century the silver boom soon turned to bust, with fire consuming the mining town of Quijotoa in 1889. Attendees at the NAFA conference heard strong reasons to believe in a much more sustainable (and profitable) future for business aviation.

Prickly saguero cacti surrounded the conference venue. Inside, delegates discussed thorny topics such as the impact of high interest rates.

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