Market trends
A strong economy and increased interest in general aviation keep aircraft financing strong
By Jordanna Smida, assistant editor
April 2000
Airport Business spoke with aircraft financing companies to find out the latest trends. Results indicate a strong market, new entrants, and an optimistic outlook.
Though much of the success for the growth in aircraft financing can be attributed to a booming economy, it is only one of a few factors. According to the aircraft finance companies we spoke with, an increase in the interest of general aviation as well as the re-entry of many manufacturers into the market have also spurred the market's growth.
Competition is strong among all aircraft finance markets, notes Joe Dini, president of the National Aircraft Finance Association (NAFA). He is also vice president of general aviation for FINOVA Capital Corporation, which offers niche financing and leasing to merging growth credits, special purpose borrowers, and lessees. "Over the last five years the number of people involved in providing financing for various levels in the marketplace from good credit to emerging companies has doubled," he explains.
Dick Ramsten, manager of domestic aircraft financing for Bombardier Capital, which finances its fractional share program, Flexjets, states, "I think the real nucleus behind the growth is that prior to a year or two ago it [fractionals] was a product that had an uncertain future. It is now a program that everyone has accepted as a viable alternative to owning your own airplane," Ramsten states.
Longer terms are also a function of the steady economy. According to Bud Walker, vice president of specialty finance for MBNA, which specializes in personally owned aircraft from single-engine pistons to light business jets, many lenders are offering 20-year terms with 10 to 15 percent down payments, as opposed to 20 to 30 percent in the past. Aircraft portfolios perform well, Walker explains. "You're typically dealing with very upscale individuals or companies that are very financially solvent. Particularly in the used markets we've seen collateral values be very strong, so the result is you have a well-qualified customer and a collateral that holds its value very well."
The economy's strength has also brought more players into the aircraft finance market, notes John Newton, senior vice president of domestic sales and marketing for Cessna Finance Corporation, which specializes in new and used single-engine piston aircraft.
"We have an awful lot of competitors entering the market making the available cash or money very abundant. We have more players in our market than I've ever seen," he states.
The growth of the market is hard to pinpoint because the marketplace has become so competitive the past few years, says Al Lange, vice president of the aircraft finance division for Textron Financial Corporation, which offers aircraft lending to nearly the entire general aviation industry. "There are so many more lenders in the aviation field today then there were five years ago. There is growth in the market, but it is hard to determine the amount because of all the lenders that have entered," he states.
According to NAFA's Dini, the strong economy is reflected in the numbers: used aircraft trading increased about five to six percent a year over the last five years. He also says that the units of jets and turboprops traded has exceeded almost 2,500. The market has also seen a substantial increase in new deliveries, he notes, attributing a good portion of the orders to fractional ownership.
Increased interest in General aviation
The re-entry of many aircraft manufacturers has also played a role in
the growing market, catching the attention of financial institutions.
"It seems like there has been a market developed for an owner-flown plane in the million-dollar class that three or four years ago didn't exist," Walker states. As more companies enter into aircraft financing, he says, it has made aircraft ownership available to more people, which, in turn has helped the market grow.
"I think you can say that aircraft financing has played a key role in helping with the resurgence of the general aviation market by making aircraft ownership more accessible," Walker states.
Aside of more new aircraft entering the marketplace, Lange also attributes the market's growth to experimental aircraft. "I am absolutely convinced that one of the biggest contributors to growth in this industry is the Experimental Aircraft Association." The market for kit airplanes has grown due to increased interest and sophistication, which has brought a lot of people into the market, he explains.
More interest in business aviation has also helped to spark growth within the finance market as well. "The economy and general appeal of the aircraft as a business tool has come into the market and into major operations. One of the ways you increase productivity is through a better use of time and an aircraft is probably the most focused area you can get to as far as what you can do while you're traveling," states Dini. "I think corporate America and very busy individuals have come to the conclusion that this is not a toy anymore, it's a tool," he adds.
Ramsten says the fractional market has grown significantly. "Bombardier Capital's financing program has expanded probably five-fold over the past four years," he states.
Ramsten attributes the fractional market's dynamic growth to the acceptance of fractional ownership as a viable way to meet transportation needs, as well as the acquisition of NetJets by Warren Buffet, an endorsement he feels solidified the long-term validity of fractional programs. "I think that acquisition sealed the future of this industry. The manufacturers certainly felt it was a futuristic product ... for them to say it is one thing; for someone to put their money up to back it is another thing," he states.
On the leasing side of the market, the economy has been equally strong. According to Lou Scino, director of business aircraft for Boeing Capital Corporation, leasing is still a popular means for people who can't use the tax benefits associated with ownership or for people who want to keep the aircraft off the balance sheet. "People are acquiring airplanes ... people don't want to take the airlines and companies are expanding," he states.
Interest rate upturn
Interest rates, according to Ramsten, have been rising, making it difficult
for many in the finance market to make predictions.
Ramsten attributes some of the guesswork to Alan Greenspan, chair of the Federal Reserve. "Rates have been rising steadily since February of last year ... there's some uncertainty on the behalf of some borrowers," he states. Though rising rates increase the cost to the borrower, sales for shares have not slowed, Ramsten adds.
Sharing Ramsten's concern but remaining optimistic, Newton hopes it will only be another 20 to 25 basis points. "I'm hoping he [Greenspan] won't take it too far where the confidence in the economy drops off and consumers stop borrowing and buying," he states.
Despite the rising rates, Newton has found a steady flow of consumers entering the market. "We really have not seen a lack of confidence. Business has been growing ... and we think we will continue to do that this year as long as rates stay reasonable," he states.
MBNA's Walker has found the same. "This tends to be cyclical," he states. "When funds are cheap you'll see a lot of people jump into the market."
Lange explains that even through rates are rising, they are still attractive and lower than they were in 1994. "Interest rates have increased, but interest rates for aircraft financing still remain very low compared to where they were six or seven years ago. The economy is strong and these higher interest rates are only higher relative to what they were six months ago when they were at historic lows," he states.
The leasing market, according to Scino, is less sensitive to interest rates fluctuations because of residual values, among other things. However, he notes that higher interest rates benefit the leasing market. "We can offer big cash flow savings for a long-term lease instead of a long-term debt structure," he states.
Defaults
The trend in defaults seems to be the same across all markets; there are
very few to none.
"Default rates are extremely low and probably the lowest I've seen it since I've been in the business," Newton says.
Walker, who has also witnessed few defaults states, "With the economy being as strong as it has been, most people are seeing that the product is performing very well."
PREDICTING THE
FUTURE
In his predictions for the next couple of years, Ramsten states "Our
forecast is that we expect our business to double or triple over the next
two years as it relates to the sale of fractional shares."
FINOVA's Dini sees his market a bit differently though, predicting tightening interest rates and indicating that the aircraft finance market is finite and not very elastic. "The market we're in is a mature market, which means it will only grow as fast as or as strong as the economy will grow. If the market gets weak, the economy weakens and interest rates may get prohibitive. When the rates get high and the market gets tight the financial institutions that loan good credit will experience some loss," he states.
From a financing viewpoint, he says, "If we have a weaker economy and higher interest rates, we'll see less profitability in the marketplace for lenders, see fewer lenders, and those that remain and have been in the business will stay and do fine."
Dini, wary of the market's current strength, indicates that there is plenty of room for error. "If the economy slows down, people are not going to spend as much money for transportation and will probably cut back on general aviation also."
