Will the BizAv Lending Environment Change?

When assessing the current business aircraft lending environment and its liquidity, it’s important to first consider the current pre-owned and new aircraft sales markets.

Both have seen a significant increase in activity over the past two years, but a recent uptick in preowned aircraft inventory may suggest a peak has been reached, and a market correction is due. According to AMSTAT, as of July 2022 the global inventory of pre-owned business jets for sale was 33% lower than a year ago (965 units, versus 1,432 units in July 2021). However, inventory levels bottomed out in March with 782 units for sale. Since that low, the preowned jet inventory had risen by 23%.

As of July 18, 3.9% of the active fleet of business jets was for sale, up from that historical low of 3.2% in March.

Meanwhile, the global inventory of pre-owned business turboprops was 38% lower than 12-months prior (524 units compared to 845 in July 2021). However, inventory levels bottomed out in May when just 501 units were available for sale. Since then, pre-owned turboprop inventory had increased 5% (as of July 18), with 3.1% of the turboprop fleet available for sale.

Ultimately, there needs to be approximately 2.3 times more aircraft for sale (than were available in July) to match the 20-year average for pre-owned business jet and turboprop inventory for sale.

According to the International Aircraft Dealers Association (IADA) Q2 2022 market report, almost 600 aircraft sales were recorded during the first half (H1) of 2022 compared to 529 in H1 2021 – a 13% increase. The increase was spurred by a robust Q1 2022, with Q2 showing lower-than-expected sales numbers.

Overall, January-July sales still reflect a healthy market in 2022, though this metric will need to be watched closely.

In terms of a market outlook for 2022, many within the industry concur that it’s difficult to predict where the pre-owned business aircraft market is heading. On the one hand, multiple airlines continue to announce capacity cuts of between 5% and 15%, driving first-time customers towards Business Aviation. On the other hand, inflation, coupled with rising interest rates are key concerns for aircraft buyers, and could impact borrowing.

Moreover, a scarcity of top-quality, nearly-new pre-owned business aircraft is a concern to some buyers, as are the average two-to-three years wait time for new aircraft to be delivered from the OEMs.

Lending Environment: Pre-Pandemic versus Current

After consulting several industry colleagues, lessors and financing institutions, the general consensus is the lending environment will continue being highly competitive with many players able to lend money to meet their client’s needs, even within a higher interest rate environment.

The key question is whether rate increments will lower the appetite of market newcomers, or push back existing aircraft owners that may want to upsize to a larger jet.

The expectation is for lending conditions outside the US to continue as they were at the beginning of the pandemic, with the terms for loans typically spanning between seven and ten years, and with down-payments averaging 15% to 20%.

In terms of interest rates, buyers can today expect between 7.5% and 8.5% as a combined result of swap, bank margins and guarantees. Going forwards, any rate increments will be on top of the 7.5-8.5% interest rate.

Within the US, rates of 5.5% and 6.1%, based on a Federal Funds Rate estimate of 1.50 to 1.75, may also be adjusted to reflect new rate hikes. Thus, lending will continue to flow as before, but under revised conditions which make it more expensive to buy an aircraft at a time when many potential buyers may be deterred by higher financing rates. In fact, rate premiums could become the norm for the next 12-24 months.

If pre-owned inventory continues to dwindle, or hovers near the 3% mark, premium prices for business aircraft are likely to continue.

OEM Production Rates

Another key question is whether aircraft OEMs will begin to increase their production rates if the appetite for business aircraft continues to be strong, and pre-owned aircraft inventory remains in short supply. Supply chain issues, logistics, and low levels of qualified technical personnel have so far prevented the OEMs from doing so, and are likely to continue to inhibit them for the next 12 months.

On the other hand, if the economic picture darkens too much with rising fuel costs, revised and lower global GDP projections, and a looming recession, the financial institutions may revise and tighten their loan requirements as they seek to protect themselves from asset repossession scenarios. A market correction that impacts aircraft values is a real concern to any lending institution.

In that case, cash-backed loan instruments, such as ‘back-to-back’ transactions, may be the preferred low-risk lending strategy for banks as a two-party arrangement by which a bank advances a loan to a corporate or private banking account, based on the client’s top-tier deposit and liquid assets with the bank.

Floating rate contracts are expected to be the new norm as many expect rates to stabilize again in one or two years. And in the unlikely case a client requests fixed-rate financing in the current environment, a credit swap will continue to be the best instrument to secure it.

In Summary…

Even with a looming recession and market correction impacting pre-owned inventory levels and pricing, the market should remain active for all size categories. If interest rates do go up, however, some potential aircraft buyers may prefer to wait for better rates to become available again.

As always, it is a good idea to get expert advice when financing an aircraft, and to shop around and benchmark multiple financing proposals.