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Recent news and events

The news this month focuses on several observations from the recent National Aircraft Finance Association  (NAFA) conference.  The NAFA conference always produces individuals, experts in their respective fields, that provide a wealth of information to its members.  This year was no exception.  For the past couple of years, analysts have been indicating improving conditions stating that any recovery would take about three (3) years and their current analysis seems to continue support this position.  What I found interesting were details that were NOT covered or included in this year's analysis.  If you have any interest in piston aircraft, you may find the observations interesting.

The general perception was that the market has stabilized in terms of pricing and values.  For the most part, information from the NAAA agrees with this assessment, although there are always exceptions with regards to specific makes and models.  I also found it interesting that one analyst supported something that I have saying for some time - that there is no public database of aircraft selling prices or values.  As a result, the information used in the analyst's charts were based on asking prices as reported by AMSTAT.  An exception pointed out by one analyst at the conference was the aircraft priced/valued over $25M versus those priced/valued under $25M.  For the many years, these market segments have tracked together until about 2008 when they started to diverge.  For those aircraft priced above $25M, the economy has not had much of an impact and pricing remained unchanged and in fact appeared to be increasing.  For those under $25M, values (as a group) have been, and continue to be, on the decline.  It should be noted that the mix of aircraft used by the analyst in his presentation is made up of ALL turbine aircraft including airliners and military aircraft so most of the General Aviation aircraft fall into the $25M and below category.  One segment that WASN'T discussed in this analysis was the piston aircraft.

I found this observation interesting because piston aircraft make up the great majority of aircraft registered in the U.S.  In fact, the most recent information I have indicates that piston aircraft (including helicopters) make up over 94% of the market!  Of course, the majority of revenue related to financing is most likely obtained from the remaining 6% of turbo props and business jets but if a bank's business plan focuses on turbine aircraft to the exclusion of other segments, then 94% of the market is being ignored.  I think that the absence of any piston market analysis or discussion represents a problem for those banks who finance piston aircraft regularly in that very few individuals at NAFA or in the industry are really addressing this segment of the market adequately.  As a result, these banks and bankers are left to figure things out on their own - sometimes with disastrous result to the bank.

There are many reasons that this segment is being ignored of course.  In an informal discussion, one banker indicated that they finance very few if any piston aircraft because it was simply too much effort for the payout.  The buyers for turbine aircraft are more sophisticated (than piston buyers) and piston buyers really don't know what they want (his comments).  While there is some truth to this, it should be noted that today's piston buyer may very well be tomorrow's turbine buyer - or they may be an influence to someone who is purchasing a turbine aircraft.  This type of attitude may also impact the bank's lending policy and risk management strategies.

There is a mistaken belief that piston aircraft do not represent much value or risk to the bank on a "per deal' basis so the more cost effective option is to do little more than file a lien against the airframe.  Unfortunately, many in the banking industry take that same approach when financing turbine aircraft and the results can place the bank in an unacceptable risk situation because only minimal effort is expended.  After all, where does the bank "draw the line"?  There is no clear answer to this question because most banks want to "draw the line" based on a value or number but who determines that number and how sharp is the line?  In other words, if the estimated value of the aircraft is $1 below the line then is the collateral effort minimal versus comprehensive?  Is the bank really prepared to put themselves at unnecessary risk or possibly overextend on a loan based on a superficial analysis of the collateral by someone sitting behind a desk and not turning one page of the logbooks or reviewing one maintenance record?

Another reason for minimal effort is the expected costs involved.  There is simply quite a bit of misinformation "out there".  Another informal discussion with a banker revealed that "the bank could not afford to pay $2000 for an appraisal report on a single engine piston aircraft".  I am sure that there are appraisal companies who charge that much but I explained that I charge only a fraction of this amount for a single engine piston.  Excessive pricing by other appraisal companies is simply one method of not wanting to get involved in piston aircraft.  I cannot speak for all aircraft appraisal companies but my banking clients need assistance with ALL GA aircraft including pistons and we are happy to help in this regard.  Our rates are provided to clients before receiving the assignment and any changes to these fees (due to unforeseen events) are identified, discussed and approved as soon as practical.

My point is that there is no real reason to ignore this large segment of the market other than effort.  Effort is needed to ensure the bank is not placed at an unacceptable risk level and that the bank's documentation meets or exceeds FDIC requirements and the bank's own lending policies.  Plane Data, Inc. is in a unique situation to address the needs of both the piston segment and the turbine segment for our banking clients - and we do so routinely.  There are no free services of course and no free lunch but all services are competitively priced based on the effort extended and the aircraft involved.  Doing the job in a professional manner takes time too but there is no deal that needs to close within a 24 or 48 hour timeframe and there is no real need to meet artificial timelines that buyers may impose.

If you think you or your bank can do better when financing aircraft, give us call to discuss your needs.  Plane Data, Inc. has programs in place to minimize costs while protecting the bank's portfolio.  Programs can be customized to meet the specific needs of our clients.  However, it takes effort to pick up the phone or write the initial email.  It takes even more effort to address collateral issues resulting from poor lending practices and/or bad decisions.

Too Much information

Years ago, I heard a comment that I reflect on often and that is - we make the best decisions we can with the information we have at that point in time.  When it comes to financing aircraft there appears to be a balancing act between the need to manage collateral/risk versus meeting personal/business objectives versus "doing the deal".  Having too much information can upset this balance - in a positive or negative way.  Unfortunately, there is no way to know how the balance will be upset and to what degree without some level of investigation.  There are several ways to go about getting key details without upsetting the balance but regardless, "bad deals" or unacceptably high risk situations should be identified and avoided.  The bank also needs to be prepared to take action if need be but in many cases, banks that finance aircraft simply choose to do little if anything and hope that the situation corrects itself.  However, there is no substitute for having good, reliable intelligence to act on.  In other words, better decisions can be made with better information.

Knowing that a particular deal or aircraft is "underwater" may force the bank to put the collateral into a "special" or distressed asset category which shows up in their numbers - if I understand current regulations correctly - and there is a certain amount of effort (read hassle and additional overhead) to manage or address this special asset month over month.  Of course, no one wants to see a $1M "stain" quarter after quarter on their balance sheet - or any exposure for that matter.  The bank has options here that can help them understand the status of the collateral without a dollar amount or value associated with the analysis in the hopes of avoiding the reclassification of the aircraft or the deal.  Collateral Inspection reports address this very need and can help the bank get an early indication of a distressed asset without the expense of a full blown appraisal and the resulting exposure of the current market value.  The typical repossession aircraft that I am involved with have not been flown or maintained in some time (months if not years) and many are not in flyable condition.  In this market, it can cost more to get the aircraft in an airworthy condition to dispose of it than it is worth.  Missing log books and maintenance records only complicate the situation further.  "Scraping" the aircraft is not a great option either because the aircraft salvage yards are full of this material and are offering very little for aircraft in this situation.  My point is that these aircraft did not get in this situation overnight.  Could the situation have been avoided completely with timely information?  This is unclear because of the second issue.

Once the bank becomes aware of a problem, can they do anything about it and does their Security Agreement allow for the bank to take any corrective action?  If the bank is using the standard Security Agreement template provided by the FAA or derived from the FAA, the answer is most likely "no".  Keep in mind that the FAA really has no interest in the bank's collateral or the management of that collateral so it really was not addressed in their template.  An effective collateral management/risk management program will also involve changes to the bank's documentation that allows the bank to take corrective action in a timely manner to avoid a bad situation from becoming worse.

The bottom line is that there is collateral management and then there is collateral management.  Being aware of problems or issues is one thing.  Being able to take corrective action is another. 

In this economy and in this market, closing the folder on one deal and moving on to the next without any regard for the ongoing use, maintenance and registration status of the aircraft puts the bank at unnecessary risk.  There is simply no good reason to ignore the situation and hope that things get better.  The situation will most likely not improve and will typically get worse if neglected.

A Question for the Appraiser

Q:  A customer's aircraft registration has expired.  How does this impact the bank's lien?

A:  I discussed this question with Insured Aircraft Title Services and I would recommend checking this answer with other resources as well.

The bottom line is that the bank's lien is protected as long as it has been properly recorded with the FAA.  My understanding is that the current lien will remain on file regardless of the registration status.  However, once the registration has expired, a new lien cannot be filed/recorded until the aircraft is properly registered although any "Release of Lien" will still be accepted by the FAA during this period (expired registration).

An interesting item to note is that banks will NOT be notified that any aircraft's lien is about to expire and once a registration expires, the aircraft is considered "unairworthy" and it cannot be flown until the aircraft is properly registered. 

Aircraft become unairworthy from time to time for normal reasons such as routine maintenance.  However, an owner who allows a registration to expire is most likely not addressing other issues with the aircraft as well.  Banks that finance aircraft will need to re-think their collateral management strategy in light of the new registration requirements imposed by the FAA because it is not in the bank's interests to have collateral that is maintained in an unairworthy condition.

This raises the question of "who" is going to check on key items such as the registration status of the aircraft and its maintenance status during the life of the loan and how is this information going to be verified for the bank's records? 

Plane Data, Inc. offers a variety of solutions and pricing plans to fit just about any need when it comes to collateral management and the client receives written, signed reports documenting findings based on first hand information.  Call to see how Plane Data, Inc. can help you or your bank.

Key Items to Note

 

 

other information

Call 800-895-1382 for more information or to see how Plane Data, Inc. can help you.