Plane Data, Inc. - Aircraft Consulting and Appraising

November 2010 Newsletter

Market Summary

Stagnation is the word again this month as very little change across all market segments is observed when reviewing NAAA and JetNet data.  Aircraft sales are taking place but the number coming off the market is about the same as those coming on the market keeping prices and values at their current levels.  The banking industry appears to be contributing to this situation to an extent and there are two supporting articles that highlight this point along with several changes that have taken place in the aircraft lending industry.  One analysis calls the current aircraft financing situation a "log jam" and based on my observations there may be some merit to the comment.

The first article or press release comes from Brian Foley Associates and it speaks to the bizjet financing market.  You may recall that Brian Foley was one of the few voices who indicated that the bubble was about to burst on turbine values some months ago when many bankers continued to provide financing on aircraft at unsupportable levels.  At the time, Mr. Foley's observations were ignored but they matched the market data and sales information seen and reported by the NAAA.  Of course, published guides continued to promote unrealistically high figures and bankers elected to use "book values" instead of field research.  Brian's article or press release speaks to items that have been identified for many months.  The interest rates offered by banks may be great but the terms and conditions of the deal have changed quite a bit.  As a result, buyers who would have easily qualified for a bizjet loan some time ago are now being rejected.  Banks are putting more focus on the borrowers and less focus on the aircraft itself.  As a result, the traditional aircraft financing resources are being bypassed as buyers are electing to pay cash or they are looking to other funding sources.  Add to this the glut of used aircraft on the market and the problem gets worse with no immediate sign of improvement. 

Aviation Consumer has also published an article this month that speaks to aircraft financing from the buyer's perspective.  Again, the theme is that the banking industry is focused on newer aircraft and the "best of the best" borrowers.  The article provides good advice to those who are looking for aircraft financing and it most likely mirrors what banks are telling their customers who come in for a loan.  The result is that this may be a great time to purchase an aircraft but financing is not going to be available for most buyers.  They may be selecting older aircraft that fit their budget - but fall outside of the aircraft age limit.  Or, they may have a blemish on their credit record that would not have been an issue several months ago.

Over the past few weeks, I have been involved as an NAAA Qualified Buyer's Agent in two different aircraft purchase deals in which the buyer paid cash for the aircraft and the aircraft were purchased below the appraised value - in one case well below the appraised value.  Although these two cases are statistically insignificant to the overall market, it does highlight that sellers are under increasing pressure to move their aircraft and buyers are electing to pay cash versus financing the transaction.  For those who make a living financing aircraft, this is not a good trend.

At some point, something has to give.  The number of borrowers and aircraft that qualify for aircraft financing using the current guidelines is limited as are the number of buyers who can afford to pay cash.  Until the inventory of used aircraft begins to drop, prices will remain at their current levels or even decrease.  Banks who are truly interested in aircraft financing and increasing the number of aircraft loans are going to need to come to terms with the collateral and management of that collateral over the life of the loan in addition to the credit worthiness of the customer - or be satisfied with the current loan volume they have coming in.  Meanwhile, there are aircraft still on their books that need financial assistance or collateral management and these situations are continuing to decline.

I have been saying for some time that aircraft financial intuitions can increase their volume of loans and their profitability by focusing on both the borrower AND the collateral.  I will leave it to the banks to determine the borrower's ability to repay the loan and manage their risk from that perspective.  However the change that I will focus on involves evaluating and managing the bank's aircraft collateral on a regular basis thereby effectively and proactively managing that risk.  For example, there is no evidence that a 20 year old aircraft carries any more risk that a 10 year old aircraft or a 5 year old aircraft.  In fact, the Aircraft Owners and Pilot's Association (AOPA) completed as study a few years ago showing that older aircraft are not falling out of the sky and have as much utility as younger aircraft due the way in which aircraft are maintained in general.  The values between year models may be quite different due to the marketability of those different aircraft or the technology present in those aircraft or other reasons but understanding those risks or values from the typical banker's perspective becomes very difficult as few banking truly understand aircraft or the aircraft market.  This becomes more complicated over time as aircraft values fluctuate as does the "health and well being" of the aircraft itself.  Having an Aviation Consultant in your corner can help the bank better understand their collateral at the beginning of the loan and throughout the life of the loan.  Banks can take corrective action BEFORE problems occur because they will know how the owner is flying and maintaining their aircraft - or not.  Avoiding the collateral is only going to make the current situation worse and the answers to these types of issues are not going to be found in any book but in the field by first hand analysis of the collateral in question.

GA Sales Continue to Drop

From AVweb:  In the first nine months of 2010, general aviation shipments were down 15 percent compared to the same time period last year, the General Aviation Manufacturers Association reported on Tuesday. Pete Bunce, GAMA president, said despite the decline from 1,588 units last year to 1,357 units this year, he believes the longer-term outlook for GA remains positive. "Our industry is coming off of a successful National Business Aviation Association (NBAA) convention and we are encouraged by the sales announcements and a more positive outlook overall as discretionary spending starts to pick back up on a global level," he said. He added that GA manufacturers are continuing to invest in research and develop new products. "GA manufacturers are clearly looking toward the future and will be poised for a strong return when the economy fully recovers," Bunce said.

The third-quarter report shows that piston-powered airplane shipments totaled 634 units in the first nine months of 2010, compared to 679 units delivered in the same period of 2009, a 6.6 percent decrease. Turboprop shipments declined 20.8 percent to 232 units in 2010. Business jet shipments totaled 491 units, a 20.3 percent decrease over the 616 units delivered during this same period in 2009. Individual manufacturers show a range of statistics. Cessna, for example, had delivered 512 aircraft by the third quarter last year, and only 347 in this year's report. Cirrus, however, stayed virtually level, with 188 deliveries so far this year compared to 189 by this time last year. The full shipment report is available at GAMA's web site.

Aerospace Companies Set up NextGen Fund to Help Pilots Retrofit Planes

The "NextGen Program" being proposed by the FAA will require most if not all aircraft to undergo some type of equipment upgrade to utilize the airspace system by 2020.  As with everything else aviation related, these equipment changes and updates are expensive.  Aircraft financing organizations have an opportunity here to assist their customers by providing financing for these equipment upgrades.  It is also in the bank's interest to do this as those aircraft with these upgrades applied will command higher values in the marketplace and be easier to sell.  The article that follows is targeted at commercial aircraft but General Aviation Aircraft can benefit from a similar program as well.

From AOPA and AviationWeek:  As the Federal Aviation Administration flies along with work on its NextGen program, several U.S. aerospace companies are setting up a fund to help pilots properly equip their planes to use the new technology. ITT Corp. and Nexa Capital Partners are heading up the establishment of the fund that will total "well over" $1 billion, says Nexa managing partner Michael Dyment. That should be enough money to cover up to 80% of the U.S. commercial transport planes that need cockpit retrofitting.

A Question for the Appraiser:  (Typical questions asked about aircraft appraisals, evaluation methods and the appraisal process )

Q:  (from a potential aircraft buyer) I have asked the bank about how they are determining value on aircraft they lend against and they simply point me to Vref.  Is this the last word on the value of the aircraft?

A:  What the bank chooses to accept as evidence of value is stated in bank policy.  In the past, banks have accepted just about anything in regards to the aircraft's value such as a number written on the back of a napkin - but those types of situations are in the past and banks tend to rely on more substantial and quantifiable methods to document their collateral.  Published guides, such as Vref, do not meet this need (and they never have).  Field results routinely identify factors that impact the aircraft's value, the buyer's decision to purchase the aircraft and the bank's lending decision.  Publications and those who do not perform field visits or complete the necessary research simply cannot provide that level of information. with any degree of accuracy and accountability.