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Report: 3 Most Common Mistakes When Purchasing An Aircraft


Aircraft Appraisals 101: Everything You Need To Know Before Purchasing An Aircraft


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Aircraft Financing

This is the first in a series of three articles involving topics related to aircraft financing – specifically the aircraft itself.  My objective is to help banks who become involved in aircraft financing to better understand the collateral they are dealing with and the revenue opportunities of this market.  This specific article will highlight some of the more common observations that I have seen after 19 years of evaluating and documenting aircraft for a number of banking clients across the U.S.  and how many problem areas could have been easily avoided with more reliable information. I would also like to introduce a few aircraft financing techniques that may help the bank better manage their risks thereby allowing banks and bankers to make more informed decisions based on analytical data.

The #1 item any bank or banker needs to understand about aircraft financing is that aircraft are like no other asset the bank lends against.  Therefore, aircraft should not be treated like every other asset the bank lends against if the objective is to reduce/manage risk and make informed lending decisions.  If handled properly, aircraft financing can be extremely profitable but there is more fraud, deceit and misrepresentation of the facts in this industry than you may want to realize.  There is no one source or individual to point to in every situation but the atmosphere is one wherein facts which are not verified or details which are not disclosed may lead to erroneous conclusions, evaluations and decisions.  

A common thread through most issues is the bank’s aircraft financing policy or more appropriately the lack of an aircraft financing policy or a single knowledgeable resource.  In many cases, these policies contain outdated or incorrect assumptions about the best methods of evaluating and documenting the collateral and in other cases the policy is ignored or overridden altogether.  In the past, the focus has been more on “making the deal happen at any cost” (and many banks have paid a huge penalty for that strategy) but current trends appear to be more cautious. However, bank policy and employee efforts have been slow to reflect this trend.

I have worked with several banking clients over the years in the development of their aircraft financing policies and those banks that generally do well and face fewer issues with banking regulators place more emphasis on the aircraft itself along with routine scrutiny of the borrower.  Policies that need more work usually reflect thinking that “aircraft less than $X do not need a formal appraisal (more on “formal appraisals” in the next article)”. My usual response to this thought process includes questions such as – who determines that the subject aircraft is below or above $X and what is the basis for that analysis?  Is there really a belief on the part of the bank that somehow the aircraft that is $0.01 below the stated threshold is somehow an insignificant risk and efforts should be made to avoid any analysis of the collateral? How does the bank address the value of their collateral as the aircraft or market fluctuates? In other words, the deal that closed a week ago (when the aircraft was below the threshold) now involves an aircraft that is well above the threshold due to market conditions or improvements of the aircraft itself.  How is this situation adequately addressed in the policy and who is charged with doing this function and how often is it completed? What is stopping the bank from doing a proper evaluation of all aircraft and documenting the results? If we were talking about a piece of real estate at the same dollar value, would we make the same decision?

The answers to those questions leads to another gap in aircraft financing policies regarding who/how aircraft are evaluated and documented.  I find it interesting when involved in repossessions that there is rarely any appraisal report on file for the aircraft in question. What is typically found is little more than a number on a piece of paper with very limited supporting documentation.  A banking representative in charge of this project attempts to support this missing documentation by stating that the bank relied more on the strength of the borrower than the asset itself (relationship lending vs. asset based lending). However, I find the reasoning behind that position difficult to support given the fact that the loan is in default and the only reason I am being hired as a Professional Aircraft Appraiser/Consultant is due to the diminished strength of the borrower and the bank’s need to assess and liquidate their security interest in the asset they did not think was important at the beginning of the loan – and which is now substantially less than they thought it was worth.  Having documentation on file to support the bank’s collateral decision should be a firm requirement of any bank policy because relationships can and do change over time. In comparison, real estate transactions require some type of appraisal to be part of the lending process (due to regulations I’m sure) but for some reason aircraft that may have dollar values exceeding an average house several times over may have very little information on file to document the contents and condition of the aircraft. When aircraft are involved, understanding a specific aircraft’s market value (and how it was determined) is one of the most important attributes in the overall decision making process. It should not be glossed over or avoided for any reason.

The first myth I will bust is the belief that the market value for any aircraft can be found in a variety of publications and all the evaluator has to do is make a few “adjustments” to determine the actual value of any aircraft.  The reality is that there is NO public database of aircraft selling prices and the “adjustments” an evaluator needs to make involves more parameters than one might think. Many evaluators may believe that the final number is “close enough” but this is really an irrational belief because that type of conclusion would really involve an analysis comparing the results from at least two data sources over many makes/models of aircraft over a period of time and it is unlikely that the evaluator with that belief has completed that level of analysis.  I perform that type of analysis routinely and I always find the results interesting but rarely consistent.

As part of my normal reporting, I typically run an analysis using one of the published guides – but not in the way you might think.  The publication, of course, is a general guide only and should not be used to appraise a specific aircraft (a paraphrase of the publication’s disclaimer) but there are other limitations and inaccuracies that become apparent as any evaluator works through the process.  In a good number of cases (I would estimate about 30% - 50%) the publication could not be used as the sole resource to reliability determine a specific aircraft’s market value. The shortcoming is due to issues associated with attributes such as damage history, missing log books or log book entries, airframe/corrosion issues, and so forth.  In those instances another resource must be called upon or the evaluator has choices to make about going forward and most of these choices are not good ones thereby creating problems for the bank in the future due to an incomplete analysis or erroneous results/conclusions.

Another common myth is that the bank has a sufficient “cushion” in their “LTV” percentage such that they are covered in the event of any repossession.  The unfortunate reality is that the evaluation approach initially used (the use of an unreliable publication to determine the aircraft’s value, using third party information about the aircraft from a source connected to the deal, etc.) means the bank most likely over-extended on the loan to begin with.  The 20% or 30% “cushion” that the bank is counting on in many cases simply does not exist or it has evaporated due to the manner in which the asset is disposed of. There is a mistaken belief that selling the aircraft at auction or turning it over to a broker/dealer will result in obtaining the aircraft’s market value.  However, a “liquidation situation” (wherein the aircraft needs to be liquidated within X days) does NOT result in 100% of the aircraft’s market value but in something much less. How much less depends on the liquidation timeframe (some aircraft take over a year to sell under normal market conditions), how the original value of the aircraft was determined, when the aircraft’s value was determined and what may have changed since the initial evaluation.  The traditional 70% or 80% LTV is generally inadequate for this purpose.

So what is the best solution to solve these shortcomings?  Banks that are at the next level in their aircraft financing efforts utilize some type of risk management plan involving an unbiased third party along with solid factual information at the beginning of the loan along with periodic analyses of the aircraft over the life of the loan.  The process typically starts with a Market Analysis or Certified Appraisal of the subject aircraft and it may involve Collateral Inspection Reports, Certified Appraisal Reports or an updated Market Analysis during the life of the loan to avoid surprises. Re-visiting the aircraft on a periodic basis can also identify new financing opportunities for improvements related to engine overhauls or avionics upgrades.  Using factual data at the beginning of the lending process allows the bank to make intelligent, informed business decisions thereby sending higher risk situations to their competitors. Some banks try artificial methods of limiting their risk by limiting the age of the aircraft or the type of borrower but this is only a short term solution and it actually limits the bank’s ability to service a larger market (more revenue) that is available to them.

The heart of any risk management plan is an understanding of the aircraft and its records and how these are related to the overall value of the aircraft in the current market – which should be part of any legitimate appraisal report.  However, this brings up earlier questions such as – what is a legitimate appraisal and how are they obtained? How does the bank know they have a legitimate report and what is actually contained in these reports? Who is qualified to perform an appraisal and how much do they cost?

The answers to those questions and more are the subject of the next article.

As an Aircraft Consultant, I routinely help banking clients in all phases of the aircraft lending process and I can help your bank too.  Many in the banking industry have questions that they want to ask but they may believe them to be too basic. I think that the more information available to all parties, the better the decisions being made and I welcome any question or any discussion on this topic.

Mike Simmons has written and published many articles on the subject of documenting and evaluating aircraft and worked with a variety of banking clients both large and small as an aviation consultant assisting them in their aircraft financing policies and day to day projects.  The aircraft he has been involved with over the years includes single engine piston models all the way up to business jets such as Challengers, Gulfstreams, and Citations along with a few helicopters along the way. Mike’s assignments have taken him all across the U.S. including Hawaii.  As a normal course of business, he has observed several bankers over the years making questionable decisions when financing aircraft because those questionable decisions were the easy thing to do at that time, the banker may have been unsure about the right action to take (unaware of the services that could have been helpful) or they simply did not have good data to work from – and these are the types of situations that Mike attempts to highlight along with other options to consider.  The objective is to help banking clients make solid business decisions based on creditable, reliable information.


Important Notes

Have Questions or Need Immediate Assistance?

Call Plane Data, Inc.

Report: 3 Most Common Mistakes When Purchasing An Aircraft


Aircraft Appraisals 101: Everything You Need To Know Before Purchasing An Aircraft


Price Matching - Check out the details!


The Advantages of Using a Qualified Buyer's Agent Service. Click Here!


View the On Line Presentation - Aircraft Financing Made Easy. Click Here !


Connect with us!

other information

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

Plane Data, Inc.
P.O. Box 1414 Denver, NC 28037
Phone: 800-895-1382 Website: http://www.planedata.com