Selling prices for aircraft are through the roof right now, reaching levels of 20% or more above what they were just two years ago. And if the current demand persists, they could continue to increase at similar rates for years to come.
That uncertainty causes buyers to wonder if they’ll find themselves in a difficult financial position when they’re ready to sell or trade up.
It’s a dilemma, but if you are in the market to buy or replace an aircraft, fluctuating prices won’t diminish your air transportation needs. If you are ready to buy, you’re ready to buy.
Real concerns can arise, however, when it comes to financing the purchase. If you buy an aircraft at an inflated price today, what happens if the prices plunge when you decide to sell or trade? How does that affect the type of funding structures that financial organizations offer to customers in the current market? (See BAA Family (Office) Planning for Aircraft, December 2021)
Use Data, Not Opinions
Financing professionals rely on data, as opposed to opinions. The price guides that lenders use are similar to home purchase comps, based on previous sales, historical data, and comparisons with other models. This data lags the market by several months, which often causes confusion. But by the next evaluation period, the comps normally have caught up with the price changes.
“There always have been market corrections,” said Bryan Byers, aviation lender at Scope Aircraft Finance. “Aircraft selling prices generally have always come back to a normalized curve over time.”
The curve is on the high end now; will it continue to curve upwards, or will it start downward toward “normal”?
Historical Trends are Comforting
“It may not seem like it, but over the course of 15 to 20 years, after going through occasional spikes, the average prices of aircraft remain roughly the same,” said Keith Hayes, national sales manager at PNC Aviation Finance. “The key is gauging when the next spike is due, and determining if that aligns with your needs and requirements.”
Work With the Experts
It’s important to work with financers who understand the market, Hayes says. “We want each client to be happy that the loan is structured appropriately, and there isn’t an unmanageable gap that results in the seller having to write a large check in the future for the difference.”
Education Is Essential
“We recommend that all buyers, but especially first-time buyers, get educated. Don’t go with something simply because someone told you to,” said Hayes. “Partner with a certified dealer broker or get tax counsel with people who can accurately guide you to make an educated choice. Make sure it’s someone specifically familiar with financing aviation purchases. This is not something to take lightly and make assumptions about.” Hayes says that public information is on file with the FAA and buyers can see 20 to 30 years of historical aircraft sales data to help them determine if a potential purchase is a wise one.
Shortening Amortization
Many financial institutions help clients prevent becoming upside down by shortening the loan’s amortization. Paying off the loan faster lessens concerns by leaving a smaller residual. Rather a loan with a 20-year amortization, buyers are encouraged to finance their plane over a 5- to 7-year term. That helps avoid the unpleasant situation of owing more on the plane than you’ll get from the resale.
“Don’t stretch out the payments,” advises Byer. “It will serve most buyers to try to pay quickly, in larger amounts.”
Knowledge Is Power
“It’s important to be knowledgeable about current market conditions and how you’ll manage the debt of a new purchase. We try to be consultative so that buyers can make smart financial choices. Get with a team of partners to help ensure that the experience is pleasant today and also in the future,” Byers said.”
Tracey Cheek is the Marketing Director of The National Aircraft Finance Association (NAFA), a professional association that has been promoting the general welfare of aircraft finance for nearly 50 years.
