How to Refinance Your Existing Aircraft Loan Effectively

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Proper valuation and monitoring mitigate these risks. These may include insurance packages tailored for aviators, maintenance financing options, or even partnerships with aviation experts who can assist with legalities during acquisition or ownership transitions. Conversely, lower rates could encourage growth by making financing more affordable.

Rising interest rates increase the cost of borrowing, leading to higher monthly payments for aircraft loans or leases. Alternatively, consider leasing if you're looking for lower upfront costs and flexibility at the end of the lease term.

Yes, improving creditworthiness can lead to better access to funding options, more favorable terms, and reduced borrowing costs in future transactions by demonstrating financial reliability and responsibility. The two primary types of leases in this sector are operating leases and finance leases.

By collaborating closely with such professionals, businesses can ensure they are making informed decisions that promote fiscal responsibility while capturing all eligible tax benefits associated with their aircraft investments. Maintenance and UpkeepMaintaining an aircraft demands ongoing attention and resources.

What is Aircraft Financing and How Does It Work

Comprehensive insurance policies cover various potential liabilities including damage during flight operations or third-party claims due to accidents. Asset valuation is crucial for managing residual value risk as it helps determine the future market value of an aircraft. Financial Flexibility and LiquidityThe primary advantage of a sale-leaseback agreement is the increased financial flexibility it offers airlines.

Primarily, it helps preserve cash flow by reducing the need for large capital expenditures associated with buying aircraft. They may offer different terms based on whether an LTV is considered low or high relative to industry standards-lower ratios typically equate to better terms due to reduced exposure.

Evaluating Aircraft ValueThe valuation process in determining the appropriate LTV ratio involves assessing various factors such as age, type, condition, and market demand for specific aircraft models. These questions focus on critical aspects of aircraft financing decisions: understanding costs, exploring options tailored to individual circumstances, assessing impacts on finances over time, and considering tax implications.

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Airlines benefit from competitive borrowing costs due to the enhanced security ECAs provide lenders, especially during economic downturns when traditional financing options may be limited. Why is it important to understand the total cost of ownership in an aircraft financing deal?

How to Understand the Tax Implications of Aircraft Financing

This backing not only promotes job creation within these nations but also strengthens their positions as leaders in aircraft production. It's important for owners or financiers to familiarize themselves with local regulations to take full advantage of available deductions without running afoul of legal requirements. An airline's eligibility is determined by factors such as creditworthiness, operational history, financial health, business model viability, and fleet strategy.

Market DynamicsFinally, changes in interest rates can have ripple effects throughout the entire aviation market ecosystem. It also provides quicker access to funds and can be tailored to match cash flow needs.

Each has distinct characteristics and benefits tailored to different airline needs. Assess each option based on interest rates, terms, eligibility requirements, and how they align with your financial goals.

Frequently Asked QuestionsCertainly! Airlines often rely on a combination of debt, equity, and leasing options to acquire new or used planes.

What is Aircraft Financing and How Does It Work?

Here are five concise and important questions related to negotiating favorable terms in aircraft financing deals, formatted with HTML tags as requested:1. Conversely, lower interest rates make it more affordable to finance aircraft acquisitions, potentially spurring investment in fleet expansion. If the borrower defaults, the lender can repossess the aircraft.

How do I assess my creditworthiness for an aircraft loan? Reinvent your cost structure by reallocating savings towards other operational needs such as maintenance upgrades or crew training initiatives-thus improving overall efficiency while maintaining safety standards.

This option is generally more appealing to established carriers with strong cash reserves. Conversely, poor creditworthiness can result in higher costs due to increased risk premiums.

In this model, an airline sells its owned aircraft to a lessor and then immediately leases it back for continued operation. Strategic Considerations for AirlinesWhile sale-leasebacks offer numerous advantages, airlines must strategically weigh several considerations before entering such agreements.

How to Secure Financing for Your Aircraft Purchase

Crafting Effective Lease AgreementsAn effective lease agreement is comprehensive and meticulously drafted to protect all parties involved-lessor, lessee, and any financiers. Why might an airline choose a finance lease over an operating lease?

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Technological AdvancementsThe aviation industry constantly evolves with technological advancements that can render older models obsolete quickly compared newer iterations available market-wide presently hence why keeping pace becomes ever-critical aspect decision-making process concerning acquisition strategies pursued either option chosen ultimately dictates how well positioned remain competitively moving forward longer term basis overall therein lies criticality choosing wisely amongst myriad possibilities offered within realm today surely enough so!

A high credit score signals reliability and reduces the perceived risk for lenders, thus qualifying you for more favorable terms. The required documentation typically includes financial statements, cash flow projections, business plans, details about existing assets and liabilities, information about management teams, and specific terms related to the desired funding structure.

Financing Options and StructuresFinancing remains a pivotal aspect of acquiring aircraft through leasing arrangements. Don't hesitate to discuss different aspects like interest rates, amortization schedules, prepayment options, and any associated fees directly with lenders' representatives.

However, given their historical importance and demonstrated ability to adapt strategically over time-particularly during periods marked by economic uncertainty-it seems probable they will continue playing an integral role well into the foreseeable future. These can provide lower interest rates or favorable terms.

How to Qualify for Low-Interest Rates on Aircraft Financing

Ownership might offer certain tax benefits such as depreciation deductions that could reduce taxable income substantially over time but requires careful planning and management expertise regarding asset treatment under tax laws within respective jurisdictions involved during ownership tenure periods themselves instead thereof otherwise potentially incurring unexpected liabilities later down line accordingly upon disposal eventualities too! Firstly, it allows airlines and leasing companies to leverage their fleet's intrinsic value to secure necessary funding without stringent cash flow or profit requirements. By underwriting loans for new aircraft acquisitions or leasing arrangements, ECAs support modernization efforts essential for improving service quality and operational efficiency.

Frequently Asked QuestionsHere are six important questions related to trends in aviation asset-backed securities in the context of aircraft financing:What are the current trends driving growth in aviation asset-backed securities? Frequently Asked QuestionsWhat are the primary sources of financing for commercial airlines looking to acquire new aircraft?

The primary risks in aircraft financing include credit risk, market risk, operational risk, legal and regulatory risk, residual value risk, and technological obsolescence.2. How does creditworthiness influence the terms offered by lenders in aircraft financing deals?

Here are three important questions on the role of Export Credit Agencies in aircraft financing:What is the primary function of Export Credit Agencies (ECAs) in aircraft financing? Risks include long-term financial commitments through lease payments, potential loss of control over the asset, exposure to fluctuating interest rates that could affect lease terms, and possible challenges if market conditions change unfavorably.

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What is the Difference Between Operating and Finance Leases in Aviation?

Export Credit Agencies primarily provide financial support and guarantees to facilitate the sale and export of domestically produced aircraft. This can be especially beneficial during economic downturns when revenue streams might be unstable but asset values remain high. Negotiating Key TermsFocus on critical components like interest rates, repayment schedules, collateral requirements, maintenance reserves, and exit strategies when negotiating terms.

Lessors acquire high-value assets with established revenue streams from reliable lessees (the airlines), making this an attractive proposition within asset-backed financing markets. What are the eligibility criteria for an aircraft loan?

Moreover, sustainability trends are influencing financiers' decisions; newer models with lower carbon footprints might command higher loan-to-value ratios due to increased demand among eco-conscious operators. Their monetary policy decisions impact economic activity levels and inflation expectations, indirectly affecting the terms available for aircraft loans and leases.

Understanding Aircraft FinancingAircraft financing is a specialized area of finance that involves securing funds for the purchase or lease of aircraft. Familiarity with these structures is essential for navigating legal intricacies, as they determine liability, maintenance responsibilities, and financial commitments.

How to Navigate the Legal Aspects of Aircraft Leasing and Financing

Aircraft finance refers to financing for the purchase and operation of aircraft. Complex aircraft finance (such as those schemes employed by airlines) shares many characteristics with maritime finance, and to a lesser extent with project finance.[citation needed]

Private aircraft

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Financing for the purchase of private aircraft is similar to a mortgage or automobile loan.[citation needed] A basic transaction for a small personal or corporate aircraft may proceed as follows:

  1. The borrower provides basic information about themselves and their prospective aircraft to the lender.
  2. The lender performs an appraisal of the aircraft's value.
  3. The lender performs a title search based on the aircraft's registration number, in order to confirm that no liens or title defects are present. In many cases, a title insurance policy is procured to protect against any undetected defects in title.
  4. The lender then prepares documentation for the transaction:
    • A security agreement, which establishes a security interest in the aircraft, so that the lender may repossess it in the event of default on the loan
    • A promissory note, which makes the borrower responsible for any outstanding loan balance not covered by repossession of the aircraft
    • If the borrower is deemed less credit-worthy, a surety from a third party (or from multiple third parties)
  5. At closing, the loan documentation is executed and then funds and title are transferred.

Commercial aircraft

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Aircraft are expensive and owning one requires hefty Capital Expenditure. A Boeing 737-700, the type Southwest uses, is priced in the range of $58.5–69.5 million.[1] Airlines also typically have low margins so very few airlines can afford to pay cash for all their fleet.[citation needed]

Commercial aircraft, such as those operated by airlines, use more sophisticated leases and debt financing schemes. The three most common schemes for financing commercial aircraft are[citation needed]

  1. Secured lending
  2. Operating leasing
  3. Finance leasing.

However, other ways to pay for the aircraft & flying equipment are:[2]

  1. Cash
  2. Operating leasing and sale/leasebacks
  3. Bank loans/finance leases
  4. Export credit guaranteed loans
  5. Tax leases
  6. Manufacturer support
  7. EETCs

These schemes are primarily distinguished by tax and accounting considerations, particularly tax-deductible depreciation, interest, operating costs which can reduce tax liability for the operator, lessor and financier.[citation needed]

In May 2016, lessors had a 42% share of the market.[citation needed] It was increasing until 2008 but has since stagnated, and should continue[why?] so if not for a rise an interest rates, a slowing of airlines' profits, an increase in lessors' share of new airliner deliveries, and market liberalization. Lessors could also increase their market share by including more start-up airlines, more older aircraft recycling, a change in views on residual values, and lower returns acceptance.[3]

Direct lending

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As described above for private aircraft, an airline may simply take out a secured or unsecured loan to buy a commercial aircraft. In such large transactions, a syndicate of banks may collectively provide a loan to the borrower.[citation needed]

Because the cost of a commercial aircraft may be hundreds of millions of dollars, most direct lending for aircraft purchases is accompanied by a security interest in the aircraft, so that the aircraft may be repossessed in event of non-payment. It is generally very difficult for borrowers to obtain affordable private unsecured financing of an aircraft purchase, unless the borrower is deemed particularly creditworthy (e.g. an established carrier with high equity and a steady cash flow). However, certain governments finance the export of domestically produced aircraft through the Large Aircraft Sector Understanding (LASU). This interstate agreement provides for financing of aircraft purchases at 120 to 175 points over prime rate for terms of 10 to 12 years, and the option to "lock in" an interest rate up to three months prior to taking out the loan. These terms are often less attractive for larger operators, which can obtain aircraft less expensively through other financing methods.[4]

By directly owning their aircraft, airlines may deduct depreciation costs for tax purposes, or spread out depreciation costs to improve their bottom line. For instance, in 1992, Lufthansa adjusted its accounting to depreciate aircraft over 12 years instead of 10 years; the resulting drop in depreciation "expenses" caused the company's reported profits to rise by DM392 million. JAL made a similar adjustment in 1993, causing the company's profits to rise by ¥29.6 million.[5]

On the other hand, prior to the advent of commercial aircraft leasing in the 1980s, privately owned airlines were highly vulnerable to market fluctuations due to their need to assume high levels of debt in order to purchase new equipment; leases offer additional flexibility in this area, and have made airlines increasingly less sensitive to cost and revenue fluctuations, although some sensitivity still exists.[6]

Operating leasing

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Commercial aircraft are often leased through a Commercial Aircraft Sales and Leasing (CASL) company, the two largest of which are International Lease Finance Corporation (ILFC) and GE Commercial Aviation Services (GECAS).

Operating leases are generally short-term (less than 10 years in duration), making them attractive when aircraft are needed for a start-up venture, or for the tentative expansion of an established carrier. The short duration of an operating lease also protects against aircraft obsolescence, an important consideration in many countries due to changing noise and environmental laws. In some countries where airlines may be deemed less creditworthy (e.g. the former Soviet Union), operating leases may be the only way for an airline to acquire aircraft.[7] Moreover, it provides the flexibility to the airlines so that they can manage fleet size and composition as closely as possible, expanding and contracting to match demand.

Conversely, the aircraft's residual value at the end of the lease is an important consideration for the owner.[8] The owner may require that the aircraft be returned in the same maintenance condition (e.g. post-C check) as it was delivered, so as to expedite turnaround to the next operator. Like leases in other fields, a security deposit is often required.[9]

One particular type of operating lease is the wet lease, in which the aircraft is leased together with its crew. Such leases are generally on a short-term basis to cover bursts in demand, such as the Hajj pilgrimage. Unlike a charter flight, a wet-leased aircraft operates as part of the leasing carrier's fleet and with that carrier's airline code, although it often retains the livery of its owner.[10]

US and UK accounting rules differ regarding operating leases. In the UK, some operating lease expenses can be capitalized on the company's balance sheet; in the US, operating lease expenses are generally reported as operating expenses, similarly to fuel or wages.[11]

A related concept to the operating lease is the leaseback, in which the operator sells its own aircraft for cash, and then leases the same aircraft back from the purchaser for a periodic payment. The operating lease can afford the airlines flexibility to change their fleet size, and create a burden to the leasing companies.[citation needed]

Finance leasing

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Finance leasing, also known as "capital leasing", is a longer-term arrangement in which the operator comes closer to effectively "owning" the aircraft. It involves a more complicated transaction in which a lessor, often a special purpose company (SPC) or partnership, purchases the aircraft through a combination of debt and equity financing, and then leases it to the operator. The operator may have the option to purchase the aircraft at the expiration of the lease, or may automatically receive the aircraft at the expiration of the lease.

Under American and British accounting rules, a finance lease is generally defined as one in which the lessor receives substantially all rights of ownership, or in which the present value of the minimum lease payments for the duration of the lease exceeds 90% of the fair market value of the aircraft. If a lease is defined as a finance lease, it must be counted as an asset of the company, in contrast to an operating lease which only affects the company's cash flow.[12]

Finance leasing is attractive to the lessee because the lessee may claim depreciation deductions over the aircraft's useful life, which offset the profits from the lease for tax purposes, and deduct interest paid to those creditors who financed the purchase. This has made aircraft a popular form of tax shelter for investors, and has also made finance leasing a cheaper alternative to operating leases or secured purchasing.

The various forms of finance leasing include:

  • Equipment trust certificate (ETC): Most commonly used in North America. A trust of investors purchases the aircraft and then "leases" it to the operator, on condition that the airline will receive title upon full performance of the lease. ETCs blur the line between finance leasing and secured lending, and in their most recent forms have begun to resemble securitization arrangements.
  • Extendible operating lease: Although an EOL resembles a finance lease, the lessee generally has the option to terminate the lease at specified points (e.g. every three years); thus, the lease can also be conceptualized as an operating lease. Whether EOLs qualify as operating leases depends on the timing of the termination right and the accounting rules applicable to the companies.[13]
  • US leveraged lease: Used by foreign airlines importing aircraft from the United States. In a US lease, a Foreign Sales Corporation (FSC) purchases and leases the aircraft, and is tax-exempt so long as at least 50% of the aircraft is made in the US, and at least 50% of its flight miles are flown outside the US. Because of the extensive documentation required for these leases, they have only been used for very expensive aircraft being operated entirely outside the US, such as Boeing 747s purchased for domestic routes within Japan.[14]
  • Japanese leveraged lease: A JLL requires the establishment of a special purpose company to acquire the aircraft, and at least 20% of the equity in the company must be held by Japanese nationals. Widebody aircraft are leased for 12 years, while narrowbody aircraft are leased for 10 years. Under a JLL, the airline receives tax deductions in its home country, and the Japanese investors are exempt from taxation on their investment. JLLs were encouraged in the early 1990s as a form of re-exporting currency generated by Japan's trade surplus.[15]
  • Hong Kong leveraged lease: In Hong Kong, where income taxes are low in comparison to other countries, leveraged leasing to local operators is common. In such transactions, a locally incorporated lessor acquires an aircraft through a combination of non-recourse debt, recourse debt, and equity (generally in a 49-16-35 proportion), and thus be able to claim depreciation allowances despite only being liable for half of the purchase price. Its high tax losses can then be set off against profits from leasing the aircraft to a local carrier. Due to local tax laws, these investments are set up as general partnerships, in which the investors' liability is mainly limited by insurance and by contract with the operator.[16]

Corporate trust lease

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Some U.S. banks hold an aircraft "in trust" to protect the privacy of the true "owners" of the aircraft or to "secure U.S. registration of aircraft for non-U.S. citizen corporations and individuals".[17][18][19][20]

See also

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  • Option (aircraft purchasing)

References

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  1. ^ "Boeing Commercial Airplanes Prices". Archived from the original on 2010-01-06. Retrieved 2010-01-06.
  2. ^ Airfinance Journal
  3. ^ "Lessors unlikely to manage 50% of fleet within 10 years: Ascend". Flightglobal. 6 May 2016.
  4. ^ Morrell, Peter S. (1997). Airline Finance. Ashgate. pp. 153–4. ISBN 0-291-39845-6.
  5. ^ Morrell 1997, p. 23
  6. ^ Morrell 1997, p. 6
  7. ^ Morrell 1997, p. 178
  8. ^ Morrell 1997, p. 175
  9. ^ Morrell 1997, p. 177
  10. ^ Morrell 1997, pp. 178–9
  11. ^ Morrell 1997, p. 25
  12. ^ Morrell 1997, p. 49
  13. ^ Morrell 1997, pp. 174–5
  14. ^ Morrell 1997, pp. 173–4
  15. ^ Morrell 1997, pp. 172–3
  16. ^ Johnson Stokes & Master, Legal Aspects Of Aircraft Finance In Hong Kong Archived 2007-09-29 at the Wayback Machine (March 18, 2005).
  17. ^ "Corporate Trust Lease - Wells Fargo Commercial". www.wellsfargo.com. Wells Fargo. Archived from the original on 2014-04-05. Retrieved 18 April 2014.
  18. ^ CORKERY, MICHAEL; SILVER-GREENBERG, JESSICA (17 April 2014). "Iran Gets an Unlikely Visitor, an American Plane, but No One Seems to Know Why". www.nytimes.com. The New York Times Company. Retrieved 18 April 2014.
  19. ^ Wood, Connie L. (August 2000). "INTERNATIONAL AIRCRAFT OWNERSHIP". www.agcorp.com. World Aircraft Sales. Archived from the original on 19 April 2014. Retrieved 18 April 2014.
  20. ^ Cirillo, Gregory P. (June 21, 2013). "FAA finishes its evaluation of non-U.S. citizen trusts for aircraft ownership". www.lexology.com. Wiley Rein LLP. Retrieved 18 April 2014.