Very Light Jets on the Horizon

 - October 18, 2006, 5:24 AM

For aircraft financers, insurance and the stability of the OEM are the main concerns when they consider the very light jets (VLJs), three of which are working toward certification next year.

“Other than the Cessna Mustang, all the VLJs are being developed by new companies that have no track record or residual-value histories,” said James Dickerson of Banc of America Leasing. “Insurance coverage may be an issue, along with FAA certification and the capitalization of the manufacturers to support these new aircraft.

“Finally, long-term demand is somewhat questionable, as is the air-taxi segment for these aircraft. Future values of the VLJs are still difficult to ascertain, but the financing of one should not be a problem for qualified owners,” he added.

David Davis of 1st Source Bank said, “While there’s a definite market for very light jets, the big concern is insurance. It’s not that it will be too high in the beginning, but that owners might not be able to get it at all. And without insurance, the buyer won’t be able to get financing. The problem for insurers is that there is little actuarial data on owner-pilots moving up from props to jets. To their credit, the VLJ manufacturers are coordinating with the insurance industry. Insurers may require an owner without jet time to hire a pilot before they write a policy.

“Lenders won’t finance a substantial investment like a VLJ without insurance because they’ll want to get paid if the airplane crashes,” Davis continued. “They’re also worried about liability. From the lenders’ viewpoint, the worst-case scenario is if insurance costs go way up and cause demand for the airplanes to drop, decreasing residual values below the loan amount.”

Joe Dini of Sovereign Bank added a concern about the effects of air taxis. “What if an air-taxi operator using a fleet of VLJs can’t make it work and has to shut down? All of a sudden, you could end up with 30 airplanes on the market, bringing values down. That’s not something that the company that financed those airplanes wants to happen.”