Special Report: Aviation Finance
For the business aviation industry, the past year has been a trying one, to say
the least. Aircraft sales and usage declined steeply as the economic downturn tightened its grip, forcing operators to cope with the new financial realities, and in some cases with disparaging views of the industry.
While the business aircraft industry experienced a record-shattering year in 2008, with deliveries of 1,313 jets and 535 turboprops, the seeds were already planted for a steep decline. At an industry seminar in June this year, Dave Labrozzi, president of GE Commercial Finance’s corporate aircraft division, traced the roots of the current credit situation back to the sub-prime mortgage collapse that began in summer 2007. “The day the earth stood still was in October 2008 when [all the] money markets just froze,” said Labrozzi. “You could not buy or sell a one-month Libor note; you could not buy or sell a corporate trade.”
The resultant tightening of credit spilled into the aviation financing market, which began experiencing its own difficulties when some companies grounded their aircraft, saturating the used aircraft market and eroding aircraft values. “When the asset valuation bubble burst, many banks and captive finance companies suffered severe reductions in capital, some to the point of insolvency,” said Bob Kent, president of Scope Aircraft Finance. “Bank capital evaporated as they took asset write-downs, mostly related to commercial and residential real estate finance.”
Some companies that had been active lenders withdrew from the market, while others–such as National City, Merrill Lynch, Wachovia and Washington Mutual– were absorbed entirely. Many of the major companies that remained–such as Bank of America, JPMorgan Chase, PNC and Citigroup–were so damaged by the downturn that they required an infusion of some of the more than $454 billion the government spent through its Troubled Asset Relief Program (Tarp).
By this past August, the number of troubled financial institutions on the Federal Deposit Insurance Corporation’s watchlist– those whose regulatory rating has been downgraded due to dwindling liquidity or asset quality–rose to more than 400, while regulators closed more than 80 banks. Last month, major lender CIT–which had received $2.3 billion in Tarp funds–filed for Chapter 11 protection.
But of late there have been glimmers of a recovery. On October 14 the Dow Jones Industrial Average rose above the 10,000 mark for the first time since October 2008, when Wall Street and the finance industry were shaken by the collapse of venerable money house Lehman Brothers and a round of mergers and consolidations on an unprecedented scale. At the October annual meeting of the Equipment and Leasing Finance Association, keynote speaker economist Mark Zandi told the audience that the recession had likely ended in August. That assessment coincided with the recent Aviation Research Group/U.S. report that showed Part 135 flight activity in September reaching its highest level since October 2008.
Another important indicator is the decline in used jet inventories as brokers and resellers report an uptick in interested customers. According to market research provider Amstat, the inventory of used business jets decreased from 18 percent
to 17.2 percent in September. By the end of the following month, according to JPMorgan, inventory was down to 13.3 percent of the active fleet. “We’re all a lot busier than we were four or five months ago,” said Mark Smith of Gantt Aviation Sales in Texas. “I’m just keeping my fingers crossed that things keep going the way they are.”
For most purchasers re-entering the aircraft-buying arena after recent boom years, things are now different in the financing market. “We were seeing down payments that were absurdly low, terms that were too long, deals that should have had guarantees and/or covenants that had neither and just what we thought were ill-advised loans,” Allen Qualey, president of the specialty finance group at 1st Source Bank, told AIN. “That’s what the market demanded, and there were plenty of willing lenders doing those types of things when values were at their peak.”
When the economy turned south, many of those lenders found themselves in trouble as aircraft values dropped. “As the recession set in, valuation guide publishers struggled to evaluate categories of aircraft where there were few transactions,” said Kent. “When transactions did occur, they were frequently sales where the seller was desperate to unload the aircraft and the buyer was bottom fishing. Many models, on paper, lost half of their value in a matter of months.” That, coupled in many cases with the diminished ability and appetite of customers–whose net worth may have plummeted as well–to continue payments on aircraft that were in many cases no longer worth what they paid, caused a rash of foreclosures and repossessions (see sidebar on page 24), cluttering lenders’ loan portfolios.
A Lonely Marketplace
In the aircraft lending market, this economic turmoil led to the departure of many firms that had jumped in when sales were booming. “During the past year, the aircraft finance industry has transformed in a few distinct ways,” said Michael Amalfitano, Bank of America’s executive head of corporate aircraft finance. “The most noticeable change has been the exit of several bank and institutional lenders from the sector, which has placed further constraints on the investment of capital and has led to market illiquidity.”
“Not as many people are in the [business aviation finance] business today, certainly not near the numbers that there used to be,” noted industry veteran Randy Groom, owner of Groom Aviation Sales. “In my past years in aircraft sales, I can’t begin to tell you how many free lunches I’ve had from aircraft lenders coming in and wanting to wine and dine me to swing me their way as aircraft deals come along. I haven’t had many free lunches lately.”
Today the number of active business aviation financiers has diminished dramatically, by some estimates to as few as six. “The number has dwindled from almost any bank or financial services company to a handful of banks that had experienced aircraft lenders and a large diversified customer base,” noted Dick Ramsden, vice president at Wells Fargo Equipment Finance. “I believe there are now fewer lenders able to or willing to commit to transactions in excess of $10 million.”
Few firms have publicly declared their retreat from aggressively seeking deals on the open market, choosing instead either to hold their financing capital solely for existing high-credit customers or to offer overly restrictive terms to deter hopeful but less well qualified applicants.
This relative scarcity of active lenders has led to some changes in current loan structures. “The market is such that it’s not that competitive,” Bill Quinn, aviation consultant and chairman of Aviation Management Systems, told AIN. “You’re not going to have lenders falling all over themselves trying to get you to do deals.” With less competition driving the market, remaining lenders can step back and thoroughly examine each potential loan before committing to financing. The pace at which deals are completed has become more deliberate, with some transactions taking more than a month-and-a-half to complete.
One of the major differences is that what was considered creditworthy as recently as last year may no longer be so. “The feedback I am getting from brokers and clients is that there is much tighter availability,” noted Groom. “Perhaps a customer who might have been able to obtain financing two years ago just cannot get it today because of either a creditworthiness issue, just tougher standards or because he is required to give a larger down payment than he really wants to for the particular transaction.”
Matthew Huff at O’Gara Aviation in Atlanta made a similar observation. “Early this year we lost a couple of deals because a buyer couldn’t get the financing that he thought he was going to be able to get. A year ago he was perfectly qualified and now he’s being told he’s not.” According to Joe Dini, senior vice president of Sovereign Bank, financing is now a much simpler equation. “Rate and terms are not the question now; it is strong credit, stronger credit and strongest credit as a requirement to get funded.”
While some have complained that there is little financing available, many lenders believe there is still enough capital in the aviation finance market to cover all the deals– although perhaps not at the easy terms seen recently. “I summarily reject the comment that we still hear by a lot of people in the industry that lenders aren’t lending and credit is too tight,” 1st Source Bank’s Qualey told AIN. “The simple fact is if the buyer of an airplane is qualified, meaning he can comfortably make the payments, is reasonable in his terms and expectations, and reasonable in his pricing [of the aircraft], credit is readily available.”
A mid-year report by the Federal Reserve Bank showed that in a survey of senior bank loan officers only about 30 percent reported tightening standards on commercial and industrial (C&I) loans, compared with a peak of 85 percent in November 2008. The uncertain economic outlook and a reduced tolerance for risk were the primary reasons cited for the tightening of credit standards for C&I loans.
Many domestic firms also noted a worsening of industry-specific problems as a factor. Asked to describe the reasons for the decline in commercial and industrial loans this year, banks listed lower loan demand from creditworthy borrowers followed by a deterioration in the credit quality of potential borrowers. “The capital required for making loans has become a precious commodity, forcing lenders to book loans that carry minimal risk,” noted Wayne Starling, senior vice president of PNC Aviation Finance. “Many financiers are structuring transactions that require higher down payments and shorter loan amortizations in an effort to mitigate that risk.”
As observed in last year’s financing report, the zero-down-payment deal has become nearly extinct. “Now with 40-percent residual loss, banks are being careful of the current value, and what they are trying to do is increase the level of skin you
put in the deal,” explained Sean Lancaster, vice president at Washington, D.C.-based aviation consultants Bristol Associates. “They want you to put in larger down payments, in some cases they want to be able to tie the net worth of the company to specific points during the term of the deal, or at specific points of the deal they want to be able to reference the value of the aircraft.”
“On average I’m seeing 20-percent down payment as a minimum this past year,” said Keith Graham, senior vice president of Salem Five Savings Bank and director of the bank’s national aviation finance division. “Many times I’m getting down payments significantly higher, and if there is any exposure potential from the standpoint of charter, we’re talking 30 percent and up, so that is part of the process in trying to determine where we are in values.” Those considerable down-payment demands could have a chilling effect on some deals, noted Groom. “Some of those buyers could perhaps get the aircraft financed but they just don’t want to put that much cash into the deal,” he said. “Could they get it? Yes. Are they willing to do it under these new terms that are much more onerous than they used to be? Sometimes not.”
Some consider the tightening of credit a natural response to an unnatural demand situation. “You started to see a little reality setting in before the financial crisis, as you saw the banks begin to take a more cautious approach about values,” explained Lancaster. “A 2008 airplane was selling for more in 2008 than when it was ordered new two or three years earlier, so the banks started saying they were not going to lend more than the original delivery value. Now banks are being careful of the current value.”
Another area that has seen a change is the terms of the loans offered by the lenders. “There’s generally an aversion to taking any asset risk now,” said Mark Wooler, head of consultancy at the UK-based IBA Group. “Whereas you might have had an amortization over, say, seven years down to a reasonable balloon repayment in seven years, that amortization now will be more aggressive so that that balloon payment is–as far as the financier is concerned– relatively low risk.”
A Change in Focus
While in the past the value of the collateral was a major part of the underwriting consideration, in these uncertain times the surety in the clients to fulfill their obligations is carrying increasing weight. “Performance of current loan portfolios based on different business sectors is getting scrutinized more heavily than before,” explained PNC’s Starling. “Lenders are paying much more attention to the line of business that the owner is involved in [real estate, auto sales and so on] and are making decisions based on the outlook for those particular industries or sectors. Capital is precious and a limited commodity in this economy; lenders simply do not have the room to make additional bad loans.”
According to Bank of America’s Amalfitano, “The most important factors [for potential buyers] are in-depth current financial statements, forward-looking business projections, brokerage statements for high-net-worth individuals that show unencumbered liquidity and cash flows, data on the aircraft asset and how it will be used, and cash for required down payment in the case of loans or security deposit for leases.”
Extra due diligence now also extends to how lenders perceive the customer’s use of the airplane, according to Aviation Management Systems’ Quinn. “Lenders are going to be a lot more inquisitive about why you are buying it, how much you are going to fly it, where you are going to keep it, who is going to maintain it, whether it is going to be on an engine program, an airframe program; if you hit all those little touch points and you’re buying into all the new concepts for owning and operating aircraft, I think the lenders will be really comfortable,” he said, adding that brokers and resellers now need to do some extra homework with their clients before making a call to a financier.
A Long Road to Recovery
Of the recently increasing number of used jet and turboprop transactions, many of the deals have been cash purchases driven mainly by the low pricing currently in the market. “There are a lot of people out there paying cash for airplanes,” noted Smith of Gantt Aviation. “They don’t have to wait in the financing process, and a lot of people with cash feel they are going to get a better deal on the airplane if they say, ‘I’ve got cash right now.’” That trend may once again be on the decline. In its September business jet industry survey, UBS reported that nearly a quarter of its North American respondents thought that customer financing has improved recently while 72 percent believed it had remained the same, representing a slight improvement since the previous survey in June, and continuing the overall upward trend that started near the beginning of the year. “It’s a tough market, but I think the lending is stabilized,” said Bristol Associates’ Lancaster. “Not that it’s easier to get credit but in that the rules are finally set. We have a set of requirements that seem finally to be almost standard across the market, and that probably helps.”
Lenders who do have capital available are viewing this recession recovery period as an excellent opportunity to lend. At October’s NBAA Convention, Bank of America Leasing reported that in the year since the previous show, it had financed more than 130 new corporate aircraft transactions worth more $1.3 billion. “For those that are in the market, the big guys like Bank of America and Wells Fargo, they clearly know this is probably one of the best times ever to be making loans,” said 1st Source’s Qualey. “An airplane that was worth $5 million 18 months ago is worth $3 million today. When you are at the bottom of the market, you’ve got a lot more protection.”
Looking forward, the aviation financing industry clearly has some healing to do along with the rest of the economy, according to Graham, who is also the current president of the National Aviation Finance Association. “The bottom line is that right now banks are still dealing with some unsettling consequences of prior easier credit lending, but I think most of them have been aggressive in addressing them and the ones that are still in the market in this business have taken proper steps to ensure that their units will continue to operate and be profitable in the future and support the market.”
Another Source of Funding
The tightening of financing has also been of concern to the aircraft manufacturers, which have seen their shipments and order books shrink. For the first time in its existence
the General Aviation Manufacturers Association (GAMA) convened an ad hoc finance committee to make recommendations on areas of possible industry involvement. As the percentage of aircraft delivered outside North America has grown in recent years, OEMs have taken a greater interest in government-backed export-import banks, which facilitate the export of a nation’s manufactured products. Last year, in its role as the official export-credit agency of the U.S., the U.S. Export-Import Bank (Ex-Im) authorized more than $5 billion to support the export of airliners. In the past business aviation manufacturers have used it infrequently because its terms are generally more restrictive than those of mainstream lenders.
“It’s not necessarily the bank of last resort but it’s not always as competitive as some of the traditional financing markets,” said Jens Hennig, GAMA v-p of operations. “What we’ve seen in the traditional financing industry is that as [bank] terms get tightened up, for a lot of these deals, opportunities with Ex-Im have increased.” According to Hennig, while aerospace and transportation is one of the biggest areas for
Ex-Im, in the past it handled only a few business aviation deals. That changed in May when Textron secured a $500 million loan from Ex-Im to assist Cessna and Bell’s international customers with financing. According to Ex-Im Bank transportation v-p Robert Morin, “Ex-Im Bank’s mission is to assist in financing U.S. exports to help companies create and maintain jobs in the United States, and [this deal] will help Textron to continue exporting Cessna aircraft and Bell helicopters and support the jobs of thousands of U.S. workers at these companies.”
Similar agencies exist in other countries known for producing business aircraft such as Canada, France and Brazil. “While in the past they did not necessarily play active roles for general aviation, they are already stepping up, so the task for GAMA and our members is to look at how we can work more closely with these agencies,” said Hennig. “The consensus is that there’s an opportunity to really educate the financial community about business aviation. The industry has grown from $3 billion a decade-and-a-half ago to $25 billion now, so it’s a real market for them to pay attention to.”
Coping with the Casualties
After every downturn comes the inevitable fallout in which the occasional financing deal goes sour, forcing the institution to foreclose on the aircraft. “Certainly loan defaults and repossessions have been much higher,” said Wayne Starling, senior vice president of PNC Aviation Finance. “Add that to the fact that aircraft values have significantly declined, and it is easy to see that many lenders have had a difficult time navigating these troubled economic waters.”
For those in the aircraft repossession industry, this latest downturn has been interesting indeed. “We’ve picked up a couple of dozen jets this year, whereas before two years ago we hadn’t picked up a single one,” said Ken Cage, president of operations with Orlando, Fla.-based International Recovery and Remarketing Group. “Until probably the second quarter of 2008 it was really all just general aviation stuff, some singles, some twins,” he said, noting that the value of the aircraft repossessed has increased on average 10 times what it was just a couple of years ago.
According to statistics from industry analyst JetNet, 87 jets and 115 turboprops have been repossessed worldwide so far this year, putting 2009 on a pace to double last year’s repossessions and triple those in 2007. Barron Thomas has been handling aircraft repossessions and sales for more than 40 years and has seen a number of business cycles. “What we’re seeing right now is the natural conclusion of a boom economic market and that is foreclosed airplanes, foreclosed real estate, foreclosed yachts,” said Thomas. He continued, “If you are going to make loans in any capacity, you are always going to have repossessions.”
While he declined to mention how many aircraft he handled during this current financial meltdown, Thomas said that the flood of repossessions seems to be drying up, noting that he sold his last repossessed aircraft at the end of October. The lenders take a similar view. “Since the end of the second quarter, we have seen a slowing in the number of past dues, indicating that hopefully the worst is behind us and the survivors will come out even stronger,” said Starling.
Some clarity on the calamity
An interview with economics professor James West
by R. Randall Padfield
How do you see the condition of the U.S. economy now as compared with last year?
Last year we were concerned about the financial stability of the major banks, the credit freeze and the subsequent decline in the GDP [gross domestic product]. So it was a much bleaker outlook than it is today. We’ve endured a year of tough economic restructuring, high unemployment and industry cutbacks across the board. The third quarter registered growth in GDP–3.5 percent–so we may well be in the upswing now. Equity values [stock prices] have risen 50 to 60 percent over the last eight months. There is cause for optimism. That does not eliminate the possibility for corrections in the market, especially because the recent rise was so rapid. Many investors and business people are being cautious and sitting on the sidelines. But overall it looks pretty good. There will continue to be a lag in employment recovery and large purchases such as business jets.
Have the government’s bailout efforts had the intended effect on the economy?
With the credit crisis last year and the virtual freezing of money markets we had a genuine financial crisis on our hands. A complete financial meltdown and collapse of the money supply were real possibilities. Intervention of the government into the marketplace, while unfortunate, was essential to restore confidence and help
the banks to get back on solid footing by reestablishing their capital base and reserve capabilities. But once this intervention was in place, the additional stimulus may not have been as wise. I am a bigger fan of Tarp I than of Tarp II and the stimulus plan.
There’s no doubt that stimulus packages help in the short run, ease some household pain and create spending, but a lot of that spending impact is short-lived, delayed and targeted to preferred industries, such as automobiles and housing. Cash-for-Clunkers, for example, created a flurry of activity and then sales decreased significantly when it ended. While it helped the auto industry for a short time, it was also more of a nod to the environmentalists as a way to get more fuel-efficient cars on the road.
On the monetary side, the Federal Reserve stimulus has increased bank reserves by about one trillion dollars. This has helped the banks stabilize, but has
not increased lending as much as expected. Banks are now more cautious about lending. Borrowers are also more wary.
Monetary policy [designed] to accommodate the deficit-financed government stimulus packages–what economists call ‘monetizing the debt’–is generally unacceptable in Treasury/Fed relations. When the government goes into debt, it has to sell its bonds in financial markets. But because there is a dearth of buyers of U.S. bonds, especially in foreign markets, the Fed has been buying them instead.
This has helped keep interest rates low by pumping money into the economy, but has weakened the dollar substantially and could create inflationary problems down the road as it did in the stagflation of the 1970s. An independent central bank is the best insurance against inflation.
I’m also concerned about the government taking an equity position in the banks and other companies, such as GM, and then getting involved in the internal management. This practice has a chilling effect on the private sector. It was unfortunate but necessary for the government to provide equity for banks at the beginning of the crisis, but such temporary solutions should not be made permanent and certainly not include micromanaging the companies. Two economic wrongs don’t make a right. We will ideally try to ease the financial pain in a way that does not permanently alter the way free enterprise operates.
Why have banks become more restrictive in their lending requirements?
The banks have reserves at unprecedented levels, but the effect of the recession and the fact that there was a lot of loose lending in all the markets–real estate, consumer finance, commercial loans, airplane finance and so on–has chastised lenders into appraising collateral more prudently and making loans more carefully. They are going back to the old standards of good credit: considering the character of the borrower (not lending to unknowns) and looking at economic conditions. It’s going to take time to regain that business confidence to take risks. And as I mentioned, borrowers are also leery about taking on big loans, so there is both supply-side and demand-side trepidation.
You’ve written about the “Four P’s of Capitalism” and that you are concerned that the pendulum of private and state action appears to be swinging heavily toward the state these days. Why are you concerned and what could be the negative effects of greater state action on the aviation industry?
There’s a general perception that some people in the private sector and on Wall Street abused their power. While there is certainly a lot of blame to go around, the government has not regulated well, especially in housing, and has its own sins to account for, including Fannie Mae and Freddie Mac. The crisis supported a presidential election that showed that the American electorate favored a more interventionist role for the government. That was part of the platform. Many may now feel they got more than they bargained for.
There is also an anti-business, anti-market chorus that is demonizing the role of private enterprise and profit-making. Business at large is being painted with a broad brush– the idea that a lot of corrupt fat cats are enriching themselves with big bonuses and enjoying luxurious lifestyles. Corporate jets are considered one of the great excesses of conspicuous consumption. There’s not only been a ratcheting up of government involvement in the economy, but also an increasing perception that the private sector is the cause of the problem and that by cutting back on the excesses of the rich and corporate CEOs will somehow make things better. It might make things worse.
During the first [George H.W.] Bush administration, the government increased taxes on luxury goods [see note below]. The thought was that this would affect just the rich, but it affected mainly the people who made the luxury items.
In a recent article directed to the U.S. Chamber of Commerce [Read “Pillars of Prosperity” at ainonline.com], I called for a focus of their education initiative to get back to basics by focusing on the “Four P’s,” of capitalism. These are production, property, prices and profits. I argue that the first, production, is accomplished best by the private sector, which is the wealth creator of the economy. Entrepreneurs and business people create the bulk of the jobs and income. Government jobs and programs can never be a substitute. They are expensive and unsustainable.
Profitability is a motivator of creativity. It motivates companies to be innovative, to take risks, to come up with better products. The denigrating of profit is itself a risky venture, if we want to see a solid recovery.
Another “P” is property rights. Overt interference and knee-jerk reactions by
the government or by excessive taxation and regulation are an assault on the principles of private property. When regulation or taxation gets too expensive
it tends to drive people away to other states or other countries.
Finally, prices are a form of economic communication. When there is too much manipulation of prices, it confuses the market. When we artificially set prices either by government action or union action it creates an imbalance in the economy. We have to let prices fall where they fall and then make economic adjustments to the prices, not adjust the prices
to our economic wishes.
What are your thoughts about the “No Plane, No Gain” campaign that NBAA and GAMA are running to counteract the negative publicity about business aviation?
It is not unlike what the Chamber of Commerce is doing in its “Campaign for Free Enterprise,” which aims to create 20 million jobs in the next 10 years and will be spending up to $100 million to educate people about the benefits of a free-market economy and a free-enterprise system.
It is important that the business aviation industry makes its case, rather than sit back and allow critics to malign and stereotype business practices as self-
serving and greedy when in fact they are just the opposite. You can’t leave charges unanswered. There are obviously a lot of misconceptions about what business jets are, how they are used, why they are important and how many private-sector jobs are at stake.
You said last year that if Joe Investor still had his 401K in the stock market, he might as well keep it there. That turned out to be good advice. What advice do you have for him now?
I think that a lot of the financial storm has passed. There may be some other things on the burner that we don’t know about yet, but the market has largely stabilized. The credit crisis and the media-induced frenzy turned a business-cycle movement into a much sharper downturn. So now we know the sky isn’t falling, lending and financing are going on again and the economy is strengthening and growing. In the long run, stocks will continue to make gains. Growth will be on more solid footing, because the lenders will be much more circumspect about whom they lend to and all sorts of investor will be more attentive to the fundamentals of asset valuation. It will slow things down but it will be more sustainable– slow and steady, with occasional, but moderate, turbulence.
Lenders exercise renewed vigilance in defaults on aircraft loans
by Ian Sheppard
The Isle of Man Aircraft Registry has agreed to work with aviation recovery experts IBA and leading London-based aviation law firm Gates & Partners to help facilitate rapid repossession of aircraft anywhere in the world when owners fall behind with mortgage payments or break other terms of their financing.
The team is offering aircraft financiers thorough preparation and fast recovery action to prevent a long battle where aircraft are increasingly difficult to recover and remarket. “It is a bit like preparing for a war,” said Aoife O’Sullivan, a partner at Gates & Partners.
Isle of Man director of civil aviation Brian Johnson said that although corporate aircraft repossessions have been relatively rare in the past, the Registry wanted to provide a stable, tax-efficient environment to reregister aircraft temporarily in such situations. Isle of Man-based ICM Aviation and Martin Fiddler & Associates will provide additional advisory services.
The Registry has grown rapidly since its establishment in May 2007 and has made no secret of its goal of becoming the world’s leading corporate aircraft registry. The new arrangement will also extend to aircraft on air operator’s certificates, which can be registered in the Isle of Man only temporarily (while they are remarketed, for example) due to an agreement with the UK CAA.
The Isle of Man is a tax haven with considerable advantages for aircraft owners, not the least of which is stability and a customs union with the UK (meaning no import duty). However, the main point of the new initiative is to give those with an interest in aircraft as assets a risk-management strategy if things go wrong with the operator, with experienced aircraft recovery experts backed by sound, on-going legal advice.
At a seminar at the Royal Aeronautical Society in London in late summer, O’Sullivan urged banks not to act too hastily, as there are various potential legal pitfalls surrounding the repossession procedure, such as being certain there is a clear event of default before taking action. However, she clearly endorsed planning for the worst case.
O’Sullivan said that if a mortgage does not give a lender a right to repossess, it cannot take the aircraft. She also said that an event of default must be established, lenders must observe any required “grace period” to allow the breach to be corrected, and clear notices must be served on the owner/operator.
Because the operator of a business aircraft is often not the owner, banks would be well advised “to work closely with the operator to repossess an aircraft in the business aviation world”–in the event the owner fails to come to a suitable arrangement.
For aircraft operating in Europe (which extends beyond the EU), aircraft owners, operators and lenders need to be wary of the power Eurocontrol has to retain and ultimately sell aircraft for unpaid charges, she said. The agency also has the power to exercise a “fleet lien” so that any aircraft on the same AOC can be detained and sold to clear arrears.
O’Sullivan also warned that maintenance providers could exercise a lien for unpaid work, but only in cases that the work actually added value to the aircraft. It therefore does not include–as many erroneously believe–routine maintenance and checks. “A lien can defeat the best mortgage, even if there is nothing in writing,” she concluded.
A Move of Last Resort
Owen Geach, IBA commercial director, agreed that acting quickly is important but also emphasized the importance of making repossession a last resort, especially in the current poor market where remarketing is difficult and costs of storage and maintenance, among other things, could quickly become high.
Geach also pointed out the danger of airports and other creditors preventing aircraft from moving until their bills are paid–and suggested that in IBA’s experience it is best to pay them so matters are not delayed further. Noting it is not uncommon for parts of an aircraft to be moved or for things to go missing, Geach advised hiring security personnel to protect the aircraft and its records if possible. These are all issues a defaulting business aircraft owner could face if a lender starts to take action against it.
Geach suggested that banks are showing increasing interest in the condition and whereabouts of aircraft, although in some cases they have little information. For example, they may not be aware of the whereabouts or condition of technical records, without which the aircraft value could be severely impaired. It seems that struggling owners will be subject to increased scrutiny and possible rapid-fire action, of which they may have little or no warning.