Airplane Loans - As the dimensions of the COVID-19 outbreak emerged in mid-March 2020, airline bookings soon fell off the cliff and the rest of the airline industry rested. And of course, the phone stopped ringing at the finance office where the airline loan originated. The outlook looks bleaker than it did during the deep recession of 2008.
But within a month, in a surprising development that no one expected, the used aircraft loan market has rebounded and for some banks and lenders, it now looks stronger than ever. "The level of activity is unbelievable. I can't tell you how busy we are. It's amazing," said Bob Howe of Dorr Aviation Credit, a veteran financial brokerage that has been in the business for more than 50 years. If potential buyers are taking a wait-and-see attitude, it's not clear from those taking out airline loans.
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But what is clear is that the banks are sitting on piles of cash that cautious investors have dumped into CDs that may yield less but are also safer than the stocks that poured in in mid-March. They have been redeemed. That same week, the Federal Reserve cut interest rates to zero and announced plans to buy up to $700 billion in government bonds and mortgages.
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Between stimulus and rate cuts, the economy is fueled by the highest amount of liquidity. According to the Federal Reserve, M2 money rose 20 percent from December to July, from $15.3 to $18.3 trillion. The supply of M2 consists of money deposits, checking accounts, savings and money market securities.
The last major shock to the economy and aviation was the financial collapse of 2008. Due to the COVID-19 pandemic, it was a gradual train wreck that began in 2009 with a slow and rapid decline that continued into 2012. It is still rebounding in the face of falling volumes new aircraft sales.
The pandemic decline, if it can be called that, began in mid-March and lasted until early April, brokers told us. The phone stopped ringing and the rest of the economy shook. "I think everyone needs to take a deep breath and realize what's going on. Many of our customers are using airplanes as a business tool. They're feeling the impact of the pandemic firsthand," said David Savoie of US Aviation Finance, a direct director of lenders specializing in aircraft. light to heavy singles and twins.
Three other brokers we spoke with reported similar experiences but the slowdown was almost too short to notice. "When the Fed lowered rates, we saw a significant opening in activity for refinancing. For us, March, April and May were not new business, but in June, we started to see an increase in new business. look big," said Jim Blessing of Airfleet Capital, a leading brokerage firm. And credit inquiries haven't slowed down since. "It's definitely active. It's as busy as we've ever been," Blessing told us. AOPA Finance, also a broker that uses foreign banks, reported similar activity.
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There are several market changes in this revival. First, the long-established trend of buyers relying on their cash reserves seems to be returning to buying on credit.
This has been going on for a year or two. Second, because money is so cheap and there is so much equity in owned aircraft because of tight prices in the used market, many owners can borrow enough to buy complete upgrades in avionics, engines and paint jobs. finance minimal pain.
For a while there in the 1990s, the words "investment" and "aircraft" could be seen in the same sentence without eliciting a laugh. And there is some truth to that because Cirrus doesn't exist, Cessna doesn't make planes, and Piper is bankrupt.
After 30 years, the three made airplanes and so did Diamond Airplanes. But the price of new aircraft is at a stratospheric level which causes the price of used aircraft to rise as well. But there's a problem: It's hard to do well, and for older airplanes, they just add more hours, making the airframe crowded.
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For some models, this means that the traditional depreciation curve that sees the new price tank for the first three years has been somewhat reduced. For some aircraft, it is the opposite. The chart above is interesting not only for the actual value, but also for the direction.
And there is a marked division between glass-paneled and steam-powered aircraft, especially for the Cessna 172 SP, a popular trainer. The map shows a 2006 model with a G1000 for $200,000, but that may be understating things. We've seen them listed for north of $250,000, if you can find them. The education market drives demand.
Warning: The values here are from the Bluebook but we are not sure how accurate they are since accurate sales reporting is difficult.
"When you see several hundred thousand dollar airplanes at a sale rate of three, it's pretty hard to beat. I've been doing this for 32 years and I've never seen anything like it," said Howe of Dorr Aviation.
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Explaining the trend from cash to debt, Blessing said buyers increase the opportunity cost and push the cash-in-the-bank button. "If they're in the market and their portfolio is giving them a 5 or 6 percent rate of return, then they're in a better position in the 3 or 4 percent range today than if they were using that capital in other ways. bring ." He says good luck.
And the bank is ready to negotiate. Up to a point. When it looks like the stock market is about to fall, many investors flee to bank CDs and even if the returns aren't worth the trouble, at least they retain value. As a result, banks are flush with money and, if they are not too desperate to lend it, they are motivated to use the money.
"In past years, we've asked banks to sharpen their pencils. To drive business, we've sharpened our product," Howe said. "It's rare that our bank comes to us and says here's our rate, you can get more deals. If we rolled out a little bit more, what do you think we could get?" it increases.
And what they can get is a good deal for the buyer. A year ago, interest rates were very low, but now they are even lower. The grade is not less than 4 percent and on new aircraft, manufacturers do better deals than that.
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For perspective, long-term interest rates have traditionally been between 6- and 7 percent. According to Emily Meczkowski of AOPA Finance, small loans—say under $50,000—may still command 7 percent, but loans closer to $100,000 will get better rates.
In fact, airplane loans are now cheaper than car loans, even for car buyers with exceptional credit ratings. According to Bankrate, the loan rate for more than 800 networks is 4.19 percent for new cars and 4.7 percent for used models. And there is a reason for that.
"This is a safe business," said Bob Howe. Banks like airline loans because they are reliable with fewer deposits, repos and repos. "The other part of commercial lending in banks is not very active. We see that banks are very hungry to add loans and aircraft is a large and diverse portfolio. You have many industries, you have a wide geographic diversity and compared to what we hear, it not just planes, but boats and RVs are on the move," said Airfleet's Blessing.
When we asked if some of this buying frenzy was driven by a return to general aviation because of the fear of flying on an airplane, brokers said there was no clear evidence to support that. "There are a few of them," Savoie said, but no one sees him as the main driver.
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A cash injection of about a third of the aircraft's value, or a little more, could bring the old board up to modern standards. Banks tend to say yes.
Even if the bank is in bankruptcy, this does not mean that you can walk out of the bank with a loan of half a million with just your signature. You also can't expect to beat many borrowers at already low interest rates. "We're seeing lenders put the lowest rates because they have the lowest budgets they're using. Interest rates are currently in the 4 percent range or lower. You can get variable rates that can go lower. But often, it might not make sense to take that extra risk if you're already at 3.9 percent to begin with," Blessing said.
Although banks are not necessarily picky, they choose the candidates they choose. Although banks are hungry for business expansion, they are well aware of what happened in 2008 and have built up protections about who they will lend to. And unlike in 2008, some banks are trying to prevent potential loan advances by offering payment deferrals to customers. Eva
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