Overcoming finance-house ignorance of product and market is the first problem for private purchasers attempting to buy an aircraft.
Karen Walker/ATLANTA
BUYING A HOUSE is often listed as a high-stress activity, but for those people interested in owning an aircraft, obtaining a mortgage can seem enviously simple.
While financing is almost always available for traditional commercial and corporate aircraft, it can be notoriously difficult to persuade banks or any of the usual financial institutions to put up a loan for a personal aircraft or helicopter, regardless of the potential owner's credit status. Few people have the large sums of money available in cash needed to buy an aircraft outright, but they could afford the required monthly payments on a loan. The problem which aircraft buyers face is that banks are familiar with mortgages, but know little or nothing about aircraft. They will often turn the potential aircraft owner away, therefore, even though they would grant a mortgage to the same person.
RECOGNISED PROBLEM
The lack of financial help for would-be purchasers of personal aircraft is recognised as a problem in the general-aviation (GA) industry. At the same time as industry, governments and associations - especially in the USA - are combining efforts in programmes aimed at kick-starting the GA industry back into life, the fact remains that people must be able to buy aircraft if any of these campaigns are to succeed. In particular, the long-term health and growth of GA depends on attracting new, younger, pilots. These people - used to getting loans for their houses, cars and other major purchases - may only be interested in buying an aircraft if a reasonable loan arrangement is available.
This dilemma is beginning to be recognised by some financial organisations interested in entering the niche market of aircraft financing. Early and positive responses to the deals on offer indicate that such organisations are fulfilling a real need.
Just 18 months ago, Green Tree Financial of New York set up an aircraft-financing division. Since its launch, the division has fielded more than 5,500 inquiries and provided more than 1,000 loans.
Alden Lange, the division's vice-president, explains the environment in which it found itself operating. "Aircraft have been typically financed by two sectors - from home-town banks and from organisations such as Cessna's or Beech's finance organisations, but these tend to be for the higher end of the market. Aircraft buyers have difficulty obtaining a loan for amounts under $250,000, for aircraft over 25 years old and for aircraft other than the traditional single- or twin-engined production-types. Plus, the lending process tends to take longer," says Lange.
According to Lange, if a loan is made available, the usual terms involve a down-payment of between 20% and 25% of the aircraft value, repayment within seven to ten years and a prime interest rate. The reason for these inconvenient conditions is simple, says Lange. "Bankers are paid not to take risks. Lenders are infinitely more familiar with all types of collateral other than aircraft and, when they are confronted with something unusual, they will shy away from it. Gaps in communications are filled with fear and suspicion. They will throw up their hands and say: 'Those things are dangerous'," says Lange.
Green Tree, which provides financing for luxury consumer products such as grand pianos, yachts and Harley-Davidson motor-cycles, decided on a similar approach to the personal-aircraft financing business. "Aircraft buyers are consumers and are no different in that respect. They expect quality products and a service and price that is fair and affordable," says Lange.
To this end, the company has introduced what it claims to be the first across-the-board availability of a 10% down-payment for all loans, regardless of the amount of money involved or type of aircraft. Loan terms are available for up to 20 years for a new aircraft and up to 15 years on older ones. The company takes the informed view that aircraft are a good investment - older aircraft tend to hold their values especially well as they become a rarer commodity - and it is willing to consider financing a loan on almost any aircraft type, including kitplanes, sailplanes, gyrocopters and warbirds. "If it flies, then the chances are that we will finance it," says Lange.
The company tries to make the process as easy on the applicant as it would be to arrange financing for a car. Most transactions are conducted almost entirely over the telephone or facsimile and a decision is usually reached within 24h.
Greentree has made loans available to aircraft buyers for as little as $5,000 and up to several millions of dollars. Successful applicants include a 20-year-old and a 70-year-old. The vast majority of loans, however, are for amounts under $100,000 and go to younger people - some 80% of purchasers fall into this category, says Lange. Between 5% and 6% are female.
STRONG INTEREST
Lange believes that interest is strong in the USA in personal aircraft ownership, and that people are being put off by the problems they face trying to get a loan. Green Tree says that it is now seeing the formation of other specialist finance organisations, which are also offering previously unheard-of terms such as 15-year loans. "It appears that the number of first-time buyers now make up to 35% of those people looking for aircraft financing, which bodes well for the general-aviation industry," says Lange, but he adds that it is still important for the salesmen of GA aircraft to let potential customers know about their financing options. "We view ourselves as an extension of the aircraft-sales effort, but we don't finance anything until someone first sells an aircraft," says Lange, who believes that many aircraft salesmen tend to regard financing as the customer's problem.
At the beginning of this year, Mooney Aircraft took the decision that financing should not just be "the customer's problem" and formed an agreement with Eaglemark Financial Services - a subsidiary of Harley-Davidson - to establish its own Mooney Aircraft Financial Services division. "The reasoning behind it was that financing for aircraft is not an easy thing to do if you have not done it before, so we wanted to address this issue by bringing together people who have expertise in finance with people who need that service," says the division's programme manager, James Foulkes.
Mooney sales people have available a document listing the services of the financial division as well as the details they need to obtain if a potential customer is interested in a loan. As with Green Tree, Mooney recognises the importance of handling an application swiftly, with as little paperwork involved as possible. "We review an application promptly, ask for any more information if it is needed and try to give approval within 24h. People expect a prompt turn-around and we want to minimise the strain on the consumer," says Foulkes, who adds that response to the new service has been positive.
Foulkes feels that everyone benefits from the arrangement. Customers welcome the availability of an easy-to-deal-with financial service which is familiar with aircraft: Mooney captures customers who might otherwise have given up after being turned down by banks with no knowledge of aircraft as collateral, and Eaglemark regards its clients as wise investors. "Mooneys retain their value - they are a good asset with a very solid, strong, reputation," says Foulkes. "They can often increase in value."
Loans are available for used aircraft, but Foulkes says that most arrangements are for new aircraft, typically in the $200,000-or-more price range. Loans are available over 15 or even 20 years and with down-payments of as little as 5%. "Mooney had a need and we were in the right place at the right time," says Foulkes. "Mooney definitely sees the benefit when it is able to offer this service to a highly qualified buyer who might be put off by the prospect of finding funding. We are just a point in that chain."
UNDERSTANDING COLLATERAL
Understanding aircraft as collateral has also been the niche market of ITC Aerospace, a Tokyo-based company which specialises in financing and leases for helicopters - in particular, for what it terms "cross-border sales", such as US-made helicopters being sold to overseas customers. Although the company also handles fixed-wing aircraft, including types such as the Fairchild Metro, its main expertise lies with rotary-wing craft, a subject little understood by most financial organisations and, therefore, a problem when it comes to raising funds.
ITC president Tomoo Nakayama believes that the unwillingness of most banks to finance helicopters is based on a lack of detailed knowledge about them, coupled with some knowledge of an incident five years ago when French bank Credit Lyonnaise financed loans on several helicopters just before a downturn in the industry, with the consequence that many owners defaulted. Nakayama feels that this gave helicopters a bad reputation among bankers worldwide. "There are so many operators in the world who would like to change or increase their fleet, but have no way of convincing their banks to help them," says Nakayama. "A bank which would normally lend the money with other collateral will say when they are told it's a helicopter: 'We don't know that market should there be a default, so we won't take the risk'."
Convinced that lack of knowledge and poor communication were leaving both potential helicopter buyers and financiers short-changed, Nakayama set up a committee 18 months ago under the umbrella of the Helicopter Association International (HAI) to help both sides to be better informed.
The HAI's Financing and Leasing Committee, which is chaired by Nakayama and co-chaired by US-based colleague Gary Kovach, aims to be a source of education and advice on leasing and financing for HAI members. A key part of its work is the publication of a handbook which will include information on the state of the helicopter industry, its financial condition, residual values and return conditions, insurance, credit-approval processes, break-even analyses. It will also include a leasing vocabulary. The handbook is expected to be completed in time for the HAI's 1997 annual con- vention early in 1997 in Anaheim, California, and will be distributed among HAI members as well as to bankers.
STEADY GROWTH
Since its inception, the committee has grown steadily, with more people coming forward to each of the quarterly meetings. Membership in 1996 is being expanded and the committee has invited members of the US-based National Aircraft Finance Association to join.
Kovach says that, while the helicopter is regarded as an unusual asset, it normally holds its value reasonably well, especially if it is well-maintained. That is the message which the committee wants bankers to understand. "We are finding that there is a real need for this committee in the education it can provide," says Kovach. "We need to explain helicopters to investors and financing to the customers. Many operators have told us that they have spent a lot of time with their banker just explaining what a helicopter is and what it does. There is a chronic problem that needs to be resolved in getting lessors to understand this industry and we now realise that we should have set up this committee a long time ago," he concludes.
Source: Flight International
