Flying On Borrowed Wings

 

Are you looking for an aircraft? If so, odds are you’re either soaking in cash or do not have nearly sufficient. If it’s the latter, no worries: You might be able to borrow the money.

Airplane loans are financing arrangements, much like home or car loans, that allow people and companies to buy and use aircraft. Since aircraft tend to be extremely costly, aircraft loans are very common in the air travel world.

Some aircraft loans are relatively simple while others are more complex. At the simple end are loans for private and corporate aircraft; at the complex end are the loans commercial airlines use to buy their aircraft fleets. The simplest loans are those used for corporate and private aircraft; the more complex are used by commercial airlines to buy and maintain their fleets. The less complicated loans are more like car loans or home mortgages, while the complicated loans are more similar to maritime or project financing.

Here’s how a private loan process typically works. First, you allow the lender (most probably a bank or aircraft financing company) basic information about yourself and the aircraft you desire to buy. Next, the lender appraises the aircraft’s value and conducts a title search to make sure the airplane is owned free and clear and can change hands without issues. A security contract is then prepared, providing the lender a security interest in the airplane, along with a promissory note that holds you personally responsible for the remainder of the loan in case repossession of the aircraft does not cover the entire balance. A surety, much like a co-signor, might be required if you’ve questionable credit. If you’ve shaky credit, the lender may also need a surety, much like a co-signor.

This arrangement works with private and corporate aircraft, which normally do not cost much, relative to their business counterparts. The large jets flown by business airlines, by comparison, are extremely expensive. Last year, Boeing pegged value of its 747 jets at $333 million; although airlines do not normally pay the full price, the final cost is still high.

Airlines use 3 common financing ways to pay for their fleets: direct lending, operating leasing and finance leasing. Cash payments, tax leases as well as manufacturer assistance are alternative options.

Direct lending is similar to the standard aircraft loans given to private owners, only on a much larger scale. In this instance, many banks often contribute to one airline’s loan. As with private owners, airlines generally have to give their lenders a secured interest in the aircraft so it can be repossessed in case the loans aren’t repaid.

Operating leasing, in contrast to direct lending, doesn’t grant ownership to the aircraft’s users. In this kind of aircraft loan, air carriers lease their aircraft from Commercial Aircraft Sales and Leasing organizations, businesses that lease used aircraft and equipment to airlines. These leases are typically short-term, no longer than ten years, and they are most attractive to small airlines and start-up ventures because costs are reduced and the airlines do not have to hold onto the aircraft beyond its usefulness.

Finance leasing, finally, is basically a more complicated form of operating leasing. A third party, usually a partnership or special purpose company, buys aircraft using loans and equity financing, then leases it to an airline. Often the airline has automatic ownership, or the option to buy, when the lease expires.