Pay Cash? Are you crazy?

CJI Expert
By CJI Expert October 9, 2019 10:48

Pay Cash? Are you crazy?

One could spend an eternity discussing what makes this period in history unique. Technology, politics, social issues, Boston’s undisputed sports dominance, you get the picture. Yet when we look back at of all the events which make this period different to others, will our continued era of low interest rates even make the Top 10? Monetary policy rarely makes good water cooler talk, but for those in the lending industry or those that frequently utilize financing, it’s going to be an unforgettable era. Yet,the number of aircraft owners borrowing money is down over the past 10 years. This does not make sense.

Before-2007 between 60% and 70% of aircraft acquisitions had some form of financing associated with them, that number had held true for as long back as many grey-haired aircraft bankers can remember. Post 2007, the script has flipped, with about 60% of acquisitions using cash rather than financing. Part of that reason was due to the short period after 2007 when many banks were not lending. But we are well past that period now with rates still at all-time lows, and yet aircraft owners still aren’t borrowing at historical norms.

Why? There are two common responses: (1) I (or my company) have too much liquidity; (2) Borrowing money is a real pain post-recession, I don’t want to go through the process.

Most lenders who understand how to properly articulate the benefits of borrowing have the same response to these statements: “Are you crazy?”

“I have too much liquidity.”

There’s a saying in aviation that you can never have too much fuel in your plane or too much runway ahead of you (fuel on the ground and the runway behind you are useless). Planning for the unexpected also applies to sound capital planning by prudently utilizing financing. It’s prudent to borrow when you don’t need it, because you never know when you might.

Getting back to Finance 101 for a moment, one of the basic tenants of finance is: if your capital is earning you X%, and you can borrow at Y%, then if Y is less than X, then you should borrow. For the borrower who has too much liquidity, or in other words cannot find a suitable return for her capital, simply investing it into a S&P 500 index fund would have garnered a return in excess of the cost of borrowing. Lest we forget, the majority of aircraft depreciate, and any opportunity to redeploy the capital invested into them into an appreciating asset is a worthwhile exercise. At the very least, reinvesting the borrowed funds mitigate some of the economic depreciation on an aircraft, best case it eliminates the economic loss.

In addition to maximizing your return on invested capital, aircraft values have stabilized significantly over the past 10 years with a couple models even appreciating, albeit slightly. This makes a great opportunity to maximize the amount you can finance, and/or couple it with a longer loan amortization than lenders may have been less willing to in previous years.

“Lenders are a pain to deal with.”

This is often said by someone who last tried to borrow money right after the recession (yes, it was hard then), and/or isn’t dealing with an experienced aircraft lender. Yes, you will need to provide some financial disclosure, and the bank will ask a few questions, but for a borrower with a strong credit, and a well-prepared financial package, most experienced lenders these days won’t put you through brain surgery. Especially for transactions under $10 million with a mainstream aircraft of good pedigree, the best aircraft focused lenders can often render a credit decision within a week or two, and close shortly thereafter.

It’s worth reinforcing the importance of having a well-prepared financial package and aligning with a seasoned aircraft lender who fits the borrower’s profile. But this is the best predictor of how well (or not) a borrower’s experience with a lender will be. The *pain” from a bad experience with a lender might Just be as simple as a lack of alignment with the profile and expectations from both sides, as well as the level of experience the lender has with providing financing on private aircraft.

Will we look back on this era and remember Tom Brady’s six championship rings (and counting), or an unprecedented opportunity to maximize investment returns by utilizing low cost borrowing? Hopefully for Boston sports fans, and those who took advantage of low interest rates, both will prove to be true.


Michael Francis is a Managing Director with First Republic Bank’s Aviation & Marine Finance group, and an unabashed Boston sports fan. These are his own views.

CJI Expert
By CJI Expert October 9, 2019 10:48

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