For what it’s worth
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Posted Date: 19/05/2008
Issue: Executive & VIP Aviation International June 2008
Publication: Executive & VIP Aviation International
It is clear that when demand for new aircraft is high but the supply is limited, new aircraft prices will increase in value accordingly. This position is further complicated by the five or six years an aircraft owner has to wait to achieve a slot for the completion of a new aircraft interior. The simple law of supply and demand rules and asset prices react accordingly. But many financiers are starting to consider whether we are witnessing over-pricing of these assets and ask themselves whether this value might disappear given the possible nervousness in the market.
The same is true for pre-owned aircraft. Owners are keeping their existing aircraft longer whilst waiting for new equipment. This too will drive pre-owned aircraft prices up.
Rather than make assumptions about the reaction of financiers to this difficult market dynamic, we invited the views of: Dan Tyburski, Managing Director of Wachovia Equipment Finance; David Davis Senior Vice President & General Manager of CIT Aerospace – Business Aircraft; Thomas Holzinger, Aviation Finance Manager of Jetalliance in Austria; Mary Schwartz, Global Head of Aircraft Finance at Citi Private Bank; Toennies von Limburg, Director, International Sales of Bank of America Corporate Aircraft; and Philippe Foulon, Head of Aviation & Syndication, SG Equipment Finance. Set out below are their responses.
For which aircraft types are the differences between list prices and market values most prominent?
• Dan Tyburski’s view is that, generally speaking, certainly in respect of new aircraft there are increasing premiums between the classes of business aircraft, starting with the light jet, through the mid-cabin and to the heavy jet. Although not always the case, these premiums generally will widen as the aircraft gets larger. Even pre-owned aircraft now have premiums as owners are keeping them longer.
• David Davis says that the most prominent differences are in the large or heavy aircraft and that this difference might generally depend on the availability of the type of aircraft. He says that the market can be odd, difficult and interesting at times.
• Thomas Holzinger says that the largest spread is in the large long-range aircraft and he believes the reasons for these differences are because of the delivery slots being sold many years in advance.
• Mary Schwartz says there are differences but that the biggest difference is in the large cabin, long-range aircraft such as the Falcon 7X, Gulfstream 550 and the Bombardier XRS. She believes the main reasons for the big differences are customers are paying a premium for early delivery positions and the long wait for delivery of the aircraft.
• Toennies von Limburg says most segments of the market are commanding significant premiums on immediately available aircraft at the moment, but it is fair to say that the long-range and especially the ultra-long range widebody aircraft are standing out most.
• Philippe Foulon of SG Equipment Finance says that the larger premiums are in evidence for large sized and more expensive aircraft but, in relative terms, there are also small to mid-size jets or turboprops that attract sharp upsides because they are in high demand, especially when it comes to newly launched models.
With which aircraft manufacturers do financiers feel most comfortable?
• Dan Tyburski says that Wachovia’s experience is very good with all principle OEMs and he feels comfortable doing business with all of them.
• David Davis says that CIT Aerospace feels comfortable with all major OEMs, again he feels very comfortable dealing with them.
• Mary Schwartz says that Citi Private Bank is comfortable with all and any of the business aircraft manufacturers. She says: “They all do a wonderful job”.
• Toennies von Limburg says the financing community surely feel very comfortable with the well established manufacturers where product support and also resale values have been proven over the years. However, new types of aircraft from new manufacturers entering the market now can also be very attractive due to the implementation of latest technology.
• Philippe Foulon comments that many financial institutions are uncomfortable with VLJ’s which have not yet been certified or when they are not designed and manufactured by established OEMs. Many banks will watch the entry into service of these models carefully before they are ready to sign off unrestricted financing.
Is there such a thing as a list price anymore? Does anyone ever pay the list price?
• Dan Tyburski says: “Our experience has been that while there is certainly some negotiating that takes place; the ultimate price paid for the aircraft is dictated by a number of things including aircraft, class, delivery time frame, actual specifications/equipment ordered and general economic environment, to name a few.”
• David Davis says that only new aircraft have list prices. He believes the low value of the US dollar means that anyone buying in dollars is getting a good deal. Those aircraft manufacturers whose products are priced in another currency and sell in dollars are feeling a strain because of the low value of the dollar. He could even see a hedging benefit for anyone using another currency converting that into dollars now and paying for an aircraft that is going to be delivered in a few years time.
• Thomas Holzinger believes manufacturers do have a list or base price. You do pay this price when you buy directly from the manufacturer or from one of their authorised sales representatives.
• Mary Schwartz says “yes” that there is such a thing as a list price. She also says that the answer is “no” because no one ever pays the quoted list price as all aircraft sales are dealt with on an individual aircraft basis, each aircraft can be fitted differently with various cabin layouts and cockpit equipment specified by the client. So no aircraft is realistically priced the same.
• Toennies von Limburg says there will always be a manufacturer list price. However, new aircraft sales prices relative to list prices diverge as a result of market conditions, product demand and competition.
• Philippe Foulon notes that granting discounts is like opening Pandora’s box.
How do financiers feel about bizjet operators paying a premium for an early delivery slot?
• Dan Tyburski states: "Given the length of time to take delivery of some aircraft today, the practice of a buyer paying a premium to step into an earlier slot can complicate the financing process somewhat by inflating the cost of the aircraft. This may result in the lender taking a more conservative view with respect to the amount it is comfortable in funding.”
• David Davis says that usually the large corporations don’t worry that much about finding an extra amount to secure an early slot but that the problem is with those smaller concerns or individuals who want a 100% loan for the equipment.
• Thomas Holzinger believes his experience with business jets is very good and that the A318 is a particularly good example as if the owners default then this aircraft can be easily converted into a more standard airline configuration.
• Mary Schwartz says that there are concerns over this matter, as sometimes financiers do think that when a premium is paid the asset might be being over-priced. She said that over-pricing of this kind of asset is happening more and more in the market.
• Toennies von Limburg says premiums are a sign of a strong market where demand is higher than supply. They go hand in hand with the delivery backlog of the manufacturers. The market is cyclical and the peaks and lows are not sustainable over the long term. For example, in a long-term growth market prices will normalise sooner or later as the supply will adjust to the new increased demand. In the light of these cycles it is for all financiers very difficult to include premiums in a loan-to-value or residual value analysis.
• Philippe Foulon declares that this does no harm, as long as financiers are not asked to finance premiums. In actual fact, financial institutions always check the extent of financing requested by clients against the normal market prices. Whenever there is a large discrepancy, banks will usually ask clients to increase their down payments in order to maintain the loan to value ratio at an acceptable level.
What risk mitigation measures are financiers putting in place?
• Dan Tyburski of Wachovia says: "For Wachovia, our processes remain consistent throughout market conditions. Our assessments naturally factor in current market valuations, credit profile and other data points. So, from our perspective, we have always employed and will continue to employee proper risk management approaches and standards necessary. Clearly taking a longer historic view of the marketplace brings balance”.
• David Davis says CIT might expect a company to find a little more cash to purchase the aircraft; it is usual for larger jets to have 15 year amortisation attached to them. Smaller jets will have a 5-10 year amortisation period attached. With pre-owned aircraft, an engine maintenance deal might be required. It used to be the case that over 50% of deals were for business jet aircraft in the US; that is no longer the case with countries like China and India developing their business jet structures. Another area that CIT could well look for is where the aircraft is registered. Countries such as the Bahamas and the Isle of Man are considered friendly countries given that they are signatories of the new International Registry.
• Mary Schwartz says that Citi Private Bank may not want to lend 100% of the money to its customer to purchase the aircraft. This means the customer must find more of the capital to buy the asset; and the bank might also require quicker amortisation and a lower balloon payment at the close of the lending.
• According to Toennies von Limburg, financiers will look at aircraft values over the long term in order to determine a reasonable financing percentage in relation to the actual purchase price. Also they are viewing the operation and the maintenance of the aircraft as an important determinant of its future value.
• Philippe Foulon believes that most global players tend to regulate the market by applying the same principles (US dollar funding, 15-year amortisation periods, 80-85% loan to value, etc.). Little deviation from these rules will result in the avoidance of any large collapse or credit crunch when the cycle goes into reverse. This is borne in mind by all long-standing players in this market and is based on their past experience.
Is there nervousness in the market?
• Dan Tyburski of Wachovia says: "Both the pre-owned and new aircraft markets are very active. As we discussed earlier, new aircraft manufacturers are still years out for delivery and pre-owned aircraft are in demand for buyers who have immediate needs. Remember, during the 2001 downturn, despite occasional shuffles where aircraft purchasers sold slots for their new aircraft delivery, buyers were there. Aircraft continue to be mission-critical assets. We do see purchasers evaluating their decisions thoughtfully and tapping our help both from an advisory and an execution standpoint for aviation finance requirements.”
• David Davis of CIT pointed out that the situation in the US in the last quarter was one of the worst for the economy but the aviation market moved in exactly the opposite direction. He is very cheerful about the last quarter of 2007 and says: “Corporate aviation is the best market it’s been since Orville and Wilbur quit building bicycles.”
• Thomas Holzinger of Jetalliance believes that in Europe there is currently not much nervousness, especially for a company dealing with Russia and eastern Europe, however he suggest we wait and see what happens over the next few months with the value of the dollar and the challenges in the financial investor market.
• Toennies von Limburg of Bank of America says he would expect that the combination of significant premiums on immediately available aircraft with the expectation that prices will normalise in the long run certainly triggers some nervousness among buyers and sellers that do not want to buy or sell too early or too late.
• Mary Schwartz of Citi Private Bank says yes there is nervousness, but that she believes raising prices of aircraft cannot continue and at some time in the future prices will plateau. The nervousness might not be the only factor that flattens the market. Customers might not be so quick to order and may take a step back and take a long hard look at the market. Also, the high and maybe still rising prices may deter customers as well as the long wait for delivery of new aircraft. Finally, the credit crunch itself may help to flatten the market.
• Philippe Foulon reckons that some corrections in the market have already took place with a larger percentage of delivery positions normally traded in the US domestic market now being shifted to the eastern European or Asian markets. This may just be the beginning of a structural reshuffle, with more demand and more need for financing coming from the Middle East, central and eastern Europe, Russia, India and Asia. It may help to ensure a “soft landing” scenario, thereby avoiding a dramatic downturn similar to 2001.
So there is clearly nervousness in the market and, in the longer term, the worldwide credit crunch that began in the US is having a less than helpful effect on the available finance, even for some of these higher value transactions. The global credit crisis could be deeper than forecasters first predicted and many operators will have to find more equity to make aircraft purchases. Finding this extra equity could put a cash strain on aircraft owners and even manufacturers. Many financiers are naturally being very cautious about lending, especially given the question over values. Let’s not forget, banking, by its very nature, is a cautious business and pricing uncertainty does little to add confidence.
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