Sam Cook, who leads J.P. Morgan Private Bank’s Specialty Lending division, provides an overview of aircraft financing in an unprecedented marketplace
Even industry veterans with 30 or 40 years’ experience are calling these the most unusual of times. The global pandemic shone a spotlight on the distinctive capability, professionalism and versatility that characterise business aviation, while risk-averse travellers subsequently turned away from airlines for fear of Covid infection, choosing private charter instead.
The demand for charter remains strong, while some customers are inevitably stepping up to aircraft ownership. Or at least, attempting to do so, in a market where wait times for new production aircraft are long and good-quality used aircraft are not only attracting high prices, but also selling fast. And now, of course, while the US market remains buoyant, the European market is weakening in light of the bloody conflict in Ukraine.
Wider understanding
So these are, indeed, unprecedented and complicated times, during which Sam Cook, who leads J.P. Morgan Private Bank’s Specialty Lending division across Europe, Middle East and North Africa (covering aircraft, yachts and fine art) says aircraft purchasers, especially those new to the market, must ensure they understand the longer term costs of aircraft ownership and seek the very best support for their transaction in a rapid-paced marketplace.
“The increase in demand for aircraft post-Covid has been huge,” Cook confirms. “The supply/demand dynamic has shifted heavily in favour of sellers and we’re seeing record low levels in stocks of aircraft available for sale. Buyers are competing on price and the ability to transact quickly, taking aircraft off the market in maybe two or three weeks – people are even taking aircraft without pre-purchase inspections.”
Cook cautions that while purchasing an aircraft with robust maintenance programmes in place for airframe, engines, APU and so on helps mitigate the risk of buying without inspection, there may be hidden issues that a pre-delivery inspection might detect. Without an inspection, there is always the chance of unexpected and expensive rectification work being required soon after purchase.
And while he does not expect these extreme market conditions to last long, for the time being they are keeping aircraft sales brokers, aviation lawyers, MRO providers and, of course, lenders, very well occupied. “A busy market is good for all participants, but it doesn’t mean we change our appetite around the kinds of deals we want to do as a bank and how we think about our credit underwriting guidelines. We want to maintain a consistent product and ensure we’re underwriting the right risk for us.”
Cook is enthusiastic about new buyers entering the market, especially the opportunity it provides for J.P. Morgan Private Bank to help them understand the industry. “It’s really interesting helping them think through what’s the right aircraft for them and who are the participants to partner, while also helping them understand aspects they perhaps haven’t considered around operations, jurisdictions and so on.”
Aligned interests
Another important consideration is to determine the appropriate term for financing. “We usually set loans up over five-year committed periods,” Cook explains. “Five years is the typical ownership period we see, but every owner is different and circumstances change. Sometimes they fairly quickly start needing more range, in which case we can help finance a move to a larger aircraft or a second one. Typically we don’t charge early repayment penalties, so they’re also free to pay off the full loan at any time should they want to.”
After a financing agreement has been reached and an aircraft purchased, the bank’s continuing involvement includes regular reports on the number of hours flown, the latest maintenance input and other parameters ensuring, as Cook puts it, that the value has been properly protected over the life of the loan. “Our interests are aligned with the owner’s,” he says. “They want to ensure the aircraft isn’t depreciating more than it should because if they want to sell it, they want a good, marketable aircraft with liquidity; they want its value protecting.”
For now, the business jet market remains healthy, but the war in Ukraine is casting a degree of doubt, especially in Europe. The media has carried a number of stories of aircraft linked to or known to be owned by sanctioned individuals being frozen, and there seems little clarity on what that will mean in the long term. Cook reveals J.P. Morgan Private Bank’s point of view: “It’s a fast-moving situation and we don’t yet know what it means for the market. There is the issue that those aircraft can’t be properly maintained or supported and they’re depreciating faster than would have been expected.”
Critically in any deal, J.P. Morgan’s advice to clients is to ensure they have fulfilled due diligence and the structure they have in place is legally robust. Cook says: “We’ve built trusted relationships with some of the leading participants in the aircraft market and I believe our clients appreciate our ability to give them open, frank suggestions that help them navigate the market successfully. Over the past 18 months or so it’s been interesting helping new owners do that and I hope they see the guidance we provide as an added benefit of working with J.P. Morgan Private Bank.”
