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Jet Finance

The aviation industry has seen a significant rise in demand for private and commercial jets, driven by the need for flexibility, convenience, and efficiency. In the UK alone, the private jet market has experienced growth, with a 9% increase in flights in 2022 compared to previous years, highlighting the surge in both personal and corporate travel (source: Statista). As jets represent a significant capital investment, businesses and individuals often turn to jet finance to manage the high costs associated with purchasing or leasing an aircraft. Jet finance provides various solutions that enable buyers to acquire these assets while managing cash flow and preserving capital.

We explore the fundamentals of jet finance, the types available, differences from other aircraft financing, eligibility criteria, the impact of credit scores, and the pros and cons of leasing versus buying. Additionally, we examine tax implications, depreciation, challenges in securing jet finance, and the future trends shaping this industry.

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What is Jet Finance?

Jets, whether for corporate or personal use, require substantial investment, and financing these purchases allows buyers to spread the cost over time rather than paying the full amount upfront. Similar to helicopter finance, which caters to rotorcraft purchases, jet finance is structured to address the unique costs, depreciation, and operational needs associated with high-value aviation assets.

Jet finance typically includes a range of options, from leasing to hire purchase agreements, and it is often considered a specialised form of asset finance. As part of asset finance, jet finance leverages the aircraft's value to create tailored funding solutions, providing flexibility and efficiency for high-value acquisitions.

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What Types of Jet Finance Are Available?

The types of jet finance available can vary based on the needs and financial circumstances of the buyer. Common options include:

1. Leasing

Leasing is an attractive option for many businesses and individuals who do not want to make a long-term commitment to owning a jet. There are two primary forms of jet leasing:

• Operating Lease: Operating leases are short-term and it's where the lessee rents the jet for a specific period, typically one to five years. At the end of the lease, the jet is returned to the lessor.
• Finance Lease: Finance leases are where the lessee has the option to purchase the jet at the end of the lease period, often for a balloon payment.

2. Hire Purchase

With a hire purchase, the buyer takes immediate possession of the jet but pays for it over time through a series of instalments. Once the final payment is made, ownership of the jet is transferred to the buyer. This option allows for eventual ownership without the need for a large initial outlay.

3. Asset-Backed Loans

In an asset-backed loan, the jet itself serves as collateral for the loan. The borrower receives a lump sum of money from the lender and makes repayments over time, with the jet acting as security in case of default.

4. Sale and Leaseback

In a sale and leaseback arrangement, a company that already owns a jet sells it to a financier and then leases it back for continued use. This provides immediate capital while allowing the business to continue using the aircraft.

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How Does Jet Finance Differ from Other Aircraft Finance?

Jet finance is similar to other types of aircraft finance, but it has some important distinctions due to the value and complexity of jets:

1. Higher Capital Requirements: Jets, particularly private and corporate jets, are typically more expensive than smaller aircraft, making financing terms larger and more complex.
2. Customisation: Jets are often customised to meet the specific needs of the owner, which can affect the financing structure. Personalised interiors, technology, and enhanced features may be financed separately or added into the total cost.
3. Operational Costs: Jets come with significant operating expenses, such as fuel, crew salaries, and maintenance, which lenders often factor into finance agreements.
4. Regulatory Considerations: Owning a jet requires compliance with strict aviation regulations, and financiers may require proof of compliance before approving loans or leases.

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What Are the Eligibility Criteria for Jet Finance?

To secure jet finance, lenders typically assess a number of eligibility factors, including:

• Creditworthiness: Both personal and business credit scores are scrutinised to ensure the borrower has a reliable financial history.
• Income and Revenue: For businesses, lenders will evaluate the company’s revenue streams to determine its ability to service the loan or lease.
• Collateral: For loans, the jet itself often acts as collateral, but additional assets may be required for larger financing amounts.
• Business Plan: Companies may need to provide detailed plans on how the jet will be used for business purposes, especially if the purchase is intended to generate revenue (e.g., for charter services).

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How Does Credit Rating Impact Jet Finance Options?

A borrower’s credit rating significantly influences the terms of jet finance.

Those with higher credit scores typically benefit from lower interest rates, more flexible repayment terms, and access to a wider range of finance options. Conversely, individuals or companies with lower credit scores may face:

• Higher interest rates: This increases the total cost of the loan or lease.
• Shorter repayment terms: Lenders may reduce the repayment period to mitigate risk.
• Collateral requirements: Lenders might ask for additional collateral to secure the financing.

For individuals or businesses with a poor credit rating, securing jet finance may require working with specialised lenders or opting for leasing arrangements rather than outright purchases.

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What Are the Advantages of Leasing vs Buying a Jet?

When deciding between leasing and buying a jet, it’s important to weigh the advantages and disadvantages of both options.

Advantages of Leasing:

• Lower Initial Costs: Leasing requires less capital upfront compared to buying.
• Flexibility: At the end of the lease, businesses can upgrade to newer models or terminate the lease if the jet is no longer needed.
• Tax Benefits: Leasing payments may be classified as operating expenses, which could provide tax advantages.
• Less Depreciation Risk: The lessor absorbs the depreciation, reducing the risk to the lessee.

Advantages of Buying:

• Ownership: Owning a jet provides full control over its use and modification.
• Asset Value: Once purchased, the jet becomes an asset on the balance sheet, which could enhance a company’s financial standing.
• No Ongoing Lease Payments: Once the jet is fully paid off, there are no further finance-related payments.

However, buying requires a substantial upfront investment and carries the risk of depreciation over time.

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How Do Interest Rates and Loan Terms Affect Jet Finance?

Interest rates and loan terms are critical factors in jet finance. Interest rates determine the overall cost of financing, and even a small increase in rates can significantly impact the total amount paid over the life of the loan.

• Fixed vs Variable Rates: Fixed-rate loans offer stability, as the interest rate remains the same throughout the term, while variable rates fluctuate with the market, potentially lowering or raising monthly payments.
• Loan Term Length: Shorter loan terms mean higher monthly payments but less interest over time. Longer terms offer lower monthly payments but increase the total interest paid.

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How Does the Condition and Age of a Jet Influence Financing?

The age and condition of a jet play a significant role in the type of financing available.

Newer jets generally have better financing terms because they are more valuable and less risky for lenders. In contrast, older jets may come with higher interest rates or shorter loan terms due to:

• Higher Maintenance Costs: Older jets may require more frequent repairs, increasing operational costs.
• Depreciation: Older jets lose value faster, making them less attractive as collateral.
• Resale Value: Lenders may be more hesitant to finance older jets because of their lower resale value.

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How Can Businesses or Individuals Choose the Best Jet Finance Option?

Choosing the best jet finance option depends on several factors, including:

• Budget: Assess how much capital you can allocate for upfront costs or ongoing payments.
• Purpose: Consider whether the jet will be used for personal or business purposes, as this can affect tax implications and finance structures.
• Financial Stability: Ensure that your cash flow can support regular payments, whether through a loan or lease.
• Tax Considerations: Consult with a tax professional to understand the tax benefits associated with leasing versus buying.

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What Are the Tax Implications of Financing a Jet?

The tax implications of jet finance can be significant and depend on the structure of the financing. Some key points include:

• Leasing: Lease payments are often considered operating expenses, which may be fully tax-deductible.
• Purchase: When purchasing a jet, companies may be eligible for capital allowances, which allow for the deduction of depreciation over time.
• VAT: In some cases, VAT may be recoverable, depending on how the jet is used and the location of the buyer.

It’s essential to seek advice from a tax professional to fully understand the tax implications of financing a jet.

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How Does Depreciation Affect Jet Finance Costs?

Depreciation is a major factor in the cost of jet finance.

As jets age, their value decreases, which can influence both the financing terms and the resale value. Leased jets typically have depreciation built into the monthly payments, while purchased jets may allow the owner to claim capital allowances on the depreciation.

Depreciation can also affect resale values, as older jets generally command lower prices. This should be considered when choosing between leasing or buying, as a leased jet’s depreciation is the responsibility of the lessor, whereas a purchased jet’s depreciation directly impacts the owner’s investment.

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What Challenges Arise in Securing Jet Finance?

Securing jet finance comes with unique challenges, including:

• High Capital Requirements: Jets are expensive assets, and financing amounts are often substantial.
• Regulatory Compliance: Borrowers must comply with aviation laws, and financiers may require proof of compliance.
• Insurance Costs: Jets must be insured, and these costs can be high, adding to the overall financial burden.
• Economic Uncertainty: The volatile nature of the aviation industry can impact the willingness of lenders to finance jets, particularly during economic downturns.

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How Can Individuals Improve Their Chances of Approval for Jet Finance?

To improve the chances of securing jet finance, individuals and businesses can take these 4 steps:

1. Improve Credit Score: Ensuring a strong credit rating can lead to better finance terms.
2. Prepare a Detailed Business Plan: Demonstrating the commercial viability of the jet, especially if it will be used for charter or corporate travel, can reassure lenders.
3. Provide Collateral: Offering additional collateral may reduce the risk for the lender and increase the likelihood of approval.
4. Work with Specialised Lenders: Some lenders specialise in aviation finance and may offer more favourable terms than traditional banks.

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What Is the Future Outlook for Jet Finance?

The future of jet finance looks promising, with increasing demand for both private and commercial jets.

The rise of sustainable aviation technologies, such as electric jets, will likely influence financing structures, making green finance more prevalent. As businesses and individuals seek more flexible and affordable ways to access jets, we can expect to see continued growth in leasing options and customised finance packages tailored to the needs of specific industries.

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Bottom Line

Jet finance provides essential solutions for businesses and individuals seeking to acquire a jet without paying the full cost upfront.

With options ranging from leasing to asset-backed loans, choosing the right finance method depends on several factors, including budget, tax implications, and future jet usage. As the aviation industry evolves towards more sustainable technologies, jet finance will continue to adapt, offering innovative options to meet the needs of a dynamic market.