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Corporate Aviation

Three Underwriting Tips for Aircraft Financing

Adam Webster | March 27, 2015

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When it comes to underwriting aircraft loans, what some underwriters miss early on in the game are basic things that can easily bite the bank much sooner in the loan cycle than you'd typically think. The point behind this article is to hammer home three key things that will keep any underwriter far ahead of any problems with the asset he or she just financed.

The three principles we'll talk about in this article are the cornerstone of how an underwriter or aircraft loan portfolio manager can build his or her business up without corresponding ulcers or a rise in blood pressure.

The harsh reality with aircraft is that the bigger the deal is, the bigger the swings are on everything, from engines to tires. And when you have an 80 percent stake in an airplane, you want to be darn sure that those payments stay ahead of the depreciation for the inevitable day when it comes back to you or you have to go take it back.

Amazingly, the simplicity in protecting your position on an aircraft's balance sheet basis can be done with three simple things that you could apply to your thoughts about your child as a vigilant parent: know what it is eating (maintenance), where it is going (flight tracking), and, ideally, how it is feeling (quality assurance).

Maintenance Monitoring: from the Beginning

If you don't know someone who has Inspection Authorization (IA) or Airframe and Powerplant access or has enough acumen to read the results of what happens after you log into an online maintenance tracking system, find one. This person is your new best friend. You pay him or her to sit in front a terminal and track your entire fleet of aircraft. When are the inspections due? What items got done at the last inspection, and what is the engine trend data telling you? Trend monitoring and logbook viewing are the 101 of ongoing due diligence. Whether it is AvTrak or any other CAMP-like tool, simply be sure that your agreement stipulates that you are looking at that stuff all the time. You simply have to be.

A more memorable story is one that began terribly, without the bank having the slightest clue, and it begins with a simple adage: don't let bankers read logbook entries. Pre-funding due diligence at a minimum requires an IA-level Federal Aviation Administration (FAA) license. On the deal in question, the bank was reading from a script/checklist that was, in their mind, tried and true … after all, they had never had a problem.

The culprit in question was a checklist item: "What does the last page of the logbook say?" In fact, a ferry permit is innocuous looking when compared with a typical sign-off, as it concludes with the words "Aircraft safe for intended flight." The harsh reality here is that these words were for a ferry permit—namely, to take a crippled airplane from A to B legally with the blessing of the FAA—hence the word "intended." (This means the FAA knew full well this was one last movement before the airplane headed into the operating room for heart surgery.)

Would the bank have known that this was the true intent of the entry, the deal would never have gone through.

Where Are You?

This is a sensitive issue for some owners, but as the lienholder, you actually want to have a say in some part of this story. For example, if the plane is leaving the lower 48, how often and to where? If you are a Hollywood woman of mystery who pays cash for her airplane, then fine, you are free to roam the planet with anonymity. If you borrowed money from us, however, not so. We at least want to know how often you plan to take the asset to say … Senegal or Tajikistan. These are fair questions for the people who technically will own 50 to 80 percent of your favorite toy.

We don't need to know why; we just want to know how often because this affects our ability to ensure the ability to get the airplane back easily if something goes amiss. This also will affect the terms and rates of the loan. We're in business to help you finance your dreams, but not if our 80 percent position gets stuck somewhere.

Typically, insurance policies will define the locus of operations, so this protects banks to a degree, but the asset leaving the zone of coverage would also be nice information to have throughout the course of the loan. A quarterly checkup, along with a dump of airports visited, is a fair item to integrate into your loan, even if it is subject to a confidentiality agreement.

Another key metric is following cycles versus hours. Long flights are okay since the hours become the item driving the value of the airplane appraisal, but in the case where you had a lot of short flights and higher cycles, now you have a potentially accelerated depreciation set up for your asset—it will reach the end of its life or face major maintenance events sooner than your risk profile model accounted for. Know that ratio of cycles-to-hours is key. Think of this as highway miles versus city miles in a car. If the end of term only allowed for so many city miles, you'd want to know if it was used exclusively for driving around Boston.

How Are You Feeling?

Without the aid of psychotherapy, aircraft are getting better at talking about their feelings. With acronyms like FDM and MOQA (flight data monitoring and maintenance operational quality assurance), there are services that integrate with cockpit technology to report all kinds of things to your director of maintenance. And, as long as we are seeing the maintenance story post mortem (the logbooks), we might as well see how the airplane is feeling while it bops around your destinations. As the owner and operator, you'd want to know if there was an engine anomaly, a strange trend, or anything that the telemetry could tell you about pilot behavior when no one was onboard.

Feelings to an airplane are now things that allow predictive modeling for upcoming maintenance events and better management of the aircraft in all regimes of its day. If there was a possible clue of an unreported lightning strike (you'd be amazed how many pilots don't want to confess how close they let the airplane get to a thunderstorm), you'd want to be able to inspect the aircraft for possible hail damage.


If you can think about aircraft like a concerned parent would for his or her children, you'll easily remember the "three things" and be sure your underwriting criteria have a solid plan for diet, whereabouts, and feelings.

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