Cash might be king, but financing still often makes the most sense for business aircraft purchases.
It is hardly a secret that the U.S. Federal Reserve Bank has cranked up the federal funds rate to tame inflation. These rate moves, which raised interest costs, spared no industry, including aircraft lending and leasing. Then, the Fed signaled last month that it might cut the federal funds rate a few times in 2024, setting off rampant speculation of when and how many rate cuts might occur.
Did the Fed announcement mean that aircraft lenders and lessors (financiers) can expect aircraft lending and leasing transactions to take off? No one knows, but even if rate cuts occur and financing shows the potential to soar to new heights, continuing challenges abound for financiers.
The notion that “cash is king” resonates with buyers, and cash still dominates the way many buyers purchase aircraft despite sensible reasons to finance aircraft purchases. Although aircraft lenders seem mostly past the 2023 regional banking crisis, many banks have imposed stricter lending standards, increased loan pricing, experienced heightened regulatory scrutiny, and constricted available funds for aircraft lending.
As a consequence, some lenders will not or cannot seriously entertain aircraft lending transactions without a stellar creditworthy borrower, a bulletproof guaranty, or a strategy to win the purchaser’s business at a higher but acceptable risk.
This article was written by NAFA member David G. Mayer, Partner at Shackelford, Bowen, McKinley & Norton, and originally published by AINsight on January 12, 2024.