By Dave Labrozzi, president, GE Capital, Corporate Aircraft Finance
The economic downturn and plummeting corporate profits of the last few years thrust the corporate aircraft market into extreme turbulence. Today, as the economy and corporate profits improve, and public contempt for the business jet seems to have been a passing blip on the radar, the corporate aircraft market is emerging from this perfect storm.
However, it’s not the high demand market it was two or three years ago. There is a new norm developing, one of steady demand with a focus on newer aircraft. As in previous recoveries, business leaders are motivated to buy because of the advantages and conveniences of the corporate jet to conduct business.
At the same time, today’s business leaders have become keenly aware of risk and have developed a new appreciation for cash. Despite the improving economy, many companies are conserving cash and appreciate the flexibility that adequate cash levels provide.
The question then becomes, how does a company that wants to expand its aircraft fleet -- or an entrepreneur seeking to grow their customer base -- pay for a corporate jet? With plenty of liquidity available in the market for good credits, corporate aircraft leasing is becoming an increasingly attractive alternative to paying with cash. Of course, companies with speculative-grade credit ratings will have more difficulty securing financing, especially for older aircraft. But for the foreseeable future, many buyers will find there is ample liquidity in the credit markets.
In general, leasing offers a number of compelling cash management and risk benefits over ownership — advantages that are too often overlooked. Many risks of ownership can seem far down the road at purchase. However, before committing to such a large purchase, executives should carefully consider the consequences, as well as the alternatives to a simple cash purchase.
Although each company’s situation is unique, here are some of the most important reasons for leasing versus buying.
Improving cash management and flexibility
First, leasing can help businesses improve their cash management and create flexibility. Leasing frees up capital that would otherwise be tied up in a purchase while making payments predictable and affordable. Also, working with asset-based lenders with expertise in aircraft finance means the lease can be secured by the value of the aircraft – not income-producing core business assets. This creates financial flexibility by allowing business assets to remain unencumbered and available to secure bank loans for growth, working capital or other business needs. Consider a few examples:
· A company in the Northeast whose business is very seasonal uses a seasonal pay plan that defers payments during its low revenue period.
· A firm chooses a seven-year lease instead of purchasing its aircraft. The time value of money means that, instead of paying $5 million upfront, the company pays approximately $2.7 million over seven years.
· An automobile supplier that owns its aircraft arranges a sale-leaseback that monetizes the equity in it and simultaneously frees up capital.
· A construction company chooses an early buy-out lease, preserving capital until more projects materialize and purchasing the aircraft makes sense.
· A high net worth individual chooses a lease instead of borrowing against their wealth management accounts. This allows them to avoid investment risk on an asset with a low likelihood of high returns.
Mitigating asset risks
In addition to cash management issues, leasing mitigates many types of asset risk. Consider the risk of determining what to do with the used plane when it’s no longer needed. In most cases, few companies have the resources to accurately price, market and resell it. Leasing an aircraft means that business owners can turn it in at the end of the lease period and walk away hassle-free.
Depreciation and tax implications
Along with asset risk, companies that own aircraft must also consider depreciation and taxes that can have a significant impact on the true cost of aircraft ownership. For instance, personal usage and chartering rules can tighten, leading to restrictions on tax depreciation deductions. Or, if a company is in a current year net operating loss position, the cost of asset ownership increases because the full tax benefit from depreciation deductions isn’t available in that year. Leasing takes these considerations out of the equation.
Finally, leasing is a way to diversify financial relationships while preserving cash and bank credit lines for future business needs. Even as the business climate improves, maintaining the ability to invest in the business while gaining a financial ally will be valuable over the long term.
Dave Labrozzi is a thirty-year GE veteran, and president of GE Capital, Corporate Aircraft Finance, one of the world’s leading providers of aircraft leases and loans to public and private companies and high net-worth individuals. Dave, an instrument-rated private pilot, manages this global business that has provided customers with more than $29 billion of corporate aircraft financing. Dave also advises GE’s non-financial businesses focused on corporate aviation and sits on the National Business Aviation Association’s (NBAA) Associate Member Advisory Council.