Story ID: 
Insurance and financing go hand-in-hand
By: David A. Lombardo
Caption: Buying an aircraft can be a daunting task.
Word Count: 560
Buying an aircraft can be a daunting task. Unless a company or individual has deep pockets, it will inevitably require either leasing with an option to buy or financing a purchase. Even if paying in cash is an option, doing so can be problematic. Dave Labrozzi, senior v-p and general manager of Danbury, Conn.-based GE Corporate Aircraft Group, explained the difference between leasing with an option to buy and outright purchase.“Asset-based loans rely primarily on the underlying collateral–in this case the business aircraft–to secure the loan,” he said. “Some aircraft buyers have used cash-flow lending, which relies on the strength of a borrower’s cash position, balance sheet and income statement, or pre-existing business or personal lines of credit to finance the purchase. However, especially for a growing midsize company, this type of lending can restrict the use of working capital for other important business needs.” Having liquid assets allows new market expansion, research and development and many other options. Asset-based borrowing gives the company greater financial flexibility and frees up working capital.Since a company in a net-loss position has no taxable income, it usually can’t take advantage of the tax benefits associated with depreciation deductions. By transferring aircraft ownership to a finance company, as occurs in some leases, the financing company can take advantage of those depreciation deductions and then pass the savings on to the lessee in the form of lower payments.When considering leasing one should have a feel for how long the aircraft will be kept. Also, the buyer should have an idea of what the potential value of the aircraft will be at that time. Aircraft values go through cycles, and an asset-based lessor bears the risk of any future fluctuation in the airplane’s value. If a lease is not renewed or the lessee doesn’t purchase the airplane at the end of the lease, then the aircraft is returned as mutually agreed, and the lessor takes full responsibility for remarketing.“Typically, a lender might structure the loan, including the downpayment and term, based on the age and type of asset, credit quality of the borrower and the needs of the customer. We frequently create customized solutions for our customers,” Labrozzi said. “For example, if we have a customer with cash-flow needs, we might provide a balloon-type structure that exchanges lower payments now for a larger lump-sum payment at the end of the loan.“Insurance is a necessity to protect both the borrower and lender, and typically the lender is directly named as the loss-payee. The insurance companies and the FAA establish the standards for operational issues such as crew training, but lenders are interested in the use of the aircraft–for example, whether the aircraft is chartered or flown internationally. We can structure deals to accommodate this or other customer requirements.“Lenders look at a lot more than just the ability to come up with the downpayment. The credit quality of the customer, their experience operating business aircraft, the type of aircraft, the planned use of the aircraft, financing considerations such as cash-flow needs and how long the customer expects to be in this aircraft before they upgrade are all factors that influence the loan and lease structuring process. We work with our customers to assess their specific challenges and structure solutions that meet their individual needs.”