Aircraft Financing: Three Key Principles to Sound Underwriting

That Every Lender Should Know

“How does a deal go well? A good start is someone other than a banker looking at logbook entries.” — Rich Thompson

I came across Rich Thompson in the fall of 2014 while he was wearing a variety of hats: Quality Assurance here, Director of Maintenance there, he was the octopus version of aircraft maintenance and monitoring. While the more routine affair of protecting an owner from overpaying for everything is his normal diet, an interesting sideline he knew well was what 2nd tier banks typically didn’t do before closing in many of their deals. After a responsible amount of cocktails and some mutual story swapping about business aviation, we realized that a short article on the “THREE THINGS” would fun, insightful and helpful.

The three things are the corner stone of how an underwriter, or aircraft loan portfolio manager, can build their business up without a corresponding rise in their ulceritis or blood pressure. But airplanes and jet owners are funny that way – the more money involved, the bigger the swings on everything, from engines to tires. As an aircraft lender, when you have an 80% position in an airplane, you want to be sure the payments stay ahead of the depreciation.

Staying on top of your loan portfolio is simpler than you might think, if you follow these three simple rules with each airplane: 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 that has enough acumen to read an online maintenance tracking system, find one. This person is your new critical first line of defense. When are the inspections due? What items got done at the last inspection and what is the engine trend data expressing? Trend monitoring and logbook viewing are the cornerstones of ongoing due diligence. Whether it is AvTrak or any other CAMP like tool – be sure that your agreement stipulates that you are able to have unfettered access.

One of Rich’s most memorable examples as a loan rescue specialist, was consoling a portfolio manager who was facing a debacle that began at closing. The crux of the story is simple:

Don’t let bankers read logbook entries.

On the deal in question, the bank was reading from a script / checklist that was, in their experience….tried and true: “What does the last page of the logbook say?” The checklist called for a statement of airworthiness. 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.”

What Rich knew, and was the cause of the banker’s ulceritis, was that these words were the concluding portion of ferry permit, on the last page of the maintenance logs which is where the checklist said to look. What was not gleaned or interpreted was that a loan was closing on a crippled airplane that would go from A to B legally with the blessing of the FAA one last time before a whole pile of money got spent.

What mattered a bit more were the words preceding the last paragraph, which to paraphrase, went something like this: “This airplane is very sick, but not too sick to make it 500 miles to the only shop that can get it working properly. Other than that – this aircraft is safe for intended flight.”

Where Are You?

This is a sensitive issue for some owners, but as the lien holder you actually want to have a say in some part of this story. For example if it is leaving the lower 48 US States, how often and to where? If you are a Hollywood woman of mystery that pays cash for her airplane, then fine, you are free to roam the planet with anonymity. But, if you borrowed money from us, 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 company that has an 80% stake in your private chariot.

We don’t need to know why – we just want to know how often, because our ability to get the airplane back easily if something goes amiss is something we factor into the loan. We’re in business to help you finance your dreams, so long as we can take them back when our stake in the dream is at risk. The insurance is helpful here, and it provides a good expectation of what limits might be on the aircraft.

Online tracking services also provide a monthly data dump of airports visited which in turn can get you great stage length data. Why do we care about short flights more than long flights? Too many short flights can cause aircraft cycles to force maintenance and overhaul events before the hourly requirement.

Maximum hours per year is one thing, but knowing the highway miles vs. city miles (to use an analogy) is a key barometer to have at least a quarterly handle on.

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 so long as we we are seeing the maintenance story post mortem (the logbooks) we might as well see how the airplane if feeling while it bops around the country or planet. 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 on board. (“Who was that buzzing the yachts – doing the 60 degree banks in the big expensive bird??”)

Feelings, to an airplane, are what allow for predictive modeling of maintenance events and better management of the aircraft in all regimes of its day. No one likes surprises, but bankers are probably the least surprise seeking species on the planet. Good FDM and knowing feelings is all about preventing surprises.