Private aircraft financing: From leases to loans

Today, many wealthy families are choosing to travel on private aircraft instead of flying commercial. Ever-more crowded airports and planes, and the unpredictability and delays of commercial flight schedules are some of the factors driving this decision.

The pandemic also heightened demand for private aircraft, says Chris Peary, senior vice president and managing director of client advisory for Ascent Private Capital Management of U.S. Bank.

“Some affluent families and individuals who flew frequently opted to acquire private aircraft instead of fly commercial to reduce health risks,” he says. “Of course, flying private is also more convenient, and it can even be more cost-efficient if you fly frequently.”

Private aircraft options

According to Peary, there is a continuum of private aircraft options, starting with the most basic:

• Charter flights, or “pay as you go”
• Membership in a private jet club, such as NetJets
• Fractional ownership, where you share ownership of an aircraft and flight time with others via a management company
• Full ownership of a private aircraft

“Full ownership offers the most convenience and flexibility, but it’s also usually the most expensive option,” says Peary.

In addition to the cost of the aircraft, there are operating costs such as routine and unplanned maintenance and repairs, crew salaries, insurance and hangarage. “These are often higher than many people realize,” he adds.

Private aircraft financing: Loans vs leasing

Unless you purchase a private jet outright, there are two main options if you decide on full ownership: financing the plane or leasing it.

Aircraft loans

A private aircraft loan is like a loan taken out for a luxury vehicle or yacht. A down payment of 15% to 20% may be required, though some lenders will finance 100% of the purchase price. Payment terms can vary dramatically depending on the borrower and the aircraft but typically range from three to 10 years. Private aircraft loans may be fixed or floating rate.

Some lenders offer hybrid private aircraft loans, such as a floating rate loan that extends the option to purchase a swap to avoid interest rate increases.

Asset-based loans are another option. These don’t always require financial disclosures or the submission of personal tax returns or K-1 forms. Asset-based loans can be non-recourse, which means in the case of default, lenders may not legally pursue the borrower for repayment.

Aircraft leasing

Aircraft leases are like automobile leases. At the end of the lease term, you can renew the lease or simply walk away and terminate the contract without taking a depreciation hit. Leasing lets you “try before you buy” without taking on the big, long-term financial commitment of an aircraft purchase.

There are two main types of private aircraft leases: tax leases and non-tax leases.

• With a tax lease, the lessor is the owner and reaps the tax benefits of depreciation. Therefore, tax leases generally offer more favorable interest rates.
• With a non-tax (or off-balance sheet) lease, the lessee is the owner for tax purposes and takes the depreciation hit. “However, in the current environment, some private aircraft are actually appreciating in value, which can change the equation a little bit,” notes Peary.

Peary says some private aircraft owners are sub-leasing their planes to third parties when not in use to help recoup some of their operating and ownership costs.
“Demand for this has really grown over the past five or six years,” he says. “In some instances, owners can recoup almost all of their operating costs and practically fly for free.”

How to finance an aircraft

When searching for a private aircraft loan or lease, your existing bank is often a good place to start, since it already has most of your financial information.

“This can help make the application process go smoother and faster,” says Peary.
Some banks have access to private aircraft finance groups with specialized expertise and credentials with trade associations, such as the National Business Aviation Association (NBAA) and the National Aircraft Finance Association (NAFA).

Ideally, your private aircraft lender or lessor should have expertise with Federal Aviation Administration (FAA) requirements and up-to-date knowledge of regulations that will affect your purchase or lease of a plane. A private aviation consultant or jet financing broker may be able to help you find the right lender or lessor.

Peary recommends searching for a recognized aircraft lender or lessor who can surround you with the right advisors and help you create the right legal and tax structure for your transaction. “This could make a big difference in the success of your loan or lease application,” he says.

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