Financing Aircraft Improvements

Reprinted with permission from AirFleet Capital, Inc.

Historically, active aircraft owners tend to trade-up to a newer aircraft every three years or so. Today, that trend has shifted and we are seeing owners keep their aircraft longer, likely a result of recent economic conditions and its impact on personal income, net worth and liquidity. The most economical option for some in today’s market is to keep their current aircraft, and upgrade some of the components.

In conjunction with this, we are often asked the question “Can I finance upgrades on my aircraft?”. The answer is yes. If you have decided to keep your aircraft longer than you originally expected, but still want to have the “feel” of the latest and greatest, then an avionics upgrade may be just what the doctor ordered. It also may be time to overhaul the engine – this is costly, and in most cases we can help with financing the overhaul as well. Avionics upgrades, engine overhauls, or even airframe upgrades (i.e. speed modifications) – may all enhance your ownership experience without the major undertaking of a new purchase. More importantly, when you decide to sell your aircraft a few years down the road, these upgrades could help your aircraft stand out in the marketplace.

With respect to the “finance-ability” of improvements and upgrades, there are a few rules of thumb. In terms of improvements that we consider to add value to the bottom line of an aircraft, the amount that can be financed will vary depending on the aircraft and upgrade. In general, we can finance 50% to 80% of the equipment price for the upgrade or overhaul. Labor costs for new component installation are not included in this rule of thumb, as these costs don’t add value (sometimes book values do include an element of the labor costs in the upgrade). A lender will often need to get behind the current value of the aircraft, then understand the value-added of the upgrades you are considering. It is important to know that value-added may be different to the lender, as a lender will often estimate the value a couple years down the road – after the initial “drop” that we typically see in avionics depreciation in the first 1-2 years for example. To get to the bottom of “how much” of the upgrades may be financed, most lenders will complete a desktop valuation using sources such as Bluebook or VRef.

If you have a loan on your current aircraft, the refinance amount can be included with upgrades and improvements (wrapped into one new loan), but there are some things that are generally not finance-able with respect to airframe upgrades and improvements. For example, we cannot cover much cost (if any) for paint and interior work, as paint and interior values quickly depreciate over time; and while the bright-pink neon scheme may be attractive to you, it may not be something that appeals to the masses in a re-marketed situation. Also with paint/interior, while it will look like a new and improved aircraft and could add value in the marketplace when you eventually sell the aircraft – most likely you will not get out the same amount you put into it. Either way, the lender’s goal is for you to be right-side-up in your loan as it matures, and it’s important to keep this in mind – a lender will look at these values more conservatively than you or the marketplace, so as to ensure they’re not out of compliance on their lending limits for your aircraft.

General maintenance is also something that is not finance-able in most cases. While an engine overhaul to have a zero-time engine can increase your aircraft’s value significantly, general maintenance (such as an aircraft’s annual inspection) does not add value, it just maintains it to the standard required for a safe, operational/airworthy aircraft. A lender lends on an assumed airworthy aircraft, and book values assume a certain maintenance standard is kept to maintain airworthiness. Any general maintenance and upkeep would assume that the aircraft has fallen below this baseline minimum, which likely will put the client in a challenging situation with the lender if standard airworthiness is not maintained (could be a default provision).

If you have decided to keep your aircraft longer than you expected, but want to upgrade from steam gauges to a new glass panel or the latest touch screen GPS, please give us a call at 800.920.5190 and mention IFA or request an online quote. We would be happy to discuss your upgrade potential and see how you can enjoy your aircraft - new and improved!