Aviation finance is defined as financing of aircraft for the purpose of purchase and operations. Aviation finance is also a strong opportunity for companies to efficiently use huge amounts of capital in acquiring ‘hard assets.’
Aviation Financing holds similarity with an automobile loan in the context that both are granted for the purchase of a traveling vehicle. Aviation Finance is for the purpose of purchasing and operating an aircraft and it also shares a few complicated traits with maritime financing as well. The help rendered by financing institutions includes expert advice and specifically tailored financing to buy, sell or refinance aviation infrastructure assets.
TYPES OF AIRCRAFT
In U.K. different types of aircraft can be financed like executive jets, helicopters, gyrocopters, fixed wing aircraft and gliders. Theses aircrafts can be leased through operating leases, cross-border and tax-based leasing. The operating lease expenses can be declared on the balance sheet and can be capitalized.
CAPITAL LEASING OR FINANCE LEASING
Accounting rules, as per British regulations define finance leasing as capital leasing that allows the operator to have all rights to own the aircraft. The complex transaction involves debt and equity financing and the opportunity to purchase the aircraft once the lease expires and it involves a long term finance arrangements.
Capital leasing or finance leasing allows the lessee to avail the depreciation deductions over the aircraft’s operation life. This tax “loophole” is a tax haven for investors and a good choice to make finance leasing a competitive alternative to operating leasing.
To achieve a transaction of a personal or a corporate aircraft, one would have to follow the given steps.
The borrower will have to give personal information about themselves and the aircraft they plan on buying, to the lender.
The lender then tries to perform an appraisal to determine the aircraft’s market value.
Next step for the lender is to perform a title search against the aircraft’s registration number and validate that no liens exist.
The lender is responsible for preparing and detailing the transaction documentation.
It must include a security agreement, according to which the borrower has to submit a security interest in the aircraft which the lender repossesses if there is a default on the payments in the future.
If the lender deems the borrower to be not very trust worthy, a surety from a single or several third parties can be included as well.
When the deal is closed, all the funds and titles are transferred as stated in the loan documentation.
FINANCING OF COMMERCIAL AIRCRAFT
The lease term for commercial aircrafts is not more than 10 years. The short-term lease is justified because of fast advancements in technology and the aircrafts becoming obsolete. Add to it the changing environment, noise and laws. Finally, the short-term lease provides flexibility to the airlines to adjust the fleet as per requirements and demands. It enables to keep the fleet lean and smart to be profitable and expend accordingly if the air-traffic increases.
Aviation finance is a win-win situation to enjoy air travel.