Because aviation companies are purchasing more aircraft, financing of aircraft is a high-value sector that has grown. This article discusses aviation finance, its features and its sources.
Fremont, CA: The demand for airplanes that are faster, more fuel-efficient, safer, and offer more luxury on board has skyrocketed in the twenty-first century. Consequently, outdated aircraft are being replaced even before their entire technical life has come to an end. A plane is not cheap. Therefore, in order to purchase a costly aircraft, loans or leases must be obtained. There is a liquidity crisis as a result of the Indian economy's present downturn and banks' reluctance to fund significant expenses.
Airlines are broadening their pool of investors as a result. A variety of financial sources can be used to address the unique characteristics of the aviation industry as well as the difficulties in obtaining financing.
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Features of Aviation Finance
Purchasing an aircraft requires a significant amount of capital, which is obtained prior to the transaction. An airplane is a very adaptable car. It can go across any area of land or sea and function in any nation with any political system. This presents a challenge as well as a benefit. The benefit stems from the fact that an airplane can be used to generate revenue in any nation. Its operations span political ideologies and regulatory bodies, which makes it challenging to navigate in terms of ownership, taxation, depreciation, accounting procedures, and operating standards. A plane's residual value can become highly erratic due to laws, disposal practices, and the accessibility of new aircraft. Therefore, in order to survive, significant hedging, reserve building, and liquidity must be guaranteed.
When an aircraft is purchased, it can be used anywhere in the world. Since this is a costly proposal, extensive planning and market research are needed to make sure that funding is obtained from a variety of sources at the lowest possible cost of borrowing. Due to the significant risk concentration, a single financial institution often detests funding an airline. Airlines must, therefore, obtain money at various interest rates from multiple financiers. The aviation industry has a number of unique financial characteristics that lead to financial difficulties.
Sources of Aviation Finance
The simplest way to raise capital for aviation financing is through institutional wealth. Low-cost, lump sum funding for aviation assets will come from funds from sovereign wealth funds, insurance firms, pension funds, personal cash, and special purpose bonds. If an organization has its funds, this is the most effective way to finance the acquisition of an airplane.
The ideal way for an institution to finance the acquisition of an airplane is if it has its funds. If the aircraft is being used as collateral security by the institutional investors and they have contributed the margin money, then bridge loans from banks would be accessible. The swift disbursement of funds with few conditions would be made possible by this system.
The financial assistance provided by the manufacturer to the buyer to help them purchase the aircraft is another crucial option. One of the finest methods for obtaining inexpensive financing is through private equity; however, this method will result in some control being exerted through executive or non-executive members on the promoters' board of directors. This funding is contingent upon the operators' guaranteed cash flow creation and creditworthiness. It will be exceedingly challenging for the organization to raise private equity if any of these elements are missing.
