Chambers HNW: Private Aviation Overview
Paul Jebely Managing Partner, Co-Chair of Private Wealth, Co-Chair of Asset Finance Pillsbury Winthrop Shaw Pittman LLP
I have for years answered the question of what I do for a living by describing myself as “counsel to extraordinary people with extraordinary machines.” I must occasionally follow-up with a clarifying, if decidedly less romantic description of my craft: “an attorney for the affluent with airplanes.” The force of gravity is strong, but extraordinary people are meant to fly.
As I pen this overview, in the midst of viral and consequent economic contagion, normal life is becoming possible again - hour by hour, and day by day. My clients around the world are emerging from their various gilded cages, to what is likely the end of a gilded age.
One of the great privileges of having a degree of contact with individuals around the world that together have held over a quarter of a trillion dollars of private wealth (from new money shaping the world to old money controlling it) is the odd crumb of sage wisdom that I - basin and spoon in hand – have received. One such example that seems poignant at the moment is, in essence, that a crisis is a terrible thing to waste.
There is a well-known though poorly understood correlation between wealth creation (as measured, in macroeconomic analysis, by GDP) and private aviation usage, sales and finance. An accurate understanding of economic reality is paramount to an accurate understanding of the private aviation marketplace. This holds true in the ordinary course and especially so in the throes of epoch-making crisis. In that light, I believe it noteworthy that the closest parallel to the economic fallout that is about to transpire may well be the Great Depression. As such, the high-water mark of the private aviation marketplace is unlikely to be reached again for the next 5 years, at the soonest. In the interim, uplifting exhortations by aircraft manufacturers and other promoters aside, it is (to borrow from Bill Clinton’s recession era election campaign slogan) “The economy, stupid.”
One consequence of the foregoing is that many of the factors that supported stable private aircraft values historically will simply not be present in the medium term. This presents opportunities for both first time and upgrade purchasers. Overall demand for private aircraft ownership remains stronger than one might imagine at the moment, particularly in the United States and for pre-owned midsize and super-midsize cabin aircraft below USD10 million. This is in no small part owing to the fact that flying commercial, even in first class, is viewed with trepidation as an increasingly brutal and hazardous affair – indeed, the increased focus on wellness and safety in favour of private aviation as a protective solution will remain, long after the current health crisis has passed. Private aircraft values were softening pre-crisis and have certainly softened further, though they have thus far not fallen off of any cliff. While it is quite clearly a so-called “buyer’s market” for pre-owned private aircraft, new aircraft prices have thus far failed to rationalise at the same pace – though production rates have reduced, partly in adherence to the law of supply and demand and partly due to force majeure. All private aircraft values will continue to descend, though the trajectory and velocity of the descent is a story that only time will tell.
The battering of aircraft value drops on the balance sheets of private aviation financiers will likely translate into an increased scarcity of financing on favourable terms. Attractive financing will always be available to private aircraft owners with the highest credit flying the newest aircraft. Yet, even for those for whom such economically attractive terms are available, the often complex, intrusive and expensive fandango that is a private jet financing transaction is enough to explain why only a small percentage of the worldwide private aircraft fleet is financed. Still, many astute private aircraft owners have leveraged their previously unencumbered aircraft in order to increase liquidity so that they may pursue opportunities (or hold steady their positions) at a time of crisis. While an array of financing products is available, including sale and leaseback, secured debt (most often backed by personal recourse and, in the case of private banks, requiring sizable assets under management) remains by far the most common option.
It has been said that nothing in life is truly owned. Metaphysics and aircraft title aside, the private aircraft charter, lease and shared usage market has experienced significant growth leading up to and during the current crisis. A range of options present themselves to those wishing to enjoy most of the benefits of private aircraft without the burdens of full ownership. These include joint or fractional ownership, operating leases, hourly charter and flight cards. New ownership models and operation structures will no doubt evolve, introducing more individuals and companies to private aviation, though recent history is strewn with the wreckage of lost investments by those who minded beyond reason the promise of private aviation market disruption in backing would-be private aviation unicorns that were, at best, ahead of their time, despite the rise of the so-called shared economy. Private ownership of private aircraft will always remain the pinnacle of privilege to which most in the marketplace ultimately aspire.
Replete with elaborate rituals of deal making, the secondary market for private aircraft is a particularly lucrative enterprise for layers of intermediaries. Rightly or wrongly, it has long been part of, and is not unique to a game absent any immediate referee. The occasional penetrating gaze of law enforcement and/or judiciary does serve to momentarily correct flight paths, however. Amid the transaction civilities, true diligence is tricky. When private aviation deals (and secret deals within deals) unravel in an acrimonious fashion, the litigation that ensues can be ferocious, unedifying and astoundingly expensive. Indeed, if litigation is the new sport of kings, then private aviation makes for a field of dreams.
Private aviation industry professionals, right down to the attorneys, would be well advised to surrender the thought of business as usual for the time being. Perhaps counterintuitively, a departure from business as usual could in some ways actually better serve aircraft owners. At present, a confluence of factors inherent in an ecosystem that is premised primarily on the notion of airborne opulence and reward for hyper aggressive salesmanship make private aviation a minefield for the very clients which the entire industry orbits and depends upon. The private aviation marketplace can at times best be described by reference to Hobbes’s State of Nature, particularly the descriptors “nasty” and “brutish”. It also has the potential to be a controlled and manipulated marketplace. This all maddeningly goes with the terrain, which features the ubiquitous presence of a kaleidoscopic cast of men and women of renown and ill repute. In an industry that is reluctant to vilify even its worst actors, perhaps the best advice to the unaccustomed is “be advised”.
The “overview effect” that astronauts speak of when they see our planet from afar is instructive for the more terrestrial among us to occasionally take time to survey our own ecosystem. Having just done so above, I conclude that it is the good, bad and ugly idiosyncrasies of the private aviation marketplace that ultimately make it a manifestation of both the spirt of commerce and flight itself. The private aviation marketplace is a proverbial glass menagerie that somehow still functions to serve well the demands of the uncompromising and prodigiously wealthy by building, financing, selling, chartering and operating such mesmerising mechanical birds, ready to fly at their command.