Purchasing a private jet is a major strategic decision for aircraft operators and corporations. Depending on your mission, a business jet can mean a significant unlock for your business and seeing it as a return on time as opposed to an expense will help you in your decision making.
This article is designed to guide you through the process, covering everything from jet categories to key financing structures and critical financial terms.
Understanding the Categories of Business Jets
Private jets are categorized based on major differences in their acquisition price, operating costs, and overall financing considerations. Different lenders have different specialties depending on their size, structuring, and appetite for risk. If you’re interested in a more cost-efficient solution, check out our guide on turboprop financing.
| Jet Category | Passenger Capacity | Typical Range | Example Aircraft |
| Very Light Business Jet | 4 to 6 passengers | ~1,000 nautical miles | Cirrus SF50 Vision, Embraer Phenom 100, Cessna Citation M2 |
| Light Business Jet | 4-8 passengers | ~2,000 nautical miles | Cessna Citation CJ4, Pilatus PC-24, Embraer Phenom 300 |
| Midsize Business Jet | 8-12 passengers | ~3,000 nautical miles | Cessna Citation XLS series, Embraer Praetor 500, Learjet 75 |
| Super-Midsize Business Jet | ~12 passengers | ~ 3500 nautical miles | Dassault Falcon 2000, Cessna Citation Longitude, Gulfstream G280 |
| Heavy Business Jet | Up to 19 passengers | ~5,000 nautical miles | Dassault Falcon 900, Bombardier Challenger 600 series, Gulfstream G500 |
| Ultra-Long-Range Business Jet | Up to 19 passengers | 6,000 to 8,000 nautical miles | Dassault Falcon 8X, Gulfstream G700, Bombardier Global 7500 |
The Total Cost of Ownership: Beyond the Purchase Price
New owners and operators must recognize that purchasing an aircraft is a financial commitment. They come with expenses that should strongly be considered. These expenses vary based on the aircraft’s size, age, and utilization. For example, light business jets typically have lower expenses compared to ultra-long-range jets, which fall on the higher end of the cost curve.
The main costs include:
- Operating Costs: As a percentage of total budget, operating costs are usually the largest line item expense. Generally speaking, direct operating costs cover This covers:
- Fuel: Can constitute nearly 50% of the aircraft’s total operating expenses.
- Crew: Salaries and training, which can vary greatly, especially for larger aircraft requiring multiple, specialized pilots.
- Insurance and Hangar Fees: Often times included in a management agreement, hangar fees and insurance are fixed fees that do not vary depending on hours flown
- Maintenance and Overhaul: Long-term requirements for engines, landing gear, or airframe components, often based on specific inspection intervals. These can cost hundreds of thousands of dollars. Many owners utilize maintenance programs to manage this cost, which is a factor in financing.
- Fixed Administrative Expenses: Costs such as management company fees, accounting, or dispatch support. These are particularly important for larger jets conducting international and multi-crew operations.
There are many tools to calculate your total cost of ownership, with one of the market leaders being Aviacost.
Do I Need an Engine Program if I’m Going to Finance an Aircraft?
More than likely, yes, you will need an engine program to finance an aircraft, though this is not always a strict requirement. Lenders need assurance that the aircraft’s value will be preserved over the life of the loan. A lot of value is held in the engines of a business jet, so keeping those with as strong of a residual value as possible is important. That said, you do not always have to have an aircraft on engine programs, but your interest rate will likely be higher and the amortization will be shorter. Your two choices are an Engine Maintenance Program (like JSSI, ESP, or Rolls Royce Corporate Care) or creating a DIY engine program via an escrow account at the lender who holds the note.
- Engine Maintenance Programs: These are preventative measures that allow owners to budget and control for long-term maintenance and overhaul requirements. By enrolling in a maintenance program, owners opt to pay a predictable fee per flight hour, which covers major overhauls and unplanned engine repairs, thus mitigating financial risk for both the owner and the lender. The downside is the Time Value of Money equation often works out in the favor of the program holder.
- Alternative Option (Escrowed Account): If a jet is not enrolled in a full maintenance program, the lender may require the borrower to establish an escrowed maintenance account. This account is held with the lender and acts as a “DIY” engine maintenance account. The borrower contributes regular payments (often on a per-flight-hour basis, settled up monthly) into the account, ensuring that a reserve fund is available to cover inevitable major maintenance events, thus protecting the aircraft’s value and the lender’s collateral.
Key Financing Structures for Business Jets
The choice of financing structure is determined by several factors, including the buyer’s financial profile, tax strategy, and the type of aircraft being purchased.
1. Traditional Aircraft Loan
This is one of the most common options.
- Source: Typically offered by banks or aviation-specialized lenders like Prestige Aircraft Finance.
- Terms: Often feature competitive fixed or variable interest rates, flexible amortization terms with a standard of 15 years but up to 20 years, and can finance both new and pre-owned aircraft.
- Benefit: Lenders may offer financing packages with low down payments.
2. Operating Lease (True Lease)
In this structure, the lessor retains ownership of the aircraft, and the lessee pays for access through fixed monthly payments.
- Popularity: Very popular among corporations or owners with aircraft fleets.
- Benefit: Reduces upfront costs and provides balance sheet flexibility. Very popular with publicly traded companies to avoid a fleet of corporate jets on their balance sheet.
3. Finance Lease (Capital Lease)
Often described as a blend of a traditional loan and an operating lease.
- Structure: The lessor typically holds the legal title, but the lessee assumes the benefits (including tax benefits) and responsibilities of ownership.
- Appeal: Attractive to operators seeking tax advantages or those who want to spread payments over time with the option to purchase the aircraft at the end of the lease.
Critical Financial Concepts in Business Jet Financing
When securing a loan or lease for a business jet, three terms are paramount to understanding the overall cost and risk: Interest Rate, Amortization, and Loan-to-Value (LTV).
Interest Rate
The interest rate is the cost of borrowing the principal amount. It is a critical component that calculates the total cost of the loan over time.
- Fixed Rate: The interest rate remains locked for the life of the loan, offering predictable repayment and amortization. This supports long-term cash flow planning but locks you into the current rate.
- Floating (Variable) Rate: The rate adjusts periodically based on changes to an underlying benchmark index (like the Secured Overnight Financing Rate or SOFR). This can be advantageous if rates fall, but it carries the risk of increased payments if rates rise, which can strain cash flow.
Amortization
Amortization refers to the process of paying off the principal amount of the loan over time, typically through regular installments.
- Period: In aircraft financing, the loan term (the time you have to pay) and the amortization period (the rate at which the principal is reduced) are often not the same.
- Balloon Payment: It is common to have a shorter loan term, typically 5-7 years, with a longer amortization period, typically 15-20 years. This results in a balloon payment due at the end of the shorter term.
- Benefit: Extending the amortization period lowers current periodic payments, which reduces the borrower’s cash-flow demands during the loan term.
- Tip to borrowers: ensuring that the amortization and the real depreciation of the aircraft are aligned ensures a pleasant end-of-term experience. This retains the owners positive equity position in the plane over the life of the loan.
Loan-to-Value (LTV)
The LTV ratio is a percentage that compares the principal amount borrowed to the appraised or agreed value of the aircraft. Loan to value is oftentimes calculated based on the purchase price or appraised value, whichever is less. It is expressed as a percentage with the calculation:
LTV = Loan Principal Amount/Aircraft Appraised Value * 100
- Common Range: For recourse loans, the LTV is typically between 75% to 80%. This means a down payment of 20-25% is often required. For nonrecourse loans, the LTV is typically less at 50-75%.
- LTV Maintenance: Some lenders require a collateral true-up structure, which gives them the right to demand prepayment of a portion of the loan’s principal to maintain a specified LTV ratio if the aircraft’s value drops. This is typically tested either quarterly or annually, but is not required by every lender.
- Impact: A higher LTV (meaning a smaller down payment) may be possible with a personal guarantee (recourse loan) or with a strong relationship with the lender.
If you would like to calculate how these factors in business jet financing interact with each other, we have created a simple aircraft finance calculator for you to use.
Structuring the Right Loan for Your Transaction
Prestige Aircraft Finance offers debt advisory services that ensure that your structure is most optimized for your financial goals. We work with a network of lenders to ensure that you get the most competitive financing for your goals. We understand the nuances of business jet financing and can help you navigate the process. Reach out to our team today to schedule a consultation to discuss your upcoming business jet purchase, and see how we can help.