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Your capital may be at risk but can investing in aircraft improve your finances? - by Andy

Posted by Andy on 14 February 2015 at 20:42

When I am not running childrenarewelcome I work for a Peer-to-Business lender which allows people like you and me to invest anything from £100 in aircraft and earn rates of 10% plus. Obviously this is not something for everyone and there are risks involved. You should never risk more than a sensible amount of your savings and most importantly you should make sure that you understand the risks on the different loans.

Anyway, as some of you may know, in my past life I was an investment banker. However, after the birth of number two I decided that I wanted a job that was, well, more interesting. And with better hours so that I could spend more time with the family! After a few conversations with other businesses, I met David, the CEO of Ablrate and we had two major things in common - we both are genuinely interested in alternative finance and we both love planes. In fact, he loves them so much that he had just set up a peer-to-business lending platform allowing private individuals to invest in planes and earn 10-14% per year.

If you do choose to look at the site, you can see how easy it is to invest through a peer-to-peer lender in the UK now. You can sign up and deposit money instantly. Your funds are held in a segregated client account until you invest and we have investors from around the world who see sterling as a "safe" currency and the "UK" as a safe country to invest. It certainly is less volatile than Euros at the moment.

This sounded a bit too good to be true so I did a bit of digging around to see whether it was possible to achieve this without any financial jiggery-pokery. It turned out that it is. I find it fascinating as an industry and as lots of people have asked about my new job, I thought that I would blog about it! We don't just finance planes - we have financed bottling plants and removal crates and have lots more interesting stuff lined up.... but somehow aircraft are just more fun!

Most of the aircraft that we help people to invest in are mid-sized, 2-10 year old and have strong future cashflows from a lease that is in place.

For the planespotters among you, most of what we finance are mid-sized turboprops like ATRs or smaller planes like Twin Otters.

Please do bear in mind when reading this that I work for Ablrate and so am naturally positive about the site. Investments carry risks to your capital. This post is addressing some of these risks but we are always happy to answer in more detail. #investaware . If you already invest through one of the more established platforms like Funding Circle or Zopa then you may well already understand the risks and so you can treat this as an introduction to our site. :) This is NOT a marketing pitch on a specific transaction - it is a general set of answers to some of the questions I get asked commonly by people!

Your capital may be at risk but can investing in aircraft improve your finances? - by Andy - TwinOtterSmall.png

Is a used aircraft a sensible investment?

Forget, for a minute that it has wings. A mid-sized aircraft is basically a bus. It moves passengers from one location to another location.

If you own the bus, you want :

  • The bus to be able to safely complete the journey
  • Running costs as low as possible

If you are a passenger, you want :

  • The bus to be able to safely complete the journey
  • Lower cost fares

Now, if you are looking to buy a bus to operate on a route, you can either buy a new one for £100,000 or a two year old one with a full service history for £60,000… but the fare that you charge is going to be the same whichever it is because there is another bus company on the same route. Clearly, you buy the used bus because you really won’t succeed if you buy the more expensive bus and try to pass it off in higher fares.

The economics of the mid-sized aircraft market trends are the same as for cars and buses. Once that plane completes its first flight, it depreciates sharply. So, as you can see, airlines that buy used aircraft SHOULD be able to make more profit.

Isn’t an older aircraft inherently less safe and more likely to crash?

As long as an aircraft is properly maintained, it should be at no more risk of a malfunction than a new aircraft. Aircraft maintenance is rigorous and regular and is checked by a government agency before a licence to operate is granted. An aircraft’s “useful life” is assumed to be around 25 years by airlines and insurers. Investing in aircraft older than that is something to exercise a little more caution on. Would you be surprised if I told you that the average age of a British Airways jumbo jet is 19 years?! (British Airways Fleet)

Bigger isn’t often better

When an airline is choosing what aircraft to put on a route, it doesn’t choose the aircraft by size, it chooses it by efficiency per passenger. Of the eight busiest airline routes in the world, only one is over 600 miles (List of the world's busiest routes) . Not one of those routes will use a massive A380 or a B747. They all use smaller but more efficient aircraft, like B737s or ATRs. As a result, mid-sized aircraft are always in strong demand, which boosts their value.

Your capital may be at risk but can investing in aircraft improve your finances? - by Andy - ATR TakeoffSmall.png

Leased Aircraft

As strange as it seems, many airlines do not own most of their aircraft. They lease (rent) them. This saves them having to pay a huge amount up front. Our clients own the aircraft and rent them out to the airline for 3-5 years. They receive a rent and keep ownership of the aircraft. The airline pays for servicing, crew etc. Our client knows how much money that they will receive each month from the airline and can afford to pay that in interest to our investors in return for the loan.

What happens if the airline stops paying?

Simple. We contact the airline and if they are unable to pay we can approach their local regulator (ie. The CAA in the UK) and de-register the aircraft, meaning that it can no longer be used by the airline. We will then re-possess it and lease it to someone else. This is all clearly set out in the contract as well as by international convention. In actual fact though, many of our aircraft are leased out to government-owned airlines who have a strong track record of paying on time.

What if something happens to the aircraft? All of our clients are required to ensure the aircraft up to their full value. However, given the regular maintenance of an aircraft, significant problems are very rare.

How do I get my interest and capital back?

In a typical situation, our client is receiving a pre-agreed lease fee every month and interest payments are made out of this. At the end of the lease, we can either sell the aircraft or re-lease it out and take a new loan. Either way, investors get their capital back on schedule.

What other protection do I have? In most of our transactions, the revenue from the aircraft lease is ring-fenced. As security, the investors from Ablrate not only have the value of the aircraft, but also have access to the pool of money before the aircraft owner gets paid out. Aircraft values can be predicted for years in advance by an independent agency and as part of our process, we check that the aircraft value at the end of the loan is high enough to repay investors. If you have a query on a particular deal, you can always ask us for more detail on the cashflows.

Investors in these loans are not protected by the FSCS and this should always be remembered.

How often do we have new opportunities for investors?

Your capital may be at risk but can investing in aircraft improve your finances? - by Andy - ablratelogo.png
We often have deals on the platform and e-mail people when a new one comes up. There's an aircraft loan currently funding on there at the moment paying 11% for 3 years that is fairly typical of our transactions. If you want to find out more, then head over to Ablrate and have a look around and if you have any questions then feel free to ask! I am always happy to receive emails at my work e-mail address.

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