The President’s Corner
Dorr’s President, Robert Howe, shares his viewpoint on everything related to General Aviation. Working with industry leaders, aviation lenders and pilots, he has a unique perspective on aircraft lending and the aviation market.
2020 Wrap Up – Chaos and Uncertainty
2020 has been an unprecedented experience for all of us. High expectations followed by chaos, uncertainty and then more uncertainty followed by more chaos. The aircraft finance industry has followed along the same path, but mostly, it has been an excellent year with regards to rates, availability of cash and the lenders willingness to participate in the light Jet, Turbine and Piston lending markets. This has translated into growing aircraft finance activity in what should have been a slowing market.
Covid has proven to be a difficult problem to overcome, with conflicting information from the “scientists”, the politicians and the press. We are told that we need a mask mandate like in many European countries by the press and politicians that seem more interested in sowing division rather than providing useful information. We are currently going through a spike in cases, but so is Europe and in many areas, are far worse off than here in the states. Sweden on the other hand, is also suffering in this worldwide spike, but is one of the lesser impacted countries in Europe. If you remember, Sweden did not have any lockdowns, nor did they call for a mask mandate. Conflicting information and conflicting results.
Of course, the election is also following the same pattern; chaos, uncertainty followed by more uncertainty and more chaos. From the Russian hoax to the impeachment to fake polls to threats of violence and unrest to the “blue wave” to an election too close to call with allegations of fraud and malfeasance, to one candidate being selected by the press and hoisted upon us. “See you in court” appears to be the catch phrase. Hopefully, all this uncertainty will be resolved shortly. More conflicting information and more chaos.
The aircraft finance industry also followed this very same pattern. What started out as a very promising year with an exceptionally strong economy and aggressive rates became a quagmire of unpredictability as banks wrestled with the shutdown and the ensuing uncertainty of the impact of that shutdown. There was the specter of the economy crashing and across the board delinquencies and a stock market crash. The lenders’ concerns cannot be over emphasized. Banks responded with unsolicited offers of loan deferments in hopes of assisting borrowers through uncharted waters. The results were unspectacular, to say the least, as less than ½ of 1% of our current portfolio decided to take the underwriters up on their offer. Borrowers continued to pay their debts, the phones kept ringing and applications continued to come in. It was as if our clients and aircraft buyers, as a whole, decided that they simply did not choose to participate in the crises.
In the Dorr Aviation office, we observed the state mandate of working from home. The dire concerns of having enough business to sustain a small office were real, but the consequences remain unrealized. As soon as the mandate was amended, we initiated staffing up within the acceptable safety guidelines and in short order we were at full staff.
Historically, aircraft loan activity during presidential election years tends to drop off mid-summer as the campaigning season heats up. This year, with all the political unrest, the artificially depressed economy and the turbulent election season, we have benefitted from a robust aircraft sales market. The slow-down, long anticipated by the shutdown and resulting fall in GDP and rising unemployment simply failed to materialize in our market.
With slowing economy, coupled with the Covid environment, one would typically assume conventional wisdom for a slowing of demand, an increase in inventories and lower prices. This is exactly the opposite of what transpired. Low interest rates and increased demand were and are a huge driver in the market as well as a desire for normalcy. We found that the lenders, though cautious, were hungry for our business. As aircraft prices rose from the demand, interest rates have held steady. This has translated into a 20% increase in business so far this year and we still have the year end rush to look forward to.
Dorr Aviation is busy, very busy. So busy in fact that we have added to our staff and are looking to further expand. The banks remain solid players in the market and seem to be looking past the Covid and economic crises. At least for now.
As I sat down to write this on Veterans Day, I am brought back to the overwhelming gratitude I have for our Maker for the blessing of being born into the greatest country in history. A vaccine will soon be available, the Covid crises will pass, the election will be settled, and the sun will continue to rise in the morning. The aviation finance industry is healthy and robust. Rates are aggressive and GA pilots continue exercise their freedom and we are here, as always to assist.
General Aviation Remains Healthy Despite Mandated Shutdown
Many of my clients have asked me how the market has responded to the global pandemic and specifically how the aircraft finance market has been impacted. From the first instance of hearing the rumors, miss-information and the eventual truth of the emerging virus in Hunan, questions of the extent of the potential spread of this highly potent contagion whispered in the minds of many. As the news of the covid-19 virus’s devastating impact on the people of Hunan and seeing the draconian efforts of a tyrannical authoritarian government of China to stop the spread of both the disease and information pertaining to it, many in government and in business took note. As we have seen, efforts to contain the ChiCom Flu have proved to be largely unsuccessful as the revenging impact crept across Europe, the Untied States and eventually the entire world.
The limited but growing knowledge of the virus has lead governments across the globe to shut down their economies and issue “shelter in place” orders to help stem the spread and “flatten the curve”. Questions are being raised that no one previously could have imagined. Is your job “essential”? Am I putting my family at risk by trying to feed them? As day to day commerce ceases and supply chains are compromised, the fear of the virus is giving way to the stress and fear of losing the ability to provide for our families.
As the mitigation efforts have been successful in “flattening the curve” and the infection rates appear to have peaked, the pressure on governments to reopen the economy grow. Citizens through out our country are eager to get back to work and reestablish their lives as best they can. This pent-up demand should allow the economy in the coming months to gradually grow in momentum and intensity and by 4th quarter many are predicting robust growth.
Throughout the last three and a half months, Dorr Aviation has been surprisingly busy. As it became clear that our state government would require us to either shut down or work remotely, our concern was focused on keeping our families healthy and felt that the interruption to business would be short lived. As we established our routines of working remotely, we anticipated a slowdown, “the phones” would stop ringing and loan production would suffer. Much to our profound surprise, we have discovered the opposite to be true. We found that by working remotely we were missing calls and inconveniencing our clients and potential clients as well as missing the opportunity to speak to the real driver of our aviation market place.
A healthy percentage of our business continues to be generated by savvy aircraft owners who are eager to take advantage of the fed’s recent moves at holding borrowing costs down to help stimulate the economy during this self-induced slowdown by refinancing their current aircraft mortgages. Owners can save significantly by lowering their rate anywhere from a half to two percentage points in the current market. These current offerings are on top of already outstanding rates. Prior to this current crisis, rates were as low or lower than I have ever seen them in my 31 years of making aircraft loans at Dorr.
As the continued opportunity created by the lower rates was certainly expected, we are pleasantly surprised by the high activity of aircraft purchases we are participating in during this period. Purchase money has been borrowed by our clients on the whole range of aircraft, from Skyhawks to Bonanzas from 310’s to 421’s from Conquests to King Airs from Citations to Phenoms. The biggest issues we are finding is that our clients are sometimes having difficulty finding mechanics and facilities to perform prebuy inspections. Since March 1st, a full 87% of our transaction have been purchase money loans. This is clearly a sign of the optimism that so many Americans have about their future, our economy and the resilience of the American spirit.
This optimism has been shared and promoted by our partner underwriters and lending institutions. When so much of the lending business is either government supported (PPP, et al) or the refinancing of current business, our partners are encouraged by the steady stream of “new business”. Many lenders have also been aggressive in support of their current portfolios and are cognizant of the potential impact of the shut down may have on individual customers. These institutions have been bold in offering rate modifications to clients in good standing to easily lower current contract rates and many have even offered temporary forbearance of payments from 60 to 180 days. Surprisingly, few have taken the lenders up on payment forbearance.
When this crisis began, the unknowns were great. As our government started to respond to the threat to the health of their citizens, many were concerned that the “cure” would be worse than the disease. So far, the cure has been quite painful, but we have flattened the “curve” and it appears that the worst of the disease is behind us. As the economy slowly re-opens, we are anticipating growth that reflects the pent-up demand that is an outgrowth of the artificial recession created by the mandated shutdown. This anticipated growth will make fourth quarter and next year a great opportunity to restore the millions of jobs lost because of the Hunan Flu. Although the information that I have presented is anecdotal (as it is only of reflection of what I have witness in my company), the optimism it reflects should help carry our economy forward to new heights. From my observations, aircraft lending and GA is quite healthy considering the what might have been.
GA Prices Rising, Sales Gaining Momentum
Success in lending on the acquisition of a piston aircraft depends primarily on two important aspects.
Of course, as in all lending, the first is finding borrowers with outstanding credit, strong liquidity and cashflow. The is fairly self-explanatory. Lenders search out clients that have sufficient cash on hand for the down payment, usual expenses and then some. Each underwriter has their own matrix that they require a borrower to confirm to that leaves the borrower in a comfortable cash position after the purchase. Cash flow means the borrower makes sufficient money each month to allow for unburdensome payment to the borrower. Every lender wants the borrower to have the character and financial history that compels them to the monthly payment in a timely and consistent fashion.
To read more of the article, visit Aviation Digest’s page.
Bob’s editorial in Aviation Digest’s June issue
As it has been reported all over the media, the US economy is starting to gain steam under our new president. Most of the key indexes are showing movement in the right direction, including unemployment, labor participation rate, housing prices, consumer and business confidence. This is certainly great to hear after almost a decade of bad economic news.
The unemployment rate dropped to 4.4% in April as the Bureau of Labor Statistics reported an increase of 211,000 in payroll employment. Jobless claims are at a 17-year low. The Labor Participation Rate seems to have bottomed out in September of 2015, and hopefully as the economy heals, more people will enter the work force and be able to find gainful employment. Consumer and Business confidence levels have soared since the election. All this is very welcome news!
On the political side, the House has passed a replacement for the structurally unstable and expensive ACA. If the plan, once reconciled against a promised Senate bill, can rein in costs and make healthcare and insurance affordable, the economy and the federal budget will correspondingly respond. According to a recent LA Times story, President Trump has promised to overhaul the current tax code and has started the long roll back of suffocating and over reaching regulations in a number of industries.
For lenders, these economic indicators are very encouraging to the potential of what the fiscal year could bring to the table. Many, if not most lenders I have spoken to are confident and that confidence is not necessarily born of all this good news, but from the actual increase in activity. Across the aircraft finance industry, most of the people I have spoken to are adjusting to the increase in activity. For our part, Dorr Aviation has had a spectacular first quarter, nearly doubling last year’s first quarter production. As I had stated in a previous offering, all the good news will inevitably lead to an increase in finance rates.
The rates we are offering at Dorr remain as competitive and aggressive as I have seen in 30 years of aircraft financing. However, the inescapable is starting to press the market. At this point the rate pressure has been very small for the most desirable clients and aircraft. New and newer Bonanza’s, SR22’s, 206’s, et. al. still demand rates in the mid to upper 4’s for terms to 20 years. The market that seems to be experiencing the most upward pressure are the aircraft that were manufactured more than 30 years ago. These rates have seemed to increase anywhere from 25 basis points to 75 basis points.
Be sure to keep these rates in perspective! At the height of the economic expansion in 2007, the average retail loan rate was 6.883%. Today, it is 4.776%. It is clear that rates are still at historically low levels and it may be time to take advantage of these rates before prices start to respond in similar ways to all of this great economic news.
The last several years have not been kind to the aircraft finance market. The number of aircraft loan opportunities had declined drastically as borrowers were feeling the pinch of a contracted economy. With historically low consumer confidence, high taxes and burdensome regulations, small businesses and consumers had taken a hiatus from aviation financing. Consequently, the months following the economic collapse and its fall out were painful for many in the aviation finance industry. The comeback has been very slow. Historically speaking, the recovery is the flattest in history. We have seen the average growth rate at an anemic 2.1% in the last 8 years. There were several managers in the market that would remark to me “We are having a great year!” I would smile and think to myself, “compared to what?” Sure, 2014 was better than 2013 and 2015 was better still… Last year was a good year for my company as well; if you compare it to the production of years 2010 through 2015. In fact, 2016 was a great year, unless you compare it to the production of each of the years from 1997 through 2009!
As Alexander Pope’s poem “An Essay on Man” proclaims “Hope springs eternal in the human breast!” We have seen a market increase in activity since November 8. It is clear to me that the activity is directly related to the outcome of the very contentious and raucous election. Small businesses and consumers are confident that the new administration will be addressing three of the big drags on the economy; Obamacare, taxes and regulation. This confidence translates into economic activity.
With this new confidence in the economy, there has been another result that consumers who are looking for financing may not like as much. The inevitable rise in interest rates has arrived. Since November 8, mortgage rates have climbed as much as 70 basis points. Historically, these rates are still extremely low. But if you are interested in taking advantage of these rates, the time may have arrived that you should consider moving forward with your purchase, refinance or upgrade. Fed Chairman Yellen has announced that she expects 3 quarter point rate hikes in 2017. Kiplinger’s forecast calls for 30 year mortgage rates to rise to 4.60% in 2017.
The lending environment is good and the banks are anxious to grow their consumer portfolios. There is still some “economic collapse hangover” carrying forward with some senior lenders. As we have all seen, post collapse regulations, lenders’ fear of recriminations and over caution has many lenders buried in indecision and regulatory paperwork. This translates into a slower approval process and sometimes gratuitous and redundant paperwork. But in the end, the good deals get done.
I am looking forward to another “good” year with the hope that production levels approach that of the early 2000s. Our underwriters are all looking to expand their portfolios and some have promised to beef up their departments in anticipation of increased activity. Some have even promised to try to streamline some of the burdensome paperwork. I look forward to the time when my friends exclaim “We had a great year!” and know that truly it was a great year!
Having been in aviation for almost 30 years, I have been asked on occasion to comment on the current “state of the market”.
The market I participate in is the piston, turbine and small jet finance market. If I would have been asked to comment on the market in 1993, 2000, or 2007, I am confident that I would have given a concise and accurate summary and aptly described how specific factors impacted day to day lending. Sadly, since 2008, the hard lessons learned don’t seem to apply and the last several years have been ones of steady, yet lackluster growth. This year promises to be more of the same, more of the “new normal”.
In the “good old days”, low fuel prices, low interest rates and low unemployment would mean that the economy was healthy and business was good. As the economy would heat up, the interest rates would climb, fuel prices remained stable and business would start to slow. The inverse would happen once the economy turned sluggish and business would happily continue on that course with the net effect of healthy sustained growth and profitability. Those same basic rules no longer apply in today’s feeble economy.
It is rather obvious that a strong economy is the key to most every industry’s success. Very few industries find refuge in a sluggish economy. My business is similarly dependent on a strong and vibrant economy. More directly, a large portion of my clients and a large portion of aircraft owners are small business owners, entrepreneurs whose livelihoods are a microcosm of the economy as a whole. When they struggle, the aviation market struggles.
What normally would help accelerate the economy, low interest rates & low fuel costs, seem to have no perceptible impact. Our current economic malaise is reflected in a sub 2% annual growth rate. Our economy is suffering through the lowest labor participation rates since the late 70’s, and median incomes are down approximately 4% in just the last 8 years. Quantitative easing may have stopped the economy from slipping into a depression, but it has also stalled the lively expansion that historically comes after a serious recession.
All of the economic activity that has yet to unfold has the Federal Reserve Chairman tinkering with rates as her “confidence” in the economy has given way to concerns of “no inflation” according to the minutes of the Fed’s December meeting, which were recently released. The confidence remarks were made at the press conference after the decision to raise its benchmark rate by .25%. The notes of this meeting appear to bring into question the wisdom of the Feds decision to act. The monetary policy seems to have had little effect and has run their course.
Concerns that China, the world’s second largest economy, is sliding into recession have the markets jittery. How this will impact the economy is yet to be seen. Of greater concern is the strong dollar, which makes US products more expensive for our trading partners to import. With the dollar at a 12 year high, economists at the Fed estimate that this alone has cost our GDP .5% growth.
It is apparent that the current administration does not have any fresh ideas to help unleash the markets. Fiscal policy has had a record, on occasion of igniting economic activity. It would make sense to some to unleash the drivers of our market, the US consumer. In the past, lowering marginal tax rates and cutting corporate tax rates have had the beneficial effect of accelerating the economy. Putting money into the pockets of the wage earners and giving business confidence would certainty improve the market. The down side of course is that it also drives the debt as our elected officials have very little political courage to curb spending. For the next year at least, don’t count on the economy rebounding, median incomes going up or labor participation rates improving…
Given these circumstances, the state of the aircraft finance market is as strong as can be expected. We anticipate continued measured expansion with rates staying relatively low, employment markets continuing to grow, the energy market and aircraft prices remaining flat. This guarded optimism is driven by a stable yet slow economic growth. The one element which seems to be the constant regardless of the economy, interest rates and fuel costs is the passion that aviation rouses. There will always be people who are motivated by the liberty and adventure that comes with flight. These are the people who are the heart and soul of this industry and the state of their passion is unwavering.
As Fall presses onward towards winter, it is an opportune time to look back at how this year has fared and where we think the GA finance market for prop driven aircraft will go in the near future. One would think that with interest rates at historic lows and fuel prices stable, this market would be having a resurgence.However, based on the data that we see in our office, the prices on prop driven aircraft have remained steady. It appears to continue to be a buyers’ market, with business being stable, no dramatic upswings in pricing and no down swings in dealer inventory. The number of transactions we are experiencing is about the same as last year and slightly up from the 2013 levels. Our rates and terms have remained steady with little upward or downward pressures since well before the beginning of the year.
It seems that whenever I turn on Fox Business News, I am being told that the Fed has again stated emphatically that interest rates will be rising at the very next Fed meeting. It is telegraphed by the Fed Chairwoman Janet Yellen that the economy is strong enough to raise interest rates to “normal” levels. Yet after each Fed meeting one of the “Governors” dutifully trots out and says “we really think that at the next meeting we will raise rates because the economy is so strong”…
The Fed usually uses rate adjustment as its first tool in fighting inflation. When the economy heats up, prices go up and the value of money goes down. By raising rates (the cost of money) the Fed hopes to damper demand and slow the economy to acceptable levels of inflation.
In 2008, the Fed put the “Benchmark Interest Rate” at near zero to stimulate the economy. After 7 years, we see that the labor participation rates are at 38 year lows, the economy is slouching along in the slowest recovery recorded and GDP for third quarter is at “the new norm” of 1.5% annual growth rate. All the while, inflation is floating around 1.7%. The Fed gambles that raising the rate, even slightly could pour cold water on the luke warm recovery.
I am no economist and I could very well be misreading the tea leaves, but I believe there will be no rise in interest rates until well after the New Year. I also believe that with a federal government that is bent on recasting our economy to one that is more centrally controlled through regulatory expansion and tax policy, we will continue to slouch forward at anemic intervals for the next year and a half.
What this translates to our customers and potential customers is simple… It will continue to be a buyers’ market with stable prices and low rates. So get ’m while they’re hot!
“To the American People: Christmas is not a time or a season but a state of mind. To cherish peace and good will, to be plenteous in mercy, is to have the real spirit of Christmas. If we think on these things, there will be born in us a Savior and over us will shine a star sending its gleam of hope to the world.” ~Calvin CoolidgeIt is also the season when many look back and reflect on the blessing of the past year and offer thanks to our creator. From a business perspective, the year has had many ups and downs. We continue to see that the economy is performing in fits and starts. One quarter up, the next down. The aviation market seems to be holding its own, with many sectors finally appearing to recover. The aircraft lending market is also showing signs of life as interest rates remain low. However, as the economy improves and the Fed has discontinued “quantitative easing” look for rates to start to creep up over the next several months.
All in all, this has been a good year here at Dorr Aviation. We have added a wonderful new employee to our team, one of our long-standing employees is semi-retiring to Florida within the week, and we have redesigned our website, to name a few of the highlights from 2014. We are thankful for all of our blessings and particularly for our customers. We are truly appreciative for the opportunities you have given us and the confidence you have shown in us. We look ahead with optimism for a prosperous 2015.
“Welcome to the updated Dorr Aviation website! We have needed a face lift for some time now. We wanted the new look to reflect not only an evolving market, but also our core beliefs and CEO & Founder, Mel Dorr’s love of aviation. It was this passion for aviation that drove Mel into this business as a teenager in the 1950’s.Mel started flying for the “Nantucket Flying Service” as a charter pilot at the age of 17. After graduating from Brown University, Mel was commissioned an officer in the Air Force and was stationed in Montana at an early warning radar station. During his time in Montana he bought and sold aircraft across the country. Upon his retirement from the service, Mel came home and opened “Dorr Aviation” at the Marlboro Airport in Massachusetts. Mel continued to buy and sell used aircraft and along the way became a Cessna, Piper and Bellanca dealer. In 1963, through an affiliation with the Framingham Trust Company, Mel set up the financing for a client’s purchase and started financing the sales of his aircraft. In 1973, with Framingham Trust’s profitable and growing portfolio of aircraft paper, Mel started financing other aircraft dealers’ sales as well. In 1983, Mel stopped selling aircraft and Dorr Aviation became strictly an aircraft finance company.
In 1988, I joined Dorr Aviation as a loan officer and we grew from a single office at the Marlboro Airport (9B1), to offices in Texas, Minnesota, South Carolina, California, Florida and eventually we built our current office space in Oxford, Massachusetts. With the crash of 2008-2009, we down-sized to stay ahead of the power curve and survive as an organization in the tumultuous market. Currently we operate out of a single location in Oxford with a lean crew of 5 aviation professionals.
Over the years, Dorr Aviation has originated well over 10,000 aircraft loans in 49 states. We have financed Cubs, King Airs and Citations. All of our loans are closed through bonded escrow agents to ensure that there are no title or paperwork glitches so you can be confident that at the end of the day, the aircraft is properly documented and registered. We concentrate not only on fine customer service, but aggressive pricing and terms.
Take a look around our new website. We hope you enjoy it and come back to it often for updates and news. We look forward to a bright future in General Aviation and continuing to work with pilots to make their airplane ownership dreams a reality. We hope our passion for aviation is reflected in every communication you have with us, after all it’s the backbone of the 50 year history of Dorr Aviation. If you have any questions, please give us a call and find out why we continue to be the most experienced and most trusted name in aircraft financing.”