German credit institutions have been heavily involved in aircraft financing since the 1980s. In March 2009, the Aircraft Pfandbrief became available to Pfandbrief banks as an additional funding instrument for aircraft financing.
Civil aviation is closely tied to macro-economic trends and is very cyclical. Previous crises in aviation notwithstanding, the aircraft industry is a growing market in the long term. This positive forecast is mainly attributable to two aspects:
- A rising population and economic growth, particularly in Asia (China, India, Singapore, Malaysia), and
- Increasing demand for more modern, efficient aircraft (reduced weight, improved aerodynamics, optimal fuel efficiency).
Aircraft financed by Pfandbrief banks can be divided into four classes:
- Wide-body aircraft, such as the Boeing B747 and the Airbus A380, which are used for long-haul and intercontinental flights,
- Narrow-body aircraft, such as the Boeing B737 and Airbus A320, which are used for short- and medium-haul flights, i.e. primarily on intracontinental routes,
- Regional jets and turboprop aircraft, which are used for short-haul flights, particularly for handling feeder traffic. Important manufacturers in this segment include Bombardier (Canada), Embraer (Brazil), and ATR (France/Italy), and
- Cargo aircraft, which are generally special versions of the larger Airbus and Boeing aircraft models.
Because of their high degree of standardisation and nearly uniform safety regulations, aircraft can be used in a flexible manner. If an operator requires a certain type of aircraft, potential sellers can be found quite quickly, and the aircraft can then be modified to meet the buyer's needs without a great deal of effort. The buying and selling of used aircraft is an important market, and the process usually takes one of three forms:
- Aircraft as a true commodity: Some market participants – particularly large leasing companies – buy aircraft with the intention of selling them for a profit in the short to medium term.
- Fleet restructuring: Airlines introduce new routes or abandon existing ones, or they expand or reduce their capacities.
- Restructuring or liquidation of airline companies.
Certain requirements need to be met in order to be able to fund aircraft loans by issuing Aircraft Pfandbriefe. First, an aircraft mortgage is needed. In addition, the law sets a mortgage lending limit and specifies certain loan terms. Finally, sufficient insurance coverage has to be in place. In detail:
Aircraft eligible for mortgage lending
- Pursuant to section 26b (1) of the German Pfandbrief Act (Pfandbriefgesetz, PfandBG), mortgage lending is limited to aircraft within the meaning of section 1 (2), sentence 1 of the German Aviation Act (Luftverkehrsgesetz, LuftVG) – i.e. aircraft as they are commonly understood – that are recorded in a public register. Aircraft are a sub-group of “air vehicles” (Luftfahrzeuge) as used in the LuftVG. Pursuant to the German Aviation Licensing Regulation (Luftverkehrs-Zulassungs-Ordnung, LuftVZO), they have to be recorded in the Aircraft Register at the time they are licensed for flight operations. The Aircraft Register is the official list of all aircraft licensed for operation in the Federal Republic of Germany. An aircraft may not be recorded in the Aircraft Register if it is recorded in another country’s aircraft register.
- Only those loan claims that are secured by aircraft mortgages (recorded liens under section 1 of the German Act Concerning Rights in and to Aircraft (Gesetz über Rechte an Luftfahrzeugen, LuftFzgG)) or by comparable foreign aircraft mortgages are eligible as cover for Aircraft Pfandbriefe.
- Pursuant to section 1 LuftFzgG, an aircraft may be encumbered with an aircraft mortgage only if it is recorded in the Aircraft Register. A mortgage comes into effect by agreement and after it has been recorded in the Register of Aircraft Liens, which is maintained at the Local Court of Braunschweig.
- The collateral provider's consent to the recording must be demonstrated in officially authenticated form. The aircraft mortgage is strictly accessory, i.e. it may be assigned only together with the claim, and it becomes void when the claim is satisfied. Contractual assignment of the claim requires agreement between the previous creditor and the new creditor, as well as recording in the mortgage register.
Mortgage lending limit
- Loans may be included in the cover pool for an Aircraft Pfandbrief only up to 60% of the aircraft's conservatively determined mortgage lending value.
- Financed aircraft must be insured to at least 110% of the outstanding loan claim throughout the entire term of the loan. Common types of insurance cover for aircraft include aviation liability insurance, aviation hull insurance, and aviation hull insurance with cover for war risks.
Loan claims under aircraft financing may be included in cover for an Aircraft Pfandbrief only after the aircraft's mortgage lending value has been determined. This value must be ascertained by an independent professional appraiser, who must have the requisite professional experience for this purpose, as well as the requisite specialised knowledge for determining aircraft mortgage lending values (section 26d (1) PfandBG).
The valuation of aircraft is handled by specialised appraisal firms that have worked on the market for many years. Most of their appraisers are members of the International Society of Transport Aircraft Trading (ISTAT). ISTAT establishes uniform valuation standards, as well as standards for appraisers.
In determining value, the focus must be on the aircraft’s long-term features, and its market value may not be exceeded. Speculative elements may not be taken into consideration in determining value (section 26d (2) PfandBG).
The procedure for determining the mortgage lending value is set forth in the German Regulation on the Determination of the Mortgage Lending Value of Aircraft (Flugzeugbeleihungswertermittlungsverordnung, FlugBelWertV), which entered into force on 15 May 2009.