GSE Financing: Finding the Capital

posted on 6th April 2018

Airside talks to Neil Bennett – Divisional Vice President, aviation at Somerset Aviation Capital – about how his company can help GSE operators not only fund their equipment leases, but manage their whole GSE fleet life cycle3. AS_Aut15 - Finding the Capital_1

Somerset Aviation Capital has numerous airlines, fixed base operators (FBOs) and maintenance, repair and overhaul (MRO) companies as part of its aviation sector client base but, right now, handlers represent the most dynamic source of demand for leasing funds, Bennett explains.

These customers are not just looking for funds, they are looking for expertise. Thus, for example, while most of them will already have their preferred equipment vendors, Somerset is “perfectly capable of finding a vendor if required, or finding an alternative and more suitable vendor that the customer might not yet be aware of”.

Key to Somerset’s offering in this regard is Bennett’s own background and skills. He was previously a ramp manager, and has many years of experience of working with GSE – old and new, owned and leased. While Somerset has many financial experts, he brings experience and knowledge of GSE use and fleet management.

Perhaps because of that breadth of experience, Somerset has become skilled in offering a complete package for GSE fleet management. “We are a full-cycle company that helps our customers manage their fleet from funding and lease acquisition right through to disposal,” Bennett notes. As such, it can handle as part of the overall package agreed with a client all relevant associated ‘soft’ costs, such as transportation costs and training. Ongoing maintenance provision can also form part of any Somerset-managed GSE funding and acquisition deal.

Somerset can finance any leasing deals through its own funds or through recourse to external investor credit sources. It depends on the scenario – how quickly the funds are required, for example. Somerset also has its own GSE supplier partners that it knows well and can readily turn to for equipment, but it has no exclusivity deals with these suppliers, Bennett insists.

PRICE AND FLEXIBILITY

Key to any leasing deal will be flexibility. The majority of Somerset’s GSE financing is undertaken through the medium of what is known as a ‘fair market lease’. These typically run for five, perhaps seven years, although the period of any lease is negotiable, and – at the end of that period – four options are usually open to the operator: returning the equipment; extending the lease for another term; switching to renting the equipment on an ongoing, perhaps month-to-month, basis; and buying the equipment at its ‘fair market value’. The operator retains a high degree of operational flexibility, therefore.

The comparatively short period of a lease offers – compared to equipment purchase – a much safer option to a handler, especially one of the smaller ones, for whom business can never be completely relied upon. Carrier customers come and go, and stations occasionally have to be closed down entirely if a particularly important airline customer is lost.

Similarly, GSE fleets can be rapidly expanded through such lease deals, for those times when a new carrier client is taken on board, an existing customer ramps up operations at any given airport at which the handler serves the airline, or if the handler launches a fresh operation at a new gateway.

Many handlers might also turn to Somerset or one of the other financial services providers to fund replacement of ageing equipment. A lot of GSE lasts for many years, some for decades, but replacement is an ongoing burden that has to be financed in addition to any new equipment type purchases. Somerset offers a service in the form of acquiring ageing equipment that a customer is seeking to replace; Somerset can then modify and upgrade that equipment if and as necessary, before passing it on to another client – one, perhaps, with a smaller budget or less need for a (comparatively) modern GSE fleet.3. AS_Aut15 - Finding the Capital_2

Perhaps even more important, especially to cash-strapped handlers working in their highly competitive environment, the cost of a fair market lease tends to be as low as any of the options available to such a GSE operator.

LEASING TRENDS

While Europe has for many decades used the leasing option for GSE acquisition, other parts of the world are less familiar with the mechanism, Bennett suggests. Even North America has less of a history of leasing. But this is changing, he suggests. Credit for investment in equipment procurement in the US has become harder to win, and the leasing option is therefore becoming more popular in the country. Plus, with a lot of European operators also now having US operations, they are spreading the leasing gospel.

Elsewhere, in the Middle East and Asia there still needs to be something of a change in mindset when it comes to GSE acquisition and its funding, Bennett remarks. Nevertheless, leasing is becoming more popular even here. “There is now a general global emphasis on leasing,” he advises.

By employing the services of Somerset, third-party handlers, self-handling airlines, and even FBOs and MROs can concentrate on their core operations, Bennett concludes, leaving GSE fleet acquisition and management – throughout the equipment’s entire life cycle with the customer – to an expert in that field.