How Interest Rates Affect Charter Rates
Ah, the days of ZIRP.
A term many of you have become brutally familiar with lately—especially when applying for a mortgage or financing your next plane. The ZIRP era (Zero Interest Rate Phenomenon) will be remembered fondly as a time when the economy was booming and everything felt easier.
What many tend to forget is that ZIRP was born out of necessity, following the 2008 financial crisis. It was a tool to stimulate the economy after everyone had finished licking their wounds. The result? Cheap money in the form of easy debt financing. And then, post-pandemic, things got even crazier.
How Banks Make Money
Treasury bond rates are considered the benchmark for a risk-free rate of return because they’re backed by the United States government. They’re often used as a reference point for lending, with banks taking that rate and adding a spread on top.
If you’re unfamiliar with how that works, here’s a quick example: if the 5-year Treasury rate is 5% and the bank adds a 2.5% yield, your effective rate becomes 7.5%.
For today’s exercise, we’ll use the 5-year Treasury rate as our baseline, since most aircraft loans are structured over a five-year term.
There are other benchmarks that banks and financiers may use in aircraft lending—such as SOFR (Secured Overnight Financing Rate) and the Wall Street Journal Prime Rate—but we’ll stick with the 5-year Treasury for simplicity.
We’ll also use bps (basis points, often called "bips") and percentages interchangeably. Just remember: 100 bps equals 1%.
The Three Pillars of Loan Structuring
We’ll be done with Finance 101 soon, I promise. All the private equity bros can skip to the next section.
In all aircraft loans (and many forms of asset-based financing), there are three main elements of structure:
- Interest Rate: This is what we discussed earlier—the cost of money.
- Amortization: This refers to how the payments are structured. For example, if a loan is amortized over 15 years but has a 5-year term, you’ll make payments as if it’s a 15-year loan during those five years. At the end, you’ll either make a balloon payment or refinance. (This will be important later.)
- Down Payment: This determines your LTV (Loan to Value) or LTC (Loan to Cost).
Each of these is a lever on the same machine, working together to get the best possible loan structure. A higher down payment can help you get a lower interest rate or more favorable amortization. Want a long amortization with a low down payment? Expect a higher rate. Short amortization and a large down payment? You’re likely to get the lowest rate possible.
These are general rules of thumb and not hard laws. They also assume very strong creditworthiness. A severe oversimplification: if you make a lot more than you spend, don’t carry too much debt, actually pay taxes (and don’t hide too much from the government), and don’t have anything risky in your background like a bankruptcy or ownership in a cannabis business, then you would likely be a strong credit.
Rules of Thumb
These are very general, as the credit worthiness portion is going to be very case-by-case basis. That said, some general rules of thumb are:
- Interest Rate: A wide range of 5-year treasury + 250 bps to 5-year treasury + 500 bps
- Amortization: Maximum 20 years, standard at 15 years. Rule of thumb is Age of aircraft + amortization <= 30 years. So a 20 year old airplane would get a 10 year amortization. (This is subjective and not law)
- Down Payment: Brand new, 10-15%. Most common, 20%. Up to 60% for certain product types.
- Guarantors/Recourse: There are only a few non-recourse products on the market. The rest will have a combination of Corporate and Personal Guarantee. I remind clients that if you default on the airplane, you have much bigger problems.
Now that you have attended Finance 101 with Professor Holland, I want to take you to the meat and potatoes of this article.
How This Affects Charter Rates
About a month ago I wrote about Power Laws and Private Jets, discussing the difference between owned fleets and managed fleets. Some companies will hold the aircraft assets on their balance sheet, while others will enter into two types of leasing agreements. Here's how they work.
The Managed Fleet Model
This model works best for individuals who own a private jet, fly a portion of the hours themselves, and lease it out when it's not in use. Typically, the owner flies between 75 and 200 hours per year and charters the aircraft out for an additional 100 to 250 hours annually.
It's a popular approach among ultra-high-net-worth individuals who want to offset some of the costs of owning a private jet.
Here's how that ownership structure typically works:
The bank will lend money to the aircraft owner based on their personal creditworthiness. Underwriters will take into account fixed costs, maintenance expenses, expected flight hours, and overall operating costs.
To qualify, the owner must be able to support the aircraft and the anticipated usage entirely on their own—without relying on any charter income. Fortunately, buyers in this category are typically purchasing out of abundance. They choose to finance instead of paying cash because their money is working for them elsewhere.
They’ll receive a pro forma that includes numbers like the example below (from a real-life scenario).
That $342,800 will go toward offsetting expenses like crew, hangar, and insurance—but it typically doesn’t go far enough to cover the loan payments.
The biggest advantage? The aircraft owner gets to control how many hours the plane is flown, helping protect against asset depreciation. Depreciation is one of the hidden costs of private aviation, and for every hour flown, there's a loss in value that isn’t reflected in the cash flow.
Fortunately, the managed fleet model is generally more insulated from interest rate fluctuations as long as the management company isn’t promising buyers a guaranteed return.
Management companies have a funny habit of telling owners they can "fly for free by chartering" their jet. As you can see above, that’s almost never true.
The Triple Net Lease
These leases are often pitched as investment opportunities. I’ve seen a Facebook ad recently promoting one, offering potential tax incentives for jet ownership along with guaranteed monthly cash flows. Many operators offer similar lease structures to prospective owners.
During the ZIRP era, capital was starving for yield. That hunger helped fuel the SPAC craze—and will likely be studied in business schools for decades (assuming AI doesn’t take everyone’s jobs first).
Here's how these structures work:
In this model, you purchase an aircraft and enter into a triple-net operating lease agreement with an operator. They pay you a guaranteed monthly amount for the asset, and you don’t have to deal with maintenance, overhauls (a huge cost), pilots, hangars, management companies, or anything else operational. You also gain the tax benefit of depreciating the asset (not tax advice) while collecting fixed monthly income at an agreed-upon rate.
I’ve reviewed many of these lease contracts, and they’re generally straightforward. The operator is essentially leveraging an individual’s balance sheet and creditworthiness to expand their fleet and generate more revenue.
The Challenge with NNN Leases
These triple net leases work better when borrowing money is very cheap. Now we're going to put those Finance 101 skills to work!
Remember the 5-year treasury rate that we're basing rates on? Here's historical pricing for this rate:
Take January 2015. The 5-year treasury rate was around 1.5%. If we price a loan at 275 bps over that number, the interest rate would be 4.25%. A solid margin for the bank at 2.75%, and a good and fair rate to the borrower. Say they were going to purchase a $5,000,000 plane to put on a NNN lease. The numbers would look something like this:
Going back to our rules of thumb: with a 15-year amortization and a 20% down payment, you could pencil out a 13.9% levered cash-on-cash return before any tax benefits. In a market hungry for yield-producing assets, that was a very attractive proposition.
That was ten years ago.
Today, the 5-year Treasury is hovering around 4% (3.949%, to be exact), so for simplicity, let’s round up. On that same deal—with no changes to the structure other than the interest rate—you’d now be paying around 6.75% interest.
The levered cash-on-cash return just got much less attractive at 7.5% without changing anything to the deal. In order to achieve the same return, the annual cash flow (from the operator) would need to increase by $63,663 per year, or a 12.73% increase in lease payments.
This likely gets passed on to the charter customer. And thus, the main point of the thesis how interest rates affect charter rates.
The Elephant in the Room
Depreciation is a great tax haven—but it’s also a real cost.
Those who underwrite an aircraft purchase the same way they would a real estate investment often overlook depreciation as a real factor. Unlike most real estate, airplanes have historically depreciated in value—2021 to 2023 being the notable exception.
Using a T-Value calculator and a spreadsheet, I’ve modeled the two examples above across a 10-year lifecycle to show how depreciation affects the overall picture.
That may be a little hard to read due to the formatting, but if you zoom in, you’ll see the delta between the asset value (what you could sell the aircraft for at a given point) and the loan balance. This gives you a snapshot of your net equity position in the event of liquidation—before accounting for any acquisition or disposition fees.
The end of year five represents a 60-month term, but assuming one renewal, this gives you a full 10-year lifecycle. The cash-on-cash returns look great—until they’re impacted by shifts in asset value.
You’d need to talk to a tax consultant to determine what this means for your actual net tax benefit. But this illustrates that aircraft ownership isn’t quite as simple as underwriting a storage building or a standard commercial triple-net lease.
My Conclusion
I hope I haven't lost you, and I would imagine this may have gotten too technical for many readers. I'm sorry if this was you, and I hope that you'll stick around for next week where we're not as technical.
My conclusion is that the levered returns that once were possible may have been a ZIRP phenomenon. This demonstrates the technical nature behind the idea of "no one flies free" and why its important to understand how leverage is used (and how it shouldn't be used.)
Until next week,
Preston Holland
P.s. Send this to a friend that you want to partner with on a plane. Let them know its much more achievable than they may have thought!
