Financing an Aircraft Engine Overhaul: Loans, Refinancing and Reserves

How do you pay for an aircraft engine overhaul?

There are four common ways: save into a per-hour reserve before the engine is due, borrow for the work, refinance the aircraft to include the cost, or have a lender hold back money in escrow when you buy or refinance. Which one is cheapest depends on how much engine life is left, how much equity the aircraft carries and what your current loan allows.

The overhaul is large enough to matter. FLYING Magazine, in a piece sponsored by FLYING Finance, puts typical piston engine overhauls at roughly $30,000 to $65,000 and notes the aircraft can be grounded until the work is paid for. Treat any figure like that as a range, not a quote. Costs vary by engine model, shop and what the teardown finds, so start every plan with a written quote from a shop you trust.

For operators the stakes are higher than for private owners. A trainer or charter aircraft that sits in a shop for weeks earns nothing, while loan payments, insurance and hangar costs continue. That is why the best financing plan is usually made well before the engine is due.

How do you calculate an engine reserve per hour?

Divide the expected overhaul cost by the engine's time between overhaul (TBO) in hours. FLYING, citing AOPA guidance, gives a Cessna 172 example: a $17,000 overhaul over a 2,000 hour TBO equals $8.50 per hour. If the same airplane has a $27,000 factory remanufactured engine with 900 hours left to run, the rate rises to $30 per hour, because the same money is spread over fewer hours.

The second example is the important one for buyers. The less time left, the higher the reserve you must collect, and the sooner you need the cash. AOPA's approach also adds small amounts for propellers and allowances for inflation and early overhauls, so a real reserve rate is usually a bit above the simple division.

Two practical points. First, a reserve is usually an accounting discipline, not a legal requirement: unless a lease or loan says otherwise, you decide whether to set the cash aside in a separate account. A separate account is better, because it cannot be spent by accident. Second, TBO is a manufacturer's recommended interval. For many aircraft flown under Part 91 it is not a regulatory limit, but inspections under 14 CFR 91.409 and your insurer, lender and maintenance provider may still treat it as the practical limit. Check your own aircraft's rules with your maintenance provider.

How do lenders view engine time and TBO?

Cautiously. AOPA Finance explains that lenders assume a worst case: the borrower defaults on an aircraft whose engine is at or near TBO, and the lender must pay for an overhaul before it can resell the aircraft, then wait while the work is done. The article says a complete overhaul takes weeks at minimum.

That shows up in lending policy. According to AOPA Finance:

• Lenders are reluctant to finance aircraft with partial overhauls near TBO or engines close to TBO.
• Lenders use the same valuation guides as buyers, such as Vref and Bluebook, so a deduction in those guides for a high-time engine carries into the loan value.
• Some lenders will not finance an aircraft with an engine past TBO. Others require the overhaul first, or hold money back in escrow for it.
• Some piston lenders only finance aircraft with no less than half of the engine's TBO life remaining.
• A factory remanufactured engine and a major overhaul are treated as roughly the same, even though owners may prefer the remanufactured engine.

FLYING, citing AOPA's finance desk, adds that lenders often require turbine owners to enroll in an hourly-cost engine program as a loan condition. The practical lesson is the same for piston and turbine: remaining engine life is part of the collateral, so document it. See what an aircraft appraisal covers and how age, hours and engine time limit used aircraft financing.

What are the financing options, and how do they compare?

If your aircraft is financed through an acquisition loan or leased, check the documents before you borrow separately. A lease may require maintenance reserves or return conditions that already cover the engine, and a loan may limit additional liens. Ask your lender in writing.

What does an overhaul loan look like in practice?

This is a hypothetical example to show the math. It is not a quote, and the rate is assumed.

In this example a full reserve at $20 per hour would collect $40,000 over 2,000 hours. At 100 hours a year, that is 20 years, which shows why calendar and hours limits matter. If instead only 500 hours remain before the engine is due, the same $40,000 needs $80 per hour, or $8,000 a year at 100 hours. Borrowing then costs roughly $8,663 in interest in the hypothetical case above. You can test other amounts, rates and terms with the aircraft loan calculator.

The comparison to make is not reserve versus loan. It is the cost of collecting the money slowly before the work versus paying interest after it, plus the cost of any downtime. The earlier the reserve starts, the lower the per-hour cost and the less you rely on borrowing.

When should you overhaul: before or after you refinance or sell?

Often before, if a lender will require it anyway. AOPA Finance says some lenders insist on the overhaul first or hold back escrow, so the work effectively gets paid for whichever route you take. For a sale, appraisers and buyers price remaining engine time into value (FLYING, citing PistonAircraftLoans.com), so a fresh overhaul can raise the price, though not always by the cost of the work.

A rough decision path:

1. Get the shop quote and remaining engine hours and calendar time.
2. Check your loan or lease for maintenance, reserve and additional-debt terms.
3. Ask two or three lenders whether they would finance now or require the overhaul first.
4. Compare the monthly cost of each path and the downtime cost for each.
5. Confirm tax treatment of the work with your tax advisor, since whether costs are expensed or capitalized depends on your facts.

What should you have ready before asking a lender?

• Engine make, model, serial number, total time and time since overhaul.
• A written shop quote and a scope that states overhaul or remanufacture.
• Maintenance logs and recent inspection results.
• Your reserve balance and your hourly cost plan.
• Utilization history and the revenue the aircraft earns, so the lender sees the cash flow that repays the debt.

Operators such as flight schools should show the lender the fleet plan, not just one aircraft. If you want to organize these items into one file before talking to lenders, JetFinex can help you start a deal file. Tax and legal treatment varies, so confirm with your tax advisor and aviation counsel.

Frequently asked questions

Can I get a loan just for an engine overhaul?

Some lenders and shops offer financing for maintenance, but terms vary by lender and by aircraft. Ask your current aircraft lender first, because it may need to consent to additional debt secured by the aircraft.

How do I calculate an engine reserve per hour?

Divide the expected overhaul cost by the engine's TBO in hours. AOPA's example, cited by FLYING, is a $17,000 overhaul over a 2,000 hour TBO, which gives $8.50 per hour.

Do lenders treat a factory remanufactured engine differently from an overhaul?

AOPA Finance says that from a lender's perspective the difference between a major overhaul and a factory remanufactured engine is small, even though owners may prefer the remanufactured engine.

Will an engine near TBO hurt my ability to refinance?

It can. AOPA Finance says some lenders will not finance an aircraft with an engine past TBO, and others require an overhaul first or hold money back in escrow for one.

Sources

• AOPA Finance, How Do Lenders View TBO and Types of Engine Overhauls?
• FLYING Magazine, The Overhaul Bill You Already Owe (sponsored content, FLYING Finance)
• eCFR, 14 CFR 91.409 Inspections

This guide is educational and is not tax, legal or investment advice. See our editorial standards and disclosures. Spot an error? Tell us.