Technical Aspects of Lease
Agreements
Oisín Murray - Head of Technical
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Agenda
• Lease Agreement Technical Considerations
• Maintenance Reserves
• Maintenance Reserves Portability
• Technical Records
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Lease Agreement Technical
Considerations
What you are paying for
• Define Specification
• Define Configuration
$45MM Aircraft
$43MM Aircraft
Maintenance provisions
• Lessee is approved by local CAA
• Lessee MRO’s are FAA/EASA approved
• No PMA parts or DER repairs
• Lessor annual inspection rights
• Workscopes iaw OEM recommendations
• Lessor approval required for major repairs
• Lessor representation during repairs requiring MR drawdown
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Lease Agreement Technical
Considerations
Redelivery Conditions
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FAA/EASA compliant
Defined Redelivery process
Engine substitution rights
Bridge maintenance to to OEM standard or next lessee requirements
Minimum condition for component conditions
LLP Back to Birth
Detailed list and format for technical documents
Non Incident/Accident statement, PMA and DER repair statements
Maintenance Compensation mechanisms
Current Redelivery Conditions are the next Lessee’s Delivery
Conditions
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Lease Agreement Technical
Considerations
Next Lessee
• Representative site access during redelivery workscope
• Configuration changes for next lessee
• Incorporate next lessee livery
• Attend demonstration flight including cockpit access
• Engine and APU borescope observation
Allow for delays at redelivery
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Maintenance Reserves
Maintenance Reserves are payments made by the lessee to the lessor
based on the utilisation of the aircraft to provision for the cost of
significant aircraft maintenance events.
Why collect Supplemental Rent
• Security to protect asset value and maintain lessor exposure
• Influence maintenance workscope
• Means to monitor lessee contract compliance
• Promote financial discipline
Supplemental Rent Options:
• Cash Maintenance Reserves
• Letter of Credit
• Lease end adjustments
• Half life adjustments
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Calculating Maintenance Reserve
Rates
Predicted event cost divided by the event interval. Customize for
variations in
• Flight profiles
• Operating environment
• Aircraft age
Annual Escalation
• Normal range 2.5% - 3.5%
• Engines should be higher (OEM escalation)
• LLP lease end adjustment
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A320 Maintenance Reserve Cash Flows
for a 12 year lease
Maintenance Events
Airframe Structural Inspections
Airframe Structural Inspections
Landing Gear Overhaul
APU Overhaul
Engine Overhaul
Engine LLP Replacement
Interval limit Event Cost
72 months
$900K
144 months
$900K
120 months
$350K
8,000 hours
$350K
18,000 hours
$2.6M
20,000 cycles
$3.0M
Rate
$12,500 per month
$6,250 per month
$2,917 per month
$43.75 per APU hr
$144.44 per FH
$150.00 per FC
Total
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$
$
$
$
$
$
Monthly
12,500
6,250
2,917
7,109
72,222
50,000
$
150,998.26
Managing Maintenance Reserves
Best Practices
• Clearly define qualifying maintenance
• Lessor approval for reimbursable workscopes
• Modular approach to engine reimbursement
• Lessor attendance at repair facilities during maintenance
• Good communication to forecast timing of maintenance and
reimbursement
• Annual review of rates
• Aircraft specific accounts and component specific sub-accounts
• No co-mingling even across same lessee fleet
• Annual review of accounts with reconciliation as needed
End of life assets
• Retain Maintenance Reserves in lieu of Return Conditions.
• Engine and Component exchanges
• Fly to expiration
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OEM Maintenance Agreements
OEM’s have entered maintenance market aggressively. These
agreements offer:
• Fixed price maintenance
• Long term agreement
• Peace of mind
• Residual value protections
Agreements can be
• Term based
• Event based
• Cradle to grave
• Paid monthly
• Paid at maintenance event
OEM agreements include
• GE / CFMI: OnPoint
• Honeywell: MCA
• Rolls Royce – Total Care / OPERA
• IAE: Flight Hour Agreement (FHA)
• Boeing GoldCare
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Maintenance Reserve Portability
Lessor preference is to collect cash:
• Influence maintenance workscope
• Use to offset outstanding debts
• Maintain lessor exposure at deal origination levels
• Easily assign reserves for next lessee
Complexity where “Power by the Hour” Agreements are in effect:
• Qualifying maintenance definition and rates may differ to lease
• Increase in lessor exposure
• Inability to offset delinquency
• Credit accrued tends to be engine and MRO specific
• Administrative burden when assigning credit due to multiple parties
• Not all PBH agreements are equal
End of life
• Ability to convert credit to cash
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Technical Records
Records
• Operator required by law to maintain records
• Law is enforced by local Aviation Authority
• Records show Airworthiness via compliance with regulations
• Protect owner operator warranties
• Regulations becoming more stringent
Leased fleet 50% by 2020
• Increasing number of aircraft transitions
• Local regulations are inadequate for cross border transfers
• Lessor standards more demanding than regulatory requirements
• Disconnect between lessor and operator
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Records Quality
Aircraft values
• Appraisers assume satisfactory records
• Leases signed on the basis of fulfilling records requirements
• Direct correlation between aircraft records and aircraft value
Inadequate records
• Delay redelivery acceptance
• Postpone or prevent onward delivery or sale
• Reduce aircraft value
Operator and Lessor standards are far apart
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Records Harmonisation
The Future is Digital
Industry working groups cooperating to harmonise standards and meet
challenge of the future.
Recent progress with addition of Technical Documentation definition to
ICAO Airworthiness manuals
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Electronic copies with search functionality
Daily back up
Secure on line access
Regular access and inspection by lessor
Support from Airlines and the Aviation Authorities required.
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Technical Records IT Systems
Primary function
• Collect
• Index
• Centralise
• Search
• Share
• Secure
Providers
• AERDATA/ STREAM
• FlyDocs
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QUESTIONS?
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Oisín Murray
Head of Technical
技术总监
Hong Kong Aviation Capital
Suite 6511-13, 65/F,
The Center, 99 Queen’s Road, Central, HONG KONG
Tel: + 852 2568 0229
Fax: + 852 2568 0015
Mob: + 852 9229 0920
Email: oisin.murray@hkaviation.com
www.hkaviation.com
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