Professional Documents
Culture Documents
Aircraft Leases
Effective 1 February 2014
1st Edition
1st Edition
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TABLE OF CONTENTS
ABBREVIATIONS ............................................................................................................................................ 1
SECTION 1.
INTRODUCTION.................................................................................................................... 3
SECTION 2.
BACKGROUND ..................................................................................................................... 5
2.1
INTRODUCTION ............................................................................................................................. 5
2.2
2.3
SECTION 3.
3.1
3.2
Introduction........................................................................................................................ 9
3.1.2
3.1.3
3.1.4
3.1.5
3.1.6
3.1.7
Insurance......................................................................................................................... 13
3.1.8
3.2.2
SECTION 4.
4.1
4.1.1
4.1.2
Introduction...................................................................................................................... 25
5.1.2
5.1.3
5.1.4
SECTION 6.
6.1
OPERATIONS...................................................................................................................... 23
ALTERATIONS IN OBLIGATIONS................................................................................................. 23
SECTION 5.
5.1
PRE-LEASE ........................................................................................................................... 9
CASE-STUDY ...................................................................................................................... 27
Situation .......................................................................................................................... 27
6.1.2
6.1.3
Outcome .......................................................................................................................... 28
ANNEX II
ANNEX III
ACKNOWLEDGEMENTS .............................................................................................................................. 42
ii
ABBREVIATIONS
AD
AMOC
APU
BtB
CAA
CMM/IPC
CAA
CofA
CP
CPCP
CSN
DER
EASA
ELT
ETA
ETOPS
FAA
FC
FDR
FDIU
FH
FOD
HIL
HMV
HT
IATA
ICAO
LLP
LOC
LOI
LOPA
MLG
MPD
MRO
NDT
NLG
NRC
OC/CM
OEM
P/N
PMA
RAP
RVSM
S/N
SB
SELCAL
SRM
SSID
STC
TCDS
TSN
Airworthiness Directive
Alternate Means of Compliance
Auxiliary Power Unit
Back to Birth
Civil Aviation Authority
Component Maintenance Manual/ Illustrated Parts Catalogue
Civil Aviation Authority
Certificate of Airworthiness
Condition Precedents
Corrosion Prevention & Control Programs
Cycles Since New
Designated Engineering Representatives
European Aviation Safety Agency
Emergency Locator Transmitter
Estimated Time of Arrival
Extended-Range Twin-Engine Operational Performance Standards
Federal Aviation Administration
Flight Cycle
Flight Data Recorder
Flight Data Interface Unit
Flight Hour
Foreign Object Damage
Hold Item List
Heavy Maintenance Visit
Hard Time
International Air Transport Association
International Civil Aviation Organization
Life Limited Parts
Letter of Credit
Letter of Intent
Layout of Passenger Accommodation
Main Landing Gear
Maintenance Planning Document
Maintenance, Repair, and Overhaul
Non Destructive Testing
Nose Landing Gear
Non-Routine Cards
On Condition/Condition Monitoring
Original Equipment Manufacturer
Part Number
Parts Manufacturer Approval
Repair Assessment Program
Reduced Vertical Separation Minima
Serial Number
Service Bulletin
Selective Calling
Structural Repair Manual
Supplemental Structural Inspections Document
Supplemental Type Certificate
Type Certificate Data Sheet
Time Since New
SECTION 1.
INTRODUCTION
This document provides guidance material and best practices, which may be used by airlines to effectively
manage and optimize the lease process. Whilst this document is written from the airlines perspective, it
also describes the perspective of the lessor and the regulator to provide insight into the different points
of view. With this document, IATA hopes to shed light on the complex process of aircraft leasing between
the lessor and the lessee/operator.
An aircraft lease, with the associated delivery and redelivery process, can be a cumbersome and timeconsuming activity, which very often catches airlines off-guard. Whilst an aircraft lease might seem tedious
and difficult, many issues can be resolved by proper preparation and attention to detail. Airlines need to
consider that the activities performed by the lessor are focused on the purpose of maintaining the asset
value, mitigating risk and maximizing their return on investment. This approach very often differs
significantly from the airlines perspective, which is one of operational efficiency and regulatory compliance.
Preparation for an aircraft delivery or lease return of an aircraft may start many months before the actual
event. Many airlines already have a large workload and are consumed with the burden of resolving
operational challenges. However one of the biggest pitfalls for a delivery or redelivery program for any
airline is insufficient preparation-time or lack of manpower. Freeing up airline staff or hiring in support is
money well spent considering that delays are extremely costly. As well, lease contracts impose significant
penalties ranging from 50% up to 100% on top of the standard rent in the event of a delay in redelivery.
However, it is not only up to thorough preparations. A lease agreement requires input from many different
departments, ranging from legal to financial and maintenance to operations. Leveraging the available
expertise is of equal importance. An initial low lease rate may very easily evaporate against the high cost of
a redelivery as a result of delays, regulatory issues or technical difficulties. Looking at not only the initial
cost, but integrating the cost of the entire leasing life cycle into the negotiation process will create clarity
and aid in determining which issues have a (significant) impact during lease negotiations.
This document consists of six different sections which cover the entire aircraft leasing life-cycle, starting at
the negotiation phase, through to operations and subsequent redelivery.
Figure 1, below illustrates the structure of this document, in which this first Section provides the introduction
and objective. Section 2 describes the background of this document. The leasing life-cycle is described in
Section 3 through to Section 5, from pre-delivery through operations to the re-delivery phase. The last
section provides a practical example and case-study.
Please provide any relevant comments regarding this document to: alag@iata.org. This is a living
document as conditions change and updates to this document may be required.
SECTION 2.
BACKGROUND
2.1 INTRODUCTION
Aircraft operating leases represented less than 5% of the overall aircraft ownership situation in the 1980s.
However, this percentage has significantly grown since then (Shpall, 2011). It is expected that half of all
aircrafts worldwide will be under either an operating or financing lease in the next decade, as illustrated in
Figure 2. Whilst a lease allows airlines to add an aircraft to its fleet without any ownership risks, thereby
introducing much needed flexibility, it also introduces a series of unique challenges for the airline. Many of
these challenges result from different viewpoints between the lessor and lessee.
The asset value depreciation must be in line with other similar aircrafts under similar conditions. This
implies that the aircraft must be operated and maintained in a manner that protects the value of the
asset. Associated aircraft records must be readily available to enable fulfillment of this requirement.
The asset must be freely transferable without any significant burden. Very often this means that the
aircraft will need to meet importation or exportation requirements of a specific aviation jurisdiction,
usually supported by an Export Certificate of Airworthiness (Export CofA). Furthermore, elaborate
or airline specific changes or branding will need to be removed in order to increase the marketability
of the aircraft.
c)
Protection must be in place against events of default. A lessor will implement a number of measures
to ensure that adequate coverage is available for such events. Payment of a deposit, maintenance
reserves and other down-payments will give the lessor additional protection during unforeseen
bankruptcies, Chapter 11 events or other similar situations of financial distress. Inspection rights
during normal operations, heavy maintenance events and other significant maintenance actions will
give the lessor insight into the day-to-day activities and operations. As well, it will assist the lessor in
forming an opinion on any potential issues which may arise.
Regulator
Compliance in Regulatory
Environment 1
Compliance in Regulatory
Environment n
Risk Mitigation
Asset Value Depriciation
Lessor
Transferability
Lessee
Lessee 1
Interest of Lessee 1
Lessee 2
Interest of Lessee 2
Lessee n
Interest of Lessee n
Lease duration
Background
a) Back to Birth Traceability
Of the many issues which may occur, one of the items most commonly misunderstood is how to prove
Back to Birth Traceability (BtB) for Life Limited Parts.
Life Limited Parts (LLP) exist in a number of aircraft components, such as Engines, APUs, Landing
Gears and Airframe parts. Failure of an LLP may result in unsafe conditions or safety hazards. Major
regulatory agencies such as the Federal Aviation Administration (FAA) and European Aviation
Safety Agency (EASA) state that an operator must have an approved system in place that effectively
controls and records the total operational life of the part. Although a seemingly simply process, the
airline and the lessor will both have a different approach. While the airline will record the total time of
each LLP with the use of their maintenance software, the lessor often requires a much more detailed
approach. The lessor will want proof of each and every step in the LLPs life by means of a dirty
fingerprint coupled with the consumed time (flight hours and flight cycles). The reason for this is
threefold:
The lessor will want 100% certainty that there are no errors in the total time consumed by the part
and will want documentation to substantiate this.
o The provided paperwork must be of the highest standard to maintain the asset value (assuming
that there are two identical parts available for sale, the part with the best quality paperwork will
obviously be more desirable and hence provide a higher value).
o The lessor will want to protect itself against more stringent requirements of future operators or
regulatory agencies, thereby ensuring maximum marketability for the asset.
Although providing a summary sheet will often not be sufficient to meet this requirement, it is however
sufficient for the regulatory authorities. It must be noted that most regulatory authorities will also require
the most recent authorized release certificates (i.e. EASA Form 1 or FAA Form 8130) for each part
where details on the status of SBs, ADs, any applicable task and remaining life is clearly stated.
o
The problem of incomplete back to birth paperwork is specifically apparent in the case of landing gear
LLPs. Landing gears, with their 10 year overhaul interval, are quite frequently exchanged (including the
individual subassemblies) and new LLPs have been introduced over the years. In addition, landing
gear overhaul shops dont always supply paperwork that meets the requirements of the lease
agreement. Therefore, the question remains: What is needed to prove the full back to birth traceability
and how is this requirement properly defined? The best way to mitigate this risk is to include a detailed
and very specific description of all documentation required in the lease agreement.
b) Repairs
Repair documentation and certification is another area of misunderstanding. When the lease
agreement requires an airline to deliver dirty fingerprints certification of repairs, what exactly needs to
be included? Does a lessor require each blend on the aircraft to be recorded (no matter how small)?
Does this requirement apply to both internal and external repairs? In many cases, the lessor will require
that the repair file and the linked damage tolerance analysis for any inspection requirements in the
future are comprehensive and detailed enough to satisfy any regulatory agency or future operator.
Some lessors also request any external repair to be a flush repair, which is not always allowed by the
repair manual and, subsequently, could lead to the aircraft skin needing to be replaced. Other lessors
may require repairs to be permanent, whilst the OEM only provides a solution with a repeat inspection.
As with back to birth traceability, the lessee needs to ensure that the requirements for repairs are
achievable and match with the capabilities of the maintenance organization.
SECTION 3.
PRE-LEASE
Introduction
In an increasingly volatile industry, it has virtually become standard industry practice for lessees, as well as
lessors, to create documentation which will provide sufficient remedies for both parties in the event that
problems arise. As the leasing of aircrafts is a lessors core expertise, the lessee often finds itself in a more
disadvantageous position than its counterpart. This is especially the case when a multinational leasing
company is contracting with a relatively small airline, which is a regular occurrence within the industry.
The purpose of the legal considerations analyzed in this guidance document is to examine a selection
of the most relevant legal issues with regards to an aircraft lease. Therefore, it provides only an overview,
which is by no means comprehensive. A comprehensive legal assessment would entail a much
more voluminous and in-depth document, which is outside the scope of this guidance document. For this
reason, certain legal considerations, such as tax implications, will not be addressed here.
3.1.2
Letter of Intent
A letter of intent (LOI) typically precedes any aircraft lease agreement as a first contractual step, and
outlines the broad terms of agreement between the parties. The LOI simply clarifies the key points, and
provides safeguards in the event that further negotiations do not succeed. This document is also commonly
referred to as heads of terms, memorandums of understanding, or term sheets.
It is important to note that whilst there is always a significant amount of work to move from an LOI to a
definitive lease agreement, the LOI does already set out most of the key terms, thus forming the basis for
further negotiations. In fact, these key terms are sometimes simply replicated into the definitive lease
agreement. The lessee should therefore treat the LOI with the same attention and care as the definitive
lease agreement, if not more.
The LOI is usually legally binding in that following its signature by both parties, the lessee must pay a
deposit and/or commitment fee to the lessor, as consideration for the lessor to remove the aircraft from the
market. Such a security deposit is refundable only in certain circumstances, typically subject to the
conditions precedent (see Section 3.1.5) of the finalized lease agreement.
When drafting the LOI, the lessee should make sure that the lessor has identified and detailed its lease
restrictions. These specific lease restrictions are usually associated with the typical financier covenants
found in any leveraged lease structure. It is important that both parties identify and assess these
restrictions early on, as some of them could be deal-breakers (i.e. where the lessee wants to operate in
a severe environment, and there is a financier covenant on the lessor regarding operational location of
the aircraft).
3.1.3
Delivery Conditions
The delivery conditions specify when, how, and in what condition the aircraft will be delivered to the lesseeprovided that the conditions precedent have been complied with, as discussed in Section 3.1.4.
The parties should ideally agree to a delivery period instead of any firm date, in case of a delay with the
delivery of aircraft. The lease agreement will often refer to delivery on or around a specific date, as well
as a back-stop date, which serves as the final date for acceptance, after which the parties would have to
agree to a new delivery date. Failing delivery by the back-stop date or equivalent, the relationship
between the parties would terminate in accordance with the lease agreement.
The lease agreement will almost always be drafted in such a way that the lessor shall not be liable for any
damages or losses incurred by the lessee due to a delay in delivery of the aircraft. This is a common
industry standard and the rationale behind it is that the lessor should not be responsible for delays caused
by late redelivery of the previous lessee of the aircraft, as this is out of the lessors control. However, delay
can also be caused directly by the lessor. Therefore, it is advisable to the lessee to negotiate this carve out
of liability, in that the lessor should at least be responsible for any damage caused by delays which are
within the lessors reasonable control.
A lessor will sometimes insist on distinguishing between major and minor defects with regards to delivery of
the aircraft, with minor defects consisting of easily resolvable issues which will not have an impact on the
normal operation of the aircraft by the lessee. The rationale behind this is to avoid any delay with regards to
delivery. Therefore, minor defects should not delay the aircraft and should be transferred into delivery
exceptions and potentially conditions subsequent, as discussed in Section 3.1.5. Of course, major defects
need to be repaired by the lessor before the lessee accepts delivery of the aircraft.
The lease agreement will almost always specify that the lessee will accept the aircraft in an as is, where is
condition. This essentially means that the lessee must take the aircraft in the condition it presently exists or
as found on inspection immediately prior to purchase or lease, even if damaged or defective, without
modification and without any express or implied warranties. This term is an indication of the Caveat Emptor
concept (buyer beware) in that the buyer (or equivalent) is taking a risk on the quality of the goods. If any
hidden defects are discovered after purchase (or after delivery in case of an operational lease), the buyer
generally has no recourse against the seller. The buyer is regarded as having inspected and accepted
goods in their current state. As such, all burden is placed on the buyer to ensure discovery of any defects.
Therefore it is important to note here that the only protection the lessee has with regards to the as is,
where is concept is to thoroughly inspect the aircraft and associated records before delivery, and to make
sure that the aircraft is not accepted in the case where it does not meet the specified delivery conditions.
10
Pre-Lease
3.1.4
Whilst representations and warranties are often grouped together in a lease agreement, they are in fact
quite different. Representations are statements of facts designed in order to induce a counterpart into
becoming party to a transaction. Whereas warranties are conditions upon which the contract is to take
effect. Whilst a lessee should always be aware of this distinction, in practice both representations and
warranties are considered in the same provisions.
Representations are always made concerning the past and present only. The equivalent of future
representations is typically caught in the form of events of default in the definitive lease agreement.
However, the lessee should be especially aware of any concept of repetition of representations. Such
repeating representations must be assessed and renegotiated, or if included, subsequently monitored
during the lease term when necessary. This is especially relevant where a representation is partly or wholly
out of the lessees control, such as where a representation is subject to a change in national law (i.e. tax
related). The worst of possibilities, for the lessee, with this type of concept, are representations that repeat
automatically throughout the term of the lease. The lessee must ensure in this case that the potential risks
of such automatically repeating representations are carefully considered. Certain representations may be
outside of the lessees control. Therefore, the lessee must consider its own potential breach where it is not
even at fault. In the event of a breach, it is then possible that the lessor would have the right to terminate
the lease.
The representations and warranties in a lease agreement typically consist of, at least, the following:
3.1.5
Conditions Precedent
The conditions precedent (CP) of a lease agreement sets out the conditions which must be complied with
for the lease agreement to become effective. Unlike other industries, with aircraft leases, the entry into
force of the obligations of the lease agreement almost always depends on compliance with the conditions
precedent by both parties (keeping in mind that certain terms will survive in the event the obligations under
the lease agreement do not arise, such as non-disclosure, liability waiver provisions, and representations
and warranties). In the event of failure to comply with the conditions precedent, the lessor is no longer
obligated to deliver the aircraft to the lessee, or alternatively the lessee is no longer obligated to accept
delivery of the aircraft by the lessor.
11
A lease agreement typically also includes at least the following conditions precedent:
3.1.6
Redelivery Conditions
The redelivery conditions are, by their nature, drawn from the delivery conditions. It is therefore advisable
to the lessee to aim to match the redelivery conditions as closely as possible to the delivery conditions
during contract negotiations. Any uncertainty or mismatch in the delivery and redelivery conditions of the
lease agreement could lead to the lessee investing (heavily) in putting the aircraft in a better condition at
the end of the lease than it was in at delivery.
It is advisable to the lessee to pay specific attention to the redelivery conditions and the redelivery timetable
as the consequences of non-compliance can result in financial liabilities for the lessee. Redelivery
conditions are agreed before the lease term commences, usually as early as the LOI. However, even at
such an early stage, lessees must be wary of even the slightest potential of the lessor claiming that a
specific item would not be in compliance with the redelivery conditions.
If at redelivery the lessor successfully argues non-compliance with the redelivery conditions, not only will
the lessee have to remedy the defect at its own cost, but the lessee will continue to be obligated to pay rent
on the aircraft. Often, the rental obligation will be even worse for the lessee, as the lease agreement may
specify that in the event of a late redelivery, the rent shall increase by a certain percentage. Notably,
increases upwards of one hundred percent are not uncommon. Therefore it is advisable that the lessee
makes sure that any increase in rent after delay of redelivery is as low as possible. It is also advisable to
the lessee to negotiate a grace period for redelivery of the aircraft, in accordance with the similar concept of
the back stop date as discussed in the delivery conditions (see Section 3.1.3).
While it is common to have precise redelivery wording with regards to certain elements, such as
arrangements for specific hours and cycles with respect to aircraft and engines, some elements are almost
always left vague. The lessee should not overlook these relatively small items as they soon add up, and
can ultimately result in adverse financial consequences.
12
Pre-Lease
A specific example of one of these smaller items to look out for is the redelivery location. Lease
agreements typically provide for a redelivery location either as designated by the lessor, or by mutual
agreement of both parties. It is advisable to the lessee never to accept wording to the effect that the
redelivery location shall be determined by the lessor. At the very least, the redelivery location should be
designated by the mutual agreement of both parties. Ideally, a firm redelivery location will be agreed in the
lease, however sometimes practicalities do not allow for a specific location to be designated (i.e. where
there is uncertainty with a long term lease). By leaving the seemingly unimportant choice of redelivery
location to the lessor, the lessee will not be able to control the ferry flight cost, which could be substantial.
3.1.7
Insurance
As described in Section 3.1.5 (Conditions Precedent), the requirement of insurances tends to be one of the
most important requirements from a lessor perspective, as it protects the value of the lessors asset. For
this reason, lessors typically start negotiating at the high end of the insurance level spectrum. In
accordance with the concept of almost all risk of operation of the aircraft passing to the lessee, it is wholly
the lessees responsibility to provide insurance coverage for the aircraft.
The two broad types of insurance commonly required by an aircraft lease agreement are: Hull insurance
and Liability insurance.
a) Hull Insurance
It is always advisable to determine the exact definition of a type of insurance coverage by referring to
the actual policy and/or requirements attached to such coverage. Hull insurances may vary in certain
elements, such as for total loss of the aircraft, as well as distinguishing between hull insurance for
aircrafts in motion and not in motion. However, a typical hull insurance may be defined as the policy
covering damage or loss to the aircraft. This relates to physical damage to the aircraft, in which case
the insurance policy will cover restoration of the aircraft to the condition it was in before the damage
occurred. Should there be damage to the aircraft such that the aircraft is no longer reparable (a total
loss has been incurred), then the hull insurance will typically provide for a fixed payment in accordance
with the agreed hull value.
The agreed hull value may be subject to certain lessor restrictions, which would keep the agreed hull
value above the actual market value of the aircraft for the duration of the lease. An example of such a
restriction is found in a leveraged lease structure, whereby the lessor may have an obligation to its
financier to keep the aircraft insured at a certain value for a defined time period. This may result in an
unreasonable obligation of the lessee to insure the aircraft at a value above what it is really worth.
In this case, it is advisable to the lessee to renegotiate these levels down as close as possible to the
actual market value through alternative methods. This may mean that the lessor would have to
contribute to a portion of the insurance premium. Furthermore, lease agreements typically provide for a
reduction in the agreed hull value by a certain percentage each year, and thus the associated
premiums for the lessee would also decrease. The insurance premiums will of course also be subject
to the level of deductibles agreed (amount of damage which must be borne by the lessee, with anything
above that being covered by the hull insurance policy).
b) Liability Insurance
Liability insurance is typically the coverage for damage to third parties. Specifically, liability insurance
provides coverage to protect and indemnify the insured for potential exposure to passenger, cargo or
baggage claims and to third party liability claims including property damage, bodily injury or death
caused by, or arising from the insureds operations.
13
3.1.8
Aircraft lease agreements are typically structured as net leases. The net lease concept means that the
lessee will also be paying for, in addition to the rental fee, the usual costs associated with ownership of the
aircraft (expenses associated with operation and maintenance).
The net lease concept means that, in addition to the rental fee, the lessee will also be paying fort the usual
costs associated with ownership of the aircraft (expenses associated with operation and maintenance).
14
The Montreal Convention 1999, formerly known as the Convention for the Unification of Certain Rules for International Carriage
by Air, followed the Warsaw Convention by developing the legal regime for rules relating to international carriage of passengers,
baggage and cargo. The Montreal Convention 1999 is applicable to the majority of ICAO member states, including most of the
developed aviation countries. See the following ICAO link for full membership
details:http://www2.icao.int/en/leb/List%20of%20Parties/Mtl99_EN.pdf
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary
Fund. Special Drawing Rights are not a currency, but are instead a claim to a currency.
Pre-Lease
The main elements to be considered when dealing with payment and security are the deposit (which may
be accompanied by a commitment fee or similar fee), the rental payment and the supplemental/additional
rent (i.e. maintenance reserve payments). These payment and security elements are considered in further
detail as follows:
a) Security deposit
As mentioned in Section 3.1.1., the security deposit is paid by the lessee as consideration of the lessor
to take the aircraft off market. However, the security deposit also fulfils the typical role of being a
protection for any non-payment under the lease agreement. Whilst this is typically targeting
non-payment of the rent, the security deposit can also be used by the lessor to offset other
non-payments (i.e. maintenance reserves, failure to meet delivery conditions etc). Therefore, it is usual
that the security deposit consists of an amount equal to two to three times the monthly rental fee.
However the lessee is advised to consider the level of the security deposit carefully in conjunction with
any other payments, such as the commitment fee discussed further on in this section. As a balance
must be achieved, it is advisable that the lessee should commence from a basis of a total payment of
up to three months of the rental fee and no existence of a commitment fee. Nevertheless, the levels of
security deposit are very much subject to a commercial negotiation, as is the beneficiary of interest
accrued on such a security deposit (although this is typically for the benefit of the lessor).
b) Commitment Fee
It is often a concern to the lessor that the security deposit may be subject to a lessee claw back in the
event of lessee bankruptcy. Of course this claw back would be in addition to the potential unsecured
creditor status of the lessor in respect of the rest of the payments under the lease agreement.
Therefore, in an effort to circumvent this potential bankruptcy claw back risk, lessors often term part, if
not all, of the security deposit as a commitment fee. This allows the lessor to retain the commitment fee
as an absolute property of the lessor, in that it is given as consideration for taking the aircraft off market
only. Consequently, this commitment fee would not form part of the lessees estate in bankruptcy.
It is advisable that the lessee takes an active interest in detailing out the criteria for return of the
commitment fee, at the end of the lease term. Furthermore, whilst we have considered what may
happen in the event of lessee bankruptcy, as well as the methods of circumvention proposed by the
lessor, we have not considered lessor bankruptcy. In an increasingly volatile aircraft leasing industry,
lessees will also be at risk of losing their security deposit and/or their commitment fee should the lessor
go bankrupt. Therefore, whilst it is purely a commercial negotiation, it is advisable that the lessee
requests that the security deposit and/or commitment fee, be placed in a pledged account.
c) Rent
The rental fee is the consideration given by the lessee to the lessor for use of the lessor aircraft. The
rental fee is most commonly paid monthly in advance and can be structured in a variety of ways,
although a fixed fee is typical (as opposed to a floating rate). This element of the payment and security
structure can be considered as the most valuable and therefore is always subject to the hell or high
water clause as described above.
15
Fixed interval
Flexible interval
Fixed cost
Flexible cost
An overview of the different Maintenance Reserve events, in combination with the different types, is
provided in table 1.
Fixed Interval
Fixed Cost
Flexible Cost
Flexible Interval
Maintenance Reserves accumulate in order to be used once the intended event takes place. By doing so,
the cost of such an event will be distributed pro rata over the interval to the various users. As well, the risk
of insufficient funds to cover the maintenance event in case of any airline bankruptcy will be minimized.
As detailed in the example below the Heavy Maintenance Visit (HMV) for an Airbus A320 has an interval
of 6 years. If the first lessee operates the aircraft for a period of four years, maintenance reserves will have
accumulated for this same period of time. The remaining two years of maintenance reserves are
accumulated by the second lessee who operates the aircraft for an additional 10 years as explained in
Figure 4. From a lessor perspective, the maintenance reserves are equivalent to an insurance to reduce
exposure in an event of default.
16
Pre-Lease
A lessor will only pay a contribution towards an agreed and scheduled maintenance event if this event
meets the strict requirements as detailed in the lease agreement. Payment for any work outside of this
scope falls under the responsibility of the lessee (i.e. accidents, incidents, modifications, shipping etc).
It is part of the commercial negotiation between the lessor and lessee to agree a fair rate for the various
event types. The lessor will obviously want to ensure that each maintenance event is adequately covered
(thereby providing protection in case of default), while the lessee will want to reduce cash-out as much as
possible. Whatever the case may be, the lessee should ensure that the maintenance reserve mechanism
and the subsequent payments by the lessor are in balance with the amounts paid by the lessee.
The accumulated maintenance reserves over time commonly have a saw-tooth pattern depending on the
typical interval of the maintenance events and their related costs. Figure 5 indicates a typical saw-tooth
shaped maintenance reserve depreciation curve, in which the depreciation of the maintenance reserves
occurs over time.
Figure 5: Accumulated Maintenance Reserves versus time-frame showing the typical saw-tooth shape,
with the respective maintenance events
There is a number of alternatives for the lessor to reduce the risk associated with the fluctuations of the
aircraft maintenance value, and for a lessee to prevent payment of maintenance reserves and the
associated cash-out. The various solutions are highly dependent on the creditability of the lessee, but
common solutions are:
17
Delivery Conditions
There are different objectives for both the lessor and lessee during the delivery of the aircraft and pre-lease
phase. The lessor would prefer to keep the costs related to the delivery as low as possible as any
additional work may result in out-of-pocket cost. For this reason, the status in which the aircraft is delivered
to the new lessee depends largely on the commercial negotiations and is often highly dependent on the
delivery conditions of the previous lessee (i.e. the redelivery conditions of the previous lessee are mirrored
with the delivery conditions of the next lessee). The main objective for the lessee is to have the aircraft
ready for operation at the right time, as various routes have been scheduled accordingly. Additionally, the
lessee will want an aircraft delivered in a configuration which is in line with the standards of the rest of the
lessees fleet. It can be very beneficial to determine the configuration differences prior to making a LOI as
configuration changes can be beyond what is considered economically reasonable. Commonality across
the fleet saves costs on spares provisioning, staff training, maintenance processes, and operators often
prefer to fly in a standard configuration as part of their branding. It is also common to expect a certain
amount of clearance for airframe, engine and component maintenance. In general, distinction can be made
between two different forms of delivery conditions. The first is a typical delivery consisting of general and
common industry terms, while the second one is more basic and typically associated with end-of-life leases
or distressed leases.
a) Typical delivery conditions
It should be the goal for the operator to have the aircraft delivered in the same standard as the rest of
the fleet. Although maintenance programs for modern aircraft types typically do not define C-checks,
the terminology is still widely used. In this case, the former C-Check interval is defined by a specific
number of flight hours, flight cycles or/and calendar time, and it is advisable to ensure that this specific
period matches the requirements of the operator. The remainder of the maintenance items, such as
hard time components, emergency equipment and landing gears, are usually cleared for a similar
period. Engines are generally treated separately and, with the exception of LLPs, operational
assurances are usually based on softer terms. It is therefore more difficult to determine if these
conditions are met at delivery. An example of a typical delivery conditions is provided in Annex III.
Other items usually have specific delivery requirements and are negotiated separately, such as wheels
and brakes, auxiliary power unit, modifications, repairs and paint;
o
18
Wheels and brakes: While seemingly unimportant, wheels and brakes are subject to wear. With the
redelivery of an aircraft in sight, previous lessees are usually less inclined to replace worn wheels
or brakes. These replacements can be costly and establishing a clear delivery requirement, which
mandates the need to have at least 50% life remaining or be in a new condition, will save costs and
prevent logistical challenges.
Pre-Lease
o
o
o
APU: Determining the remaining life of the APU can sometimes be challenging. Performing a
borescope and reviewing previous shop visit documentation will aid the lessee in determining the
remaining life. However, these soft requirements are subject to individual interpretation and very
often lead to discussions. The lessee could consider a simple hard time whereby the APU may
not have more than a certain amount of hours since its last shop visit. Whilst the lessee will then
also see this requirement in the return conditions, it will at the very least provide the lessee with
some form of an additional guarantee at delivery.
Service bulletins: Free of charge manufacturers service bulletins are expected to be performed on
the aircraft. Otherwise, these free of charge kits should be delivered along with the aircraft as these
are usually issued against a tail number.
Repairs: There are a number of items that the lessee should take into consideration for repairs and
the associated repair documentation (as described in paragraph 2.3). Firstly, the lessee should
clearly define which repairs are acceptable. Very often requirements such as flush or permanent
are inserted. Remembering that what is delivered will also be mirrored at redelivery, the lessee
could insert wording that allows alleviation in case flush or permanent repairs are prohibitively
expensive or otherwise impractical. Secondly, the lessee should consider a clear definition of
which repairs should be included (i.e. blends, patches, etc) as this may lead to discussions either at
delivery or redelivery.
Paint: The paint condition and paint scheme may be separately agreed between lessor and lessee.
In most cases, the aircraft is delivered with a freshly painted white fuselage. However, agreeing
to deliver the aircraft in the lessees color scheme (with compensation to the lessor) will save
valuable downtime.
Besides the aforementioned requirements, several additional aspects could be mentioned in the
delivery conditions, such as the export Certificate of Airworthiness and regulatory conditions, AD
compliance, etc. All of these should be carefully considered by the lessee.
b) Minimum delivery conditions
In certain cases, aircraft are offered with only the minimum of delivery conditions. This category of
delivery is common in the event where the previous operator ceased operations. It is also common for
older aircrafts where the lessor and previous operator commercially agreed to buy-off the redelivery
conditions. Therefore, the new lessee will effectively inherit the minimum delivery conditions but at a
lower lease rate. In most cases, the aircraft is delivered in an airworthy condition, without any
outstanding maintenance and/or deferred defects, but without any additional maintenance clearance.
This would imply that applicable aircraft records should still be available in order to comply with local
aviation authorities regulations. However, depending on the age and/or circumstances surrounding the
previous operators termination, the lessee is advised to be cautious and take care in reviewing the
records and aircraft in order to clearly describe the state of the aircraft and documents in the lease
agreement. This should include the condition of interior, fuselage, windows, doors, interior, cockpit,
landing gears and landing gear bays.
3.2.2
The lessee should actively get involved in the delivery process as early as possible in order to ensure that
the aircraft meets the delivery conditions. This will concern both a physical and records inspection and the
lessee should realize that in almost all cases the aircraft will be accepted in an as-is-where-is condition.
Additionally, it is the lessees obligation to detect any issues or shortfalls with the aircraft or records (as
described in Section 3.1.3). It is therefore advised to involve all relevant parties within the organization as
early as possible in order to detect issues early on and prevent unnecessary delays. Both the physical
inspection and the records review are outlined below.
19
20
Maintenance program compliance review: Verify the status of each maintenance task to:
Determine that no task is overdue and the aircraft falls within the agreed maintenance
clearance period.
Verify the status of the sampling program.
Confirm that repeat inspections of repairs and additional tasks linked to modifications
(Instructions for Continued Airworthiness (ICAW)) are included.
In particular, the lessee should be aware of recently included maintenance tasks and their related
grace period, which are the result of new MPD or MRBR revisions. Additionally the lessee should
also verify that the status and findings resulting from the Corrosion Protection and Control Program
are readily available (i.e. level, follow up etc).
Review of the AD-note dirty fingerprints for correct compliance including review of any Alternate
Means of Compliances (AMOC), to verify transferability. AMOCs are not (always) transferable
between operators and should therefore be avoided. In this case, transferable means that in order
for the AMOC to be valid, there is no company specific tool or procedure required which is not
available to next lessee.
Pre-Lease
Some AD notes are applicable to a specific part number or serial number (range). Specific attention
should be paid to these AD-notes as very often these parts may have been replaced and/or the
AD-note may not accurately reflect the inspected part.
o
Modifications and alterations: A review of the dirty fingerprints and engineering data for all major
and minor modifications. Of particular importance are major modifications, such as Supplemental
Type Certificates (STCs). Ensuring that all STC data are available, including the relevant manual
supplements, is of the utmost importance. The data-package should include a Right to use letter,
the engineering drawings and certification basis (local, Pre-EASA, EASA, FAA, other) as well as
any dirty fingerprints to see if any in-situ changes were applied. Specific attention should be paid to
the associated manual supplements (i.e. correct integration into the AMM, IPC, WDM, etc) to
ensure correct implementation of any additional inspection requirements into the maintenance
program.
Repair file: Review of the dirty fingerprints and certifications of each individual repair including a
mapping of the aircraft should be performed. Compliance data should include correct reference to
the Structural Repair Manual (SRM) used, NDT task-cards, communication with manufacturer and
engineering data such as drawings, damage overviews and thickness specifications. Of particular
importance is the SRM revision as the continuous development and subsequent issue of newer
SRM revisions may introduce new and more stringent repair procedures.
Hard Time (HT) components and On Condition/Condition Monitoring (OCCM) components: The
lessee should verify availability of the correct release certificate, as well as compliance with the
maintenance clearance period. Items such as emergency slides should be carefully inspected as
these have sub-assemblies (e.g. batteries, squibs, etc.) which are required to be listed separately
on the release certificate.
Regulatory certificates: Lessee should perform a review of the different certificates and statements,
such as Certificate of Airworthiness (CofA), Certificate of Registration (CofR), Certificate of
Insurance, Noise Certificate, non incident statement, etc.
Logbooks: Verify that all logbooks are available, updated and closed. It is important to note that not
all authorities require the use of hardcopy logbooks. Should such a requirement be applicable to a
lessee, it is of vital importance to verify that logbooks are available for the entire life of the aircraft.
Should this not be the case, that dispensation is arranged with the authorities prior to importation.
Engines: As engines are high value components and individual maintenance events are extremely
costly, special attention should be paid to the documentation associated with engines. During the
review of the engine records, the lessee should ensure that all documentation required to
determine the engines remaining life and expected operational limitations are available (shop visit
reports, trend data, borescope reports etc). Subsequently the back to birth documentation for Life
Limited Parts should be carefully reviewed.
Interior burn certification: Lessee should verify that burn certification is available for cabin, flight
attendant, flight crew seat covers, cushions, sidewalls and also for carpets, curtains. This
requirement can be satisfied by either confirming an official test-report and approval is available or
that these components are listed in the IPC. Subsequently, the lessee should perform a physical
check to determine if the correct parts numbers are installed.
21
22
SECTION 4.
OPERATIONS
Cost allocation becomes an issue once costs are made by a specific operator. Depreciation, which will only
affect the lessor's statements, is required over a certain timeframe during which multiple operators will
make use of the aircraft. This would not cause any complications if the time of accomplishment of such an
event in the future is known, for example, for landing gear replacements of specific maintenance events.
Complications arise for events that are unknown at start of lease; such is the case for ADs.
Whenever there is an unsafe event, the airworthiness authorities may prescribe an Airworthiness Directive
(AD-note). This document often requires performance of a mandatory modification or repetitive inspection
in order to maintain continued airworthiness of the aircraft.
Without cost sharing formulas, the cost of this modification is for the lessee, while it cannot fully enjoy the
benefits of such a modification as this safety improvement is applicable to the entire life of the aircraft and
the lessee will only operate the aircraft for a limited period (this is specifically apparent with short term
leases). The lessors will often argue that lessees should cover the cost related to local regulatory
mandated modifications; in particular if these regulations are not applicable to any other jurisdictions. From
a lessee perspective, one can argue that the cost of ADs is fully the lessors risks because if the aircraft
was not on lease, the associated cost would have been for the account of the lessor.
Cost sharing formulas in leases are common and the lessee should evaluate the benefit of such formulas
carefully. Usually these cost sharing mechanisms include a threshold for the sharing formula to be
applicable and only ADs over this threshold will be reimbursed. It is obviously in the lessees interest to
keep this threshold as low as possible. Additionally, the lessee should also carefully review existing ADs
which might fall due during the lease term as there are several known ADs which are applicable to certain
older aircraft (or applicable to aircraft over a certain flight-hour or flight-cycle threshold) and performance of
these are expensive. This cost sharing is usually limited to ADs issued by the civil aviation authorities only
and excludes other mandatory changes, such as navigation upgrades or noise related modifications, as
they are often linked to the operational area of the aircraft and not to the technical status.
4.1.2
At the start of the lease, the lessor will establish an account for each of the, by the lease identified,
maintenance events. Maintenance reserves can be constructed in various ways, but often it is not possible
to transfer amounts between the different accounts during the lease. The maximum claimable amount will
therefore always be the amount accumulated in the specific account.
For maintenance reserve claims, efficient communication with the maintenance provider and lessor is
essential to speed up the release of maintenance reserves and will minimize possible delays. More often
than not, an event is not treated as a qualifying event because an incorrect workscope has been performed
(or only partially been performed). Agreeing on the workscope prior to commencement of the maintenance
activities will prevent unwanted delays or claim rejections.
23
24
SECTION 5.
RE-DELIVERY
Introduction
The redelivery process is the final step in the aircraft leasing life cycle and the lessor will have started its
marketing efforts well before the aircraft is redelivered. Consequently, the redelivery date is of great
importance to the lessor as penalties and other protection mechanisms against late redelivery have been
included in the lease agreement. The lessee should therefore thoroughly prepare for this redelivery process
and prevent any unnecessary delays, which are extremely costly. Open communication with the lessor
during this final phase, will prevent any unwanted surprises just before the redelivery date.
Whatever the circumstances surrounding a redelivery may be, the amount of effort and time required for a
redelivery process depends largely on how well the individual requirements from the lease have been
implemented by the lessee at the start of the lease. The redelivery process can be divided into three
separate phases.
Initial phase: this initial phase or planning phase should be used to review the redelivery requirements
from the lease, create a baseline plan and assign relevant manpower. This phase could start as early
as 12 months before the redelivery depending on the length and complexity of the lease.
Pre-redelivery phase: this phase usually starts immediately after the initial phase and is focused on
planning and preparing for the significant maintenance events, such as required engine shop visits and
airframe checks. Ideally the lessee should also make arrangements to meet with the lessor in order to
align expectations and discuss the redelivery process.
Redelivery phase: during this final phase, the aircraft will undergo a redelivery C-check and records
specialists will start compiling the redelivery binders and work alongside inspectors from the lessor.
An overview of the different phases and their timing can be found in Figure 4 below.
25
Initial phase
The redelivery process starts many months before the actual redelivery event. A proper project plan based
on a thorough evaluation of all lease requirements, the actual state of the aircraft and records will prevent
unpleasant surprises. The start and duration of this planning phase are dependent on the complexity and
length of the aircraft lease. Considering that engines usually require shop visits to meet the redelivery
conditions and the need to obtain additional information from third parties (such as shop reports), it may not
be uncommon to start this process 6 to 12 months before redelivery or even longer.
5.1.3
Following the initial planning phase, the lessee can start with the creation of the relevant maintenance
work-scopes. Ideally, this should be done in conjunction with the aircraft lessor to prevent any discussions
close to the redelivery. Many lessors will already send over an inspector to perform a pre-redelivery
inspection in order to determine the condition of the aircraft and records. This may be a good opportunity to
discuss the expectations of the lessor and the redelivery planning. Generally this phase will include the
following elements.
5.1.4
Redelivery phase
The final phase will focus on the performance of the aircraft redelivery check and the preparation of the
aircraft records. Commonly, the aircraft lease will describe the exact records requirements. This usually
includes the so-called redelivery bible, which contains all relevant and latest summary sheets (an index of
a typical redelivery bible can be found in Annex II).This phase is also the most labor intensive phase and
lessees records staff will work side by side with the lessors team of inspectors.
26
SECTION 6.
CASE-STUDY
6.1.1
Situation
A rapidly growing airline plans to add several Airbus freighters to its fleet as part of its fleet expansion
plans. Their current fleet consists of several airframe types of various manufacturers, but did not include
any Airbus airframes. The aircraft was originally delivered and operated in the United States, but stopped
operation about one year before it was accepted by the new lessee. The aircraft will be exported from the
United States and subsequently imported into a new jurisdiction after a cargo conversion.
6.1.2
As the operator was under significant time pressure, a full records due diligence was not performed prior to
acceptance and only limited portions of the records were reviewed. During the cargo conversion, the
operator started with the importation and registration proceedings and only then discovered a number of
anomalies not previously known to the operator;
a) Operator Maintenance Program
A new aircraft maintenance program needed to be developed and the aircraft needed to be bridged
into this program. This required verification of all maintenance tasks and their last performance data.
The review revealed that the maintenance program of the previous operator was highly customized and
that a significant amount of work was required to bring the aircraft closer to the Airbus MPD.
Additionally, it was found that the previous maintenance program was based on a previous (older)
version of the MPD.
b) Hard Time components and OC/CM components
The internal procedures in place with the previous operator only required maintenance records to be
stored for a period of 2 years. Records were then subsequently scanned and destroyed. Unfortunately,
the scanned copies were of poor quality. Part number and serial number information were sometimes
hard to read, requiring the component to be removed and recertified; a very costly and time
consuming procedure.
c) Modifications
Many of the modifications installed on the aircraft were designed and approved by the previous
operators own engineering department. Engineering data for the modifications was often unavailable
as this was stored in a central location (rather than with the aircraft documentation) making it extremely
difficult and time consuming for the operator to have these changes approved by their local authority.
27
6.1.3
Outcome
Several major and minor issues were discovered after the aircraft was accepted by the lessee. Although
the records were acceptable to the FAA, the Civil Aviation Authority of lessee required a significant amount
of changes to the aircraft and records prior to importation. Given the fact that the aircraft was accepted by
the lessee in an as-is-where-is condition, almost all additional costs were for the lessees account. The
many component changes, repair recertification, records rebuilding and other work, were not only
extremely costly but also resulted in a significant delay in the operational start of the aircraft.
28
REFERENCES
Ascend, 2012, Ascend Online Fleet Database, Ascend Advisory, London (United Kingdom). Available
from: http://www.ascendworldwide.com/ [Accessed 1 November 2012].
Shpall, J., 2011, Tracking Global Airline and Aircraft Leasing Trends, TCW Group Inc, Los Angeles
(United States of America),November 2011.
Aviation Working Group, August 2004. AWG Position on Eurocontrol and Air Navigation Route Charges.
Bunker D.H., 2002. Aircraft Wet Leasing: the Perils and the Benefits, Annals of Air and Space Law,
Volume XXVII.
Chrystal P., 1999. The Aviation and Reinsurance Markets Defying the Odds, Handbook of Airline
Finance, 1st Edition, Aviation Week: McGraw-Hill.
Crans B., 2004, How to Make Sure Your Aircraft Lease Agreement Covers (Almost) Everything. Air and
Space Law, Vol. XXIX/1.
European Civil Aviation Conference, July 1997. Recommendation on Leasing of Aircraft, Recommendation
ECAC/21-1.
French D., July 2008. Legal considerations for aircraft engine financiers. Airfinance Journal.
Hanley D. P., 2012. Aircraft Operating Leasing, A Legal and Practical Analysis in the Context of Public and
Private International Air Law. Alphen aan den Rijn: Kluwer Law International.
Hamilton J.S., 2005. Practical Aviation Law. 4th Edition. Blackwell.
Hanley D.P., 2011. Contractual and Property Rights in Leased Aircraft Engines, Air and Space Law:
Contemporary Issues and Future Challenges, Air and Space books.
Kuiperi H.E., 2008. Aircraft leasing in the context of the AF-KL merger. International Institute of Air and
Space Law.
Shupe J.D. and Buhler G. W., 2004. Commercial Aircraft Transactions: Liability of Owners, Lessors and
Finance Parties. Air and Space Law, Vol. XXIX/6.
SGI Aviation, 2012. Internal Database and Centre for Knowledge Excellence, SGI Aviation, Amsterdam
(The Netherlands).
29
ANNEX I
Avionics
Cargo
LDG
APU
Engines
External
Area
30
Item
Description
General Overview
Paint condition
ID plate
Cowlings
Intake
ID plate
General overview
Showing MPH/Ply/PN
Annex
ANNEX II
For delivery and redelivery a certain number of documents and related substantiation records are required.
This Annex provides a best practice of the various documents and their description of what is required.
Every lease agreement and associated delivery and redelivery will be different and consequently the list of
documentation will be different as such items can be added and or removed from this list.
CERTIFICATES
Certificate of Airworthiness
Certificate of Registration
STATEMENTS
Non Accident/Incident Statement
31
Sampling statement
On watch statement
STATUS LISTS
Certified Current Time in Service
TSN and CSN for Airframe, Engines, APU and Landing Gear
of the equipment to be redelivered.
32
Annex
Certified Supplemental Type Certificate
Status
A current list for each engine showing all the LLPs installed in
the engine by P/N and S/N. Furthermore the list should show
the Life Limit of the part for each thrust setting, the hours and
cycles accumulated at each thrust setting, and the hours and
cycles remaining at each thrust setting.
A current list for each landing gear assembly showing all the
LLPs installed on the assembly by P/N and S/N, showing the
Life Limit for the part for each aircraft type to which it can be
fitted, the Cycles accumulated on each aircraft type, and the
Cycles remaining for each aircraft type.
33
RECORDS
Airframe Log Book
Airframe Checks
All official logbook containing all the pilot reports and line
maintenance reports (i.e. in service defect reports for the
aircraft and cabin) of the last 5 years.
34
Annex
Engine Condition Monitoring Report
A certified copy of the latest trend data for each engine which
must show no obvious deterioration in the on-wing
performance of the engine. The trend data should be provided
for to the last 6 months.
Latest engine ground run report (this is not the same as the
ground run which is performed at redelivery).
Shop visit reports for all APU shop visits. At a minimum the
records should include the following; Release to Service
Certificate, AD Status, SB Status, LLP Status (if applicable),
Incoming Inspection Report, Summary Report of Work
Accomplished, and Test Cell Report.
AD Records
Modification Records
35
CPCP Records
SSID Records
Repair Records
36
Annex
Last Weighing Report including Schedule
Latest test flight report (this is not the same as the test flight
which is performed at redelivery!).
Paint history
Modifications List
37
Aircraft Logbook
MANUALS
Airplane Flight Manual
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Task Cards
Latest revision
38
Annex
Aircraft Schematic Manual
Latest revision
Latest revision
Overhaul Manual
Latest revision
NDT Manual
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
Latest revision
LOPA
MISCELLANEOUS
List of Oils and Fluids used on Aircraft
A list of all oils, greases and fluids which are used on the
aircraft.
At redelivery
Fuel Sample
At redelivery
39
2.
3.
4.
Certificate of Registration
5.
6.
Noise Certificate
7.
8.
9.
40
Annex
ENGINES
1.
Minipack
2.
AD-status
3.
SB-status
4.
Repairs
5.
LLP
6.
Modules
7.
Repetitive inspections
8.
9.
Logbook
10. Borescope
11. Accident/Incident Statement
12. Data Submittal
41
ACKNOWLEDGEMENTS
SGI:
Joost Groenenboom
Remko Bruinsma
Marc Beechcroft-Kay
IATA:
Chris Markou
Geraldine Cros
Others:
Thanos Pascalis
42
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ISBN 978-92-9252-258-2