A General Introduction to Aircraft Leasing Maintenance Reserves

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SofemaOnline takes a look at the Purpose of Maintenance Reserves within an Aircraft Leasing Arrangement

Introduction

The concept of Maintenance Reserves is designed to “protect” the Lessor by ensuring funds are available to cover major activities.

Maintenance reserve payments are typically calculated on flight hour, flight cycle, and/or calendar basis and are usually paid on a monthly basis in arrears.

At the time an aircraft is taken out of service for maintenance, the lessor should already have funds to cover the cost of outstanding maintenance.

Note - In the event of default, the maintenance reserve provides the lessor with a degree value protection throughout the lease.

Examples of typical activities which can call on MR Funds

▪ Airframe Heavy Structural Inspections
▪ Landing Gear Overhauls
▪ Engine Performance Restoration
▪ Engine Life Limited Parts (LLPs)
▪ Auxiliary Power Unit (APU) Restoration

Maintenance Reserves are Not Universal!

Some “major” airlines have sufficient credit status that they can basically insist to forgo the entire MR provision.

Of course, the Lessor prefers there to be MR’s in place but they balance against the size of the lease arrangement (How many Aircraft / How Long) and make appropriate risk-based decisions.

Lessors will on the other hand usually insist in all cases where the strength of the balance sheet is not evident to require these operators to pay maintenance reserves.

Accumulated reserves can be reimbursed (subject to limitations) after major maintenance events are completed.

Note - A “Collateral Security” in the form of an End of Lease Financial Adjustment or Letter of Credit (LOC) may be required in the event of no MR payments.

Who Owns Maintenance Reserves?

Consider the Maintenance Reserve as being multiple funds or “pots” - each one dedicated to a particular aspect or element. In fact, the funds are separated from each other and may not be used to bridge any perceived shortfalls.

Maintenance Reserves “belong” to the Lessor on payment and it is necessary for the Lessee to claim reimbursement for the works that have been (providing the account is up to date).

End of Lease Payment Process 

Under an End of Lease Financial Adjustment structure, if a certain maintenance event is returned at the end of a lease in a worse than stipulated condition, the lessee must make an end of the lease payment to the lessor. Conversely, if a certain maintenance event is returned in a better than stipulated state, the lessor is obliged to pay the lessee.

There are generally two types of end-of-lease payment structures:

a) Mirror-In / Mirror-Out
b) Zero-Time or Full-Life

Mirror Adjustment

Either the Lessor or Lessor (depending on circumstances and condition) may pay an adjustment.

Zero-Time or Full-Life

A payment whereby the lessor receives payment for a time used since the last overhaul or since new.

A maintenance Letter of Credit (LOC) guarantees that lessee will return the asset to the lessor in the condition required by the lease.

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