Aircraft Lease Maintenance Reserve Considerations

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Process Review by SofemaOnline

Introduction

Clearly an airframe or engine which is just out of a maintenance overhaul has a higher market value than one that is coming due for major maintenance.

To mitigate and provide structure to aircraft leases maintenance reserves, (MR) accumulate during the term of the lease with the goal of covering the cost of maintenance.

These funds are typically collected to account for “high value” elements, for example, the cost of airframe, engine, landing gear, and APU.

What are Aircraft Lease Maintenance Reserves?

Maintenance Reserves are designed to support the integrity of the aircraft leasing process by building in a degree of financial protection.

The value of an aircraft (and engines) is principally determined by its age, maintenance status with due consideration to the business cycle positioning.

There is always a risk where high-value assets are concerned and ultimately it is the lessor who carries the residual risks. Consider for example the potential for a default.

For example, In the event of bankruptcy, all the current and ongoing costs must be met by the Lessee.

Whilst the primary goal of an aircraft lease is to ensure that the payments do in fact cover the capital and financing costs of the underlying asset as well as to produce a profit for the Lessor.

Maintenance Reserves are intended to provide protection for the Lessor in respect of the Aircraft, Engine Propeller & Major Components.

One industry concern involves the subject of Aircraft Lease Maintenance Reserves with a general believe it is often not given sufficient attention.

Reality Check - An understanding of maintenance reserves is critical to gaining a perspective on the risk and rewards of aircraft leasing.

Maintenance Reserve Fund Considerations

Taken together the funds currently allocated to Maintenance Reserves total many billions of USD with the basic cost of maintenance typically rising at a rate in excess of 3% / annum.

Maintenance reserves are typically a contentious part of lease negotiation.

Lessor / Lessee Viewpoint 

The lessor sees maintenance reserves as a cost-covering exercise which protects exposure.

The lessee, of course, views it as a burden on their cash flow resources.

Whilst the value of an asset usually decreases with age the actual market value is also influenced by the condition and maintenance status of the engines and airframe. 

Calculating Maintenance Reserves 

MR payments are included with the monthly rent and are based on the cost of each major maintenance event divided by the controlling interval.

Examples:

Airframe 

If the Airframe heavy check is on a 24-month interval, the MR will equate to the cost of the heavy maintenance event divided by 24-month interval. 

Engines 

Engines have two separate MR funds to enable the protection of market value.

a) Life limited parts (LLP) and

The cost of the set of LLPs is based on the cost of the LLP stack divided by the cycle limit.

b) Engine performance restoration

The cost of the performance restoration is typically divided by the anticipated interval in hours between performance restorations. 

Landing Gear Overhaul & APU Restoration 

The landing gear with an overhaul schedule based on landings or Calendar and the APU performance restoration which is based on hours. 

General Notes: MR are intended only for routine maintenance, being major events such as Heavy Maintenance Visit HMV, engine overhaul, engine Life Limited Part LLP replacements.

Within these packages there will, of course, be various “non-routine” findings for which the maintenance reserve will be used to pay for, however, the principle event itself remains a routine maintenance task.

Typically in the case of incident or accident, there is no mechanism for MR to be paid or to be claimed for on accidental damage.

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