An increasing number of airlines will be coming to loggerheads with lessors over advance payments for maintenance and conditions for return of leased aircraft now that more carriers are tapping the aircraft lease market.
Airlines are responsible for aircraft line maintenance, such as A checks, but the heavier checks—C and D checks—are far more expensive, so lessors usually require airlines to pay monthly installments known as maintenance reserves to cover the cost of future maintenance.
Lessors' policies have caught the attention of, which plans to formulate industry guidelines. The first set of guidelines will cover maintenance reserves, says IATA Maintenance Cost Task Force Chairman Tiymor Kalimat, who is also the aircraft leasing manager at Royal Jordanian Airlines. The guidelines will be hammered out by a working group with equal representation from airlines; maintenance, repair and overhaul (MRO) companies; and lessors, he says. Kalimat was speaking at the IATA Maintenance Cost Conference in Singapore Oct. 19-20.
The issue of maintenance reserves is controversial because airlines are concerned some lessors may be pocketing some of the money in the fund, rather than giving it back to the airline.
Monthly payments to the maintenance reserve are becoming such a drain on airline cash flow that the amounts can often be more than the monthly operating lease payments, particularly if it is an older aircraft, says Kalimat. He says there are no industry standards governing maintenance reserves. On the one hand, large carriers can negotiate lease deals in which they are not required to contribute toward a maintenance reserve. On the other hand, smaller carriers with less bargaining power have no choice but to accept the lessors’ demands, he says.
Kalimat also says lessors sometimes put a clause in the contract that says the aircraft has to reach a certain number of cycles or flight hours per year. The lessor wants the cycles clicking over, so the maintenance reserve money keeps rolling in, he says, adding that if an airline fails to reach the target, the lessor may deem the aircraft to be a non-operating asset, in which case the lessee will have to pay penalties.
Leo Koppers, senior VP-marketing and sales at German engine maker and MRO company MTU, says most lessors consider the reserve something you keep for “security in case the operators can’t pay their bills. I understand lessors who say ‘we need to sit on some of the maintenance reserve in case of that.' And it does happen. There’s so many new companies stepping into the airline business and defaulting shortly after.”
Once the lessor agrees to use some of the money in the reserve for maintenance, MTU has found that the lessor is often reluctant to opt for designated engineering representative (DER) approved repairs, says Koppers, referring to-approved repairs. But MRO providers generally prefer DER repairs because it creates an opportunity for the MRO firm to add value, and save the airline some money at the same time, says Koppers.
Leased aircraft now account for 30-35% of the global airline fleet. Koppers says they will account for more than 40% by 2020. The fact that so many aircraft are controlled by leasing companies or financial institutions means airline maintenance personnel who have had free reign deciding on maintenance matters, now have to be more careful and bear in mind the terms of lease contracts. For example, the airline maintenance department may decide to perform an engine overhaul, but the leasing firm may refuse to reimburse the airline for it.
One of the concerns IATA has is that some lessors may be using the maintenance reserve system as a mechanism for effectively charging airlines twice for maintenance. The airline will make the lessee pay toward future maintenance, but when the aircraft switches to a new lessee, the lessor may not admit the work has already been partly paid for by the previous lessee.
When asked if leasing companies disclose to the new lessee how much the previous lessee has paid toward future maintenance, Shannon Ackert, VP-commercial operations at aircraft leasing firm Jackson Square Aviation, says, “Leasing companies traditionally don’t disclose that. We don’t divulge the balance in the reserves.”
Some of the money put into the maintenance reserve is for future engine maintenance; an important issue for lessors because as the aircraft ages, most of the value of the aircraft is in the engines, rather than the airframe. If they have to also pay the lessor for future engine maintenance, they are effectively paying twice.
Tom Bemstein, managing director of aviation consulting firm TBE International, says because aircraft lease contracts affect aircraft maintenance, the airline’s aircraft leasing managers should involve the maintenance department in the lease negotiations. A mistake carriers often make is that the airline fleet manager fails to keep the maintenance department in the loop, so the fleet manager may unwittingly agree to terms that are draconian or difficult for the maintenance team to fulfill, he says.
There may be language in the contract stipulating that an aircraft structure has to be returned “half-life to a heavy check,” says Bemstein. For example, the aircraft may be due to be returned to the lessor after three years, but is due for a heavy check every six years. The clause may sound reasonable to a fleet manager who is not an expert in MRO, but to fulfill the clause, an airline must bring forward costly heavy maintenance work.
Olympic Air CEO Thanos Pascalis says lessors usually require that the aircraft undergo a C check before being returned. He concedes that lessors have this clause because the next lessee may only be interested in aircraft fresh from a heavy maintenance check.
Pascalis also takes issue with lessors’ opposition to parts manufacturer approval (PMA) parts. “PMA is a lost opportunity to drive costs down,” he says. Royal Jordanian’s Kalimat says the irony is large airlines have enough bargaining power to get lessors to accept PMA parts.