Tuscar's Knowledge Series: Qualifying Maintenance Events
One of the most contentious aspects of any Lease Agreement is that of Maintenance Reserves or Supplemental Rent as they are now referred to in more modern day Leases.
The concept behind Supplemental Rent is simple; if the Lease agreement is reserve based, the Lessee pays a Dollar amount each month (utilisation or calendar based) to the Lessor towards the following maintenance events:
Engine Shop Visits
Aircraft “C” Check (or equivalent) and HMV
Landing Gear Overhaul
On completion of the maintenance event, the Lessee provides evidence that the event has been accomplished – such as a Copy of Engine SV Report and a Copy of the Invoice paid by Lessee to the Engine Shop. The Lessor will then review the various documents and if all is in order, will refund the Lessee the amount accrued to cover the cost of the event.
Cases have occurred where the Lessee has been denied access to the reserves as the event was not a “Qualifying event” iaw the Lease Definitions.
In my first article “The Lease Agreement” I mentioned how focusing on key sections of the agreement such as Definitions is critical to avoid exposing the Lessee as a result of non-compliance.
Let’s take an Engine Shop Visit (ESV) as an example. When an Engine is due to undergo a scheduled shop visit maybe for a Performance Restoration or LLP replacement, the powerplant engineer will prepare a workscope designed to achieve a certain MTBR (Mean Time Between Removals). There is a high probability that this workscope will be standard for all engines of the same type within the Airlines’ fleet - CFM56-7B, however the fleet may be leased from a number of Lessors with different Lease definitions.
In some cases the Airline may have a PBH (Power By the Hour) or TCA (Total Care Agreement) in place with the Engine shop who will perform a certain level of Engine Overhaul or Repair, designed to achieve the MTBR outlined in the terms of the PBH or TCA.
Whilst the level of maintenance performed on the Engine may achieve the desired MTBR, let’s say 10000 FH / 5000 FC, it’s imperative that the Lessee ensures in advance of placing the Engine into shop, that the Workscope level meets the ESV definition of the Lease and that they seek pre-approval of the proposed workscope from the Lessor.
Failing to do so may result in the access to the reserve fund being denied, as the Engine may not meet the “Engine Shop Visit” definition as per the Lease Agreement.
Whilst the particular level of maintenance performed on each Engine module by the Engine Shop may be sufficient to achieve the MTBR, the actual Lease Agreement may require a higher level of maintenance to be performed than what the Engine Shop may deem necessary.
On Reserve based lease agreements, the Lessee can protect its position by ensuring that it obtains pre-approval of the proposed Engine Workscope from the Lessor and that the Lessee closely monitors the progress of the Engine through the shop.
Lease Agreements which are “Compensation” based as opposed to Reserve based may leave the Lessee prone to financial exposure at the End of Lease (EOL) as no pre-approval is required for shop visits which may occur during the Lease period.
At the EOL the Lessee may find itself compensating the Lessor back to a Shop Visit that may have happened 2 shop visits ago as the most recent shop visit may not have met the terms of the Lease.
Whilst I have focused on the Engines in this article due to the high costs of Engine shop visits, the Lessee also needs to be aware of the lease definitions with respect to the Aircraft, Landing Gear and APU maintenance events.
Our next instalment will focus on the area of Lessor Engagement. We welcome your thoughts and experiences with respect to Maintenance Events and should you wish to discuss further please do not hesitate to reach out to Tuscar’s industry experts.