Tuscar's Knowledge Series: The Lease Agreement
Whilst the Aviation sector is one of the fastest growing sectors, it’s also one of the most competitive. Not only has the aviation landscape changed due to the emergence of LCC’s and ULCC’s but with the shifting of economic powers due to globalisation, we see the emergence of developing markets which ultimately fuel aviation growth.
By 2037, passenger numbers will be at 8.2 billion and circa 37,000 new aircraft will be required to meet this demand. At present approximately 40% of the worldwide fleet are leased, with this scheduled to increase to 50% over the next decade.
More Airlines are leasing aircraft as it enables them to afford new, fuel efficient and technologically advanced aircraft, whilst facilitating the deployment of capital to other areas of the Airlines’ organisation. However with leasing aircraft comes “End of Lease Redeliveries” and if poorly managed, can cost an Airline $2M (USD) for a Narrowbody and in excess of $5M for a Widebody.
Tuscar’s team is comprised of former Leasing executives who have witnessed first-hand the difficulties Airlines face during the redelivery phase and how, if poorly managed, translates into a $2M (USD) redelivery.
Over the next series of articles, we will briefly examine 5 key elements of the Redelivery process, which if managed effectively should substantially reduce the Airline’s financial exposure:
Qualifying Maintenance Events
Redelivery Planning & Budget development
The Lease Agreement
Given the importance of the Lease Agreement, it’s incredible that only a select few individuals within the Airline have access to this document and tend to be those primarily involved with the Lease negotiation stage.
Chances are that those same individuals will not be involved in managing the Aircraft during the Lease nor the Redelivery phase.
Normal practice on execution of the Lease Agreement, is to file it away with only those responsible for generating the Monthly Utilisation Report and paying the Monthly Rental and Supplemental Rent (Maintenance Reserves) having access to the relevant sections of the agreement.
This lack of “lease awareness” becomes evident at various stages throughout the Lease. For example, when an Airline performs an Engine Shop Visit (ESV) only to have access to the reserve fund disputed by the Lessor as the ESV did not meet the qualifying criteria of the ESV definition in the Lease Agreement. Other areas which may need to be addressed or compensated for at Redelivery include Repairs, Modifications, Components, Records, etc.
The average Lease Agreement consists of approx. 150 pages, the majority of which are technically related. A simple solution is to prepare a Quick Reference Guide or “Cheat Sheet” summarising the lease into a number pages which can be circulated to the various technical affiliated departments - with the caveat that access to the actual lease is available should any ambiguity need to be clarified.
Focus should be placed on key Sections & Clauses such as:
o Maintenance & Repair
o Installation of Engines & Parts
o Pooling of Engines and Parts
o Redelivery Obligations.
Airline departments tend to work in “silos” operating independently of each other. Whilst information overlap does occur, one department may not be aware of how its decision may impact another or if the action may need to be reversed or addressed at Aircraft redelivery.
It’s important for the various departments to be aware of their respective obligations under the terms of lease agreement, how their decisions impact other departments and ultimately by creating this “lease awareness” will reduce the cost associated with returning the Aircraft to the Lessor at lease end.
Our next instalment will focus on the area of Qualifying Maintenance Events. We welcome your thoughts and experiences of various Lease Agreements and should you wish to discuss further please do not hesitate to reach out to Tuscar’s industry experts.