Why were commercial passenger aircraft ever invented, built, bought and sold or operated? The clue's in the name: the passenger. Many if not most travellers spare scant thought to the feats of engineering behind an aircraft's take-off and landing, not to mention keeping it airborne in between. What they will notice and expect when flying, however, is how the aircraft looks inside and whether it is clean, tidy and comfortable. So, having interiors in the best condition throughout the life of an aircraft is paramount for most operators.
An aircraft's interior can be years in the design and building. New technologies might be added and included as and when they become approved and available prior to delivery. Colours and material finishes may be tweaked right up until final commitment agreements are signed. Then at last, with submission of the order a distant memory, the aircraft is delivered to the lessee or operator and will serve them for many years. What happens though when the operator is ready to return the aircraft to the lessor or owner at the end of the period?
At IBA we believe that, despite being fundamental, an aircraft's interior and its condition at lease return are often overlooked and relevant lease terms are somewhat open to interpretation. Anyone who has read the 'at lease return' section of most leases will undoubtedly be aware of reference to the catch-all 'fair wear and tear'. What does it mean? Dictionary definitions read along the lines of 'the damage that happens to an object in ordinary use during a period' but is this helpful? Who decides what's 'ordinary use'?
In IBA's view the term is unhelpfully imprecise and this ambiguity results in its meaning being entirely open to interpretation. Two independent inspectors could have vastly different opinions about whether a defect in an aircraft's interior is deemed acceptable as 'fair wear and tear' or is indeed damage that requires replacement or repair. Reaching a consensus between parties is sometimes challenging.
The entire end of lease project is condensed into as tight a timeframe as practical to ensure costs are minimised and the redelivery process is itself usually combined with a heavy maintenance check. High cost items such as engine LLPs and landing gear overhaul are planned well in advance as all parties have visibility on these items based on utilisation rates. However, aircraft interiors are often an afterthought in such time sensitive circumstances despite the complications they can present.
Last year, IBA conducted a survey of the issues arising out of aircraft redeliveries. Asked which area of an aircraft is most challenging to deliver on time and on budget, over 20% of respondents, aircraft industry stakeholders including lessors and lessees, cited interiors. Full details of the Redelivery Survey results can be viewed here.
Lead times on aircraft interior parts are notoriously long even for very common components such as wall or ceiling panels. This means maintenance providers will be limited to repairing rather than replacing defective items, unless the interior has been considered early enough in the redelivery process. Failure to leave enough time to source replacements leaves the owner exposed to accepting return of an aircraft whose interior is in a less than ideal condition. In turn, the subsequent operator will have to be prepared to accept the aircraft as it is.
Apart from lengthy lead times, IBA has seen cabin interiors and furnishings create certification disputes which can be costly. Long-term leased aircraft having undergone refurbishment may have been granted approval for the materials used but certification, for example burn certificates, might have only local approval. Without the requisite certification at redelivery, operators face the headache of either seeking retrospective certification, replacing the equipment or reaching a compensation settlement.
A proven remedy for these issues is to put a plan in place well in advance of the lease return date. Our studies have shown that lack of planning, late engagement, underestimating effort and unforeseen repairs cause most delays in lease end projects. In recent years, IBA's expert advisory and asset management teams have helped more and more operators and owners to prepare for and mitigate these difficulties. Working as an experienced intermediary between lessor and operator, IBA has been appointed to carry out pre-lease return inspections to highlight any areas or items of concern for both parties.
A thorough understanding of the full conditions and clauses specified within a lease is vital and, several months in advance of the lease end, IBA reviews the lease agreement in depth before carrying out a detailed inspection. This process not only helps both owner and operator to ensure fulfilment of the lease agreement commitments but also gives them advice about what would and should be acceptable as 'fair wear and tear'.
During 2019, a major European airline had lease returns of two A340-600 aircraft and both lessor and airline wanted to retain IBA's services exclusively. However, working as an independent advisor on behalf of the airline, we were well placed to ensure the needs of both parties were recognised and all commitments satisfied. A year before the lease end IBA deployed three inspectors to the operator's hangar facility where one of the aircraft was undergoing an 'A' check, the ideal opportunity for such inspection to take place.
Having comprehensively reviewed the lease agreement, the inspectors were entirely familiar with the operators obligations under the return conditions. From the flight deck to the aft galley, the inspectors spent several hours detailing and photographing all interior defects. Lavatories, seats, overhead bins, wall panels and galleys were all subject to inspection: not an inch of the interior escaped scrutiny. The inspection completed and the defects itemised, IBA advised what flaws required rectification, replacement or repair in advance of lease return and which items would be acceptable in accordance with the 'fair wear and tear' wording of the lease agreement.
The advantage of this process is that it benefits both parties. It's a win-win. The airline has many months' advance notice of any items that require replacement prior to lease end and can therefore mitigate against long lead times. The new equipment will be ready for fitting during the redelivery maintenance input or beforehand. For the owner, defective parts are rectified before return of the aircraft is accepted and their asset is in a better condition for the next operator.
Ideally, the new operator's inspection will reveal no issues or areas of concern. However, in the absence of a properly planned inspection and rectification schedule during and prior to lease end, complications are likely. It is possible and entirely reasonable the next operator will demand that faults which should and could have been rectified by the previous operator be corrected. In these circumstances, the owner becomes liable for the cost of rectification or will be obliged to renegotiate some of the terms of the commercial agreement.
Unresolved issues with an aircraft's interior at lease end can therefore prove costly for the owner. Any defective components whose lead times have prevented their replacement can become bargaining chips for the next operator. The outstanding faults may provide leverage for renegotiation of the terms on which they will accept the aircraft, underlining the benefit that pre-lease return inspections by independent examiners affords all parties.
Use of an independent, skilled third party to mitigate the need for costly extra or out of scope works during the redelivery process is a valuable tool for both parties.
There are many factors to address during and before a time-constrained end of lease period and inadequate planning brings with it a heavy financial burden.
For more information on IBA's services or to find out how we can help you with a pre-lease return inspection, redelivery management or aircraft deliveries please contact Peter Walter, Asset Management Director.
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Two fundamental situations have prompted IBA Group and Split Rock Aviation to reflect on some key 'industry standard' provisions within aviation lease agreements and re-evaluate their applicability and relevance: the 737 Max's grounding and the continued growth of leased aircraft in the industry. With the proportion of commercial aircraft leased now at 44% compared with 56% owned according to IBA's intelligence platform IBA.iQ, and witnessing the aviation industry's handling of the 737 Max's grounding, we have produced the first in a series of articles considering today's operating lease agreement. This segment will assess several industry standard lease agreement positions and test their logic in the current market.
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