IBA Insights


Operating Leases – the hidden costs and pitfalls to avoid. What to do? November 2019

In this joint session between IBA’s Peter Walter and Guljar Lehri and IATA’s DeeDee Doke and Chris Markou, we look at how airlines can manage their operating leases to avoid millions of dollars of unwanted and hidden cost.

It has been predicted that the aircraft leasing market will grow to over US$60,000 million by 2023. Looking at the growth and success of this market, the presenters will share their expertise, insight and research to help airlines mitigate against overspends and unnecessary costs during the operating lease cycle.

The session aims to provide airlines with clarity and precision for contract drafting, insight on the challenges of redelivery and aircraft transition, reviews the most common areas for redelivery disputes and provides a check list of IBA’s best practise for avoiding hidden costs and overspends – our research shows the average narrowbody overspend is now close to $2m.

With the large number of aircraft transitions expected to continue for both narrow and widebody aircraft over the next 4 years, this session reinforces the importance of early planning and engagement, robust contracts and resources.

The Webinar can be viewed here on our YouTube Channel and the slide deck is also available to download. If you have further questions, please contact: PeterWalter@iba.aero.

 

Webinar Synopsis – Operating Leases – the hidden costs and pitfalls to avoid.

Aircraft Leasing: factors for consideration

The importance of a strong technical department or external resource when leasing or re leasing aircraft cannot be over emphasised, especially when dealing with second-hand equipment. Many contracts contain a where is – as is clause which means you accept the asset as it is and so need strong technical advice to ensure compliance with all regulatory requirements. It’s also crucial that redelivery conditions and maintenance reserves are fully understood. Lessees unfamiliar with maintenance reserves can be ignorant of their precise workings.

Apart from lease rates, the parties to a lease will have various priorities which will differ between lessors and lessees. One of the most important considerations for lessors will be the protection of their asset values and precise, efficient record keeping is key to this.

Aircraft Redeliveries

The redelivery process is complicated and involves many stages including analysing return conditions, carrying out checks and inspections, appointing an MRO, meeting the lessor and preparing records. The task is time- and labour-intensive and the whole procedure should be planned for at least 24 months before the return date.

Leasing Challenges

As already underlined, strong technical support is vital from end to end of the lease. From initial contract negotiation and delivery, throughout the lease’s life until redelivery, every aspect needs technical input. Ideally, annual reviews involving the lessor will be completed rather than leaving discussions until the lease end period and regular records audits carried out. Essentially, redelivery planning should commence as soon as the aircraft is delivered. For further guidance regarding aircraft leasing, IATA has created a best practice document.

The International Civil Aviation Organisation (ICAO) has also released guidance which covers the acceptance of electronic aircraft maintenance records and there are further standards and frameworks for aircraft technical records and cross border transfers.

MRO Smarthub

This is a unique web-based platform IATA’s developed to simplify the aircraft parts market. Effectively attempting to establish a ‘blue book’, IATA is collating data from actual transactions of parts so a fair market value for specific types in specific conditions can be established.

Best Industry Practices for Aircraft Decommissioning (BIPAD)

This is a useful guide covering all aspects of an aircraft’s end-of-life process: when to decommission, disassembly and parts distribution, for example.

The Growth and Attraction of Leasing

From small beginnings in the 1970s, the proportion of leased aircraft within the market has grown enormously so that we expect a 50:50 split between owned and leased assets to be reached in 2020. There are numerous benefits to leasing rather than owning:

  1. It requires less capital outlay
  2. It enables quick access and avoids the lengthy delay between placing an order and accepting delivery
  3. It allows flexibility in a fleet and makes available the latest technology

 

Leasing Issues to be Managed

An aircraft is an extremely complicated and expensive asset and every owner or lessor will have to make sure their leased equipment is adequately maintained and monitored. This will involve many compliance procedures and included in the services IBA offers is the collation of records covering maintenance work completed and support with maintenance cost sharing between lessee and lessor within leases. By conducting fleet audits to review lease terms and maintenance reserves we have saved some clients significant sums, one airline alone $5M by uncovering unclaimed maintenance reserves and requesting their return. We also manage upgrades and modifications so that lessor approval standards are complied with.

Inadequately managed aircraft redeliveries are a staggering waste of money, unnecessary expenditure averaging $2M for narrowbodies and $4.5M for widebodies. This is due to maintenance being performed to comply with redelivery conditions that could have been avoided if the aircraft had been managed throughout with the lease end in mind.

Actual and Forecast Lease Ends

Historically, average annual redeliveries have been 500 for narrowbodies and 100 for widebodies. There is, however, a sharp increase in lease ends forecast for the next three to four years and, based on the overspends above, the wasted expenditure is around $1.28b, more if turboprops and regional aircraft are included. Most of the lease ends will fall in Europe and America.

What Causes Late Redelivery?

IBA conducted an aircraft redeliveries survey over the last three years, roughly split 50:50 between lessees and lessors. It revealed that the single biggest cause of late redelivery was an underestimation of the time and effort involved in the redelivery process. Late or inadequate engagement between lessees and lessors and unscheduled repairs are also a factor.

Redelivery Challenges

Records and their efficient management, engines and aircraft interiors can create significant difficulties for lessees facing a redelivery, especially in situations where multiple leases are ending simultaneously and there are inadequate resources to manage the process. Improperly documented interior refurbishments can cause big delays to rectify. It may well be that a lessor would prefer a lease to be extended rather than the aircraft redelivered, especially where the asset is aging and would therefore be difficult to re lease. They are therefore unlikely to be willing to help the lessee fulfil the redelivery conditions.

MRO Bottleneck

There is an upward trend in MRO activity corresponding to the increased numbers of lease ends forecast for the next three or four years. Redeliveries were down between 2016 and 2018 as lessees extended their leases while awaiting new technology to come to the market. Used to dealing with around 600 aircraft redeliveries annually, the MROs now face in the region of 1,200 and there is insufficient capacity. In addition, MROs are being used to resolve some OEM technical issues and there will be MRO involvement in bringing the MAX back into operation so planning for aircraft redeliveries is going to have to start at least 48 months ahead.

Cost Effective Aircraft Management Process

All airline departments must be involved in every stage of an aircraft’s lease, from inception of the contract and throughout its term so they’re aware of what’s going on. Engineering teams, maintenance people, supply chain staff, planners and fleet managers have to coordinate and work with each other. Problems can arise when a commercial team signs a lease before any involvement by the engineers who need to be consulted from the outset so they understand the return conditions.

How to Avoid Overspends

Pre-planning is vital. Early engagement is key, as is ensuring there are adequate resources for record collection. Appointment of an external resource to review lease end requirements may be necessary in the absence of sufficient internal people. Otherwise, a strong project manager familiar with aircraft leasing can review the contract and understand its terms well in advance of the lease end. MRO slots and shop visits should be booked in good time so the lessee can fulfil the aircraft redelivery conditions.

IBA.iQ Airlines Package

IBA’s services are informed by our peerless data intelligence platform, IBA.iQ, whose wealth of information and insight on over 48,000 aircraft has also fed into this piece. We have launched an airlines package to support fleet planners and finance professionals in their scenario planning, portfolio management and decision making. A very competitive preferential rate for airlines applies so, if you are interested and would like to access a free trial, please sign up here.

 

The Webinar can be viewed here on our YouTube Channel and the slide deck is also available to download. If you have further questions, please contact: PeterWalter@iba.aero.


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