As you would expect, aircraft and engines that are well looked after, maintained and inspected regularly will inherently hold their value more than those that are less well managed. To protect and maximise the value of an aircraft or engine, inspections are an essential element of asset management. A thorough inspection should always include an examination of the metal and its associated technical records, since it is the combination of the physical condition and historical records that create the overall value.
From our experience, an aircraft or engine with no valid or accurate historical records is effectively worthless. The cost of recovering the value depends on the age of the aircraft and the degree of missing documents, but in an extreme example it could be tens of millions of dollars where repairs and heavy checks may require repeating to rebuild the required documentation.
We wanted to share our knowledge with you, so this guide presents our opinion on how and why inspections are vital and at which points during the life of a lease they are indispensable.
Why are inspections vital?
While aircraft and engines are routinely checked by the operator as part of ongoing regulatory airworthiness processes, financiers and lessors should also insist on their own inspections.
When an operator does not own the aircraft outright, we recommend that the financiers or lessor periodically ensures that the operator is complying with the terms of the lease or loan. The operator must fulfil airworthiness regulations but the financier or lessor needs to be responsible for monitoring the specific condition of its aircraft with respect to maintaining its market value, managing any perceived risks for the asset, or the operator’s financial status, and in anticipation of remarketing.
A lot can change from the day an aircraft is delivered to the operator and the day it is returned. These changes can significantly impact the value of aircraft and engines. The detail and depth of any inspection will depend on the needs of a client and at IBA Group we tailor our services to meet their exact requirements. For example, a pre-purchase inspection may be requested because a new owner wants to ascertain the condition and/or status of an aircraft or engines. This may be part of a due diligence exercise and/or a lenders requirement, much the same that a mortgage lender will request a survey of a property as part of the loan due diligence process.
In some cases, the pre-purchase inspection may be limited to a straightforward walkround of the aircraft interior and exterior, where a trained eye can spot any repairs, modifications or damage and check the aircraft records summaries. We would normally only suggest carrying out this type of inspection when the aircraft being purchased is subject to a lease, since in reality, the buyer of the aircraft is buying the lease contract rather than simply the metal value. In these types of transactions, the lease will usually allow the operator to have “quiet enjoyment” so long as the operator is up to date with lease payments and other operating and maintenance covenants. This type of arrangement also restricts the buyer from invoking a full inspection, which would involve prolonged downtime of the aircraft.
In other cases, such as the outright purchase of a corporate jet, we advise a thorough technical inspection, including engine borescope inspections, engine performance runs, ground checks and a test flight, all prior to purchase.
Technical inspections – from straight forward pre-purchase through to complex due diligence projects.
Some inspections may require more than simple checklists and involve project management of aircraft deliveries/redeliveries, change of aircraft registration, liaison with aviation authorities to affect such changes, and/or full technical services including the purchase of parts for the aircraft during a reconfiguration or freighter conversion. Such full technical inspections may be used to adjust the aircraft value based on actual condition.
There may also be incident related inspections such as when an aircraft is involved in an accident and requires repairs. IBA has developed a methodology for assessing the value impact of damaged/ repaired aircraft, which has been used in many litigation and mediation cases where there is a case for value diminution.
Where are inspections performed?
It is advisable to carry out inspections at the same time as routine maintenance checks are scheduled. These may range from a long turn around or short overnight stop, through to a major check. Checks will be performed outside “on the ramp”, within an aircraft hangar at the operator’s base, or at an MRO facility.
Engines can be inspected “on the wing” for a routine lease survey, or at an engine shop if a more detailed “table top inspection” of all of the dismantled parts is required. We strongly recommend that lessors or financiers familiarise themselves with such opportunities to carry out their own inspections, so as not to impact on the utilisation of the aircraft.
The associated aircraft and engine records will typically be stored at the operator engineering HQ and may take the form of hard copy files or electronic files scanned or stored on systems such as Aerdata, Mxi, Flydocs – or the myriad of other systems. Whilst there have been advances in the electronic storage of aircraft records, the nature of aircraft leasing means that there will always be a need for flexibility and possibly the combination of hard copy and electronic files. However, as a future transfer may involve moving an aircraft from one jurisdiction to another, we always recommend that the hard copies are still kept.
How much do inspections cost?
IBA tailors its inspections to the exact requirements of our clients. We advise on the level of inspection necessary and price work accordingly and competitively. A number of factors determine the cost of an inspection, including workscope, location of the aircraft/records and speed of airside security clearance, for example. There is a significant difference between a few man-days for a routine mid lease survey and up to several hundreds of man-days for an aircraft redelivery.
With some aircraft values running into the hundreds of millions the real value of quality inspections speaks volumes. If you neglect your assets, there is a possibility that it becomes near worthless – in the extreme.
Our top tips for regular monitoring and checks throughout the lease period are:
1: Utilisation Monitor aircraft and engine utilisation, check for unexpected changes in usage, parked and stored status, AOG vs. maintenance downtimes. Significant utilisation changes will impact reserves and residual values.
2: Components Are the lease conditions being met as per the policy for new vs used vs PMA components? Are the measures safeguarding the exchange and life control of parts working and records being kept?
3: Damage/Repairs Has there been any damage or repairs? If yes, are the source documents available? Are the records accessible? Has a credible MRO been instructed? Can you establish the impact on the value and remarketing impact of the damage/repair?
4: Maintenance Have the original maintenance agreements remained in place around outsourcing/in-house programs? Are the OEM/MRO agreements being followed? Does the Lessee Approved maintenance Programme match the OEM Maintenance Planning Document? Do the Schedule Reserve Drawdowns in the lease match the Lessee claims?
5: Flight Operations and defects
Are the flight operations being maintained? Is the engine de-rate policy being upheld? What does the Brakes vs Thrust Reverser usage look like? Are defects being deferred? Is the operator meeting environmental obligations?
Has the Lessee made any changes to the aircraft configuration? Check that the changes are in line with end of lease policy and that the source documents are available, and FAA or EASA approved.
Understand what impact the new configuration may have on value and remarketing.
7: A changing technical environment
In recent years aircraft construction, systems and materials have changed from the classic/legacy aluminium alloy structures to a range of composite structures with increasing use of electrical systems replacing hydraulic and pneumatic systems. We are familiar with inspecting the B787, the first aircraft of this kind and since then most new aircraft types have include such changes in technology. IBA has embraced such changes and our team have been given up to date training on composite materials and technology as part of our ongoing IBA “excellence” philosophy.
IBA is an independent firm and currently works on behalf of a wide range of clients. Although we do not certify the aircraft or engines, our systems, processes and reports are audited by the UK CAA. We are an EASA approved organisation in the Part M category, authorising us to issue workcards and packs, where necessary, on certain aircraft types. We have eight full time aircraft inspectors plus a further seven ISTAT certified appraisers. Where we identify a particular need, we may utilise consultant technical managers. All of our inspectors will have passed IBA’s comprehensive internal checks and will be up to date on the latest technical issues. Our inspection teams are backed up with IBA HQ full administrative support so that they can focus their time and efforts on the specific work that needs completing for our clients.
For more information contact: Faizal.Gara@iba.aero