Investor’s guide: How to deal with the end of first lease?

Whether it is a short or long-term lease, lessors need to ensure they receive their aircraft in the same technical condition as it was initially delivered.

Getting this process is right is vital in protecting the integrity and value of the asset, ensuring good customer relations and, in the long run, a return on investment for a lessor.

So what are the key considerations in order to manage a process that can be both expensive and time consuming?  In this Insight Ishka provide an overview of the process involved and some of the potential pitfalls along the way.

 

A guide to aircraft redeliveries
 

Speak to any lessor that has redelivered or transitioned aircraft and they will have had their own unique experiences (or ‘war stories’) from the process of a lease return.  Depending on the characters involved on each side of the table it can become an emotive subject - ranging from the near punch-ups (literally) at one end of the spectrum to the complete mundane – all of which, in the end, need to be resolved to a mutually agreed position.  That’s not to say every lease return is a painful process; indeed, those that are managed well and where the parties work together can go relatively smoothly.

Although there is no ‘rulebook’ which can be applied to every situation that arises, there is certainly guidance material which is available; the trade body IATA and a consortium of airlines, lessors, manufacturers and other stakeholders have worked together to publish guidelines and best practices in aircraft leasing – and this is a decent starting point.

At this juncture it is worth taking a step back for a moment to consider the beginning rather than the end of the lease. It is always worthwhile having an experienced legal and technical personnel agree and document a clear, appropriate and enforceable set of return conditions within the lease agreement – and making them as unambiguous as possible. 

Despite this, redelivery disputes can often arise due to the way the conditions might be interpreted.  This is often made harder when return conditions are softened to consummate a deal, leading to a vague definition or intention of a certain clause.  It is also unlikely that the parties who originally negotiated the redelivery conditions in a lease will still be around to explain any ambiguities at lease-end. Such short-sightedness, and its consequences, can end up materially affecting the economics of the deal when looked in its entirety.

A lessor should also have an active technical asset management programme to monitor an aircraft throughout the course of the lease term.  This will highlight any areas where the lessee may be skirting with the compliance terms of a lease, and take mitigating measures along the way.  Any lessor that doesn’t have this in place is asking for trouble when redelivery time arrives.
 

The inspection process
 

A redelivery project typically requires bringing together the current lessee, the lessor and the next lessee (in a scenario assuming a ‘normal’ transition), all of whom should have an aligned interest in the project – the effective transition of the aircraft from the returning operator to the next lessee. 

The process also requires the engagement of a number of other organisations.  The maintenance organisation performing the end of lease check plays a key role in order to keep to the project on schedule and apply sufficient resources. The aviation authorities of both the out-going and next lessees are essential in order to, in the case of the former, issue the export certificate of airworthiness, and the latter, accept the aircraft onto the registry.  A holdup or miscommunication with either can lead to significant delays.

A flight crew is required for the demonstration and acceptance flight following the end-of-lease check.  An engine borescope team will be required to examine each engine and the APU, often the last item to be accomplished prior to the transition.  A lengthy delay to the transition can result if there are ‘findings’ following the acceptance flight. This is one aspect of the redelivery where everybody crosses their fingers and hopes for a positive outcome.  Without careful planning and communication, these third parties can have an inordinate effect on the success or failure of the project.

Table showing a typical redelivery plan

Source: IATA Guidance Material and Best Practices for Aircraft Leases, 3^rd Edition

It’s good to talk

When the lease of an aircraft is scheduled to expire, a prudent lessor will convene a meeting with the lessee somewhere between 12-18 months, depending on the aircraft type, ahead of the contractually agreed redelivery date.  By undertaking a ‘page-turn’ of the lease return conditions, this preliminary engagement will provide an outline of the lessor’s expectations with the aim of documenting and agreeing to all action items, open any discussions on exceptions to the redelivery condition and/or requirements the lessor may have at redelivery, and an overall indication of the out-going lessee’s competency for achieving an on-time redelivery. 

This is all the more important as some lessees can often underestimate the enormity of the redelivery project, particularly for those lessees were redeliveries are sporadic in nature and not geared-up to cope with the nuances of a redelivery compared to the routine day-to-day technical airline operations

In order to minimize aircraft downtime, the out-going lessee must plan a clear schedule of component overhaul work, including those related to engines, the auxiliary power unit (APU), landing gear, flight control surfaces and other monitored components.  Critically, the lessor needs to align the lease redelivery conditions with the delivery conditions of next lease.  Any gap between the two will have to be either facilitated by the current lessee or the lessor will have to accomplish itself. 

A carefully prepared work scope will allow a lessor to assess what major component changes may be required so that they can order spare parts for pre-loading and, if necessary, make arrangements for the aircraft’s storage, insurance and preservation of continuing airworthiness status during any gaps in the time between the redelivery and the commencement of the follow-on lease.  In particular, it is a requirement of EASA that the Continuing Airworthiness Management of Aircraft be maintained throughout any off-lease transition period by an appropriate EASA Part M subpart G approved provider, and this will need to be outsourced to a ‘CAMO’ to bridge any possible gap between leases.

Coupled with the physical condition is the status of the aircraft records.  The entire technical documentation must be reviewed and properly updated before being accepted by the lessor.  Airlines with a high proportion of leased aircraft typically have a team designed to manage and oversee the entire redelivery process, and, with this, have become rather proficient in churning out all the necessary paperwork.  Proper documentation is essential for a smooth redelivery.  Incomplete or records that are not in the English language can take a great deal of manpower to either reconstitute or translate.  The use of technology in this area to standardise the records exchange associated with aircraft lease transitions is slowly becoming a reality, and one that will assist in the lessor not be seen as the ‘bad guy’ all the time.

 

The Ishka View
 

There is no getting around the fact that aircraft transitions are a highly complicated and resource intensive exercise. But aircraft transitions are ultimately a process; a series of actions or steps taken in order to achieve a particular end. 

Each redelivery tends to be unique and comes with its own set of challenges. However, through detailed planning, open communication and experienced personnel driving the process, lessors can turn this multifaceted practice into an opportunity for adding value and building relationships. The constant reinforcement of this practice can reduce the strain of the operating lease model to become less of a cause of friction between stakeholders.

As a final tip here are some key questions lessors should ask themselves:
Do you have a transition plan in place with your lessee?
Have you done an up to date review of the technical records? Have you ensured this has been done on a regular basis?
Are you prepared for unexpected delays or costs, and has this been factored into your redelivery budget?
 

Please Note: The views expressed do not constitute investment advice. We accept no liability to recipients acting independently on its contents in respect of any losses, including, but not limited to profits, income, revenue or commercial opportunities.

Photo:Joao Carlos Medau

 

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