© HKAC | Hong Kong | 3 Nov 15 | 1 Technical Aspects of Lease Agreements Oisín Murray - Head of Technical

© HKAC | Hong Kong | 3 Nov 15 | 1

Technical Aspects of Lease Agreements

Oisín Murray - Head of Technical


• Lease Agreement Technical Considerations• Maintenance Reserves• Maintenance Reserves Portability • Technical Records

Agenda


Lease Agreement Technical

ConsiderationsWhat you are paying for• Define Specification • Define Configuration

Maintenance provisions•

Lessee is approved by local CAA

•

Lessee MRO’s are FAA/EASA approved

•

No PMA parts or DER repairs

•

Lessor annual inspection rights

•

Workscopes iaw OEM recommendations

•

Lessor approval required for major repairs

•

Lessor representation during repairs requiring MR drawdown

$43MM Aircraft$45MM Aircraft



ConsiderationsRedelivery Conditions• FAA/EASA compliant• Defined Redelivery process• Engine substitution rights• Bridge maintenance to to OEM standard or next lessee requirements• Minimum condition for component conditions• LLP Back to Birth• Detailed list and format for technical documents• Non Incident/Accident statement, PMA and DER repair statements• Maintenance Compensation mechanisms

Current Redelivery Conditions are the next Lessee’s Delivery Conditions


Next Lessee

• Representative site access during redelivery workscope

• Configuration changes for next lessee

• Incorporate next lessee livery

• Attend demonstration flight including cockpit access

• Engine and APU borescope observation

Allow for delays at redelivery


Considerations


Maintenance ReservesMaintenance Reserves are payments made by the lessee to the lessor based on the utilisation of the aircraft to provision for the cost of significant aircraft maintenance events.

Why collect Supplemental Rent• Security to protect asset value and maintain lessor exposure• Influence maintenance workscope• Means to monitor lessee contract compliance• Promote financial discipline

Supplemental Rent Options:• Cash Maintenance Reserves• Letter of Credit• Lease end adjustments• Half life adjustments


Calculating Maintenance Reserve

RatesPredicted event cost divided by the event interval. Customize for variations in• Flight profiles• Operating environment• Aircraft age

Annual Escalation• Normal range 2.5% - 3.5%• Engines should be higher (OEM escalation)• LLP lease end adjustment


Maintenance Events Interval limit Event Cost Rate MonthlyAirframe Structural Inspections 72 months $900K $12,500 per month $ 12,500 Airframe Structural Inspections 144 months $900K $6,250 per month $ 6,250 Landing Gear Overhaul 120 months $350K $2,917 per month $ 2,917 APU Overhaul 8,000 hours $350K $43.75 per APU hr $ 7,109 Engine Overhaul 18,000 hours $2.6M $144.44 per FH $ 72,222 Engine LLP Replacement 20,000 cycles $3.0M $150.00 per FC $ 50,000

Total $ 150,998.26

A320 Maintenance Reserve Cash Flows for a 12 year

lease


Managing Maintenance ReservesBest Practices

• Clearly define qualifying maintenance• Lessor approval for reimbursable workscopes• Modular approach to engine reimbursement• Lessor attendance at repair facilities during maintenance• Good communication to forecast timing of maintenance and

reimbursement• Annual review of rates• Aircraft specific accounts and component specific sub-accounts• No co-mingling even across same lessee fleet• Annual review of accounts with reconciliation as needed

End of life assets• Retain Maintenance Reserves in lieu of Return Conditions. • Engine and Component exchanges• Fly to expiration


OEM Maintenance AgreementsOEM’s have entered maintenance market aggressively. These agreements

offer:• Fixed price maintenance• Long term agreement• Peace of mind• Residual value protections

Agreements can be • Term based• Event based• Cradle to grave• Paid monthly• Paid at maintenance event

OEM agreements include• GE / CFMI: OnPoint• Honeywell: MCA• Rolls Royce – Total Care / OPERA• IAE: Flight Hour Agreement (FHA)• Boeing GoldCare


Maintenance Reserve PortabilityLessor preference is to collect cash:

• Influence maintenance workscope• Use to offset outstanding debts• Maintain lessor exposure at deal origination levels• Easily assign reserves for next lessee

Complexity where “Power by the Hour” Agreements are in effect:• Qualifying maintenance definition and rates may differ to lease• Increase in lessor exposure• Inability to offset delinquency• Credit accrued tends to be engine and MRO specific• Administrative burden when assigning credit due to multiple parties• Not all PBH agreements are equal

End of life• Ability to convert credit to cash


Technical RecordsRecords• Operator required by law to maintain records• Law is enforced by local Aviation Authority• Records show Airworthiness via compliance with regulations• Protect owner operator warranties• Regulations becoming more stringent

Leased fleet 50% by 2020 • Increasing number of aircraft transitions• Local regulations are inadequate for cross border transfers• Lessor standards more demanding than regulatory requirements• Disconnect between lessor and operator


Records QualityAircraft values• Appraisers assume satisfactory records• Leases signed on the basis of fulfilling records requirements• Direct correlation between aircraft records and aircraft value

Inadequate records• Delay redelivery acceptance• Postpone or prevent onward delivery or sale• Reduce aircraft value

Operator and Lessor standards are far apart


Records HarmonisationThe Future is DigitalIndustry working groups cooperating to harmonise standards and meet challenge of the future.Recent progress with addition of Technical Documentation definition to ICAO Airworthiness manuals

• Electronic copies with search functionality• Daily back up• Secure on line access• Regular access and inspection by lessor

Support from Airlines and the Aviation Authorities required.


Technical Records IT SystemsPrimary function

• Collect• Index• Centralise• Search • Share• Secure

Providers• AERDATA/ STREAM• FlyDocs


QUESTIONS?


Oisín MurrayHead of Technical技术总监

Hong Kong Aviation CapitalSuite 6511-13, 65/F,

The Center, 99 Queen’s Road, Central, HONG KONGTel: + 852 2568 0229Fax: + 852 2568 0015Mob: + 852 9229 0920

Email: [email protected]

mailto:[email protected]

http://www.hongkongaviation.com/

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© HKAC | Hong Kong | 3 Nov 15 | 1 Technical Aspects of Lease Agreements Oisín Murray - Head of Technical