Aircraft Lease negotiations are mainly focused on few topics such as Lease Rent, Thrust rating and MTOW (Maximum Take-off Weight). It is obvious that these factors have considerable commercial affect, but maintenance reserve rates like aircraft configuration are mostly underestimated. Airlines and leasing companies that additionally focus on maintenance reserve funds and aircraft configuration will positively differentiate from the others.
We will review the maintenance reserve rate’s calculation in this article without considering risk management factors. In order to positively differentiate from competitors, maintenance reserve funds should be managed in detail. Basically, maintenance reserve calculation should be performed under the following subjects;
· Payment Method
· Airline Utilization Values
· Maintenance Concept
Most importantly, payment method should be evaluated. There are two different payment methods available in the market. First method is cash payment. Cash payment is preferred by Leasing companies to secure themselves, but negatively affects airlines cash flow. Additionally, interest income is not considered at the time of reimbursement for this method. Second method is lease end adjustment. Instead of cash payment, a small number of Leasing companies accept lease end calculation and settlement methodology. Briefly, operator performs maintenance activities at the time of maintenance during the lease term and at lease end, operator and leasing company perform the delivery/redelivery maintenance condition settlement. As a result of this calculation, operator or leasing company pays the differentiated amount at the end of lease term. The advantage of the method for the leasing company is to hold previous operators’ reserves on hand till the end of additional lease term. Advantage as for the airline is not to perform payment in advance.
Common mistakes in the industry are that operators request to perform lease end settlement and leasing companies request to get cash payment.
Instead of such blind request, leasing company and operator should plan the upcoming maintenance activities and estimate volume and time of payments during the lease term. Afterwards a payment plan should be presented to the finance experts. Finance experts should select the methodology type. For example, lease end adjustment method may not be beneficial for operators when leasing a used aircraft just before its engines maintenance activity. In direct contradiction, cash payment method may not be beneficial for leasing companies when leasing out a used aircraft just before its engines maintenance activity.
Moreover, operator’s utilization values are quite important during determination of maintenance reserve rates. Since utilization values are main factor during maintenance reserve calculation, flight hour to flight cycle ratio will definitely affect financial value of the lease agreement. In such cases decreasing maintenance reserve rates may be an advantage for the lessors. Utilization value estimation and yearly control of those values are vital for leasing companies and operators.
Finally, Operator’s maintenance concept is also another important point to be considered during maintenance reserve rate negotiation. If the operator has its own base maintenance facility or well-negotiated base maintenance agreements with extensive content of base maintenance, then calculations should be made considering the fact. On the other hand, Leasing companies, should consider and estimate average market rates of possible maintenance reserve related maintenance activities. A considerable saving can be provided by the calculations made before lease agreement execution.
As a result, well calculated and designed maintenance reserve rates of the lease agreement will differentiate the companies from the others. Maintenance reserve rate arrangements and fund management should be performed before execution of lease agreements. Moreover, periodically check and updates on these funds will bring additional financial aspects.
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