School of Aviation Finance · 2016-01-25 · School of Aviation Finance . Document Title 2...

Technical Part of Transaction Documentation

Brian Tumulty, Executive Director, Standard Chartered

School of Aviation Finance

2 Document Title

Technical Part of Transaction Documentation

Brian Tumulty

January 20, 2016

3 Document Title

1) What is included?

2) Delivery/Redelivery Definition

3) Maintenance Reserve definition & Management

4) Importance of Record Management

Contents

4 Document Title

What is included?

• Letter of intent

• 10 pages to 50+ pages

• Lease Agreement

Acceptance Certificate

Exception to (the) Acceptance

Side Letters

What are

Technical

Transaction

Documents?

5 Document Title

What is included?

• Lease Agreement

• Does ‘Technical’ need to look at all of the lease?

Definitions - Construction o “Aircraft”

o “Aircraft Documents”

o “Approved Maintenance Programme”

o “Engine Performance Restoration” (various) o “Parts”

o “Checks”

o “Redelivery Compensation Amounts” / “Supplemental Rent” / “Maintenance Reserves”

Aircraft Description o Manufacturer Serial Number (MSN)

o Design Weights

o Engine serial numbers etc.

6 Document Title

What is included?

• Acceptance Certificate

Details Aircraft condition, configuration and status at time of Delivery

Useful as a reference point throughout the term of the lease

Essential at time of Redelivery in the event of disagreement as to physical and documentation condition at Delivery and for calculating end of lease adjustments (if no maintenance reserves have been paid during the lease term)

• Side Letters

Usually only used to cover off some unexpected situation during the Delivery process -

may not be required if items have been dealt with as Exceptions to the Acceptance as an appendix to the Acceptance Certificate

o - marginal defect found on Engine outside of ‘Delivery Condition’ minimum

• Relevance : Acceptance Certificate and, where applicable, Side Letters may play a more vital role in lease management at Redelivery than sections of the lease such as Aircraft Description as they can be more accurate and descriptive

7 Document Title

Delivery/Redelivery

• There can be a variety of Delivery/Redelivery scenarios

Some more attractive than others!

o Delivery – New from OEM, SLB, sale of aircraft

o Delivery/Redelivery – coming off lease/going out on lease

o Redelivery – coming off lease, parking, parting out

8 Document Title

Delivery

• Delivery

How is Delivery detailed in the lease agreement?

o Date of Deliver – What happens if the contracted date is not achieved?

o Location – MRO – Lessee’s engineering facility

o What is being delivered? – interior configuration, livery

o Delivery section of lease agreement, part A, B, C?

A – Procedure – who gets access, when

B – Specifics – inspection content, engine runs, demo flight etc

9 Document Title

Redelivery

• Redelivery

Redelivery – Is there a new Lessee?

o Date – contracted date not achieved

o Location – MRO – Lessee’s engineering facility

o What is being redelivered? – interior configuration, livery

o Redelivery section of lease agreement part A, B, C?

A – Procedure – who gets access, when

B – Specifics – inspection content, engine runs, demo flight etc

C – [End of lease compensation] - [Upsey/downsey] – calculate in advance

10 Document Title

Maintenance Reserve definition & management

- Ensure sufficient funds are available to cover the cost of certain high cost maintenance events occurring at various intervals during the lease term or during the life of the aircraft-

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• Maintenance reserves are collected, usually in cash, on a monthly basis by the Lessor from the Lessee as a security against the cost of performing (qualifying) heavy maintenance events on the aircraft

• They are not a mechanism to ensure that redelivery conditions are met

• They are not a means of curing payment defaults

• They are not a profit source for the Lessor

12 Document Title


• Maintenance Reserve events typically include the following

Airframe heavy checks – 6 year/12 year – 8/(9)/10/12 Year (D checks)

Engine Performance Restoration

Engine Life Limited Parts Replacement

Landing Gear Overhaul

APU Overhaul – Performance Restoration

13 Document Title


• Event Intervals

Airframe heavy check 6/8/10/12 years

Engine performance restoration 20-40,000 flight hours – three to ten years

Engine LLP replacement 15-30,000 cycles - ten to twenty + years

LDG overhaul 10 years

APU overhaul 5 then ~ 3 years

14 Document Title

• Why are there variations in maintenance reserve event costs?

Operating environment of the lessee – hot/high – cool

Quality of overall maintenance by the lessee

Hour to cycle ratio operated by the aircraft – engines

Amount actually spent on qualifying maintenance events

Maintenance performer – labour costs - contract


15 Document Title

• How are maintenance reserve rates set?

Lessor typically wants high rates o More security – onward sale - default

o Honeymoon period – advantage for first lessee – lessor must deal with cost of ownership over life and not just during any lease term

Lessee usually wants low rates – but is this really in the lessee’s interest?

o Lessee gets back what they pay in

o Does not if a qualifying event occurs after redelivery

Parties reach a considered compromise o Experience – what was the cost of previous events?

o OEM published data

o Estimates – What will be the cost of the next event?

o Market status – current desirability of aircraft – bargaining tool


16 Document Title

• Maintenance reserves collection and disbursement

Collected funds paid into accounts controlled by Lessor

Qualifying criteria for repayment detailed in the lease agreement

o Lessor given advance notification of event and draft workscope

o Lessor Reviews and agrees with workscope

Lessee submits payment request when qualifying event is performed

o Including all necessary supporting documentation

Lessor reviews payment request and provided supporting information

o Satisfied that event qualifies and that all supporting data has been received Lessor makes payment to Lessee


17 Document Title

• New aircraft versus used aircraft

New aircraft – Lessee pays maintenance reserves from date of delivery for all qualifying events

o Lessee can drawdown up to the balance of the funds from maintenance reserve fund when or if a qualifying event occurs

Used aircraft – Lessee pays maintenance reserves from date of delivery for all maintenance reserve qualifying events

o Lessee can drawdown amounts up to the balance of the funds paid into the relevant maintenance reserve fund when a qualifying event occurs

Lessee may have entitlement to a ‘Lessor contribution’ for life consumed on a qualifying event prior to the delivery date


18 Document Title

• Are maintenance reserve funds usually sufficient to cover the cost of a qualifying event?

Yes - and no

o New aircraft that have only had one lessee and first qualifying events generally yes

o Used aircraft that have had more than one lessee experiencing mature qualifying events frequently will not have sufficient funds in the current Lessee’s maintenance reserve fund

How is the shortfall dealt with?

o Lessee cost – what was agreed in the lease? – when was the lease written (market conditions)?

o Pool of funds from previous lessee

o Lessor contribution


19 Document Title

• Are some maintenance reserves more important than others?

o Over the life of the aircraft engine maintenance cost is significantly greater than the airframe and landing gear costs

o Airframe maintenance reserve drawdown qualifying events happen every eight (8) years approximately

o Landing gear overhaul events happen ever ten (10) years

o Engine events, while slow to start, rise in frequency and are considerably more expensive


20 Document Title


Event type Interval Monthly charge Event Cost Airframe heavy check

6/8/10/12 years

Typically fixed monthly charge - $10,000 - $30,000

$600,000 - $2,500,000

Engine refurbishment

~20-40,000 flight hours

Flight hour charge $100 - $600 per FH

$2,000,000 - $10,000,000

Engine LLP replacement

~15-30,000 flight cycles

Flight Cycle charge $130 - $700 per FC

$3,000,000 - $9,000,000

Landing gear overhaul

10 years

Typically fixed monthly charge - $2,500 - $10,500

$400,000 - $1,500,000

APU Overhaul

5 then ~3 Years

APU operational hour charge - $30 - $100

$300,000 - $1,000,000

21 Document Title

Maintenance Reserve component

(a) Airframe heavy check

(b) Engine Refurbishment @ 300/400 FH’s/ engine/month

(c) LLP’s @ 100 – 150 cycles/ engine/month

(d) Landing gear

(e) APU 200 hours/month

Monthly maintenance reserves can be higher than lease rental

Payment due per month

Narrow body (B737/A320) Wide Body (A330/B777)

(a) $18,000 $30,000

(b) $90,000 + $400,000 +

(c) $40,000 + $70,000 +

(d) $3,000 + $10,000

(e) $8,000 + $20,000 +

$159,000

$530,000


22 Document Title


Assumptions: 3000 hours per year

2000 cycles per year

Narrow body aircraft Qualifying Maintenance Events

$0

$1

$2

$3

$4

$5

$6

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years In Service

(US$

mill

ions

)

Engine LLP Airframe Landing Gear

23 Document Title


Airframe / Landing gear

Engines / LLPs

3000 hours per year

Assumption: 2000 cycles per year

$16m + Difference

Narrow body aircraft Cumulative Maintenance Costs

$0

$5

$10

$15

$20

$25

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years In Service

(US$

mill

ions

)

24 Document Title

• What is the most important consideration in management of maintenance reserves?

ENSURE THAT THE ENGINE REFURBISHMENT AND LLP RESERVE RATES ARE SET CORRECTLY


http://www.rolls-royce.com/defence/default.htm

25 Document Title

Importance of record management

• Retained technical records should always include sufficient data to establish the following -

Current status of the aircraft

Aircraft status at delivery/redelivery

Full details of historical maintenance and modifications performed on the aircraft

- and it are generally assumed to include all relevant certificates and manuals

26 Document Title

Certificates

Air Operators Certificate

Certificate of Registration

Certificate of Airworthiness

Export Certificate of Airworthiness

Noise Certificate

Radio Licence (as applicable)

Aircraft Flight Manual approval

Approved Maintenance Programme approval

Insurance


27 Document Title

Manuals

Aircraft Flight Manual AFM

Aircraft Maintenance Manual - AMM

Structural Repair Manual – SRM

Illustrated Parts Catalogue – IPC

Dispatch Deviation Guide – DDG

Master Minimum Equipment List – MMEL

Weight & Balance Manual - WBM

Fault Reporting Manual - FRM

Fault Isolation Manual – FIM

Detail specification

Does Lessor have right of access to the above?


28 Document Title

Documentation – historical

Aircraft status – specification – live document during the term

Technical log books

Maintenance check packs – A and C checks, HMV’s

Shop visit reports – engines – APU – landing gear

Airworthiness directive files – listing and dirty finger print files

Service bulletin files – listing and dirty finger print files

Modifications – STC’s –EO’s

Repairs – detailed structural repair file with mapping – dent and buckle chart

Component serviceable tags – FAA 8130’s – EASA Form 1’s

Components listing


29 Document Title

• Lease is constructed to allow the lessee to hold/have access to the all documentation as required by the air authority of the state of registration

Therefore All “Aircraft Documents” are handed over to lessee at delivery

During the lease term the lessee must maintain all documents and manuals in accordance with air authority requirements and the lease agreement

All “Aircraft Documents” must be returned in a satisfactory condition including any updates that may have been required


30 Document Title

• How does lessee manage technical documentation?

In house tech records department?

MRO or third party management of technical records?

Is the lessee (tech records department) and/or its MRO/third party aware of the lease requirements in relation to technical records?

o No destruction of any hard copy records

o Method of filing

o Storage facility


31 Document Title

How does lessee file and store records?

o AD/SB records with workpacks or separately?

o Use of scanning

What, if any, computer/digital on-line system is used?

o Can the reports be read in isolation from lessee personnel?

o Will reports be provided in soft and/or hard copy?

o Does the Lessee have the right to provide access to Lessor/Owner during the lease term or subsequently?

o Does the lessor have the right to pass on provided data in soft copy to next lessee?

o Are digital on–line documents the future? Hmmm!


32 Document Title

• Lessee must keep records in a manner acceptable to the air authority

• Lease requirements should not conflict with air authority requirements for document management

• Avoid disagreement by precisely recording what data is delivered to the lessee

Specify what will be provided to lessee at delivery in the lease agreement

List in full on an appendix to the acceptance certificate what was provided to the lessee and what will be expected on return


33 Document Title


• Why are lessors, at redelivery, seemingly more concerned with records than lessees? Lessee air authority does not have any issues.

• In some jurisdictions MRO’s are only required to keep technical records for 24 months after the completion of the maintenance recorded, documented and certified in such records

• Lessees/operators or Lessors/Owners are required to retain records up to 24 months after the aircraft is permanently removed from service

• Lessor has to ensure that the technical records for any aircraft are in a condition suitable for registration and operation in any jurisdiction

34 Document Title

QUESTIONS

School of Aviation Finance · 2016-01-25 · School of Aviation Finance . Document Title 2...

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