Aircraft and Engine Maintenance Reserves
All operating lease agreements require the Lessee to pay for both known and unknown maintenance events which occur during the lease term. The aircraft must be returned at the end of the lease in essentially the same condition it was in at the start of the lease.
The Lessors primary financial protections for maintenance cost, in any lease type, are usually the specific aircraft/engine return conditions in the lease agreement. Lessee defaults prior to the scheduled end of the full lease term can create significant financial exposure for the Lessor/owner if their sole protection is the agreement itself.
Common Reasons for Default
Airline Bankruptcy
Labor Strikes/Work Agreement changes
Fuel Cost Increases
Currency Exchange Rate Fluctuations
Environmental, Weather, Volcanic Activity
Pandemics, Wars
Regulatory Actions
The maintenance cost required to transition a commercial aircraft from one lease to the next can sometimes exceed 30% of the aircrafts total market value. For example, a common Boeing 737NG series aircraft with one engine in need of a performance restoration (overhaul) and with the majority of Life Limited Parts (LLPs) also due for replacement could require a shop visit with a cost of USD $7 million or more just for the one engine alone prior to the aircrafts next lease placement.
For lessees with excellent credit and a proven record of past performance, operating leases based on a flat rate rent with a single monthly payment are usually sufficient to protect the Lessor. Other lessees will pay a monthly rent split between a fixed basic rent and a variable supplemental rent adjusted for the airlines actual usage of the aircraft.
Supplemental Rent for Maintenance Reserves is paid from the lessee to the Lessor, in arrears monthly based on utilization, to provide funds in advance for known maintenance events which will occur during the lease term. These expected cost can be estimated in advance, however the portion of these cost that the lessee is responsible for and the amount of monthly supplemental rent they will owe, can vary based on their utilization of the aircraft. Additionally, the cost of these events will change year to year and the supplemental rent payment amounts must escalate annually to adjust for these changes.
In some cases, the lease could end before the maintenance event becomes due. The Lessor should therefore not view reserve funds on account as a form of profit, but rather view them as dedicated to that specific aircraft and the maintenance event for which they are intended. At the end of the lease, any unused funds will remain with the Lessor, but these funds will be needed to properly transition the aircraft for sale or prior to its next lease placement.
Maintenance Reserves should not be confused with security deposits. The typical aircraft lease security deposit is usually equivalent to one or two months rent and is paid only once at the start of the lease similar to a common real estate security deposit. Maintenance reserves are pre-paid financial accounts which can only be used to reimburse the lessee for their direct cost of performing certain expensive maintenance task which will occur at pre- defined usage (utilization) or calendar intervals.
Maintenance Reserves can only be used for the specific maintenance event they are designated for and the funds cannot be shared between sub-accounts.
Major Maintenance Events Requiring Maintenance Reserves
Airframe Structural Inspections (8, 10, 12 Year Etc.)
Engine Performance Restoration (Overhaul)
Engine Life Limited Parts Replacement (LLP's)
Landing Gear Overhaul
APU Performance Restoration (Overhaul)
Letters of Credit
Most operating leases will allow the lessee the option of providing a Letter of Credit (LC) in lieu of paying monthly supplemental rent for maintenance reserves. LC's must be periodically renewed and the LC's Guarantor must be properly vetted. When the LC is issued months after the initial lease commencement, the MR funds on account with the Lessor must be returned in full to the lessee. The number of times a lessee can opt for a change from MR's to LC's and vice versa, is usually not defined in the lease.
CV performs detailed analysis and management functions on a daily basis of all Maintenance Reserve related task discussed on this page as well as those on our Lease Management page.
Other regular cost management and maintenance reserve advisory services involve:
MR Annual Escalations
Detailed review of MR claims and approval recommendations
Engine shop visit management and line item audit/approval of complex spreadsheet based invoices.
Analysis of lessee attempts to negotiate Engine/APU Power by Hour Programs to meet Maintenance Reserve requirements.
To receive a no obligation proposal for your specific project, please contact:
Vice President, Technical Services
1.888.800.0030 Ext 703
+1 407.758.7130 International
