Aircraft Lease Management - Part 1   

Since the 1980s, when aircraft operating leases represented less than 5% of the overall aircraft operating market, the number of aircraft operating leases has grown significantly. 

Airlines have realized the advantage of aircraft leasing; adding aircraft to the current fleet for a convenient period of time, without the economic risk of aircraft ownership. 

Prior to the actual lease, a complicated process is enacted to make sure a lease contract satisfies both the Lessor and the airline. Over time this process has become more cumbersome and time-consuming due to the associated delivery and redelivery processes. The complexity and timespan of this process often catches airlines off-guard. 

It is therefore important for the Lessee to understand what difficulties must be dealt with, and how to avoid any time-consuming and costly pitfalls. 

Maintaining Asset Value

An aircraft operating lease places full operational and maintenance responsibility for the aircraft on the airline, together with legal liability and insurance responsibility during the lease term. The aircraft however remains the property of the Lessor (or owner) who will be seeking to maximize asset value and income generating potential over the full useful life of the aircraft, which will usually span multiple lease periods and Lessees. In many cases the Lessor will also be seeking to ensure compliance with upstream finance and jurisdictional requirements. The lease will therefore contain provisions which govern maintenance and record keeping standards together with limitations relating to the use and operation of the aircraft during the lease term. In addition, the lease will seek to address relevant aviation regulatory and jurisdictional requirements including creditor protections and mechanisms to facilitate recover of aircraft assets in a default scenario. 

To maintain the asset value a few basic Lessor objectives are stipulated below. 
●  The asset value depreciation must be in line with other similar aircraft under similar conditions. This implies that the aircraft must be operated and maintained in a non-discriminatory manner consistent with the Lessee’s fleet. 
●  The asset should be transferable between jurisdictions without significant restrictions during the lease term (in the case of a default) and at lease expiry. Given the variability between jurisdictions, the lease will often require adherence to baseline airworthiness requirements (FAA or EASA) in addition to Lessees’ local requirements. Furthermore, elaborate airline-specific changes or branding will need to be removed in order to increase the marketability of the aircraft, the cost bearer for the rebranding and reconfiguration of the aircraft is a commercial item that needs to be negotiated. 
●  The lease will contain a security, default and remedy framework to protect the Lessor’s (and owner’s) interests and facilitate both the recovery of the aircraft and damages which may arise in a default scenario. In some cases, depending on the credit-worthiness of the Lessee, the payment of a security deposit and maintenance reserves, security assignments and de-registration authority will provide the Lessor with additional protection mechanism if an event of default should occur. Regular inspection rights for Lessor and reporting by Lessee will enable the Lessor to monitor the condition of its asset throughout the lease period. 

Common Misunderstandings

All of the specific technical, operational, and legal requirements will be included in an all-encompassing lease agreement, which the Lessor may have perfected over the course of numerous transactions. The complexity of such a lease agreement often results in a number of challenges for the airline. Even though many lease agreements are extensive and detailed, no agreement can be ironclad or completely clear, and certain misunderstandings commonly occur. Such misunderstandings are frequently the result of different mindsets or diverging interests, and may eventually result in difficulties which are costly or time- consuming to resolve. A Lessor will look at the entire aircraft life-cycle, which usually consists of several leases to a number of different airlines. At the very least, the Lessor will look beyond redelivery of the aircraft. In contrast, the Lessee will only look at its own operation and lease term, as it only uses the aircraft for a pre- determined period. As a result, perceptions and interpretations of specific requirements differ quite often. 

Back-to-Birth Traceability 

One of the items most commonly misunderstood in a lease agreement is how to prove ‘Back-to-Birth Traceability’ (BtB) for ‘Life Limited Parts’1 (LLP). LLPs exist in a number of aircraft components, such as engines, APUs, landing gears and airframe parts. Failure of an LLP may result in unsafe conditions or safety hazards and therefore a life limit has been imposed. Major regulatory agencies, such as the Federal Aviation Administration (FAA) and the European Aviation Safety Agency (EASA), simply state that an operator must have an approved system in place that effectively controls and records the total operational life of the part. Although a seemingly simple process, the Lessee and the Lessor will often have different expectations or approach, and Lessor/market expectations have also changed over the years, so this can lead to issues at redelivery. 

While the Lessee will record the total time of each LLP with the use of their maintenance software, the Lessor often requires a much more detailed documentation process. The Lessor may want proof of each and every step in the LLP’s life by means of a dirty fingerprint coupled with the consumed time (flight hours (FH) and flight cycles (FC)). The reason for this is threefold:
●  The Lessor wants 100% certainty that there are no errors in the total time consumed by the part and will want documentation to substantiate this.
●  The aircraft’s documentation must be of a good standard to maintain the asset value; assuming that there are two identical parts available for sale, the part with the highest quality documentation may be more desirable and hence perceived as having a higher value.
●  The Lessor wants to protect itself against possible more stringent requirements of future operators, parts sales agents (aircraft teardown) or regulatory agencies. 

Lessee providing an airline summary sheet for life used on LLP’s will often not be sufficient to meet Lessor expectations for BtB (while this may be sufficient for the regulatory authorities3). The problem of incomplete BtB is specifically apparent in the case of landing gear LLPs. Landing gears, with their fixed overhaul interval stipulated in FC or years, are quite frequently exchanged (including the individual subassemblies), and new/used LLPs introduced over the years. In addition, landing gear overhaul shops do not always hold and supply documentation that meets Lessor expectations for BtB. The question remains whether it is needed to prove the full BtB and how this requirement is properly defined. The best way to mitigate this risk is to include in the lease agreement a detailed and very specific description of all documentation required. 

 Source: IATA Guidance Material on Lease Best Practices