Technical Part of Transaction Documentation Brian Tumulty, - - PowerPoint PPT Presentation

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?

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What is included?

• Lease Agreement
• Does ‘Technical’ need to look at all of the lease?
• Definitions - Construction
• “Aircraft”
• “Aircraft Documents”
• “Approved Maintenance Programme”
• “Engine Performance Restoration” (various)
• “Parts”
• “Checks”
• “Redelivery Compensation Amounts” / “Supplemental Rent” / “Maintenance Reserves”
• Aircraft Description
• Manufacturer Serial Number (MSN)
• Design Weights
• Engine serial numbers etc.

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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
• - 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

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Delivery/Redelivery

• There can be a variety of Delivery/Redelivery scenarios
• Some more attractive than others!
• Delivery – New from OEM, SLB, sale of aircraft
• Delivery/Redelivery – coming off lease/going out on lease
• Redelivery – coming off lease, parking, parting out

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Delivery

• Delivery
• How is Delivery detailed in the lease agreement?
• Date of Deliver – What happens if the contracted date is not achieved?
• Location – MRO – Lessee’s engineering facility
• What is being delivered? – interior configuration, livery
• Delivery section of lease agreement, part A, B, C?

 A – Procedure – who gets access, when  B – Specifics – inspection content, engine runs, demo flight etc

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Redelivery

• Redelivery
• Redelivery – Is there a new Lessee?
• Date – contracted date not achieved
• Location – MRO – Lessee’s engineering facility
• What is being redelivered? – interior configuration, livery
• 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

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Maintenance Reserve definition & management

• Ensure sufficient funds are available to cover the

cost of certain high cost maintenance events

• ccurring at various intervals during the lease term
• r during the life of the aircraft-

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Maintenance Reserve definition & management

• 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

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Maintenance Reserve definition & management

• 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

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Maintenance Reserve definition & management

• 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

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• 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

Maintenance Reserve definition & management

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• How are maintenance reserve rates set?
• Lessor typically wants high rates
• More security – onward sale - default
• 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?
• Lessee gets back what they pay in
• Does not if a qualifying event occurs after redelivery
• Parties reach a considered compromise
• Experience – what was the cost of previous events?
• OEM published data
• Estimates – What will be the cost of the next event?
• Market status – current desirability of aircraft – bargaining tool

Maintenance Reserve definition & management

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• Maintenance reserves collection and disbursement
• Collected funds paid into accounts controlled by Lessor
• Qualifying criteria for repayment detailed in the lease agreement
• Lessor given advance notification of event and draft workscope
• Lessor Reviews and agrees with workscope
• Lessee submits payment request when qualifying event is performed
• Including all necessary supporting documentation
• Lessor reviews payment request and provided supporting information
• Satisfied that event qualifies and that all supporting data has been received Lessor makes payment to Lessee

Maintenance Reserve definition & management

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

Maintenance Reserve definition & management

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• Are maintenance reserve funds usually sufficient to cover the cost of a qualifying event?
• Yes - and no
• New aircraft that have only had one lessee and first qualifying events generally yes
• 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?
• Lessee cost – what was agreed in the lease? – when was the lease written (market conditions)?
• Pool of funds from previous lessee
• Lessor contribution

Maintenance Reserve definition & management

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• Are some maintenance reserves more important than others?
• Over the life of the aircraft engine maintenance cost is significantly greater than the airframe and landing gear costs
• Airframe maintenance reserve drawdown qualifying events happen every eight (8) years approximately
• Landing gear overhaul events happen ever ten (10) years
• Engine events, while slow to start, rise in frequency and are considerably more expensive

Maintenance Reserve definition & management

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Maintenance Reserve definition & management

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

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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

Maintenance Reserve definition & management

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Maintenance Reserve definition & management

Assumptions: 3000 hours per year 2000 cycles per year

Narrow body aircraft Qualifying Maintenance Events

$0 $1 $2 $3 $4 $5 $6

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

Years In Service (US$ millions)

Engine LLP Airframe Landing Gear

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Maintenance Reserve definition & management

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

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

Years In Service (US$ millions)

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

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

Maintenance Reserve definition & management

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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

Importance of record management

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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?

Importance of record management

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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

Importance of record management

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• 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

Importance of record management

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• 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?
• No destruction of any hard copy records
• Method of filing
• Storage facility

Importance of record management

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• How does lessee file and store records?
• AD/SB records with workpacks or separately?
• Use of scanning
• What, if any, computer/digital on-line system is used?
• Can the reports be read in isolation from lessee personnel?
• Will reports be provided in soft and/or hard copy?
• Does the Lessee have the right to provide access to Lessor/Owner during the lease term or subsequently?
• Does the lessor have the right to pass on provided data in soft copy to next lessee?
• Are digital on–line documents the future? Hmmm!

Importance of record management

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• 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

Importance of record management

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Importance of record management

• 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

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QUESTIONS