Aircraft Leasing Maintenance Reserve Considerations
The fundamental objective of a lease is to ensure that the payments do in fact cover the capital and financing costs of the underlying asset. Ultimately it is the lessor who carries. Any residual risks, consider the potential for a default – for example Bankruptcy where all current and ongoing costs must be met by the Lessee. (Maintenance Reserves are designed to build in protection)
Maintenance Reserves are intended to provide protection for the Lessor in respect of the Aircraft, Engine Propeller & Major Components. Taken together the funds currently allocated to Maintenance Reserves total many billions of USD. Maintenance costs are typically rising at a rate in excess of 3% / annum. Taken together the funds currently allocated to Maintenance Reserves total many billions of USD. Maintenance costs are typically rising at a rate in excess of 3% / annum.
Maintenance Reserves are Intended only for routine maintenance, being major events such as Heavy Maintenance Visit HMV, Landing Gear Overhaul LDG overhaul, Engine overhaul, Engine Life Limited Part LLP replacement and Auxiliary Power Unit APU performance restoration.
Service Time is related to Flight Hours or Flight Cycles and is the driver for the Maintenance Reserve MR calculation.
During the maintenance check the aircraft is not flying so no reserves are due.
Maintenance Reserves mat typically be used in respect of “Non-Routine” findings.
Maintenance Reserve Example
A narrow body aircraft valued at $45 million typically has a 0.8% lease rate factor with a medium-risk airline on a 12-year lease period.
This equates to $360,000 per month rental. Assuming the aircraft is operated for 300 hours and 150 flights (cycles) per month, the maintenance reserves payments could be:
Two-engine performance restoration: $1.875 million per visit at 15,000 hours = $125 per hour per engine = $37,500 per month and 2 = $75,000 per month
Two-engine life limited parts: $2.25 million at 15,000 cycles = $150 per cycle = $22,500 per engine = $45,000 per month
Airframe 6/12-year checks: circa $20,000 per month
Landing Gear Overhaul at $350,000 at 10 years = $3,000 per month
APU Overhaul at $450,000 at four years = $9,375 per month
Thrust reversers at $600,000 at 10 years = $5,000 per month
TOTAL = $157,375 per month
The airline would therefore pay $360,000 lease rental per month as well as $157,375 per month in maintenance reserves.
Warning & Cautions related to Maintenance Reserves
During end of lease returns, MR may be seen as additional “less visible” additional form of payment.
In the case of any incident or accident, maintenance reserves are not available.
Does the operator fully understand what the maintenance reserves may be used for – for example SB embodiment – especially when performance and operational effectiveness are concerned?
Does the Lessor understand (or care) about the Standard of work being performed or the condition of the records and documentation?
A lessor who has ultimate control of the maintenance reserves will off course benefits from a large cash balance and will in addition have the ability to make decisions that impact the economic life of individual aircraft.