Presented by Sofema Aviation Services www.sassofia.com:
Sofema Aviation Servicestakes a look at how the monthly cash flow management process works.
Introduction
Some Airlines avoid Maintenance reserves – how?
By offering additional security and/or a Letter of Credit.
Actual Maintenance Costs may also be very different from the Lessor’s expectation for “industry” expected “standard” costs.
Maintenance cash flow forecasting involves analysing many factors in order to understand ongoing, maintenance-related expenses as particular asset ages.
Considering the challenges with Maintenance Reserve (MR) and the “End of Lease” (EOL) compensation cash position
It is fair to say that the entire process of Maintenance Reserve (MR), as well as End of Lease (EOL) compensation cash flows, contains a number of challenges particularly related to the significant sums involved in the leasing process.
Over time any failure to correctly identify the required MR & EOL cash flow can have a significant impact on the success of the business. (It is “that” important.)
One of the current challenges relates to the effectiveness of the engine forecasting – which considering the engines are actually the single most expensive part (s) of the leased aircraft.
Typical Analysis Software’s look at the following Criteria:
· The geographical region of operation,
· Flight hour to flight cycle ratio,
· 1st run or mature run engine, and
· Derate if applicable.
Often only minimum operating conditions are factored into the process which means it is necessary to make several manual assumptions regarding others.
Note Operating conditions can often vary greatly
1/ Different factors may have a significant impact on the ultimate life the engine, potentially creating an end of lease exposures.
2/ Potential workarounds may include holding back funds to address the unknowns which could effectively “lock up” millions of dollars.
Aircraft leasing continues to evolve with over 45% of the world fleet being leased, not only providing alleviation from acquisition costs but delivering fleet planning flexibility as well.
The lease agreement typically specifies what kind of maintenance events are to be covered through the payment of reserves.
Lessors Obligation
It falls to the Lessor to agglomerate cash maintenance reserves from lessees to cover major maintenance events, ensuring that when an aircraft is taken out of service for major servicing tasks sufficient funds are available to cover the incurred costs.
Calculating Maintenance Reserves
Obtained by calculating the ratio of the estimated overhaul cost for a given component to a standard maintenance interval expressed in-flight hours, flight cycles or calendar limits.
Maintenance reserves are collected every month into a nominated MR account until such time as there is a call on funds which are only paid out in arrears against a claim by the Lessee. (Up to the actual cost of the maintenance event.)
Question – Is there a contractual claim window for cost-share and maintenance reserve drawdown?
The process of determining the sufficiency of the fund is termed maintenance cash flow (MCF) forecasting which typically involves the following:
- The analysis of client-provided data such as leasing contracts,
- Technical specifications,
- Cumulative utilization, and prior maintenance activity.
- Projected maintenance costs of each event (based on historical data) and
- Intervals (e.g. landing gears must be replaced after ten years).
The above factors are used to determine both cash inflow and cash outflow projections (throughout the life of the asset.)
Engine Maintenance Reserve Forecasting
A significant portion of the aircraft’s value is to be found in the engine
Note:
New engine asset value approximately 25 percent.
End of Life Aircraft engine asset value approximately 90 percent.
Examples
– Engine refurbishment for a narrow-body aircraft engine typically costs up to $6 million.
– Engine performance restoration shop visit (excluding life-limited parts / LLP replacement) ranges in cost from $1 million for regional jets up to $10 million for the largest widebodies.
– Complete LLP disk stacks (typically 20-30 per engine) have list prices ranging from $2.5 to $10 million.
Calculating Engine Maintenance Cash Flow
The process of determining the sufficiency of the fund related to Engine Maintenance Cash Flow (EMCF) forecasting which typically involves the following:
- Operating conditions (e.g. sandy or hot/humid environments);
- Flight length;
- Work scope;
- Previous maintenance events.
Questions arising related to MR Calculations
- Caps or limits to be applied to specific “pots” of allocated maintenance reserve funds?
- Treatment of interest accrued on reserves!
- What happens when engines are on an OEM program?
- Engine build standards (industry-standard or local experience?)
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