0900-0930 RJ AC Leasing and Mtce Reserves

Agenda

Introduction

Maintenance Reserve in the Lease

Typical Lease Provision Impact on Maintenance Cost

Industry Collaboration

Introduction

Why Airlines Need to Lease Aircraft

Economic crisis forced airlines to look to strengthen their balance sheets (leasing rather than buy)

Continuous need for more efficient aircraft

Flexibility to add or cut capacity

The need for the cash flow to handle operating expenses with a vibrant and volatile environment

Introduction

Drivers Affecting the Demand for Lease Aircraft

The strategic position of the aviation industry is changing or drifting over time

Industry attractiveness & Competitor strength

Resources & Capabilities

Cost & Customer need

Introduction

Operating Aircraft Ownership Market Share

Its around 35% now, with around 7,000 aircraft

Annual increase of about 9-10%

Leasing market is estimated to reach 40% in few years

Over 100 lessor is the market

Introduction

The Impact on Airline Financial Statements

Recording leased aircraft on airline financial statements

(IASB & FASB proposal)

Off balance sheet (higher cost) Vs straight borrowing

No longer be optimal

Introduction

The Impact on Airline Financial Statements

Recording maintenance reserve as assets Vs. expenses

Provision for leased aircraft redelivery condition

Provision for aircraft scheduled maintenance

Introduction

The Impact on Airline Maintenance Cost



Agenda

Introduction





Some Facts

M.R Part of their lessor cash flow

Lessor earn interest on M.R

Airline lose time-value for money

Leases assets is more expensive to operate and to maintain


M.R Payment Structure

Reserve will be paid based on hours/cycles/calendar utilization

Combination of hours & cycles

Additional payment of Rent and M.R for deviation from contracted hours/cycles ratio

Annually escalated


M.R Reimbursement Structure

Parties will spend moths of effort and expenses formulating and negotiating M.R lease clauses

Waste

two options counter reset or accumulation

Double dip

end of lease excess of accumulation


Time Value for Money

Paid to be reimbursed after few years

No consideration for adjustment in relation to payment time Vs. reimbursement

LC substitution

Cost and airline financial situation

Agenda

Introduction





Lessor / Industry Perception on PMA and DER

Lost opportunity driving maintenance cost down

Industrial perception

Airlines hold the operational accountability

Sole decision makers for owned assets


Maintenance Program Optimization

Leased engines

Maximizing M.R reimbursement Not

Operational Vs. Cost Optimization

Owned assets

hedge their maintenance activities vs. assets management, assuring maximum aircraft availability


Service Bulletin Implementation

Owned Assets

airlines hold the veto whether to implement manufacturer service bulletins

Lessors & Lease

Manufacturers service bulletins Category only


Parts Replacement Policy

Lessor to ensure that any replacement parts will have same or higher standard and value as the original parts

Limitations on an airlines operating efficiency

Great complexity in terms of airline inventory management

Impact on redelivery process times and cost


No Discrimination Clauses

Lessor mandates

In relation to any maintenance activity to treat the asset as their own

But in practice

No two maintenance activities are the same

Special circumstances & Operational needs


Component Installation Engine Thrust

Lost opportunity in utilizing manufacture design flexibility

Increasing in the needed spares investment

In practice

Airlines will swap engines from one aircraft to another to suit their operational needs and stagger programs


Customization Allowance

Lessors financial model consider very basic allowance

No compensation for the added value

Airline invested and in some case paid interest to the lessor to increase the value of the assets for the lessor to enjoy

better marketability after lease end


Specific Requirement Above Aviation Authorities & Manufacturer Publications

Lessor usually does not put any obligation above industrial standards on the Lessee

specific requirements addressed by the Lessor

In specific cases may not be logical & can lead to an increase in maintenance costs

Agenda

Introduction





IATAs

Working Group

Mission

The focal point in setting up standards and ways lowering airline leased assets aircraft "maintenance cost

Membership

Airline, Lessor, MRO (under IATAs umbrella & OEMs sponsorship)


Working Group

Objectives

M.R payment structureStandardization of severity curves and aging curves

M.R reimbursement structureWhat have been accumulated, will be reimbursed at the time of accomplishing related maintenance activity based on an agreed workscope


Working group

Objectives

M.R time value for money

In cases where reserve has been paid and escalated, escalation to be considered taking in consideration the time for payment

In cases where LC is replacing M.R, airline and lessor working together to facilitate the issuance


Working group

Objectives

Lease provision affecting maintenance costUse of PMA and DER

Maintenance program optimization

S.B implementation

Parts replacement

No discrimination

Use of component on other assets

Customization allowance


Working group

Objectives

Lease Financial reporting standards To add another hand /input in driving the lease financial reporting standards

Thank you

0900-0930 RJ AC Leasing and Mtce Reserves

Documents

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payment time

assets management

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