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

School of Aviation Finance Technical Part of Transaction Documentation Brian Tumulty, Executive Director, Standard Chartered

Technical Part of Transaction Documentation Brian Tumulty January 20, 2016 Document Title 2

Contents 1) What is included? 2) Delivery/Redelivery Definition 3) Maintenance Reserve definition & Management 4) Importance of Record Management Document Title 3

What is included? What are • Letter of intent Technical • 10 pages to 50+ pages Transaction • Lease Agreement  Acceptance Certificate Documents?  Exception to (the) Acceptance  Side Letters Document Title 4

What is included? • Lease Agreement • Does ‘Technical’ need to look at all of the lease?  Definitions - Construction o “Aircraft” o “Aircraft Documents” o “Approved Maintenance Programme” o “Engine Performance Restoration” (various) o “Parts” o “Checks” o “Redelivery Compensation Amounts” / “Supplemental Rent” / “Maintenance Reserves”  Aircraft Description o Manufacturer Serial Number (MSN) o Design Weights o Engine serial numbers etc. Document Title 5

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 o - 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 Document Title 6

Delivery/Redelivery • There can be a variety of Delivery/Redelivery scenarios  Some more attractive than others! o Delivery – New from OEM, SLB, sale of aircraft o Delivery/Redelivery – coming off lease/going out on lease o Redelivery – coming off lease, parking, parting out Document Title 7

Delivery • Delivery  How is Delivery detailed in the lease agreement? o Date of Deliver – What happens if the contracted date is not achieved? o Location – MRO – Lessee’s engineering facility o What is being delivered? – interior configuration, livery o Delivery section of lease agreement, part A, B, C?  A – Procedure – who gets access, when  B – Specifics – inspection content, engine runs, demo flight etc Document Title 8

Redelivery • Redelivery  Redelivery – Is there a new Lessee? o Date – contracted date not achieved o Location – MRO – Lessee’s engineering facility o What is being redelivered? – interior configuration, livery o 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 Document Title 9

Maintenance Reserve definition & management - Ensure sufficient funds are available to cover the cost of certain high cost maintenance events occurring at various intervals during the lease term or during the life of the aircraft- Document Title 10

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 Document Title 11

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 Document Title 12

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 Document Title 13

Maintenance Reserve definition & management • 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 Document Title 14

Maintenance Reserve definition & management • How are maintenance reserve rates set?  Lessor typically wants high rates o More security – onward sale - default o 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? o Lessee gets back what they pay in o Does not if a qualifying event occurs after redelivery  Parties reach a considered compromise o Experience – what was the cost of previous events? o OEM published data o Estimates – What will be the cost of the next event? o Market status – current desirability of aircraft – bargaining tool Document Title 15

Maintenance Reserve definition & management • Maintenance reserves collection and disbursement  Collected funds paid into accounts controlled by Lessor  Qualifying criteria for repayment detailed in the lease agreement o Lessor given advance notification of event and draft workscope o Lessor Reviews and agrees with workscope  Lessee submits payment request when qualifying event is performed o Including all necessary supporting documentation  Lessor reviews payment request and provided supporting information o Satisfied that event qualifies and that all supporting data has been received Lessor makes payment to Lessee Document Title 16

Maintenance Reserve definition & management • New aircraft versus used aircraft  New aircraft – Lessee pays maintenance reserves from date of delivery for all qualifying events o 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 o 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 Document Title 17

Maintenance Reserve definition & management • Are maintenance reserve funds usually sufficient to cover the cost of a qualifying event?  Yes - and no o New aircraft that have only had one lessee and first qualifying events generally yes o 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? o Lessee cost – what was agreed in the lease? – when was the lease written (market conditions)? o Pool of funds from previous lessee o Lessor contribution Document Title 18

Maintenance Reserve definition & management • Are some maintenance reserves more important than others? o Over the life of the aircraft engine maintenance cost is significantly greater than the airframe and landing gear costs o Airframe maintenance reserve drawdown qualifying events happen every eight (8) years approximately o Landing gear overhaul events happen ever ten (10) years o Engine events, while slow to start, rise in frequency and are considerably more expensive Document Title 19

Maintenance Reserve definition & management Event type Interval Monthly charge Event Cost Airframe heavy check 6/8/10/12 years Typically fixed monthly $600,000 - $2,500,000 charge - $10,000 - $30,000 Engine refurbishment ~20-40,000 flight hours Flight hour charge $2,000,000 - $100 - $600 per FH $10,000,000 Engine LLP ~15-30,000 flight Flight Cycle charge $3,000,000 - replacement cycles $130 - $700 per FC $9,000,000 Landing gear overhaul 10 years Typically fixed monthly $400,000 - $1,500,000 charge - $2,500 - $10,500 APU Overhaul 5 then ~3 Years APU operational hour $300,000 - $1,000,000 charge - $30 - $100 Document Title 20