Maintaining values

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Turmoil in the airline industry has sharpened the need for lessors to monitor maintenance of their assets, lest it become necessary to prematurely take back an aircraft and find a new customer for it.

Any lessor will have its "watch list" of customers deemed by the credit department to be at high risk of default. In a vibrant economy, lessors might be tempted to recall aircraft at the earliest signs of trouble, but the downturn has complicated the task of risk assessment. Now, lessors must weigh the danger of it being impossible to re-home the aircraft against the risk of the customer sliding into bankruptcy.

The asset's mobility depends on it being properly maintained and its maintenance properly documented. Where concerns exist, an initial step might be to send a technical team to renew the records and inspect the aircraft.

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 © SR Technics
SR Technics stresses continuing airworthiness for lessors

Attention will focus particularly on the engines - the aircraft's highest-cost items. "With a lot of the very modern engines on new commercial jets, there's good news and bad news," says Steve Hannahs, chief executive of Aviation Capital Group, a California-based lessor owned by insurance group Pacific LifeCorp. "The good news is that they last longer on wing, they're much more reliable, they can withstand greater stress, and they perform in a much improved fashion - fuel economy, CO2 emissions, etc. The bad news is that, when they have to go into the shop, they're extremely expensive to overhaul."

The dispatch of a lessor's technical team is not only an information-gathering exercise, but potentially a means of putting the relationship with the lessee on a new footing. "It sends a message to the airline: once we send a tech group in, it's a precursor that we may be considering repossession of the airplane."

However, a lessor may send a technical team because of concerns about the operating pattern revealed by performance data, even absent any fears for the operator's financial health. A high cycle-to-hour pattern could, for example, draw scrutiny, as it places strain on the engines. If it turns out that an aircraft is being operated on a route atypical to its type, the lessor may seek higher reserve payments.

"We know at any point where all the aircraft sit, all the engines sit in terms of their maintenance condition, regardless of whether the lessee is experiencing economic distress," says John Lynch, head of technical services at Dublin lessor Babcock & Brown Air.

At the outset of any lease, the lessee has imposed on it a set of redelivery conditions governing the return of the asset - and until it has met these the lessee may be liable for ongoing lease payments. However, the lessor's temptation to leave aircraft parked while the lessee racks up charges may be tempered by concerns that this will harm the lessor's reputation.

MORE ROBUST LEASES

To avoid such dilemmas, lessors have worked to finesse the contractual terms governing technical provision, operational covenants, maintenance reserves and return conditions. "I think leases today are much more robust even than three years ago," says Lynch.

Aviation Capital Group has for several years incorporated reserves for thrust reversers in its lease contracts. Meanwhile, many lessors have tightened requirements on service bulletin compliance, says David Hall, director of consultancy DHAC Avia. A lessor must also ensure that a full data pack exists for each modification made to its aircraft, he adds.

The simpler business of filing records can cause problems at redelivery, if not monitored. If the engineering department has pulled a shop-visit report and neglected to put it back, a costly delay can ensue. If a lessor gets its risk assessment wrong, dire consequences can ensue when the airline goes bankrupt. "The key with a bankruptcy is to be pre-emptive - to get in before the administrator," says Godfrey Ryan, co-owner of aircraft records management company Waviatech. "Once the administrator walks in, everything shuts down. You're talking to the lawyers and you're waiting for your precious records to become available."

There is another peril. "Employees could help themselves to the records," warns Ryan. "This has happened, and leasing companies have paid ransoms to retrieve records."

Waviatech reports increased business following last year's banking system crash. "Since last September, there has been a definite upswing in lessors contracting us not only to do standard transition work, but also pre-emptive scanning," says Ryan.

Meanwhile, MRO giant Lufthansa Technik says it is seeing rising demand for its Aircraft Leasing & Trading Support product, which it developed two years ago.

"Our market segment is typically anti-cyclic," reasons Harry Seeger, director of key account lessors and banks. Such customers draw particularly on Lufthansa Technik's expertise in project management and special engineering services (including cabin reconfiguration) undertaken as part of the transition process.

Two years ago Lufthansa Technik adopted a new approach to aircraft transitions, says Seeger. The imperative was "not to see this as a turmoil situation, but to create a unit and create a business case and to try - in a German way - to organise the disorganised".

Once Lufthansa Technik is contracted by a bank or lessor, it allocates work within its network, dispatching a specialist team from Hamburg if necessary.

SR Technics, meanwhile, offers what it terms "a turnkey solution for lessors" that includes a "range of service extending from care and maintenance to aircraft parking, to scheduled maintenance and modifications".

The MRO sets out three steps that should be completed when an aircraft is to be moved between operations. The first is a mandatory airworthiness review by a Part M-approved organisation, covering import and export inspection. The second step, also mandatory, is aircraft maintenance according to the relevant authority's requirements, be that European Aviation Safety Agency Part M requirements or the requirements of the US Federal Aviation Administration or other body.

The level of aircraft care and maintenance will depend on the length of parking. The optional third step is reconfiguration. If reconfiguration is not approved, the interior layout has to be designed by a provider with Part 21 and supplemental type certificate capabilities.

"For lessors today, continuous airworthiness of their aircraft is key," says SR Technics. "As owners they are responsible to the authorities. To guarantee airworthiness review, they require an organisation with Part M approval to manage the asset and carry out maintenance activities on their behalf."

SR Technics, like Lufthansa Technik, is certificated as a continued airworthiness maintenance organisation with Part M approval and Part 21 approval for design changes.

Technical vigilance is central to a lessor's financial health. "The money is made and lost in this business on the maintenance side," says Hannahs. "And that's something that I think is foreign to a lot of financiers and even to some lessors, potentially."

There are two components to the leasing business, adds Hannahs: the spread between the cost of funds and the returns; and asset management. "You can have very low cost of funds, but if you don't manage your assets correctly, the costs in overhaul and repair are going to far offset the benefits on the financing side," he warns.