4 I AIRCRAFT TRADING & THE AFTERMARKET

If aircraft are returned late or in an unacceptable condition at the end of a

lease, the operator can face significant compensation costs.
Recommended best practices for the lease transition process are
highlighted here, including the need for detailed, advanced planning.

Best industry practice for

aircraft lease transitions
T
he International Air Transport lease term. It may also be required to pay other cases, the lease typically involves
Association (IATA) says that supplemental rent, known as some form of lease-end compensation.
about 40% of the global maintenance reserves. This compensation is either relative to
commercial aircraft fleet is “Maintenance reserves, by definition, delivery condition, which is often referred
under operating lease, and that trends are simply for risk mitigation,” explains to as an ‘upsy-downsy’ arrangement, or
indicate this percentage will increase. It Bruce Burnett, senior vice president of based on the aircraft being returned in
emphasises the challenges that can arise technical services at Avitas. “The lessor full or half-life maintenance condition.
when the lessee and lessor look at a lease collects maintenance reserves to protect The compensation is calculated after
from different perspectives. themselves from the risk associated with taking into account the aircraft’s physical
One such challenge is how to optimise the lessee being unable to pay for any return condition. The combination of
a lease transition. This is the process major maintenance items on the aircraft cash compensation, or retained reserves
under which an aircraft is removed from when they come due in the lease term. and physical potential, is referred to as a
service with one lessee, and returned to These are most often related to heavy synthetic return condition.”
the lessor in a previously agreed airframe maintenance, engine From an operator’s perspective there
condition, before being prepared for performance restorations or overhauls, are several advantages to an operating
operation with the next lessee. If a lessee replacement of engine life-limited parts lease. The most obvious one is that it
fails to meet the lessor’s required return (LLPs), and landing gear and APU avoids any large, upfront capital
conditions and/or deadline it may face maintenance. Since these are significant expenditure and the residual value risk
significant compensation costs. cost items the lessee pays into a reserve lies with the lessor. An operating lease can
The International Bureau of Aviation account, based on the aircraft or engine provide flexibility when optimising
(IBA) estimates that in a 12-month period utilisation, thereby creating a fund to capacity, including adjusting seasonal
from 2014 to 2015, there were 895 cover the cost of such maintenance demand. It is also often easier to acquire
aircraft lease returns. With this number of events. an aircraft on short notice via an
annual transitions taking place, lessors “Maintenance reserves for engines are operating lease.
and lessees would benefit from optimising adjusted periodically based on the lessee’s The following analysis of the lease
the transition process. operation, since the duration between transition process is split into two main
Some of the usual requirements shop visits will be influenced by the flight areas of consideration: lease return
associated with the lease transition hour (FH) to flight cycle (FC) ratio, and conditions and the required redelivery
process are identified here. The analysis the average amount of engine take-off de- actions.
includes a summary of the potential rate used,” continues Burnett.
pitfalls and recommended practices that Phil Seymour, chief executive officer
operators should consider. at IBA, suggests that many large, top- Redelivery conditions
credit airlines will not be required to pay All operating lease agreements specify
maintenance reserves, since lessors do not the maintenance and general condition in
Operating lease see them as a credit risk. Instead, they which the aircraft is required to be
An aircraft on an operating lease is will typically pay any relevant returned to the lessor, by a given date, at
owned by the lessor and operated by the maintenance fees or compensation at the the end of the lease term. These are the
lessee. The lessor grants the lessee end of the lease. Generally all but the top return or re-delivery conditions. “Usually
exclusive use of its aircraft for an agreed credit operators will pay the lessor the return conditions, such as the ability
period of time, known as the lease term. maintenance reserves towards future high to substitute a ‘replacement’ engine, are
For new aircraft this term is often eight to cost events. outlined in a separate set of clauses in the
12 years for a narrowbody, and up to 12 “Reserves or supplementary rent are lease or in an annex to the lease,” says
years for a widebody. Subsequent lease probably paid in about half of all Burnett. “Occasionally, they are
terms often decrease in length as the operating leases,” claims Gary Fitzgerald, embedded in clauses throughout the
aircraft ages. managing director at Stratos, an lease.”
The operator is charged a monthly independent advisory firm specialising in “The redelivery conditions should be
lease rental fee for the duration of the aircraft leasing and financing. “In the negotiated before the lease commences,

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6 I AIRCRAFT TRADING & THE AFTERMARKET
There are a standard set of redelivery conditions
that account for the majority of return clauses in
most leases. There are, however, certain
variables or precise requirements that can vary
by lease. Minimum engine FH and FC
requirements could differ between narrowbody
and widebody aircraft due to different levels of
utilisation.

between leases.
The return conditions in IBA’s
example can be broadly split into nine
categories, covering the general condition
of the aircraft, components, engines,
fuselage, windows and doors, wings and
empennage, interior and flightdeck,
landing gear and wheels and brakes, APU
and corrosion. Many of these categories
include multiple sub-sections with specific
return conditions. There are 10 sub-
sections listed under general condition
alone.

General condition
General conditions include
usually as early as the letter of intent Aircraft redeliveries are timed around requirements that the aircraft will ‘be in
(LOI),” explains Chris Markou, head of a scheduled heavy airframe check good operating condition and be clean by
operational cost management, safety and whenever possible. “At the end of the scheduled passenger airline standards,
flight operations at IATA. lease, the lessor would like the aircraft and all structural damage shall have been
The level of detail included in lease returned with the airframe, engines, repaired to a permanent standard.’ The
return conditions has increased as landing gear and auxiliary power unit ‘full complement of equipment,
operating leasing has become a more (APU) in a condition which would allow components, accessories, furnishings and
common method of aircraft acquisition. operation for a year or two without any loose equipment’ should match the
“Over time, lessors and those who draft major maintenance coming due,” says aircraft’s delivery configuration at the
the return conditions have become more Burnett. “The lessor and lessee will often beginning of the lease and the aircraft
savvy with the specific language used,” agree to a ‘mirror in/mirror out’ should ‘be in a condition suitable for
says Burnett. “Each time a lessor faces a arrangement, whereby the return immediate operations under European
challenge during the return process, the condition should, at a minimum, reflect Aviation Safety Agency (EASA) EU-Ops 1
next lease they negotiate will include the condition in which the aircraft was or FAR Part 121’. The general conditions
language to address that particular issue. initially delivered at the start of the ask that the aircraft ‘comply with the
Over the past 20 years lease return lease.” The variables and associated original equipment manufacturer’s
conditions have grown from a simple requirements can vary by lease. (OEM) original specifications as at the
paragraph to 20-30 pages of very specific “There is an industry standard set of delivery date’ and have a valid certificate
requirements.” return conditions, which account for 70- of airworthiness (C of A), or if necessary
Lease return conditions are negotiable 80% of the return content within most a valid export C of A issued by the
between the lessor and lessee, but the operating leases, such as the requirement lessee’s national aviation authority
operator’s leverage is likely to vary. “The for an aircraft to have 18-24 months (NAA). The general condition at delivery
biggest influence on lease return clear of any major maintenance events,” includes details of the aircraft’s basic
conditions is where the aircraft goes after says Fitzgerald. “The remaining 20-30% specifications including weights and
redelivery,” says Fitzgerald. “If it is being of conditions can vary greatly between engine thrust ratings.
dismantled, most lessors are keen to leases, from an agreement for an aircraft Other typical general conditions
receive cash compensation in lieu of a to be returned in ‘totally run-out’ require the aircraft to: be free of any open
better return condition. Also the largest condition, which is popular for mid-to- or deferred defects; undergo the next
carriers are often in a position to old vintage aircraft with many US major relevant C check in block format
influence the return conditions when the carriers, to a requirement for the aircraft immediately prior to redelivery; and have
lease is signed, whereas smaller airlines to be returned in ‘full-life physical all outstanding airworthiness directives
generally have to agree to what the lessor condition’, which is common with (ADs) and service bulletins (SBs)
dictates,” claims Fitzgerald. Japanese operating lease (JOL) deals.” performed. Specific requirements ask that
“The return conditions section of a In 2015 IBA produced a white paper the C or base check be performed in
lease is often heavily negotiated, although titled ‘Redelivery expenditure: minimising accordance with the OEM’s maintenance
the leverage in any deal may depend on surprises and maximising cash flow’. The planning document (MPD), and that ADs
market conditions, lease rates and terms white paper includes examples of typical issued by the Federal Aviation
of lease,” says Burnett. “The lessor’s goal redelivery conditions based on a six-year Administration (FAA) or EASA should be
is to be able to immediately re-market an lease for an A320 or 737. complied with during the lease term if the
aircraft with one or two years clear of The return condition examples are aircraft is registered under either agency,
any significant maintenance requirements, summarised here. While these are or, if applicable, for a period of up to 180
while the lessee wants to minimise its intended to provide typical examples, days after redelivery. There are general
expenses at the end of the lease.” there is likely to be some variation condition demands that relate to the

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 7 I AIRCRAFT TRADING & THE AFTERMARKET
aircraft’s livery, signs and decals. These engine ‘will have not less than 6,000
include a requirement for signs and decals engine flight hours (EFH) expected life Interior and flightdeck
to be clean, secure and legible. remaining to the next scheduled removal, In recent years, aircraft interiors have
and the LLPs shall have not less than become more advanced with the
6,000 engine flight cycles (EFC) life introduction of new space-saving and
Components remaining.’ connectivity technologies. Airlines are
The IBA white paper lists four typical The second clause requires that ‘each also placing a greater emphasis on
return conditions for components. The engine shall have just completed a hot interior standards as a service
first relates to FH- and FC-controlled and cold section video borescope differentiator.
hard time components (HTCs), and inspection, and a power assurance run During the redelivery process the
specifies minimum levels of remaining performed in accordance with the OEM’s lessee may remove any proprietary
utilisation. In this case the example maintenance manual.’ It adds that the elements of its cabin design, including in-
stipulates that these components should lessee will be liable to cover the cost of flight entertainment (IFE) technology.
have 3,000FH and/or FC remaining to any defects uncovered by these Lessors generally require an aircraft to be
the next scheduled removal. There is also inspections, which exceed OEM in- returned with a functioning IFE system if
a condition related to calendar-limited service limits. The final clause requires it was delivered with one. Alternatively if
components. It asks that, ‘each calendar- that ‘each engine will be devoid of any an aircraft was not supplied with IFE,
limited component, including safety defect which places less remaining life on and the operator removes a proprietary
equipment, will have not less than 12 its constituent parts,’ in accordance with seat-back system, the lessor may require it
months remaining to the next scheduled OEM or regulatory airworthiness to install suitable plugs or covers in its
removal’. There is also a request that each requirements until removal. place.
on-condition and condition-monitored “Lease return conditions not only IBA’s white paper highlights typical
component should be serviceable and that include the engine type and thrust interior redelivery requirements, such as a
the average accumulated flight time since variant, but also the engine serial number need for carpets and seat covers to be
new of the installed components should and documentation requirements,” says returned in ‘good condition’ and be clean
not exceed 110% of the flight time Les Cronin, head of global leasing at and free of stains. The cabin ceiling,
accumulated by the airframe. MTU Maintenance Lease Services B.V. sidewalls and overhead bins will need to
“Furthermore agreements will include a be clean and serviceable and there may be
maintenance timeline that predefines EFC requirements related to meeting fire
Engines since the last engine performance shop resistance regulations.
IBA identifies three typical redelivery visit. Engines must also meet minimum
clauses for engines. The first calls for serviceability requirements on return,
minimum levels of remaining utilisation. including any applicable SB and AD Other
The example given requires that each embodiment standards.” Lease return conditions for landing

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IATA has produced a chart for a proposed
redelivery plan it says airlines should follow to
achieve a successful lease return. IATA splits the
redelivery process into three stages: the initial
phase, pre-redelivery phase and redelivery
phase. It recommends that airlines should
beginning analysing the return conditions 12-15
months before lease end.

Complications
The structure and wording of
redelivery conditions can lead to
complications for lessees.
One issue facing operators has been
that some redelivery conditions are not
particularly clear and precise, which can
leave things open to interpretation.
IBA identifies the poor contract
drafting of redelivery conditions as one of
the main challenges in the lease transition
process, since it can lead to disputes
between lessors and lessees.
gear, wheels and brakes and APUs In the third edition of its ‘Guidance
generally include minimum utilisation Variation material and best practices for aircraft
requirements. IBA’s example stipulates The minimum requirements specified leases’, IATA acknowledges that some
that each landing gear should have a in the return conditions could vary elements of the re-delivery conditions are
minimum of 10,000FH, and/or 10,000 according to the length of lease and the ‘almost always left vague’. It highlights
gear cycles and/or 36 months calendar age and type of aircraft. wording such as ‘fair wear and tear’ as
time available before the next scheduled “The term of the lease often changes one term that can lead to disputes during
removal is due, and that wheels and expectations of return conditions, both lease returns.
brakes should have at least half of their during the lease and upon the aircraft’s Some of the vaguest return conditions
useful life remaining. It further states that return,” says Burnett. “All things being can relate to interior items, since these are
the landing gear and wheel wells should equal, a longer lease term typically means often evaluated in cosmetic terms which
be clean, free of leaks and repaired where a lower lease rate and a softening of can be open to interpretation.
necessary. The white paper says that return conditions. A long lease may see David Louzado, principal consultant
typical conditions include returning the an aircraft make the transition from a in the aircraft advisory and management
APU in a serviceable condition, with no marketable commodity to one destined practice at ICF, provided the following
more than 1,000 APU hours consumed for teardown. There is little sense in definition of fair wear and tear from a
since the last hot-section inspection. drafting onerous return conditions for an typical lease:
Other redelivery conditions will relate aircraft that may not fly again at the end Fair Wear and Tear means normal
to the fuselage, wings and empennage of the lease. wear, deterioration or dirt ingress which
and corrosion issues. The example given “Even for short-term leases, if an causes an item of interior furnishing,
by IBA requires that the fuselage should aircraft is approaching the end of its fittings, trim, panels, bulkheads, doors,
‘be free of major dents and abrasions, lifecycle, the return condition floor panels, ceilings or other interior
loose or pulled or missing rivets,’ with the requirements lessen at each subsequent equipment to be worn or to have such
further requirement that all structural lease transition,” continues Burnett. level of deterioration which is consistent
repairs should be permanent and “When an aircraft is new, its initial lease with normal operational use and which
completed in accordance with the will have stringent return requirements. does not materially affect the appearance
structural repair manual (SRM) or OEM- As the aircraft ages and changes lessees, standard (compared to other passenger
approved data. the redelivery requirements lessen, until aircraft coming out of a heavy check and
IBA’s example adds that windows the aircraft reaches its end of life. re-entering service in lessee’s fleet),
should be free of crazing, and that any “The return conditions related to serviceability, operation and normal use
delamination should be within acceptable airframe maintenance are similar for both of such item.
limits, while doors need to be free- widebody and narrowbody aircraft,” says “The idea of fair wear and tear is to
moving and fitted with serviceable seals. Burnett. “There may, however, be allow some level of deterioration to be
Where the wings and empennage are different FH and FC minimums for the acceptable at redelivery, but the use of the
concerned, typical return clauses stipulate engines, since these are adjusted for the words ‘normal’ and ‘compared to other
that leading edges should be utilisation of each aircraft type. passenger aircraft’ makes this highly
‘substantially free’ from damage, and any “All return conditions are negotiable, subjective,” argues Louzado. “This can
repairs are performed to a permanent regardless of the age or type of aircraft or lead to expensive delays and disputes.
standard. With respect to corrosion, the the length of the lease,” adds Burnett. ICF recommends clearer wording such as
redelivery conditions are likely to “Even when the lease states the airframe ‘the cabin shall be free from scratches,
stipulate that the aircraft should be or engines must be fresh from heavy tears, nicks, and stains.”
inspected and treated in accordance with maintenance, some lessors may prefer to Louzado says that definitions
approved corrosion prevention and receive a cash settlement in lieu for an regarding the replacement of parts can
control procedures (CPCP). asset that may not be marketable.” also be open to interpretation and gives

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Lack of planning has been highlighted as a
primary cause of late redeliveries. Areas where
airlines can struggle include the timely ordering
of MRO slots for the end-of-lease check. IATA
recommends that MRO slots should be booked
nine-to-12 months before the lease end date,
but in reality it is not uncommon for airlines to
leave it until three-to-six months out.

calendar clearance periods in addition to

letter check references to cover all
variations and avoid confusion,” adds
Louzado.
“Some return conditions can be
ambiguous, such as those that require
part of the aircraft to be returned in
‘good condition’ or to ‘airline industry
standards’,” says Guljar Lehri, aircraft
lease team general manager at Monarch
Aircraft Engineering (MAEL). “Nine
times out of 10, the interpretation of this
language will depend on the relationship
between lessee and lessor. If they have a
positive working relationship, the lessor
and lessee will easily agree and
an example from a lease agreement: lease, but their interpretations of the compromise on what actually represents
A ‘Replacement Part’ means a part, language may be significantly different. ‘good condition’ or airline industry
component, furnishing, appliance, “Having reviewed hundreds of leases standards.”
module, accessory, instrument or other and negotiated returns, I see a few clauses Lehri cautions that some operators
item of equipment and shall include the that reoccur and are known challenges,” can end up in default of redelivery
APU: continues Burnett. “The engine conditions, because they have not
(i) That is in the same operating substitution clause, for example, comes properly read the lease and taken into
condition as, and has a utility at least as up with surprising regularity. Under this account its implications. “The lessee
equal to the part replaced (assuming that clause an engine can be substituted at needs to familiarise itself with the main
the replaced part was in the condition lease return provided it is by an engine of body of the lease and the return
and repair in which it is required to be equal value and utility. The clause conditions.”
maintained under this agreement). attempts to clarify this requirement with
“The intent of this clause is to ensure the words, ‘without regard to hours and
parts are replaced correctly when cycles’. The challenge at redelivery is to Best practice
required, and the term ‘at least equal to determine the value of the substitute To avoid misinterpretations of return
the part replaced’ is supposed to protect engine, without taking account of FH and conditions, IATA recommends that
the aircraft against a devaluation from FC. potentially vague terms are formally
having much older parts fitted,” says “The use of outdated terms can also defined to ensure that both parties clearly
Louzado. “However, the words ‘at least leave things open to interpretation,” says understand their meaning. It also
equal’ could be interpreted to mean that Burnett. Reference to traditional letter proposes that objective standards such as
it is acceptable to fit a replacement part checks, such as a C or D checks when the MPD should be used where possible.
with the same or much higher establishing minimum clearance “The lease contract must clearly
accumulated utilisation than the one that thresholds for remaining life at redelivery define the return conditions,” says
was removed. This is a typical case of the is one such example. MPDs produced Markou.
words not carrying the intent. A more under contemporary maintenance “Optional SBs, equipment upgrades
effective way of expressing this clause is steering group three (MSG3) principles and other non-mandatory modifications
to say the part shall have accumulated no assign each independent task its own that usually add value to the asset should
more FH, FC or calendar time than that inspection interval rather than grouping be openly discussed when negotiating the
of the removed part. them into letter checks, to allow return conditions,” says Elentinus
“There is no industry obligation or operators to group checks more Margeirsson, manager of operational cost
requirement to track the utilisation of efficiently, based on their levels of management, safety and flight operations
‘on-condition’ parts,” adds Louzado. “All utilisation. at IATA. “In addition, the timing of the
of these clauses that seek to protect the “A return clause may specify the application of mandatory requirements
overall value of the aircraft are therefore aircraft shall be returned with ‘a fresh D with dates beyond the lease expiry should
difficult to comply with in the real world, check’,” says Burnett. “Unfortunately the be addressed.
and may lead to disputes if taken out of term D check is no longer clearly defined, “Ideally all issues that can possibly
context.” and although the authors meant well arise in the redelivery process should be
“The originating authors of a lease when they drafted the clause, this can discussed and clearly identified in the
are seldom around when the lease term result in a lengthy discussion at lease end negotiation stages,” adds Margeirsson.
expires,” claims Burnett. “It is therefore over the amount of maintenance “The people that draw up the contracts
the exact language in the agreement that required.” are often no longer there seven to 10
needs to be addressed or potentially “When it comes to the return years later when redelivery takes place, so
reinterpreted. At this point, the lessee and maintenance check, most return it is important to avoid ambiguity in the
lessor may read the same clause in the conditions will feature specific FH, FC or contract. Technical experts who will be

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 11 I AIRCRAFT TRADING & THE AFTERMARKET
involved operationally should also be agreed redelivery conditions. maintenance events for major
involved in all discussions between the IATA has published recommended components such as engines, APUs, and
operator and lessor.” guidelines for the redelivery process. landing gear.
“A lessee must involve its technical IATA suggests that lessees should
team in reviewing the return conditions begin the initial redelivery phase up to 24
before signing the lease,” agrees Burnett. Redelivery guidelines months before the end of the lease term,
“Failure to do so may lead to significant “A detailed timeline listing how the although it acknowledges that timing will
compliance expenses at lease end.” entire redelivery process can be handled, vary by airline, and that it is not
“Lessees should allow enough time and who is responsible for certain tasks, uncommon for the process to start only
during the initial lease negotiation to can be found in chapter 5.2 of IATA’s from six to 15 months out. IATA also
establish a set of practical return ‘Guidance material and best practices for cautions that the starting point and
conditions, while avoiding any perceived aircraft leases’,” says Markou. “It is duration of the initial planning phase will
pressure to ignore these considerations in recommended that airlines follow these vary depending on the length and
the rush to get the deal signed,” says guidelines when preparing and executing complexity of the lease.
Louzado. “Technical staff from both sides a redelivery. A number of airlines that
should have an opportunity to negotiate participated and collaborated in the
and refine the return conditions together, creation of the best practices has been Pre-redelivery phase
rather than leaving it to the commercial, able to return aircraft on time based on IATA suggests that the pre-redelivery
legal or sales staff, or accepting them as a the recommendations.” phase should commence 12-15 months
given.” IATA categorises the redelivery before the end of the lease, with the
Those lessees that pay maintenance process into three separate phases: the operator performing a detailed analysis of
reserves may wish to establish how far initial, pre-delivery (operating), and the return conditions. It recommends that
these will go in terms of financing the redelivery phases. The recommended the lessee identify any possible
required end-of-lease maintenance guidelines for each phase have been compliance issues at this stage before
obligations. summarised. evaluating potential solutions.
The next steps are to select an MRO
to perform the required redelivery touch
Redelivery actions Initial phase labour, and arrange an initial face-to-face
A number of redelivery actions must According to IATA the initial phase meeting with the lessor to discuss the
be performed as an aircraft approaches should start with an airline confirming return process and requirements. IATA
the end of its lease term, including a that the lease will end on the agreed date proposes a number of objectives for this
combination of planning, administrative rather than being continued. At this point first redelivery meeting between lessor
and physical touch labour tasks, designed IATA recommends that airlines review the and lessee, including: appointing project
to ensure the aircraft complies with the return conditions and any upcoming managers from each party; defining a

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Missing or incomplete documentation can cause
problems during the redelivery process. Missing
records can sometimes require a repair to be
removed and performed again. IATA
recommends that airlines begin to prepare the
aircraft records six to nine months before
redelivery.

should be completed three to four months

before the end of the lease. These tasks
include defining the final check package
and arranging a pre-input meeting with
the MRO. IATA says the final check
package should confirm the components
that must be replaced to satisfy the
redelivery conditions and any actions
needed to resolve missing or invalid
historical records. The final workpack
should be approved by the lessor before
the lessee discusses the details and
schedule with the MRO. IATA
recommends that the lessee directs the
MRO to only take instruction from the
operator rather than the lessor or next
schedule for follow-up meetings; and records. IATA suggests prioritising lessee.
clarifying each element of the return records on critical issues such as AD or If the lessor already has the next
conditions to ensure a common repair status, so that potential solutions lessee lined up, and they are based in a
understanding between parties. The can be considered. It also recommends different country with a different NAA to
initial meeting may also formally that lessees review the aircraft’s repair the current lessee, the aircraft may require
document any agreed amendments to the and modification status at this stage, and an export C of A when it is returned.
return conditions or agreements related consider giving the lessor remote access to IATA recommends that the lessee’s
to buy-outs, whereby the lessee agrees to electronic records where available. regulator be contacted three to four
pay the lessor in lieu of meeting a certain IATA proposes that in the same months before redelivery to begin making
redelivery requirement. Other potential timeframe cabin and cargo bay walk- arrangements for this document.
objectives from the initial lessee/lessor through inspections should be arranged
meeting might include a discussion of and attended by the lessee’s and lessor’s
general issues related to the return representatives. These inspections provide Redelivery phase
process, and reaching agreement on an opportunity for the two parties to The lessee’s first task in the redelivery
potential compensation costs, if clarify what constitutes an acceptable phase is to present the organised aircraft
applicable. return condition, and give the lessee records to the lessor for review, before the
IATA recommends that lessees book sufficient time to place early orders for end-of-lease maintenance inputs. The
their MRO slots and begin meetings with any cabin interior items, as these have records are often presented in a
the lessor nine to 12 months before notoriously long lead times. IATA ‘redelivery book’, which contains various
redelivery. The lessee should generate a therefore recommends placing orders for summary sheets. IATA says that collating
project plan for redelivery eight to 10 any parts deemed to be ‘at risk’ even if the redelivery book and associated
months out. This would include details of their condition is still being discussed compliance files can be one of the most
the main redelivery tasks and timelines with the lessor. labour-intensive stages of the redelivery
and should be agreed with the lessor. At five to six months out it is process.
The IATA guidelines propose that the recommended that lessees establish a IATA guidelines say the records
next redelivery actions should be the preliminary check package for the should be made available three or four
preparation of aircraft records and cabin aircraft’s redelivery maintenance input. months before redelivery, and recommend
and cargo bay inspections, six to nine IATA emphasises that this should take that the two parties should agree on a set
months before returning the aircraft. account of applicable return conditions time period in which the lessor will
It is recommended that lessees begin that might require the aircraft to be complete its records review and make the
to prepare aircraft records, either in hard bridged from an operator’s bespoke lessee aware of any discrepancies. IATA
copy folders or digital format, depending approved maintenance programme proposes that the lessor and lessee should
on their internal processes. A list of (AMP) to the latest revision of the OEM’s agree on a cut-off date, after which the
typical redelivery records is included in MPD. lessor is not permitted to raise further
Annex II of the IATA guidelines. They IATA guidelines suggest that issues with the records.
include aircraft manuals and records preliminary engine and APU borescope At two to three months out, the lessee
documenting the condition and status of inspections should be performed four to should receive the detailed check plan
the aircraft, and its key components. six months before redelivery so that the from the MRO, the schedule for which
Examples include AD and SB status, the lessee has time to respond to any issues. It should be shared with the lessor. With
certified LLP status for the engines, also recommends that the findings are two months to go the lessor should have
landing gear and airframe, the certified shared with the lessor so that the two completed its review of the aircraft
aircraft repair status and repair records. parties have a common understanding of records. IATA contends that any further
Other typical documents include those engine and APU condition. discrepancies raised by the lessor should
related to shop visit and traceability The final pre-redelivery phase tasks be restricted to the return maintenance

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14 I AIRCRAFT TRADING & THE AFTERMARKET
It is almost certain that lease return conditions
will require each of the aircraft’s engines to
undergo a borescope inspection. IATA suggests
airlines should perform preliminary engine and
APU borescope inspections four to six months
before redelivery so that they have enough time
to respond to any issues.

cost in the redelivery process and puts

this down to late decisions and poor
planning by airlines, leading to them
having to take quick and expensive
decisions to ensure return condition
compliance.
“A well-respected airline client had a
fleet of aircraft to return,” explains
Louzado at ICF. “The airline did not
prepare, and took the view that it was
compliant with the regulations, so the
return would be straightforward. It did
not distribute details of its redelivery
obligations among its engineering team,
did not plan additional downtime for the
check and associated documents. end-of-lease checks beyond that of a
High power engine runs, acceptance Potential pitfalls normal C check, and did not assign a
or demonstration flights and engine and There are a number of potential project manager from the beginning. The
APU borescope inspections should be redelivery pitfalls for operators. These result was months of delays that turned
performed once the return check can lead to lease transition complications the redelivery programme into an
workscope is completed, typically within and cause late returns, resulting in expensive and complicated situation for
a month of the redelivery date. These additional costs or financial penalties. “It all sides. The maintenance checks were
inspections could be witnessed by is quite common for an operator to hand not suitably cleared to cope with delays
representatives of the lessee and lessor, to back an aircraft after the agreed caused by a lack of repair substantiation
permit the two parties to agree on a final redelivery date,” says Lehri. data, which demanded the re-work of
discrepancy list and any required IBA identifies a number of factors that certain structural repairs. The additional
solutions. can lead to challenging lease transitions downtime knocked the checks that had
and potential redelivery delays. These already been performed out of
include: lack of lessee planning and early compliance and a lack of cabin spares
Return acceptance & deregistration engagement with the lessor; inadequate caused further delays.”
“Once the lessor and lessee agree that focus on assets during operation; lessee “An example of poor planning is an
all of the redelivery conditions have been operational demands consuming engine that fails to meet the return
met or remedied, the aircraft is nearly redelivery resource; decentralised, missing conditions,” says Burnett at Avitas. “By
ready for return,” says Burnett. “The or incorrectly completed records; under- not monitoring its utilisation well before
lease often includes a clause where the estimation of the total workload, lead the lease end date, the operator may
lessee will be required to provide an times and lessor expectations; discovery allow the engine to exceed the minimum
export C of A. This will allow for the of additional work required during the return requirements established in the
deregistration of the aircraft by the redelivery maintenance input; lack of lease. Failure to plan ahead may cost the
outgoing lessee and subsequent lessor appetite for the returned aircraft; lessee a several million dollar shop visit.”
registration by the next lessee if the and engines failing final borescopes. Inadequate and late planning can
aircraft is moving to a different region affect the rest of the redelivery process.
with a different NAA. “If aircraft surveys are not carried out in
“The challenge associated with this Lack of planning a timely fashion, the airline may be
requirement is that the new NAA may “Poor lessee planning is almost unable to procure the required spares in
require specific modifications before the always the cause of most issues during time for the end of lease check,” says
aircraft is granted a C of A,” continues the redelivery process,” says Fitzgerald. Lehri. “This is particularly true of cabin
Burnett. “There could be significant costs “Beginning the redelivery process too items which have long lead times. If
associated with this compliance, and the late will result in a high probability that insurance borescopes are not carried out
lease needs to clearly define which party the aircraft will not be returned by the on the engines and APU, and damage is
is obligated to cover them. If the aircraft required end of lease date,” says Lehri. found during the end-of-lease check, it
stays within the same region, the In a study carried out by IBA in 2016, will result in late delivery, since shop visit
deregistration/re-registration process will over 80% of responding lessors thought rectifications will be required and could
be much simpler.” that lessees engage too late on at least have lead times of up to 90 days. Bad
The final step in the redelivery process 50% of lease returns. Lessee respondents planning could also result in a lack of
is for the lessee and lessor to sign the suggested that such incidents were more MRO and paint slot availability,”
technical acceptance certificate included infrequent. This prompted IBA to continues Lehri. “If there are any missing
in the lease, once it has been established conclude that lessees are in denial over records for repairs or components,
that the aircraft has successfully met the the engagement process with lessors. It repairs may need to be redone or re-
return conditions. identified engines as incurring the most assessed and components replaced. This

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 15 I AIRCRAFT TRADING & THE AFTERMARKET
leads to increased maintenance downtime often a significant issue,” adds Burnett. operator that maintained its leased
and costs that have not been budgeted “Without the approved paperwork to aircraft meticulously in accordance with
for.” authorise the repair, the lessee may have the MPD. “When the operator began
“Documentation irregularities cause to remove the repair, inspect the area, and planning the redelivery six months out, it
the most nuisance to a smooth return,” install a new repair to ensure compliance. was apparent that the redelivery
explains Fitzgerald. With the advent of digital record-keeping conditions featured certain work to be
“The most common issues involve the number of documentation and performed in excess of the MPD
records of repairs, how the repair was records issues has dropped significantly.” requirements,” explains Paul Lyons,
performed, traceability of work and IBA suggests that lessees are often strategy director at IBA. “The resulting
providing back-to-birth information for aware of issues with records, but ignore unscheduled maintenance on the engines
components,” claims Margeirsson. “Parts them until it is too late. It highlights how and landing gear cost over $2.00 million
Manufacturer Approved (PMA) parts and collating records can be complicated by and the operator was left in a weak
Designated Engineering Representative different document formats, including a negotiating position.”
(DER) repairs can be an issue, although combination of hard copy and digital Defects discovered during the return
most lessors now accept them as they are records. IBA claims that another major check and final borescope inspections can
recognised by the relevant airworthiness issue related to records is that the lead to delayed aircraft returns. IBA
authorities. The PMA/DER issue should redelivery conditions might require more estimates that unscheduled repairs
be negotiated up front to avoid redelivery detailed information than the airline account for about one-quarter of delays.
delays and misunderstandings.” would normally process. LLP traceability “Underestimating the amount of
Burnett highlights missing paperwork and back-to-birth records, for example, work and time required to comply with
for repairs or modifications as a common can differ in format and detail. the lease end conditions is all too
problem and adds that there can be issues “The belief that a regulatory common and results in significant added
related to AD compliance documentation. compliant aircraft is compliant for return expenses for the lessee,” says Burnett at
“The collection and acceptance of aircraft is a common mistake,” says Louzado at Avitas.
records and redelivery compliance ICF. “The lease agreement is invariably Areas where airlines struggle include
discussions have the largest influence on stricter than the requirements of the the timely ordering of MRO slots and
the length of the return process,” says regulator, because the lessor wants to spare parts, particularly for cabin items.
Burnett. “These may take anywhere from preserve the value of the asset and It is not uncommon for some operators to
three to four weeks for a well-organised enhance its liquidity with minimum book MRO slots up to six months out,
lessee, but there are many cases where investment. This means records retention but others leave it as late as three months
this process can take months or even policies and the depth of detail required before the redelivery deadline.
years if the records are not in compliance, for the redelivery need to be understood IBA says that disagreements regarding
or the aircraft needs substantial work. from the outset.” the condition of interior items can lead to
“Missing repair substantiation is quite IBA provides an example of an costly delays due to long lead times. It

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16 I AIRCRAFT TRADING & THE AFTERMARKET
Disagreements over the condition of interior
items or the late ordering of these parts can lead
to costly delays due to the long lead times for
cabin spares. IATA recommends arranging cabin
walk-through inspections six to nine months
before redelivery so that any ‘at risk’ cabin items
can be ordered well in advance.

planning of lease redeliveries.”

“A number of airlines regularly return
aircraft on time and achieve this through
learning the hard way initially, before
improving their processes, bringing in
external help, or both,” says Louzado.
“In my previous experience, return
conditions never used to be distributed
within airline maintenance organisations,
and there were no procedures in place to
align with the aircraft exit programme,”
explains Lehri. “Operators have learned
painful lessons through poor redeliveries
in the early years and they now start
planning for lease returns 18-24 months
out.”
“Monarch Airlines has 32 aircraft to
offers an example where replacement of normal redelivery period for a medium redeliver over a six-year period,”
seat foams resulted in a 10-week delay widebody such as a 767 or A330 would continues Lehri. “At MAEL we have
while they were sourced and delivered. be two months from the start of the already begun the planning phase for the
Another reason for delay identified by return check. It also recommends first redelivery, which is due to occur at
IBA is that the lessee’s technical team can evaluating the risk of delay in the the end of March 2018. Redelivery
end up focusing on its day job - keeping redelivery process. IATA proposes that conditions are distributed within the
the aircraft flying - at the expense of airlines faced with tight return check slots business to ensure all requirements are
forward planning for the lease return. should consider flying their aircraft to a met. A robust redelivery timeline is
“A lessee without a team focused on different location where there may be established for an on-time lease return.”
the planning requirements of a lease more hangar space and manpower “We believe that we are in a phase of
return will inevitably have significant available, once the routine tasks have change regarding lease transitions,”
expenses associated with failing to meet been completed. It advises that any such explains Cronin at MTU Maintenance
return conditions, penalty rent, or movements should be agreed with the Lease Services. “They have a reputation
negotiated settlement costs,” says lessor before the redelivery process for being long, fraught with
Burnett. begins. IATA also recommends that misunderstanding and costly, though in
operators should place emphasis on our opinion this is not necessary. MTU
evaluating the condition of the interior, Maintenance offers a portable
Recommendations since lead times for spares can stretch into maintenance solution for lessors and
IATA’s redelivery guidelines offer a several months, and that lessees should lessees that accompanies the engine
useful template for operators looking to regularly review aircraft records. across all phases of its service life, and
avoid common lease return “IATA encourages operators to focuses on mitigating risk for all parties
complications. Most recommendations review records for leased aircraft when it comes to engine maintenance and
focus on the importance of planning. annually,” says Markou. “Best practice is ensuring maximum asset value is
“The main recommendations are, do to supply the records at year’s end for maintained at each phase of life.
not leave redelivery planning to the last each aircraft they are leasing to the lessor “Through our programme we provide
minute, do not give the lessor an excuse for review, so that at the time of the lessee with predictable, direct engine
to challenge or reject the return redelivery the only records outstanding operating costs,” continues Cronin.
condition, and do try to get on top of any would be for the preceding year.” “MTU maintenance can carry forward
contract ambiguity,” says Lyons. maintenance reserves for pre-consumed
“Preparation and planning are key,” life and determine the actual condition of
says Louzado. “The return should be Changing behaviours the engine and take on the associated risk
planned and prepared from the day the There are signs that airlines are in the lease transition phase. Additionally,
lease is negotiated, not just at the end.” becoming more proactive in the the MTU programme coverage includes
“The major element of a successful redelivery process either through dealing with corrective action required by
lease return is planning,” says Lehri. “If employing third-party expertise from the findings during an end-of-lease check.”
you do not plan adequately you will fail likes of Avitas, IBA, ICF and Stratos, or In addition to a more proactive
to meet your objectives.” via establishing their own in-house teams. approach from lessees, IATA has been
In addition to its main timetabled “Most lessees are getting better at developing ways to smooth the lease
guidelines, IATA offers general redelivery preparing for and meeting their return transition process. It has been trying to
advice for lessees. This includes the need condition obligations,” says Burnett. simplify documentation requirements
to understand that the larger the aircraft, “Many of the costs associated with non- related to aircraft leasing and the whole
the more complicated the redelivery compliance or late returns can be averted aircraft transfer process. Working with
process will be. IATA estimates that the by having a dedicated staff overseeing the lessor community and their

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 17 I AIRCRAFT TRADING & THE AFTERMARKET
representatives through the Aviation be a motivator for the lessee to redeliver $500,000 for a regional aircraft, $1.65
Working Group (AWG), IATA has the aircraft on time and compliant with million for a narrowbody and $3.90
introduced the Incident Clearance the return conditions. million for a widebody. In 2017 dollars
Statement (ICS) that replaces the Non “All the other clauses that require the figures for narrowbodies and
Incident Statement (NIS). “Both of these specific return conditions or widebodies are now closer to $1.90
are commercial documents that are not documentation may be the subject of million and $4.10 million. IBA says that
required by regulatory authorities,” financial settlements,” adds Burnett. the largest proportion of this overspend is
explains Markou. “The NIS states that “Each lease contract will be different accrued by engines.
there has been no incident or accident and penalties may apply for various non- It is possible that lessees will redeliver
involving the aircraft or its engines, but compliance issues,” says Markou. aircraft with higher specifications or
this can be open to interpretation due to “Usually penalties are explicitly maintenance standards than the return
broad definitions of accidents or addressed in the contract and airlines conditions require, but a lessor will
incidents. It also does not say much about should be aware of them when seldom compensate them for this.
the current condition of the aircraft. In negotiating and signing the lease “Unless the lease has specific language
contrast, the ICS states that even if an agreement.” addressing the cost-sharing of upgrades,
incident or accident has taken pace, the Misinterpreted return conditions modifications, AD compliance, or other
aircraft or engine is clear of any defects could lead to misunderstandings between changes to the configuration of the
according to the maintenance manual. lessor and lessee regarding the validity of aircraft, the lessor is under no obligation
The ICS is becoming standard, especially certain compensation demands. to contribute to funding these changes,”
among airlines and lessors that work “Most misunderstandings are solved says Burnett. “In addition, the lease often
closely with IATA.” well before any legal action is initiated,” stipulates that the lessor needs to be
says Burnett. “There is a great deal of notified of, and consent to, any
negotiation and trading at the end of a substantial changes to the aircraft’s
Potential compensation lease because everyone is motivated to configuration. At redelivery the lessee
If a lessee fails to redeliver an aircraft transition the aircraft from one lessee to may be required to undo any changes
on time or in the agreed condition it will the next.” embodied during the lease. In some
be liable to pay compensation costs to the IBA has calculated that, in addition to circumstances, upgrades in the certified
lessor. late rental payments, poor redelivery weights or other performance
“The largest and easiest penalty to planning can lead to maintenance enhancements may remain embodied as a
impose is late rental payments,” explains overspend at the end of the lease as windfall enhancement for the lessor.” -
Burnett. “A clause in the lease may lessees attempt to bring the aircraft up to NMP
stipulate that rental payments continue required compliance standards. In 2015
with a payment factor of 150%, or even IATA estimated that the average end-of- To download 100s of articles
twice the initial rate. This is intended to lease maintenance overspend was like this, visit:
www.aircraft-commerce.com

ISSUE NO. 110 • FEBRUARY/MARCH 2017 AIRCRAFT COMMERCE