The total maintenance reserves business is a $22 billion industry and will grow in the coming decades as the leased fleet is increases and maintenance costs continue to rise at a rate of 3-5% rate per annum.

The basic principles of an operating lease agreement are that the lessor expects a lease rental to cover the cost of capital and the financing of its aircraft asset.

And, of course, at the end of the lease it is the lessor who is the owner – the airline simply hands back the keys. The lessor carries the residual risk and management of the aircraft and the next placement under

its control. In the event of default, the lessor finds but to support the aircraft’s ongoing costs.
The associated costs of that liability for just a six-month period will be many hundreds of thousands of dollars to cover storage and insurance and upcoming maintenance tasks. 

Once the aircraft is placed, the next lessee usually expects to receive some form of contribution to the upcoming tasks.

Ideally the lessor wants to have the aircraft in as close to full-life condition as possible either by way of ongoing cash maintenance reserves and or lease-end condition or compensation that takes the aircraft either physically back to full life or cash to that same level.
For the stronger credit airlines, there may be no cash maintenance reserves payable in the lease term.

In the case of airlines with weaker credit lines, there is a need to provide security in the form of monthly lease rentals and additional monthly cash payments for key components such as the engine, engine life limited parts, landing gear, auxiliary power units, thrust reversers and airframe checks.

Flexibility for airlines and lessors?

As the end of the lease term approaches, a lessor may discuss with the airline the option of not performing maintenance work with a view to retaining the accrued cash and then sell the aircraft for part-out. This
has become a popular option especially for lessors of the smaller versions of the Airbus A320 family aircraft and the Boeing 737 next generation aircraft.

Many A318s, A319s and 737-600s and -700s have been parted out since their value as parts in the broader family spares market is robust. The lease rate likely to be achieved for the smaller versions has not
been sustainable.

When lessors are sold, or portfolios of leased aircraft are placed into asset backed securitisation (ABS) structures, the benefits of the cash maintenance reserves are used as a significant part of the overall consideration of the value of the aircraft and/or structure.
There can be major differences in the assumptions and details between original equipment manufacturer (OEM) data, what an airline pays for maintenance and what the lessor may desire to be accrued in the worst case of a default - since lessors are unlikely to have maintenance cost agreements lower than the airlines achieve.

The most volatile cost of maintenance relates to the engines and for the older airframes. The steadier aspects of the maintenance reserves are the airframe scheduled checks and the engine life-limited
parts. Therefore the scope for negotiation is considerable.

Support Packages
The matter has become more complex in recent years with the push by the OEMs, especially the engine OEMs, to provide long-term support packages to airlines.

For airlines it is often an easy decision – pay the OEM an agreed ongoing amount that transfers the technical and maintenance cost risk back to the OEM.

These agreements go way beyond the purpose of the maintenance reserves. The airline benefits from an almost fixed, known cost whereas the maintenance reserves paid to the lessor is only a payment towards scheduled maintenance cost.

Under the typical maintenance reserves payment scheme, the airline is only allowed to claim for the scheduled major shop visit of the engine. Other non-scheduled events are for the airline’s account. Whereas under the OEM long-term support schemes, the OEM becomes aligned with the airline’s desire for maximum on-wing times for the engine. The OEM decides the build standard and takes the risk of lower than expected on-wing times.

This offering, which has become standard for widebody aircraft is one reason why there are fewer lessors in the widebody sector.

The narrowbody maintenance market is much less dominated by the OEMs in terms of the aftermarket offerings.

The total maintenance reserves business is currently a $21.6 billion industry and will only grow in the coming decades. Both the leased fleet and maintenance costs continue to rise in the order of 3% to 5% per annum.

With the leased fleet forecast to double in 10 years’ time and with a circa 4% average inflation of maintenance costs, the maintenance reserves business will be worth over $50 billion per annum.

It is hardly surprising that this aspect of airline costs in relation to leased aircraft is the topic of increased discussion and debate.
Maintenance costs however are usually guarded by airlines and there is no desire for an airline to disclose costs incurred to any other party.

However, several of the airline associations, including the International Air Transport Association (Iata), do occasionally run data provided on an anonymous basis from member airlines.

The organisation has a specialist group advising on leasing and Iata use the broader resources, not just airlines, but the likes of IBA to independently assess the output and advise on improvements.

But the data is only valuable as long as the context is understood and airlines are increasingly having their own data benchmarked to the wider global industry.

For many airlines who traditionally finance their aircraft and have large in-house maintenance resources the prospect of paying maintenance reserves to a lessor can be deal breaking. Comparing global rates with their own costs - perhaps at locally significant reduced rates, compared with an OEM estimate of $85 per man hour, the impact is a significant draw of its cash resource and can offset the advantage of operating new aircraft.

After all the main selling point of buying anything new is that maintenance is a long way in the future. So why pay cash for that now?

On the other hand, maintenance reserves are the price to be paid for the ability to operate new equipment without having the capital and reserves to finance the aircraft with a bank.

And there is another upside for an airline. Even airlines that could potentially finance aircraft at lower rates then they lease them at, are attracted to the flexibility that leased aircraft give them. They can be handed back at the end of the term when there may be overcapacity and does not require internal resource that would otherwise be required to manage the sale process.

The maintenance reserves are just one small piece in the overall economic assessment of the operating leasing option. That’s if you consider $21.6 billion as just a small piece.