Maintenance forecasts in asset-backed securities (ABS) are slightly lagging behind the current environment of lower cash collections, according to Goldman Sachs vice president Carla Schriver.
Maintenance reserves are an important part of an ABS structure as they rely on maintenance reserves for cash flow but with less flights performed the cash flows have dropped.
Speaking at the Airfinance Journal North America 2020 virtual conference, John Mowry, managing director of Alton Aviation, says that with lower levels of flying, reserve collections are significantly down.
“The vast majority of the reserves required are related to the utilisation of the aircraft. If an aircraft performs in normal operations, about 80% of the reserves are related to the utilisation while the remaining 20% are fixed monthly
But Mowry also points out that lower levels of flying pushes out the maintenance requirements into the future.
“We heard that discussions around airlines trying to accelerate some maintenance in this environment so some aircraft are ready-to-go when demand comes back.
“We are not seeing this. Cash is king to all airlines,” he comments.
If an engine comes in for maintenance, Mowry anticipates airlines will use the “green time” lease of another engine rather than re-invest funds in performing maintenance.
Schriver says the target balance in the reserve accounts in ABS transactions is actually increasing but the percentage funded has been going down over time.
“This is not necessarily reflective of maintenance events being pushed out because the way those structure works is you get maintenance forecast you are looking for based on that. You are not necessarily refreshing every single month and you see a bit of a lag in terms of maintenance forecasts catching up to what we see in the current environment,” she says.
“That being said, the structure don’t necessarily operates black and white. There are mechanism in the structure so that the service can actually override what these forecasts are saying. The structures are structured in a way that it does not necessarily flow through to the waterfall. It can stay in the structure,” she adds.