Maroc - NEWSDAY.CO.TT - A la Une - 15/Jan 06:48

Tricks and traps of aircraft leasing

Several years ago, a very successful local entrepreneur decided to start up an airline and incorporated a local company for that purpose. An application was made to the Civil Aviation Authority for an air operators certificate (AOC) which is the approval to engage in commercial air transport operations. This is done in accordance with a five-phase certification process in accordance with the policy guidelines of the International Civil Aviation Organization (ICAO). The prospective operator (“the lessee”) proceed to dry lease a used jet aircraft from a US leasing company (“the lessor”) to conduct the air transport operations. A dry lease is an agreement in which an airline leases an aircraft without any crew, maintenance, or insurance. The lessee is responsible for providing its own crew, maintenance, and insurance. This type of lease is typically used when an airline needs to expand its fleet for a longer period such as when it is entering a new market or launching a new route. Dry leases are usually long-term agreements, ranging from three to twelve years. Midway during the certification process, the entrepreneur withdrew the application for the AOC and decided to return the aircraft to the lessor. All aircraft lease agreements specify the “Return Conditions” for the aircraft to the lessor. The lessee has a legal obligation to meet all the return conditions to the satisfaction of the lessor. In this situation, one of the return conditions was that “the aircraft must qualify for a US 14 CFR Part 121 Certificate.” This required the aircraft to comply with all mandatory modifications and inspections in accordance with a continuous airworthiness maintenance programme (CAMP) ensuring all aircraft remain airworthy through regular, documented inspections and repairs. By that time, the aircraft had attained the threshold based on calendar time, flying hours and cycles for compliance with the FAA approved mandatory Supplemental Structural Inspection Programme (SSIP). The lessee has to expend millions of dollars to comply with the SSIP. In the process, the lessee had to sell his lucrative business and personal real estate to fund the return conditions. [caption id="attachment_1202247" align="alignnone" width="1024"] -[/caption] In reviewing the lease agreement before execution, the lessee and his attorneys did not understand the meaning of “the aircraft must qualify for a US 14 CFR Part 121 Certificate.” On another occasion while employed at BWIA with responsibility for aircraft acquisition, I was sent to the Orlando, Florida to take delivery of a used MD83 twinjet aircraft for which a duly executed leased agreement was in place. In doing the acceptance checks, an engine was found to be marginally meeting the performance requirements for full takeoff power. Additionally, there were some minor structural issues. Based on these two conditions, I refused acceptance of the aircraft and insisted that the lessor change the engine and rectify the structural issues. The lessor’s engineer on site refused to take any corrective action and a standoff ensued and I continued to refuse acceptance. This went for about a week until one of the lessor’s senior attorneys arrived in Orlando and showed me a copy of the full lease agreement which stated that BWIA had agreed to lease the aircraft in an “as is, where is” condition. I was seeing this for the first time and the BWIA legal department, when contacted confirmed the an “as is, where is” condition. BWIA was contractually obligated to take delivery of the aircraft. During the period 1996/1997, BWIA dry leased two Airbus A321-131 aircraft for a seven year period. A new CEO decided that it was the wrong aircraft type and sought to terminate the lease. However, there were no grounds for the termination of the lease. The agreement provided that the lessee (BWIA), with the approval of the lessor, can sublease the aircraft. If the aircraft is subleased at a lower rate than that prescribed in the substantive lease agreement, the lessee is obligated to pay the difference. The two Airbus A321-131 were subsequently subleased to a Turkish carrier, Air Alpha at a lower rate and BWIA had to pay the difference of US$20,000 per month per aircraft. On December 19, 2011 CAL signed an agreement with lessor AerCap for lease two Boeing 767 -300 ER aircraft for delivery in May 2012 to operate non-stop services between Port of Spain and London Gatwick. The London route was losing approximately US$20 million per year. Consequently, in July 2015, CAL agreed with AerCap for the early redelivery of the two Boeing 767-300 ER aircraft as part of its discontinuation of the London Gatwick route effective January 31, 2016 and termination of the Boeing 767-300 ER operations. This agreement to early redeliver the aircraft included an early termination penalty of US$135,000 per month on each of the two 767 aircraft from the dates of the early redelivery of February 1, 2016 and March 15, 2016 respectively to the original contractual redelivery date of August 25, 2017. [caption id="attachment_1202248" align="alignnone" width="878"] -[/caption] In February 2019, signed a lease agreement with Air Lease Corporation for four Boeing 737 MAX 8 aircraft with a 12-year lease term on each aircraft. One aircraft was delivered and the other three are due for delivery. As previously reported, CAL may not need that additional capacity if it increases the average daily utilisation of its Boeing 737 MAX fleet through optimal flight scheduling. Whenever an airline executes a firm lease agreement with a lessor for an aircraft and pays the required deposits, the lessor places a firm order with the aircraft manufacturer for the aircraft. Once the aircraft has been manufactured and certified, the lessee has a legal obligation to take delivery of the aircraft. If the lessee no longer has need for the aircraft, the most practical option is to sublease the aircraft to another air operator with the approval of the lessor. The reality is that the lessor has made a large capital investment by the purchase of the aircraft and expects to get a fair return on that investment. Airline fleet planning is the strategic process of deciding what aircraft to buy/lease, how many, and when to retire them, to match demand, optimize costs, and meet business goals like profitability and sustainability. This is balanced with factors like capacity, range, fuel efficiency, and maintenance, and involves long-term decisions on fleet size and composition. It's a complex, data-driven process crucial for an airline's success, impacting everything from route network design to day-to-day operations.   The post Tricks and traps of aircraft leasing appeared first on Trinidad and Tobago Newsday.