Is the aviation sector ready for the redelivery bow wave threatening to hit?
According to IBA, a wave of over 2,000 Airbus A320-200 and Boeing 737-800 redeliveries will take place over the next five years, raising questions over the preparedness of the industry to manage the costly implications. Data on estimated and actual lease end dates taken from IBA’s aviation analysis platform, IBA.iQ, indicates that the Airbus A320-200 and Boeing 737-800 will experience a surge in redeliveries if leases are not extended.
Phil Seymour, CEO, IBA, says: “Within these numbers, there are plenty of inexperienced lessors and operators and it is inexperience that presents the greatest risk in terms of disputes during complex aircraft transitions.”
With disputes increasing despite more focus from lessors and operators, IBA emphasises the importance of both parties being aware of what is required for a redelivery. “With the average redelivery dispute costing $2m, the challenges surrounding aircraft transitions are a potential minefield,” says Seymour.
Redeliveries continue to challenge. At a recent seminar examining the rise in disputes around redeliveries and what legal and commercial steps can be taken to minimise and mitigate losses, IBA observed that contract drafting is improving, reducing some of the historical disputes around ambiguous terminology. However, the substantial noise around disputes is rising as the potential for overcapacity of used aircraft increases for some types, and the demand for maintenance slots around the peaks of seasonal redelivery (most often Northern Hemisphere Winter/Spring) increases.
These challenges relate predominantly to an underestimation of the effort required for an aircraft return, resulting in late redeliveries; insufficient records and/or late or incomplete records leading to delays; and a gap between the commercially imposed redelivery conditions versus the real state of the operating engine, leading to engines becoming a major cost element of the process, all of which can lead to major overspend.
“Better planning can ensure a smoother transition,” Seymour adds. “The Lessee should be planning the redelivery much earlier and be much more efficient and thorough in their end of lease check. Additional last minute requests to the MRO can raise costs and downtime significantly.”
IBA’s recent experience covers advice to lessors and lessees on a variety of strategies to increase the chances of a successful redelivery. This includes overseeing the redelivery of a SE Asian aircraft which required unscheduled repairs and records to be translated. IBA’s professional supervision allowed the Lessor to re-lease the aircraft, despite the additional work needed to meet conditions. IBA also supported an underprepared lessee with only four months left on the lease, negotiating revised return conditions, saving millions of dollars.
So what are the options at the end of a lease? According to Seymour the big decision on whether or not to extend a lease is driven by a complex balance of rates, costs, reserves and demand. “Good deals are there to be had, especially on wide-bodies, given demand and fit out costs. The gap between current and next generation kit has also narrowed, slowing adoption. But if a lessee is looking to return an aircraft, leaving it until the last minute is bad news, it equates to big fees.”
Seymour is emphatic. “Redelivery planning is essential if lessors want to avoid falling between the cracks.” IBA’s evidence shows that operators need to be on stringent watch for catch-all and ambiguous terms in the lease return agreement: e.g. ‘good’, ‘clean’ which are open to interpretation. Damage and old repairs can create need for rework. Lead time for materials almost always delays redelivery if only identified at the redelivery check. Modifications without detailed acceptable source documents and certification issues such as “Back to Birth” and non-contracted use of PMA parts and DER repairs still create disagreement.
“As regards Maintenance Planning, documentation is everything” says Seymour. “Yet in all IBA’s thirty years of experience we have never (that’s right, NEVER) seen a full set, on time and acceptable to the Lessor. To solve this matter, lessees must retain tight control of any subcontracted component providers to minimise downtime, and consider replacing components earlier if access is easy. Forceful life limitations terms must be monitored carefully.”
Lastly, the subject of ‘commerciality’ and common sense has to assume supremacy: redelivery and maintenance planning may all be up to scratch, but if the negotiation goes badly no-one wins.
Improved focus on financial implications and proper resource planning will avoid overspend on lease return aircraft counsels IBA. A determined strategy to optimise fleet planning, reduce direct maintenance costs, leverage warranties and transitions, as well as securing expert redelivery resources will save airlines millions of dollars annually.
Analysis by IBA indicates that CFOs can be surprised by the level of potential savings. Assuming a fleet of 76 narrow body aircraft, IBA demonstrated that a total of $300m in savings was possible through careful analysis and managements of costs, including transitions.
Phil Seymour concludes: “Enhanced decision making by airline management relies on market intelligence, data, and possession of the true facts and figures. A whole host of factors contribute to transition challenges, including poor contract drafting around redelivery conditions, lack of lessee planning, bungled engagement with the lessor, and underestimation of the total workload.
“Airlines can and should be putting steps into place at least two years prior to returning a leased aircraft to ensure that overspend is avoided. Planning ahead will reap financial benefits and avoid headaches for CFOs who are often faced with hefty bills accompanying lease return aircraft which can be avoided.”
IBA is a participant in the IATA Aircraft Leasing Advisory Group. Phil Seymour says: “we have been part of the process for five years now and the latest version of the guidance, primarily written for airlines to better understand a lessor’s motives, has evolved to become a very useful tool.”