IBA: Issues in $22 billion-worth maintenance reserves market
As preferences for aircraft leasing develop further, management of maintenance becomes even more critical as both a percentage of total costs and as a means of conserving asset value and return on investment. As a result, IBA suggests that the need to manage cash flow and exposure has now become a commercial imperative for airlines and operators.
In a time when the lease rate factors are at or around 0.6% the overall economics of the lease – including proper assessment of the redelivery conditions/end of lease compensation and/or maintenance reserves, become even more essential.
IBA’s industry research concludes that the total maintenance reserves market represents a $22 billion industry that will continue to expand over the next decade at a rate of 3-5% per annum, while the total number of leased aircraft is expected to double. IBA estimate that by 2027, the maintenance reserves business will be worth more than $50 billion per annum.
Such figures highlight the importance of maintenance reserve provision and indicate the extent to which efficient management of cash flow could benefit both operators and lessors.
According to Phil Seymour, CEO of IBA, accurate forecasting can help to ensure that there is sufficient cash flow to cover maintenance events such as airframe heavy checks, engine shop visits, LLP replacement, landing gear and APU overhaul. “Cost forecasting can equally provide opportunities for the proactive management of maintenance exposure or the realisation of surpluses through trading, lease/re-lease timing, or part-out decisions,” he says.
However, maintenance and exposure forecasting is undeniably complex and time consuming. Forecasting maintenance events and managing associated cash flow requirements requires the appropriate technical knowledge and expertise, as well as accurate cost data.
IBA has developed a Maintenance and Cash Flow Forecasting solution IBA.MC by combining its technical expertise, its proprietary cost data and its highly successful Fly Forward model. IBA.MC cuts through the complexities and provides a clear plan to help lessors, investors and operators efficiently manage maintenance reserves by producing an effective and accurate picture that highlights exposure for all aviation assets within a portfolio.
With the use of industry-sourced maintenance data, IBA’s Asset Management Team is able to forecast maintenance exposure for both reserved and non-reserved leases, calculate the cash reserves and necessary timescale to cover maintenance obligations and establish appropriate maintenance reserve rates. They are equally able to provide independent assessments for M&A and Capital Market transactions, drive end-of-lease decisions around investing for release vs residual realisation and interrogate maintenance costs, including variances between OEM estimates and IBA’s proprietary industry-sourced database. IBA.MC can also provide full visibility of cash income, estimated expenditure and aggregate cash available to use for alternative purposes.
“A lessor receiving maintenance reserves enjoys considerable cash flow benefits and retains the ability to influence decisions that impact the useful economic life of an individual aircraft, so managing this process in a business that is set to double in the next ten years is crucial for all parties,” concludes Seymour.
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