Is the aviation sector ready for upcoming redelivery bow wave?
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 indicates that the Airbus A320-200 and Boeing 737-800 will experience a surge in redeliveries if leases are not extended, according to IBA.
“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,” says Phil Seymour, CEO of IBA.
With disputes increasing despite more focus from lessors and operators, the importance of both parties being aware of what is required for a redelivery increases. “With the average redelivery dispute costing $2m, the challenges surrounding aircraft transitions are a potential minefield,” says Seymour.
Redeliveries continue to challenge. Contract drafting is improving, but substantial noise around disputes is rising as the potential for overcapacity of used aircraft increases for some types as well as the demand for maintenance slots around the peaks of seasonal redelivery (most often Northern Hemisphere Winter/Spring).
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.”
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.”
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. 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.
“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,” says Seymour. “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.”