Aircraft Leasing – Maintenance Reserve Fund & Letters of Credit

The maintenance reserve fund we have seen in the prior posts is a benefit to the lessor in that it
affords them financial security and reduces their financial exposure to an asset.

The maintenance reserve fund is an agreed sum of money paid alongside the lease cost for “renting”
the aircraft based on the future maintenance costs during your operation period.
It can mean that you are now paying a lease cost for the rent of the aircraft and a maintenance
reserve fund alongside this, which can be called supplemental rent. While you can claim back the
money paid into a reserve fund based on maintenance carried out, there is a lot of finance tied up in
such an operation.

This is where a letter of credit can become a consideration, although it is not a lessor’s preference. It
means that the funds are not released to the lessor and instead a letter of credit takes their place.
The letter is a risk for the lessor with regard to credit and the lessor also does not have the benefit of
the maintenance reserve fund itself.

The MRF is a significant cash flow for the lessor and also it can accrue interest, which across a large
portfolio is significant. It is not a common solution to the maintenance reserve fund, but can be used under certain
conditions and so is important to be aware of it.

Learn more on our Lease Transition Course. Remember to follow us on LinkedIn for more updates!