Aircraft Leasing & Maintenance Reserve Funds.

Aircraft Leasing & Maintenance Reserve Funds.

A large amount of the world’s aircraft is leased for operation; this is due to many factors including costs associated with an outright purchase.

If you lease an aircraft out then the cost of that asset you will want retained to the highest value so you have a viable asset that you can lease multiple times, convert, or sell in the future.

To maintain the value of the asset we have a lease agreement and conditions for return and conditions provided initially. The lessee will then pay an agreed amount in “rent” while they lease the aircraft.

Aircraft maintenance is mandatory and can also be expensive, to this end we need to consider how we mitigate risk of exposure to this. What happens if a major check is due after 24 months of operation and the lessee goes bankrupt 22 months in – this could leave a large check to be performed with no finding for it.

It is here that we meet something called maintenance reserve funds commonly known as MRF.

The calculation of Maintenance Reserves is a key negotiation point in every lease and it is basically the cost of the major check (degradation of components, replacements, scheduled maintenance tasks for example) divided over a period of time.

The time frames might be calendar, flight hours or flight cycles depending on the component and how its life is measured.

FH = the actual number of hours flown by an aircraft over a specified time from the moment the aircraft leaves the ground on take-off until the moment the wheels touch the ground on landing.

FC = a take-off and a landing.

This MRF which can be called supplemental rent is paid alongside the lease rent for the aircraft typically and it builds up over time until the maintenance is due – it can then be released to perform the maintenance.

By having the money paid in such a manner it means that the lessor has a limited exposure financially.

There are of course many conditions and considerations with MRF; this is a simple overview of the function they can provide.

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