From the start of this year, airlines in many parts of the world have adopted the IFRS 16 lease accounting standard.
The main effect of this is to recognise future lease payment obligations as debt, and leased aircraft as right-of-use assets, on the balance sheet, but IFRS 16 affects also how airlines account for maintenance of aircraft on operating lease.
Return and restoration provisions require the estimated costs to dismantle, remove or restore such equipment to be included in the asset at lease commencement date.
Essentially, this means that airlines must account up front for many future maintenance costs of leased equipment, the rationale being that maintenance obligations are an indivisible and unavoidable part of any operating lease.
When assets are owned, in contrast, major overhauls are capitalised into the aircraft as it prolongs the life of aircraft used in operations. This is then depreciated over the useful life of the asset.
While such provisions might appear esoteric to the MRO community, their impact on AirAsia’s maintenance costs was the main contributor to a 31% fall in pre-tax profit for the first quarter.
The low-cost airline group had engaged in significant sale and leaseback activity through 2018, leaving it with a higher proportion of leased aircraft in Q1 2019 than in the prior-year period.
Due to the different accounting treatment of leased and owned aircraft, AirAsia reported 64% higher maintenance and overhaul cost for Q1 2019 “on the back of non-cash maintenance provisions of ~RM100m given [the] higher number of leased aircraft post aircraft monetisation exercise in 2018”.