Printed headline: Lessors’ Leap
Lessors have been playing an increasing role in commercial aircraft financing and operations, with operating leases now accounting for nearly half of the world’s fleet and well over half of used, midlife aircraft. Consequently, the policies of lessors toward maintenance are becoming far more important in the MRO market than the policies of large airlines.
But lessors are hardly powerful enough to simply impose maintenance programs on airlines. In fact, the strongest influence on lessor maintenance policies is the desire to have the maximum amount of freedom in placing re-leased aircraft with many different airlines. So in effect, leasing works to strengthen the maintenance policies most commonly pursued by airlines.
That does not mean lessors have no choices in terms of maintenance policies. But their choices can be limited, and once made, these choices tend to require compliance by their airline customers, especially smaller carriers, which may prefer to do things differently.
These considerations apply importantly in the use of engine and non-engine parts manufacturer approval (PMA) parts. Chris Gruener, head of technical operations at lessor BOC Aviation, has strong reservations about PMA parts. He understands their appeal to airlines trying to reduce costs. “But it really only works if the operator owns the aircraft, never plans to sell it and never plans to move it across the border from one regulatory environment to another,” Gruener asserts.
PMA parts affect residual values, the ability to move aircraft to other operators or sublease them if an airline does not need the lift, leasing companies argue. PMA parts are usually accepted by one authority, such as the FAA, European Aviation Safety Agency or Civil Aviation Administration of China, but may not be accepted in other jurisdictions. And lessors often move assets into different regulatory regimes several times over their lives.
Gruener stresses that operating lessors bear full risks of residual values of both aircraft and engines, from first delivery to part-out. Financiers are also aware of these risks. “Even availability of debt financing for aircraft buyers can be negatively impacted by PMA parts. As a consequence, we exclude or restrict use of PMA parts in our lease agreements,” he says.
Gruener also does not think the recent GE-CFMI settlement with the International Air Transport Association (IATA) on engine PMA parts changes much. CFM will not require replacement of or discriminate against PMA parts found during a shop visit in a CFM network shop, and CFM may reinstall serviceable PMA parts. But Gruener notes the OEM will release affected engines with disclaimers and will not manage repair and certification of PMA parts. “And their warranty may be impacted,” he notes. So PMA parts will still alter the value of aircraft and adversely affect flexibility in repositioning and refinancing them.
As BOC does not operate aircraft, responsibility for tracking parts installed during lease terms falls on lessees. The lessor checks part history and sometimes must reconstruct this using common software such as Excel spreadsheets. “To reconstruct a part’s history, OEM portals or databases are helpful, as well as a good network of contacts at the MROs, airlines and lessors who operated, overhauled or owned the part in the past,” Gruener says.
Lessors also may be playing a hugely beneficial role in moving the industry toward better, more digitized asset tracking, including perhaps eventually blockchain record-keeping, and toward portable maintenance agreements.
Gruener hopes that a distributed ledger like blockchain can ensure or aid back-to-birth tracking of parts. But he lays out several conditions that must be met to make this approach practical. First, all participants must use the blockchain, including the OEM and all companies involved in a part’s history. “No operation should be recorded outside the blockchain,” Gruener notes. Second, everybody must use the same blockchain. “It’s of little help if you have to search multiple blockchains,” he says. Third, data structure of the blockchain record must be well-defined and contain all data any stakeholder requires. Fourth, all stakeholders, including regulators, must accept blockchain as proof of a part’s history, globally. Finally, participants must give up some degree of privacy. “It is important to identify participants in a particular operation, not just their encrypted public key,” he asserts. Gruener expects it will take some time before all these conditions are met.
He considers some OEM flight-hour support programs, those that can be transferred from one lessor to another, to be portable maintenance agreements. These are important to BOC, as lessors have to be able to trade aircraft and transfer flight-hour programs as well. So BOC uses these programs in individual leases if it makes sense. “We have a number of these agreements in place,” he confirms.
Another big lessor, SMBC Aviation Capital, prohibits use of non-OEM-approved parts or repairs on all its assets. “The main reason for this is that such parts or repairs may not have universal acceptance among airlines, and this can lead to issues when transitioning the aircraft from one airline to another,” explains Diarmuid Healy, head of technical asset management. “On the flip side, OEM-approved parts and repairs are universally accepted.”
The recent settlement between GE-CFMI and IATA does not change SMBC’s stance on PMA parts, at least not yet. “The settlement agreement doesn’t change the fact that all PMA parts do not have universal airline acceptance,” Healy stresses. However, the agreement alleviates some of the lessor’s concerns about engine warranties and technical support on GE and CFMI engines.
The mega-lessor expects digital record keeping to improve both the availability and quality of back-to-birth part tracking. Healy says he is watching future enhancements of RFID and blockchain, hoping these technologies can move the industry away from mostly paper-based tracking, which is susceptible to loss or misplacement of key documents. But while blockchain’s potential to create a secure and searchable distributed digital ledger that can be updated over time is attractive, he also judges this tool as not mature yet.
On the portable maintenance agreements that OEMs or major MROs offer to lessors and their customer airlines, Healy says SMBC uses these agreements when they make sense for a particular lessee and as part of the overall deal. “Airlines increasingly seek a maintenance-risk transfer product, particularly on new-technology engines,” he notes. “We work to accommodate this into our deals where it makes sense.”
But understanding what is covered or not covered under these portable arrangements is critical in determining how they work within the structure of a particular lease agreement. SMBC advises airlines to focus on arrangements that fit the lease’s maintenance-compensation structure with qualifying event descriptions that are commonplace in leasing markets. “MROs and OEMs understand the requirements of the lessors,” Healy observes. “So we anticipate they will highlight the key concerns lessors are likely to have in discussions with an airline about which maintenance product to select.”