Hi All!

Probably a really amateur question, but I'm wondering what exactly a lease return entails to the lessee/lessor. I know there's a battery of tests and evaluations prior to actually giving the airplane back to the lessor. Someone put up pics of a HA 763 going through an engine swap "before the lease is turned in", which got me thinking about the custom interiors on some of the leased equipment as well as any other lessee-specific alterations that were changed. I've always assumed that under an ACMI lease, hours/equipment are accounted for - would a different lease entail installing new (to the airline) power plants, and keeping the original locked up until lease return? The only logical explanation I can think of on the engine swap is the hours on the engines.

Anyway, just curious. I appreciate any insight!

Depends on the contract really. You can have contracts saying that the airline needs to return the aircraft after a complete check or it can say that it is returned in the current condition and the maintenance work is paid by the leasing company. But then the lease rate is higher.

Don't know the answer, although for the interior I can imagine that it will be left untouched, the new leaser will custom fit it anyway or can leave it as it is and then it has value for the lessor. I think I've read somewhere that the A380 (ex-SAI) going to High Fly still have their Singapore Airlines interiors fitted, which makes sense to me.

In regards to components, the leasing companies usually have a clause which limits the component age to a certain percentage of the airframe age. In most cases it will say average of all components 110% and single components not older than 120% or 130% of the airframe. Meaning, an airline cannot source the oldest spare parts around and install them on the airplane.

Regards,
Loran

Depends on the contract but sometimes the original engines need to be installed, so on a four engine aircraft for example it may require a lot of engine shuffling. That may explain the engine change you mention.

Well, think of when you return a rental property to the landlord. Sometimes you return it with furniture; other times the furniture is yours and you return the property empty. Sometimes you are required to pay for a cleaner upon vacating the property; other times you are not. It is a gross oversimplification, of course, but the point is: just like in a property lease, it depends upon what is in the lease agreement between the lessor and the airline. The airline and the lessor negotiate these sorts of terms and conditions during the creation of the lease.

I think a more interesting question would be: what happens when an airline breaks the conditions of the lease upon returning an aircraft? Presumably litigation - but are there actually any instances where airlines have wilfully broken the terms of a lease? Such as removing equipment that should not have been removed? If so, what happened and how was it resolved?

Remember the Kingfisher aircraft in India. Many of these leased planes were missing parts and engines when the leasing company wanted to pick them up. I have another question: Do leasing companies do regular inspections of their property during an ongoing lease with an airline?

Leasing new and used aircraft are quite different, especially if used are close to end of life.

For used aircraft, nearly everything is negotiable.

For a new aircraft lease, all leasing companies use their own generic templates, which are not so different between competing companies. Customers will try to negotiate some favourable amendments. The exception are leases to large operators, like the US3, ME3 and EU3, sometimes referred to as Tier one airlines. Tier one airlines have their own generic lease documents, which the leasing companies will seek to fine tune.

The main lease document, which depending how the lease is financed, may or may not be published, includes multiple side agreements (which are never published), covering a multitude of subjects, including end of lease (EOL) condition and payments.

Aircraft and engines are physically inspected by the leasing company's own or contracted staff at regular intervals throughout the lease, and documentation too, and even more thoroughly before return.

Most leases exclude the use of parts pre-dating the build date of the aircraft. So if returning a 12 year old 777, it cannot be returned with documented parts older than 12 years. As preparation for return, the leasor will either require compensation for older parts, or for the parts to be updated.

One side agreement covers utilisation, expressed as hours and cycles for the aircraft, and hours, cycles and 'other' for engines. If for example, the aircraft is returned with more hours than agreed, then the leasee will incur a financial penalty.

There is no saving to the leasee returning an aircraft just hours from major inspections or maintenance, as the pro rata cost of these are documented, and included in the EOL payment. For example, return the aircraft just hours from a major inspection, and the leasee will be up for 99.99% of the cost of the inspection.

Airlines with major maintenance and inspection capability inhouse, will actually operate the aircraft to the limit, and undertake required work inhouse before returning to the leasor, as it provides an opportunity to save EOL costs.

Another side agreement covers the external condition of the aircraft. Mostly they have to be returned white. Again, in some cases, if the airline has inhouse capability, they will do it themselves. Most airlines arrange painting before return, as they do not like the publicity of their aircraft being recognisable in storage, or in use by third parties.

Interiors usually have to be returned in as new condition, but it's common practice to agree a dollar figure, and pay that instead of undertaking the work. Most airlines will attempt to remove all interior branding. This payment gives the leasor some wriggle room to negotiate with new customers.

Just as for a new aircraft, where there is a customer acceptance flight, the same happens on behalf of the leasor before the aircraft is formally returned.

Engine ownership is no longer straightforward. We have airlines buying and leasing (in some cases from the engine OEM's or other leasing companies) engines for the same fleet. We have loan engines from other airlines and the OEM's.

The appetite to participate in commercial aviation finance, means those leasing engines may package 4-6 at a time, and offer them to the market. Those deals may include restrictions, like remaining with the original operator.

Engines purchased in different tranches, may incur different PBTH fees. Or some may be on fixed and others on variable terms. Or if very different ages, with hours and cycles miles apart, and are on variable PBTH contracts, the fees for one could be radically different to another.

So an engine swap, may be to harmonise ownership, and/or PBTH charges.

Engine swaps in the 60's and early 70's, were to return the oldest or worst engines. Those days are long gone.