Maintenance Matters in Aircraft ABS Deals – Part 1

In this edition of mba Aviation’s Insight Series, the Forecasting & Modeling team looks at the way Maintenance is considered in Aircraft Securitizations.

Key Concepts:

  • Maintenance Value and Compensation are significant elements in Aircraft Asset Backed Securitizations (ABS)
  • The Maintenance Support Account of an ABS is used to fund all future maintenance events for the assets in the portfolio
  • Maintenance Value becomes a larger portion of the overall aircraft’s value as it ages

Maintenance value and the corresponding compensation, typically designated as “Supplemental Rent”, “Reserves”, or “End of Lease Compensation” within a lease agreement, contribute an essential element of value and liquidity within an Asset Backed Securitization (ABS) portfolio.

In an aircraft lease, lessors collect maintenance compensation for utilization on the individual components on each aircraft.  These typically include the airframe, landing gear, auxiliary power unit (APU), engines, and engine life limited parts (LLPS).  The chart below depicts a typical distribution of monthly maintenance reserves over each component, determined by cost and approximate interval of each relevant maintenance item on an A320-200.

Within an ABS deal, maintenance compensation collected from the lessees is funded into an aggregate Maintenance Support Account.  Whereas typical leases will divide reserves into individual accounts to be drawn down at the time each component undergoes maintenance, the Maintenance Support Account is used to reimburse all future maintenance events for the assets in the portfolio, and is only required to have funding over a predetermined “look-ahead period”, typically 12 months.

In addition to supplementing cash flows in a portfolio, maintenance adjustments, as calculated by the cost of a maintenance event and the position of the aircraft in its maintenance life cycle, are applied to each aircraft’s Base Value.  The maintenance adjusted values are then used to assess the overall value of the collateral pool and determine the loan-to-value (LTV) on each tranche of issuance.

As an aircraft ages, the overall value of the asset depreciates.  However, the cost to perform maintenance on each of its components increases over time with inflation.  Therefore, as the asset ages, the inherent value of maintenance in the aircraft becomes a larger portion of its overall value.

Based on the full life market value and the full maintenance value of the components on an aircraft, an approximate run-out value on each vintage of the aircraft can be derived.  The maintenance value to full-life value ratio illustrates how the value of maintenance in an aircraft encompasses a larger factor of the asset’s total value over time. The example below is an estimation of the reinvestment needed to bring an A320-200 back to full-life conditions.

As a result of the dynamic between aircraft depreciation and maintenance appreciation, we find two immediate impacts on ABS transactions over time: First, the inherent maintenance value become a larger component of each aircraft’s value and therefore the overall collateral pool. Second, as lease rates decrease with the decline in overall asset value, the maintenance-related cash flows become an increasing portion of the ABS’s liquidity.

The Possible Effect of the Coronavirus Outbreak on the Aviation Industry and Aircraft Values

In this edition of mba Aviation’s Insight Series, Sloane Churchill, Analyst – Asset Valuations, uses analysis of the effect of the SARS outbreak of 2002-2003 on aircraft values and the aviation industry to provide insight on how today’s Coronavirus might take its toll.

Key Concepts:

  • SARS increased volatility of market values for older vintage and out of production aircraft types more than newer vintage and in-production types, though market values generally recovered within three quarters. It is likely Coronavirus will similarly effect aircraft market values in the short term, but will have no long-term effects.
  • The timing of the Coronavirus outbreak over the Chinese New Year, slowing economic growth in China, and extensive travel restrictions are expected to make a larger dent in RPK’s than during SARS.
  • No health epidemic of the past 20 years has had a long-term effect on global financial markets, with most recovering with a year. While global airline stocks have taken an immediate hit due to the Coronavirus outbreak, it is not anticipated to have long-term effects on airline stocks.

The Possible Effect of the Coronavirus Outbreak on the Aviation Industry and Aircraft Values

Though the Coronavirus outbreak in China is reminiscent of the SARS outbreak in 2002 – 2003, the effects on the aviation industry have the potential to be quite different. So far, the Coronavirus has infected over 45,000 people, mostly in mainland China, leading to over 1,100 deaths. This Coronavirus is proving to be faster spreading, though less deadly than SARS, with a death rate of approximately 2.1%. Historically, while global health epidemics have hurt aviation by reducing revenue passenger kilometer (RPK) growth in the short term, there have been no long-term effects for any epidemic of the last twenty years, including SARS, Avian Flu, Swine Flu, Ebola, or Zika on aircraft values or the aviation market as a whole.

The SARS outbreak could provide some insight as to how aircraft values and the aviation industry might be affected by the current Coronavirus. mba values research shows SARS disproportionately affected aircraft values. Typically, older vintage and out of production aircraft were hit the hardest after the SARS outbreak, showing the most value volatility in the following two years. Newer vintage and current production aircraft were significantly less volatile.

Market values for aircraft and Brent Crude prices have historically had an inverse relationship; in low fuel price environments, aircraft values tend to increase as aircraft become less expensive to operate, while market values decrease in high fuel price environments. This is especially apparent in older vintage and out of production aircraft, as they are less fuel efficient, and thus more sensitive to fuel price. However, 9/11 and the SARS epidemic broke the correlation between Brent Crude prices and market values, and this relationship does not recover until after the worst point of the SARS epidemic in 3Q 2003 for most aircraft types and classes. After the SARS outbreak, looking at narrowbody aircraft, the market value of a 1988 737-400 and A320-200 fell 14.8% and 42.0% respectively in 1Q 2003 from the previous quarter, while market values for a 1998 737-400 and A320-200 fell 15.1% and 16.7% respectively in 1Q 2003. Market values for a 1998 737-800, which technologically replaced the 737-400, dropped 11.2%. At the same time, Brent Crude prices fell 3.5% from the previous quarter during 1Q 2003.

Generally, narrowbody aircraft values recovered by 3Q 2004 and show no long-term effects from the SARS outbreak. However, there were only limited travel restrictions in place during the SARS outbreak, while travel restrictions in China and internationally during this Coronavirus outbreak have been significantly more extensive, potentially having a larger effect on RPKs than SARS. The immediate reduction in passenger demand caused by these travel restrictions will likely hit narrowbody values slightly less than widebody values, as carriers will rely more on their narrowbody fleets in the reduced-demand environment, particularly in the domestic Asia market.

Widebody aircraft in particular took the brunt of the value hit during the SARS epidemic, as they potentially will in the quarters following this Coronavirus epidemic as well. Like narrowbodies, widebody values recovered by 3Q 2004. The small to mid-sized widebodies such as the 767-300ER and A330-300 showed less volatility than large widebodies. Market values of older vintage aircraft, such as a 1988 767-300ER and a 1994 A330-300, were affected the most, falling 13.3% and 18.8% respectively in 1Q 2003. The newer 1998 vintage 767-300ER and A330-300 market values fell slightly less at 10.4% and 13.6% respectively. With the A330 currently in a soft market, all vintages, but particularly older vintages, could be vulnerable to further market value volatility, as the A330 is a popular widebody in the Asia/Pacific region. The 787, also a popular type in the Asia/Pacific region, could be vulnerable to market value volatility as concerns of overproduction combined with reduced passenger demand might lead to delayed or cancelled deliveries of the type in the near to mid-term.

Large widebodies, such as the 777-200ER and the 747-400 were also heavily affected by the SARS outbreak. Market values for the 1998 vintage 747-400 were hit the hardest by SARS in part because the type was nearing the end of its production run, falling 16.1% in 1Q 2003 while market values for a 1989 vintage only fell 7.7%. This time around, we could see softening of market values for older vintage 777-300ERs, or even the A350-900, as these types are popular on mid to long-haul routes in Asia.

Financial markets took an immediate hit with the shock of the epidemic after the Chinese New Year on January 27th, with the US’s S&P 500 and NASDAQ falling 1.6% and 1.9% respectively, and London’s FTSE 100 Index fell 2.3%. However, so far through the epidemic, the S&P 500 has only fallen 0.16% and the NASDAQ has actually risen 2.0%. Since the Coronavirus was announced, through the end of January, Hong Kong’s Hang Seng Index has fallen 6.7% and Shanghai’s SSE Composite Index has dropped nearly 10.0%.

International airline stocks were also affected, particularly airlines with large international presences and extensive Asian networks. China Eastern Airlines and China Southern Airlines’ stocks have been hit the hardest, both falling around 17.0% during the epidemic, as their networks rely heavily on international routes within Asia and around the globe. The following chart shows how several airlines were affected at various event dates throughout this epidemic, starting December 31, 2019 when China reported a new illness to the WHO, around the weekend of the Chinese New Year, and when the WHO deemed the Coronavirus to be an international public health emergency at the end of January.

Airlines are now more flexible than they were in the early 2000’s, becoming more savvy with capacity and revenue management, making changes to flight schedules just days after the start of the epidemic in response to anticipated drops in demand. Several airlines have cancelled their flights to China altogether, including British Airways, Lion Air, Lufthansa, Air France – KLM, Virgin Atlantic, Delta Air Lines, and American Airlines, with more expected to follow. While cutting flights to and from China might curb the spread of the illness, it could potentially have drastic effects for airlines’ financials. Research conducted by mba’s Forecasting and Modeling Group shows three of the top ten international routes from China to outside of the region by frequency are between China and the United States. United Airlines and American Airlines each serve two of those three routes, with Delta Air Lines serving one route, making them particularly exposed to the travel restrictions. United Airlines is also one of the top ten operators to China by frequency and has taken the largest hit to its stock price so far because of its exposure.

After the SARS outbreak, global financial markets fully recovered within one year, even while continuing to recover from the effects of the 9/11 terrorist attacks. This coronavirus hit during a long boom period for the financial and aviation markets, which may help to mitigate the financial effects of the epidemic on aviation, as most airlines are more flexible and financially fit, and thus more equipped to handle the reduction in passenger demand.  The coronavirus has also affected the manufacturers, as Airbus announced it has closed its final assembly line in Tianjin, China in response to the coronavirus. China’s importance to the aviation industry has grown tremendously since the SARS outbreak 18 years ago, and is essential to many global airlines’ growth horizons, which may make this epidemic that much more painful for the industry. The aviation industry’s fears of an economic downturn ahead combined with the potential severity of this epidemic is likely to perpetuate the rash of airline bankruptcies we saw in 2019, as some financially suffering airlines might not cope with the reduced demand. It would also be reasonable to see a slowdown in aircraft transactions and financings in the near to mid-term, though the ABS and EETC markets might hold solid, as they are more long-term instruments.

The timing of the outbreak is also unfortunate for the industry as the Chinese New Year January 25th, China’s largest travel holiday, was effectively cancelled by the outbreak. According to CNN, in 2019 the Chinese New Year accounted for around 73 million trips by air travel. According to IATA, at the worst of the SARS outbreak in May 2003, RPK’s dropped by about 35% with no travel restrictions by countries. Currently, with the travel ban within China and many other countries limiting travel to and from China, RPK’s are expected to take a sizeable hit. With economic growth slowed to 6.1% in 2019, and resulting reduced passenger demand growth in China over the past two years, if the Coronavirus lasts through the quarter, it could have long-term economic effects, unlike prior health epidemics, as Asia grows to be one of the largest aviation markets in the world.

Aircraft Value Update and Insights for 2Q 2018

What’s Driving Values in 2Q 2018?

REDBOOK’s ISTAT Certified Appraisal Team Has the Latest:

Relying upon the current market conditions and the aircraft transactions that have occurred over the first quarter and into the second quarter of 2018, mba has updated and released the 2Q 2018 values on REDBOOK. Below you’ll find the highlights from the update and a look into the most highly traded aircraft of the year.

For a look into current and historical data of the entire global aircraft fleet, mba launched STAR Fleet (System Tracking Aircraft Repository) within the REDBOOK platform.

New Additions to REDBOOK

  • 32 new engine variants and types have been added to REDBOOK including the Trent 1000, GEnx-1B64 and -1B70, and the -5Bs and -7Bs with tech insertion.


  • Mid-vintage A320-200 market adjustment factors increased up to 4% for some years including early 2000 builds. Demand for current generation aircraft remains high due to low fuel prices and neo delays.
  • A350-900 and 787-9 Market Values see market increase of 1% above base as operator and lessor appetite remain strong.
  • A320neo and 737 MAX family aircraft continue to see Market Values equal to Base, though Market Lease Rates are trending below the 0.8% lease rate factors historically achieved by new aircraft, averaging closer to the mid-0.6% lease rate range.


  • PW4060s saw a boost of 2% over the quarter mainly due to the demand from 747-400Fs and 767-300Fs boosting need for spare engines and parts. Values are expected to climb in the short term.

For more updates on the 2Q 2018 Aircraft Market. Please note, non-REDBOOK subscribers will have limited access.

Utilizing Alternative Collateral: Spare Parts

Alternative Collateral

In order to raise capital, many airlines issue debt or secured bonds backed by their aircraft and engines, but most airlines are sitting on another underutilized form of collateral: spare parts.  Spare parts are a widely-accepted form of collateral, but few airlines have used this often appreciating asset-to-issue debt.

There have been few instances of aircraft spare parts being used as collateral for secured debt in recent years, highlighting the underutilization of spare parts.  mba has found only US$1.1bn of outstanding debt tied to spare parts that has been publicly listed, which pales in comparison to the tens of billions of dollars of outstanding debt tied to aircraft and engines.  This excludes credit facilities that were undrawn as of December 2016.  It also excludes any privately-held airlines where financial information is not publically available and parts debt issued by Republic totaling US$139.7mn due to Republic’s bankruptcy and subsequent removal from the NYSE.  Cash-rich airlines have paid down debt in recent years, so there may be limited need to issue new debt, however due to the cyclical nature of the aviation industry, the time will come when airlines will need to issue debt once again.

Spare Part Classification and Condition Overview

There are three (3) main types of aircraft spares: rotable, repairable, and expendable parts.  Rotable items are parts that can be repeatedly rehabilitated to a fully serviceable condition over a period of time approximating the life of the flight equipment to which it is related.  Examples of rotable items include avionics, landing gear, and major engine accessories. Repairable items can be rehabilitated to a fully-serviceable condition over a period of time less than the life of the flight equipment to which it is related.  Examples of repairable items include engine blades, some tires, seats, and galleys.  Expendable items are parts for which no authorized repair procedure exists, and for which the cost of repair would exceed that of replacement.  Examples of expendable items include nuts, bolts and rivets. Rotable items are usually the most valuable items in any operator’s inventory, and although they may make up 10.0% of a particular inventory, they will normally make up over 90.0% of an inventory’s value.  On the other hand, expendable components make up a large portion of the inventory but have a smaller percentage of value.

Part condition plays a major role in the value of a particular component.  Spare parts in aviation use a rather unique set of condition descriptions.  The most common part conditions are: New, As Removed, Serviceable, Unserviceable, and Overhauled.  When a part is removed from an aircraft during a part-out process, that part is considered to be in “as removed” condition.  These parts do not have the necessary paperwork that will allow them to be put into use in an operator’s fleet, and therefore are considered by the market to be less valuable.

In order for a part to be considered “serviceable,” spare parts must be accompanied by certifying documents, such as an FAA 8130-3 or EASA Form One, prior to installation on an aircraft.  The most cost-effective method to achieve this certification is for an authorized repair station to conduct what is known as a “bench-check” to confirm the serviceability of a particular component.  Components that are determined to be “unserviceable” must be repaired or overhauled in order to receive a certifying document.  Overhauled components are components that have been disassembled and returned as close as possible to new specifications, and therefore command a higher price in the market than components that are determined to be serviceable.

Spare Part Valuations

A market-based approach is typically used to value spare parts, as values for spares are more volatile than aircraft and engine values.  Data points from a year ago may not tell an accurate story of the Current Market Value of a particular part due to market variations, which may occur more rapidly on a supply and demand basis in the spare parts market than the aircraft market.  A current snapshot of the market for each individual part number needs to be obtained at the time of valuation.  Values may then be adjusted based on the market availability and component condition to reach a Current Market Value for each line item in the stated condition.  One way to value components is on an individual component basis which assumes that each part in a particular inventory will be sold individually with no time restrictions for the sale.  In order to determine the value of an inventory that needed to be sold in its entirety within a specified time period, an Orderly Liquidation Value or Forced Liquidation Value should be provided for a specific “lot” of components or an entire inventory, creating another valuation basis for an appraisal.

An aircraft or engine that is in high demand will naturally have spare parts that are in high demand, and will be priced accordingly.  However, unlike aircraft, spare parts do not necessarily depreciate over time.  Spare parts that service a particular aircraft will depreciate at first as the aircraft platform enters service and supply of parts is predominantly provided by the manufacturer of the components at what many would consider “list prices.”  Then, as the secondary parts market becomes more active, the market value of components will usually appreciate modestly until the remainder of the platform’s production life.  Once production of a particular aircraft is ceased and a considerable number of aircraft remain in service, the market value may begin to appreciate at an even greater rate as part scarcity starts to increase and demand remains constant.  This typically drives the entrance of part-out companies in greater numbers which acquire and disassemble aircraft to service this market. This leads to a period of stability in value before entering a period of volatility in which values are directly correlated to the supply and demand ratio for the specific component.  The following graph illustrates the life-cycle of spare parts value.

Monetizing Spare Parts

Spare parts trade rather easily on the secondary market, as there is always a demand for parts to keep in-service aircraft flying.  There are several platforms on which sellers can market their parts including several online services such as ILS and Parts Base, where sellers can post the parts they are looking to liquidate.  When monetizing inventories, sellers looking to maximize yield typically list their spare parts on the market individually, yielding the highest value over a long period.  Those who own larger inventories that require monetization in shorter periods of time may require a ‘lot sale.’  Lot sales have lower yields than selling each part individually, but they have higher sale rates and allow for the sale of parts in greater numbers.  Another option for part sales is auctioning, during which the seller packages entire spare part inventories for liquidation. This alternative often results in the fastest turnaround for sale on the market, but provides the lowest yield overall.


*Backed by a team of five ISTAT certified appraisers, mba’s trusted valuation team offers a wide range of valuation services, including the valuation of alternative collateral and spare parts as defined in this article. For more information or questions, please email

Aircraft Value Update and Insights for Q1 2018

What’s Driving Values in Q1 2018?

REDBOOK’s ISTAT Certified Appraisal Team Has the Latest:

Relying upon the current market conditions and the aircraft transactions that have occurred at the end of 2017 and into the first quarter of 2018, mba has updated and released the Q1 2018 values on REDBOOK. Below you’ll find the highlights from the update and a look into the most highly traded aircraft of the year.

  • The E2-190, A319neo, 737 MAX 9 and 787-10 have been added to REDBOOK with deliveries commencing in 2018 for all four types.
  • Mid-vintage 737-800 market values continue to see heightened demand, with market values upwards of 2.0% over base.
  • The spread for new build neo/MAX aircraft over the ceo/NG expands as last off the line aircraft are discounted, widening the delta.

Please download the full insight for more updates on the Q1 2018 Aircraft Market. Please note, non-REDBOOK subscribers will have limited access.

Technical Records in Commercial Aircraft Leases

It would be accurate to say that a significant portion of any aircraft’s value is in the logbooks. An aircraft can appear to be physically in pristine condition, but without the technical records to back that assertion up, the value of the aircraft is severely impaired. The relationship between airplane value and the quality of its records has been understood for many years, but in an era where aircraft leasing has become an increasingly attractive option, the accuracy of the documentation is more important than ever.

Aircraft leasing has become a significant factor in today’s aviation marketplace. In the 1980’s as little as 1.7% of the worldwide commercial fleet was owned or managed by lessors. Today lessors, led by industry powerhouses like GECAS and AerCap, hold the titles to over 40% of the global aircraft fleet.[1] By 2021, half of all the aircraft in airline service globally will be supplied by aircraft leasing companies.

Even as they have become more popular, the fact of the matter is that commercial aircraft leases are far from simple. Leasing aircraft, whether it is one airframe or one hundred, is a complicated legal, technical, and logistical exercise. Misconceptions commonly arise when operators begin to consider the technical requirements that are imposed on them when they lease aircraft. It is often not enough to comply with the “letter of the law” when it comes to airworthiness documentation and component traceability; for a variety of reasons, lease agreements often impose more restrictive covenants on air carriers that can add up to substantial downtime and costs on the front or back end of a lease. The goal of this mba Insight is to identify some of the common issues encountered by both lessors and lessees and to capture some best practices that can help airlines avoid additional costs and leasing companies to preserve the value of their aircraft assets.

The Three Stakeholders in Commercial Aircraft Leases

When considering the technical aspects of airworthiness records, it is fundamentally important to have an understanding of the stakeholders that must be satisfied. The aircraft operator is one obvious stakeholder; they require the aircraft to be a reliable and operative vehicle with which to conduct their business. They have a vested interest in maintaining the aircraft and its records in an airworthy condition that their national aviation authority (FAA, EASA, JAA, etc.) considers acceptable.  The depreciation or resale of the asset is not their primary concern.  By leasing the aircraft, the operator has shifted the residual value burden of the aircraft to the leasing company.

The second stakeholder in the lease is the lessor, who has interests that differ substantially from those of the operator. The lessor’s primary business is preserving the value of their asset—that is, ensuring that the aircraft will retain its value and generate rental income for as long a period as is possible. Not only does a leasing company have to concern itself with minimizing the depreciation of its asset, but it must consider the future transferability of the aircraft as well. The goal of the leasing company is to ensure that, at the close of the lease agreement, the aircraft can be re-marketed to as wide a customer base as is possible.

Retaining the ability to quickly redeliver their asset is why the commercial lessors often dictate that the aircraft and its technical records be in a state that exceeds the regulator’s airworthiness requirements at the end of the lease term. The operator may only have to meet one standard, that of their national aviation authority. The leasing company has to ensure that their product can comply with the highest global standards so that their customer base is not artificially limited to one geographic region.

The third stakeholder is the financing party (or parties). While the leasing company has the primary and direct relationship with the aircraft operator; it’s rarely the case that the leasing company has 100 percent financial interest in the aircraft. A single aircraft may be collateralized by a bank, a consortium of banks, (or indeed other types of financial institutions). Financing parties therefore have risk centered on the leasing company’s continued ability to repay its debt obligations; and as the aircraft is held as collateral in many cases – the value of the asset itself. Financing companies have a vested interest in both the current and residual values, and watch both closely as values depreciate over time. An aircraft with sub-par technical records will have an adverse effect on current value; which if not corrected through the appropriate means will also affect the residual value. The leasing company provides the primary control, and mitigation measures when required.

Objectives for Stakeholders in Commercial Aircraft Leases


When an operator does not adhere to the technical records and maintenance conditions of a lease, or when an aircraft has significant gaps in maintenance program coverage, the value of the aircraft can be substantially affected. Problematic or missing records can represent an opportunity or an obstacle for a leasing company acquiring a used aircraft. Marc Wilson, mba’s Vice President of Technical, says, “What it boils down to is this – a sharped-eyed negotiator will use lapses in maintenance documentation as financial leverage. Or, it will force the leasing company to go back to the OEM for an expensive solution.”

The costs are real; mba’s experience indicates that airlines routinely spend upwards of $1 million on extra costs related to narrowbody aircraft returns to lessors. Overspending on widebody aircraft can easily exceed that amount by double. The majority of lease return costs and spending overruns are due to difficulties related to the accuracy and completeness of aircraft technical records.

Aircraft Technical Records are Essential to Aircraft Valuation

Accepting or preparing to return an aircraft to a lessor involves in-depth records checks. Aside from the basics that are common to every aircraft (airworthiness, registration, radio station license, and noise certificate), there are a host of maintenance records that need to be in a condition and format acceptable not only to the regulator but also to the leasing company. Among these maintenance records will be the status of life-limited components, hard time components, airworthiness directive and service bulletin compliance data, maintenance program data, and more.  Lacking any of these elements will create delays and necessitate extra work that can cost tens of thousands of dollars.


Aircraft technical records are more than just the basics, however. Anyone having even a casual relationship with aviation realizes that aircraft are sophisticated machines, composed of hundreds of individual components, a significant number of which have specific flight hour or cycle limits before they must be replaced, overhauled, or subjected to other prescribed maintenance requirements.  While the requirements for tracking the service life of these parts are generally well understood by operators, leasing companies rely on a higher standard of record keeping to preserve the value of their valuable assets. Instead of just tracking the number of flight hours or flight cycles, most lease arrangements require operators to adhere to the principles of back-to-birth and back-to-overhaul traceability.

Life-Limited Part Traceability

A significant part of any aircraft technical recordkeeping task is tracking the status of the life-limited parts on the airplane. Life-Limited Parts (LLPs) are those components that the OEM intends to be used for only a specified number of flight hours or cycles. When an LLP reaches the flight hour/cycle limit, it is no longer usable and must be permanently withdrawn from service and disposed of in a manner approved by the air carrier’s national regulatory body.

The problem with LLPs is that there is little consistency across the globe in methods used to track these parts. In the United States, the regulation that governs the tracking of LLPs is 14 CFR §43.10, which states in part that; “The part may be controlled using a record keeping system that substantiates the part number, serial number, and current life status of the part. Each time the part is removed from a type certificated product, the record must be updated with the current life status. This system may include electronic, paper, or other means of record keeping.”

The EASA regulations treat LLPs in a somewhat similar fashion. EASA M.A. 305 states that technical records must include “the component life limitation, total number of hours, accumulated cycles or calendar time and the number of hours/cycles/time remaining before the required retirement time of the component is reached.”

In reading the regulations, it is immediately apparent that the operative recordkeeping requirement is to track the part relative to its time or cycle limit. There are neither regulations that require specific evidence illustrating the accumulated time/cycles on the LLP such as engine logbook or shop visit logs, that a chain of ownership be established nor is there a requirement that previous owners’ show that the part was always kept in a secure environment. In the spirit of performance-based regulations, authorities generally grant operators a fair degree of latitude to choose a tracking method that works for them.

LLP component tracking and tracing is an area in which the commercial aircraft leasing industry is out in front of the regulators. Recalling that the primary concerns of aircraft lessors are to preserve the value of their asset and enable easy transferability to another lessee down the line, leasing companies have a significant vested interest in ensuring that they can prove the “chain of custody” of LLPs with a high degree of certainty. To that end, the industry standard has become more stringent than the regulatory standard; leasing companies, in particular, insist on back-to-birth (BtB) tracing for all LLP components installed in their aircraft.

BtB tracing of LLP components can impose significant time and work effort burdens on aircraft operators. If LLPs come directly from the component OEM, are installed on the wing, and simply stay there until their flight hour or cycle limit runs out, tracing the entire life cycle of the component is a relatively simple exercise. The reality is that airlines are continually removing, repairing, and replacing parts. In engines and APUs in particular, it would be an unusual situation for those highly complex modular assemblies that contain multiple LLPs to be returned to the lessors with the same serial numbers with which they were delivered to the operator. Instead, LLPs often make their way through various tail numbers during their life cycle, or even in between companies in the course of third-party MRO maintenance or parts interchange agreements.

BtB tracing involves retaining the original OEM Production Conformance Certificate or 8130-3/EASA Form One, a record of the operators or MROs that the component has passed through, along with a certified record of the hours that the part has been on the wing. Often, a statement of non-incident/accident is also required, which verifies that the component has not been exposed to saltwater, fire, severe stress, and has never been the root cause of an ICAO Annex 13-defined accident or incident.

Without these records, the overall value of the aircraft could be significantly impaired, and transfer between national jurisdictions could prove to be more difficult. The general rule around the world is that the aircraft owner, (the lessor in the case of leased airplanes), is ultimately responsible for providing proving the airworthiness of each LLP. Without BtB tracing, that level of certainty becomes difficult to attain.

Let’s look at an example of an engine having incomplete BtB LLP traceability, and how this might impair the value of an aircraft or the engine itself, and the costs associated with remedying the situation:

We have an engine, for which we cannot substantiate the BtB traceability on five LLPs. In our example, the engine has a CMV of $1,000,000; each of the LLPs has a list price of $100,000, a life limit of 20,000 cycles, and has 5,400 cycles remaining.

Let’s first examine the likely outcome, where the engine is being returned to the lessor as part of the redelivery of the aircraft:

The aircraft would be rejected (not accepted for return). The most likely scenario then would be that another engine (of at equal value and utility) would be substituted.

  • Additional cost and expense for the Lessee (Airline) in arranging title transfer, removing and replacing the affected engine.
  • Additional cost and expense for the Lessor, in marketing delays and possibly narrowing the market.

Now, let’s examine the likely outcome where the engine is being offered for sale for part-out.

The purchaser will realize that the five LLPs are of no use, as they cannot be re-sold as individual components. The price offered for the engine will be discounted to ascribe a zero-value to each of the five affected LLPs – resulting in a $135,000 price reduction.


Hard Time-Limited Component Traceability

Many of the parts on a modern commercial aircraft are subject to what is termed as “hard time” limitations. Landing gear assemblies are examples of hard time-limited components; it is often useful to think of these parts as assemblies since they are usually modular assemblies made up of a series of parts, some of which may be LLP components. The critical difference between hard time limited assemblies and LLPs is that components with hard time limits are intended to be overhauled, tested, and reused. They are designed by the OEM to last throughout the life cycle of the aircraft, so long as they receive the proper maintenance.

Given the “above the regulatory standard” applied by leasing companies to LLPs, it makes sense that hard time limited assemblies would be subject to the same scrutiny. The regulatory standard requires that operators track the flight hour or cycle status of hard time-limited parts. Leasing companies expect that any overhauled hard time components with which the aircraft is returned will come with sufficient documentation that shows not only when the overhaul was completed, but the details of that overhaul down to the “dirty fingerprint” record level. Additionally, the operator can expect to return the aircraft with a contractually agreed to amount of life remaining on both hard time-limited components and LLPs. Meeting this expectation requires careful maintenance planning and proper documentation on the part of the operator.

The reason that detailed back-to-overhaul records are so crucial for leasing companies is the same as the issues that drive their insistence on BtB records for LLPs: Asset value and the ability to redeliver the aircraft anywhere on the globe. Whether it is an engine, APU, or landing gear assembly, an overhaul involves complete disassembly and rebuilding of the component so that it is returned to a condition that is functionally equivalent to a new assembly leaving the OEM’s manufacturing facility. Old parts of the assembly may be replaced with new or repaired components. While it is permissible under FAA and EASA rules to use Parts Manufacturer Approval components in overhauls, that acceptance is not universal around the world. Thus, aircraft lessors generally insist on the use of OEM parts. OEM components ensure aircraft transferability and preserve value to the maximum degree.

PMA Components and DER Repairs on Leased Aircraft

The United States is unique in the world in that the FAA grants permission to manufacture aftermarket aircraft replacement parts under an authority called Parts Manufacturing Approval (PMA). The FAA approves these parts as being at least equivalent in quality to OEM components. While PMA parts are legal for use in U.S. flag aircraft, acceptance of PMA components for commercial aviation applications is not globally ubiquitous. Thus, lessors tend to avoid the use of PMA parts in their aircraft; the presence of non-OEM aircraft components could artificially deflate aircraft value, delay redelivery, and restrict the transferability of an otherwise airworthy aircraft.

The PMA parts issue is the backdrop for political and economic disputes as well. Some countries subsidize commercial aircraft parts manufacturers based within their borders. In doing so, they have shown a willingness to engage in protectionist trade strategies and use regulation to hamper foreign competition. Additionally, engine manufacturers, in particular, have made moves in recent years to tighten their grip on the aftermarket replacement parts marketplace; some engine manufacturers place severe restrictions on the use of PMA parts in the form of voided warranties or reduced levels of support.

The same issues surround the concept of designated engineering representative (DER) repairs. The FAA allows airlines and MROs to develop fixes for what would otherwise be unserviceable parts. Once these repairs are validated and deemed safe by an FAA DER, the operator or MRO can employ these procedures to render aircraft airworthy. Often, DER repairs can save an operator a lot of money in maintenance costs. Since DER repairs under the auspices of the FAA are not necessarily acceptable to foreign airworthiness regulatory bodies, leasing companies tend to avoid having these procedures employed in the maintenance of the aircraft that they own.

The bottom line is this: Both FAA PMA components and DER repairs create a situation where the aircraft may not be readily redeliverable to a customer on the other side of the world without significant additional costs and regulatory headaches. While some bilateral symmetries exist between the FAA and EASA, these agreements are not nearly comprehensive enough to accommodate leasing companies’ marketing needs. As such, the presence of PMA parts or a history of DER repair solutions can negatively impact aircraft valuation because it could render the aircraft much harder to place with another operator.

The Special Challenge of Bankrupt and Defunct Airlines: Gaps in Maintenance Program Coverage

When an airline ends up in bankruptcy or suddenly becomes defunct, it would stand to reason that lessors would be able to recover their aircraft along with the relevant technical records and then redeliver that aircraft to another customer reasonably rapidly. However, that is not the situation in which many lessors find themselves. An airline’s departure from business is rarely a well-organized activity. Key people leave their posts to pursue other opportunities. If the aircraft have stopped flying, dying airlines may see little use in fulfilling their contractual lease obligations concerning maintenance and record keeping. Finally, the aircraft themselves may be held hostage by other creditors: unpaid government taxes, fuel bills, airport fees, or MRO invoices may cause entities in some countries to attempt to hold onto the one part of the defunct air carrier that still has value—the aircraft themselves. The Cape Town Convention on International Interests in Mobile Equipment does provide a legal remedy for lessors to recover their aircraft, but exercising those rights can sometimes be a challenging endeavor. Additionally, there are many countries (especially in Africa and South America) that are not parties or signatories to that agreement.

As a lessor endures the slings and arrows of attempting to recover its assets, the clock is running. One of the major elements of commercial aircraft maintenance is continuity—that is the foundational principle that undergirds continuous airworthiness maintenance programs (CAMPs).  These programs require that maintenance is done at specific intervals that may be defined in terms of days, months, cycles, or flight hours. When an airline becomes defunct, the continuous maintenance of airworthiness essentially ends. Marc Wilson from mba says, “you can generally go no more than seven days without a maintenance action on the airplane. Once you roll over seven says—certainly more than 14—you start to get into a problem. The lessor must get a plan in place with the type certificate holder relatively quickly.”

International Redelivery Considerations: EASA CAMO

A particular challenge related to the redelivery of leased commercial aircraft is meeting the maintenance records requirements of the jurisdiction where the aircraft will be redelivered. Some of the most stringent regulations exist in the European Union; the governing authority in the EU, EASA, prescribes that each commercial operator must engage a Continuing Airworthiness Maintenance Organization (CAMO). The purpose of a CAMO is to ensure that EASA maintenance continuity, quality, and recordkeeping requirements are met. Among the tasks handled by a CAMO are ensuring compliance with airworthiness directives, monitoring LLP flight hour/cycles, scheduling maintenance activities, tracking certification maintenance requirement completion, and incorporating STC requirements into the overall aircraft upkeep and record keeping picture.

In short, CAMO is the glue that holds the entire airworthiness puzzle together. Since the advent of CAMO as an EASA requirement for air carriers, other countries have begun to adopt similar regulatory models. CAMO-esque regulations have taken root in the Middle East, Southeast Asia, and South Africa, among other locations. According to Marc Wilson, “Latin American countries have begun to transition from a framework modeled on the U.S. FAA towards EASA-type CAMO systems. At some point, the regulations that lessors have had to accommodate in Europe will come into vogue in South and Central America as well.”

The stringent requirements of the EASA CAMO regulations are one of the reasons why lessors insist on pristine technical records when an aircraft is returned at the end of a lease. If a commercial aircraft is to be redelivered in the EU, all of the maintenance activities on that aircraft must be predicated on the receiving airline’s CAMO. The lessor does not have an EASA air operations certificate, so it is not permissible for them to do the work required and then deliver the aircraft to the lessee. Whatever maintenance is done must be completed under the auspices of the receiving air carrier’s CAMO, and the maintenance organization identified by the air carrier’s CAMO must complete the work.

Bilateral Agreements between the United States and the European Union do prevent situations where work on the aircraft has to be replicated, but only if the technical records indicate that the appropriate maintenance has been performed to the standards outlined in the receiving air carrier’s CAMO. If the records received from the previous operator of the leased aircraft are not up to the CAMO’s standards, expensive and time-consuming delays can result. The air carrier could be left paying lease payments on an airplane that they cannot fly without costly and unnecessarily redundant maintenance actions.

The Importance of Timing: Preparing for Redelivery

Optimally, the review of an aircraft’s technical records is an ongoing process that is conducted throughout its service life; the entire concept of continuous airworthiness holds rigorous records review as a foundational principle. However, real-world operational needs and time constraints often force air carrier maintenance organizations to make hard decisions about where to deploy their resources. In the case of aircraft that are operating under a lease, delays in conducting maintenance tasks required by the lease agreement or improper recordkeeping can result in increased aircraft shop time and unexpected costs.

Lessors can be expected to monitor the health of their asset while the operator is flying it. “Lessors generally will keep an eye on things via visits to the operator throughout the lease term,” says mba’s Marc Wilson. “These visits often consist of a high-level inspection of the aircraft and a snapshot review of the technical records.” Many lease agreements incorporate language that stipulates that the lessor will have the opportunity to inspect the aircraft annually or on some other specified schedule.

In addition to keeping up to date on the condition of the airframe and the aircraft’s records, operators leasing commercial aircraft can also expect that the lessor will pay particular attention to the amount of time remaining on critical hard time assemblies like engines, APUs, and landing gear assemblies. Most lease agreements set forth requirements for the time remaining on these components when the aircraft is returned to the lessor; 18 to 24 months of remaining life (or the flight hour/cycle equivalent) are typical values. Unless the operator plans carefully, these requirements can raise end-of-lease costs; airlines may find themselves in the position of replacing hard time components on the aircraft at an earlier stage than economics and regulations would otherwise dictate.

Engines and APUs demand particular attention in the run-up to redelivery. Many commercial aircraft leases have a mirror in/mirror out clause, which means the lessor expects that the aircraft will be returned in a state that closely resembles the condition the aircraft was in when it was delivered to the operator. Typically borescope inspections will be conducted of the hot and cold sections to ensure that the engines and APUs meet redelivery parameters. Additionally, the engines will require maintenance runs to document that they are still producing the rated thrust. Since lease agreements often stipulate a maximum number of engine flight cycles since the last shop visit, operators will likely need to incorporate off-wing maintenance planning into their redelivery preparation timeline. Since many operators contract out their engine work to third-party providers, beginning this work 6 to 12 months before the end of the lease is not uncommon.

As the aircraft approaches the end of the lease, operators would be well advised to bring technical representatives from the lessor into the information loop at an early stage. The last ‘C’ check event before aircraft return is one of the natural places to solicit lessor input; ensuring that there is operator and lessor concurrence on the scope of the work can go a long way toward avoiding unexpected expenditures. Communication also gives the operator the chance to fully utilize the final ‘C’ check interval, which could eliminate unanticipated end-of-lease downtime and an overall increase in operational expenses.

The general impression among lessors is that airlines tend to begin the process of preparing for aircraft later than they should, which increases the costs to the carriers and creates uncertainty in lessor redelivery schedules. IATA publishes a helpful guide that lays out a timeline of pre-redelivery and redelivery tasks. Their Guidance Material and Best Practices for Aircraft Leases document lays out a 12-month footprint of activities that can be broadly grouped into three categories:


Even though IATA’s guidance places records assembly at the end of the redelivery preparation process, it is a best practice to get started early. “The proper time to commence the records review—it’s somewhat variable,” says mba’s Marc Wilson. “A good starting point to begin this review is about 9 to 12 months prior to lease end. This also allows the lessor’s marketing staff to have some insight into the projected return condition of the aircraft, and allows their marketing plan to be geared accordingly.”

A Summary of Best Practices

Air carriers spend millions of dollars each year on lease returns, and much of the money spent is related to unforeseen costs that are incurred as a result of misunderstandings regarding redelivery requirements and recordkeeping. A good place for operators to begin is with a thorough understanding of the redelivery conditions outlined in the lease agreement and planning around those stipulations throughout the life of the lease. A clear concept of the lessor’s requirements regarding return condition, PMA parts, and DER repairs should drive maintenance planning and MRO selection. Communication with the lessor throughout the lease term is another way of avoiding redelivery hassles. Getting the lessor’s input on their interpretation of the lease conditions provides an opportunity to settle disagreements before it costs precious time and funds to do so.

As the date that the aircraft is to be returned to the lessor approaches, operators should put a plan and a team in place at the earliest possible stage. The IATA Guidance Material and Best Practices for Aircraft Leases publication provides a useful template for framing a strategy. Since there are many moving parts in any aircraft return, early and frequent coordination between operator technical staff, the lessor, and any MROs or third-party maintenance providers that will be engaged is essential to success. Finally, operators should ensure that they reach an agreement on the work-scope of the final “C” check before work begins. Failing to achieve this concordance could result in extended shop time and inflated costs.


[1] IATA. October 7, 2016. “To Buy or Not to Buy, That is the Question.” IATA Economics Chart of the Week.