Aviation Maintenance Bonds

The brainchild of the late Tony Ryan, Aviation leasing began in the 1970’s initially through the launch of Guinness Peat Aviation. Most of the industry learned their trade in GPA.

How far the industry has come. 50+% of all aircraft is leased these days. Ireland is the forefront of this industry and is seen as the Silicon Valley of aircraft leasing.

The concept of aircraft leasing works as follows. The leasing company outlays the price of the aircraft and is the owner of the plane. A aircraft company who may not have a lot of cash on hand and who wants to expand its fleet enters into a lease agreement whereby they will pay in instalments over a certain time period for the plane. In some cases, at the end of the lease, the Airline owns the plane.

There are 3 types of Lease and all can be either short or long term:

  1. Wet – Leasing company provides aircraft, pilots and cabin crew, maintenance and insurance
  2. Dry – Leasing company provides aircraft, insurance and maintenance
  3. Damp – Leasing company provides aircraft, pilots and contributes to insurance.

Aircraft are very complex machines full of high tech systems and need to be serviced by engineers and mechanics at set intervals. Maintenance reserves are usually part of the lease agreement. This is the capital set aside or scheduled maintenance events.

The industry works as follows:

  • Top Tier Airline who has enough credit to circumvent paying maintenance reserves as they are trusted to pay them when they come due.
  • Mid to Lower Tier lessees who are required as part of the lease to accrue maintenance reserves which can severely hinder free cash flow putting untold stress on the operators’ balance sheet.

How are they structured?

Maintenance reserves are structured in a few different ways.

  1. Cash Maintenance Reserve Payments
  2. End of lease adjustments (UPsy & UPsy – DOWNsy)
  3. Maintenance Reserve Letter of Credit (usually provided by the bank and usually affects credit)
  4. Aviation Maintenance Bond (Used instead of MRLoC so that companies will not affect their credit or free cash flow and will outsource the guarantee to the surety).