Aircraft rejections lead to maintenance expenditure, remarketing costs, and lost revenue during the transition period. Therefore, it is critical to take proactive measures to secure your assets and prepare for potential asset recovery and remarketing. Engaging a technical advisor with the proper skill set and experience is vital to maximising value recovery and achieving a timely aircraft transition, says Julian Aldana, ACC Aviation VP of Technical Services.
Aircraft rejections under restructuring
As the COVID pandemic hit, widespread travel restrictions were triggered driving the consequent plunge in passenger demand, airline revenues, and aircraft utilisation. As a result, many airlines were forced to restructure and declare bankruptcy. Such a declaration helps airlines protect their business from creditors whilst recapitalising and restructuring their operations, including their fleets – which leads to aircraft rejections where airlines are able to elect which aircraft to retain and which to return to lessors/financiers. The most common bankruptcy and restructuring procedures are the UK restructuring plan under the new Part 26A of the UK Companies Insolvency Act 2006 and the US Chapter 11 Bankruptcy Code, with the latter being the most popular due to the benefits it provides to debtors, allowing airlines to keep or reject assets at their discretion.
In 2020, I was personally involved in this often hectic process as a technical advisor to various banks and financiers with at-risk assets subject to Chapter 11 proceedings. I guided and advised my clients with various tasks such as negotiation of power-by-the-hour (PBH) rates and utilization, asset recovery, project management of physical and records inspections for aircraft at risk of rejection, identification of the location and technical status of title engines and all On Condition / Condition Monitored (OCCM) parts, in particular, those not installed on aircraft.
Aircraft rejections can be a painful process for both parties, in particular for lessors and financiers. The goal in these scenarios is to ascertain the assets’ technical condition quickly and to minimize the risk of potential maintenance expenditure and value loss. Good communication and negotiation skills are paramount, as these goals cannot be achieved without the airlines’ cooperation and support. It should also be noted that airlines do not treat all lessors/financiers the same. During rejections, pari passu treatment (the equal or non-preferential treatment of lessors/financiers assets) can not be automatically assumed. Communication and negotiation skills play a large role in determining the success and efficiency of asset recovery.
An aircraft rejection is not a redelivery. In a rejection scenario, aircraft redelivery conditions are typically not met and the asset is returned to the lessor or financier “as is where is”. At the time of rejection, technical management of the asset transfers from the airline to the lessor/financier, and those affected must act fast to secure their assets and mitigate value loss. It is highly advisable that lessors/financiers take a proactive approach in assessing aircraft technical condition and status as soon as a potential rejection scenario becomes known. Proactive engagement with the airline and the asset enables lessors/financiers to act quickly at the time of rejection and to minimise the cost and time spent on aircraft transition and remarketing.
Major risks related to aircraft rejections and how to mitigate them
Risks related to an aircraft rejection vary depending on the operator and the economic and political situation of the country where the asset is located, among other considerations. These risks are latent and can be quantified in millions of dollars in worst-case scenarios.
The “least harmful” of such risks is the robbery of aircraft and engine-related parts along with poor maintenance and storage practices, all of which lead to asset value loss. These are more common occurrences than one may think. To put it in perspective, engine nacelles of an Airbus A320 with CFM-56 Engines, which may be easily removed to support more preferred assets, have a replacement cost of approximately US$ 2m per engine. In situations where there are inadequate or missing records, the recertification costs for around 20% of the non-high value OCCM – On Condition / Condition Monitored components (approximately 2,000 in total) for an airbus A320 can exceed US$ 300k per aircraft. Incorrect structural damage assessments not found during the leasing period may lead to longer ground time for repairs representing a high-cost rectification.
In the worst-case scenario, lessors and financiers may find themselves with an aircraft unserviceable, fully or partially cannibalized, or abandoned. In such scenarios, especially with asset values depressed due to the pandemic, return-to-service costs may render an aircraft beyond economic repair.
In order to mitigate these risks, speed and proactivity are critical. The operator must be contacted as soon as possible to request all available records, at the same time requesting an aircraft inspection to ascertain its physical condition and technical status. If it is confirmed that the aircraft is rejected, communication must be enhanced with the operator to coordinate the delivery airport, the use of operator crew for the ferry flight, handover of physical records, etc.
I always recommend that my clients establish an on-site presence to have their own eyes on the asset at this critical moment. There is no better alternative than having someone in situ looking after your valuable assets and representing your interests. It should also be evaluated whether the location warrants putting in place additional security measures to protect the aircraft.
Value add of technical advisory
Repossession is a costly and complex exercise with the aircraft typically not meeting redelivery conditions and technical responsibility passing from airline to lessor/lender on rejection; hence, it is important to have a good technical team looking after the assets during this process. Proactive management of an aircraft rejection scenario helps lessors/financiers to mitigate asset technical and value risk as well as speed up recovery and remarketing timelines. This can be arranged in-house or by engaging the right technical consultants.
From a technical perspective, an aircraft rejection project will typically involve the following:
- On-site physical inspections of the aircraft to determine its condition;
- Collection and review of aircraft records, confirming whether they are complete and in good order to enable the transition of aircraft to another operator;
- Advising lessor/financier on the technical status of the aircraft and associated records along with remarketing prospects should the aircraft be rejected;
- Advising and supporting lessor/financier during airline negotiations where our expert opinion may be crucial to reach desired outcomes;
- Where the asset is retained under restructured financing terms, supporting lessor/financier in determining and negotiating appropriate PBH or lease rates as well as maintenance reserves, redelivery conditions, and other commercial terms;
- Where the aircraft is rejected, project managing ferry flights, aircraft storage, remarketing, and aircraft transitions.
ACC Aviation’s Consulting team has the capability and expertise required to engage and advise across the spectrum of aircraft rejection issues; from the deployment of on-site technical resources, ascertaining and advising on technical status and maintenance issues, providing aircraft valuations and remarketing advice, to execution of the asset recovery and remarketing campaign. ACC Aviation provides a single point of contact for addressing the challenges associated with an aircraft rejection scenario.
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ACC Aviation provides market-leading solutions across aviation consulting, ACMI leasing, and aircraft charter. Our consultancy practice provides holistic aircraft transaction solutions covering asset management, finance & advisory, and technical services.
Since 2002 ACC Aviation has been supporting airlines, lessors, financiers, and other industry stakeholders with its deep domain knowledge and innovative aircraft transaction solutions.
The lease return or redelivery process is the final stage in the aircraft leasing life cycle. This phase is of great importance to the lessor and lessee as it could have significant financial and reputational implications if not managed well.