The main purpose of Maintenance Reserves is to protect the lessor by ensuring funds are available to cover major activities.
Maintenance reserve payments made by the lessee to the lessor are typically calculated according to the basis of flight hours, flight cycles, and calendar basis (see below); and are usually paid on a monthly basis in arrears. These payments are typically collected to cover five different components:4
▪ Airframe Heavy Structural Inspections (calendar basis)
▪ Landing Gear Overhauls (calendar basis)
▪ Engine Performance Restoration (EPR) (flight hours)
▪ Engine Life Limited Parts (LLPs) (flight cycles)
▪ Auxiliary Power Unit (APU) Restoration (APU hours)
At the time an aircraft is taken out of service for maintenance, the lessor should already have funds to cover the cost. Moreover, in the event of default, the maintenance reserves provide the lessor with extra funds as protection throughout the lease.
The current market trend is for top tier airlines to have sufficient credit status to forgo the entire MR provision. Of course, the lessor prefers there to be MR’s in place but they balance the need for this against the size of the lease arrangement (number of leased aircraft/lease period) and make appropriate risk-based decisions. Quite often, a “Collateral Security” in the form of a Letter of Credit (LOC)1 may be required in the event of no MR payments.
Maintenance Reserves belong to the lessor on payment and it is necessary for the lessee to claim reimbursement for the work that has been performed, providing the account is up to date.
Finally, under a return compensation clause of the Lease Agreement, the lessee must make a payment to the lessor if the lessee returns an aircraft in worse status for an applicable component than required by the return conditions. Conversely, if the aircraft is returned in a better maintenance status than the stipulated in the Lease Agreement, the lessor might be obliged to pay to the lessee.
1 Letter of Credit (LOC): Letter issued by a bank to another bank to serve a guarantee for payments made to a specified person/company under specified conditions.
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