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Lease Turnback: Have a Plan or Pay the Consequences

By Peter Zeeb | VanAllen

The aircraft leasing market has dramatically changed over the past 10 years.  Since the downturn in 2008, many banks have gotten out of the leasing market altogether.  Those who remain are very cautious when bidding new leases.  We are now seeing leases issued in a volatile market come to the end of their term.  Of all the leases we’ve seen recently, none bet the residual curve accurately; not even close.  As a result, the only way the lessor can help offset this loss is to make up whatever they can on the lease return process.  Ideally, this will make a more marketable aircraft that they can sell or redeploy on another lease.  For the lessee, it’s important to have a plan to prepare for this process to mitigate your own risk.  Not being prepared can be costly or extend a difficult process.

 

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Preparation Phase 1 (12 months out)

  • Read the lease!  Become familiar with return process and return conditions. Clarify any ambiguity written in the lease.  Many of these leases were written before NextGen mandates were defined.  Is the lease silent on issues like system obsolescence? 

  • Benchmark with others who have recently gone through a lease return.  What would they do differently? 

  • Confirm the notification period to the lessor.  There is typically a 60-90-day window to confirm your intentions to exercise options such as termination or extension.

  • Review your aircraft status compared to return conditions – adjust as necessary.  Are you up against an excess usage clause? 

  • Begin to plan financially for the termination inspection.  Depending on your lease and your aircraft, the cost to terminate can be less than $100,000 to over $1M.

Preparation Phase 2 (3 months out)

  • Treat the process like a pre-purchase inspection when selling an aircraft.

  • Organize all records, logbooks, loose equipment and galley items.  For any unique logbook entries, have supporting documentation.

  • Review maintenance status and conduct any items you can clear prior to lease turnback inspection.  This will shorten the return process and help save cost.

  • Begin to work with your lessor on inspection coordination - facility selection, scope of inspection, input date, etc.  Consider that MROs are getting heavy backlogs with the NextGen mandate upon us.

  • Once your facility is chosen, build a relationship with the Service Team Manager assigned to your aircraft. 

  • Retaining your registration number or SELCAL?  Begin to file associated paperwork.

 

Return Inspection

  • Be present or have a designated representative present… your lessor will! Attending the inspection will make it easier to defend the charges later.

  • Review all discrepancies identified and confirm they are required under the lease return conditions (there can be confusion on what is classified as “airworthy”)

  • For discrepancies responsible to you, examine creative options to reduce cost or downtime.  Perhaps an overhauled part is available versus new. 

  • Leverage warranties and maintenance service plans whenever possible.

  • Audit the 50% calculation worksheet created by the lessor.  There is room for negotiation within their assumptions.

 

Post Inspection

  • Work with the lessor and your internal parties to complete the lease termination paperwork.

  • Transfer all maintenance programs and pay any outstanding balances.

  • Settle the final inspection invoice with the inspection facility.

  • Cancel all subscriptions and insurance.

  • Confirm change in Beacon registrations, ELT and Internet/phone subscribers.

  • Confirm all warranties have transferred with the OEM.

 

Contact VanAllen today to discuss how we can help you navigate this complicated and potentially costly process.