RE: Redelivery Condition announcements?23 Apr 2024 07:51
Under typical aircraft leasing conditions a lessor has to return the aircraft back to the lessor in accordance with the re conditions set out during the commencement of the lease. This is normal almost boiler plate contract clauses. Essentially all the original equipment has to be placed on the aircraft e.g. aircraft engines/APU's would have been placed on other airframes during the normal course of business so they have to be removed from wherever they may be and re-installed on the lease aircraft. This also applies to other components eg avionics etc although there is some room to accept equivalent parts as these may not be life limited. Typically the interior/seating has to be returned to a particular standard. These latter issues may have a cash element payment as, for example, the interior will be impossible to return to original condition.
However the aircraft must also be returned in a serviceable condition with a pre-agreed minimal life expectancy and here is the rub. Often the aircraft will have to undergo a 'C' check which is a major overhaul taking several weeks. Additionally the engines must be to a minimum engine modification standard and will almost certainly have to go for a shop visit. This means in practice to return an aircraft to the lessor may cost the airline $20-40m.
However having an aircraft returned to the lessor implies that the lessor will be re-leasing it to another operator. Unfortunately this cannot occur with A380's as there are no customers for the aircraft type so its just going for scrap, in which case the potential recovery is largely based on the materials irrespective of its serviceability. Therefore a 'happy' medium is for the lessor to offer the airline an option to pay them a certain cash payment ($12m) and the airline 'saves' an unnecessary expenditure of $8m - $28m.
Should be noted that an airline would start to plan an aircraft redelivery to the lessor around 6 months or more prior to the end of the lease and the likes of Doric are informing it's investors they have formally issued a side letter for the $12m and whilst it has not been formally accepted its almost certain, given the timescales involved, that the airline intends to sign the side-letter.
Hope that helps.