Aircraft financing is complicated business. Given the enormous sums involved, it is rarely a simple matter of forking out ‘cash on demand’. The three most common methods of aircraft purchase are
a. operational lease (the lessor does not expect to take ownership of the aircraft at the end of the lease)
b. finance or capital lease (the buyer has the option to own the aircraft at the end of the lease)
c. Direct lending (where the buyer raises financing which may be secured or unsecured debt, usually from a consortium of banks and other financial institutions)
In this article we look at what happens when the aircraft owner wishes to sell its asset, or in the case of a leasing arrangement, relinquish its use or ownership. This is referred to in the industry as ‘redelivery’ and can occur in any context in which the asset, in this case an aircraft, changes ownership.
Since lease financing accounts for around 50% of aviation financing if not more, (exact post-pandemic numbers are not yet available), we explain how the aircraft redelivery process works in the context of an operational lease. In this context, Aircraft Redelivery is the process by which a leasing contract is closed and the leased asset, the aircraft, is returned to the lessor. In this case, the lessor may be (but is not limited to) an aviation leasing company or a financial institution.
The lessee, who may be an airline, a corporation or a government, must complete all the conditions of the redelivery process agreed at the time the leasing contract was first signed. End-to-end – from the point at which the lessee should notify the lessor of its intentions to the point at which the aircraft is transported back to the lessor and final checks completed – this complex process can take up to 24 months to complete. It is enormously expensive and time-consuming for both the lessor and the lessee. Lack of adequate planning can make it unpredictable and add to the costs.
Aircraft redelivery: the element of surprise
There are various reasons why the redelivery process is an unpredictable exercise. Here we discuss some of the most important ones:
The element of time: Leasing contracts can be as short as five years or as long as 25. During that time, changes to rules and regulations, technology, skills and expertise and indeed the world, are inevitable. It is impossible to prepare for all possible eventualities.
The consequence of place: Lessors and Lessees are often resident in different countries and therefore bound by varying sets of jurisdictions and regulations. For instance, not all countries are bound by the Cape Town Convention designed to protect the interests of creditors. In countries where some laws might not be considered creditor-friendly, this can become a problem. In such situations, disputes are inevitable.
Best Practise: The International Air Transport Association (IATA) has published a comprehensive aircraft leasing guide that includes guidelines for the redelivery process. However, the industry has yet to develop a set of accepted standards, protocols or practices that can be referred to as “best practice” for the planning and execution of a ‘gold standard’ in the redelivery process for either the lessor or the lessee.
Aircraft redelivery: the importance of planning
Research suggests just under three out of four redelivery projects are late due to inadequate planning. Inaccurate estimations of work, unexpected maintenance and repair requirements, problems with documentation and missing records are some of the most cited problems. Sometimes this happens because the lessee has not adhered to the terms of the maintenance and repair schedule, other times it can due to particularly onerous redelivery requirements on the lessors part. The single largest cost component of redeliveries according to multiple surveys of industry stakeholders is in fact records followed by engines.
So what are the elements of a successful redelivery implementation? In fact, what is a successful redelivery project?
The answer to the first question is comprehensive, detailed planning and communication. A redelivery project must be meticulously planned to address macro and micro level variables, include clear processes for monitoring progress, managing conflict, engaging stakeholders and map clear lines of communications across all levels.
The answer to the second question is a redelivery project delivered on time, with the minimum of conflict, maximum adherence to the terms of the leasing contract, minimum surprises and maximum engagement of all stakeholders.
Aircraft redelivery: the importance of technical expertise and local experience
Mismanaged aircraft deliveries can cost stakeholders millions of dollars in unnecessary expenditure in both time and capital. That the parties to these transactions are situated thousands of miles apart, as most lessors and lessees in this industry tend to be, exacerbates the inherent challenges and complexities of these projects. Stakeholders on both sides can therefore benefit from Independent advice and support spanning technical expertise, jurisdictional knowledge and strong local experience.
