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COMMERCIAL AIRCRAFT
DRY LEASE REQUIREMENTS
&
The Alternatives
The following will provide
the prospective lessee with some insight into
the requirements, difficulties and expenses
involved in leasing valuable commercial
aircraft.
The process begins with the lessee presenting a
“lease- worthy” entity to the lessor(s) and
secured parties. The following explains the
meaning of “lease-worthy.”
What does it take to be considered lease-worthy?
Essentially, and most importantly, the lessee’s
financial statement has to be fully 100%
transparent and needs to demonstrate that he has
the financial resources to support the lease
throughout the term. In the case of a start-up
carrier, this means that he will need to provide
the lessor with a professional business plan
demonstrating exactly how the new carrier will
earn sufficient revenues to sustain the lease
payments and survive as a viable company.
Lessors do not want to and will not engage in
risky enterprises. No one wants to go through
the difficult and very expensive problems
involved in re-possessing an aircraft,
especially if it is parked in a foreign country.
The prospective lessee needs to demonstrate that
he has the maintenance capability to support the
aircraft as per the manufacturers MIP
(maintenance inspection program). The lessee
will have to have licensed and knowledgeable
individuals on staff that have experience with
the type and class of aircraft being considered.
The maintenance facility will have to have the
proper library, tooling and spares packages as
well as the basic shop equipment such as tugs,
GPU,s, work stands, ladders, etc. All new or
overhauled spares need to be maintained in
segregated storage and the avionics shelves need
be air conditioned. The representative of the
lessor will inspect these facilities and, from
time to time throughout the lease, will check on
the aircraft and its records.
Maintenance, of course, can be contracted
(out-sourced) to approved and properly licensed
MRO’s (commercial maintenance facilities) but,
the lessee will still be required to support or
actually maintain the ship’s historical records
and provide turn-around maintenance.
The lessee will have to demonstrate that his
flight crew and cabin staff training program
meets reasonable international standards
and that his crews have the requisite experience
to operate the lessor’s aircraft safely. The
carrier will have to demonstrate that each and
every destination also meet reasonable
international standards as far as passenger and
ramp security are concerned as well as having
serviceable and safe navigational aids.
In short, the lessee has to demonstrate to the
lessor that he is capable of operating and
paying for the lessor’s aircraft in a reliable
and professional manner meeting all
international standards.
This process begins with the lessee cooperating
fully with the lessor’s representatives and
supplying the requested and required
information. Often a verifiable banking
reference is required and this should be from a
prime money center bank.
Once satisfied that he is dealing with a
lease-worthy client, the lessor will, in
exchange for a relatively small security
deposit, contract to lease his highly valuable
aircraft. The Lessor will entrust the lessee
with the aircraft secure in the knowledge that
he will receive without fail each and
every lease payment on time and in the full
amount. The lessor also has to be assured
that the lessee will maintain his valuable
aircraft exactly as the manufacturer’s
maintenance program specifies and that the
aircraft will be returned under the terms of the
lease as specified in the return provisions.
This generally means that the aircraft will be
returned with a fresh heavy inspection and the
engines and airframe reserves, if charged) will
be paid up and fully accounted for.
Once the Lessor has agreed to provide the
requested aircraft the lessee will be expected
to inspect the aircraft to ensure that it meets
the delivery conditions as expressed in
the lease document. The lessee needs to
carefully read and understand the documents
return provisions as it is this section of the
lease wherein many disputes arise that can be
very costly for both parties often leading to
claims that wind up being settled in court.
The lessee will be required to deliver “good
funds” to the lessor at the finalization of the
lease. The lessee and his attorneys should
carefully read and understand every paragraph of
the lease document. There is no such thing as
“boiler-plate” in these documents.
The amount of the security deposit and the
collection of reserves generally is determined
by the “exposure” or risk the lessor believes
may be associated with a particular lessee. The
greater the risk, the larger the security
deposit. Risk is determined by the Lessor who
will evaluate the country where his aircraft
will be based, the experience and business
history of the client and the routes his
aircraft will operate on.
In most cases, the lessee will be expected to
fly the aircraft from wherever it may be located
to it’s principal base. The costs to do this as
well as the costs of returning it are up to the
lessee as well as the painting of the aircraft
into his company livery and changing the
interior configuration and placement of his
required cabin and cockpit placards. The
return provisions will generally specify
that the aircraft be re-delivered (at lease
termination) painted in “white-tail” with all
the lessee’s nomenclature and exterior and
interior markings removed.
Before movement, and at the transfer of the
aircraft as specified in the lease document, the
lessee will be expected to place the aircraft
onto his fleet insurance program which must be
underwritten by a Lloyds syndicate and
will name the lessor and all secured parties as
the loss-payees on the hull coverage and as
‘additional insured’ under the liability policy.
Copies of the insurance certificates have to be
provided the lessor in advance of and as a
condition of receiving the aircraft.
Generally, the lessee will arrange with his
staff to have the aircraft inspected by his
national civil aviation authority and phased
onto this national registry ( if necessary)
before the delivery flight. The registry of the
aircraft must match the licenses of the flight
crew. The costs for the inspection trip by the
lessee’s national civil aviation personnel will
be at the accounts of the lessee.
Of course, it needs be mentioned that should the
client not wish to become involved in the
qualifying process described herein, there are
two alternatives. 1) Simply buy the aircraft for
cash in which case, nothing is required except
the money and evidence that the buyer is
approved by the selling entity’s national
government. 2) ACMI: The lessee can simply
wet lease the aircraft. This is a lease
wherein the lessor is another carrier who
provides the aircraft, crew, maintenance and
insurance while the lessee pays for the fuel and
all other considerations.
The lessee in this case, need only pay the round
trip positioning plus one month lease rate in
advance based on an hourly rate times a minimum
number of guaranteed hours. In general, for a
modern airliner, the minimum hours per month is
approximately 250 to 350. There is far less
exposure or risk in the ACMI (wet lease) than in
a dry lease. In the event of a default, the
lessor merely ceases flying the lessee’s routes,
retains the deposit and returns the aircraft to
his home base, thus greatly limiting his
financial losses.
We hope that the above information will be of
interest and provides some indication of the
steps, requirements and alternatives involved in
leasing large commercial aircraft.
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