IATA Aircraft Lease Guidance
Guidance Material for aircraft leasing Guidance Material for aircraft leasing
Guidance Material and Best Practices for Aircraft Leasespremium. Many lease agreements will provide for a reduction in the agreed hull value during the lease period,and thus the associated premiums for the Lessee would also decrease. The lease will also specify the highestlevel of deductible which may be agreed by Lessee (the deductible being value of damage which must beborne by the Lessee before the hull insurance policy will respond).2.4.2 Liability InsuranceLiability insurance provides coverage for damage to third parties. Specifically, liability insurance providescoverage to protect and indemnify the insured for potential exposure to passenger, cargo or baggage claims,and to third party liability claims including property damage, bodily injury, or death, caused by or arising fromthe insured’s operations.While hull insurance is determined on a commercial basis only, liability insurance is obligatory in accordancewith specific legislation.Article 50 of the Montreal Convention 1999 5 requires that state parties “shall require their carriers to maintainadequate insurance covering their liability” and “may be required by the state party into which it operates tofurnish evidence”. However, the insurance levels required and deemed “adequate” are not specified anyfurther by the Montreal Convention. Therefore, it is up to each Montreal Convention contracting state todetermine what levels of insurance are “adequate” under its national law.Many states have defined their minimum requirements with respect to liability insurance. However, theserequirements vary greatly across the globe, with developed countries typically requiring higher levels ofinsurance.Furthermore, the insurance levels required under national law are based on a calculation mainly taking intoaccount the maximum take-off weight of the aircraft and the number of passengers carried, and finally adefinitive level of Special Drawing Rights 6 . The number of passengers carried is then multiplied by theSpecial Drawing Rights amount, which results in the minimum level of liability insurance consideredmandatory by national law.2.5 Payment and SecurityAircraft lease agreements are typically structured as net leases. The net lease concept means that the Lesseewill, in addition to the agreed rental fee, also pay for the all costs associated with ownership of the aircraftincluding expenses associated with operation and maintenance.5The Montreal Convention 1999, formerly known as the Convention for the Unification of Certain Rules for International Carriage by Air,followed the Warsaw Convention by developing the legal regime for rules relating to international carriage of passengers, baggage andcargo. The Montreal Convention 1999 is applicable to the majority of ICAO member states, including most of the developed aviationcountries. See the ICAO website for more details.6Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International MonetaryFund. Special Drawing Rights are not a currency, but are instead a claim to a currency.10 4 th Edition 2017
Pre-DeliveryThe net lease is often structured with the rental fee provisions as absolute and unconditional, which ensuresthat the payment of the rental fee is an absolute obligation. Therefore, no matter what, the Lessee will alwayshave to pay the rental fee, regardless of any breach of Lessor obligations.The main elements to be considered when dealing with payment and security are the deposit, if applicable,the rental payment, and the supplemental/additional rent (e.g. maintenance reserve payments) or end oflease maintenance cost adjustment mechanism. These payment and security elements are considered infurther detail as follows:2.5.1 Security DepositThe security deposit functions as a protection for any non-payment under the lease agreement. While this istypically targeting non-payment of the rent, the security deposit can also be used by the Lessor to offset othernon-payments (e.g. maintenance reserves, failure to meet delivery conditions etc.). Whilst the level of securityis a matter to be agreed between the Lessor and Lessee, and will be driven by Lessor’s credit assessment ofthe Lessee, it is common market practice for the security deposit to be priced as a two to three times multipleof the monthly basic rent.However, the Lessee is advised to consider the level of the security deposit carefully in conjunction with anyother payments, such as the commitment fee (discussed in 2.5.2). A balance must be achieved, and it isadvisable that the Lessee should start from a basis of a total payment of up to three months of the rental fee,and no commitment fee. However, the level of the security deposit is very much subject to a commercialnegotiation, as is who will be the beneficiary of interest accrued on such a security deposit (although this istypically for the benefit of the Lessor).The security deposit is usually paid by the Lessee in staggered payments. A portion of the security deposit ispaid within a few days of execution of the LOI, with the rest becoming due on signature of the executiondocument or lease agreement.2.5.2 Commitment FeeThe commitment fee is paid by the Lessee as a consideration for the Lessor to take the aircraft off the market.In certain jurisdictions any security deposit may be characterized as the property of the Lessee and subject topotential claw back in the event of Lessee bankruptcy, undermining the primary purpose of the securitydeposit. In an effort to address this risk, Lessors will generally seek to characterize the security deposit as theabsolute property of Lessor, and in some leases will re-name the deposit as a “commitment fee” or anotherform of supplemental rent.It is important for the Lessee to ensure that it is comfortable with the lease provisions relating to the return ofthe security deposit (or commitment fee) following lease expiry. Some leases will provide for the return of thedeposit upon satisfaction of all Lessee obligations, which could include actual and contingent obligations.This can be problematic where continuing indemnity and insurance obligations might mean that release of4 th Edition 2017 11
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- Page 3 and 4: Table of ContentsList of Figures ..
- Page 5 and 6: Table of Contents4.4 Engine Power b
- Page 7 and 8: Table of ContentsAnnex X: LLP Back-
- Page 9 and 10: List of FiguresFigure 1. Document S
- Page 11 and 12: List of TablesTable 1. Different Ty
- Page 13 and 14: AbbreviationsACACMIADAIRAMCAMMAMOCA
- Page 15 and 16: AbbreviationsIPCLDNDLLPLOCLOILOPALR
- Page 17 and 18: ScopeIATA’s ‘Guidance Material
- Page 19 and 20: IntroductionIATA recommends a proce
- Page 21 and 22: Section 1—Background1Background2P
- Page 23 and 24: Backgrounddetermined period. As a r
- Page 25 and 26: Backgroundthe repair is within SRM
- Page 27 and 28: Pre-Deliveryin certain circumstance
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- Page 33 and 34: Pre-Delivery●●Fixed costFlexibl
- Page 35 and 36: Pre-Deliveryreserves rates depends
- Page 37 and 38: Pre-DeliveryAs of July 2015, sixty-
- Page 39 and 40: Deliveryredelivery conditions of th
- Page 41 and 42: DeliveryOther items, such as wheels
- Page 43 and 44: Deliverymodification and without an
- Page 45 and 46: Deliveryand registration process in
- Page 47 and 48: Deliveryimportant, as the continuou
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- Page 55 and 56: Deliveryimporting states recognize
- Page 57 and 58: DeliveryIn Europe, under EASA rules
- Page 59 and 60: Deliveryspecial procedures, phraseo
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- Page 63 and 64: Section 4—Operations1Background2P
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Guidance Material and Best Practices for Aircraft Leases
premium. Many lease agreements will provide for a reduction in the agreed hull value during the lease period,
and thus the associated premiums for the Lessee would also decrease. The lease will also specify the highest
level of deductible which may be agreed by Lessee (the deductible being value of damage which must be
borne by the Lessee before the hull insurance policy will respond).
2.4.2 Liability Insurance
Liability insurance provides coverage for damage to third parties. Specifically, liability insurance provides
coverage to protect and indemnify the insured for potential exposure to passenger, cargo or baggage claims,
and to third party liability claims including property damage, bodily injury, or death, caused by or arising from
the insured’s operations.
While hull insurance is determined on a commercial basis only, liability insurance is obligatory in accordance
with specific legislation.
Article 50 of the Montreal Convention 1999 5 requires that state parties “shall require their carriers to maintain
adequate insurance covering their liability” and “may be required by the state party into which it operates to
furnish evidence”. However, the insurance levels required and deemed “adequate” are not specified any
further by the Montreal Convention. Therefore, it is up to each Montreal Convention contracting state to
determine what levels of insurance are “adequate” under its national law.
Many states have defined their minimum requirements with respect to liability insurance. However, these
requirements vary greatly across the globe, with developed countries typically requiring higher levels of
insurance.
Furthermore, the insurance levels required under national law are based on a calculation mainly taking into
account the maximum take-off weight of the aircraft and the number of passengers carried, and finally a
definitive level of Special Drawing Rights 6 . The number of passengers carried is then multiplied by the
Special Drawing Rights amount, which results in the minimum level of liability insurance considered
mandatory by national law.
2.5 Payment and Security
Aircraft lease agreements are typically structured as net leases. The net lease concept means that the Lessee
will, in addition to the agreed rental fee, also pay for the all costs associated with ownership of the aircraft
including expenses associated with operation and maintenance.
5
The Montreal Convention 1999, formerly known as the Convention for the Unification of Certain Rules for International Carriage by Air,
followed the Warsaw Convention by developing the legal regime for rules relating to international carriage of passengers, baggage and
cargo. The Montreal Convention 1999 is applicable to the majority of ICAO member states, including most of the developed aviation
countries. See the ICAO website for more details.
6
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary
Fund. Special Drawing Rights are not a currency, but are instead a claim to a currency.
10 4 th Edition 2017
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