IATA Aircraft Lease Guidance

Operations
4.2.7 Other Important EoDs
Other EoDs that the Lessee should be specifically aware of include the following:
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A provision detailing that an EoD will occur if at any time during the term, the Lessee’s liabilities exceeds
its assets, should not be accepted by a Lessee. Due to the substantial fluctuation of aircraft values over
time, this would constitute a significant risk of default for the Lessee, especially if the Lessee is a small to
mid-sized company.
Litigation should not be accepted as an EoD, as this can be a common occurrence, and does not
necessarily impact on the Lessee’s performance of its obligations, at least not until a verdict is rendered.
Breach of material covenants is a standard EoD in the industry and relates to the express obligations in
the lease. This would include valid insurance policies, as discussed above, but also redelivery conditions
and transfer of possession to a non-permitted person.
Finally, referring back to the distinction between EoDs resulting in immediate remedies and EoDs with a
grace period attached, the Lessee should be aware that any EoD arising may have specific operational
consequences, even if this EoD has a grace period in which the Lessee may provide a remedy. An
example of this situation would be where subleasing is only permitted when there is no ongoing EoD.
Therefore, if an EoD occurs while the aircraft is on sublease, this would clearly raise some significant
complications. The Lessee should carefully consider the indirect consequences of an EoD arising.
4.3 Sale-and-Leaseback
The “sale-and-leaseback” is a common method of financing aircraft for airlines, and represents one of the
major channels of aircraft procurement for Lessors. Key factors in selecting a sale-and-leaseback transaction
for the airline include:
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Access to off-balance-sheet financing (via operating lease) for new aircraft orders placed by the airline
Ability to generate additional cash by freeing up equity and/or by profit on sale of new or existing aircraft
Transfer of asset residual value risk and end of service remarketing to Lessor
As the name suggests, the “Sale-and-Leaseback” essentially involves two distinct transactions. The
Sale/Purchase transaction followed by an Operating Lease. Whilst the Sale/Purchase transaction will have a
short lifespan, the Operating Lease which follows will provide the ongoing lease framework for the term of
the Lease and will have a greater impact on the airline going forward. Whilst the lawyers and finance teams
will be focused on the “front end” aspects of the Sale/Purchase transaction, it is important for the airline to
pay close attention to the longer term commercial and operational aspects of the Operating Lease for the
reasons discussed more broadly in this paper.
The main difference between the sale-and-leaseback and a “normal operating lease”, particularly in respect
of used aircraft transactions, is the absence of extensive delivery conditions and consequently the delivery
inspection of the aircraft. This introduces a number of challenges for the airline:
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