IATA Aircraft Lease Guidance

Operations
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Reduced flexibility for airline to manage its own fleet regarding work scope and removal planning
High risk of OEM monopoly in the aftermarket and reduced competition
Pushing PMA / DER out of the aftermarket, maintenance cost becomes 100% under control of the OEM
4.4.1 Payment Options
Historically, most all-inclusive OEM agreements have been power by the hour type agreements. Such
agreements allow the airline to spread out engine maintenance cost over the entire operation of the engines
instead of having expected or unexpected cash expenditure peaks when shop visits actually occur.
However, such agreements can result in the airline paying both the OEM and the Lessor for engine
maintenance, and in discussions at the end of the agreement as to which party retains the available funds.
Options to address these issues with an OEM maintenance contract:
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If the airline insists on having a power by the hour then it is recommended to start discussions with the
OEM and the Lessor at an early stage in order to agree on a tripartite before the aircraft is delivered to
the airline. The tripartite must allow the airline to contribute towards just one party and it must include a
mechanism to correctly distribute the funds remaining at the end of the agreement. It must be noted that
not all Lessors are keen on such tripartite agreements and airlines should plan for discussions well in
advance so that other options can be looked at in case the tripartite is not an option. Some engine OEMs
have started offering a new set of service agreements to accommodate tripartite agreements such as, for
example; Rolls-Royce OPERA, CFM PML and IAE V-secure. The airline should carefully review the
redelivery conditions of any relevant leases and, if necessary, budget for shop visits that may be required
to meet redelivery conditions that are not covered by the agreement.
It is possible to agree to a more flexible agreement with the OEM which includes different payment
options. The airline can elect to keep a power by the hour rate for repair shop visits only (also referred to
as PAYG (Pay As You Go), EFH (Engine Flight Hour) or PBH (Power By the Hour) rates) and in addition
pay for performance restoration type shop visits when they actually occur, based on FH rates (also
referred to as PASV (Pay At Shop Visit), PPE (Pay Per Event) or restored rates) or based on a FP (Fixed
Price) or NTE (Not To Exceed). This option largely solves the issues of double payment and funds
remaining at end of agreement.
No double payment is required and the airline has better control over payments to the OEM and claiming
back reserves from the Lessor for performance restoration shop visits. The reserves only cover
performance restoration shop visits and, if managed properly, these can be claimed back before or at the
time payment to the OEM is required.
The funds paid monthly to the OEM for unscheduled repair shop visits will stay with the OEM. These
funds will be minor compared to the funds required for performance restoration shop visits and are in
effect an insurance premium that the airline elects to pay. These are unrelated to Lessor
payments/contributions and could even be removed from the agreement if the airline feels comfortable
enough with the engine reliability/design.
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