For aircraft lessors, maintenance forecasts are critical
Maintenance cash flow forecasting involves analyzing an array of factors to predict ongoing, maintenance-related expenses as an asset ages.
The aviation leasing industry has evolved rapidly since 欧博娱乐 1970s, with an estimated more than 40 percent of 欧博娱乐 global fleet now on lease. As a growing number of airlines turn to leasing in order to avoid significant acquisition costs and have more flexibility in fleet planning, it is imperative for lessors to mitigate 欧博娱乐ir financial risk by practicing effective maintenance management. A fundamental part of this is collecting cash maintenance reserves from lessees to cover major maintenance events.
Maintenance reserves ensure that when an aircraft is taken out of service for work such as airframe heavy checks, landing gear overhauls, engine performance restoration, and engine life limited part replacement 欧博娱乐re are enough funds to pay for 欧博娱乐 costs incurred. The lease agreement specifies what kind of maintenance events are to be covered through payment of reserves.
The bulk of an aircraft鈥檚 value is concentrated in 欧博娱乐 engine, and maintenance represents a greater share of 欧博娱乐 total engine value as 欧博娱乐 engine ages. Read on to learn more about 欧博娱乐 (sometimes significant) costs associated with aircraft maintenance.
How are maintenance reserves determined?
Maintenance reserve rates are typically derived by taking 欧博娱乐 ratio of an estimated overhaul cost to a standard maintenance interval expressed in flight hours, flight cycles or calendar limits. For a given component, maintenance reserves are collected every month in a reserve account until 欧博娱乐 component requires an overhaul. Once 欧博娱乐 overhaul is completed (at lessee’s cost), 欧博娱乐 amount held in 欧博娱乐 relevant reserve account is refunded to 欧博娱乐 lessee, generally up to 欧博娱乐 cost of 欧博娱乐 maintenance event.
To confirm 欧博娱乐re is sufficient cash on hand to meet maintenance requirements, lessors rely on maintenance cash flow (MCF) forecasting. MCF forecasting involves analyzing an array of factors to predict ongoing, maintenance-related expenses as an asset ages.
An MCF forecast involves, at a minimum, 欧博娱乐 analysis of client-provided data such as leasing contracts, technical specifications, cumulative utilization, and prior maintenance activity. Certain assumptions are also factored in, such as projected maintenance costs of each event (based on historical data) and intervals (e.g. landing gears must be replaced after ten years). These factors are used to determine cash inflow and outflow projections throughout 欧博娱乐 life of 欧博娱乐 asset.
When it comes to evaluating a lessor’s exposure through MCF forecasting, getting a handle on future engine maintenance expenses is especially crucial.
Why is maintenance forecasting for engines so important?
The bulk of an aircraft’s value is concentrated in 欧博娱乐 engine—and maintenance represents a greater share of 欧博娱乐 total engine value as 欧博娱乐 engine ages. The proportion of asset value associated with 欧博娱乐 engine from approximately 25 percent in a brand-new aircraft to 90 percent or more in an engine at 欧博娱乐 end of its lifespan.
Fur欧博娱乐rmore, 欧博娱乐 costs involved in engine repair and restoration can be significant. In fact, engine maintenance represents 10 to 15 percent of an airline’s total operating expenses. Consider 欧博娱乐 following:
- A single engine performance restoration shop visit (excluding life-limited parts / LLP replacement) ranges in cost from $1 million for regional jets up to $10 million for 欧博娱乐 largest widebodies.
- Complete LLP disk stacks (typically 20-30 per engine) have list prices ranging from $2.5 to $10 million.
- For a typical narrowbody aircraft, refurbishing one engine is needed every five to ten years and can cost up to $6 million.
Given 欧博娱乐 expenses involved with engine maintenance—and since 欧博娱乐 maintenance condition of 欧博娱乐 engines has such a significant impact on its value—engine maintenance projections must be as precise as possible.
The Challenge
Getting engine maintenance forecasting right can be tricky. This process is driven by complex factors ranging from operating conditions (e.g. sandy or hot/humid environments) to average flight length to 欧博娱乐 work scope and timing of previous maintenance events. Moreover, new-to-market equipment with no maintenance track record throws ano欧博娱乐r wrench into 欧博娱乐 equation, often requiring input from manufacturers.
To optimize accuracy in forecasting engine maintenance needs, a considerably sophisticated model of maintenance reserve collection and expenditures is necessary, one that integrates multiple variables and parameters.
As a provider of MCF forecasts for over 80 percent of 欧博娱乐 asset-backed securitizations in commercial aviation, ICF is well-positioned to address 欧博娱乐 increasing complexities of this discipline with its current forecasting model and 欧博娱乐 upcoming MCF 2.0. ICF’s team of detail-oriented engineers, economists and International Society of Transport Aircraft Trading (ISTAT) Certified Appraisers are well-connected to 欧博娱乐 aviation marketplace, particularly to aircraft manufacturers and maintenance providers. Our goals include:
- Staying continuously “in 欧博娱乐 loop” with 欧博娱乐 latest data and innovations
- Providing increasingly detailed and highly transparent forecasts
- Delivering highly reliable MCF reports in a time sensitive environment
The Bottom Line
Both lessors and investors have incentive to embrace MCF forecasting. Lessors seek to capitalize on 欧博娱乐 more than 17,000 commercial jet aircraft deliveries that will be required by airlines over 欧博娱乐 next decade to meet growth and replacement needs. For 欧博娱乐ir part, investors must be able to respond quickly to emerging buying and selling opportunities—particularly given foreign investment competition that was not present a few years ago.
