Tag Archives: Aircraft Repair

Replacement of Parts and Part Pooling

Posted on by

In a perfect world for an aircraft lessor the following rules would apply to each part on a leased aircraft:

Rule 1.  No part should be removed from the aircraft except as required for maintenance of the aircraft and/or the part.

Rule 2.  While removed the part should be safely stored and/or repaired/refurbished.

Rule 3.  No part on the aircraft should be replaced other than because of damage, failure, loss or expiry of that part.

Rule 4.  If a part is to be replaced because of damage, failure, loss or expiry, the part should be promptly replaced with a part of the same manufacturer and model (or a more advanced and compatible model), and upon installation title to the replacement part should vest in lessor free and clear of any liens.

I can hear a number of you saying “uh huh, yeah, that’s right, what’s your point?”

My point is that very few aircraft lease agreements actually contain the first three rules.  Don’t believe me?  Pick up any random lease and check.

Right now I am picking up a lease at random (I really am) and I see the following standard Replacement of Parts clause:

LESSEE, at its own cost and expense, will promptly replace all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or rendered unfit or beyond economical repair for use for any reason. In the ordinary course of maintenance, service, repair, Overhaul or testing, LESSEE may remove any Part provided that LESSEE replaces such Part as promptly as practicable.

The wording in this lease agreement goes on to specify the requirements for the replacement part (Rule 4 above) and to address title transfer issues (also Rule 4 above) and the required timing for replacement (again, Rule 4 above).

But what about the first three rules?  They are not contained in the above quoted language (read it again).  Note especially that in the second sentence it does not say “Only in ordinary course of maintenance . . . ” or “maintenance, service, repair, Overhaul or testing of the Aircraft.”

You may be able to find the first three rules partly covered in other parts of the lease agreement.  For example, the lease agreement Possession section may have a provision prohibiting delivering possession of any part to a third party (though the prohibition in that section is often limited to the aircraft and engines).  The Maintenance section will likely have a clause on repair.  But I bet you didn’t find the first three rules in the Replacement of Parts section.

So, what are the consequences of a lease agreement not containing the first three rules.  Well, the most material and (highly) likely consequence is that parts will be removed from the lessor’s aircraft for use on other aircraft in the lessee’s fleet, with the only requirement usually being that the removed part be replaced with a compliant part “as soon as practical but in any case prior to the last day of the Lease Term”–and that the lessor will not be able to prohibit the use of its parts on other aircraft.  Another possible consequence, theoretically at least, is that good parts can also be swapped out for inferior parts–though most leases have a requirement that the replacement part have a value and utility at least equal to the replaced part.

Let me jump to another issue here and then I’ll come back the issues raised above.

Often during lease negotiations the lessee will say “we need the right to do part pooling,” and when I’m reviewing leases I sometimes run across a “Part Pooling” section in which the lessor gives the lessee broad rights to pool “Parts” from the aircraft with other airlines pursuant to an inter-airline pooling arrangement.  When I see such a part pooling section I wonder how can the lessee engage in inter-airline part pooling and still comply with its separate obligation to replace removed parts “as soon as practical,” vesting title to the replacement part in the lessor.  The two provisions are in conflict.

When pooling comes up in my lease negotiations, my first response is to ask the lessee’s representative what he/she means by “parts pooling.”  Invariably the response is something like “if we need a part from your aircraft to keep another aircraft in our fleet in operation then we will want the right to remove the part from your aircraft.”  Anyone who has been in the aircraft leasing business for more than a few deals knows that this sort of part sharing among aircraft is common.  Lessors don’t like it, but it’s going to happen and it’s unlikely the lessor will ever find out.

I don’t think I have ever heard the following response from a lessee:  “we want the ability to share your aircraft’s parts with other airlines as part of an inter-airline pooling arrangement without any obligation on our part to replace them before return of the aircraft to you.”  I can see a very creditworthy airline taking that position, but unfortunately (for me) those are the kind of airlines I don’t usually deal with.  My experience is that a request to “pool parts” is a pretty narrow request to use parts from a lessor’s aircraft in an “emergency.”  And if that is the case and the lessor is willing accommodate the lessee on this request, then the “part pooling” provision should be narrowly drafted.

I sometimes wonder whether the loose drafting around the removal and replacement of parts (as discussed above) is the result of lessees trying to leave open the possibility of removing parts from the leased aircraft for use on other aircraft in its fleet.  If so, I guess that is OK, but as a lessor’s counsel I would strongly prefer that the four rules above are clearly stated and that any exception for “emergency” use of parts on other aircraft is clearly and narrowly drafted.

Who Bears the Risk of Loss in Value After an Aircraft is Damaged?

Posted on by

Every lessor has horrifying examples of heavy damage to one or more of its aircraft—the tail strike on takeoff, the hard landing, the landing with the landing gear retracted, the exploding grenade perforating the fuselage, the aircraft leaving the runway and sinking in the mud, etc. Whether the damage constitutes a “total loss” of the aircraft for insurance purposes is often clear, and where not clear the lessor, the operator and the underwriters will negotiate to determine whether to attempt repair or declare a total loss. In these negotiations, the underwriters will generally favor repair (because it is cheaper than paying out the aircraft agreed value) and the lessor will favor declaring total loss (because it wants to receive the agreed value, which is usually in excess of the lessor’s book value). The oft quoted full of thumb is that if the expected cost of repair will exceed 75% of agreed value, then the underwriters will declare a total loss.

In those cases where the aircraft is repaired after heavy damage the airframe manufacturer will be involved in the repair planning and often will perform or manage the repair, and the airframe manufacturer will, at least as a practical matter, be the final arbiter of whether the repair was successful—that is, that the aircraft is airworthy and can be returned to service. But even after a successful repair, the aircraft re-sale value and re-lease value will be less than if the aircraft had not suffered the damage in the first place. Whether the values should be less will depend on the damage and the repair, but in the real world aircraft market an aircraft that has had substantial damage will always suffer a loss in re-sale and re-lease values.

Who should bear this loss in value?

The insurers will, correctly, point out that their only obligation is to pay for the repair.

The lessee will, maybe correctly, point out that its only obligations are to repair the aircraft in accordance with the terms of the lease (which usually provide that all repairs will be performed in accordance with the structural repair manual or otherwise as approved by the airframe manufacturer) and return the aircraft in the required return condition.

It’s at this point that the lessor’s lawyers will be closely reviewing the lease documents for a provision putting the burden of the loss in value on the lessee–which in all fairness is where it belongs. The first stops will be the damage repair provisions and return conditions. Maybe the lawyers will find something–it’ll vary lease to lease.

The next stop will be the general indemnity, which in almost all leases will provide that the lessee will indemnify the lessor for “losses” incurred in connection with the “operation” of the aircraft. The lawyers should also carefully review the exceptions to the general indemnity–an exception for “loss in market value” is a not uncommon exception. Even if the general indemnity looks like it applies, the lessee is certain to argue that its only obligation is to repair the damage in accordance with the lease documents’ damage and repair provisions, and these provisions trump the general indemnity–in other words, the lessor shouldn’t be able to make a claim under the general indemnity where the lessee has fully performed under the specific provisions of the lease documents.

The safest approach is to deal with the issue clearly and expressly in the damage and repair provisions, but you can expect some push back from the lessee during the lease negotiations.