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.