Available online at www.sciencedirect.

com
Available online at www.sciencedirect.com
ScienceDirect
ScienceDirect
Available online at www.sciencedirect.com
Available online at www.sciencedirect.com
ScienceDirect
Transportation Research Procedia 00 (2019) 000–000
Transportation Research Procedia 00 (2019) 000–000 www.elsevier.com/locate/procedia
ScienceDirect www.elsevier.com/locate/procedia
Transportation Research Procedia 00 (2019) 000–000
Transportation Research Procedia 56 (2021) 110–117 www.elsevier.com/locate/procedia

1st International Conference on Aviation Future: Challenge and Solution (AFCS 2020)
1st International Conference on Aviation Future: Challenge and Solution (AFCS 2020)
Aircraft
1st International leasing,
Conference a challenge
on Aviation sinceandthe
Future: Challenge 70s (AFCS 2020)
Solution
Aircraft leasing, a challenge since the 70s
AircraftGilles van Hövell
leasing,
Gilles
tot Westervlier
a challenge
van Hövell since** the 70s
tot Westervlier
Aviation Independent Consulting
Gilles van Hövell
Aviation tot Consulting
Independent
The Westervlier *
Netherlands
The Netherlands
Aviation Independent Consulting
Abstract The Netherlands
Abstract
Aircraft leasing has rapidly developed and expanded over the last 50 years. Today more than 40% of all commercial
Abstract
Aircraft
aircraft are leasing
subject has rapidly developed
to operating leases. and expanded over the last 50 years. Today more than 40% of all commercial
aircraft are subject to operating
Aircraft leasing is a complicated leases.business with many interesting aspects. In order to be successful as a stakeholder
Aircraft
Aircraft leasing
leasing has
is a rapidly developed
complicated and with
business expanded
many over the last aspects.
interesting 50 years.InToday
ordermore
to be than 40% ofasalla commercial
successful stakeholder
it is important to know the basics and the principals of aircraft leasing.
aircraft are
it isOperating subject
importantleases to
to know operating
the basicsleases.
and the principals of aircraft leasing.
are different comparing with financial leases. The importance of operating leases is clear when
Aircraft leasing isare
a complicated business withwith many interesting aspects. In orderoftooperating
be successful as is
a stakeholder
weOperating
look to theleases
benefits different
and comparing
the market developments. financial leases.is The
This paper importance
focusing on the aircraft operating leases clear when
leases.
it is
weRiskimportant
look istoathe to know
benefits the
and basics
the and
market the principals
developments. of aircraft
This paperleasing.
is focusing on the aircraft operating leases.
major aspect of aircraft leasing. The international Cape Town Convention reduces this risk and provides
Operating
Risk leasesaspect
is a major are different comparing withinternational
financial leases. CapeThe importance of operating leases
riskisand
clear when
more security, specificallyoffor aircraft
the assetleasing.
owners.The Town Convention reduces this provides
we
more look to the
security, benefits and
specifically the market developments. This paper is focusing on the aircraft operating leases.
Aircraft operating leasesforhave
the asset
their owners.
life cycle. The start, operation and lease-return are the major phases of this
Risk is a operating
Aircraft major aspect of aircraft
leases have leasing.
their The international
life phase
cycle. The Cape Town andConvention reduces this riskphases
and provides
cycle. Knowing the main issues for every in thestart,
cycleoperation lease-return
and understanding areofthe
the role themajor
different players of this
is
more
cycle. security,
Knowing specifically
the main for the
issues asset
for owners.
every phase in the cycle and understanding the role of the different players is
important. For operating leases, the maintenance reserves form a very specific part of the lease agreement and for
Aircraft For
important. operating leases
operating havethe
leases, their life cycle. reserves
maintenance The start,form operation
a very and lease-return
specific part of are
the the
leasemajor phasesand
agreement of this
for
lessors and lessees to be negotiated in detail because of the financial impact.
cycle.
lessors Knowing
andconditionsthetomain
lessees issues forinevery
be negotiated detail phase
becausein the
of thecycle and understanding the role of the different players is
Return can cause severe disputes between thefinancial
lessor andimpact.
lessee. It is really important for all parties to
important.
Return For operating
conditions leases,
can causeand the
severe maintenance
disputeseven reserves
between form
the lessor a very specific
and lessee. part of the lease agreement and for
know the different conditions in practice the very deep details. Part It
ofisthese
really important
conditions for allthe
forms parties to
aircraft
lessors
know and
the lessees
different to be negotiated
conditions and in
in detail
practice because
even of
the the
very financial
deep impact.
details. Part of these conditions forms the aircraft
documentation. Documentation belongs to the asset and is especially required for approving the airworthy condition.
Return conditions can cause belongs
documentation. severe disputes betweenisthe lessor and lessee.for
It is really important for allcondition.
parties to
DeregistrationDocumentation
and re-registration form to the
theasset
finaland step inespecially required
the operating lease approving the airworthy
cycle. Differences in international
know the different
Deregistration conditions and
and re-registration in practice
formfor even
theanfinal the very deep
steptransition details.
in the operating Part of these conditions forms the aircraft
standards form sometimes an extra burden aircraft to a new lease cycle. Differences in international
jurisdiction.
documentation.
standards Documentation
form sometimes belongs to the asset and is especially required for approving the airworthy condition.
Main challenges in the annearextra burden
future for an aircraft
are further transition
harmonization oftostandards
a new jurisdiction.
and regulations for the aircraft leasing
Deregistration
Main challenges andin re-registration
the near future form
are the final
further step in the of
harmonization operating
standardslease
andcycle. Differences
regulations the in international
business. This may also help to improve efficiencies and the cooperation between the differentfor aircraft
stakeholders. leasing
standards form sometimes an extra burden for an aircraft transition to a new jurisdiction.
business. This may also help to improve efficiencies and the cooperation between the different stakeholders.
© 2021 The
MainThe Authors. Published
challenges in the near by ELSEVIER B.V. harmonization of standards and regulations for the aircraft leasing
© 2020
This Authors.
is an This
open access Published
article by future
under Elsevier are
B.V.further
the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
business.
© 2020
This The
is an may
Authors.
open also help
accessPublished to improve
by Elsevier
article under efficiencies
B.V.
the CC BY-NC-ND and the
license cooperation between the different stakeholders.
(http://creativecommons.org/licenses/by-nc-nd/4.0/)
Peer-review under responsibility of the scientific committee of the 1st International Conference on Aviation Future: Challenge
This is an open access
* Corresponding
and Solution author.article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Tel.: +31(0)651449902
©*2020 The Authors.
Corresponding
E-mail address: Published by Elsevier B.V.
[email protected]
author. Tel.: +31(0)651449902
ThisE-mail
is an address:
open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
[email protected]
* Corresponding
Peer-review under author. Tel.: +31(0)651449902
responsibility of the scientific committee of the 1st International Conference on Aviation Future: Challenge
E-mail
Peer-review
and Solution [email protected]
address: responsibility of the scientific committee of the 1st International Conference on Aviation Future: Challenge
and Solution
Keywords: aircraft operating lease; aircraft financial lease; maintenance reserves; Cape Town Convention; IFRS16; GATS;
Peer-review
Keywords: under
aircraft responsibility
operating of thefinancial
lease; aircraft scientific committee
lease; of the
maintenance 1st International
reserves; ConferenceIFRS16;
Cape Town Convention; on Aviation
GATS;Future: Challenge
and Solution
2352-1465 aircraft
Keywords: © 2020 operating lease;
The Authors. aircraft financial
Published lease;
by Elsevier B.V.maintenance reserves; Cape Town Convention; IFRS16; GATS;
2352-1465
This © 2020
is an open Thearticle
access Authors. Published
under by Elsevier B.V.
the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Peer-review under
This is an open responsibility
access of the scientific
article under CC BY-NC-NDcommittee of the
license 1st International Conference on Aviation Future: Challenge and Solution
(http://creativecommons.org/licenses/by-nc-nd/4.0/)
2352-1465
Peer-review©under
2020responsibility
The Authors. ofPublished by Elsevier
the scientific B.V.of the 1st International Conference on Aviation Future: Challenge and Solution
committee
2352-1465
This © 2021
is an open The
access Authors.
article Published
under the by ELSEVIER
CC BY-NC-ND B.V.
license (http://creativecommons.org/licenses/by-nc-nd/4.0/)
This is an open
Peer-review underaccess article of
responsibility under the CC BY-NC-ND
the scientific committee oflicense (http://creativecommons.org/licenses/by-nc-nd/4.0/)
the 1st International Conference on Aviation Future: Challenge and Solution
Peer-review under responsibility of the scientific committee of the 1st International Conference on Aviation Future: Challenge
and Solution
10.1016/j.trpro.2021.09.013
 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117 111
2 Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000

1. Introduction

Aircraft leasing started in the early 1970s and is a still rapidly growing business.
The growth of leasing can be attributed to a combination of practicality and efficiency: leasing facilitates the
efficient use and redeployment of aircraft, regardless of age, size, type or location. It forms an attractive source of
financing and/or supply of aircraft in a capital-intensive industry, while providing operational and fleet planning
flexibility to operators. It also provides financiers and investors with an opportunity to secure lending or investment
in the aviation industry against a diversified portfolio of aircraft equipment.
Aircraft leasing is a very complicated business. In order to become successful as a stakeholder it is important to
know the basics and the principals of aircraft leasing.
Operating leases are different comparing with financial leases. The difference will be explained; however, the focus
will be on operating leases as they form the major part of the aircraft leasing business.
Risk is a major aspects of aircraft leasing. The international Cape Town Convention has been developed, launched
and now ratified by many countries in order to reduce the risk related to asset ownership.
Aircraft operating leases have their life cycle. As participant you have to be aware of the main issues for every part
in the cycle and you have to understand the role of the different players. At the start, during the operation and at the
end-of-lease, major issues need the right attention.
For operating leases, the maintenance reserves form a major part of the lease agreement and mostly a big issue for
negotiation between lessors and lessees.
Return conditions can cause severe disputes between the lessor and lessee. Therefore, it is very important to know
the different conditions and in practice even the very deep details. Aircraft documentation forms a substantial part of
the return conditions, specifically as it is used to proof the airworthiness of the aircraft and the value of the asset.
Deregistration and re-registration form the final step in the operating lease cycle. Discrepancies between different
national standards require sometimes extra efforts when transitioning an aircraft from one state to another state.
This paper is addressing some challenges and developments for the near future.

2. Some basics of aircraft leasing

2.1. Operating versus financial leases

For the aviation industry the core lease types are operating leases and financial (or capital) leases.
In an operating lease, the leasing company, referred to as the lessor, purchases and retains legal ownership of the
aircraft throughout the lease period. The lessee (the airline) has complete use of the aircraft, maintains and ensures the
aircraft, and makes lease payments, also called rental payments, to the lessor for the use of the aircraft over a fixed
period of time. At the end of the lease term the aircraft must meet certain minimum return conditions or otherwise the
lessee has to pay extra lease charges or penalties.
With an operating lease the lessor (owner) takes most of the risk on aircraft value. The lessee just hands the keys
to the lessor at the end of the term and walks away if the aircraft is in compliance with the lease “return conditions”.
The lessor takes the risk that the market for used aircraft has changed since the beginning of the lease.
Financial leases allow the lessee to use an aircraft over a certain period and may include the right to purchase the
aircraft at the expiration of the lease term or even to become automatically owner at the expiration of the lease.
This paper is focusing on operating leases as they form the major part of the aircraft leasing business 1.

In order to obtain an aircraft under an operating lease, an operator negotiates a lease agreement that usually includes
some form of security deposit. The security deposit paid is a heavily negotiated aspect of the lease transaction. Security
deposits can range in amount, normally related to months’ worth of lease rental payments.

1
Leases between different operators are specified as dry-, wet- and damp-leases. Dry-lease is without crew, wet-lease is with crew and damp-
lease is only with cockpit crew. Aircraft leases between operators are out of the scope of this paper.
112 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117
Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000 3

An attractive aspect of operating leasing is that you need only a small fraction of the cash or financing to obtain an
aircraft comparing to purchasing the aircraft. Additional flexibility in operating leases may include lease extension
options, early termination options, options to roll over into other aircraft types and purchase options.
After the lease rate itself the maintenance and return conditions are the most heavily negotiated sections of an
operating lease, simply because there are millions of dollars at stake for each aircraft.
In the past the operating lease had the advantage of so-called “company’s off-balance sheet” financing for
commercial aircraft. Because the lessee simply rents the aircraft and ownership stays with the lessor, the lessee does
not show the aircraft as an asset on its balance sheet, nor does it record a liability on its balance sheet for the lease
payments. This has changed since January 1st 2019, when the International Financial Reporting Standard (IFRS) 16
became effective for annual reporting2.
Often operators enter into purchase contracts with manufacturers and then assign the ownership right to the lessor
and lease the aircraft back from such lessor under either an operating lease or a financial lease. The advantage of these
sale-and-leaseback (SLB) deals is that the operator can fully specify and customize the aircraft. SLB is one of the
oldest forms of aircraft sales and finance. The SLB deals are also used by airlines to create cash on a short notice.

2.2. Some principles and advantages of aircraft leasing

There is a basic separation between ownership (lessor/financier) and operation by the lessee. Operational
responsibility and risk reside with the lessee, who is best positioned to minimize and manage such responsibilities and
risks. Lessors are financial service providers and have no operational control of the aircraft during the lease. Lessors
have no capacity to continuously monitor and ensure full compliance with aviation laws and regulations that govern
the operation of aircraft. The operator is liable for loss or damage to passengers or third parties on account of
operational risk.
Efficient redeployment of aircraft forms another principle. The basic economics of the leasing industry assume
continuous use of aircraft which in practical terms means the ability to promptly redeploy aircraft after the term of a
lease or in case of an early termination.
Leasing contracts are complex instruments entered into by sophisticated parties, usually represented by legal
advisers, in a competitive marketplace. The lease agreement and related contracts set out the respective rights and
obligations of the parties. It is essential that these rights and obligations are enforceable on the terms set out in such
contracts so that the allocation of risk is in line with what has been agreed between and is expected by the parties.
Greater certainty in respect of risk allocation creates greater efficiency in the aircraft leasing market and more
attractive pricing for aircraft operators.

An operator with a small taxable income may not be able to use the tax depreciation allowances on the purchase of
aircraft. However, if a financial company buys the aircraft and leases, it to the operator, the financial company can
gain the tax allowances, thus enabling the lessee to get an attractive rental charge.

Risks related to aircraft leasing are always an issue of major concern. For lessors the value and unemployment of
the assets form a risk as well as the insolvability of the lessee. Leases placed in some countries require a high deposit
security like 3-4 times month rental placements. In order to protect against defaulting lessees, a lessee has to sign a
de-registration agreement. In case when a customer would become bankrupt or defaults on lease payments, the lessor
can approach the local aviation authority and de-register the aircraft making it possible for the lessor to continue
operating the aircraft and making it easier to remove the aircraft from the lessee’s country.

2
IFRS 16 is issued under the auspices of the International Accounting Standard Board (IASB). The objective of this standard is to provide
much-needed transparency on companies’ lease assets and liabilities. Reference https://www.ifrs.org.
 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117 113
4 Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000

2.3. The aircraft leasing market and the increase of aircraft operating leases

Since its start in the early 1970s the aircraft leasing business has grown tremendously and nowadays the aircraft
leasing represents more than 40 percent of in-service commercial aircraft ownership, referring among others to Boeing
Current Aircraft Finance Market Outlook 20193.
Lessors continue to have access to liquidity and the capital markets. This market segment is successful and today,
there are more than 150 leasing companies worldwide according to this Boeing report.
The top two aircraft operating lessors, based on the value of their fleet, are AerCap and GE Capital Aviation
Services (GECAS). AerCap is now acquiring GECAS and the resultant company will have more than 2,000 aircraft
out of roughly 12,000 leased aircraft globally4.
The global aircraft leasing market size was estimated to be worth USD 290.7 billion in 2019 according to Polaris
Market Research5.
“COVID-19 is causing the greatest disruption that aviation has ever seen. However, it has always been a cyclical
sector and it will recover. The key question is how long that recovery will take,”, said Joe O’Mara, Head of Aviation
Finance of KPMG Ireland6.
An advantage of aircraft leasing companies is that they can place bulk orders and can negotiate discounts from the
manufacturer. As a result, their profit margins will be much higher.

2.4. The Cape Town Convention

The Convention on international interests in Mobile Equipment was concluded in Cape Town on 16 November
2001, as was the Protocol on matters specific to aircraft equipment7. The Convention and the Aircraft Protocol were
adopted under the joint auspices of the International Civil Aviation Organization (ICAO) and the International Institute
for the Unification of Private Law (UNIDROIT). The Convention and the Aircraft Protocol are used as one instrument
and also called Cape Town Treaty.
According UNIDROIT more than 80 states have now ratified the Convention and it is becoming one of the most
successful commercial treaties. The purpose of the Convention is the creation of a framework, facilitating the efficient
financing and leasing of aircraft through harmonised international rules, creating priority and recognition and
enforcement of property and security rights in aircraft equipment.
The Convention aims to facilitate the acquisition, leasing, and financing of aircraft equipment through the creation
of international interests which can be registered and are recognised in all contracting states. It provides creditors,
such as lessors and financiers, with a range of basic remedies in instances of default, including advance relief, to allow
the prompt recovery of aircraft equipment. These aims are designed to give lessors and financiers confidence in their
assessment of the risks involved with entry into aircraft leasing and financing transactions, thereby reducing the cost
to the advantage of all interested parties. This certainty and harmonisation of international rules, familiar to lessors
and financiers, particular assists the risk assessment in less known markets.
The Cape Town Convention as a major international treaty, was expressly designed to reduce transaction risks. It
reduces such risks by providing clear and precise rules.
Including in that set of remedies are the de-registration and export of an aircraft. The former is required given the
provisions of the Chicago Convention of 1944, which prevent the nationality registration of an aircraft in more than
one jurisdiction at a time, referring to ICAO Annex 7, Aircraft Nationality and Registration Marks8. Without de-
registration, the other remedies are ineffective, as an aircraft cannot be redeployed, which is fundamental to the Cape
Town Convention and to the very concept of leasing and secured credit.

3
Boeing Current Aircraft Finance Market outlook 2019, http://www.boeing.com/company/key-orgs
4
Aercap Media, March 10, 2021, http://aercap.com
5
Polaris Market Research Report, February 2020
6
KPMG Ireland, Insights, What’s next for aircraft leasing?, 30 November 2020
7
Referring to https://www.unidroit.org/status-2001capetown.
8
Annex 7 to the Convention on International Civil Aviation on Aircraft Nationality and Registration Marks, Sixth Edition, July 2012
114 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117
Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000 5

3. Aircraft lease cycle

3.1. Start – operation – lease return

The lease process starts with the evaluation of an aircraft. For a good start a multidisciplinary team is highly
recommended consisting of technical, financial and legal specialists.
The obligations at a lease return must be understood very well prior to signing the lease agreement. The day the
lease is signed is one day too late to understand the contractual obligations, and could lead to an expensive surprise if
the full implications of the lease return conditions are underestimated and not understood.
During the operation the lessee as operator has to earn money in order to pay for instance the lease fees. It is good
practice to handle the principle of “the right of quiet enjoyment”. This means that the lessor shall not interfere with
the use of the aircraft by the lessee. However, the lessor has to monitor the asset value. This value can be influenced
by many factors, whereas the physical condition and the paperwork are the main factors. For monitoring the lessors
use often quarterly or even monthly reports.

A lease return, also called a redelivery, requires a detailed planning and an exercise in risk management. This
exercise is all too often left until it is too late to take what could have been the most cost-effective option. Many
airlines still think the return process starts at the moment the aircraft stops its commercial operations. This is a mistake
that can cost millions to the airline. Preparing well in advance for the lease return is absolutely a must.
It is customary for the lessors rather than for the lessees to prepare the lease return documents.

Understanding the leasing process and the methodology behind the lease agreements is of utmost importance.
Any delay in meeting the redelivery conditions will most often mean that the lease continues to accrue and usually
at an increased rate.

Return conditions are the final act of the aircraft lease cycle. These conditions are in many cases the subject of much
debate and arguments. It may even lead to some extremely stressful circumstances. Having a new lessee lined up
before an aircraft is redelivered may help to make progress.

3.2. Different players

During the lease different “players” are participating and they are engaged in the very different activities.
Three main “players” form what often is called the “tricky triangle”: the lessor, the lessee and the Maintenance,
Repair and Overhaul organization (MRO).
The lessor gets usually support from several different consultants, specifically if an aircraft is transferred from one
lessee directly to the other (new) lessee. The transfer can be very complicated, dependent on the kind of lessees and
their respective aviation authorities. The authorities are responsible for the oversight during the operation and play a
major role during the de- and re-registration activities.

The lessee has all the responsibilities during the operation of the aircraft. In assuring the airworthiness of the aircraft
the operator has contact with the aviation authorities on a regular basis. Internal expertise is usually available at the
lessee for these activities and also for the redelivery.

The MRO is playing a major role in keeping the aircraft and its equipment in an airworthy condition. The MRO
can be part of the airline or it can function as a service provider. Formally there is no relationship between the MRO
and lessor. There may be an agreement to provide data to the lessor by the MRO since the lessor needs to monitor the
value of its assets as stated before.

The lessor, the lessee and the MRO are all heavily involved in the lease return process. As the lessee is ultimately
responsible to meet the return conditions, the coordination of the return activities lays normally with the lessee.
 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117 115
6 Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000

3.3. Maintenance reserves

Maintenance reserves are formed by regular payments made by the lessee to the lessor to accrue for those
maintenance events that require significant aircraft grounding time and for certain major component overhauls. They
provide a buffer of security over the course of the lease.
Main objective of the maintenance reserves is to protect the asset value. Maintenance reserve funds usually cover
heavy airframe checks, engine overhaul and replacement of life-limited parts, auxiliary power unit overhaul and
landing gear overhauls. Collection and allocation mechanisms should be in place as well as regular utilization updates
by the lessee. A reimbursement mechanism is also needed for pay out after maintenance events. Maintenance reserves
are not applicable for repairs and maintenance aircraft upgrades, such as cabin refurbishments.
Payment of maintenance reserves are calculated on flight hour, flight cycle9 and/or calendar basis and are usually
paid monthly. Rates are pre-agreed and payment is in cash or by letter of credit. Such maintenance reserves provide
the lessor with additional security that the airline will have the funds available for major maintenance work.
Any money left in these maintenance funds usually stays with the lessor at the end of the lease. Airlines believe
and, in many cases argue with the lessor that they are overpaying their maintenance reserves.

4. Aircraft lease return and redelivery conditions

4.1. Specifications & conditions at re-delivery

Return conditions contractually define the conditions an asset must be in to accomplish a successful redelivery.
These contractual requirements specify the physical condition of the asset, and the detailed paperwork, required from
the lessee and its maintenance provider to cover the status of the asset during the lease.
Major return conditions are for example:
• The aircraft airworthiness,
• The technical status of the aircraft and its position in its maintenance cycle,
• The technical status of the engines, landing gears, auxiliary power unit (APU) and thrust reversers as they form a
substantial part of the total value of the asset,
• Requirements regarding life time of the aircraft, engines and components.
• General conditions defined as minimum standards for specific areas of the aircraft such as the cabin.
The return conditions applicable to the aircraft at lease expiry are of high importance and it is often said that
profitability in operating leases can be made or lost in the return conditions of the lease. Generally speaking, in addition
to meeting all the airworthiness requirements of the aviation authority under which the airline operates, the aircraft
must usually conform to one of the two broadly accepted standards, the U.S. Federal Aviation Administration (FAA)
or the European Union Aviation Safety Agency (EASA) standard.
Delays in re-deliveries are often caused by underestimated efforts for instance for unscheduled repairs and as
follow-up on engine borescope inspections. Normally engines operate to on-condition programs, which means that
they may operate as long as they stay within well specified operating limits. During normal operations there is no need
for full front-to-back borescope inspections. Performing such a borescope inspection during a lease return may result
in finding cracks out of limits, which may have to be repaired.
A situation such as the engine having insufficient life-limited part (LLP)10 life remaining should never be a reason
for failing to meet the return conditions, as this should be very predictable, and hence avoidable.
Redelivery conditions should be well defined. Return condition language has evolved significantly. Lessons have
been learned from past disputes because of inconclusive or unfavorable wording. Wordings like an engine “shop visit”

9
Flight Cycle means the complete running of an engine from start through any condition of flight and ending at engine shutdown. A “touch
and go landing” used during pilot training shall be considered as a “Flight Cycle.”
10
A life-limited part means any part for which a mandatory replacement limit is specified in the type design, the Instructions for Continued
Airworthiness, or the maintenance manual. LLP’s are for example engine shafts and disks.
116 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117
Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000 7

versus an “off-wing performance restoration’, an “acceptance test flight” versus a “demonstration flight” make quite
a difference. “According industry standards” is a vague statement and subject for discussions at lease-end.
In some airlines there is not enough discussion between the technical, legal and finance staff. Technical people
sometimes lack to realize how important it will be for the future to have everything well defined. Legal and finance
staff sometimes lack the knowledge of how complex this can be.
For the lessor it is important that the aircraft can be re-marketed at the end of the lease. The aircraft and the
maintenance records will then have to meet the needs of a new lessee.

4.2. The essence of aircraft documentation and technical records

With aircraft documentation the operator can show the continuing airworthiness of the aircraft. Every maintenance
activity has to be recorded in order to proof compliance with all airworthiness requirements.
Asset management needs documentation to relate the aircraft to the maintenance program and to proof compliance
to it. Modifications and last but not least LLP’s need to be well documented. LLPs with insufficient documentation
should be considered as not airworthy and hence without residual value.
In general, the aircraft documentation consists of status data, compliance data, proof of compliance data and other
data such as historical data and manuals. Examples of status data are overviews of airworthiness directives (AD’s)
and components. Examples of compliance data are detailed overviews for AD’s and modifications, including
engineering data and release to service data and burn certificates for cabin materials. Proof of compliance data consists
of detailed maintenance records like “dirty finger prints” and approved maintenance data.
Requirements for aircraft documentation and technical records are usually based on aviation regulations. The data
belongs to the aircraft and hence to the owner.
Records for older aircraft are highly susceptible to missing paper maintenance documents and inaccuracies.
For critical parts like LLP’s the issue of “back to birth traceability” 11 can cause many headaches. Without
supporting MRO documents components need to be pulled and “re-exchanged”, repairs to be repeated, resulting in
unplanned expenses and mostly delaying the lease-return process.
Engines can generate thousands of pages of documents over their service life. The volume can be a challenge, but
beyond that records have no value if they are not legible. A few bad scans in a digital package can pose a real problem.

4.3. Export certificate and de-registration

An aircraft has to obtain a registration and has to be registered in a national aircraft register, referring to the ICAO
Annex 7 Aircraft Nationality and Registration Marks as mentioned before. The ultimate responsibility for continued
airworthiness is assigned in ICAO Annex 8 Airworthiness of Aircraft12 to the state of design. The program to achieve
continuing airworthiness is a matter for the state of registry, which is issuing the certificate of airworthiness. The
continuing airworthiness authority may be delegated by the state of registry to the state of the operator 13.
The primary objective of aviation industry regulators is safety. Each state has to ensure that the required safety
standards are met by the operators. While in general international standards exist on ICAO level, lack of harmonisation
exists on a regulatory level. This results often in duplication and overlap of work and produces substantial cost
inefficiencies, specifically in processing an aircraft transition.

Quite some aircraft are re-registered in different countries several times during their useful lives, which means
there is a need for efficient cross-border transferability rules. Regulatory overlap and duplication among national
systems should be minimised and eventually eliminated. So should import regulations for aircraft be based on risk
assesments and not on aircraft age.

11
A paper trail back to when the aircraft was delivered.
12
Annex 8 to the Convention on International civil Aviation Airworthiness of Aircraft, Eleventh Edition July 2010
13
Referring Article 83bis of the Convention on International Civil Aviation
 Gilles van Hövell tot Westervlier et al. / Transportation Research Procedia 56 (2021) 110–117 117
8 Gilles van Hövell tot Westervlier/ Transportation Research Procedia 00 (2019) 000–000

5. Some challenges and future developments

This article shows that lease agreements are very complex instruments agreed among sophisticated parties,
represented by legal advisers in a competitive marketplace. Lease agreements are quite different and many of them
are open for interpretations and discussions. The aircraft leasing business could benefit from more harmonization and
standardization of lease contracts. Specifically, the harmonization of redelivery protocols should get attention.
Significant work has been undertaken under the auspices of the International Civil Aviation Organization (ICAO)
through the establishment of an ICAO Circular 95 - The Continuing Airworthiness of Aircraft in Service14. This
circular is designed to allow easy comparison of national import requirements, which may encourage national
authorities to harmonize rules. In October 2014 ICAO launched the “Online Airworthiness Information Network” as
an interactive web-based application to replace the paper-based version of Circular 95. It is a repository for states to
directly update their information online and to provide users with faster access to up-to-date information. This helps
states establish contact with other states and facilitates the cross-border transferability of aircraft.
Since a few years the International Air Transport Association (IATA) has also initiated activities in this domain.
IATA’s Aircraft Leasing Technical Group (ALTG) was formed to assist in all matters relating to aircraft leasing. In
May 2017 ALTG issued the 4th edition of Guidance Material and Best Practices for Aircraft Leases15. This edition
provides information about all aspects related to aircraft leases with focus on the technical perspective.
Data traceability, integrity and accuracy still need extra attention and improvements. The principal of “Garbage In
is Garbage Out” is very applicable in the area of recording maintenance activities. The operators and the MRO industry
are in the stage of transitioning from paper-based documents towards electronic formats. Today, more electronic
documents are generated, which of course are easier to handle.
The trading and financing of aircraft equipment subject to leases is an increasingly important part of the aviation
industry. The Aviation Working Group (AWG), a nonprofit legal entity comprised of major aviation manufacturers,
leasing companies and financial institutions, has addressed the inefficiencies. As a result, the Global Aircraft Trading
System (GATS) has been designed16. The main purposes of GATS are to facilitate the trading and financing of aircraft
equipment by reducing the burdens on lessees, lessors and financiers. It promotes aircraft equipment trading and
financing in an efficient, secure and predictable manner which, above all, protects the rights of all parties involved,
including and especially the lessee’s rights under the lease. GATS will increase the transparency of and confidence in
aircraft trading, and further protect rights, by introducing a secure, live and searchable electronic ledger displaying
details of ownership and security interests in GATS. The rights of lessees will be further protected in particular by
prohibiting transfers unless agreed conditions in favor of the lessee have been satisfied or waived.

Hopefully we will see further developments, where lessors and lessees cooperate like partners instead of
adversaries, and reach win-win agreements that are fair for both parties.

References
Boeing Current Aircraft Finance Market outlook 2019, http://www.boeing.com/company/key-orgs
Polaris Market Research, Aircraft Leasing Market Research Report, Size, Share & Forecast by 2020 – 2026, Feb 2020
KPMG Ireland, Insights, What’s next for aircraft leasing? 30 November 2020, https://kpmg/home/insights/2020
ICAO Circular 95 -The Continuing Airworthiness of Aircraft in Service
Guidance material and best practices for aircraft leases, 4th edition May 2017

14
ICAO Circular 95 -The Continuing Airworthiness of Aircraft in Service, 9th edition, updated April 2013.
15
4th edition
16
Referring to http://awg.aero