Aircraft Maintenance Reserves

Basics of Aircraft
Maintenance Reserve
Development and
Management
A Lessor’s Perspective of Maintenance
Reserve Theory and Best Practices
By: Shannon Ackert

sackert@aircraftmonitor.com
Abstract
The importance of maintenance reserves to protecting asset value is a key consideration of lessors.
In an ideal situation, the reserves plus the residual condition of select high cost maintenance events
would essentially keep the economic condition of the aircraft whole.
Maintenance reserves serve as a mechanism to mitigate credit risk and therefore are generally
imposed on weaker credit airlines. However, in the event a lessee negotiates to not pay maintenance
reserves they may still be required to provide collateral security in the form of an end of lease financial
adjustment or through a Letter of Credit (LOC). These reserves are, in turn, based on the industry
norm for that aircraft type, or in the case of a new aircraft, based on manufacturers’ recommendations.
Maintenance reserves are often the most contentious part of a lease negotiation; the lessor views
reserves as a cost-covering exercise, while the lessee views it as a burden on their cash flow
resources. Often undervalued as a discipline, an understanding of maintenance reserves is critical to
gaining a perspective on the risk and rewards of aircraft leasing.
Copyright © 2012 Aircraft Monitor. All rights reserved.

Basics of Aircraft Maintenance Reserve Development & Management
TABLE OF CONTENTS
1. INTRODUCTION …………………………..……………………………………………………………………… 2
2. SOURCES OF MAINTENANCE DATA ……………………………………………………………….………… 4
3. MAINTENANCE RESERVE ECONOMICS …………………………………………………..………………… 5
3.1. Airframe Maintenance Economics…..……………………………………………..…….………………… 6
3.2. Landing Gear Maintenance Economics……………………………………………...…….……..………. 7
3.3. Engine Maintenance Economics ……………………………………………………………..…………… 11
3.3.1. Engine Module Maintenance Economics ………………………………...………………….. 12
3.3.2. Engine LLP Maintenance Economics ……………….……………………………………….. 16
3.4. APU Maintenance Economics ………………………………………………………………...…………… 17
3.5. Maintenance Reserve for Equipment with no Maintenance History …………………………………… 19
4. MAINTENANCE RESERVE CONTRACT MANAGEMENT……………………………..……...…………….. 20
4.1. Definitions & Interpretations …………………………………………….………………………………….. 20
4.2. Maintenance Reserve Notional Accounts – Development & Management ……………………...…… 21
4.3. Maintenance Reserve Coverage and Exposure …………………………….…………………………… 22
4.4. Modeling of Maintenance Reserve Rates ………………………………………………...………………. 23
4.5. Maintenance Reserve Cash Flow Forecasting …………………………………..……………………….. 24
4.6. Maintenance Reserve Cost-Sharing ……………………………………………………………………….. 27
4.7. Maintenance Inflation ………………………………………………………………………………………... 28
APPENDIX A: MAINTENANCE UTILITY ……………………………………………………………………………. 29
APPENDIX B: EXAMPLE MAINTENANCE RESERVE NOTIONAL ACCOUNT LEDGER ……….……………. 30
APPENDIX C: EXAMPLE MAINTENANCE RESERVE LETTER OF INTENT LANGUAGE ……………………. 31
APPENDIX D: MAINTENANCE COSTS, INTERVALS & RESERVE RATES ………………….………………. 32
REFERENCES ………………………………………………………………………………..……….……………….. 34
1 Version 1.0 / August 2012 | Aircraft Monitor

1. INTRODUCTION
Most operating leases provide that the lessee is liable for the ongoing costs related to maintaining an
aircraft to the required standard. In the event that an aircraft is forcibly repossessed due to a default by
the airline, the aircraft may require expensive investment in outstanding maintenance work before it is in a
condition to be re-leased or sold to another airline/investor. Therefore, a lessor's primary risk in relation to
maintenance is one where the lessee fails to pay, in whole or in part, for the maintenance utility they
consumed.
To mitigate maintenance exposure most lessors have independent credit departments to evaluate the
creditworthiness of lessees. Evaluation of an operator's credit standing generally involves the
establishment of some financial test, the failure to meet which would invoke an obligation to establish
more stringent collateral security in the form of security deposits and payment of maintenance reserves.
Maintenance reserves are payments made by the lessee to the lessor to accrue for those scheduled
major maintenance events that require significant aircraft grounding time and/or turn-around time for
certain major component overhauls. Put another way, maintenance reserves are payments for
maintenance utility¹ consumed and can be expressed as follows for a particular maintenance event:
Mx Reserves = Mx Utility Consumed OR Mx Reserves = Full-Life Mx Value – Mx Utility Remaining
A lease agreement will specify what maintenance events are to be covered through payment of reserves
and for which the lessee may draw down against the accrued amounts. Areas of maintenance typically
covered by reserves are as follows:
 Airframe Heavy Structural Inspections

 Landing Gear Overhauls
 Engine Performance Restoration
 Engine Life Limited Parts (LLPs)
 Auxiliary Power Unit (APU) Restoration
The contractual position relating to maintenance reserve is always a subject of intense negotiation. Many
airlines have sufficient credit stature that their prominence in the marketplace means they can reject
paying maintenance reserves. On the other hand, lessors will show less flexibility for weaker credit
lessees and require these operators to pay maintenance reserves.
Maintenance reserve payments are calculated on flight hour, flight cycle, and/or calendar basis and are
usually paid on a monthly basis in arrears. Accumulated reserves are reimbursed (subject to limitations)
after major maintenance events are completed.
① see Appendix A for summary of Maintenance Utility
Aircraft Monitor | Version 1.0 / August 2012 2

Therefore, at the time an aircraft is taken out of service for maintenance, the lessor should already have
funds to cover the cost of outstanding maintenance. More importantly, in the event of default,
maintenance reserve provides lessor with value protection throughout the lease.
In general, reserves become the property of the lessor immediately upon payment. Customarily, the
lessee will cause the required maintenance to be completed and then claim reimbursement for the
qualified portion of the work from the reserve account held by the lessor.
Repayment takes place only if payment into the reserve account is fully up to date, and only up to the
amount held in the specific reserve account. Thus if a particular event is carried out, and the cost of that
work exceeds the total in the specific reserve account, the excess cost is the responsibility of the lessee.
Funds generally cannot be transferred from other reserve accounts for the same aircraft to cover any
shortfall incurred. So, for example, a lessee cannot siphon a fund used for engine maintenance and
funnel those proceeds to subsidize the cost of airframe heavy check.
In the event a lessee negotiates to not pay maintenance reserves they may still be required to provide
collateral security in the form of an End of Lease Financial Adjustment or through a Letter of Credit
(LOC).
Under an End of Lease Financial Adjustment structure, if a certain maintenance event is returned at
the end of a lease in a worse than stipulated condition, the lessee must make an end of lease payment to
the lessor. Conversely, if a certain maintenance event is returned in a better than stipulated state, the
lessor is obliged to pay the lessee. There are two types of end-of-lease payment structures:
 Mirror-In / Mirror-Out – A mirror adjustment can either be one-way, where the Lessee is
required to pay an adjustment when a certain maintenance event is returned with less time
remaining than at delivery, or a two-way mirror whereby lessor may have to pay the lessee if a
certain maintenance event is returned in better condition than at delivery.
 Zero-Time or Full-Life – A payment whereby the lessor receives payment for time used since
last overhaul or since new.
A maintenance Letter of Credit (LOC) is bank guarantee that lessee will return the asset to the lessor in
the condition required by the lease. Often, LOC amounts are reconciled on periodic basis – typically
annually or semi-annually – to reflect maintenance utility consumed and performed.

2. SOURCES OF MAINTENANCE DATA
Most lessors analyze cost data to come up with baseline maintenance reserve for each aircraft and
engine model. Reserve rates (particularly engine rates) are often adjusted to account for key factors such
as age, average flight length, and environment. Once sufficient reported cost data is available, baseline
reserves are benchmarked to actual reported data to ensure consistent and unbiased cost metrics.
To develop baseline costs, lessors make use of internally available sources as well as industry sources.
The three primary maintenance cost data sources available to lessors are derived from internally
generated reserve claims, industry publications, and manufacturer published cost data.
i. Reserve claims – as a lessor accumulates sufficient maintenance reserve claims the degree of
variability between baseline costs and actual costs diminishes. Many lessors develop costs reports
that provide individual airline specific maintenance costs. In the example illustrated in Figure 1,
information extracted from an engine performance restoration claim will yield a host of maintenance
data (i.e. removal cause, time between performance restoration, flight leg, build goal, restoration
and LLP costs, and the associated cost per flight-hour).
F IGURE 1‐ E XAMPLE E NGINE M AINTENANCE COST & INTERVAL DATA E XTRACTED FROM A RESERVE CLAIM R EPORT
ii. Industry publications - the following industry publications provide detail analysis of both aircraft and
engine types spread across numerous airlines, and are useful for establishing maintenance cost and
performance interval benchmarks.
a. Aircraft Commerce
b. International Bureau of Aviation (IBA) – Maintenance Cost Journal
c. Aircraft Technology & Engineering Maintenance

iii. Manufacturer published cost data – The majority of aircraft and engine manufacturers publish
maintenance cost handbooks as reference guides for establishing maintenance reserves. Airbus and
Boeing, for example, publish annual handbooks that detail calculation methods used to benchmark
Direct Maintenance Cost (DMCs) for a wide range of different airframe, engine, landing gear, and
APU equipment. Additionally, most engine manufacturers publish similar handbooks aimed at
providing both product and maintenance benchmark information for their engine models.
3. MAINTENANCE RESERVE ECONOMICS
The table below illustrates the equations used to compute reserve rates for each of the major
maintenance events. Although each equation is identical in framework – that is, numerator equals cost
and denominator equals performance interval – the variability in costs and performance intervals vary
depending on the maintenance event. The computations of engine LLP rates, for example, exhibit
virtually no variability given their cost and associated intervals are set by the engine OEMs. On the other
extreme, engine & APU rates are subject to high degrees of variability in both event costs and on-
condition performance intervals.
Application Equation Comments
Airframe Heavy Structural HSI Costs  Uncertainty in HSI costs, which can be difficult
Inspection (HSI) Fixed Mo Interval to predict if equipment is mature and/or aging.
Landing Gear Overhaul Overhaul Costs  Overhaul intervals are typically calendar based
Costs Overhaul Interval or cyclic based, whichever is more limiting.
 PR Costs & Mean-Time Between Removals
Engine Performance PR Costs (MTBR) is heavily dependent on the operation
Restoration (PR) MTBR  Often difficult to quantify if equipment is in new

or mature phase
Engine LLP Catalog Costs

 Predictable, with little to no uncertainty
Replacement Cyclic Limit
APU Performance PR Costs  Uncertainty in both costs and time on-wing

Restoration (PR) MTBR  Often difficult to quantify if equipment is new
The greatest challenge of calculating maintenance reserves is attempting to predict the costs - and on-
condition intervals in the case of engines & APUs - of maintenance events and spreading that cost out in
a way that is fair to both lessor and lessee. In theory it sounds simple, however the uncertainty in
predicting both costs and on-condition intervals can lead to all kinds of difficulties, particularly with new
equipment that has no documented maintenance history. The following is an overview of the economic
factors that influence each major maintenance event.

3.1 Airframe Maintenance Economics
Background
Depending on the aircraft type, airframe heavy structural inspections are scheduled every 6-12 years.
Usually the aircraft is taken out of service for several weeks. During this check the exterior paint is often
stripped and large parts of the outer paneling are removed, uncovering the airframe, supporting structure
& wings for zonal and structural inspections. In addition many of the aircraft’s internal components are
functionally checked, repaired/overhauled, or exchanged.
The MPD document provides maintenance planning information necessary for operators to develop a
customized maintenance program. The document lists all recommended scheduled maintenance tasks
for every aircraft configuration. Scheduled maintenance tasks are categorized into three program
groupings consisting of: a.) Systems & Powerplant, b.) Zonal Inspections, and c.) Structural Inspections
a) The Systems & Powerplant Program is developed to perform functional and operational
checks on typical airplane systems i.e. flight controls, pneumatics, electrical power, etc.
b) The purpose of the Zonal Inspection Program is to assess the general condition of attachment
of all systems and structures items contained in each zone by use of defined zonal inspection
tasks. The zonal inspection tasks include visual checks of electrical wiring, hydraulic tubing,
water/waste plumbing, pneumatic ducting, components, fittings, brackets, etc.
c) The Structural Inspection Program is designed to provide timely detection and repair of
structural damage during commercial operations. Detection of corrosion, stress corrosion, minor
damage and fatigue cracking by visual and/or NDT procedures are considered.
It is the MPD that outlines the task requirements F IGURE 2‐ A IRFRAME M AINTENANCE R ESERVE S OURCE D OCS
used to assess airframe maintenance reserves –

see Figure 2. In general, the MPD routine
maintenance tasks, and the rectification of any Airframe reserve rates are
deficiencies resulting from performance of such commonly derived from
tasks, forms the basis for the qualifying scope of the routine maintenance
tasks referenced in the
work that is used to quantify airframe
Maintenance Planning
maintenance reserves. The lessor, thus must Document (MPD) - tasks
factor incremental costs resulting from non- from other sources are
routine maintenance into the airframe rate. generally excluded.

Maintenance Cost Drivers
Aging of aircraft - As an aircraft ages subsequent airframe heavy checks are expected to require higher
levels of non-routine maintenance, which is defined to be the work required to rectify routine maintenance
tasks. The non-routine ratio – sometimes referred to as the defect ratio - is the ratio of non-routine man-
hours to routine man-hours, and is a measurement of the incremental time required to correct routine
defects. For example, if an aircraft’s heavy structural inspection requires 4,000 routine man-hours, in
addition to 2,000 non-routine man-hours, the non-routine ratio for this check is 50%.
As an aircraft ages, the non-routine ratio can easily exceed 100%, which explains why successive
maintenance checks tend to be more costly. Therefore, when developing airframe maintenance reserves
it’s important to adjust the rate to account for the particular phase within the airframe’s maintenance
cycle. The airframe’s maintenance cycle can be broken into three phases consisting of: first-run, mature-
run, and aging-run. Figure 3 highlights the changes in airframe Direct Maintenance Cost (DMC) of an
A320 aircraft as it progresses through its maintenance cycle.
 First-Run is the initial operating years, often referred to as the honeymoon period and generally
considered the first 4-6 years of in-service operation. The structure, systems, and components
are new; and there is less non-routine maintenance and material scrap rate.
 Mature-Run begins after the newness phase and runs through the first maintenance cycle. This
period typically falls between the first heavy maintenance visit and the second maintenance visit.
 Aging-Run begins after the end of the first maintenance cycle when the effects of airframe age
result in higher non-routine maintenance costs. This period typically begins after the second
heavy maintenance visit and continues to increase with time.
F IGURE 3 – E XAMPLE ADJUSTMENT OF AIRFRAME D IRECT M AINTENANCE C OST (DMC) FOR AN A320 A IRCRAFT

Typical Qualifying Work : Man-hours associated with scheduled grouping of MPD routine tasks and all
non-routine man-hours generated by routine tasks, material costs related to the above tasks, basic cabin
refurbishment, and rotable overhaul for time-controlled items. Some lessors include strip & paint into their
standard reserves if these events occur at regularly scheduled heavy structural checks.
Typical Excluded Work : Work related to Service Bulletins (SBs), Service Letters (SLs), Airworthiness
Directives (ADs), airline unique tasks, vendor tasks, local regulatory tasks, cabin reconfiguration costs,
accidental damage repair. Packaging, duties, and shipping & handling fees are also generally excluded.
Some lessors exclude tasks associated with the Systems Maintenance Program.
Example Airframe Reserve Estimations
A. Airframe Heavy Structural Event : A320 C4 / 6-Year SI & C8 / 12-Year SI

B. Inclusions: The labor and material cost of performing all MPD tasks affiliated with the Systems,
Structural, and Zonal Maintenance Programs, and the rectification of any deficiencies resulting
from performance of such tasks, stripping and painting, cost of cabin refurbishment and rotable
overhaul costs for time-controlled items.
C. Exclusions: Work related to Service Bulletins (SBs), Service Letters (SLs), Airworthiness
Directives (ADs), airline tasks, vendor tasks, local regulatory tasks, cabin reconfiguration,
accidental damage repair. Packaging, duties, and shipping & handling fees are also excluded.
Check Check Tasks MPD Interval Check Phase Check Costs $ Reserve Rates $ / Mo
C4 / 6-Yr SI 1C+2C+4C+6Yr SI 72 Months First-Run 800,000 – 850,000 11,000 – 11,800
C4 / 6-Yr SI 1C+2C+4C+6Yr SI 72 Months Mature-Run 920,000 – 970,000 12,700 – 13,400
C4 / 6-Yr SI 1C+2C+4C+6Yr SI 72 Months Aging-Run 1,100,000 – 1,150,000 15,200 – 15,900
C4 / 6-Yr SI +
C8 / 12-Yr SI 144 Months First-Run 720,000 – 780,000 5,000 – 5,400
8C+12-Yr SI
C4 / 6-Yr SI +
C8 / 12-Yr SI 144 Months Aging-Run 860,000 – 930,000 5,900 – 6,400
8C+12-Yr SI

3.2 Landing Gear Maintenance Economics
Background
An aircraft landing gear shipset consist of a nose gear assembly plus two to four main gear assemblies,
depending on the aircraft type. The main components of each gear assembly consist of the inner and
outer cylinders, drag braces and struts, and various hydraulic actuation mechanisms that serve to lower
and retract the gears.
Landing gear overhaul intervals are determined by the need to inspect, and if required, treat for corrosion.
Overhaul intervals for landing gears are generally calendar & flight cycle limited, and for most models are
in the region of 10-12 years and 18,000-20,000 flight cycles.
The timing of when the overhaul occurs is based on which of the performance intervals is more limiting.
For example, a landing gear with overhaul intervals of 10 years and 20,000 flight cycles, which is
operating 2,500 flight cycles per year will occasion its overhaul at the eight-year anniversary. Landing
gears that are operating below 2,000 flight cycles per year will have their overhaul calendar-limited to 10
years.
Factors driving Landing gear overhaul cost consist of:
 Size and complexity

 Number of modifications to incorporate
 Operational environment and maintenance practices
 Market penetration - number of MROs supporting the gear
 Cost of exchange fee
Labor required to overhaul a gear shipset is generally predictable since most of the workscope is routine.
The majority of the total cost of an overhaul is material related ; bushings account for the biggest cost of
parts and material, as do seals, bearings, and parts containing special alloy materials such as nickel,
cadmium and chrome. Downtime for a narrowbody overhaul process is in the range of 30-40 days, while
widebody gears are in the range of 50-60 days.
Few airlines have their own landing gear overhaul shops given that most do not have sufficient volumes
to financially justify it, therefore most use third-party specialist overhaul facilities. These overhaul facilities
typically carry spare gear inventory for multiple aircraft types, which they offer under either an exchange
or loan program.

3.2 Landing Gear Maintenance Economics
Under a loan program, the overhaul specialist provides the airline with a designated spare gear, which is
fitted to an aircraft while the airline’s gear is overhauled. Upon completion of an overhaul, the spare set is
removed and replaced with the original gear. The cost to the airline general reflects both the cost to
overhaul the original gear plus a loan fee.
Under an exchange program, a spare gear is installed on an aircraft while the original gear is
transferred to an overhaul facility. Once the airline’s gear has been overhauled it then becomes a spare
set, and subsequently an exchange unit. The cost to the airline general reflects both the cost to overhaul
the original gear plus an exchange fee.
Typical Qualifying Work : Overhaul of a Landing Gear assembly in accordance with the Manufacturer's
repair manual that restores such Landing Gear to a "zero time since overhaul" condition in accordance
with the Manufacturer's repair manual and is performed in accordance with the Manufacturer's overhaul
specifications and operating criteria (excluding any rotable components such as wheels, tires, brakes and
consumable items). Most lessors include loan and/or exchange fees into their standard reserves.
Directives (ADs), exchange & handling fees, packaging and shipping charges. Repair, overhaul or
replacement of thrust reversers and non-modular components, such as QEC, LRU or accessory units is
not eligible for reimbursement from engine reserves.
Example Landing Gear Reserve Rate Estimations
A. Equipment : A320 Landing Gear

B. Overhaul Intervals : 120 Months & 20,000 FC, whichever is more limiting
C. Overhaul Cost : $420,000
D. Reserve Rate: US $21.00 per Cycle but not less than US $3,500 per Month
Operator Utilization Cyclic Limiter Calendar Limiter Overhaul Limiter Reserve Rate
A 3,500 FH / 1,500 FC 160 Months 120 Months 120 Months $3,500 / Month
B 3,500 FH / 2,000 FC 120 Months 120 Months 120 Months $3,500 / Month
C 3,5000 FH / 2,500 FC 96 Months 120 Months 96 Months $4,375 / Month
D 3,000 FH / 3,000 FC 80 Months 120 Months 80 Months $5,250 / Month

3.3 Engine Maintenance Economics
Background
An engine removal is classified as a shop visit whenever the subsequent engine maintenance performed
prior to reinstallation entails either: a) Separation of pairs of major mating engine flanges, or b)
Removal/replacement of a disk, hub or spool. Engine shop maintenance includes two primary elements:
a) Performance Restoration: The core engine deteriorates as parts are damaged due to heat,
erosion, and fatigue. As an engine is operated the Exhaust Gas Temperature (“EGT”) increases,
inducing accelerated wear and cracking of the airfoils, which further decreases performance.
Based on the engine materials and their properties, a critical EGT is established by the OEM,
attainment of which necessitates a performance restoration shop visit. During a performance
restoration, the core module is traditionally dismantled and airfoils (rotors & stators) are
inspected, balanced, and repaired or replaced as necessary.
The primary objective of the workscope is to restore the engines performance, and to build the
engine to a standard that minimizes long-term engine direct maintenance cost, or cost per flying
hour. This process, however, can be quite challenging given parts and modules have different
rates of deterioration.
b) Life Limited Part Replacements: The rotating compressor and turbine hubs, shafts, or disks
within the engine have a specifically defined operating life, at the end of which, the parts must be
replaced and not used again.
The breakdown of an engine’s shop visit costs F IGURE 4 – E NGINE S HOP V ISIT B REAKDOWN
and maintenance process is detailed in Figure

4. The primary cost driver of engine shop
maintenance is material cost; approximately
60% - 70% of the cost of an engine shop visit is
due to replacement of material.
If life-limited parts (LLP) require replacement the

material cost will increase further. Direct labor
will account for approximately 20%-30% of total
cost, while repairs will account for 10%-20%. In
the aggregate, costs related to engine
restoration and LLPs will make up approximately
70%-80% of total reservable maintenance costs.

3.3.1 Engine Module Maintenance Economics
The biggest portion of material cost is attributable to airfoils – blades & guide vanes. Individual vane
segments in the turbine modules can cost as much as $10,000, while turbine blades can cost as much as
$8,000 each. A full shipset of High Pressure Turbine (HPT) blades can total between 60 – 80 blades and
costs $400,000 - $700,000. And a full shipset of High Pressure Compressor Blades (HPC) can cost
$150,000 - $300,000. Typically, the largest portion of parts repair cost is also associated with airfoils
given that these parts require high tech equipment to make them serviceable again
Most repair shops will assess the life remaining on LLPs when an engine is inducted for maintenance and
will manage time limited components to coincide with subsequent shop visits. Ideally, the repair shop will
ensure that LLP stub-lives closely match the expected time on-wing from EGT margin erosion. So, for
example, if an engine’s LLP stub-life is 10,000 FC then the repair center will ensure that the engine has
sufficient EGT margin to stay on-wing for 10,000 FC. The 10,000 FC would then be called the engine
build standard.
An engine’s Workscope Planning Guide (WPG) is a maintenance planning guide published by each
engine manufacturer that details the suggested level of required maintenance on each module as well as
a list of recommended Service Bulletins. Engine manufacturers generally specify three levels of
workscopes consisting of minimum level, performance level, and full overhaul level.
i. Minimum Level Workscope – Typically applies to situations where a module has limited time
since last overhaul. The key tasks accomplished with this workscope level are external
inspections, and to some extent, minor repairs. It is not necessary to disassemble the module to
meet the requirements of a minimum level workscope.
ii. Performance Level Workscope – Will normally require teardown of a module to expose the
rotor assembly. Airfoils, guide vanes, seals, and shrouds are inspected and repaired or replaced
as needed to restore the performance of the module. Cost-effective performance restoration
requires determination of the items having the greatest potential for regaining both exhaust gas
temperature (EGT) and Specific Fuel Consumption (SFC) margin.
iii. Full Overhaul Workscope - Full overhaul applies to a module if its time / cycle status exceeds
the recommended (soft-time) threshold, or if the condition of the hardware makes full overhaul
necessary. The module is disassembled to piece-parts and every part in the module receives a
full serviceability inspection and, if required, is replaced with new or repaired hardware.

i. Age of Engine – Older engines F IGURE 5 – I NFLUENCE OF A GE ON E NGINE DMC

generally cost more to maintain than newer
engines. As an engine ages its average time to
shop visit lessens - Figure 5. First-run engines
will last considerably longer on-wing than mature
engines. In fact, it is not uncommon to see first-
run engines remaining on-wing 20%-30% longer
than mature-run engines. As the engine ages a
disproportionate amount of parts experience
higher deterioration rates, higher scrap rates, and
correspondingly higher engine maintenance cost.
ii. Operation - To accurately forecast maintenance status it’s important to consider the type of
operation the aircraft will be exposed to. An aircraft’s maintenance value will amortize based on the DMC
associated with its specific operational profile. The same model aircraft operating at different profiles will
experience different levels of DMC. The key operational factors influencing an engine’s DMC are: 1.)
Flight length, 2.) Engine derate, and 3.) Operating environment.
 Flight Length – The impact of lower flight F IGURE 6 – I NFLUENCE OF F LIGHT L EG & D ERATE ON E NGINE DMC
length – Figure 6 - results in higher cyclic

loads on an engine’s parts & accessories
with the consequence of higher non-
routine maintenance.
Smaller flight segments also force engines

to spend a larger proportion of total flight
time using take-off and climb power
settings resulting in more rapid
performance deterioration, which
translates to higher DMC.

 Engine Derate – For a particular engine, take-off derate thrust is an approved takeoff thrust rating
that is lower than the max rated takeoff thrust; operating an engine at a derate is similar to having a
less powerful engine on the aircraft. A larger derate translates into lower take-off EGT, resulting in
lower engine deterioration rate, longer on-wing life, and reduced DMC – see Figure 6.
 Environment – More caustic operating environments generally result in higher engine DMC – see
Figure 7. Engines operating in dusty, sandy and erosive-corrosive environments are exposed to
higher blade distress and thus greater performance deterioration. Particulate material due to air
pollution, such as dust, sand or industry emissions can erode HPC blades and block HPT vane/blade
cooling holes. Other environmental distress symptoms consist of hardware corrosion and oxidation.
F IGURE 7 – E NGINE E NVIRONMENTAL D ISTRESS C HART
Typical Qualifying Work : The actual cost associated with a qualified performance restoration or
permanent repair of on-condition parts in the basic engine during completed engine shop visits requiring
off-wing teardown and/or disassembly. Engine performance restoration means, at a minimum, the
accomplishment of a performance level workscope on the engine’s hot sections.
Directives (ADs), exchange & handling fees, packaging and shipping charges. Repair, overhaul or
replacement of thrust reversers and non-modular components, such as QEC, LRU or accessory units is
not eligible for reimbursement from engine reserves.

Example Engine Reserve Rate Estimations
A. Engine model : CFM56-5B4/3 rated at 27,000 lbs

B. Operational : 10% Derate / Temperate Environment / 3,500 FH / Year
C. Qualified CFM56-5B4 engine performance restoration means, at a minimum, the accomplishment of
a performance level workscope on the High Pressure Compressor (HPC), Combustor, and High
Pressure Turbine (HPT) pursuant to the then current CFM Workscope Planning Guide and minimum
performance level workscopes required on the Fan/Booster, Low Pressure Turbine (LPT) and
Gearbox pursuant to the CFM Workscope Planning Guide.
D. The CFM56-5B engine modules - Figure 8 - refers to any of the six major modules of an engine,
namely: 1.) the High Pressure Compressor ("HPC"), 2.) High Pressure Turbine ("HPT"), 3.)
Combustor, 4.) Fan Booster/Low Pressure Compressor ("Fan Booster/LPC"), 5.) Low Pressure
Turbine ("LPT") and 6.) Gearbox.
F IGURE 8 – CFM56‐5B M ODULAR C ONSTRUCTION
First-Run Maintenance Reserves Metrics Mature-Run Maintenance Reserves Metrics
FL MTBPR - FH PR Costs $ PR Rates $/FH MTBPR - FH PR Costs $ PR Rates $/FH

1.0 16,000 - 17,000 2.00M - 2.10M 115.00 – 125.00 8,500 – 9,500 2.20M - 2.30M 235.00 - 250.00
1.5 22,000 - 23,000 2.20M – 2.30M 100.00 – 110.00 12,750 – 14,250 2.25M - 2.35M 172.00 - 182.00
1.7 24,000 - 25,000 2.25M – 2.35M 93.00 – 100.00 14,000 – 16,000 2.30M - 2.40M 158.00 - 166.00
2.0 25,000 - 27,000 2.30M – 2.40M 88.00 – 95.00 16,000 – 18,000 2.35M - 2.45M 137.00 - 146.00
2.5 27,000 - 29,000 2.32M – 2.42M 80.00 – 85.00 18,000 - 20,000 2.37M - 2.47M 125.00 - 135.00
3.0 29,000 - 30,000 2.35M – 2.45M 78.00 – 82.00 20,000 - 21,000 2.40M - 2.50M 122.00 - 128.00
3.5 30,000 - 31,000 2.38M – 2.48M 75.00 – 80.00 21,000 - 22,000 2.45M - 2.55M 117.00 - 122.00
4.0 31,000 - 32,000 2.40M – 2.50M 73.00 – 78.00 22,000 - 23,000 2.50M - 2.60M 115.00 - 120.00

3.3.2 Engine LLP Maintenance Economics
Background
Within engine modules are certain parts that cannot be contained if they fail, and as such are governed
by the number of flight cycles operated. These parts are known as critical Life-Limited Parts (LLP) and
generally consist of disks, seals, spools, and shafts. The declared lives of LLPs are referenced in Chapter
5 of an engine’s overhaul manual, and typically range between 15,000 - 30,000 cycles.
A complete set of LLPs will generally represent a high proportion (greater than 20%) of the overall cost of
an engine. If the engine is operated over a long-range network, LLPs may never need to be replaced over
the life of the engine. Over short-range routes however, LLPs may need to be replaced two or three
times and, consequently, contribute a relatively high cost.
The term stub-life is used to represent the engines shortest life remaining of all LLPs installed in a specific
engine. Not all stub-lives are consumed during operation, and quite often the range of cyclic life
remaining on an individual LLP at the time of replacement can vary from 3 to 15 percent of total cyclic life.
Certain LLPs can have shorter lives imposed on them by Airworthiness Directives or other technical
issues such as a decrease in fatigue characteristic. Additionally, some engine manufacturers certify
ultimate lives at the time engine enters into service. Other manufacturers certify the lives as experience is
accumulated. In these scenarios ultimate lives are reached after one or several life extensions.
Maintenance Cost Drivers : OEM LLP escalation rates, which typically average 4% - 6% per year.
Typical Qualifying Work : Actual out-of-pocket materials cost without overhead or mark-up
Typical Excluded Work : Exchange fees, handling, packaging and shipping charges.
Example LLP Reserve Rate Estimation Based Off Current Life Limits & 10% Stub-Factor
Chpt. 5 - Current Chpt 5 - Ultimate LLP Cost - LLP Cost Per LLP Cost Per FC
LLP Description Life Limit (FC) Life Limit (FC) (US $) FC ($/FC) - 10% Stub
LLP 1 15,000 20,000 120,000 8.00 8.89
LLP 2 15,000 20,000 120,000 8.00 8.89
LLP 3 15,000 20,000 120,000 8.00 8.89
LLP 4 15,000 20,000 180,000 12.00 13.33
LLP 5 15,000 20,000 180,000 12.00 13.33
LLP 6 15,000 20,000 180,000 12.00 13.33
LLP 7 15,000 20,000 240,000 16.00 17.78
LLP 8 15,000 20,000 240,000 16.00 17.78
LLP 9 15,000 20,000 240,000 16.00 17.78
Totals : 1,620,000 108.00 120.00

3.4 APU Maintenance Economics
Background
The APU is a gas turbine generator that provides auxiliary electrical and pneumatic power to the aircraft.
Today’s APU have a modular construction for ease of maintenance. The main modules consist of the
load compressor, power section and gearbox.
There are various parameters for measuring APU reliability but from a maintenance reserve perspective
the most important is the Mean-Time Between Removal (MTBR), which is the average time between
removals for all causes ; confirmed removals, unscheduled removals, FOD, and No Fault Found (NFF).
MTBRs for APU will vary from manufacturer to manufacturer and model to model, however a
representative range is on order of 5,000 – 7,000 APU FH for units operating on narrowbody aircraft and
7,000 – 9,000 APU FH for those on widebody aircraft.
Similar to aircraft engines, APU maintenance costs and MTBRs are sensitive to the type of operation the
unit is exposed to. APUs that operates high cycles will tend to have shorter removal intervals and incur
lower shop visit costs whereas those operating lower cycles will remain on-wing longer and incur greater
hardware deterioration and higher costs.
Major causes resulting from deterioration of rotating parts in the engine include high EGT, high oil
consumption, metal in the system, and low pneumatic and/or electrical loads.
Workscopes performed at removal are either for repair or major refurbishment. In the vast majority of
cases, APUs that reach their MTBR will require major refurbishment/restoration to be performed. A key
objective of the shop visit workscope is to restore EGT margin and ensure that the APU can deliver
nominal pneumatic and electrical loads.
The removal interval affects the material input level, which generally increases in proportion to the MTBR.
Similar to engines, the cost drivers of APU shop visits are heavily skewed towards material repair &
replacement costs, which make up approximately 70%-80% of total cost while labor will account for
approximately 20%-30% of total shop visit cost.

3.5 APU Maintenance Economics
Typical Qualifying Work : Lessor will reimburse lessee from the APU Reserves for the actual cost of a
completed performance refurbishment or overhaul of the APU. An APU performance restoration means,
at a minimum, the accomplishment of a performance level workscope on the power section module.
Directives (ADs), and work performed for all other causes excluded, including material markup, outside
vendor fees, handling fees, packaging and shipping charges. Repair, overhaul or replacement of APU
accessories or line replaceable units is not eligible for reimbursement from APU reserves.
Example APU Reserve Rate Estimations
A. APU model : GTCP 131-9A – Figure 9. F IGURE 9 – GTCP 131‐9A APU M ODULAR C ONSTRUCTION
B. Qualified APU performance restoration
means, a shop visit involving the complete
disassembly, cleaning, inspection and
reconditioning of an APU which restores the
power section to zero time and with all work
being performed in accordance with the
highest standard specified in the
Manufacturer's workscope planning guide
and overhaul manual.
C. Average APU flight hours for this model is
currently 5,500 – 6,500 APU FH, while average costs range for $220K - $240K, resulting in average
restoration rates of $35 - $38 per APU FH.

3.5 Maintenance Reserve for Equipment with no Maintenance History
The preceding sections focused primarily on the estimation of maintenance reserves for existing aircraft.
But how do we establish reserves for events with no maintenance history, or more importantly, develop
fair assessments of both maintenance costs and on-condition intervals for new technology aircraft such
as the 787 and A350. Both of these aircraft not only will have new generation engines but also will
incorporate extensive use of composite materials in the fuselage and wing structures - from a
maintenance perspective, composites are lighter and stronger than traditional aluminum alloys and have
a far better resistance than aluminum to fatigue (or the formation of cracks) and they do not corrode,
which should produce benefits when it comes to the number and frequency of inspections that have to be
performed on the airframe.
The solution to the above will depend on how F IGURE 10 – E XAMPLE C ALCULATION OF T RENT XWB‐79 MR S
the contract addresses payment of

maintenance reserves. If reserves are to be
collected monthly in arrears than the most
convenient methods for developing rates
consists of either basing them on
manufacturers’ recommendations or using
relative maintenance costs from competing
alternatives. Figure 10 illustrates an example
of the competing alternative method for projecting mature performance restoration costs for the Trent
XWB-79 that is to be equipped on the A350-800.
If reserves are to be collected at end of lease in the form of redelivery payments than a sensible method
for establishing reserve rates is to agree on sourcing a maintenance event’s expected cost and
performance interval from reputable repair centers agreed to by both lessor and lessee.
Example Airframe Redelivery Rate Language Employing OEM Sourcing
“An amount equal to the number of months consumed on the Airframe since the last Airframe Heavy
Structural Inspection (SI) Check multiplied by a cost per month calculated as follows: the quotient
obtained by dividing (i) the expected cost of the next SI by (ii) the full allotment of months between SI on
the Airframe as approved by the Maintenance Program.
The cost of the next SI will be established by the following method: “The expected cost of the SI will be
the average of the cost of such SI as performed by or on behalf of Lessee and the amounts quoted by
three (3) reputable FAA/EASA maintenance facilities capable of performing such SI, one chosen by
Lessor, one chosen by Lessee, and one mutually selected by Lessor and Lessee.”

4. MAINTENANCE RESERVE CONTRACT MANAGEMENT
4.1 Definitions & Interpretations
When drafting a legal document, it is common to have a list of commonly used technical terminologies
that are referenced in the Definitions & Interpretations section of a lease document. Many of these
technical terminologies relate directly to the use of, and management of, aircraft maintenance reserves.
Therefore, it is important to avoid any ambiguity and define words exactly how they are intended to be
understood. Most lease contracts include definitions of maintenance reserve events. The following
example defines the maintenance reserve definitions associated with the A320 aircraft.
Example Maintenance Reserve Definitions – A320-200 / CFM56-5B4 Engines
i. “4C/6 Year Check” means the intermediate airframe structural, CPCP, and zonal inspection of the
Aircraft (and resulting repairs), including a C Check, all MPD tasks having an interval of 6 years, and
performed concurrently therewith such additional Flight Hour or Cycle controlled MPD structural and
zonal inspections and including all lower level checks then falling due.
ii. “8C/12 Year Check” means the heavy airframe structural and zonal inspection of the Aircraft (and
resulting repairs) including a C Check, all MPD tasks having an interval of twelve years, and
performed concurrently therewith such additional Flight Hour or Cycle controlled MPD structural and
zonal inspections and including all lower level checks then falling due.
iii. “Engine Performance Restoration” means, at a minimum, the accomplishment of a performance level
workscope on the High Pressure Compressor (HPC), Combustor, and High Pressure Turbine (HPT)
pursuant to the then current engine OEM Workscope Planning Guide and minimum performance
level workscopes required on the Fan/Booster, Low Pressure Turbine (LPT) and Gearbox pursuant to
the CFM Workscope Planning Guide.
iv. “Engine Life Limited Parts” means, those Parts, defined in the Engine Manufacturer's maintenance
manual, or by the FAA or EASA or the Aviation Authority through Airworthiness Directives, that
require replacement on a mandatory basis prior to or upon the expiration of the Engine
Manufacturer's certified life for that Part.
v. “APU Performance Restoration” means, with respect to the APU, disassembly and rework of the
power section, load impeller and gearbox modules according to the Manufacturer’s then current
performance restoration and full gas path overhaul criteria.
vi. “Landing Gear Overhaul” means an overhaul of a Landing Gear assembly in accordance with the
Manufacturer's repair manual that restores such Landing Gear to a "zero time since overhaul"
condition.

4.2 Maintenance Reserve Notional Accounts – Development & Management
Lessors establish notional accounts for each maintenance event to manage the accruals and
disbursements of funds. Funds may not be transferred from other reserve accounts to cover excess
incurred. After the work is performed the lessee pays the maintenance provider and then claims a
reimbursement from the lessor out of the accumulated reserve account. Repayment takes place only if
payment into the reserve account is fully up to date, and only up to the total value of the specific reserve
account ; if the cost of work exceeds the total in the specific reserve account, the excess cost is the
responsibility of the lessee. The following example defines the maintenance reserve notional accounts
associated with the A320 aircraft – see Appendix B for example maintenance reserve ledger.
Example Maintenance Reserve Notional Accounts – A320-200 Aircraft
Lessor shall maintain the following notional accounts (each an Account) in respect of the Maintenance
Reserves:
i. Six Year / Twelve Year Check MR Accounts, to which all Six & Twelve Year Check MR Payments
will notionally be allocated and from which all payments by Lessor will notionally be deducted;
ii. Engine #1 / #2 Maintenance MR Accounts, to which all Engine #1 & #2 Restoration Shop Visit
MR Payments will notionally be allocated and from which all payments by Lessor will notionally
be deducted;
iii. Engine #1 / #2 LLPs MR Account, to which all Engine #1 & #2 LLP MR Payments will notionally
be allocated and from which all payments by Lessor will notionally be deducted;
iv. Landing Gear MR Account, to which all Landing Gear MR Payments will notionally be allocated
and from which all payments by Lessor will notionally be deducted;
v. APU MR Account, to which all APU MR Payments will notionally be allocated and from which all
payments by Lessor will notionally be deducted.
Prior to a qualifying event, the workscope and estimated cost for each notional maintenance event shall
be agreed by Lessor and Lessee, and both Lessor or Lessor’s representative(s) shall be entitled to
observe such work and shall be provided with copies of pertinent documents detailing the scope of work.
In the case of engine performance restoration events, it should highlighted that, “a qualifying performance
level workscope seeks to: a.) Obtain the maximum time between shop visits with resultant lower cost per
Engine Flight Hour and the greatest potential for regaining EGT margin, and b.) To plan the Life Limited
Part stub-life such that engines are removed for LLP at Cycles Since Shop Visits that are consistent with
recommended engine build goals.”

4.3 Maintenance Reserve Coverage and Exposure
There are a number of performance indicators that serve to measure how a lessor is managing
maintenance reserves. The indicators that are most commonly used are Maintenance Coverage and
Maintenance Exposure.
Maintenance coverage is a cost-covering indicator, and a measure of how effectively the lessor is able
to ensure that every dollar of maintenance consumed is covered through the contractual reserve rate.
The essence of maintenance coverage is that in combination with the residual condition of the aircraft the
lessor is expected to “remain whole”, that is coverage plus residual condition should equal 100%.
Figure 11 illustrates an example of Maintenance Coverage estimation for an A320 – under the column
titled, “Mx Coverage”. Thus, overall coverage of 95.5% indicates that the lessor has $.955 in reserves for
every dollar consumed by the lessee. It’s important to note that, despite there being a deficiency in
coverage, this does not imply the lessor will incur out-of-pocket expenses given that most leases state
that the lessor will only contribute its portion of the cost; if the lessee agreed to pay a below-market rate
than it will be accountable for any shortfall. Bottom line is that a lessor will attempt to contribute its
portion of the maintenance cost irrespective of whether there is a surplus or short-fall in the fund.
F IGURE 11 – E XAMPLE M AINTENANCE C OVERAGE C ALCULATION FOR A320 A IRCRAFT
There are four forms under which maintenance coverage can be applied. These consist of: 1.) Cash
reserves, 2.) Letters Of Credit (LOC), 3.) Maintenance service agreements (i.e. flight-hour agreement
coverage), and 4.) Redelivery payments. If, for example, in lieu of cash reserves a lessor was able to
obtain letters of credit than this should be construed as being equivalent to cash given the ease (liquidity)
of monetizing a LOC. Similarly, events that are subject to maintenance service agreements are
considered a form of maintenance coverage provided, however, there exits safe-guard contingencies in
the form of assignability and recourse to funds. Lastly, redelivery payments should be accounted under
maintenance coverage irrespective of the fact that the cost-covering occurs at the end of the lease term.

If maintenance reserves are either not collected, subject to a redelivery payment scheme, or are under-
funded, than the lessor will be subject to maintenance exposure. In monetary terms, maintenance
exposure equals the value of maintenance utility consumed less the value of maintenance reserves
collected at a particular point in time.
Figure 12 below illustrates the projection of maintenance exposure for an A320 aircraft following an
event of default at year four since entry into service; the unfunded maintenance exposure of the aircraft
would total approximately $4.9M, and the lessor would likely have to fund this amount during subsequent
lease(s).
F IGURE 12 – E XAMPLE E STIMATION OF M AINTENANCE E XPOSURE FOR AN A320 A IRCRAFT AFTER F OUR Y EARS S INCE EIS
(A) (B) (C=B-A)

Maintenance Event Full-life $ Cost Residual $ Consumed $ Reserve $ Exposure
4C / 6-Year SI 810,000 270,000 540,000 0 (540,000)
8C / 12-Year SI 875,520 583,680 291,840 0 (291,840)
Landing Gear Overhaul 435,000 261,000 174,000 0 (174,000)
Engine 1 Performance Rest 2,300,000 972,160 1,327,840 0 (1,327,840)
Engine 2 Performance Rest 2,300,000 972,160 1,327,840 0 (1,327,840)
Engine 1 LLP Replacement 2,440,000 1,894,453 545,547 0 (545,547)
Engine 2 LLP Replacement 2,440,000 1,894,453 545,547 0 (545,547)
APU Performance Rest 250,000 55,456 194,544 0 (194,544)
Totals : 11,850,520 6,903,362 4,947,158 0 (4,947,158)
4.4 Modeling of Maintenance Reserve Rates
A maintenance reserve model should F IGURE 13 – M AINTENANCE R ESERVE M ODEL I NPUTS
incorporate baseline maintenance costs, along

with those age-related and operational
parameters, that are unique to an
aircraft/engine type. As illustrated in Figure 13,
the inputs to the model should include age-
related factors for both the airframe and
engines, and key operational parameters such
as utilization; derate setting; and region of
operation. For a specific aircraft/engine
combination, the output of the model should
quantify reserve rates that are unique to an
airline’s operation.

Done properly, reserve models will help us be consistent across transactions in how we view a particular
aircraft type, they will help us to be consistent within transactions in how we weigh the impact of one
feature against another, and finally, they will help us be consistent over time. Figure 14 illustrates an
example of a maintenance reserve model incorporating key operational & age-related variables.
F IGURE 14 – E XAMPLE M AINTENANCE R ESERVE M ODEL FOR A320 A IRCRAFT E QUIPPED WITH CFM56‐5B4/3 E NGINES
4.5 Maintenance Reserve Cash Flow Forecasting
Similar to a maintenance reserve model, an effective cash flow forecasting model should enable end-
users to reconcile key operational parameters, for example utilization inputs, which dictate the frequency
and timing of maintenance events. Additionally, the ideal model should allow for revisions/updates to
both maintenance program inputs, such as engine mean-time between removals, and expected
maintenance event cost inputs.
For transactions that include reserves, the goal of the model is to accurately forecast timing of
maintenance events, monthly revenues & expenditures, and ending reserve balance. In contracts where
no reserves are collected, the model should be capable of identifying the timing and amount of maximum
exposure.

Example Maintenance MR Cash Flow Projection - The following is an example that illustrates
forecasting of maintenance reserve cash flows for an A320 aircraft for two scenarios; a.) Twelve-year
term where maintenance reserves have been appropriately established and collections equal total
maintenance exposure, and b.) An event of default at year four where no reserves were collected
followed by an 8-year lease where maintenance reserves have been appropriately established.
General Assumptions:
i. Separate reserves accounts set up for:

 Airframe 4C / 6-Year SI & 8C / 12-Year SI Checks
 Landing Gear Overhaul
 Engine performance restoration shop visits & LLP replacements
 APU performance restoration shop visit
ii. Payments, payable monthly in arrears, are calculated
 On monthly basis for airframe & landing gear events,
 On a flight hour basis for engine & APU performance restoration, and
 On a flight cycle basis for engine LLPs
Contract Summary:

Scenario A:
 12-Year lease term - maintenance reserves have been appropriately established and collections
equal total maintenance exposure.
 Forecasted reserve balance at lease expiry equals $1.2M.
APU SV1
C4/6Y SI LG Ovhl
Eng SV1 &

Aircraft: A320-200
APU SV2
MSN: 1234 Eng SV2 &
Operator: XYZ C8/12Y SI
APU SV3
Lease Start: 15-Jan-2012
Lease End: 15-Jan-2024
End of Lease Res Balance: $1,200,000
Scenario B:
 Lease term during which no maintenance reserves are collected and Lessee defaults at Year 4.
 Subsequent 8-year lease term during which maintenance reserves have been appropriately
established with new Lessee and collections equal total maintenance exposure.
 Maximum exposure equals $4.9M in Year 4.
Aircraft: A320-200
MSN: 1234
Operator: XYZ
End of Lease Res Balance: $0

Max Exposure: $4,900,000
@ Date: Jan-15-2016

4.6 Maintenance Reserve Cost-Sharing
In the case of an aircraft that was previously operated by a lessee, the reserve balance at the end of the
lease term will represent the lessor’s pro-rata fund, which will be allocated towards future contributions
with subsequent lessee(s). Whether the amount in each account balance is sufficient to pay for future
expenses is immaterial, instead the lessor is bound to contribute its portion of the cost irrespective of
whether they have a fund accumulated or not.
Figure 15 below illustrates the notional account balances for A320 aircraft where maintenance reserves
have been appropriately established and collections equal total maintenance exposure during: a.) the
time of redelivery by lessee to lessor, and b.) after one year of operation with new lessee.
F IGURE 15 – E XAMPLE S TATUS OF M AINTENANCE R ESERVE N OTIONAL A CCOUNT B ALANCES FOLLOWING R EDELIVERY OF AN A320
Status at Redelivery Status after one year

from Lessee “A” Status at Delivery to Lessee “B” operation of Lessee “B”
At the time of a maintenance event the lessor will review a claim and estimate each constituent’s financial
contribution to the event’s total cost. To estimate pro-rata contributions one must estimate the
percentage share of a maintenance events performance interval consumed by both lessor and lessee,
and multiply these percentages by the expected cost of the event.
Example Cost-Sharing Calculation - The example that follows outlines the steps taken to project
lessor and lessee contributions to the aircraft’s upcoming 8C/12-Year check based on the aircraft being
delivered to new lessee at its 8th year anniversary from entry into service.
 Projected 8C/12-Year Check Cost = $1,800,000

 Lessor Pro-rata Share = 66.67% (96/144)
 Lessee Pro-rata Share = 33.33% (48/144)
 Projected Lessor Contribution = $1,200,000 (66.67% * $1,800,000)
 Projected Lessee Contribution = $600,000 (33.33% * $1,800,000)

4.7 Maintenance Inflation
Escalation can be defined as changes in price levels driven by underlying economic conditions. The
individual economy-driven factors affecting maintenance cost are mainly labor and material repair &
replacement. Manufacturing wage rates increase over time because of overall changes in wages and
prices throughout the economy, as well as changes in prevailing wages manufacturers must pay to retain
skilled workers.
From a lessor’s perspective, escalation is a “risk” that must be factored into a lease agreement.
Complicating the issue, price escalation varies for different maintenance events such as airframe heavy
checks, which are labor intensive, and engine maintenance, which is material intensive.
To measure and forecast changes to these cost inputs we need to factor the price escalations of key
economic indices that correlate to them. These key indices are illustrated in Figure 16 and consist of: a.)
Employment Cost Index (ECI) for aircraft manufacturing wages & salaries, and b.) Producer Price Index
(PPI) for industrial commodities. The charts illustrate changes in these key indices during the period of
2006 – 2011.
If we assume a sensible weighting of 70% labor and 30% material we come up with an overall escalation
rate averaging between 3% - 4% per year; a range that is generally consistent with many lease contracts.
Engine LLPs are exceptions given these parts escalate in accordance with manufacturer’s published
escalation rates.
F IGURE 16 – M AINTENANCE I NFLATION I NDICES

APPENDIX A - MAINTENANCE UTILITY
After a new aircraft enters into service, the F IGURE 17 – M AINTENANCE U TILITY P ROFILE
airframe, engine, components, and major

assemblies are subject to wear, corrosion, and
fatigue which inevitably result in some deviation
from its original condition. For a particular
maintenance event the relationship between
maintenance value, expressed in percentage
terms and its operating age, expressed in
performance intervals, can be illustrated from its
maintenance utility curve – see Figure 17. As an
event ages, maintenance will depreciate in
accordance with its exposure to certain performance intervals, expressed as the number of calendar
months, operating hours, flight cycles, or other performance intervals since new or since last shop visit.
The depreciation curve of a maintenance event follows a saw-tooth pattern, and the slope of the curve will
be influenced by how each maintenance event’s performance intervals are limited. In current regulatory
usage, maintenance events can be categorized as either having a finite (hard-timed) limit or on-condition
limit.
Hard-time limits are a measure of operating age whereby scheduled removal from service is mandated
in order to prevent either critical failure or to comply with recommended scheduled tasks. For example,
airframe structural checks are limited by calendar time and/or flight cycles to comply with recommended
scheduled tasks, whereas engine life-limited parts are subject to safe life-limits (expressed in flight cycles)
to prevent critical failure.
From a utility perspective, hard-time maintenance events have their corresponding values decline to zero
and subsequently recapitalized to full value after each event, or in the case of an engine life-limited part,
after replacement with a new part.
On-condition limits are framed through monitoring and analysis of key performance metrics to
determine whether an item is in, and will remain in, a satisfactory condition or will require corrective
maintenance. For example, engines are continuously trend-monitored to assess their overall health and
condition; key performance indicators such as Exhaust Gas Temperatures (EGT), fuel flow, oil pressure,
fan & compressor speed, and vibration are monitored for exceedance or probability of failure.
From a utility perspective, on-condition maintenance events rarely have their maintenance value fully
exhausted during a shop visit and the workscope performed will often only partially restore the value it
lost. The table below highlights each of the maintenance processes associated with their events.

APPENDIX B – EXAMPLE MAINTENANCE RESERVE NOTIONAL ACCOUNT LEDGER
Example maintenance reserve ledger – A320 aircraft:
Engine Pos 1 Restoration Engine Pos 2 Restoration
Period Flight Hours Rate Balance Actual Flight Hours Rate Balance Actual
Ending Monthly Total Per FH To Date Payment Monthly Total Per FH To Date Payment
31‐Jan‐12 250 250 $85.00 $21,250 $21,250 250 250 $85.00 $21,250 $21,250
28‐Feb‐12 250 500 $85.00 $42,500 $42,500 250 500 $85.00 $42,500 $42,500
31‐Mar‐12 250 750 $85.00 $63,750 $63,750 250 750 $85.00 $63,750 $63,750
30‐Apr‐12 250 1,000 $85.00 $85,000 $85,000 250 1,000 $85.00 $85,000 $85,000
31‐May‐12 250 1,250 $85.00 $106,250 $106,250 250 1,250 $85.00 $106,250 $106,250
30‐Jun‐12 250 1,500 $85.00 $127,500 $127,500 250 1,500 $85.00 $127,500 $127,500
Engine Pos 1 LLP Replacement Engine Pos 2 LLP Replacement
Period Flight Cycles Rate Balance Actual Flight Cycles Rate Balance Actual
Ending Monthly Total Per FC To Date Payment Monthly Total Per FC To Date Payment
31‐Jan‐12 125 125 $100.00 $12,500 $12,500 125 125 $100.00 $12,500 $12,500
28‐Feb‐12 125 250 $100.00 $25,000 $25,000 125 250 $100.00 $25,000 $25,000
31‐Mar‐12 125 375 $100.00 $37,500 $37,500 125 375 $100.00 $37,500 $37,500
30‐Apr‐12 125 500 $100.00 $50,000 $50,000 125 500 $100.00 $50,000 $50,000
31‐May‐12 125 625 $100.00 $62,500 $62,500 125 625 $100.00 $62,500 $62,500
30‐Jun‐12 125 750 $100.00 $75,000 $75,000 125 750 $100.00 $75,000 $75,000
Airframe ‐ 4C / 6‐Year SI Airframe ‐ 8C / 12‐Year SI
Period Calendar Months Rate Balance Actual Calendar Months Rate Balance Actual
Ending Monthly Total Per Mon To Date Payment Monthly Total Per Mon To Date Payment
31‐Jan‐12 1 1 11,500 11,500 11,500 1 1 6,000 6,000 6,000
28‐Feb‐12 1 2 11,500 23,000 23,000 1 2 6,000 12,000 12,000
31‐Mar‐12 1 3 11,500 34,500 34,500 1 3 6,000 18,000 18,000
30‐Apr‐12 1 4 11,500 46,000 46,000 1 4 6,000 24,000 24,000
31‐May‐12 1 5 11,500 57,500 57,500 1 5 6,000 30,000 30,000
30‐Jun‐12 1 6 11,500 69,000 69,000 1 6 6,000 36,000 36,000
Landing Gear Overaul APU Restoration
Period Calendar Months Rate Balance Actual APU Flight Hours Rate Balance Actual
Ending Monthly Total Per Mon To Date Payment Monthly Total Per APU FH To Date Payment
31‐Jan‐12 1 1 3,500 $3,500 $3,500 200 200 35.00 $7,000 $7,000
28‐Feb‐12 1 2 3,500 $7,000 $7,000 200 400 35.00 $14,000 $14,000
31‐Mar‐12 1 3 3,500 $10,500 $10,500 200 600 35.00 $21,000 $21,000
30‐Apr‐12 1 4 3,500 $14,000 $14,000 200 800 35.00 $28,000 $28,000
31‐May‐12 1 5 3,500 $17,500 $17,500 200 1,000 35.00 $35,000 $35,000
30‐Jun‐12 1 6 3,500 $21,000 $21,000 200 1,200 35.00 $42,000 $42,000
Total Actual
Period Ending Ending
Ending Balance Balance
31‐Jan‐12 $95,500 $95,500
28‐Feb‐12 $191,000 $191,000
31‐Mar‐12 $286,500 $286,500
30‐Apr‐12 $382,000 $382,000
31‐May‐12 $477,500 $477,500
30‐Jun‐12 $573,000 $573,000

APPENDIX C – EXAMPLE MAINTENANCE RESERVE LETTER OF INTENT LANGUAGE
Lessee shall pay maintenance reserves monthly in arrears for the Aircraft in the following amounts:
“Airframe Checks” - (a) US $11,250 per Month for the 4C/6-Year Structural Inspection per the Airbus
MPD. Following completion of the first 4C.6-Year Structural Inspection, this amount will be increased to
US $12,500 to account for aging of the airframe. (b) US $6,250 per Month for the 8C/12-Year Structural
Inspection per the Airbus MPD. Following completion of the first 8C/12-Year Structural Inspection, this
amount will be increased to US $7,000 to account for aging of the airframe.
“CFM56-5B/4 Engines”- (a) Engine Modules - Reserves for Performance Restoration shall be paid for
each flight hour for each of the engines. The rate shall be established from the applicable matrix below
based on the anticipated hour to cycle ratio and region of operation- the amounts below assume an
average thrust de-rate of 10% and temperate operating environment.
From Delivery through the first Performance Restoration

Flight Leg 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Rate $ / FH 165 125 100 98 95 90 88
Following the first Performance Restoration

Flight Leg 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Rate $ / FH 240 190 145 142 139 136 134
(b) “Engine LLP's” – For each LLP within each Engine, the LLP catalogue price for such LLP
divided by 90% of the then current cycle life limit for such LLP.
“Landing Gear” - US $20.00 / FC but not less than US $3,500 / Month for overhaul.
“APU” - US $38 per APU running hour for performance restoration.
The hours and cycles to calculate the reserve payments shall be provided to Lessor on or prior to the
10th day of each month for the prior month’s utilization. The above amounts are quoted in January 20XX
US dollars and shall be adjusted X% on January 1st of each year thereafter, with the exception of the
engine LLPs, which shall be escalated in accordance to the then OEM LLP catalogue prices.
Adjustments to the maintenance reserve rates will be made if the maintenance program, engine thrust or
derate, operating environment, and hour to cycle ratios or utilization vary from the original assumptions.

APPENDIX D – MAINTENANCE COSTS, INTERVALS & RESERVE RATES
1.0 Airframe Heavy Structural Inspection Costs, Intervals & Reserve Rates
 Assumes full workscope (systems, structures & zonal & material)
Aircraft Check Phase Interval Costs - 2010 $ Rates ($ / Mo)
A320-200 4C / 6Y SI First-Run 72 Months $750K - $850K $10,400 - $11,800
A320-200 8C / 12Y SI First-Run 144 Months $850K - $900K $5,500 - $5,900
A330-300 4C / 6Y SI First-Run 72 Months $1.4M - $1.6M $19,500 - $22,200
A330-300 8C / 12 Y SI First-Run 144 Months $1.5M - $1.7M $10,400 - $11,800
B737-800 C6-C8 Equivalent First-Run 120 / 144 Mo $1.3M - $1.5M $9,000 - $12,500
B747-400 C4 / D-Check Ageing 72 Months $4.0M - $4.5M $55,500 - $62,500
B757-200 S4C Ageing 72 Months $1.5M - $1.7M $22,200 - $23,600
B767-300ER S4C Ageing 72 Months $2.0M - $2.3M $27,800 - $31,900
B777-300ER C4 / SI First-Run 96 Months $2.5M - $2.8M $26,000 - $29,100
E190 C4 / SI First-Run 96 Months $475K - $575K $4,900 - $5,900
CRJ-700 HSI First-Run 96 Months $425K - $525K $4,400 - $5,400
2.0 Landing Gear Overhaul Costs, Intervals & Reserve Rates
 Assumes cost for exchange unit plus removal/installation labor
Aircraft Interval Costs - 2010 $ Rates ($ / Mo)
A320 Family 10 YR / 20,000 FC $380K - $450K $3,200 - $3,500
A330 Family 10 YR $875K - $925K $7,300 – $7,700
B737NG Family 10 YR / 18,000 FC $330K - $380K $2,700 - $3,200
B757 Family 10 YR / 18,000 FC $425K - $475K $3,500 - $4,000
B767 Family 10 YR $550K - $600K $4,500 - $5,000
B747 Family 10 YR / 6,000 FC $750K - $800K $6,250 - $6,750
B777 Family 10 YR $1.0M - $1.2M $8,300 - $10,000
E190 Family 10 YR / 20,000 FC $325K - $350K $2,700 - $2,900
CRJ 700 Family 10 YR / 20,000 FC $190K - $230K $1,600 - $1,900

APPENDIX C – MAINTENANCE COSTS, INTERVALS & RESERVE RATES
3.0 Engine Performance Restoration Costs, Intervals & Reserve Rates
Engine Thrust Phase FL Time On-Wing (FC) Costs 2010 $ Rate ($ / FH)
CFM56-5B6/P 23,500 First-Run 1.7 16,000 -17,000 $2.0M - $2.2M $72- $80
CFM56-5B4/P 27,000 First-Run 2.0 11,500 -12,500 $2.0M - $2.2M $86 - $96
CFM56-5B3/P 33,000 First-Run 2.0 7,500 – 8,500 $1.8M - $2.2M $124 - $134
CFM56-7B24/P 24,000 First-Run 1.7 17,000 – 18,000 $2.0M - $2.3M $70- $78
CFM56-7B26/P 26,300 First-Run 2.0 12,500 – 13,500 $1.8M - $2.2M $78- $88
CFM56-7B27/P 27,300 First-Run 2.0 10,000 – 12,000 $2.0M - $2.2M $86 - $96
V2524-A5 24,000 First-Run 1.7 15,000 – 16,000 $1.8M - $2.2M $72 - $82
V2527-A5 27,000 First-Run 2.0 15,000-11,500 $1.8M - $2.2M $95 - $105
V2533-A5 33,000 First-Run 2.0 6,500 – 7,500 $1.8M - $2.2M $135 - $145
Trent 772 71,200 First-Run 6.0 3,500 – 4,000 $3.6M - $4.2M $185 - $195
PW4068 68,000 First-Run 6.0 3,000 – 3,500 $3.2M - $3.6M $180 -$190
PW4070 70,000 First-Run 6.0 2,750 – 3,250 $3.5M - $4.0M $195 - $205
CF6-80E1A4 70,000 First-Run 6.0 3,000 – 3,500 $3.0M - $3.4M $165 - $175
GE90-115B 115,00 First-Run 8.0 2,250 – 2,750 $4.4M - $4.8M $250 - $260
4.0 APU Performance Restoration Costs, Intervals & Reserve Rates
Aircraft Interval - APU FH Costs - 2010 $ Rates ($ / APU FH)
A320 Family 5,000 – 7,000 $210K - $240K $32 - $38
A330 Family 6,000 – 7,000 $350K - $375K $40 - $45
B737NG Family 5,000 – 7,000 $210K - $240K $32 - $38
B757 Family 4,000 – 6,000 $200K - $225K $37 - $42
B767 Family 4,000 – 6,000 $200K - $225K $37 - $42
B747 Family 8,000 – 9,000 $425K - $475K $48 - $53
B777 Family 7,500 – 8,500 $425K - $475K $50 - $55
E190 Family 5,000 – 7,000 $160K - $180K $31 - $36
CRJ 700 Family 4,000 – 5,000 $130K - $160K $30 - $35

REFERENCES
1. Aircraft Commerce. Forming a policy to maximize aircraft residual values, Issue 19 Oct/Nov,
2001, pp. 6-12.
2. Aircraft Commerce. Risks & Rewards of Sale & Leasebacks, Issue 15, Feb/Mar 1999, pp. 6-10
3. Airline Fleet & Asset Management. Reserve Judgment. Dec/Jan 2000, pp. 1-5.
4. Airline Fleet & Asset Management. Maintenance Reserves & Asset Management. Dec 1998,
pp. 1-3.
5. Airline Fleet & Asset Management. Maintenance Reserves and Redelivery Conditions.
Jan/Feb 2004, pp. 26-30.
6. Airline Fleet & Network Management. Protecting the Asset: Maintenance Reserves &
Redelivery Conditions. Sep/Oct 2006, pp. 60-62.
About the author:
Shannon Ackert is currently Senior Vice President of Commercial Operations at Jackson

Square Aviation where he has responsibility of the firm’s commercial activities including
technical services, contract development & negotiation, and asset selection & valuation. Prior
to joining Jackson Square, Shannon spent over ten years working in the aircraft leasing
industry where he presided over technical asset management roles as well as identifying and
quantifying the expected risk and return of aircraft investments. Shannon started his career in
aviation as a flight test engineer for McDonnell Douglas working on the MD-87/88 certification programs, and later
worked for United Airlines as systems engineer in the airlines 757/767 engineering organization. He has
published numerous industry reports dealing with aircraft maintenance economics and market analysis, and is a
frequent guest speaker at aviation conferences. Shannon received his B.S. in Aeronautical Engineering from
Embry-Riddle Aeronautical University and MBA from the University of San Francisco.

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Basics of Aircraft

By: Shannon Ackert

Copyright © 2012 Aircraft Monitor. All rights reserved.

APPENDIX A: MAINTENANCE UTILITY ……………………………………………………………………………. 29

APPENDIX B: EXAMPLE MAINTENANCE RESERVE NOTIONAL ACCOUNT LEDGER ……….……………. 30

APPENDIX C: EXAMPLE MAINTENANCE RESERVE LETTER OF INTENT LANGUAGE ……………………. 31

APPENDIX D: MAINTENANCE COSTS, INTERVALS & RESERVE RATES ………………….………………. 32

1 Version 1.0 / August 2012 | Aircraft Monitor

Mx Reserves = Mx Utility Consumed OR Mx Reserves = Full-Life Mx Value – Mx Utility Remaining

 Airframe Heavy Structural Inspections

① see Appendix A for summary of Maintenance Utility

Aircraft Monitor | Version 1.0 / August 2012 2

3 Version 1.0 / August 2012 | Aircraft Monitor

2. SOURCES OF MAINTENANCE DATA

F IGURE 1‐ E XAMPLE E NGINE M AINTENANCE COST & INTERVAL DATA E XTRACTED FROM A RESERVE CLAIM R EPORT

Aircraft Monitor | Version 1.0 / August 2012 4

3. MAINTENANCE RESERVE ECONOMICS

Application Equation Comments

Inspection (HSI) Fixed Mo Interval to predict if equipment is mature and/or aging.

 PR Costs & Mean-Time Between Removals

Engine Performance PR Costs (MTBR) is heavily dependent on the operation

Restoration (PR) MTBR  Often difficult to quantify if equipment is in new

Engine LLP Catalog Costs

APU Performance PR Costs  Uncertainty in both costs and time on-wing

5 Version 1.0 / August 2012 | Aircraft Monitor

3.1 Airframe Maintenance Economics

used to assess airframe maintenance reserves –

Aircraft Monitor | Version 1.0 / August 2012 6

3.1 Airframe Maintenance Economics

Maintenance Cost Drivers

F IGURE 3 – E XAMPLE ADJUSTMENT OF AIRFRAME D IRECT M AINTENANCE C OST (DMC) FOR AN A320 A IRCRAFT

7 Version 1.0 / August 2012 | Aircraft Monitor

3.1 Airframe Maintenance Economics

Example Airframe Reserve Estimations

A. Airframe Heavy Structural Event : A320 C4 / 6-Year SI & C8 / 12-Year SI

C4 / 6-Yr SI 1C+2C+4C+6Yr SI 72 Months First-Run 800,000 – 850,000 11,000 – 11,800

C4 / 6-Yr SI 1C+2C+4C+6Yr SI 72 Months Mature-Run 920,000 – 970,000 12,700 – 13,400

C4 / 6-Yr SI 1C+2C+4C+6Yr SI 72 Months Aging-Run 1,100,000 – 1,150,000 15,200 – 15,900

Aircraft Monitor | Version 1.0 / August 2012 8

3.2 Landing Gear Maintenance Economics

Maintenance Cost Drivers

Factors driving Landing gear overhaul cost consist of:

 Size and complexity

9 Version 1.0 / August 2012 | Aircraft Monitor

3.2 Landing Gear Maintenance Economics

Example Landing Gear Reserve Rate Estimations

A. Equipment : A320 Landing Gear

C 3,5000 FH / 2,500 FC 96 Months 120 Months 96 Months $4,375 / Month

D 3,000 FH / 3,000 FC 80 Months 120 Months 80 Months $5,250 / Month

Aircraft Monitor | Version 1.0 / August 2012 10

3.3 Engine Maintenance Economics

and maintenance process is detailed in Figure

If life-limited parts (LLP) require replacement the

11 Version 1.0 / August 2012 | Aircraft Monitor

3.3.1 Engine Module Maintenance Economics

Aircraft Monitor | Version 1.0 / August 2012 12

3.3.1 Engine Module Maintenance Economics

Maintenance Cost Drivers

i. Age of Engine – Older engines F IGURE 5 – I NFLUENCE OF A GE ON E NGINE DMC