In order to protect the position of the Lessor in respect of the Aircraft, Engine or Propeller to comply with all maintenance requirements it is normal to create a funding pool which is known as the Maintenance Reserve.
What are aircraft maintenance reserves?
Maintenance reserves are calculated to cover use of aircraft for some of the life limited parts:
For Fixed Wing Aircraft the focus is on Major Components for example Engines, APU, Propellers, Landing Gears, For Helicopters again Engines, also Gear Box, Main Rotor Head etc.
The essential purpose of Maintenance Reserves is to calculate the cost of consumption of potential typically on a per hour basis
If the time between to overhaul is 5000 hours for a propeller and the cost of typical overhaul is 15000 Euro then the maintenance reserve for a propeller per hour is 15000/5000= 30 Euro / Operating Hour. The service time is identified either in Flight Hours or Flight Cycles per OEM MPD.
So, this service time is the driver of the MR calculation. For example if for example the Airframe time is 20,000 Flight Hours for next Air-frame Overhaul and the cost of Airframe Overhaul Cost is 800, 000 USD which is found from OEM OR MRO based on Aviation Industry Information. Therefore, the Flight Hour rate is determine by dividing Air-frame Overhaul Cost by Air-frame time so it will be 800,000/20,000 = 40 USD PER FLIGHT HOUR. Thus any airline or maintenance organisation should reserve 40 USD for Each Flight Hour Service time in order to finance the total maintenance cost in future when the Air-frame Overhaul Time is due.
At the lease end a close out calculation is performed to cover the use of the propeller during the lease. If there is more potential available on the propeller at the end of the lease than at the beginning, the Lessee normally receives a compensation. Of course if there is less potential at the end of the lease than at the beginning the Lessee may in fact be required to pay a compensation to the Lessor.
Often when developing criteria for the Maintenance Reserve Ground rules the following points to be considered during the maintenance check the aircraft is not flying so no reserves are due. In addition typically during the initial period – say 1 month again no reserves are due.
When either an Engine or APU is on maintenance the assumption is that a loan item is deployed so the maintenance reserve payments will fall due
In respect of Engines and APU’s typically whilst on Maintenance no specific payments are normally required for these units. Often there is no adjustment made for Engines which are operating in Hot & High Conditions. Inflation may also not be included when calculating forward reserves.
In essence, maintenance reserves are intended only for routine maintenance, being major events such as Heavy Maintenance Visit HMV, Landing Gear Overhaul LDG overhaul, engine overhaul, engine Life Limited Part LLP replacement and Auxiliary Power Unit APU performance restoration.
Within these packages there will of course be various “non-routine” findings for which the maintenance reserve will be used to pay for, however the principle event itself remains a routine maintenance task. Typically in the case of incident or accident, there is no mechanism for maintenance reserves to be paid or to be claimed for on accidental damage.
Of course in respect of managing financial risk Insurance will be the typical vehicle of mitigation. As a final cautionary note maintenance reserves, especially during end of lease returns, have effectively become an additional “less visible” additional form of payment.