A ten year lease being started today for a new A320neo or B737-8 will see the end of lease half to full life compensation reaching $10+ million due to inflation.
An End of Lease Compensation arrangement rather than maintenance reserves, is usually used for a lessee of good standing, one that will not likely default. Using the Original Equipment Manufacturers (OEMs) list prices today sees a half to full life adjustment of approximately $7.5 million. This is made up of around $3.6 million for the LLPs (for one engine) and another $3.4 million for engine overhaul (for one engine); $400,000 for the heavy maintenance visits ($0.8 million full cost); $150,000 for landing gears ($0.3 million full cost); and $150,000 for the APU. cost). While the cost of performing the heavy maintenance on the airframe can be contained to some extent by outsourcing to ever lower cost facilities, the engine manufacturers are able to apply an above CPI inflation rate to engine parts. Rises of more than five percent per annum are not unknown which are applied no matter the state of the market. Some airlines have raised such price increases to the European Commission. Applying a two percent rise per annum to non LLP items and four percent to the LLPs sees the half to full life adjustment rising to $10.2 million as of year 10. At ten years or 2028, a lessor may be entitled to an end of lease payment considerably in excess of this $15 million if the LLPs are virtually run out as they may be assuming utilization of 2,000 cycles per annum and an ultimate life warranty of 20,000 cycles. If the lessor needs to continue leasing the aircraft, then some of the End of Lease Compensation will need to be used. The effect of End of Lease Compensation becomes particularly pertinent for the second lease. A lessor entitled to some $10 million or more may seek to sell the aircraft on an as is where is basis and keep the cash payment. This may be more relevant for a widebody as remarketing becomes more difficult.