Maintenance Reserves Need to Account for Realistic D Check Costs

October 29, 2018

Maintenance reserves charged by lessors on both narrowbody and widebody aircraft need to be adequately reflect the real cost of such major maintenance.

While the cost of performing the major airframe maintenance on aircraft pales against the costs associated with overhauling the engines and replacing their LLPs, the cost of heavy maintenance is nonetheless high and is generally higher than most standard estimates.

The lessors are well versed in the management of maintenance reserves as this can generate considerable profits. Little wonder that lessors are seeking to limit the impact of PMA parts that CFM and GE have recently agreed can be installed in their engines without affecting warranties and service agreements. The use of such PMA parts and their lower pricing – perhaps 30-50 percent less than for a CFM part – will impact the bottom line of the lessors even if it allows lessees to reduce their expenses and reduce risk associated with high levels of maintenance expenditure. Lessors are increasingly seeking to consolidate their existing position of requiring maintenance reserves or end of lease payment to reflect OEM list prices rather than prices from PMA manufacturers but such a position will be hard to sustain over time and as lessees demand the ability to pare back maintenance costs.

The lessors have become very experienced in seeking to ensure that the engine reserves reflect reality and that maintenance costs are covered. As such the limit of the LLPs is not the ultimate life but the time limit manual levels that can be significantly less than the ultimate life. In addition, the lessors may also require a lessee to pay for the stub life, whereby the actual engine LLP life is not fully expended because replacement needs to be planned rather than undertaken when a LLP expires. The lessor may also require handling charges to be considered. Engine manufacturers usually impose a handling charge when an airline buys an LLP.

For the airframe maintenance, the airframe manufacturers provide an indication of maintenance costs. Such estimates can vary considerably from the costs experienced by operators. This sometimes makes it difficult to rely solely on the manufacturers estimates, particularly for the lessors who invariably seek a cushion when applying such rates to lessees. In terms of the heavy maintenance on an airframe, this is ultimately a function of the number of person hours expended. The number of hours it takes to perform an HMV may vary depending on experience of the facility and/or the familiarity with the type. A first time HMV may take much longer than subsequent undertakings. The airframe OEM has a maintenance planning document that specifies the work that is required for an HMV. A number of inspections will be required and are detailed. However, an actual HMV may see such an inspection which then identifies a defect that requires rectification. The routine work is covered by the OEM but not necessarily the non-routine. When parts and labor are included in the final HMV cost, they can be much higher than the estimates stated by the OEM. The inspection of older aircraft may result in corrosion being identified. The treatment of corrosion can involve costly replacement of structural items – Section 41 on the B747-200 is always used as an indicator of the potential problems although Boeing contributed some of the parts free of charge. Lower checks are sometimes performed at the same time as the major HMV and this will not likely be included in the OEM estimate and nor should they be included by the lessor.

The HMV visit may also require the aircraft to be ferried to a suitable facility. Moreover, an HMV visit will likely see a refurbishment of the interior which will not be included in the OEM estimates and indeed should not be included in any maintenance reserve amount. The interior is considered cosmetic in nature. The HMV visit will also include testing of components as well as testing of the aircraft once the HMV is completed. The lessee will also incur costs associated with parking the aircraft and storing components temporarily removed from the aircraft to allow access for the defined inspections. The definition of a D or HMV check is complicated when maintenance is segmented over a number of smaller visits.

A D or HMV on a B777-200ER may have an OEM cost estimate of approximately $2.5 million. However, a number of operators will confirm that the actual cost can be in excess of $4 million. Similarly, the D check on a B777-300ER may have a routine cost of some $2.7 million but a figure of more than $4.5 million is likely. A B747-400 will have a D check estimate of $4 million but $6 million is more likely. The B737-800 has a D check estimate of $650,000 but this clearly underestimates the experience of operators who will likely be expending in excess of $1 million on the aircraft. The relatively recent service entry of the B787-9 means that a D check has not yet been performed but the estimate of $1.5 million will likely be lower than the actual cost not least because overhaul facilities will need experience to achieve efficiency.

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