Tips to Prepare Your Jet for End of Lease

As business jet leases near the end of their terms, lessees must meet a huge range of demands, from technical, to legal, to financial. Here are a few of the areas to consider…

Operators must consider the potential requirements as early as possible, according to industry experts, right back to the initial signing of the lease.

The process is highly technical, warns David M. Hernandez, Business Aviation and Regulation Sub-Practice Chair at Vedder Price, a US law firm. It requires a high degree of planning, with lessees sometimes facing bills for hundreds of thousands of dollars, due to a host of unexpected factors.

“Sometimes people think they’re just going to return [the jet],” Hernandez says. “But it’s not just a matter of cleaning an aircraft and filling it with gas. There are a lot of steps to perform.”

First, and most importantly, lessees must negotiate the most favorable return conditions when they negotiate and enter the lease, according to Hernandez. This should be guided by expert advice.

Then, six-to-nine months prior to the lease termination, lessees must thoroughly review the return conditions or Return Addendum with their flight department, management company, maintenance personnel and legal counsel, to ensure they are fully aware of all necessary requirements.

There is then a range of other important steps to take. Lessees must determine the applicable notice requirements and timing obligations, for example. They must determine the relevant timing of the return inspection, or related return conditions, assessing whether to repair potential discrepancies or address potential disputes around wear and tear gray areas.

They must also ensure they take the aircraft out of commission for the period of the return inspection, and determine which parties are responsible for the transportation, return and storage costs if a problem arises with the return.

Other questions include whether there are obligations for the lessee to make the aircraft available for prospective buyers or other lessees, or otherwise cooperate in marketing the aircraft.

It doesn’t stop there. Lessees must determine what return inspections, Airworthiness Directives (ADs) and Service Bulletins (SBs) are required, and how much they might cost, Hernandez explains. And they must consider dispute resolution procedures, in the event that there are any disagreements around return conditions.

The Nature of the Lease

The nature of the lease itself will play a key role in how all this plays out, Hernandez adds. A lease with a financial institution like a bank will be completely different to anything negotiated with a private party on an informal basis.

“Leases that are vague on the return conditions, particularly between private parties, have a greater potential to trigger disputes, so it is particularly wise to evaluate the condition of the aircraft before returning the aircraft to the lessor, to avoid any surprise return disputes,” he advises.

It’s a good idea to review the actual lease agreement or contract at least six months, and even up to a year before lease termination, notes Tom Mekis, Head of Asset Management at Global Jet Capital, a business aircraft leasing and lending specialist. 

This will help the lessee understand the return conditions, as well as informing a decision on upgrading or extending the lease or purchasing the aircraft at the end of the lease.

“It’s easy to forget what was agreed five-to-seven years ago,” Mekis says. For a typical operating or “dry” lease, it’s common that the lessor will get to inspect the aircraft upon return to ensure it is in an overall good condition and meets the lease return conditions, he continues. The lessee typically pays for the cost of this inspection and the cost to repair any discrepancies.

“Additionally, the lessee usually has to return the airplane with at least mid-life or better on many of the life-limited components, such as brakes and tires,” Mekis adds. “This can be accomplished by physically replacing worn out items, or calculating the cost to bring items to mid-life and paying the difference to the lessor.”

It’s best to work with the lessor to schedule a slot at an approved maintenance facility, to perform the inspection and repairs at least 30 days prior to lease end, suggests Joseph Catarina, Global Jet Capital's Chief Credit Officer.

Buying a Jet at Lease-End

A lessee could be interested in acquiring the business airplane at the end of the lease. Typically, the lease will obligate the lessee to notify the lessor 30-90 days prior to the lease expiration of their intent to purchase, allowing “both parties time to negotiate a price (if one is not stipulated) and to secure independent appraisals of the aircraft if needed,” says Catarina.

A decision to buy an aircraft will depend on the buyout provision in the lease, Hernandez notes, (for example, if it allows lessees to acquire an aircraft at a good price). Buying the aircraft also means they could avoid the maintenance expenses for the return inspection, he adds.

“You want to make sure you assess all your options, plan ahead, and talk to an aircraft finance broker,” he suggests.

The Jet Card Bridge

Lessees may also turn to another option altogether. Doug Gollan is founder and editor-in-chief of privatejetcardcomparisons.com, a website that helps consumers figure out the best solutions for their needs from on-demand jet charter to jet cards, fractional ownership and leases.

According to Gollan, jet cards are “a very good way to bridge the gap between leases”. A number of subscribers to his website have found that jet cards can be an extended solution when “the lease inventory is under pressure and people don’t want to jump into something that’s not the best fit for a long period, whereas they can run through the cards 25 or 50 hours at a time.”

In Summary

One way or another, the return of a business jet at the end of a lease term is going to cost the lessee money. The trick is, right from the outset, to be proactive in negotiating the right terms, ideally with the help of an expert, and building these into the budget.

Then, up to a year in advance of the lease-end, make sure that everybody is aware of all the requirements, and a methodical action plan is formulated.  Aircraft leases can be highly beneficial to the right type of user, and there’s no reason for the experience to turn sour owing to lack of planning at the end of an agreement.