Airline Due Diligence & Valuation

At this early stage, the assessment required the review of all the documentation provided by the lessor, including the Letter of Intent (LOI) / lease contract and a records review of the aircraft and engines. The airline wished to understand the cost implications of the aircraft during the lease when the redelivery conditions and the condition of the aircraft were taken into account.

With the wealth of experience within the team, TGIS Aviation was able to conduct a full review of the LOI against the anticipated condition of the aircraft and engines at both delivery to the airline and subsequent redelivery back to the lessor at the end of the lease. This review highlighted all areas where there were exposures to costs that could ultimately be avoided through the renegotiation of the redelivery conditions. As the single highest cost exposure to an airline, TGIS Aviation carried out a detailed cost review of each engine taking into account the delivery condition, the anticipated timing of the shop visits during the lease, the workscope to be applied during the shop visits along with LLP replacement and the expected condition of the engine at redelivery.

TGIS Aviation was able to apply costs to the projected events to calculate the overall cost of the engines during operation taking into consideration the requirements of the LOI. The calculations were based on a $ per hour rate for the general engine costs and a $ per cycle value for the LLP costs equalised over hours and cycles flown during the lease. These calculations confirmed the $ per hour, $ per cycle reserves to be paid to the lessor were insufficient to cover the total anticipated costs of an engine at a shop visit, requiring the airline to ‘top up’ the reserve pots.

The reason for these exposures was due to:

• Restrictive redelivery conditions resulting in an early engine shop visit, for no technical reason, only to meet the terms of the contract.
• The shortfall in LLP maintenance reserves since the drawdown calculations only included a contribution to the life run and the pro-rata value of the life remaining on the LLP (stub life), which remained the responsibility of the airline.

The versatility of TGIS Aviation’s engine cost models meant that we were able to create various scenarios, adjusting the lease period, the time between engine removal, and redelivery conditions enabling us to advise to identify a situation that minimised these additional costs to the airline.

This exercise highlighted various exposures based on the above reasons. The early handback shop visit and the requirement to pay for the stub life of the LLP resulted in a potential additional cost to the airline of $7.2M across both engines.

Through providing these costs at the LOI stage allowed the airline to renegotiate a reduction of redelivery conditions, resulting in a high potential for the avoidance of the handback shop visit and eliminating the additional costs of $7.2M.