In my salesman world, it’s always based on market. If competitor X is offering $300,000 for a wide-body, I can’t be at $400,000. For me, it’s always been a competitive view and then it’s up to you and your team and then your company, ultimately, to decide whether or not the risks associated with that price are worth it or not. You’re always playing the best return scenario, but the tolerance band for pricing is only what the competition will take. I’ve been fortunate, in most of my career, to have very good relationships with the airlines and that helps a lot, in negotiations. It’s not going to help me get a better price, but it might help me know what’s going on or where I’m at or give me the last bid. But it’s never going to justify a huge delta in rent or anything like that.
You’re dealing with smart people that are watching out for their best interests. They do look around, they do know, for the most part, what the market rates are. You’ve got to be in the ball park. It’s all driven by competition.
Different airlines have different takes. First of all, if they have maintenance facilities, then, obviously, they want to do the work on the aircraft. Typically, in South East Asia, there would be a rent portion, a deposit portion and maintenance reserves. For the most part, the average airline, mid-sized or start-up, those are the sort of leverage that you have to play with. Obviously, for the higher risk, you have more deposit, hopefully. Reserves are, essentially, an insurance policy, as well. You’re just betting that if the airline hands you back the aircraft prematurely, that you’ve got money in the bank to perform the maintenance. If there’s an MTPH program, with one of the OEMs, then that allays some of that fear, but not necessarily always because, as I mentioned earlier on, with the situation we’ve had, a default uncovered that there were unpaid reserves. That’s one area that you can play a little bit in.
A lot of leasing companies would low ball on the maintenance reserves, which increases their risk but it makes the cashflow lower. Perceptively, for the airline, it looks as if they are paying less per month. The only problem with that is, when that maintenance event becomes due, then they have to dip into their own pocket, to make it up and they don’t always reserve for that. That has actually caused some airlines to go bankrupt.
The original leases, in China, were very much that way, where it was just a rent and no reserves, but they had to return the aircraft in such condition that was mid-life or three quarters life or something like that. Then when they got to the end of their leases, they were looking at tens of millions of dollars of payments, to get it back into that condition or pay out the lessor. So a lot of the early ones ended up just extending and extending, to try to offset some of that. Those were some lessons learnt in China. It looked like a great deal, initially, to them, because they were just paying their basic rent. But at the end of the day, they realized that it really wasn’t such a good scenario.
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