Case Study 1 Detail
Case 1 Detail
An opportunity to buy a new Boeing white tail arose in August with a Boeing mandated deadline of taking delivery by year end. After agreeing to price, terms and documentation in mid-September the paper work was completed. Our marketing team began looking for a lessee for the aircraft once we were confident the transaction would close. Potential airlines reviewed the specs of the aircraft while we worked on lease terms with their finance department. A decision was made to place the aircraft at a start-up carrier that had only three other comparable aircraft. The transaction was structured as a sixty month lease with full maintenance reserves as well as a three month security deposit. The aircraft was purchased from Boeing and delivered to the airline in mid-November, a full forty five days before the required closeting date.
When the December rent was due, it came a week late with the excuse of it being an operational error. When the January payment was not received on its due date calls were made to determine why. The airline had the various reasons but was told to pay and that no excuse was acceptable. This became a recurring theme for the next few months, late payment of lease payment and maintenance reserves; but always within a week of the due date. We learned that other lessors were having the same issue as we did.
After a few months the trend worsened, the payment was now slipping into the second week. Again calls and visits to the airline gave us no real comfort that the situation was going to improve. We were asked to allow lease and reserve payments to be thirty to forty five days late. The answer was a simple and clear no, the payment was due and that if it wasn't paid by a certain date each and every month, we would just ask for our aircraft back. At this time we geared up our marketing team to begin looking for a new lessee for this aircraft.
While we continued to receive late, but full monthly payments, we learned that two other lessors were not as proactive as we were and had allowed the lease payment to become sixty to seventy five days overdue. As the losses continued to grow at the airline we felt that this was not going to get any better. The airline was approached to determine if they would return the aircraft early and avoid what we thought would lead to the airline declaring bankruptcy. Once again, the airline requested a moratorium on lease payments for up to ninety days to help them restore cash balances. Again a simple no was our answer. Pay or return the aircraft.
When a payment was twenty one days over due the airline was informed that we planned to repossess the aircraft by the thirtieth day. The overdue payment was received the next day. The following month this was repeated, but no payment was made. The airline said it had no cash and requested to use some of its security deposit as a lease payment. Again a simple no was the answer with a warning of our repossession plans. Our asset managers had arranged with our lawyers to begin the legal work necessary for repossession as well as having flight crews ready to take possession of the aircraft. By this time our marketing team had found a number of interested lessees for the aircraft and had begun to structure lease agreements on a contingency basis.
With the risk of flight interruption, the airline agreed to return the aircraft, but wanted to use its security deposit to offset rent and reserves. Again a simple no was our answer. We made it clear that we would be at the airport the next the morning to foreclose on the aircraft. The aircraft was returned within a few days.
With proactive management we were able to avoid any loss of cash flow as well as saving the time and expense of being involved in the airline’s bankruptcy. The aircraft was subsequently placed on lease to a new carrier with only three days off lease with little if any transition costs. We later learned that the two other lessors had allowed the airline’s payments to be 120 days past due at the time the airline filed bankruptcy.