Attention all aircraft owners/operators – “Cash in the clouds? – Do you have any?”

Simon J Murfitt FRSA, Banking and Asset Finance Partner at gunnercooke, examines PBH and other engine Maintenance Programmes and maintenance reserves accounts (MRA’s) and how you may find yourself with an unexpected surplus of credit.

If you own, lease, or operate an aircraft (narrow or wide body) with any commercial use and you are not a licenced and approved engine maintenance provider, chances are you are party to an engine maintenance agreement with an entity that is. That agreement could be stand alone or part of your operating or lease arrangements. It could also be part of a larger fleet agreement between your operator and the relevant maintenance provider(s) that relates not only to your aircraft, but many others.

As part of that agreement, it’s possible that your payments for such services are variable and set in relation, at least in part, to the actual flight and engine hours. The exact terms for such arrangements are quite varied and diverse across the aviation industry but one commonality is that they are often referred to as power by the hour or “PBH” agreements.

PBH Agreements and MRA’s – what exactly are they?

PBH agreements reflect the reality that aircraft and engine maintenance requirements are closely tied to the actual number of hours flown. They also reflect that those hours can be vary from month to month and year to year, throughout both (a) the period that any entity retains control of the aircraft and/or engines, and (b) their commercial life.

It is also universally true that such services are not cheap.

As such, customers for such services are often very keen to ensure that their payment obligations are not unduly excessive, but also fit for purpose to help ensure that the related vital maintenance work is never adversely affected or delayed due to any payment issues, perceived or otherwise. Non maintained aircraft or engines do not fly and do not earn.

To deal with these two potentially conflicting dynamics and others, the concept of a maintenance reserve account or “MRA” has developed. Simply put, the anticipated costs of routine maintenance for the term of the agreement are periodically charged and paid out on an amortised rate. Such sums are held by the maintenance provider and used to settle, by way of set off, relevant invoices for any maintenance works as and when that they occur. This way there is no risk of non-payment for the provider and no risk of delay in works due to such non-payment for the operator.

So then how does credit in a MRA accumulate?

Most PBH agreements have the dual concepts of: –

• a standing periodic charge for the agreed scope of work; and

• a set hourly charge for such works.

When you couple these two dynamics with the fact that much of an engine’s standard maintenance requirements are determined by the amount of use of the engine, as measured by its actual flight hours, the need and reality of payments being collected, but not always, fully used on a monthly basis, results.

Over time this surplus can be significant and indeed some PBH agreement require a ‘de minimus’ (minimal) level to be kept addressing any unforeseen maintenance events.

Who owns any credit in an MRA?

In English law, until such sums are credited/set off against actual agreed works performed, they remain the property of the payee. This needs to be considered and reflected correctly in the agreement for any related interest which may accumulate. The parties may also wish to consider if ring fencing such sums is appropriate.

How do you get access to such credit?

Primarily, on termination of the underlying agreement. This can occur either under it own terms or when another key related contract, such as a lease, ends. There is often a built-in obligation for the holder of such accounts to provide statements to the payee.

The second most common event, for such access is the assignment, novation, or other change of a party of the underlying maintenance agreement or other key related contract such as a lease. There are others.

In all such events, it is important to consider that for certain large maintenance providers with large fleet arrangements with lessors or operators, it is often difficult for any lessee or payee to get clarify as to the actual MRA balance for their aircraft at any given point in time. However, it’s important to always review the exact term of the relevant PHA as it may well contain such an obligation and in any event, if you don’t ask you don’t get. As in conjunction with any helpful language or not, the larger commercial dynamic between the various parties must be consider and can be utilised.

Other uses as a potential asset?

As a liquid asset of the payor, notwithstanding the fact another is holding any such credit amount, it can be accounted for as such. This fact can also be a useful tool when considering the overall balance sheet and periodic profit and loss of the payor both for immediate and future needs.

How to use any MRA credit and what to do next?

To properly consider next steps, proper due diligence on what exact amounts of any “cash in the clouds” that may exist is needed. Once that is known, then appropriate decisions such as early refunds and/or adjusting the period payments and many others may well be relevant and desirable.