Aircraft Owners Gamble On By-the-Hour Concessions

As reality sank in that the pandemic would be of an unprecedented scale and longer than previously thought, lessors agreed to longer and more complex deferrals in exchange for lease extensions.

The proliferation of by-the-hour agreements–under which airlines only pay for the number of hours flown over a specific timeframe–reflect the fact that with supply far outstripping demand, airlines are in a dominant position in the relationship at present.

By-the-hour periods of varying lengths are being agreed either to entice new customers to take on assets or convince restructuring carriers to refrain from rejecting assets.

Chris Knight, London-based Finance counsel at Pillsbury, said by-the-hour agreements are viewed as a "necessary evil" by lessors.

Knight commented that, by and large, lessors have adopted a pragmatic view, in part to ensure that relationship airlines are taken care of, and to assist them in seeing out this period of intense difficulty, and in part to entice lessees to take aircraft on lease that may otherwise remain without a home for months on end, with the objective of saving on (not insignificant) insurance, storage, maintenance and other costs.

In terms of the impact, and also looking forward, Knight noted that "clearly this has had a negative impact on lessor profits (albeit negotiated ‘quid-pro-quo’ lease extensions will be a source of comfort) and, it follows, lessors will be, and already are, looking to move away from PBH arrangements as soon as possible."

This article first appeared in Cirium, read the full analysis here.