Buying or Selling Aircraft on Maintenance Programs

Many aircraft sale listings note that an aircraft is “on programs” (e.g., maintenance programs). These programs typically include “power by the hour” arrangements for engines or APUs, and, in some cases, airframe maintenance.

The gist is that an aircraft owner pays the original equipment manufacturer (OEM) or third-party program provider a specified rate per hour of use, plus a monthly fee. In return, the program provider pays for certain specified maintenance costs for the engines, APU, or airframe

Similar to other industries, aircraft OEMs generate a significant portion of their revenue from ongoing maintenance. Naturally, program providers aim to profit from these maintenance programs as well. So what benefits do they offer aircraft owners?

Benefits of Aircraft Maintenance Programs

At least three key benefits stand out. For starters, an aircraft owner can spread out maintenance costs. These are typically paid by the hour and month instead of in large amounts when the actual maintenance is performed.

Second, a maintenance program will often increase an aircraft’s resale value. When selling a plane nearing overhaul, one on a maintenance program will typically cost significantly more than one without. This is because the next expensive maintenance event has largely been prepaid.

Additionally, aircraft that are on maintenance programs are perceived to be better maintained. With the program covering the maintenance costs, there’s little incentive for owners to skimp or cut corners on upkeep.

Third, a program will lower your overall maintenance costs. This is because program providers have enormous buying power, including the third-party providers, that source their own parts. In turn, this translates to savings for the owner–even taking into account the actuaries’ cut in the program providers’ offices.

Purchase Agreement Considerations

Whether buying or selling an aircraft, it’s imperative that your aircraft purchase agreement addresses the various aspects of maintenance programs. First, it should cover whether the plane is delivered with the programs. Since many programs allow deferred hours or balloon payments due at engine overhaul, address any such “deferrals.”

Conversely, the purchase agreement should cover whether a current owner can “cash out” any positive balances in the programs (to the extent allowed). Finally, the purchase agreement should cover whether a purchaser must complete the transfer of the programs.

These variables can sway the value of the aircraft by hundreds of thousands of dollars or more, and prevent costly fights later on about the status of program enrollments.

When buying an aircraft “on programs,” most purchasers elect to continue the enrollments. It makes good business sense. Why stop paying into an engine program when the previous owner has already contributed a substantial amount toward the next major maintenance event?

That said, the decision to buy a plane enrolled on programs should be made in conjunction with advice from your aircraft broker. They’ll explain the intricacies of each manufacturer’s program-specific benefits. With your aircraft broker’s guidance, you can determine if a plane on programs is right for you. After all, it’s certainly cheaper in the short term to buy a plane without programs if you plan on discontinuing them anyway.

How to Transfer Maintenance Programs

The typical transfer process involves the seller providing proof of enrollment and the current invoicing status. (This is because the program provider usually only communicates with the current owner). Invoicing from program providers often lags because it relies on the owner reporting their flown hours. Any shortfall can be reconciled at closing, as calculating amounts owed is straightforward using the last reported hours and the hours on the aircraft or engines at closing. Program providers supply the paperwork, whether it’s an assignment or a new enrollment contract.

Some new owners prefer to avoid regularly scheduled payments, choosing instead to invest in their businesses until the cash is needed when aircraft maintenance expenses arise. However, an often-overlooked risk of discontinuing a previous owner’s maintenance programs lies in potential early termination fees or liquidated damages provisions.

Certain maintenance programs are “term” contracts that heavily penalize owners for discontinuing them. One manufacturer’s airframe maintenance program is particularly aggressive in enforcing these penalties. Another OEM’s program imposes penalties if the provider has paid more for maintenance than the owner contributed, and the contract is terminated before the scheduled term ends. In such cases, owners may receive surprise invoices for tens of thousands of dollars–or more–within months of closing the sale.

If these scenarios aren’t addressed in the aircraft purchase agreement, disputes over responsibility for termination fees or liquidated damages can arise, post-sale. 

While maintenance programs can simplify upkeep and stabilize costs for aircraft owners, failing to address them in the purchase agreement leaves both parties vulnerable to costly conflicts down the road.

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This article is not intended, nor should it be construed or relied upon, as legal advice. The comments, recommendations, and analysis expressed in this article are those of the individual author, John Farrish, are purely informational. This article does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, each person should retain and consult an attorney with knowledge of the subject matter.

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