A number of well-known maintenance, repair and overhaul organisations (MROs) in the aviation industry are located in Germany, including Lufthansa Technik (LHT), MTU and Elbe Flugzeugwerke. Although airlines often have in-house capabilities due to European Aviation Safety Agency or Federal Aviation Regulation Part 145 (or similar) approval, they also use third-party MROs. Such use may even increase for next generation aircraft due to high start-up costs, expensive tooling and more complex repairs. As airlines must constantly strive to reduce maintenance costs, it is prudent to carefully review and negotiate contracts with MROs.

MROs often insist that contracts must be governed by the law of their home jurisdiction. This article addresses a selection of important issues that must be considered when negotiating so-called 'time and material' or 'power by the hour' (PBH) contracts.

Is there a tool to compare the availability of replacement parts versus repairs?

Skeyos marketplace recently launched an online module which aims to revolutionise how buy-and-repair decisions are made for aircraft parts and components. Established in January 2018 and headquartered in Hamburg, Skeyos is an independent spinoff of LHT. In June 2019, at the MRO Procurement Expo in Frankfurt, Skeyos unveiled this new module which has a comparison functionality for repairs and parts, allowing purchasers of components or MRO services to compare and review what is available and at what price.

What are the different ways to calculate an adjusted PBH rate if it is payable at an event?

The PBH rate at a respective event could be calculated either by:

  • multiplying the hours operated each year by the rate that is applicable in the respective year; or
  • multiplying all of the hours (from the beginning of the term or the last event, as applicable) until the payment date with the adjusted rate that applies in the year of the event.

Does detailed negotiation of a German law contract avoid having the contract terms being classified as standard business terms?

Detailed negotiation, as interpreted by the German courts (in particular, according to decisions of the highest German civil court) means that negotiations can be considered to have taken place only if the user (of such standard business terms) makes the content of the respective clause that deviates from the law available for discussion and grants the other contracting party the freedom to safeguard its own interests with at least the effective possibility of influencing the content of the respective clause. Thus, the party providing the first contract draft must clearly and genuinely declare its willingness to make the desired changes to individual clauses. As a general rule, negotiation is reflected in amendments to the pre-formulated text. On the other side, it is insufficient if the party (that provided the first draft) just expressed its general willingness to amend clauses if the respective clause that allegedly was subject to negotiation has actually not been amended.

Should airlines co-insure MROs in relation to liability insurance and request a waiver of subrogation under their hull insurance?

Although co-insurance can usually be requested at no additional cost, this should not apply in a scenario in which the damages were caused at least by negligence of the MRO, its employees or subcontractors. If the airline uses its insurance to compensate any damages, the insurance premiums payable by the airline later on may be increased for such use. Moreover, MROs have their own hangar keeper insurance which (at least for a German MRO) also covers damages negligently caused by the MRO. Thus, in such cases, the MRO should request its insurer to pay for such damages and not the airline's insurer and a respective carve-out should be included in the insurance clause of the MRO contract.

Why do airlines often face unexpected cost increases at redelivery?

The investment required for aircraft redelivery is frequently and significantly underestimated by airlines in terms of finances, time and expertise. In addition, the International Bureau of Aviation has stated that many of the stipulations required by lessors during negotiation of redelivery conditions go beyond the standard requirements and airworthiness tasks that the manufacturers' maintenance planning document typically requires. Therefore, airlines often underestimate the quantity of actual work under the conditions of a lease agreement.

Further, if a lessee is late redelivering an aircraft, it must continue to pay rent to the lessor and often at an increasing rate. Cost increases may be applied directly after the scheduled expiry date or after a certain period pursuant to a certain scale, and could be as high as 200%.

As a result, rental payments can add considerably to the cost of aircraft redelivery. Operators should therefore review lease agreements to fully understand the cost implications of redelivery and seek external expertise for advice during lease negotiations and supervision on redelivery.

What could be problematic in defining 'engine overhaul'?

A definition of 'engine overhaul' in a lease agreement may be problematic if it means the "full performance restoration of all of the Engine core modules" as that definition is often relevant for the reimbursement of maintenance reserves from the lessor to the lessee and in such case they are only reimbursed to the lessee if a full performance restoration of all engine core modules has been actually performed. Moreover, the definition could include a provision that after such an overhaul, all life-limited parts shall have at least a certain number of flight hours or cycles remaining. If so, certain life-limited parts may need replacing earlier than necessary.

Please see the recent webinar on German MROs hosted by Lexology for further details. Watch it on demand now to learn more.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.