The United States Bankruptcy Court for the Southern District of New York has approved Aeromexico’s petition to modify the majority of its existing aircraft equipment. The Mexican carrier can now change the contracts with 27 different leasing companies, covering 82 aircraft and 14 spare engines. What does this mean for Aeromexico? Let’s investigate further.

What are “power by the hour” arrangements?

Before the pandemic, Aeromexico had leasing contracts that it paid monthly. Now, due to the COVID-19 crisis, is looking to shift its contracts to “power by the hour” (PBH) arrangements. But what does that mean? As Aeromexico said,

“The Stipulations generally provide that, if the Equipment is not used or operated, the Debtors shall not pay rent.”

This allows Aeromexico to manage its budget better when airlines are trying to reduce its cash burn to the minimum. Nevertheless, Aeromexico will still maintain, store, and ensure the airplanes. The leasing companies also have “reasonable inspection rights.”

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The concept of PBH is that an airline pays a certain amount for each hour that it flies an aircraft. The funds are used on the future maintenance requirements of the airplanes and engines. As Optima Aero, a company that provides PBH maintenance said,

“The main advantages of such programs are mostly financial. Instead of a large cash outlay at the time of your engine overhaul, you will pay for every hour flown on a monthly basis. This will improve your cash flow and allow you to use your funds for other projects with higher returns.” 

Aeroméxico B737 NG y Aeroméxico Connect Embraer
Aeromexico has returned 19 airplanes so far but expects to reduce its fleet more. Photo: Daniel Martínez Garbuno/Simple Flying

What does Aeromexico win with PBH arrangements?

Aeromexico is currently under a Chapter 11 financial reorganization. The Mexican airline has already rejected leases for 19 aircraft and expects to return more airplanes in the future. Nevertheless, when talking about the PBH arrangements, Aeromexico said it needs to have the flexibility to “use all aircraft on their current operating routes.”

Aeromexico expects to have lower operating expenses with the PBH arrangements. The rates will vary depending on the model and vintage of the airplanes. Still, the new leasing contracts will “require materially lower ongoing payments than would have been due under original Leases.” 

Aeromexico Getty
Photo: Getty Images.
An Aeromexico airlines plane lands at the Benito Juarez International airport, in Mexico City, on May 20, 2020, amid the new Covid-19 coronavirus pandemic. - From suspending all flights to reducing their employees' wages, Latin American airlines take extreme measures and cry for government aid in the face of the expansion of the coronavirus, which could leave them losses of 15,000 million dollars this year. (Photo by PEDRO PARDO / AFP) (Photo by PEDRO PARDO/AFP via Getty Images)

Which airplanes are under the new leases?

Aeromexico’s current fleet is of 105 aircraft, including 22 that belong to the airline. It leases the remainder of its planes. At the start of the year, it had over 120 planes but has already rejected the contracts of 19.

Now, Aeromexico can change the contracts of 22 Boeing 737-800, six Boeing 737 MAX-8, seven Boeing 787-8 Dreamliner, ten Boeing 787-9 Dreamliner, and 37 Embraer E190.

What can we expect of Aeromexico’s fleet moving forward?

In July, Aeromexico published a forecast of what was next to come. In that presentation, Aeromexico talked about possible codeshare agreements with powerhouse airlines like LATAM and Air France-KLM.

But it also talked about the future of its fleet. Aeromexico planned to finish the year with a fleet between 80 and 89 aircraft. It also planned to go from six subfleets to four, eliminating the Embraer E170 and Boeing 737-700 aircraft. The airline has almost done that, as a few Boeing 737-700 remain with the company.

Despite the new PBH arrangements, we can expect Aeromexico to reduce its fleet further. The airline might reject leasing contracts of its Embraer E190 and Boeing 737-800 subfleets. We don’t see Aeromexico changing its long-haul fleet or its Boeing 737 MAX fleet. Instead, we might see an upgauge in Aeromexico Connect using some of the Boeing airplanes on the regional routes.

How will Aeromexico’s fleet look like next year? Let us know in the comments.