Lessors And Lion Air Working To Modify Leasing Agreements

One of Indonesia’s biggest airline groups is attempting to radically restructure its aircraft lease agreements. The Lion Group, who own the Lion Air brand, is reported to have approached its lessors to request group-wide power-by-the-hour agreements for 24 months.

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The Lion Group wants to renegotiate its aircraft leases. Photo: Andrew Sieber via Flickr

The Lion Group wants to go to power-by-the-hour leases

Jakarta-based Lion Group is Indonesia’s biggest airline group. They operate several well-known airline brands, including Lion Air, Thai Lion Air, Malindo Air, Wings Air, and Batik Air. Between them, the various airlines lease more than 220 aircraft.

According to a Cirrum report in FlightGlobal late last week, the Lion Group has contacted its many lessors asking them to revise lease agreements. The Lion Group wants to convert its existing leases to power-by-the-hour agreements. With the Lion Group’s revenues substantially down this year, the business is asking lessors to share the pain.

The alternative is to break leases and send planes back to their owners. Airlines know lessors have a tough time farming out returned planes to new airlines in the current environment. Many experts suggest this is making airlines bolder when it comes to asking for new leasing terms on existing aircraft.

“A typical power-by-the-hour agreement usually involves a minimum spend amount, as well as a charge per flight hour,” Cirrum’s Thomas Kaplan tells FlightGlobal.

“A maximum monthly charge may also be set, plus the minimum monthly charge can be less than half the normal full lease rate.”

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Malindo Air is another airline owned by the Lion Group. Photo: Paullymac via Wikimedia Commons

A poor deal for aircraft lessors

This kind of deal might be music to the ears of the cash-strapped Lion Group, but the many lessors are unenthused. The Lion Group is not the first airline group to ask for a power-by-the-hour agreement this year. But it’s a big ask for a 24 month period.

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These types of lease agreements are most common for seasonal operations. An airline would pay the normal lease while the aircraft is busy servicing seasonal demand on a certain route or to a certain destination. Then, during the off-season lull, the lease deal might revert to a power-by-the-hour agreement.

Now more airlines are asking for power-by-the-hour deals to cut costs. The problem for lessors is that these deals cut into their revenue. While some revenue is better than no revenue (as can happen with lease deferrals or plane returns are negotiated), aircraft lessors appear underwhelmed by the trend towards long term power-by-the-hour leases.

“Lion Air and other operators are intending to negotiate power-by-the-hour agreements with some lessors. Obviously, it will cause huge losses for lessors with this unfair situation,” one lessor is quoted saying in FlightGlobal.

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Lessors argue power-by-the-hour leases can cause them big losses. Photo: PK-REN via Wikimedia Commons

Goshawk Aviation sues Lion Group over unpaid aircraft leases

One lessor has already commenced legal action against the Lion Group. Goshawk Aviation Ltd sued the Lion Group in a London Court in late July. They claimed the Lion Group had not met payments on seven Boeing 737 leases. The lease deal was worth US$12.82 million, and Goshawk says between US$2 million and $3.2 million was unpaid. Goshawk wants the full $12 million-plus paid in full.

The Lion Group says it wants to find a “fair solution” with Goshawk and all its aircraft lessors. While the multiple lessors with planes out across Lion’s various airlines are adopting different positions on Lion’s power-by-the-hour requests, one lessor summed the situation up from the lessor’s perspective.

“We’re unhappy with power-by-the-hour.”

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