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This excerpt taken from the AYR 10-Q filed Nov 17, 2008. Risks
related to our leases
We
generally will need to re-lease or sell aircraft as current
leases expire to continue to generate sufficient funds to meet
our debt obligations, to finance our growth and operations and
to pay dividends on our common shares, and we may not be able to
re-lease or sell such aircraft on favorable terms, or at
all.
Our business strategy entails the need to re-lease aircraft as
our current leases expire in order to continue to generate
sufficient revenues to meet our debt obligations, to finance our
growth and operations and to pay dividends on our common shares.
In certain cases, including the New A330 Aircraft, we commit to
purchase aircraft that are not subject to lease. The ability to
lease or re-lease aircraft at attractive rates will depend on
general market and competitive conditions at the particular
time. If we are not able to lease or re-lease an aircraft at
favorable rates, including aircraft acquired pursuant to the
Airbus A330 Agreement, we may need to attempt to sell the
aircraft to provide adequate funds for debt payments and to
otherwise finance our growth and operations. In addition, if we
are unable to place one or more of the New A330 Aircraft on
lease sufficiently in advance of the delivery dates for such
aircraft, our ability to meet specification or equipment
selection deadlines may be adversely affected, resulting in
significant down-time or reconfiguration costs. Further, our
ability to re-lease, lease or sell aircraft on favorable terms
or at all or without significant off-lease time and transition
costs is likely to be adversely impacted by risks affecting the
airline industry.
If
lessees are unable to fund their maintenance requirements on our
aircraft, our cash flow and our ability to meet our debt
obligations or to pay dividends on our common shares could be
adversely affected.
The standards of maintenance observed by the various lessees and
the condition of the aircraft at the time of sale or lease may
affect the future values and rental rates for our aircraft.
Under our leases, the relevant lessee is generally responsible
for maintaining the aircraft and complying with all governmental
requirements applicable to the lessee and the aircraft,
including, without limitation, operational, maintenance, and
registration requirements and airworthiness directives (although
in certain cases we have agreed to share the cost of complying
with certain airworthiness directives). Failure of a lessee to
perform required maintenance with respect to an aircraft during
the term of a lease could result in a diminution in value of
such aircraft, an inability to lease the aircraft at favorable
rates or at all, or a potential grounding of such aircraft, and
will likely require us to incur maintenance and modification
costs upon the expiration or earlier termination of the
applicable lease, which could be substantial, to restore such
aircraft to an acceptable condition prior to sale or re-leasing.
Certain of our leases provide that the lessee is required to
make periodic payments to us during the lease term in order to
provide cash reserves for the payment of maintenance tied to the
usage of the aircraft. In these leases there is an associated
liability for us to reimburse the lessee for such scheduled
maintenance performed on the related aircraft, based on formulas
tied to the extent of any of the lessee’s maintenance
reserve payments. In some cases, we are obligated, and in the
future may incur additional obligations pursuant to the terms of
the leases, to contribute to the cost of maintenance work
performed by the lessee in addition to maintenance reserve
payments.
Our operational cash flow and available liquidity may not be
sufficient to fund our maintenance requirements, particularly as
our aircraft age. Actual rental and maintenance payments by
lessees and other cash that we receive may be significantly less
than projected as a result of numerous factors, including
defaults by lessees and our potential inability to obtain
satisfactory maintenance terms in leases. Certain of our leases
do not provide for any periodic maintenance reserve payments to
be made by lessees to us in respect of their maintenance
obligations, and it is possible that future leases will not
contain such requirements. Typically, these lessees are required
to make payments at the end of the lease term.
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Even if we are entitled to maintenance payments, they may not
cover the entire expense of the scheduled maintenance they are
intended to fund. In addition, maintenance payments typically
cover only certain scheduled maintenance requirements and do not
cover all required maintenance and all scheduled maintenance.
Furthermore, lessees may not meet their maintenance payment
obligations or perform required scheduled maintenance. Any
significant variations in such factors may materially adversely
affect our business and particularly our cash position, which
would make it difficult for us to meet our debt obligations or
to pay dividends on our common shares.
Failure
to pay certain potential additional operating costs could result
in the grounding or arrest of our aircraft and prevent the
re-lease, sale or other use of our aircraft, which would
negatively affect our financial condition and results of
operations.
As in the case of maintenance costs, we may incur other
operational costs upon a lessee default or where the terms of
the lease require us to pay a portion of those costs. Such costs
include:
The failure to pay certain of these costs can result in liens on
the aircraft and the failure to register the aircraft can result
in a loss of insurance. These matters could result in the
grounding or arrest of the aircraft and prevent the re-lease,
sale or other use of the aircraft until the problem is cured,
which would negatively affect our financial condition and
results of operations.
Our
lessees may have inadequate insurance coverage or fail to
fulfill their respective indemnity obligations, which could
result in us not being covered for claims asserted against us
and may negatively affect our business, financial condition and
results of operations.
While we do not directly control the operation of any of our
aircraft, by virtue of holding title to the aircraft directly or
through a special purpose entity, in certain jurisdictions
around the world aircraft lessors are held strictly liable for
losses resulting from the operation of aircraft or may be held
liable for those losses based on other legal theories.
The lessees are required under our leases to indemnify us for,
and insure against, liabilities arising out of the use and
operation of the aircraft, including third-party claims for
death or injury to persons and damage to property for which we
may be deemed liable. Lessees are also required to maintain
public liability, property damage and hull all risks and hull
war risks insurance on the aircraft at agreed upon levels.
However, they are not generally required to maintain political
risk insurance. The hull insurance is typically subject to
standard market hull deductibles based on aircraft type that
generally range from $0.25 million to $1.0 million.
These deductibles may be higher in some leases, and lessees
usually have fleet-wide deductibles for liability insurance and
occurrence or fleet limits on war risk insurance. Any hull
insurance proceeds in respect of such claims shall be paid first
to us as lessor in the event of loss of the aircraft or, in the
absence of an event of loss of the aircraft, to the lessee to
effect repairs or, in the case of liability insurance, for
indemnification of third-party liabilities. Subject to the terms
of the applicable lease, the balance of any hull insurance
proceeds after deduction for all amounts due and payable by the
lessee to the lessor under such lease must be paid to the lessee.
Following the terrorist attacks of September 11, 2001,
aviation insurers significantly reduced the amount of insurance
coverage available to airlines for liability to persons other
than employees or
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passengers for claims resulting from acts of terrorism, war or
similar events. At the same time, they significantly increased
the premiums for such third-party war risk and terrorism
liability insurance and coverage in general. As a result, the
amount of such third-party war risk and terrorism liability
insurance that is commercially available at any time may be
below the amount stipulated in our leases and required by the
market in general.
Our lessees’ insurance, including any available
governmental supplemental coverage, may not be sufficient to
cover all types of claims that may be asserted against us. Any
inadequate insurance coverage or default by lessees in
fulfilling their indemnification or insurance obligations or the
lack of political risk, hull, war or third-party war risk and
terrorism liability insurance will reduce the proceeds that
would be received by us upon an event of loss under the
respective leases or upon a claim under the relevant liability
insurance, which could negatively affect our business, financial
condition and results of operations.
Failure
to obtain certain required licenses and approvals could
negatively affect our ability to re-lease or sell aircraft,
which would negatively affect our financial condition and
results of operations.
A number of leases require specific licenses, consents or
approvals for different aspects of the leases. These include
consents from governmental or regulatory authorities for certain
payments under the leases and for the import, export or
deregistration of the aircraft. Subsequent changes in applicable
law or administrative practice may increase such requirements.
In addition, a governmental consent, once given, might be
withdrawn. Furthermore, consents needed in connection with
future re-leasing or sale of an aircraft may not be forthcoming.
Any of these events could adversely affect our ability to
re-lease or
sell aircraft, which would negatively affect our financial
condition and results of operations.
Due to
the fact that many of our lessees operate in emerging markets,
we are indirectly subject to many of the economic and political
risks associated with competing in such markets.
Emerging markets are countries which have less developed
economies that are vulnerable to economic and political
problems, such as significant fluctuations in gross domestic
product, interest and currency exchange rates, civil
disturbances, government instability, nationalization and
expropriation of private assets and the imposition of taxes or
other charges by governments. The occurrence of any of these
events in markets served by our lessees and the resulting
instability may adversely affect our ownership interest in an
aircraft or the ability of lessees which operate in these
markets to meet their lease obligations and these lessees may be
more likely to default than lessees that operate in developed
economies. For the three months ended September 30, 2008,
32 of our lessees which operated 68 aircraft and generated lease
rental revenue representing 51% of our total revenue are
domiciled or habitually based in emerging markets.
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