How do you manage residual value guarantees in aircraft leases?

1 What is a residual value guarantee?

A residual value guarantee (RVG) is a contractual provision that guarantees a minimum value for the aircraft at the end of the lease term, regardless of the actual market conditions. It is usually offered by the lessor, the manufacturer, or a third party, and it protects the lessee from the risk of a sharp decline in the aircraft value due to factors such as oversupply, technological obsolescence, or regulatory changes. An RVG can also benefit the lessor, as it can lower the lease rate and increase the attractiveness of the lease offer.

2 How is an RVG calculated?

An RVG is usually expressed as a percentage of the original or base value of the aircraft, which is the agreed value at the start of the lease. The RVG percentage can vary depending on the type, age, and condition of the aircraft, as well as the duration and terms of the lease. For example, a new aircraft with a long lease term may have a higher RVG percentage than an older aircraft with a short lease term. An RVG can also be adjusted over time, based on market trends and performance indicators.

3 How is an RVG enforced?

An RVG is enforced at the end of the lease term, when the lessee has to either return or sell the aircraft to the lessor or a third party. If the lessee returns the aircraft, the lessor has to pay the lessee the difference between the RVG and the actual residual value of the aircraft, if the latter is lower. If the lessee sells the aircraft, the lessor has to pay the lessee the difference between the RVG and the sale price, if the latter is lower. However, an RVG may also have certain conditions and limitations, such as maintenance standards, inspection rights, and marketability clauses, that the lessee has to comply with in order to claim the guarantee.

4 What are the benefits of an RVG?

An RVG can provide several advantages for both the lessee and the lessor. For the lessee, this includes reducing exposure to residual value risk, lowering the lease rate, and improving cash flow and profitability. For the lessor, benefits include increased competitiveness in the leasing industry, preservation of asset value, and facilitation of remarketing and disposal.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?