LEGAL TURBULENCE: AIRCRAFT LEASING AND CROSS-BORDER REPOSSESSION DURING COVID-19 OUTBREAK.

ABSTRACT:

The aviation industry has been the driving force for global economic development for years, but the outbreak of the COVID-19 pandemic shook the industry. It stood to halt all airline operations, air fleet and traffic collapsed; unforeseen financial burden was added to the industry especially the aircraft leasing industry with lessees finding it difficult to make rent payments when the use of airlines for air transport was banned. Lease payments could not be avoided due to the unspoken rule of “Hell or High Water.” This article examines the intricacies of the aviation industry in the face of a pandemic and how the industry handles cross-border aircraft leasing agreements especially in the interpretation of force majeure clauses and mostly the absence of any remedy for non-performance of contract even during a crisis. The Cape Town Convention and the UNIDROIT are the foremost applied governing laws in this paper and the applicability of these laws during a pandemic in the aviation industry will be analysed. Regional retorts by nations like Indonesia and Thailand will also be investigated to determine the functioning of the world aviation industry during a crisis.

INTRODUCTION AND BACKGROUND:

1. AVIATION INDUSTRY:

• • The commercial aviation industry has seen an exponential growth in the recent years, where acquiring airlines has been primitive through leasing contracts between nations. Leasing agreements emphasized on the financial burden being placed on the lessor, where heavy equipment was financed in favour lessee. An obligation of “Hell or high-water” was placed to ensure the lessee paid irrespective of any unforeseen incidents or any changes that make difficulty of payment for the lessee. Purchasing aircrafts in itself is a capital-intensive mission, owing to the constant fluctuations in the aviation industry, leading to airlines leasing aircrafts. Numerous economic advantages are granted from leasing of aircrafts, like the aptitude to grow and continue to be flexible. The concept of lease comes in with the right to possess and the right of the lessor to use the leased benefit, consideration provided in return. The Cape Town Convention has defined a lease agreement. [1]
  • The 21^st century sparks the development of globalization, by connecting the world through “flight”, but the COVID-19 outbreak proved otherwise, severely affecting the running aviator operations worldwide. This has led to the airline industry, finding it difficult to maintain and uphold their financial obligation. The concept of Force Majeure exists in most contracts to protect liability from non-performance in the event of any unforeseeable events that may take place while the contract persists. But this clause does not exist in case of the airline industry, making it detrimental that airline operators fulfil their obligations irrespective of any event that may take place. Hence, airline operators must recompense and yield delivery of aircraft under acquisition contracts. The pandemic however has made the airline industry question such obligations as they do not seem practical in situations such as the pandemic. Hence, the pandemic has created a market environment, making it pertinent to re-evaluate legal remedies available to airline operators and lessees to help evade the clauses, while transitorily overcoming lease payments during a crisis.[2]

2. CONTRACT OF AIRCRAFT ACQUISITION

• • The UNIDROIT Convention on International Financial Leasing, along with the Cape Town Convention’s aircraft protocol, give a set of regulations as to the standard of the rules which range from the very nature of the obligation and responsibilities of the lessor and lessee to the governing law of the very contract. Aircraft acquisitions are governed by different laws through various contracts as each contract varies from the situation or can even vary based on different interests of the parties to varying jurisdictions of the parties. The Cape Town protocol accedes to parties who have ratified to the protocol, giving them the governing law of their choosing to be used to regulate the contractual relationship of the parties. At times the UNIDROIT principles may also come into play when international contract law is preferred by parties. It becomes imperative to notice that the Cape Town standards provide an option for settlement while conforming to the General Principles of Law. Hence, giving the parties the freedom to regulate by choosing any governing law for their contractual relationship, varying from international contract law to domestic law. Remedies in case of default are available to both the lessor and the lessee under the governing law of their choosing in the agreement. The remedies are named as follows: repossession of aircraft by transfer or delivery or reselling/leasing into the market together with recovering or collecting profits from the lessee for the use of the aircraft. The Convention of International Financial Leasing also provides the lessor the authority to recover any due rents, damages or interests from the lessee in case of failure of lease payment. The lessor has the power under the convention to have financial security in case of any default of obligatory payment by the lessee to the lessor, like that of a creditor.[3]
  • Operating lease is a distinct risk allocation, bring both consistency and logic within law. Irrespective of being an owner or a lessee of an aircraft, the aircraft business stays highly regulated with respect to safety, insurance coverage and even liability among other things. It becomes imperative that the lessor is capable enough to manage assets, but airlines lease aircrafts with the sole agenda of churning profits, on successfully obtaining the same, it may or may not be distributed to its shareholders. -No degree of mutual profit is shared between a lessor-lessee agreement in the aircraft leasing industry as this defeats the whole purpose of the lessors in wanting to lease aircrafts. [4]The risk allocation lease model has taken over both the leasing and the aircraft industry for the past century. Low blockades for entry into leasing of aircrafts has led to an expansion of the business, causing more investors in the aircraft leasing industry, this in change has led to competitive lease rates for lessees. The area of obligation and liability is lop-sided as the lessors’ obligations are limited to the physical transfer of the aircraft to the lessee and the lessee’s obligations being after the successful delivery of the said aircraft to the return of the aircraft to the lessor on completion of the lease. In the case of a pandemic like COVID 19, the availability of leased apparatus is not affected and hence rent payment to the lease contract remains probable and does not become frustrated. [5]

LITERATURE REVIEW:

1. COVID-19 CRISIS:

• • The world economy was severely affected due to drastic measures taken to battle the 2021 pandemic, like closing all borders and restricting cross-border travel. Hence, the aviation industry faced the harsh truth of coming to a near halt, suffering a huge loss due to decrease in passenger movement. Flight cancellations combined with restricted air travel, forced airlines to pulverize their fleets, suggestively affecting liquidity. Despite the supposed losses, airlines still bear additional costs and other unescapable fixed charges relating to maintenance of aircrafts, inadvertently causing a revenue burden on airlines, since the burden of paying aircraft engineers, airline crew, and charges for parking in the airport. To mitigate this risk, airlines have resorted to pay cut-off of crew members and lay-off of various aircraft employees to cut expenses to battle the pandemic in the aircraft industry. It is quite clear that the pandemic has caused a wide-spread chaos and spirited financial difficulties for the aircraft industry, thus measures such as delay of lease payment will negatively impact the active relationship between lessors and the lessees (airlines), mainly because of the strict contractual obligations adhered to in the aviation industry. The impact of COVID-19 on the aviation industry might have also sparked and pushed for a greener industry by opting for sustainable travels and implementation of new technologies. The industry leaders at the Global Sustainable Aviation Forum have echoed for a long-term climate change action added with the economic recovery required after the pandemic. [6]
  • The commercial world tends to be more complex compared to the legal world and its strict tendencies. The lessors being well entitled to refuse any concessions of lease obligations by the lessee, but it becomes inevitable in face of crisis due to the cut on ticket costs, it is well understood and the lessee will default payment as the constant flow of revenue has been cut-off abruptly. Here, the commercial stand point becomes that of the lessors to consider the financial stability required for the aircraft industry after the pandemic has ended or whether to worry about supporting a business that was doomed nevertheless. The lessors face the myriads of choices where its either that they partner with an airline and provide a helping hand in the face of a crisis or take the mile and go for repossession of the aircraft which would be impossible to place and profit from the current market and rents due from a possible insolvent or an airline suffering to meet its ends. Lessors with a good liquidity rate in the market, could opt for deferred payment where the rent is due later but not forgiven entirely, could lead to a positive future leasing and/or sale of aircrafts, irrespective of the current crisis. [7]

2. FORCE MAJEURE:

The concept of force majeure has existed in contracts for eras together. The airline industry is looking for a way to avoid liability of default in the face of such a crisis, especially regarding lease, and believe the respite of invoking the force majeure clause can help them in withholding rent payment until all pandemic related restrictions terminate. However, the existence of legal obligations like that of “Hell and High water” existing in the airline business contracts, makes it impossible for them to invoke the force majeure clause, since it means that no delay of payment is excused irrespective of any unforeseen situation that may hinder the performance of the contract. And in the case of a aircraft leasing agreement, the chance of a force majeure clause to even exist, happens to be very low. Proved by prior interpretations, pandemics do not fall under force majeure events in the aviation industry, so even if a clause of such subject existed in any aircraft leasing agreement, it is implicitly understood that it must be excluded from its interpretation. Article 7.1.7 of the UPICC is a relief provided for parties under force majeure which excused a party from performing its contractual obligations towards any aircraft leasing agreement on the occurrence of an unforeseeable event, beyond the control of the parties to the contract. The crux of the very Art. is tacit that in case of any event that may render the performance of the contract impossible and render it incapable of upholding the terms of the contract. The existence of such a clause puts a blockade on the liability for damages caused by non-performance and enforcement of any obligatory advantage to the lessor. The common practice adapted by international courts is to interpret the clause strictly and to mean literally, like in the 2005 case of China International Economic and Trade Arbitration Commission failed to consider SARS outbreak as a force majeure event which thereby led to the parties having inexcusable liability to non-performance of the terms of the contract. Nevertheless, the impact of the pandemic being worldwide and severe has led the nations to consider issuing certificates to consider pandemic as a force majeure event, providing relief to both the lessor and the lessee. [8]

3. REGIONAL MARKETS:

• • The recovery of the aviation industry after the COVID-19 pandemic is at its peak and is set to have a constant growth of 4% in the near future. The post-pandemic crisis is strongly accompanied by a strong industry drive of the Low-Cost Carrier model for growth which has shown improvement in the airline network flexibility and a step towards sustainable trends. Nonetheless the future regional growth is nothing but disparate. The emerging middle class has fuelled air traffic especially in the Asia-pacific region, outperforming North America and Europe. The North American part of the nation has recovered fruitfully from the pandemic with 10% domestic ASKs and international ASKs reaching 101% in comparison to its 2019 statistics. The infamous Boeing boasts world forecast of annual GDP growth and its aircraft fleet increasing at the rate of to 1.8% annually. In Latin America, the Airbus’s international capacity is still at 92%, where Latin America shared the world’s commercial fleet is anticipated to stay around 6% through till 2042. Eurasia, and abbreviation of Europe, Russia and Central Asia has fully recovered domestically from pandemic but the international ASKs remain constant to its 2019 variable and has not seen a growth or a downfall. Its annual growth rates and its traffic fleet of 4.6% share the world’s commercial air forecast which is predicted to decrease from its 2022 value towards 2042, where Eurasia will absorb new commercial aircraft deliveries at the time.
  • The domestic capacity of China as of 2023 is 124% ASKs of 2019, whereas the international capacity remain 41% of 2019. Annually the country’s GDP is expected to grow by 4.1% with air fleet and traffic growing. Airbus reports show that in China 0.5 trips per capita in 2019 whilst in U.S it is 2.1. The increase in trips per capita show a steady surge with places of large population, resulting in the world’s fastest annual traffic growth rate by the year 2042. The country’s segment in the world’s commercial aviation industry will also increase with new deliveries in place. The domestic capacity in Asia/pacific seems to have returned to its pre-pandemic levels showing no regression. Whereas, the international capacity is casing. GDP growth in the overall region is expected to exceed its average growth. Boeings reports show that the traffic and fleet are 7.2% and 4.6% respectively with its regions fleet to grow in 2042 with multiple new deliveries within 20 years. The Middle East has fully recovered both its domestic and international capacity with an expected 2.8% annual GDP growth. Middle East’s share of the world’s commercial airlines is also expected to increase with new deliveries in 2042.[9]

4. AVIATION INDUSTRY AND GLOBAL ECONOMIC DEVELOPMENT:

Global economic development has always been driven by the aviation industry, facilitating international trade too. Trade happens to depend on the aviation industry highly since a third of trade takes place through air transport, and compared to other modes of transport, aircrafts are infamous for being fast and reliable especially for longer distances. As expected, due to the reliability and efficiency of air transport, where only particular commodities that are compact, perishable and which mostly cannot be delivered through other modes of transport, the cost of such an air freight does not come at a low price. The aviation industry also provides for employment opportunities and also enables economic activities in particular sectors. It majorly contributes to the world economy by enabling faster access to the international market allowing globalization of production. Cargo service through air transport in the aviation industry is the main contributor to the global trade market. The smaller the volume of air cargo, the higher the value of it in world trade. The COVID-19 outbreak brought a huge downfall for the aviation industry although, it did not affect the cargo service as highly compared to the passenger service through air transport. The aviation industry has a direct and indirect impact on the economic activities of the world and on other services and businesses neighbouring the whole economic sector. Another industry which is deeply connected and impacted by the aviation industry is tourism. Since tourism is connected to air travel and transport, and the connectivity brought by air transport happens to be the heart of tourism. COVID-19 impact on tourism has changed everything and is yet to reach its level of recovery.[10]

5. LESSOR’S OPTION: THAI LAW

The outbreak had one of the most devastating effects on Thailand’s aviation industry. Both domestic and international capacity have completely stopped causing great regression in the country. Post-pandemic era is also not of surety that passengers will opt for travel with fear of the pandemic across the world hence causing great economic impact on the country. Lack od revenue has led the airline countries to cut payments and lay-off employees or providing unpaid leaves. Payment restructuring is a viable option to Thai airlines where the lessor and lessee can restructure the rent and the time of the rental payment during the pandemic, where even deferred payments may be allowed by lessors or even lowering the rent amount or applying the security deposit to make up for any unpaid rent. The Civil Aviation Authority of Thailand (CAAT) is considered to be a flexible authority in comparison to the rest of the world and allow for payment restructuring once agreed by the parties to the contract only if the restructured contract amounts to a valid contract under the Thai law. Another method in face of the pandemic can be repossession of leased aircrafts by the lessor upon the lessee’s default. The lessor can apply to CAAT for the repossession procedure started off by deregistration of the aircraft or the lessee can consent to voluntarily deregister and return the aircraft to the lessor. CAAT’s Regulation No.11 gives CAAT the power to deregister any aircraft on any valid grounds.[11]

6. AIRCRAFT REPOSSESSION: INDONESIA

The COVID-19 outbreak affected the aviation industry across the world and Indonesia happens to be no exception to this doom, reporting a steep decline in the number of passengers and some even opt for restructuring through restructuring bonds. Here comes the play of risk which needs to be considered by owners and lessors. Such desperate times call for measures such as repossession of aircrafts registered in Indonesia by the lessors from the lessees. Indonesia is an active member of the Cape Town Convention and its respective protocol, where aircraft owners are offered remedies. Art. 54(2) of the Cape Town Convention in Indonesia that all remedies offered to creditors and lessors alike, can be brought forth without any action in the court. But self-help remedies like physical repossession of aircrafts are remedies which are not available under Indonesian laws due to the absence of an aviation regulatory law and authority. It is common practice in Indonesia for leasing agreements to have a deregistration by the power of attorney clause to exist, usually legalised by the notary of Indonesia. Although it may seem that such powers are absolute, they somehow prove to be revocable. It is legally viable for a lessor or security trustee to seek an interim relief for arrest and seizure of an aircraft, but this is affected by the slow and formal court procedure of Indonesia making the decisions also difficult to enforce. Instead, a friendly approach is encouraged has this is more practical and efficient in comparison to court proceedings in Indonesia. Therefore, aircraft repossession in Indonesia requires IDERA use, as it is the most practical method irrespective of its time-consuming nature.[12]

7. RECOMMENDATIONS: AIRCRAFT INSURANCE:

The very aspect of insurance is more the customers, the fewer the losses, but how does this apple in the aviation industry with its small customer base. Lesser premium rates together with a small customer base is what will equal to an aviation insurance industry and what makes it differ from regular insurance. Due to the potential exposure to a singular airline being higher, risk tends to be usually spread across multiple insurance providers which cover multiple aspects such as airlines, airports, leasing, manufacturing and many more. The Warsaw Convention in the 1929 addressed possible risk in the aircraft business, and looked at it from a liability standpoint, where it states that the carrier of passengers is implicitly liable for the safety of the passengers irrespective of being proven that there was any fault involved or negligence took place by the carrier. Which in the larger context means that the operator of airlines need protection from any future financial loss that may occur. The evolution of the insurance industry sparked the progress of new aviation technologies. Hull coverage was the most common type of insurance opted for by the airlines but as times progressed, people searched for a new type of insurance coverage, namely that of passengers and crew members. [13]

CONCLUSION:

The COVID-19 outbreak adjacent to various government measures with financial burdens for maintaining aircraft agreements has devasted the aviation industry. All the airline businesses are exploring newer methods to lessen the burden of lease payments and discovering new methods to battle the crisis.[14] The post-pandemic effect on the aviation industry is a good example on how much the common economy depends on the aviation industry for even its GDP growth to trade to tourism and various other factors. This is the reason why even though airports were ordered for closure and air transport was banned during the pandemic, and most normal lines of businesses faced losses just as would be expected in the face of such a crisis and most still unable to recover, yet the same isn’t seen in the aircraft business, even though they took a hit by delaying lease payments and multiple repossession of aircrafts took place together with some nations opting to deregister their airlines, but still the aviation industry has still seen a steady growth after the pandemic since it is depended on for most activities which contribute to the growth of the economy, and even tasks as simple as being able to travel are made possible by the aviation industry. Although the measures taken may not fully resolve the cumbersome burden of repayment of rents for the leasing of aircrafts, due to liabilities incurred by aircraft lease agreements, but still nations have opted for various methods to overcome these difficult times, may it be friendly measures or even drastic measures. The restructuring options available to airlines will depend on the jurisdiction of the airlines, but any restructuring opted by the lessors need to be adapted and acted upon with haste, otherwise this could lead to the collapse of the airlines.

REFERENCE(S):

1. Regional: COVID-19 as Force Majeure in Aviation Contracts. Comparative Analysis Across 10 Jurisdictions, Kinstellar (Mar. 26, 2020), https://www.kinstellar.com/insights/detail/1059/regional-covid-19-as-force-majeure-in-aviation-contracts-comparative-analysis-across-10-jurisdictions.
2. Tanya Agarwal, Aircraft Leasing Contracts in the Pandemic Era: Navigating the Challenges of Invoking Force Majeure by Applying Hardship under International Commercial Law, NYUJILP, 100, 101-102(Feb. 17, 2022)
3. Hortencia Jimenez, Commercial Aircraft Leasing and its Booming Complexities (May 2017), 5-7.
4. COVID-19 Challenges for the Aircraft Leasing Industry, CMS Law Now, UK, Scotland, Nov. 3, 2020, 1-3.
5. UNIDROIT Convention on International Financial Leasing, Ottawa, May 28, 1988 [hereinafter Financial Leasing Convention] The objective of this international covenant is to provide a framework of unified guidelines to regulate lessor and lessee responsibility in cross border leasing agreements.
6. Henry Kikoyo, Liability Management for Airlines Following Complete Shut Down of Operations or Aircraft Groundings in the Wake of Coronavirus (COVID-19), (Mar. 26, 2020)
7. Airlines Financial Reporting Implications of Covid-19, KPMG (Apr. 2020)
8. Vitaly S. Guzhva, Sunder Raghavan, Damon J. D’Agostino, Aircraft leasing and financing: tools for success in International Aircraft Acquisition and Management. 3,5-7,10-12, (Elsevier Inc. eds. 2nd ed., 2021).
9. Paolo Rizzi, Christiano Rizzi, The impact of COVID-19 on World Aviation Industry: Challenges and Opportunities. 6-10, (Mario Tettamanti eds. 1st ed. 2022)
10. COVID-19 and Aircraft Leases: Lessor Options under Thai law, Tilleke & Gibbins (Apr. 27, 2020).
11. Emir Nurmansyah, Nafis Adwani, Agus Ahadi Deradjat, Aircraft Repossession in Indonesia amid Economic Fallout from COVID-19, ABNR, Lexology (May. 20, 2020)
12. Cape Town Convention, supra note 1, Art. 5(2); Wool, supra note 14, 499-500.

[1] Regional: COVID-19 as Force Majeure in Aviation Contracts. Comparative Analysis Across 10 Jurisdictions, Kinstellar (Mar. 26, 2020), https://www.kinstellar.com/insights/detail/1059/regional-covid-19-as-force-majeure-in-aviation-contracts-comparative-analysis-across-10-jurisdictions.

[2] Tanya Agarwal, Aircraft Leasing Contracts in the Pandemic Era: Navigating the Challenges of Invoking Force Majeure by Applying Hardship under International Commercial Law, NYUJILP, 100, 101-102(Feb. 17, 2022)

[3] Tanya Agarwal, Revaluating aircraft leasing contracts in the pandemic era: navigating the challenges of invoking force-majeure by applying hardship under international commercial law, NOVUMJUS (June 21, 2023), https://novumjus.ucatolica.edu.co/article/view/4056/4738

[4] Hortencia Jimenez, Commercial Aircraft Leasing and its Booming Complexities (May 2017), 5-7.

[5] COVID-19 Challenges for the Aircraft Leasing Industry, CMS Law Now, UK, Scotland, Nov. 3, 2020, 1-3.

[6] UNIDROIT Convention on International Financial Leasing, Ottawa, May 28, 1988 [hereinafter Financial Leasing Convention] The objective of this international covenant is to provide a framework of unified guidelines to regulate lessor and lessee responsibility in cross border leasing agreements.

[7] COVID-19 Challenges for the Aircraft Leasing Industry, CMS Law Now, UK, Scotland, Nov. 3, 2020, 3-4.

[8] Henry Kikoyo, Liability Management for Airlines Following Complete Shut Down of Operations or Aircraft Groundings in the Wake of Coronavirus (COVID-19), (Mar. 26, 2020)

Airlines Financial Reporting Implications of Covid-19, KPMG (Apr. 2020)

[9] Vitaly S. Guzhva, Sunder Raghavan, Damon J. D’Agostino, Aircraft leasing and financing: tools for success in International Aircraft Acquisition and Management. 3,5-7,10-12, (Elsevier Inc. eds. 2^nd ed., 2021).

[10] Paolo Rizzi, Christiano Rizzi, The impact of COVID-19 on World Aviation Industry: Challenges and Opportunities. 6-10, (Mario Tettamanti eds. 1^st ed. 2022)

[11] COVID-19 and Aircraft Leases: Lessor Options under Thai law, Tilleke & Gibbins (Apr. 27, 2020).

[12] Emir Nurmansyah, Nafis Adwani, Agus Ahadi Deradjat, Aircraft Repossession in Indonesia amid Economic Fallout from COVID-19, ABNR, Lexology (May. 20, 2020)

[13] Vitaly S. Guzhva, Sunder Raghavan, Damon J. D’Agostino, Aircraft leasing and financing: tools for success in International Aircraft Acquisition and Management. 123-153, (Elsevier Inc. eds. 2^nd ed., 2021).

[14] Cape Town Convention, supra note 1, Art. 5(2); Wool, supra note 14, 499-500.