The new Aviation Finance & Leasing 2021 guide covers 32 jurisdictions. Set against the seismic impact of COVID-19 on the industry, the guide provides the latest legal information on aircraft and engine purchase and sale, aircraft and engine leasing, aircraft debt finance, security, liens, enforcement and current legislative proposals.
Last Updated: July 30, 2021
“The moment you doubt whether you can fly, you cease forever to be able to do it.”
Peter Pan by J.M. Barrie (1904)
One ought to be forgiven for being swayed, however briefly, over the past 18 months by the thought that we may be grounded once and for all. COVID-19 is to aviation a storm that keeps changing direction. We adjust our heading, but the storm adjusts. We are left no choice but to withstand or perish. So, we throttle-up and power through the storm. To anyone in aviation, be they on a flight deck or in a cubicle, it is a calculated and managed risk that tempts fate nonetheless but answers stoically: I am the storm.
It is human nature to look to history amidst confounding events to seek discernible patterns, real or imagined, that comfort and guide. The “good news” is that the history of aviation has been, and will forever continue to be, marked by cyclicity, eternal shocks and crisis. Indeed, it takes a lot of history to produce this Guide. Still, even the 20/20 vision of the most experienced aviator could not have seen the great black swan of 2020 approaching. That proverbial bird strike proved to be nothing short of catastrophic for the aviation industry, which was subjected to the full fury of the COVID-19 pandemic. Yet, come what may, industry veterans are bound to look back one day and believe that all things worked out according to some grand order that is only discernible from the comforts of an armchair with the benefit of hindsight, and Irish whisky.
It is a bleak fact that we are presently 18 months into an industry crisis with no near-term end in sight, as COVID-19 becomes endemic. A corollary fact is that bullish outlooks for near-term airline recovery can serve as useful, if not always intentional, hiding places for deep distress in lease and loan portfolios. The unprecedented magnitude of the pandemic and its economic fallout means that the spectre of financial ruin haunts many in the industry for whom a liquidity crisis could quickly turn into a solvency crisis.
Full recovery is difficult to conceive amidst a cascade of distress, default and disputes that test the resolve of even the most coveted lessor-lessee and lender-borrower relationships. The International Air Transport Association (IATA) expects global airline revenue per passenger kilometre (RPK) to remain 57% below 2019 levels in 2021, and most forecasters do not see global commercial air travel returning to 2019 levels until at least 2024. The slowest recovery will be the long-haul market. The brutal but inescapable fact of the matter is that airlines will require smaller fleet (comprised mainly of newer, narrower and fuel-efficient aircraft in favour over older, wider “gas-guzzling” models). One consequence of the foregoing is that many of the factors that supported stable aircraft values historically will simply not be present in the short to medium term at least. The battering of aircraft value drops on the balance sheets of aircraft lessors and financiers will translate into an increased scarcity of traditional financing on favourable terms.
Where there is risk, there is usually reward – and the opposite holds equally true as well. One current consequence of the crisis in commercial aviation precipitated by the pandemic is a rebalancing of risk and reward in both the aviation debt and equity markets, which of course comes with a rebalance of power away from the borrower/lessee/investee to the lender/lessor/investor, where it arguably rightfully belongs. Another is the opportunity for investment that is presented for those whose powder was kept dry pre-crisis, whether by foresight or dumb luck.
The predation of the globalised economy is such that there must be winners and losers; the victors to whom go the spoils, and the vanquished who must simply go. All airlines and many lessors have seen their profit margins scorched. To many investors in aviation finance and leasing, the quest for a return on capital has now been replaced with the desire for the return of capital, or at least enough cents on the dollar to not bruise their egos irreparably. Such investors may exit the sector stage right, never to be seen or heard from again. The preceding five years in particular witnessed a tsunami of new capital flooding a marketplace already bustling with bright-eyed and yield-chasing neophytes who had not yet experienced the distinct displeasure of a depressed aviation finance market (and were at risk of confusing a bull market for brilliance).
Aviation finance and leasing is a sector where deal and distress experience remains the best – and, possibly, the only – teacher. Such experience is to an aviation finance and leasing attorney what pure Damascus steel is to a sword. Nothing will substitute. Battle-scarred aviation finance and leasing attorneys, who have helped shepherd airlines or their creditors through varying degrees of airline distress during prior – far less drastic – downturns (and the early stages of the present crisis), appreciate the skill it takes to make the terrifyingly complex terrifyingly simple. It is presently a matter of intense speculation which airlines will survive the current crisis. Many will not. As for the would-be survivors, debate rages as to who, between governments and the private sector, will be their saviours, and on what terms salvation will be granted. There is an intriguing serendipity about the restructuring of airlines. The fortunes of airlines depend upon the fortunes of nations, and the reverse also holds true (while the fortunes of aircraft lessors, financiers and investors depend upon both).
Although some remain scrupulously cautious of endorsing government intervention (so-called “bailouts”), it is still desperately needed in an industry where IATA expects global airlines to lose nearly USD48 billion in 2021 – which is at least a marked improvement from the USD126 billion loss in 2020. It is also worth noting that the global airline industry’s total debt burden is now estimated by IATA to be USD651 billion, up USD220 billion from 2020. As such, many airlines are experimenting with novel methods of capital raising and rescue financing ahead, or as part, of major restructurings. Alternative aircraft financiers (private, export-credit, or some combination thereof) will also continue to support global airlines through various historic and new products.
All of this, on the precipice of what some economists believe to be an eventual deep recession and in addition to pre-existing calamities (such as the Boeing 737 Max-8 grounding), indubitably promises to keep top aviation finance and leasing attorneys around the world gainfully employed for the foreseeable future.
The amount of knowledge that had to be mastered to complete the questionnaire that forms the cornerstone of this guide would have defeated many lesser attorneys, but not the ones who took a significant amount of time out of their thriving legal practices to respond. They did so masterfully, in a manner that only confirms their place in the upper echelons of the profession. Crafting the questionnaire itself was, I might add, a gargantuan undertaking made possible by my unrelenting impulse to somehow comprehensively capture and usefully present thousands of elements of cross-border and domestic law and practice into a single resource. I owe a debt of gratitude to each of the leading and highly experienced aviation finance and leasing attorneys from around the world who coalesced to make this guide possible. I hope that you not only find this Guide to be helpful, but also to be the best resource of its kind. To that end, and in the spirit of semper ad meliora, I welcome and encourage feedback and suggestions from readers for future iterations of this guide.
I believe that laws – be they Newton’s or judges’ – are the great stalwarts of aviation. I also believe that the best aviation attorneys live in the blank white spaces between the lines and at the edges of contracts, where black letter law serves the needs of commerce. We hope for the best, are prepared for the worst, and unsurprised by anything in between. But do we dare lead the way and disturb the so-called order of things while in the throes of an epoch-making crisis in the aviation industry? Well, when in the throes, look to Thoreau. The American transcendentalist writer, Henry David Thoreau, wrote (in 1854): “If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.” It is my view that the aviation finance legal community, and, therefore, the aviation finance community, has collectively overlooked international arbitration as a foundation of international aviation finance. There is very little precedent for this, but when we cannot find someone to follow, we must find a way to lead by example. Tune in next year – same time and same channel – for the fourth edition of this Guide to find out more.
There will be recovery. There must be, if for no other reason than the fact that the human spirt demands it. It may never be the same as before but, with a bit of luck and a lot of ingenuity, it may be better. To that end, may all those involved in aviation – even the attorneys – help hasten the return to a day when, once again, the greatest distance between any two places on the planet is only time.