Aviation Finance & Leasing 2021 Comparisons

Last Updated July 30, 2021

Law and Practice

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The execution of an aircraft or engine sale agreement itself (including the sale of an ownership interest in an entity owning an aircraft or engine) does not generally result in a taxation, irrespective of the location of the aircraft or engine and the seller’s domicile. Generally, the transfer of tax ownership upon completion of the sale agreement is relevant for income tax and VAT purposes.

It is not necessary for an aircraft sale agreement to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, if legal proceedings are instigated before a German court, upon its request, foreign language documents must be translated into German to be admissible in evidence in such proceedings.

In order to transfer title, the owner has to declare that it transfers its title to, and surrender possession over, the aircraft or engine; the acquirer has to declare that it accepts such title to, and establish possession over, the aircraft or engine. Transfer of title to an aircraft pursuant to German in rem law:

  • includes any essential part (wesentlicher Bestandteil) – ie, any part which cannot be removed without destruction of either the aircraft or the essential part;
  • extends to any non-essential component (nicht wesentlicher Bestandteil) which, in the parties’ understanding, forms part of the aircraft; and
  • comprises by way of rebuttable presumption any accessory (Zubehör).

Non-essential components and accessories are, as the case may be, eg engines, auxiliary power units or removable parts. There is no conclusive view as to whether an engine constitutes a non-essential component or an accessory. Pursuant to German law, the sale of the ownership interest in an entity that owns an aircraft or engine is not recognised as a sale of such aircraft or engine itself.

Under German conflict of law rules, transfer of title to an aircraft registered in a national aircraft register of a member state of the ICAO will generally be governed by the law of the jurisdiction of registration of such aircraft, unless there is – in exceptional cases – a substantially closer nexus to the laws of another jurisdiction, or if the laws of the jurisdiction of registration in turn refer to the laws of Germany (renvoi). The recognition of obligatory provisions in a bill of sale which are not related to the title transfer must be assessed independently. If the bill of sale is expressed to be governed by a law not applicable pursuant to the above, German law might vet whether such title transfer de facto abides by mandatory German law. If the aircraft is not registered in a contracting state of the ICAO, and in the case of separate engines, the transfer of title is governed by the lex rei sitae (Article 43 of the EGBGB).

If German law does not govern the transfer of title, German conflict of law rules will look at the laws which are applicable to the title transfer in order to determine if the bill of sale is sufficient. German law does not expressly specify minimum substantive requirements applicable to bills of sale. However, a bill of sale should:

  • sufficiently determine the aircraft, the engines, and any other part as well as the aircraft documentation; and
  • contain suitable wording regarding the transfer of title.

Please note that the German Civil Aviation Authority (Luftfahrt-Bundesamt) requires a proof of ownership in order to register the aircraft in the German aircraft register (Luftfahrzeugrolle), which can be established by a bill of sale.

It is not necessary for a bill of sale to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, upon request of the competent German court, foreign language documents must be translated into German to be admissible in evidence in proceedings before such court.

A bill of sale cannot be registered or filed and is not subject to any consent from any government entity. However, the application for registration of a foreign owner in the German aircraft register (Luftfahrzeugrolle) requires the submission of proof of ownership, which in practice can be established by a bill of sale (with back-to-birth traceability, if applicable).

The disposal of an aircraft or engine by a party which is a tax resident in Germany basically triggers an income taxation of any capital gain from the sale – so called unlimited income tax liability. Also, the disposal of an aircraft registered in the German aircraft register (Luftfahrzeugrolle) by a non-German tax resident results in a capital gains taxation in Germany, irrespective of where the asset is located – so-called limited income tax liability, but subject to double taxation treaties.

VAT should not be payable if the aircraft is designated to be used by airlines predominantly providing international commercial air transport. The taxation of the sale of an ownership interest in an entity that owns an aircraft or engine depends particularly on the type of entity sold (eg, partnership or corporation) and the individual structure of the sale.

No stamp duties or transfer taxes are triggered by a disposal of an aircraft or an ownership interest in an entity that owns an aircraft in Germany.

Operating leases, wet/damp leases, finance leases and leases concerning only engines or parts are permissible and generally recognised.

A lease involving either a domestic party or an asset situated in Germany can generally be governed by foreign law, provided that a German court may give effect to German public policy and to overriding mandatory provisions of either German law or of the laws of any other country pursuant to Regulation (EC) No 593/2008 (Rome I Regulation), and must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.

Except for reporting requirements relating to inbound or outbound payments in excess of EUR12,500 (or the equivalent in any foreign currency) from or to a foreign lessor pursuant to the German Foreign Trade Ordinance (Außenwirtschaftsverordnung), there are no restrictions imposed on domestic lessees making rent payments to foreign lessors in US dollars.

In the European Union, exchange controls between member states and between member states and third countries are prohibited. However, for statistical purposes all inbound or outbound cross-border payments in excess of EUR12,500 (or the equivalent in any foreign currency) have to be reported by German residents (Inländer) to the German Federal Bank (Deutsche Bundesbank) within a time period of seven calendar days of such inbound or outbound payment pursuant to the German Foreign Trade Ordinance (Außenwirtschaftsverordnung). German law will give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.

The mere physical execution of a lease agreement in Germany or the transportation of an executed lease agreement into Germany does not result in any taxation. However, income resulting from a lease is subject to taxation in case of a German tax resident lessor or, otherwise, if the aircraft is registered in the German aircraft register (Luftfahrzeugrolle) – subject to double taxation treaties – irrespective of an original or copy of a lease agreement being brought into Germany either physically or electronically. Leasing of an aircraft designated to be used by airlines predominantly providing international commercial air transport is usually exempt from VAT.

Generally, operating leasing by a German lessor does not require any regulatory approval or licence from German authorities. The provision of German financing leasing (Finanzierungsleasing) within the meaning of the German Banking Act (Kreditwesengesetz or KWG) within or into Germany can be subject to regulation under the KWG. The financing leasing of an aircraft under a financing lease will require a permit under the KWG subject to certain exemptions. The features of a German financing leasing (Finanzierungsleasing) differ from those of finance leases pursuant to IFRS and may deviate from comparable tax rules. For other roles in an aircraft financing (eg, the lender) further regulatory approvals may be required (eg, a bank licence).

We are not aware of any aspects of German law that would require the inclusion of specific provisions in a foreign law governed lease agreement that would not typically already be included, except for certain restrictions to sanctions provisions predicated on the anti-boycott rules in the German Foreign Trade Ordinance (Außenwirtschaftsverordnung) and in Regulation (EC) No 2271/96 (EU Blocking Regulation) which should be included if a German resident and/or European resident is party to the lease.

Gross-up provisions with regard to any withholding tax levied on payments by a party to a lease agreement are not prohibited by German (tax) law.

The terms of the lease can cover subsequent additions to the aircraft – eg, the replacement of, and to a certain extent, the transfer of ownership to, parts.

As regards ownership, German law provides for mandatory provisions. Under German conflict of law rules the choice of law is excluded for in rem rights. Aircraft or engine leases typically contain provisions relating to the replacement of parts, and the alteration and modification of, and addition to, the aircraft as well as to the corresponding title transfers.

Title to an engine does not vest in the person holding title to an airframe merely by installation of the engine on the airframe. However, if the title to the airframe and the engine is held by the same person, and the engine is on-wing or temporarily off-wing, the German aircraft mortgage (Registerpfandrecht) granted over the airframe may extend to such engine. Aircraft parts may follow a different regime compared to engines.

The concept of a common law trust and of an owner trustee of a common law trust is not recognised under German in rem law, because a separation of legal title from equitable title is not compatible with the German concept of title. Germany has not ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition. However, a statutory trust with an own legal personality and an owner trustee of such trust are recognised in such capacities. The German Civil Aviation Authority (Luftfahrt-Bundesamt) is likely to disregard a common law trust arrangement and has occasionally registered the trustee as unrestricted owner in the past.

The purpose of the German aircraft register (Luftfahrzeugrolle) is to implement the rules of Part 1 – Chapter III of the Convention on International Aviation (the Chicago Convention), which is devised to maintain the safety of navigation of civil aircraft, but not to constitute or allocate in rem rights in aircraft. The aircraft register records the ownership interest of the holder of legal title to the aircraft as notified to the German Civil Aviation Authority (Luftfahrt-Bundesamt), but does not prove ownership, and the registration of a person as owner in the aircraft register does not establish any ownership interests. The interest of a lessor of an aircraft is not recorded in the aircraft register.

An aircraft cannot be registered in the name of the aircraft operator if the operator is not the owner of the aircraft. The aircraft must be registered in the name of the owner.

There is no specific register for leases concerning aircraft or engines.

Neither a lease nor a lessor’s interest in or under an aircraft lease can be registered or recorded in the German aircraft register (Luftfahrzeugrolle). However, an aircraft lease to which a German operator is a party requires approval by the German Civil Aviation Authority (Luftfahrt-Bundesamt) prior to the commencement of the services. In a multi-tier lease structure this rule applies to the entire chain of leases.

It is not necessary for a lease to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. As a matter of practice, the German Civil Aviation Authority (Luftfahrt-Bundesamt or LBA) accepts leases in the German or English language. If the lease is in any other language, the LBA may require that the lease, or excerpts, be translated and such translations be certified by a registered translator.

As an aircraft or engine lease cannot be registered, no taxes/duties fall due.

As a practical observation, private and corporate jets operated in Germany are often registered in the USA. Commercial aircraft operated by German airlines and habitually based in Germany are typically registered in Germany.

Generally, any document submitted to the German Civil Aviation Authority (Luftfahrt-Bundesamt or LBA) needs to be an original or a notarised (and, if and as applicable, apostilled or legalised) copy of such document and any document in a foreign language needs to be accompanied by a certified translation into German. As a general observation, registration processes with the LBA are more voluminous than in other jurisdictions.

A non-German tax resident lessor is basically subject to limited income taxation in Germany if the leased aircraft is registered in the German aircraft register (Luftfahrzeugrolle) irrespective of the lessee being domestic or not (subject to, and often reversed by, double taxation treaties).

A foreign lessor being a party to a lease agreement or to its enforcement does not generally result in a limited income taxation in Germany. The mere leasing of an aircraft or engine does not result in a foreign lessor being deemed to be tax resident, domiciled or carrying on a business in Germany. Rather, a foreign lessor's income from a lease is subject to income taxation in Germany if the aircraft is registered in the German aircraft register (Luftfahrzeugrolle), subject to, and often reversed by, double taxation treaties.

German law does not impose a general liability for the maintenance or operation of an aircraft or aircraft engine on the owner (unless it is also the operator) or lessor (if different from the owner). This can be different if the owner or lessor assumes control over the aircraft (eg, in the case of a repossession) or, eg in case of emission rights, if the operator is unknown (which appears unlikely in the case of commercial aircraft). The owner can be obliged to provide information about the aircraft and its use – eg in connection with the registration status or emission trading obligations.

German law does not impose strict liability on the owner of an aircraft which is not the operator or on the lessor (if different from the owner). In exceptional circumstances an owner can be held responsible for any hazard or danger caused by the aircraft under general rules of prevention of harm and damages (police laws).

German law generally respects the owner’s title to the aircraft and does not permit enforcement into the aircraft for the liabilities of a German lessee. There is the potential of a liability of an aircraft for Air Traffic Control charges or of the aircraft owner for emission charges, if the operator is unknown.

If the aircraft is registered in the German aircraft register (Luftfahrzeugrolle) the aircraft cannot be encumbered with statutory liens such as workman’s liens. The owner of an aircraft can potentially be held liable for Air Traffic Control charges if the operator is unknown. Different rules may apply to separate engines.

German law does not require that all or a certain fraction of the insurance coverage taken out by the operator with respect to an aircraft is underwritten by domestic insurers. However, the insurer must be permitted to do business in Germany. Owners and lessors customarily require that the insurance be underwritten by internationally renowned insurers.

The operator of an aircraft is obliged to maintain liability insurance that covers death and injury of passengers and third parties, delayed transportation of passengers, damage to, and destruction and loss of, transported goods and third parties' property. The minimum insurance amounts depend on the maximum take-off weight of the aircraft and are provided for by European and German laws. The German Civil Aviation Authority (Luftfahrt-Bundesamt) will only issue an operating permit for an aircraft upon, inter alia, proof of sufficient liability insurance coverage with respect to the aircraft. No such minimum insurance requirements exist for property insurance with respect to an aircraft (or any part thereof).

German law does not restrict the portion of reinsurance coverage that can be taken out abroad. German operators usually do not take out reinsurance, but rather place the primary insurance with established insurers that are permitted to conduct business in Germany.

As far as is known, it has not been tested in courts whether cut-through clauses in German law governed insurance contracts would be enforceable under German law. It is not clear whether customary cut-through clauses would be upheld and honoured in an insolvency of the insurer.

Assignments of insurances and reinsurances are generally permitted under German law. Note, however, payment claims under liability insurance contracts cannot be assigned by the insured party, as it is the purpose of liability insurance to cover the affected person’s damage and therefore the affected person is the creditor of the claim against the insurer.

The lessor (as owner) retains legal title to the aircraft. Pursuant to the lease agreement the lessee has the right of use and quiet enjoyment of the aircraft, provided there is no default under the lease. During the lease term, the lessor’s repossession claim would be unjustified. If the lease is governed by German law, the lessor has a statutory right to terminate the lease without a notice period for good cause (wichtiger Grund) such as payment delays or a material breach of contract and otherwise a contractual right to terminate pursuant to the terms of the lease.

Pursuant to German insolvency law the lessor may not terminate a lease after a petition for insolvency against the lessee has been filed with the insolvency court on the grounds of a payment default or a general deterioration of the commercial situation and credit-worthiness of the lessee prior to such insolvency filing, and any such termination rights of the lessor in a lease would be unenforceable.

The aircraft does not have to be located in Germany at the time of the termination.

In general, there are no restrictions on a lessor's ability to export an aircraft from Germany, except for exports to prohibited countries. However, for certain aircraft containing parts and certain technical components which could also be used for military purposes (so-called dual-use goods), an export approval will be required pursuant to the German Foreign Trade Act (Außenwirtschaftsgesetz) in connection with the German Foreign Trade Ordinance (Außenwirtschaftsverordnung or AWV). Export requirements are tighter for countries outside of the EU and especially restricted for certain countries listed in the AWV.

The lessor will usually obtain an export certificate of airworthiness to simplify registration of the aircraft in the new jurisdiction. Such certificate is obtained from the German Civil Aviation Authority (Luftfahrt-Bundesamt or LBA) and requires inspection of the aircraft. Additional consents, approvals or licences may be required from the LBA and the LBA will have to approve the ferry flight out of Germany.

The termination of the lease is not a prerequisite for the sale of an aircraft. The aircraft is not required to be in Germany in case or at the time of its sale.

The Lessor has no right to self-help under German law should the lessee not surrender possession to the aircraft following the termination of the leasing of the aircraft. So long as the aircraft is located in Germany, repossession must be accomplished by filing a suit in a court and the subsequent enforcement of the court ruling through a bailiff (Gerichtsvollzieher). No further permissions beyond the ruling of a German court are needed to repossess the aircraft in Germany, while for operating the aircraft all customary requirements will apply. Any party that otherwise legitimately believes to have an in rem or security interest may intervene in the repossession proceedings.

The lessor may utilise faster provisional judicial measures, however, this possibility is restricted if the aircraft is used for certain purposes such as state or postal services, public transportation on scheduled routes, or if the aircraft is ready for take-off to a flight constituting commercial transportation of people or goods. An approval by the German Civil Aviation Authority (Luftfahrt-Bundesamt) is required to fly the aircraft out of Germany. If the aircraft is located outside of Germany, lex fori applies to any repossession.

There are no specific courts in Germany that are competent to decide disputes regarding sales or leases of aviation assets. The competent court is determined in accordance with general rules. In case of an enforcement of a German registered aircraft mortgage (Registerpfandrecht) the local court (Amtsgericht) of Braunschweig is competent to hear the case.

In Germany, summary proceedings (summarische Verfahren) are generally available for the enforcement of pecuniary claims, but not for the enforcement of any other right. In case of a simplified document proceeding (Urkundenprozess) in respect of payment obligations the court decides based on the document(s) in question and the uncontested statements of the parties. A simplified judgment can be challenged by the defendant if the defendant prefers to rely on other evidence than the documents introduced during the simplified procedure.

By way of an interim relief, the competent German court may order an injunctive relief (einstweilige Verfügung) against the respondent pending final judgment, if in the absence of such injunction the right of the petitioner would be frustrated or the realisation of such right would be substantially aggravated. This remedy is not restricted to pecuniary claims. However, the competent German court would not grant ultimate relief before the case is decided on the merits. Exceptions may apply for ancillary items such as aircraft documents.

German courts would generally uphold a foreign law as the governing law of an aircraft lease, provided that a German court may give effect to German public policy and to overriding mandatory provisions of either German law or of the laws of any other country pursuant to Regulation (EC) No 593/2008 (Rome I Regulation), and must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.

A submission to a foreign jurisdiction is generally accepted on the basis of Regulation (EU) No 1215/2012 (Brussels Recast Regulation), the Hague Choice of Court Convention, and/or the German Civil Procedure Code (Zivilprozessordnung).

A party to a lease is entitled to waive sovereign immunity either explicitly in the lease or implicitly by engaging in the legal proceedings before the competent German court without raising an objection (rügeloses Einlassen) of sovereign immunity. A blanket waiver of sovereign immunity does not necessarily include a waiver of consular immunity. A waiver of immunity by a German public entity may not necessarily be enforceable.

German courts will recognise and enforce:

  • a final judgment
    1. of a court within the EU without re-trial or re-examination pursuant to Regulation (EU) No 1215/2012 (Brussels Recast Regulation), and
    2. of a court outside of the EU if the prerequisites of the German Civil Procedure Code (Zivilprozessordnung, ZPO) are fulfilled; and
  • an arbitral award pursuant to the ZPO, which refers to the United Nation Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention).

A judgment can be obtained in any currency. A judgment for payment of money expressed in a foreign currency may be satisfied in euros at the exchange rate prevailing at the time of payment, unless the enforcement court decides that specific performance of the obligation to effect payment in the judgment currency has been agreed.

General limitations under German law with respect to punitive damages, compound interest, contravention of good morals (Sittenwidrigkeit), general principles of equity (Treu and Glauben) or German public policy (ordre public) have to be observed and provisions of a lease agreement in violation thereof may be unenforceable.

A lessor under an aircraft lease has to pay regular income taxes on its income in Germany in connection with the performance or enforcement of such lease agreement if the lessor is subject to either unlimited income taxation (German tax residents) or limited income taxation (foreign lessors such as those having a permanent establishment in Germany or if the aircraft is registered in the German aircraft register (Luftfahrzeugrolle), subject to double taxation agreements).

Unless the relevant aircraft lease contains specific provisions, a lessor has to comply with statutory notice periods if it terminates an aircraft lease.

Commercial lessees would usually not be entitled to any immunity from suit, execution or attachment, subject to restrictions on the attachment of aircraft in scheduled service, operated by a lessee.

Germany ratified the United Nation Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention) and German courts will recognise and enforce an arbitral decision if and to the extent it contains a final and binding decision which conclusively resolves the matter.

In an enforcement scenario safeguarding the legitimate interests of either party requires the examination of the underlying facts as well as the entire scale of legal areas affected, such as contract law, statutory law, insolvency law, aircraft regulations, etc. In an imminent enforcement scenario a creditor is well advised to retain legal experts with in-depth knowledge of aviation laws.

German law recognises legal concepts of assignment and novation. An assignment (Abtretung) is the transfer of the relevant rights, claims or receivables. In a novation (Novation), an existing right or claim is replaced by a new right or claim with the replacement right or claim having equal content as the replaced right or claim, except that the right or claim is established anew and any counterclaims, objections and the like arising from the relationship between the debtor and the (original) creditor would generally not be available against the replacing right or claim.

Due to the accessory nature of the German aircraft mortgage (Registerpfandrecht), upon novation of the claim secured by the mortgage the mortgage lapses. Further steps are required to establish a new aircraft mortgage, potentially with negative effects on the ranking of the aircraft mortgage. Similar concerns will apply to other forms of accessorial collateral (akzessorische Sicherheiten) under German law.

German law will apply German and European conflict of law rules to any finance or security document. Subject to limitations in certain circumstances and compliance with ordre public, there is general freedom of choice of applicable law under contracts between commercial parties, including lease assignments and novations. In respect to security, the law governing the collateral (eg, a claim or tangible item) will typically determine the law applicable to any security interest over such asset. The submission to a foreign place of venue is generally permissible between commercial parties.

As regards in rem rights in aircraft German conflict of law rules do not allow for a choice of law, but German law would apply to an aircraft registered in Germany. Under German law, the transfer of title to an aircraft registered in Germany to the new owner is governed by German law regardless of the chosen law in the documents.

It is not necessary for an aircraft or engine lease assignment or novation agreement to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. As a matter of practice, the German Civil Aviation Authority (Luftfahrt-Bundesamt or LBA) accepts leases in the German or English language. If the lease is not in German or English, the LBA may require the lease or excerpts thereof be translated and such translations be certified by a registered translator. Upon request of the competent German court, foreign language documents have to be translated into German to be admissible in evidence in legal proceedings.

An aircraft or engine lease assignment and assumption/novation does not require registration in the German aircraft register (Luftfahrzeugrolle). The operator has to submit a copy of the so transferred or novated aircraft lease agreement to the German Civil Aviation Authority (Luftfahrt-Bundesamt).

Depending on the specific circumstances, an assignment and assumption/novation agreement may result in an income taxation if the lessor is tax resident in Germany or subject to limited income tax (subject to double taxation treaties). VAT is triggered if the assignment constitutes a VATable supply or service and if no exemption applies. Usually, subject to the specific circumstances at hand, a customary novation of an aircraft or engine lease upon the sale and transfer of the relevant aircraft or engine can be structured to the effect that the novation itself does not trigger any German transfer or income tax.

In Germany, the transfer of a legal entity does not require or involve a transfer of the legal title to the assets held by such legal entity.

The German aircraft register (Luftfahrzeugrolle) is an owner register. The owner is entitled to apply for the deregistration of the aircraft. A form has to be completed, signed and submitted to the German Civil Aviation Authority (Luftfahrt-Bundesamt), which maintains the aircraft register, together with certain ancillary documents.

The aircraft owner’s application for the deregistration of the aircraft does not require the lessee’s consent. It is untested, however, if a lessee could take preventive action to hinder a deregistration in the case that the deregistration would constitute a breach of the owner’s obligations (eg, under a lease to the lessee). A lessee, operator or mortgagee on its own is not entitled to deregister the aircraft.

For the deregistration the owner or the owner’s legal counsel (if acting under a notarised and apostilled power of attorney) will have to submit a form of deregistration, the original of the certificate of registration (Eintragungsschein), the certificate of airworthiness and the noise certificate (Lärmzeugnis). The Eintragungsschein is to be kept on board of the aircraft. Therefore taking possession of the aircraft or at least the certificate of registration may be required for the deregistration of an aircraft. If an aircraft mortgage is registered against the aircraft in Germany, the mortgagee’s written consent to the deregistration of the aircraft is required.

If the documents presented to the German Civil Aviation Authority (Luftfahrt-Bundesamt or LBA) are complete and in the appropriate form, registration should usually occur within one to two weeks, or faster if pre-discussed with the LBA. If the lease forming the basis for the use of the aircraft is terminated and the authority is informed thereof, the authority may take action by itself in order to prevent the further operation of the aircraft.

The German Civil Aviation Authority (Luftfahrt-Bundesamt) will not pre-assure the prompt deregistration of an aircraft to the owner applying for its deregistration.

There are only minor fees chargeable in respect of the deregistration of an aircraft.

A deregistration power of attorney by the owner can generally be recognised. The power of attorney should be notarially certified and apostilled/legalised and translated (in certified form) into English or German. If substantive German insolvency law applies to the owner, upon its insolvency the power of attorney lapses.

The authority of the person acting for the owner when granting the deregistration power of attorney as well as the corporate existence of the owner (in case it is not a natural person) have to be demonstrated by acceptable documentation (including notarially certified and apostilled/legalised incumbency certificates, commercial register excerpt or other adequate proof).

A deregistration power of attorney to deregister an aircraft from the German aircraft register (Luftfahrzeugrolle) does not necessarily have to be governed by German law.

Under German law a power of attorney expressed to be irrevocable is generally irrevocable except where there is no appropriate reason for the irrevocable nature or a good cause (wichtiger Grund) occurs justifying the revocation. Therefore, the irrevocability only leads to a limitation of the right of revocation, not to a general exclusion.

In principle, an export of an aircraft by the owner does not require the lessee’s consent. However, if the aircraft is to be deregistered at the same time, a mortgagee will have to consent to the deregistration. As between the owner/lessor and the lessee a deregistration and subsequent export may not be permissible as long as the lessee’s right of quiet enjoyment under the lease subsists. A mortgagee is not entitled to export the aircraft but may only cause the sequestration of the aircraft and the forced sale by court procedure.

The certificate of airworthiness for export is issued by the German Civil Aviation Authority (Luftfahrt-Bundesamt). The documents required for the application depend on the target country as well as the status of the aircraft. Since a certificate of airworthiness for export is only required in extraordinary instances, the time to obtain an export licence will vary. Such certificate cannot be obtained in advance (eg, at inception of the lease or at registration).

There are no significant costs/fees/taxes chargeable in Germany in respect of the export of an aircraft.

For the purpose of deregistration, the owner is required to provide the original certificate of registration which is kept on board of the aircraft. Access to, and control over, the aircraft may be a prerequisite if the operator is not co-operative.

Consensual lease restructurings are usually agreed under the law governing the relevant lease. Restructurings under court supervision and insolvencies are governed by the German Insolvency Code (Insolvenzordnung), encompassing insolvency plan and other rescue proceedings as well as outright bankruptcy, or by the Stabilisation and Restructuring Act (Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen), which came into force on 1 January 2021.

If the lessor's centre of main interest is in Germany, the lessor can be subject to the proceedings set out in the German Insolvency Code (Insolvenzordnung), ie, either a restructuring plan proceeding aiming at a rehabilitation of the debtor or an outright bankruptcy proceeding. Depending on the liquidity situation, the lessee's management may be at liberty or obliged to commence such proceedings. In the latter case the proceedings can also be commenced by any creditor, whereas the restructuring plan proceeding is only available in a voluntary scenario.

The Stabilisation and Restructuring Act (Gesetz über den Stabilisierungs- und Restrukturierungsrahmen für Unternehmen) provides for a specific voluntary pre-insolvency restructuring procedure which is applicable to debtors which do not belong to the financial sector.

Within the EU, the recognition of foreign insolvency proceedings is governed by Regulation (EU) 2015/848 (the Recast Insolvency Regulation), which provides for a broad recognition of insolvency proceedings (as listed in Annex A of the Recast Insolvency Regulation) opened by the courts of another EU member state. The Recast Insolvency Regulation is generally based on the principle of universality, which means that (absent any domestic secondary proceeding) the insolvency law of the country where the proceedings are first commenced shall (subject to certain exemptions) apply to all matters and assets of the debtor (whether located in its home jurisdiction or abroad).

The Recast Insolvency Regulation does not apply to certain enterprises from the financial and insurance industries. To these as well as in cross-border cases beyond the EU, German conflicts of law rules apply. These rules are similar to the corresponding provisions of the Recast Insolvency Regulation, they do not strictly follow or enact the UNCITRAL Model Law on Cross-Border Insolvency.

Irrespective of the insolvency of the operator the German Civil Aviation Authority (Luftfahrt-Bundesamt) would not honour an IDERA in favour of the owner or financier of an aircraft, as Germany has not ratified the Cape Town Convention. As the German aircraft register (Luftfahrzeugrolle) is an owner register and the operator’s consent or co-operation is legally not necessary for an aircraft deregistration, no deregistration power of attorney is necessary for the owner to deregister the aircraft from the aircraft register upon the operator’s insolvency.

A valid deregistration power of attorney from the owner to the operator or a financier would generally be honoured by the aircraft registry provided that it is submitted as an original or as a notarially certified copy (notariell beglaubigte Abschrift); it does not survive the insolvency of the German owner.

Lease agreements concerning registered aircraft generally survive the opening of preliminary German insolvency proceedings as well as the formal opening of insolvency proceedings concerning the lessee. The insolvency administrator of the lessee has an extraordinary statutory termination right. The lessor is barred from terminating the lease agreement on the grounds of payment defaults or a general deterioration of the lessee’s creditworthiness that has occurred prior to the insolvency filing. Upon termination of the lease agreement, the insolvency administrator generally has to surrender possession of the aircraft to the lessor. Factual circumstances such as engine replacements, a lack of the necessary licences, of insurance coverage or of trained personnel may prevent or delay such redelivery.

During preliminary insolvency proceedings and provided that the insolvent lessee’s operations are continued, the insolvency court can order – at the request of the preliminary insolvency administrator – that the aircraft shall temporarily remain with the lessee irrespective of the termination of the lease agreement if the aircraft is material for the lessee’s operations. As a practical observation, insolvency administrators of airlines appeared to be co-operative in past cases, given the risk-adjacent nature of an aircraft and its operation.

The effects of the insolvency of the borrower under an aircraft financing depend on the collateral granted. While the right to realise an aircraft mortgage remains with the secured party, the realisation of any other collateral in the possession of the administrator vests in the insolvency administrator, who deducts a percentage fee and VAT (if applicable) from the realisation proceeds before remitting them to the secured party. Access to the aircraft, the aircraft documentation and the (off-wing) engines may de facto be impeded in an insolvency.

German law does not provide for a moratorium in connection with an insolvency of an entity that is not a financial institution or insurer. However, any enforcement measures taken against an insolvent borrower would cease automatically upon the opening of insolvency proceedings against the borrower as the right to realise collateral would generally vest in the insolvency administrator, who would then have to turn over the net realisation proceeds (minus a percentage fee and VAT, if any) to the secured creditor. The enforcement of in rem security over registered aircraft is exempt from this rule and may continue unless the insolvency administrator applies for its discontinuation.

Airlines can be subject to German insolvency proceedings if their centre of main interest is in Germany. Each third-party creditor can apply for insolvency proceedings upon the debtor’s illiquidity (Zahlungsunfähigkeit) or over-indebtedness (Überschuldung) (ie, balance sheet insolvency together with a negative continuation prognosis for the operations). The directors of a company generally have to apply for insolvency in these circumstances as well (subject to a relatively short grace period) and may file for insolvency upon the company’s imminent illiquidity (drohende Zahlungsunfähigkeit).

Solvent liquidation of a company outside insolvency requires a shareholder resolution. Subject to certain requirements, secondary insolvency proceedings can be opened over branches or assets of foreign airlines in Germany. Following, and in reaction to, the outbreak of the COVID-19 pandemic the legislator temporarily suspended debtors' insolvency filing obligation until 31 April 2021 (subject to certain prerequisites).

In the insolvency of a lessee of an aircraft, the lessor may repossess the aircraft upon the termination of the underlying aircraft lease agreement. Also, during preliminary insolvency proceedings and following the opening of insolvency proceedings, the aircraft lease agreement can generally be terminated by the lessor in accordance with its terms and the aircraft can be repossessed as a consequence of such termination, provided that:

  • during preliminary insolvency proceedings and irrespective of the termination of the lease agreement the competent insolvency court can order, upon the insolvency administrator’s application, that the aircraft shall remain with the insolvency estate against compensation in case it is material for the continuation of the insolvent lessee’s operations; and
  • the lessor is barred from terminating the lease agreement on the grounds of payment defaults or a general deterioration of the lessee’s credit worthiness that has occurred prior to the insolvency filing.

In the insolvency of an aircraft lessee, and despite the continuation of the aircraft lease agreement (see 2.9.5 Other Effects of a Lessee's Insolvency), the insolvent lessee usually lacks the liquidity necessary to fund the contractually agreed maintenance of the aircraft.

During preliminary insolvency proceedings lease rentals might not necessarily be paid (in full). In case the lease agreement continues beyond the formal opening of insolvency proceeding, claims for lease rentals incurred following the formal opening of insolvency proceedings constitute preferred claims against the insolvency estate. The lease security deposit would be available to the lessor to cover outstanding claims, but the insolvent lessee will very likely not replenish the security deposit.

Maintenance reserves would usually remain with the lessor, unless upon the redelivery of the aircraft the maintenance reserves exceed the amount necessary to compensate for any deviations from the agreed redelivery conditions. In that instance and depending on the underlying factual circumstances and contractual provisions, the lessor may be permitted to set-off its other outstanding claims against the lessee against the lessee’s claim for the repayment of the remainder of the maintenance reserves.

Note, however, that the exercise of set-off and retention rights against the insolvent party is widely restricted as a matter of statutory German insolvency law.

Germany has not ratified the Convention on International Interests in Mobile Equipment or the related Protocol on Matters Specific to Aircraft Equipment.

See 2.10.1 Conventions in Force.

See 2.10.1 Conventions in Force.

See 2.10.1 Conventions in Force.

See 2.10.1 Conventions in Force.

Lenders which offer loans in Germany are subject to German banking supervision by the German Banking Regulator (Bundesanstalt für Finanzdienstleistungsaufsicht) and to the German Banking Act (Kreditwesengesetz).

There are no particular restrictions on borrowers in conjunction with the utilisation of the loan proceeds. However, borrowers have to abide by rules which apply to the utilisation of monies generally (eg, compliance with sanctions, etc).

Exchange controls between member states and between member states and third countries are prohibited in the European Union. For statistical purposes all inbound and outbound cross-border payments in excess of EUR12,500 (or the equivalent in any foreign currency) have to be reported by German residents (Inländer) to the German Federal Bank (Deutsche Bundesbank) within a time period of seven calendar days of such inbound or outbound payment pursuant to the German Foreign Trade Ordinance (Außenwirtschaftsverordnung). A German court must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.

Borrowers may grant security to foreign lenders. Depending on the legal form of the corporate borrower, certain statutory restrictions exist if the lender is a direct or indirect affiliate, or if collateral is granted for the liabilities of an affiliated person (upstream or side stream collateral). The details depend on the specific corporate set-up.

In case of a German limited liability company (Gesellschaft mit beschränkter Haftung or GmbH) an upstream and/or cross-stream guarantee can expose its directors to personal civil liability, unless it is ensured that the assets required for maintaining the registered capital are not distributed to the GmbH’s direct or indirect shareholders or any of their respective subsidiaries. Even stricter restrictions exist in case of German stock corporations (Aktiengesellschaften) and Societates Europaea (established under German law).

It would not be unusual in aviation finance transactions for a lender to take share security over a domestic special purpose vehicle which owns the aircraft. German law generally recognises share pledge agreements. Share pledges over German limited liability companies require notarisation with high notarial fees.

A negative pledge obliging the pledgor not to grant security to a third party is generally recognised as an obligatory arrangement but would not restrict the grantor’s ability to dispose of its assets.

There is no material restriction or requirement imposed on intercreditor arrangements. Creditors could be deemed to form a partnership with regard to any collateral held in Germany or if formed under German law.

The role of an agent (such as the facility agent) under a syndicated loan is generally recognised in Germany and well established in the German lending market, including the aviation finance market.

Generally, debt can be or become subordinated by means of a contractual subordination or a structural subordination as well as by operation of law (eg, in the case of a shareholder loan).

The concept of transfer and assumption of contracts (including the debt) is generally recognised in Germany. Certain implications of the Regulation (EC) No 593/2008 (Rome I Regulation) may require specific attention.

Pursuant to the German Civil Code (Bürgerliches Gesetzbuch) usury is prohibited and any agreement providing for usurious consideration is void ab initio. Compound interest cannot be validly agreed upon in advance under German law.

Typical forms of security and recourse granted in an aviation finance transaction domestically would be an aircraft mortgage, a security assignment (regarding rent payments, insurance proceeds, requisition and total loss proceeds), a share pledge, an account pledge, a parent company guarantee, cross-collateralisation arrangements, airframe and engine warranties arrangements, a security deposit and a deregistration power of attorney. The selection and details of the security instruments employed depends on the specific transaction structure and the parties involved.

If the aircraft is registered in the German aircraft register (Luftfahrzeugrolle), no in rem security can be taken over the aircraft other than a German aircraft mortgage.

The concept of a security trustee (Sicherheitentreuhänder) is generally recognised and established in Germany. With respect to accessory security instruments such as mortgages and pledges it should be combined with a parallel debt arrangement in favour of the security trustee (eg, on the basis of an abstract acknowledgement of debt).

A borrower can assign to a security trustee its rights under an aircraft lease pursuant to a security assignment and mortgage the aircraft to the benefit of the security trustee. A security transfer of title (Sicherungsübereignung) in an aircraft would require additional legal consideration.

It would be usual for a borrower/lessor to assign the rights and benefits only without also assigning the related obligations of the lessor under an aircraft lease to the security trustee.

A security assignment or guarantee can generally be governed by English or New York law. Upon their enforcement a German court may give effect to German public policy and to overriding mandatory provisions of either German law or of the laws of any other country pursuant to Regulation (EC) No 593/2008 (Rome I Regulation) and must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund. It is generally recommendable that a security assignment follows the law governing the right that is assigned.

In connection with any Germany law security assignment a notification of the third-party debtor is necessary to prevent that the third-party debtor discharges its obligations by making payments to the assignor instead of making payments to the assignee. It is not necessary for a security assignment to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, if legal proceedings are instigated before a German court, upon request of the court, foreign language documents have to be translated into German to be admissible in evidence in such proceedings.

An aircraft registered in Germany should be encumbered with a German aircraft mortgage; other security over the aircraft would not be enforced by German courts. Such mortgage needs to be notarised and registered with the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen), which is different from the German aircraft register (Luftfahrzeugrolle). The costs for the notarisation as well as for the filing depend on the amount of the secured obligations. As Germany has not ratified the Cape Town Convention, no international interest can be registered against the aircraft on the basis of an aircraft mortgage.

A security assignment of rights cannot be registered in Germany.

A security interest over an aircraft pursuant to a German aircraft mortgage (Registerpfandrecht) can generally be transferred. Due to its accessory nature it can only transfer together with the secured obligations and to the same person.

The effects of any change in the identity of the secured parties under a German law security assignment depend on the specific arrangements made with respect to such security interest – eg, whether a security trustee concept has been introduced or not. The transfer of a mortgagee’s position under a German aircraft mortgage (Registerpfandrecht) is possible if transferred together with the secured obligation and requires registration with the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen).

The concept of "parallel debt" on the basis of abstract acknowledgements of debt is generally an established concept in Germany.

A secured party under a security assignment is generally not deemed to be resident, domiciled, carrying on business or subject to any taxes in Germany solely as a result of it being a party to, or the enforcement of, such security assignment.

A German aircraft mortgage would take effect upon its registration in the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen). Such mortgage encompasses engines which are on-wing and are owned by the same legal entity or natural person owning the airframe.

An engine installed on an airframe owned by the same person can become subject to an aircraft mortgage pertaining to such airframe. For a spare engine that is off-wing or owned by a person different from the owner of the airframe, other forms of security interests – such as a pledge or security transfer of title – may be available.

Typically, an account pledge would be used to take security over a bank account (such as a lease receivables account), which, among others, requires a notification to the bank.

In the case of (i) undischarged European Union Emission Trading Scheme payments, (ii) unpaid VAT and/or customs in case of an import of an aircraft, and (iii) non-payment of fines as a result of a breach of obligations under the German Air Traffic Act (Luftverkehrsgesetz), the relevant authority can register a non-consensual lien over an aircraft registered in Germany if the debtor is the aircraft owner (and in case of Air Traffic Control charges if the operator is unknown).

Repairer’s charges, which are generally permitted under German civil law, cannot be created in respect of German registered aircraft. However, in respect of salvage, the Act on the Rights in Aircraft (Gesetz über Rechte an Luftfahrzeugen) provides for a first-priority lien if certain conditions are met.

A German aircraft mortgage can be granted over more than one German-registered aircraft.

The German Aviation Safety Agency (Deutsche Flugsicherung GmbH) and the German Civil Aviation Authority (Luftfahrt-Bundesamt) can retain a bailiff (Gerichtsvollzieher) who is entitled to detain and encumber the aircraft or the fleet with a German aircraft mortgage as security for any unpaid amounts.

The discharge of the mortgage itself as a legal right and the deregistration of the mortgage from the register have to be distinguished. In general, the right "mortgage" extinguishes automatically if the claim secured by the mortgage extinguishes, and its deregistration from the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen) can be sought. Vis-à-vis third parties acting in good faith, the register is generally deemed to be correct as long as the mortgage is still registered.

Once the required documents have been submitted to the mortgage register, it generally takes at least one week until written confirmation of deregistration is received by mortgagee and mortgagor.

German aircraft mortgages have to be registered in the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen) in order to be effective. The mortgage registration avails in rem effects and generally entitles the secured party to enforce the aircraft mortgage by obliging the owner to suffer the foreclosure of the aircraft.

In the case of (i) a default in the payment of Eurocontrol charges by an aircraft operator and, if the operator is unknown, non-payment of such charges by the owner, and (ii) non-payment of charges for official acts, especially for examinations and inspections according to the German Air Traffic Act (Luftverkehrsgesetz) and the Act on the German Civil Aviation Authority (Gesetz über das Luftfahrt-Bundesamt), a bailiff (Gerichtsvollzieher) can detain and encumber the aircraft – to the extent the defaulting debtor is at the same time the owner of the aircraft – whereas an aircraft which is or was registered in the German aircraft register (Luftfahrzeugrolle) may be encumbered with a German aircraft mortgage (Registerpfandrecht) and an aircraft registered abroad may be encumbered by way of attachment.

In principle, the non-consensual lien would arise over one aircraft, whereas the Act on the Rights in Aircraft (Gesetz über Rechte an Luftfahrzeugen) generally provides for the entitlement of the bailiff to encumber more than one aircraft registered in the German aircraft register (Luftfahrzeugrolle) with a German aircraft mortgage (Registerpfandrecht).

A potential purchaser of an aircraft may search the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen) to verify that an aircraft is free from encumbrances; furthermore, a check should be run for Eurocontrol charges and, if the aircraft was registered in any other country before, a check in such jurisdiction and in the International Register is recommended.

A security assignment over rights and claims, constituting an in rem interest over the respective collateral, is typically enforced by the secured party collecting any claims and in case of other rights by realising them by private sale or auction. A loan or guarantee, constituting claims in personam are enforced by filing a lawsuit against the respective debtor and seeking court title for payment or performance, as the case may be.

Under German law a notice and acknowledgement of a security assignment over a German law governed lease is not necessary to establish a valid security assignment or to allow for enforcement. The lessee may, however, continue to discharge its obligations under the lease to the lessor, and will be otherwise protected – eg, by a continuing right to set-off – unless notice of assignment or other appropriate proof of assignment is given to the lessee by the relevant assignor.

German law applies German and European conflict of law rules to any finance or security document. Subject to limitations in certain circumstances and compliance with ordre public there is general freedom of choice of applicable law under contracts between commercial parties. As regard to security, the law governing the collateral (eg, a claim or tangible item) will typically determine the law applicable to any security interest over such asset. The submission to a foreign place of venue is typically permissible between commercial parties.

A final judgment by a court in any member state of the EEA on commercial matters will typically be recognised in Germany, pursuant to Regulation (EU) No 1215/2012 (Brussels Recast Regulation). In the absence of any specific treaties, a judgment obtained in any other jurisdiction will have to comply with certain standards of due process, certain prerequisites of the German Civil Procedure Code (Zivilprozessordnung) and reciprocity will have to be ensured. An arbitral award will be recognised and enforced by German courts subject to certain restrictions pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention).

The remedy of self-help is not available in Germany. A court order may have to be sought to obtain access to the aircraft, the engines or the aircraft documents.

For questions of enforcement (outside insolvency proceedings) the competent court will have to be determined pursuant to general rules (eg, linking the place of venue to the debtor’s seat, the place of performance or the location of the asset). The local court (Amtsgericht) of Braunschweig has exclusive jurisdiction for the enforcement of a German aircraft mortgage (Registerpfandrecht).

Injunctive relief (einstweilige Verfügung) can generally be sought to prevent a continuing or threatening violation of the lessor’s rights. Injunctive relief will typically not accelerate the objective of the main proceedings – eg an aircraft may be sequestered and be kept under custody of a bailiff (Gerichtsvollzieher) but will not be handed over to the lessor claiming repossession. There may be exemptions in extraordinary circumstances, for ancillary claims (eg, relating to aircraft documents) or where compliance with public law obligations is to be preserved.

A judgment can be obtained in any currency. A judgment for payment of money expressed in a foreign currency may be satisfied in Euro at the exchange rate prevailing at the time of payment, unless the enforcement court decides that specific performance of the obligation to effect payment in the judgment currency has been agreed.

A secured party is not required to pay taxes in a non-nominal amount in connection with the enforcement of a security agreement/aircraft mortgage per se.

Enforcement of a German aircraft mortgage can be accelerated by ensuring that the mortgage is provided as an immediately enforceable mortgage in the form of a notarial deed, thereby saving the need to first obtain court title for the enforcement. In practice, enforcement requires a close co-ordination with the local court (Amtsgericht) of Braunschweig as additional measures may be necessary to ground the aircraft and facilitate sequestration. Maintenance and storage of the aircraft while in custody of the bailiff (Gerichtsvollzieher) should be supported by the creditor.

The factual, tax and legal background of each transaction needs to be assessed on a case-by-case basis in order to be able to render conclusive advice on the specific legal issues that may arise in connection with a purchase, sale, lease or debt financing of an aircraft registered in Germany or involving a German party.

The German legislation in response to the COVID-19 pandemic does not provide for a rent payment holiday for German lessees or a moratorium in favour of commercial borrowers under loan financings. As of 15 June 2021, there is no proposed German legislation specifically addressing transactions concerning a purchase, sale, lease or debt financing of an aircraft registered in Germany or involving a domestic party.

Freshfields Bruckhaus Deringer Rechtsanwälte Steuerberater PartG mbB

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Law and Practice in Germany

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Freshfields Bruckhaus Deringer is a leading international globally integrated law firm offering clients dedicated and seamless legal advice across all legal fields and industry sectors in all important economic regions. With over 2,800 lawyers in 29 offices in 17 countries across Europe, Asia and the USA, it is among the largest law firms in the world. The firm specialises in complex, cross-legal and cross-border matters and combines in-depth industry knowledge with innovative solutions to help its clients grow, strengthen and defend their businesses. In the finance sector the firm’s advice covers real estate finance, private equity and leveraged finance, distressed debt, equity and debt capital markets, securitisation and project and asset finance. The firm’s asset finance practice revolves around its hub in Frankfurt, where the team covers German and English law matters. Though traditionally best known for rail and aviation finance, it also has a growing presence on corporate, restructuring and insolvency matters in the aviation industry.