Richard Evans joins host Joel Simon to talk about changes that COVID-19 has had on the commercial aircraft, private jet and aviation industry.

(Editor’s note: transcript edited for clarity.)

Hi, and welcome to Pillsbury’s Industry Insights podcast where we discuss current legal and practice issues in finance and related sectors. I’m Joel Simon, a partner at the international law firm Pillsbury Winthrop Shaw Pittman. To our friends from wherever you are tuning in, welcome and thank you for listening. Today I am pleased to introduce you to Richard Evans a partner in Pillsbury’s Global Finance Group. Richard is dual qualified as an attorney in California and a solicitor of England and Wales.

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Joel Simon: Richard, welcome to our podcast. Can you tell us a bit about your practice?

Richard Evans: Thanks for having me! I help people and companies buy, sell, lease and finance airplanes. This ranges from advising a high-net-worth individual on a jet subscription contract to negotiating multibillion-dollar capital market transactions for commercial leasing companies. That means my work is very international. Our aviation clients get the benefit of our network of offices in Los Angeles, New York, London, Hong Kong and Tokyo.

Simon: COVID-19 has had an impact on every industry in every country around the world and on the aviation industry in particular. How has this affected your practice area and clients over the last few months?

Evans: As you say, it’s affected almost every country and every industry, but there is necessarily a particular focus on the aviation industry as it has faced drastically reduced flight schedules and in some cases postponement of flights all together. Airlines understandably approach their creditors for deferral or relief of payments under those leases and loans. In the initial stages in February and March, we encountered a number of requests by airlines for relief based on the legal principles of force majeure and frustration of contract. Although each of those claims might have their place in other context, they were largely red herrings for the purposes of our commercial leasing arrangements. The main obstacle to a claim for frustration of contract is that our operating lease is what is known as a triple net lease, where the airline is responsible for tax, insurance and maintenance. In addition, the leases have an unconditional obligation to pay rent come hell or high water. With respect to force majeure claims, it’s only possible to make that claim where there’s such a right within the confines of the contract and another feature of leasing contracts—they very rarely express that sort of right in your typical leasing and loan agreements. Also, there’s no implied right to claim for force majeure under English law or New York law, which are the two principle sources of law that are applicable to our industry. So, if the airlines don’t have an obvious contractual right to stop paying rent, what do they do? Particularly in February and March, when these claims were first coming up, they negotiated, and they turned to their creditors and their governments for relief. With respect to deferrals, the commercial dynamics and long-term relationships applied make this a mutually beneficial arrangement in many cases. Lessors and lenders and willing to forego payment in the short term to help airlines with cash flow so that they can pay later. And based on feedback from my clients and the industry, an example of a typical arrangement entered into during that time would be to differ rent for three months and then have the airline pay it back over a period of nine or 12 months.

Simon: That sounds similar to the real estate industry where large commercial tenants seem to be able to work things out on an amicable basis with their landlords rather than take aggressive action under their leases.

Evans: Exactly. The landlords in the case of the airline industry—the lessors—would generally have adequate capital to see them through a short-term rent deferral. In addition, there’s usually security in place under the leases in the form of a substantial security deposit for instance, and often in the case of aircraft there are also maintenance reserves paid by airlines to cover repairs and upkeep. This is not a one-size-fits-all solution, and leasing companies will also analyze an airlines overall financial position and look at the airline’s other sources of alternative financing, including government assistance, before agreeing to any such deferral arrangement.

Simon: Can you tell us anything about aircraft manufacturers? There was a lot of publicity about Boeing for example when the CARES Act was initially passed, as well as some of the other manufacturers.

Evans: So, the main manufacturers that we deal with in the commercial leasing space are Boeing and Airbus airlines, and leasing companies [place] orders for new aircraft with those manufacturers years in advance. As a result, there are hundreds of aircraft ready to deliver or in the process of being manufactured right now. During the predelivery period, which can run to a number of years, the manufacturers receive a series of installment payments from these buyers, but they won’t receive the sort of larger final payment until the aircraft’s ready for delivery. As a result, the manufacturers are dealing with a much lower than anticipated revenue stream, a potential over supply of aircraft for a market with much lower demand, and also the practical difficulties of maintaining its supply chain of parts, which is sourced from all over the world. Even when the aircraft is ready to be delivered, in many cases their customers are not able to travel to the delivery centers to pick up the aircraft. The purchase agreements cover these scenarios, but the longer the delay the more likely we might get involved to provide legal advice to parties in relation to losses and potential termination rights under those contracts with the manufacturers. And sort of on the theme of manufacturers, we’ve also advised some airlines in relation to claims against Boeing related to the Boeing Max aircraft, which was the big issue in the industry before the pandemic hit and has been an ongoing in the background during the crisis.

Simon: Shifting gears a bit: when traditional transactions or access to the capital markets get disrupted or postponed, what solutions or resources can we as lawyers offer clients outside of regular transaction advice?

Evans: There’s necessarily a significant hold in the usual stream of deals being done in this transactional practice. There are several deals for instance that got finished at the end of March, but generally new deals have been on hold during April and May. So our clients have been relying on us to provide high-level advice—particularly lenders and lessors in analyzing the leases and the loans—and we’ve been providing them with summaries of what actions can be taken at a later date when action needs to be taken. Aside from that eye level, direct advice, as a firm we’ve also been very active in developing tools and resources for the industry as a whole, not just during the crisis but in general. One really good example of that is the World’s Aircraft Repossession Index, which Pillsbury published and is available to download free on our website. We’re now in the Third Edition and preparing a Fourth.

Simon: Tell us more about the Index.

Evans: When most people hear that we work on aircraft repossessions, they want to hear stories of the repo man sneaking into airports with bolt cutters to recover the jet and fly it away. I’m not saying that never happens, but what is important to remember is that gaining possession of an aircraft is a legal process that requires careful advance planning and expert advice. The World Aircraft Repossession Index helps with identifying some of the potential legal obstacles in certain jurisdictions, hopefully increasing the chances of a voluntary return of the asset so that those bolt cutters aren’t needed. The Index has been a trusted resource by which the in-house legal departments and credit committees of our clients can analyze jurisdiction risks in advance of entering into deals relating to aviation assets. [The Index] gathers all of the relevant information in a consistent format to allow comparisons to be made among the various jurisdictions with respect to multiple key factors, including the speed and cost of repossession and insolvency proceedings. The result is a concise, colorful and user-friendly Index with a one-page summary for each jurisdiction with the overall results of our analysis represented in a global rankings chart and a world map which indicates the comparative ranking that each jurisdiction achieves. Broadly speaking, the lower risks among the more than a hundred countries that we survey are associated with North America, Western Europe and other developed nations, which isn’t surprising as the methodology that we use for the Index gives sway to political and legal stability in addition to the specific insolvency and aircraft-related questions that we asked local counsel. The Fourth Edition is going to be published later this year, and we’ll be taking into account some important updates to insolvency law for countries such as Brazil, India, Israel and Russia, which have been enacted since our Third Edition in 2018. We’re also going to feature an additional supplement focusing on issues related to engine-only leasing.

Simon: These other creative solutions are really important because the industry hasn’t embraced the stimulus package on offer to it. Can you shed some light on the key areas of focus for the future, as well as your view of any surprises you’ve seen since the outset of the crisis?

Evans: The fact that there’s so much uncertainty still heading into August is surprising to many. In most respects, leasing companies have prepared and anticipated well by preserving capital, and many are expecting a second set of requests from airlines that are continuing to struggle to get back to normal service. On the other side, we were pleasantly surprised to see that many airlines did not need to ask for deferrals at all or they submitted requests in the early stages and then were able to withdrawal those requests as their operations came back or as they received government support. The leasing companies have been able to tap into existing and new lines of credit, and they have been able to successfully access the bond market. There also has been a return to certain sources of financing that were popular during the last downturn, such as export credit financing and EETC financings. Airlines are finding it much harder to find favorable terms of financing as we saw with the recent bond issuances for some of the major U.S. carriers. As we look forward to the rest of the year, we know that they will be further airline insolvencies. It’s given us a chance to introduce our clients and to our world class insolvency practice, which has enabled our asset finance team to advise creditors in that process. We’ve worked together with clients to handle the complex restructuring arrangements that are required to help those airlines emerge from those bankruptcy proceedings.

Simon: It’s great to see us pull together intersecting practice areas to support creditors during times of upheaval in the aviation industry. Any last thoughts to impart?

Evans: The industry is working together to provide stability for the airlines and for safe passenger travel, which is the priority for us all. I am impressed but not surprised by the ability of the industry to rise to these challenges. We’ve dealt with turbulence in the industry before, and I’m sure we’ll be able to ride it out.

Simon: Thanks very much Richard. I really appreciate you taking the time to join me today.