Episode #3: Aircraft Repossessions – Practical Tips (Graham Tyler and Melissa Jones-Prus)

Tyler: So, Melissa, clearly the COVID 19 pandemic has had a catastrophic effect on the aviation industry, and yet, so far, there have not been that many airline failures or contested repossessions. What has been happening?

Jones-Prus: That’s right, Graham—amazingly, only around 25 airlines ceased operations last year, despite a 65.9% global drop in demand, compared to 2019.

Airlines benefited from support on a number of fronts, including government bailouts, lessor and financier support, as well as access to the capital markets. Governments provided over $72 billion in assistance, although these funds were not evenly distributed, and U.S. airlines in particular reaped the most benefit—some $58 billion of the $72 billion was provided to U.S. airlines under the CARES Act. U.S. airlines also benefitted the most from access to the capital markets, including mileage program backed issuances and EETCs.

Tyler: And, of course, lessors and financiers also supported the industry by agreeing to rent and loan payment deferrals and other types of restructurings. Lessors also dramatically increased sale leaseback activity which provided an important source of liquidity for airlines.

Jones-Prus: All of this support has allowed the vast majority airlines to weather what has (hopefully) been the worst of the storm. But needless to say, this vital short-term liquidity has dramatically increased the medium- and long-term debt burden for airlines. The deferred rent and loan payments will need to be repaid, as will the massive government loans and other emergency debt airlines incurred.

As passenger demand rebounds, we can expect that financial assistance to airlines will start to dry up. And while some airlines are well positioned for the recovery, it’s clear that a significant number remain cash-strapped and burdened with debt. And this situation will be exacerbated by the expected lag in the recovery of business travel, which is critical to many airlines’ business models. In this context, we could see far more airline distress and failures in 2021 and 2022 than we did in 2020.

Tyler: It has been great to see the industry players yet again rally round to support each other and while it may be true to say that there were not many alternative options, that in fact belies the general approach taken by so many.

Jones-Prus: It really has been quite remarkable at times. That said, putting aside the pandemic, even under normal market conditions it is always better to try and work toward a consensual return of the aircraft wherever possible, and in fact nine times out of 10 that can be achieved though sensible dialogue. No lessor or creditor wants to be the last person at the party and get caught up in the insolvency of an airline, so early planning and continued and constructive dialogue is definitely the way to go. While I’m not certainly advocating that creditors simply roll over, finding a commercial compromise which necessitates both sides taking some pain can often be preferable to becoming embroiled in costly and lengthy repossession proceedings, especially since full recovery of sums owed is often not achievable in those circumstances.

Tyler: Absolutely right. Indeed the very word “repossession” can be quite emotive and conjure up contested matters going through the courts with huge associated costs which quite simply is not always the case. However, as we know from our own experiences, sometimes this consensual “we are all in it together” approach just runs out of steam and a leasing company or financial institution has to take a stronger approach. If that stage is reached then it really is “gloves off” time. Now we are not going to be speaking here about jurisdiction-specific frameworks like chapter 11 proceedings, but rather a more general look at things. To kick things off, we might as well start with the Cape Town Convention. Melissa, at a very high level, what does the Convention aim to do?

Jones-Prus: The Cape Town Convention creates a standardized framework that is designed to bring speed, certainty and cost savings to repossession, deregistration and export of aircraft across jurisdictions. What does that mean in practice?

Let’s start first with repossession. The Cape Town Convention generally provides for what are called “self-help” remedies (that is unless a contracting state has made a declaration requiring a court order to exercise any of these remedies). Self-help essentially means that you can go ahead and repossess and remarket the aircraft without the consent of the debtor or a court order. This concept of course exists in common law countries such as the U.S. and the UK, but is quite foreign to most civil law countries. So the Cape Town Convention is a huge benefit in those countries (which incidentally make up the majority of the approximately 80 contracting states). That said, self-help is often simpler in theory than in practice, particularly when we’re talking about seizing aircraft at highly secured international airports. In the U.S., for example, a court order is still required if the repossession would otherwise “breach the peace,” but this process is still much quicker than a full-fledged contested repossession proceeding in a non-Cape Town country.

Tyler: Now of course things are more complicated if the airline enters insolvency.

Jones-Prus: Definitely, but the Cape Town Convention can be a big help there as well, since it has an insolvency provision modelled on Section 1110 of the U.S. Bankruptcy Code, which is designed to allow lenders and lessors to obtain speedy relief, even in bankruptcy. This provision is referred to as “Alternative A,” and it provides for a defined “waiting period” after an insolvency filing, after which the airline must elect one of three options—they can either (1) return the aircraft, (2) cure their defaults and perform their obligations going forward, or (3) agree to a restructuring with the creditor. While this insolvency provision is a powerful tool, it’s important to note that it does not apply to all Cape Town countries, and the waiting period can vary depending on the elections made by the contracting state. So it’s critical to consult with local counsel to determine what rules apply in bankruptcy in the jurisdiction you’re looking at.

Tyler: Going back to the repossession side of things, once you have the aircraft in your possession, of course that is not the end of the story.

Jones-Prus: Wouldn’t that be nice if it were! But seriously, when it comes to commercial aircraft, lessors and secured parties should have obtained an IDERA (Irrevocable Deregistration and Export Request Authorization) or a deregistration POA at the time the deal closed. They should then be able to de-register and export the aircraft from that jurisdiction, ideally by simply presenting this power of attorney to the local aviation authority.

Tyler: It is worth saying that the CTC remains relatively untested in the courts around the world, but it does appear that most countries are taking what are international treaty obligations seriously (even if it sometimes takes them a little bit of time to come to the right conclusions). So aside from the CTC remedies, let’s look at some of the initial legal and practical steps that we would be looking at coordinating in a scenario where we were preparing for a possible repossession.

Jones-Prus: Clearly, there needs to be an initial focus on the contractual documents not only as regards the specific defaults, but, also, are there any cross-default provisions, what options are there under the security documents—for example does it make sense to enforce rights under the mortgage or under the share charge? All these factors need to be quickly and carefully evaluated, and we also need to check that all security filings are up to date.

It’s also common for a creditor to physically hold some forms of security such as cash deposits and letters of credit, and it’s important to ensure that everything that is required to be done or provided in order to foreclose on this collateral is in place—there is often no room for error there, particularly when you’re dealing with an LC Bank. If the airline has commenced or is in the vicinity of commencing an insolvency proceeding, it’s also a good idea to have a bankruptcy lawyer take a look at the documents to assess the implications for drawing and applying these types of security.

Tyler: And, of course, in parallel with this is the metal. Often a creditor’s recourse is only to the asset and not much else. So, turning to the asset for a moment, let’s take a look at some of the early-stage checks that are necessary, many of which would have been done at the outset of the deal. Of primary importance is to try and establish where the aircraft and its engines are—are they being operated and if so where, is any of the equipment in maintenance or perhaps, in the current climate, parked and in storage? A good lease manager or servicer will really be earning their dollars now! It’s also crucial to team up with good and reputable local counsel who know the workings of the local aviation authority. This will be important in determining whether the aviation authority will honor a unilateral request by the owner-lessor or mortgagee to deregister the aircraft from the aircraft register without the cooperation of the lessee. As you touched on Melissa, deregistration can be achieved  either through reliance on a deregistration power of attorney or IDERA under the Cape Town Convention or simply by reason of a person’s status as an owner-lessor or mortgagee of the aircraft, without reliance on any such power or IDERA.

Jones-Prus: That’s right, Graham. And local counsel are also going to be able to advise us as to whether our client can exercise any self-help remedies, which basically allow an owner to take pro-active steps to take control of its aircraft without needing a court order. As I mentioned, things tend to be simpler where the Cape Town Convention applies, but even then there can be nuances in application in each jurisdiction, so local law advice really is critical.

Tyler: It’s also worth pointing out that there may be liens that trump an owner’s ownership rights or a secured creditor’s rights in the aircraft. For example, if the aircraft is in maintenance there could be preferential liens over the aircraft that will need to be cleared. There could then be fleet-wide liens. For example, in Europe liens in respect of unpaid air navigation charges attributable to a particular aircraft in an operator’s fleet can attach to any other aircraft in that operator’s fleet regardless of the fact that the owners of such aircraft may be different. Finally, there could be non-consensual liens that arise by operation of law and not by agreement between a person with rights in the aircraft and the lienholder.

Jones-Prus: That’s very true. And going back to the metal—the actual aircraft is obviously one part, but of equal value and importance are the aircraft records, as asset values can be seriously diminished without them. So it’s critical that plans are made to recover these from wherever they are being held either by the airline itself or the airline’s MRO. It all comes down to preparation and planning from the outset so that the creditor and its team have a clear roadmap setting out the action points that need to be taken and by whom.

Tyler: Absolutely—preparation and planning is key to all this, and getting your hands on the aircraft records is of course crucial.

To recap, unless you either have a consensual return, or are able to exercise self-help remedies, then subject again to local counsel’s advice, it is quite likely that some form of court order may well be needed to gain control of the aircraft. If counsel advises that lengthy and costly court proceedings will be required, then it may be worth considering the aircraft’s flight routes and whether it can be repossessed in a more “creditor friendly” jurisdiction. One crucial initial step is for local counsel in any relevant jurisdictions to advise if a judgement obtained from the courts under the governing law of the contracts is going to be swiftly recognized in the local courts or whether it is preferable to seek a court order in the local jurisdiction—here timing and costs are going to be the key drivers.

Typically, the type of order obtained takes the form of an application for interim injunctive relief. In most cases, the effect of that order will not result in the repossession, but rather the detention of an aircraft, meaning that the creditor will not be able to deregister and fly the aircraft away at its will. Notwithstanding that, it is almost always in the creditor’s best interest to gain physical, albeit limited, control of the aircraft without delay. Simple physical control as opposed to full repossession can often be acquired more quickly and therefore less expensively through some form of freezing order or other injunctive order such as a replevin writ.

Jones-Prus: Going back quickly to the preparation side of things, then there are a raft of more practical and logistical issues that need to be put in place in parallel. It is critical to have flight schedule visibility so that arrangements such as facility and ramp access, and access for contract flight crew can be made wherever required in advance, including ensuring that ground handling, insurance and storage arrangements are in place. There may also be some form of export duties or fees that need to be paid to ensure the aircraft can be flown out.

Tyler: There are so many moving parts here that it comes back to the planning again! Melissa, one question that we often hear from clients in these scenarios involves engines and what happens if say a third party’s engine is installed on our client’s airframe. Can you briefly explain how this works out in practice?

Jones-Prus: Sure. If the Cape Town Convention applies, the situation tends to be simpler, since Cape Town overrides any national laws that might otherwise apply the accession doctrine. If the doctrine of accession were to apply, the airframe owner technically holds title to the installed third-party engine, and not its own, original engine. These laws are luckily not that common anymore, and if they do exist they can be mitigated by recognition of rights agreements with other lessors and creditors. Engine nameplates are also helpful in the situation where the engine is off wing since they put other creditors on notice of your interest in the engine.

So, if a third party’s engine is installed on our client’s airframe then in practical terms, this should not hold up repossession in what is typically a very time-sensitive scenario. Once the aircraft has been secured, then arrangements can be made for the removal of the third-party engine. Conversely, if it’s your engine on someone else’s airframe then prior to taking any formal steps to repossess, dialogue with the airline is again the best place to start, resulting ideally in a consensual engine swap. Dialogue with the airline’s other lessors and creditors may also be helpful in this scenario, and, if all else fails, a separate physical repossession of the removed engine may be needed.

Tyler: So if we were to sum up what we have talked about here in one sentence, dialogue and planning seem to be the key ingredients to a successful repossession!

Jones-Prus: That’s right, Graham. Luckily, our industry is very collaborative and close knit, so the resources are always close at hand. Before we wrap things up, it’s worth mentioning the Pillsbury’s World Aircraft Repossession Index—we will very shortly be publishing the 4^th edition which now covers 111 jurisdictions and provides a very different approach to the typical law firm publication, so please stay tuned for that. And please get in touch with either Graham or myself if you have any questions.

Tyler: Nice plug, Melissa! Well, that’s all we have time for. We hope that you have enjoyed this and if so please give it a big thumbs up on whatever media platform you have listened to it on and please look out for further editions of our Inflight Audio podcasts in the future!