Aircraft lessor lawyer – a year of the pandemic
M&T Aviation USA Inc, California
I am an English barrister and CA attorney and work in-house for Mitsui & Co’s operational lease business. For the past ten years, it has been a pleasant, positive and sociable experience being a lessor’s lawyer, documenting new sale and lease back transactions, as well as sales. Some airlines had structural problems but nothing really happened until March 2020 when suddenly everything changed. It just shows that all the provisions in the leases and all that work on jurisdictional questionnaires is effective in difficult times. We went through those in the 90s and early 2000s but they have come back on a scale that was hard to imagine. In the past year we have switched to the very labour-intensive work of dealing with defaults and problems, liaising with local counsel in many and varied jurisdictions of our lessees, and getting to know litigation and bankruptcy counsel much closer.
Also we have been doing this all while working from home. Unimaginable when I started off in the aviation world (facsimiles, desk phones, negotiations in smoke-filled rooms), but now convenient in so many ways: dealing with global time zones, linking up by email, Zoom and Teams and using Docusign (and keeping in touch with IBA friends). In the first initial wave of alarm and hyper-preparation, it was almost essential as it was a round-the-clock experience. It will be strange exiting from the home cave, having to dress up and drive to the office, and we certainly need to get on planes to get the industry going again.
You remember that a lessor’s lawyer has to be good not only at transactions, but solving the many problems when airlines are in trouble. We have gone from sale and lease contracts to dealing with deferrals, rescheduling, restructuring, insurances, MRO contracts, re-registrations, IR filing preparations, ferrying, default preparation, POAs, examinership proceedings and Eurocontrol fleet lien exposure analysis, and in many varied jurisdictions.
With airlines leasing about 50 per cent of their fleet, equally lessors have been hit by the pandemic. Globally, we see a big difference between countries within the same continent, and per aircraft model.
- Flight restrictions: Flying has been restricted for airlines, even within the same continents (eg, UK/EU, US/Canada-Mexico, India/other Asian countries). This is also complicated by quarantine requirements and restrictions varying by countries and risk areas, to produce a restrictive environment.
- Geographic variations: Some areas seem to be under control or rapidly improving and some are plunged into new crises, so it also will change on a timeline. A year ago, few imagined we would still be grappling with this problem, which initially was compared to post-9/11 but has been greater in both geographic reach and duration.
- Government support: the level of support varies dramatically from a lot to little or nothing, and varies from direct to indirect.
- Widebody aircraft have been more severely hit due to international flight restrictions. MAX owners only just saw the models returning to service this year, with remedial work to be performed.
From my perspective as counsel to a small leasing company also managing aircraft for investors, we see quite a spectrum of airline responses.
- No change: the airline continues to perform all obligations without interruption – even if aircraft are grounded.
- Initial rescheduling only: a temporary reduction for a few months in summer 2020 followed by repayment.
- Stuck in a rut: initial rescheduling, inability to repay and partial payments resumed at temporary percentage. The airline awaiting loans or aid and resumption of services, unpaid amounts not yet restructured.
- Restructuring: rent holidays and reductions agreed.
- Insolvency/reorganisation: Chapter 11 for three non-US airlines AeroMexico, Latam and Avianca with Philippine Airlines to come – no US airlines here. Irish examinership (and Norwegian reorganisation) and others on the brink. This has resulted in restructured or repudiated leases depending on aircraft model, and unpaid rent in the unsecured creditor claims.
As you can imagine, the owners and investors have faced a cascade of issues that we as lawyers have had to respond to:
- unpaid rent: serving demands and grounding notices. Because of the difficulties to re-lease, it often makes sense to keep aircraft with a defaulting lessee who will at least insure and maintain the aircraft, so we have not used the classic default response of repossession.
- documenting any rescheduling and lease modifications.
- updating jurisdictional questionnaires for repossession preparations and issuing POAs to local lawyers.
- Eurocontrol analysis and fleet lien issues.
- preparing and agreeing contracts and arrangements for returned/repossessed aircraft, including ferry, insurance, CAMO, registration, storage, warranty claims and estimating costs.
- Participating in reorganisation proceedings, lodging claims, preparing for lease modifications and returns.
Some take more time than others and we have bounced between different providers and solutions. MRO contracts vary tremendously, often with indemnity issues. Registration for storage took a lot of work to identify suitable locations and storage locations had capacity and geographic suitability issues and tax complications. We had no Ch 11 but the Irish examinership was similar, thankfully on a compressed timescale, following the complicated series of hearings, motions, submissions, orders and agreements, guided by Irish counsel – at a rolling monthly cost.
Some of the work continues as usual – some sales to document. We are supervising interim and return checks for aircraft and though these are mainly technical matters, there is still a legal dimension for compliance with lease condition, and taking care of all the arrangements for returning aircraft which may not have a new lessee or purchaser in the current market.
We all hope that normality will return. 2023 and 2024 are the hopeful targets, so that lessors and airlines can recover. In good times, but particularly in bad, lawyers are essential for aircraft leasing.