LexisNexis

Aircraft lessor lawyer: a year and a bit of the pandemic

Thursday 13 January 2022

Gerard Melling

M&T Aviation USA Inc, Los Angeles

g_melling@tombo.com

I am an English barrister and California (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, and sales. Some airlines had structural problems, but nothing really happened until March 2020, when suddenly everything changed.

Although suddenly things seem a lot better in the United States, that is not the case in the rest of the world, airline-wise, with European operators dealing with increasing restrictions and Asian operators seeing a lot of lockdowns recently.

It just shows that all the provisions in the leases and all that work on jurisdictional questionnaires (JQs) were designed for difficult times – we went through those in the 1990s and early 2000s, but they have come back at 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.

In addition, we have been doing this all from home – working from home (WFH). Unimaginable when I started off in the aviation world (the good old days of facsimiles, desk phones, floppy discs, dial-up synchronising and 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 International Bar Association (IBA) friends). In the 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 find those collared shirts, long trousers and shoes, 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 also at solving many problems when airlines are in trouble. We have gone from sale and lease contracts to dealing with deferrals, rescheduling, restructuring, insurances, maintenance, repair and operations (MRO) contracts, re-registrations, IR filing preparations, ferrying, default preparation, powers of attorney (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 and within the same continents, and per aircraft model:

  • Flight restrictions: Airline flying has been restricted, and even within the same continent (United Kingdom/European Union, US/Canada-Mexico, India/other Asian countries. This is also layered with quarantine requirements and restrictions varying by country and risk area, to produce a complicated and restrictive environment.
  • Geographic variations: Some areas seem to be under control or rapidly improving: some are plunged into new crises, so it also will change on a time line: a year ago, few imagined we would still be grappling with this problem, which initially was compared to post-9/11, but has been massively greater in geographic reach and duration.
  • Government support: The level of support varies dramatically from a lot to little or nothing, and varying 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, there is quite a spectrum of airline responses:

  • No change: 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, partial payments resumed at a temporary percentage; and airline awaiting loans/aid and resumption of services, and unpaid amounts not yet restructured.
  • Restructuring: rent holidays and reductions agreed.
  • Insolvency/reorganisation: Chapter 11 (Ch 11) for three non-US airlines – AeroMexico, Latam and Avianca, with Philippine Airlines to come; Irish examinership (and Norwegian reorganisation); and others (Garuda) on the brink. This has resulted in restructured or repudiated leases, depending on the aircraft model, and unpaid rent in unsecured creditor claims.

As you can imagine, 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 at all as yet;
  • documenting reschedulings 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: ferry, insurance, Continuing Airworthiness Management Organization (CAMO), registration, storage and warranty claims; and estimating costs;
  • participating in reorganisation proceedings, lodging claims, preparing for lease modifications and returns; and
  • maintaining aircraft and engine conditions is just as big – or bigger – exposure than rent: storage issues – not following EOM protocols for airframes and engines, corrosion and outdoor storage with humidity or North Sea weather.

Some take more time than others and we have bounced between different providers and solutions – MRO contracts vary tremendously, often with indemnity issues: aircraft re-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, we are pushing cash-strapped airlines to fulfil return conditions, pay for pricey parts and not rob your aircraft. In addition, there is still a legal dimension for compliance with a lease condition, and taking care of all the arrangements for returning aircraft that 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.