At the recent Airline Economics’ conference in London, senior experts from aviation law, consulting and leasing gathered to debate the challenges facing aircraft transitions and repossessions. Rob Watts, Director of Consulting at ACC Aviation moderated the session and believes there are a number of issues affecting the sector that are becoming more prevalent. “The market has been challenging for a while” he observes. “So, the collaboration between airlines, lessors and industry professionals is essential to be better prepared and thus mitigate transition and repossession challenges.”
Documentation discrepancies continue
In terms of aircraft transitions the major problems remain MRO slots and correct documentation. Although airlines are trying to improve – it is still commonplace for airlines’ records standards differ from what a lessor expects. Those carriers with dedicated redelivery teams manage well, but smaller airlines who do not regularly redeliver aircraft struggle. Lessors need to proactively engage with airlines if they want to protect against redelivery delays.
NewGen engine challenges ahead
The impact of NewGen engines on transitions is expected to have a major impact in the future. “The panel discussed the topic of reliability, early shop visits and unexpected module swaps in detail, and how they may complicate redelivery conditions that weren’t drafted to anticipate these challenges. Inevitably there will be end of lease compliance issues on the horizon,” continues Watts.
Power-by-the-hour programmes
Of course, there are OEM power-by-the-hour programmes to consider and whilst some provide reassurance, concerns are raised regarding lessors’ rights under these agreements, their transferability to other airlines, and the impact of these agreements on the marketability of the aircraft and engines. As Watts remarks, “FHA (Fleet Hour Agreements) give some peace of mind and are good for airlines, but for lessors the maintenance costs are hidden which makes it harder to calculate maintenance costs in the real world.”
MRO Capacity Remains Tight
Key pain points are MRO slots for engines, transitions, and base checks. These need to be secured several months in advance as manpower at MRO providers continues to remain a big challenge. Aside from engines, landing gear for A330s, 787s and A320 NEOs are also badly affected by supply chain shortages.
Quiet repossessions on the rise
As regards aircraft repossessions, Watts states that although there have been few airline failures over the past 12 months, there has been quite a high number of quiet repossessions as lessors seek to optimise their portfolios. “At ACC Aviation we note that a number of assets previously under ‘COVID-era’ contracts have been moved into new contracts under favourable market conditions.”
Legal and operational barriers persist
However, it is important to understand what has been happening in the wider marketplace and aviation law specialists confirmed that there have been some uncooperative airlines who cannot afford to give back the assets that they are relying upon. As Watts observes, “In the aftermath of COVID, lessors adopted a more tolerant approach. But now we’re in a hot market so the smartest are staying on top of the situation and at the first red flag they’re moving to recover and redeploy their assets. Naturally lessors prefer consensual lease terminations but being prepared is key.”
It’s clear that whilst ‘doing deals’ might be exciting, it’s getting all the paperwork correct at the outset that cements the best transactions. “Someone in the team must ensure that all the records and paperwork are handed over at completion and this needs to be monitored continuously. Records can be held hostage during repossessions to create a bargaining tool. Most of the large lessors know what operators and jurisdictions are cooperative. Smaller lessors may need to secure expertise in different countries and cultures and watch out for dubious practices. Engines can be swapped illegally, records held by third parties may be difficult to obtain if they have unpaid bills – it is not uncommon for repossessions to take several months to complete.”
Digital records not yet trusted
Delegates at the conference raised a point regarding the digitalisation of aircraft records and this area is still fraught with difficulty as Watts explains. “The problem is that its still too early for lessors to trust fully digital records, there is no consistency, and they prefer the paper trail. Even though there is a big initiative from EASA coming up in October where the security of records will affect airline licences, and airlines are digitising their records more and more, there is still a risk of tampering. Physical records are essential to detail the quality and detail of repairs, some of this evidence is handwritten and scanning is incomplete. If you have the ‘box’ you have the records.”
Cape Town Convention limitations
Another topic raised by the conference panel relates to the impact of the Cape Town Convention* which was designed to standardise court assistance in releasing assets to lessors and financiers in different places. The overall opinion seems to be that lessors, and the financing community as a whole, consider this to be practically useless when it comes to enforcement and repossessions. To repossess an engine or an aircraft requires co-operation from a lot of people, and it needs a court order so although a Cape Town signatory does help with local courts – it is a well-known truth that countries go at their own pace, and there is nothing that can be done about that.
*Cape Town Convention.
Commonly referred to at the Cape Town Convention, the Cape Town Convention on International Interests in Mobile Equipment provides specific rules for creating, registering, and enforcing international interests in high-value aviation assets, including airframes, aircraft engines, and helicopters. It aims to reduce the cost and risk of financing and leasing these assets by establishing a unified, internationally recognised legal framework through an International Registry.
