Aviation Law Committee 27 April 2020

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Gerard Melling

Publications Officer SVP Legal, M&T Aviation USA Inc. (CA bar 242835)

Dear Members,

We have had an unprecedented effect on our sector due to Covid-19, so we are reaching out to you in a special message.  I hope that you have been enjoying reading the Committee’s publications that we have all put together. Suddenly, we are faced with an issue that dwarfs all the matters about which we have been writing, reading and discussing. Our sector is severely affected and we don’t know when recovery will start and who will be the victims.

Firstly, we would like you to know that you are very much in our thoughts, as we officers are here to serve our committee members and support you in our journeys in the aviation sector. I am sure that your individual situations are similar to those of my fellow officers and colleagues. We just had an officers meeting where we could discuss how we have all been affected and how we are faring. We are seeing lockdowns in differing severity, which can be challenging just to manage from day to day. We all know family and friends who have been directly affected by the virus, both in death and illness. Families are separated and just have online contact. Our firms, clients and employers are all struggling as airlines have largely stopped flying, and both in our sector and in others, a lot of people have lost their jobs or are facing cuts. It has been heartening to hear from one of our officers about a mask manufacturing operation for medical staff, as we wonder what we can do on a personal level. It can be hard to see beyond containment to revival, but we have to keep our eyes on the revival horizon. 

We hope you can keep safe and healthy, and that we can meet up at the annual convention in Miami in November, which we do hope will take place and give us something positive to look forward to.

Here are a few topical topics for your consideration.

                The World of Leasing: 

• I work for an operating lessor. Most operators have ground to a halt. Airlines have grounded aircraft and laid off staff. They are short of cash and support to ride out the Covid-19 event. Bankruptcies and closures are predicted and some casualties such as Virgin Australia have already occurred, the drama continues. Lessors themselves are hurt by payment defaults, but this crisis will certainly spin out to affect certain aircraft types – long/short range, old and new models, grounded MAXs – as well as affecting lessor/investor viability. 

• Airlines have been soliciting help from lessors in terms of rent deferrals and other concessions.  The spectrum varies from no requests to selective requests, requests relating to all aircraft, for a few months up to a year, and indeed to a simple non-payment for now and waiting for proposals.

• Government help also has a wide spectrum, ranging from nothing in the pot to degrees of financial support, which can have onerous conditions attached.

• As a lawyer, we suddenly have to look at lots of unfamiliar matters: in my case, I used to deal with repossessions and bankruptcies on a daily basis but have taken a 15-year holiday from that.  So I am having to brush up my skills and get organised for-

  • Deferrals – drafting agreements in differing levels of formality, providing for interest and acceleration.

  • Preparing for return and repossessions, including:

    • Talking with lawyers in many differing jurisdictions on repossession, court proceedings and enforcement of judgments;

    • Sorting out new registration countries, which is technically driven, but which requires setting up links to the country of registration, whether by new entities, holdership agreements or otherwise, and complying with KYC/AML requirements;

    • Setting up aircraft handing – CAMO (Continuing Airworthiness Maintenance Organization), which we didn’t need 15 years ago, MROs (Maintenance and Repair Organization for Storage, Maintenance, Repair, Reconfiguration) and ferry are the main categories – this is a real headache due to massive and slow moving GTA reviews which take weeks;

    • Insurance – lessors should have ground risk-only GRO insurance in place but it may need tuning up if not actually used for years;

    • Preparing pots of money to give to lawyers, registries, CAMOs, MROs etc.

It is work, though not the positive business work we are used to. It is what the agreements are drafted for – enforcement of rights, so we will see how it works.

-----------------------------

My fellow officers Jeanette Pinard and Serap Zuvin have produced additional notes which follow.

Jeanette PinardManaging Director

Stifel | Aviation

450 Royal Palm Way

Palm Beach, FL 33480

Desk: 561 | 868-8703

Cell:   203 | 321-0324

Email: pinardj@stifel.com

Effect on airlines

What is evident from the above note is how quickly things change – which is why it would be impossible to do a country by country assessment on the aviation industry in particular, though we attach one illustrative assessment from Turkey. The theme today for all airlines and corporations generally is conservation of cash in the face of an uncertain future. Certain airlines, such as Emirates and Ryanair have months, if not a year, of cash on hand.  Other airlines have nothing and even good credits are looking for creative ways to raise cash. American Airlines, it was announced a few weeks ago, did a large SLB on a number of widebodies with BOC Aviation. Delta issued an RFQ to a small group of aviation investors for a similar cash raising exercise. 

LATAM at the end of March issued an RFQ for 48 older aircraft which they intend to go to the part-out market.  The aircraft consist of three tranches: (i) 10 x 767s -5 passenger, vintage 2008 and 5 freighter, vintage 2001 – 2006 with a price tag of approximately $23m for the passenger aircraft and $32-38m for the freighter aircraft:

(ii) 14 x A320 2008 – 2010 vintage and;

(iii) 24 A319-A320, 2008-2011 vintage with combined prices ranging from $15mm to $28mm.

LATAM wants an immediate 8 month rent deferral on the SLB with a four to six year term and minimum to no redelivery conditions.

IAG is also rumored to be in the market for a 50 aircraft SLB disposition of narrowbodies 2010 vintage.

BA and LGT have announced early retirements of A380s, 747s, A340s and possibly of some A330s.

What this is all telling you is that airlines are desperate for cash, and have a distressed view of the long haul market going into the future and impaired short haul prospects and are therefore betting on newer kit at lower discounted OEM pricing. No one has any idea if the market will step up to any of these deals and they look, based on back of the envelope pricing, to be more aspirational than realisable – but who knows what deals can be cut.

It all underscores the vast uncertainty of this market and not only when the market for aviation returns but what it will look like.

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