By: Ben Graham-Evans
As a global team of lawyers we routinely advise both Lessors as both owners and managers, as well as airlines in the commercial aviation industry. We are transactional lawyers with a commercial approach with the ultimate aim of getting the transactions done smoothly, to time and to cost and of course protecting our clients from a legal perspective. We don’t routinely issue comment on what mostly amounts to pure commercial issues, however, given the continuing trends for aircraft portfolio trading where aircrafts are being bought, sold, and financed with leases attached, we felt there was merit in describing some current positions and practices here.
The sale of an aircraft, subject to a lease, gives rise to the need for a novation or lease assignment and this is the legal process by which the rights and obligations contained in the lease are effectively passed to the new owner. This process, whether documented under US or English law, is often seen and felt as an administrative burden for an airline who often have little or no choice in the matter, may often have been given short notice to comply to the various legal and administrative hoops through which the airline must jump to enable the lessor to transfer the ownership of the aircraft. The process has become so common that some practitioners speak of “novation fatigue”.
From a lessor’s perspective, they will always desire a freely tradeable aircraft, one that they can sell onto another lessor or refinance and transfer at their own discretion with the minimum hindrance or expense.
Conversely an airline lessee, regardless of bargaining position, wants certainty as to who they are dealing with - both from a commercial and legal interface - and furthermore wants “quiet enjoyment” free of distraction throughout the lease term. Of course, no one airline is the same. In choosing to lease a number of aircraft from one lessor, a smaller airline typically places value in building the commercial relationship, in the knowledge that that lessor is greater invested by allowing a number of aircraft to be placed to that airline and allowing their asset risk to be concentrated, which in turn will hopefully ensure that Lessor has increased incentive to build a lasting commercial relationship with that airline.
In contrast, a large airline will have the bargaining position and often insist on minimum net worth criteria for potential lease transferees in an attempt to ensure that any aircraft that are traded or transferred as a consequence of post a lessor re-financing are traded or transferred to the larger scale lessors.
Post-delivery refinancing is common with newer aircraft and Lessees often know that these are likely or imminent to coincide with or following new deliveries.
We see lessor to lessor trading is very common with mid-life aircraft, particularly with the recent glut of Asset Backed Securitisation structures fuelling the “pick and mix” portfolio deals being traded. Such deals include groups of aircrafts of mixed age and value, perhaps 5 – 12 in number, and containing aircraft on lease to a number of jurisdictions involving airlines of varying credit.
Also, as aircrafts age and they head towards end of life, it is also common to see them sold to so-called “end of life lessors”. Such lessors specialise in maximising the return of the final leasing period with a view to airframe part out and often redeployment of serviceable engines into revenue service. On a transfer of an ageing aircraft on such a lease, an airline may seek that opportunity to renegotiate favourable terms as to redelivery.
So with all of this trading and transfer activity going on, Lessees have commonly been known to request, and lessors have been known in some cases to offer “novation fees”, of anything between $10 000- $50000 per aircraft to be paid to them by way of inducement or compensation. Such fees either enshrined in the lease documents themselves or negotiated on an ad hoc basis either at the request of lessee or sometimes as offered by lessor. The theory then being that the transfer or novation of the lease is then made “smoother”. In practice there is not always an obvious correlation between administrative burden, airline cooperation when documenting these transfers and payment of these kinds of fees. There may be a market perception that they help but of equal importance is that the lessee is well resourced, represented and assisted (often by external counsel) to handle the novation process with minimum distraction and hassle for airlines. So in summary, where a transfer fee is paid and then the airline handles the transfer themselves internally, we don’t often see an improved process.
In addition to the payment of novation/transfer fees, restrictions on transfers are sometimes being negotiated, perhaps an absolute bar on transfer for the first few years of a lease term that is lifted later. Alternatively, a cap on the number of aircrafts that a lessor can transfer in a given time period may be negotiated – this may be useful where an airline has a large number of aircraft leased from one lessor and does not want that stability to be denuded for an initial period.
Finally, the very process of a novation / transfer gives rise to some upsides for the lessee as well, the most notable of which perhaps is the opportunity for both parties to come to the table to revisit items in the lease, be it an improved redelivery position for the lessee or an adjustment to other terms of the lease in lessees favour. This again raises the question perhaps as to the efficacy of novation fees which may even weaken or remove lessees ability to negotiate to its advantage in these scenarios. Also, a lessor may take the view that the fact that any given lease is “tradeable” is a good sign in that it shows a diversifying lessor appetite for any given airline’s credit.
Aircraft trading will remain popular for the foreseeable future. External lawyers can often help the process proceed as smoothly as possible whilst acting in the best interest of their clients be they the airlines or the lessors.
Ben Graham-Evans is a partner in the Global Transport Practice of Smith, Gambrell & Russell. Following an invitation from the Terralex Board, Ben Graham-Evans has recently been appointed Co-Chair of the Terralex Aviation Industry Sector Team. Contact details email@example.com