Indian aviation takes giant leap with easing of aircraft lessor rules
Yet, insolvent GoAir's fleet will remain grounded, as refreshed regulations are not on retrospective basis
Early this week, under pressure from the all-powerful Aviation Working Group (AWG), the government refined its bankruptcy regulations (the Insolvency Bankruptcy Code, or IBC), exempting leased aircraft from freeze protocols – leading to a much-needed alignment with global practices.
The decision will help lessors repossess their aircraft if any airline in India files for bankruptcy. This strategic shift, spurred by Go First Airline’s bankruptcy debacle, ensures that India adheres to international norms, safeguarding the interests of global lessors.
But wait. The refreshed regulations, especially for aircraft and engines, are not on a retrospective basis. Hence, Go First, which filed for insolvency before the amendment, is out of this ambit.
About 80 per cent of India’s commercial aircraft are on lease, starkly contrasting the global average of 53 per cent. Opting for leasing instead of direct purchases can liberate significant funds. This financial flexibility allows airlines to offer reduced prices to passengers and concentrate on expanding their business rather than servicing large debts.
In the Go First incident, lessors found themselves in a quagmire, unable to reclaim aircraft due to local legal restrictions, inciting concerns among industry heavyweights like SMBC Aviation Capital.
Cape Town Convention factor
To understand the significance of this alignment, one must appreciate the role of the 2001 Cape Town Convention. This global treaty, endorsed by India in 2008, assures lessors of swift repossession in case of defaults. While India pledged support to this treaty, the lack of domestic enforcement mechanisms led to clashes between global standards and local judiciary decisions. The result? A downgrade in India’s compliance rating, signalling potential financial repercussions for airlines in India.
Earlier, as per Indian law, when a firm filed for insolvency, it was restricted from selling or transferring its assets until the resolution process was completed. This mandatory pause, often termed a moratorium, could extend for half a year, nine months, or sometimes more. For entities that lease equipment to airlines, such as aircraft or engines, it implies they cannot reclaim or lease out their assets in the interim, which disrupts their business activities.
The recent apprehensions raised by the AWG further underline this challenge. Their caution against India, following impediments in reclaiming Go First’s aircraft, indicates the global hesitance in navigating India’s aviation leasing landscape. Add to this, the complexities arising from Go Air’s recent bankruptcy filings and controversies surrounding the Pratt & Whitney engines, and one sees an environment marked by uncertainty.
The government'slatest decision also aligns with the Irrevocable Deregistration and Export Request Authorisation, known as IDERA, which grants lessors the authority to remove their aircraft from the national registry of the lessee’s home country, take them back and relocate them, especially in situations of lease payment breaches.
The AWG's heft comes from the fact that the not-for-profit legal entity represents major aviation manufacturers, leasing companies and financial institutions that contribute to developing policies, laws and regulations that facilitate advanced international aviation financing and leasing. With entities like Airbus, Boeing, Deutsche Bank, and SMBC Aviation Capital at its helm, AWG’s perspective can influence global aviation dynamics.
Hefty fee for Indian airlines
One of the major reasons for leasing companies to charge a hefty fee for airlines in India was issues with their aircraft’s repossession. Right from the time of Kingfisher Airlines, leasing companies found it increasingly difficult to take back their aircraft because several claimants, from financial institutions to oil companies, use the asset as a lien until their debts are paid for by the defaulting airlines.
This resulted in collateral damage for the rest of the airlines as leasing companies started charging them a higher fee for leasing their aircraft. This led to a situation where those set to launch an airline deferred their plans, or a few who had already launched their airline closed their operations. For example, Air Costa, the Vijaywada-based airline, had to withdraw its services as it had difficulty paying high leasing charges.
The leasing companies have repeatedly tried to get their aircraft deregistered from the Indian regulator, the Directorate General of Civil Aviation (DGCA). In recent cases, the lessors sought repossession of 45 out of 54 aircraft of the bankrupt Go Air airlines only to find the National Company Law Tribunal restraining them from doing so. The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates issues relating to domestic companies.
Similarly, an aircraft leasing company, US-based Aircastle, initiated insolvency resolution proceedings against SpiceJet in April this year, hoping to repossess aircraft. The matter is still being heard in the Indian courts.
It is clear that aircraft manufacturers and the entire ecosystem related to it must have worked behind the scenes to get the government to agree to roll out the new norms which allow lessors to repossess their aircraft whenever an airline files for insolvency.
The revised amendment is expected to pave the way for an aligned and transparent leasing framework, which will, in turn, attract more foreign direct investment (FDI). As international lessors gain confidence in the Indian market, they will bring aircraft and the promise of technological collaborations, advanced training programmes, and a potential boost to India’s aspirations of becoming an aviation hub.