An ongoing dispute among major aircraft leasing companies, local Indian authorities and Kingfisher Airlines, which has been grounded since late last year, provides some "critical insights into risk factors for lessors seeking to safeguard interests in emerging markets", according to Fitch.
Since Kingfisher's grounding, major lessors have taken a number of different approaches to asset recovery, with "varying results", says Fitch.
The ratings agency views the Kingfisher experience as important in underscoring the risks associated with leasing to start-up airlines that lack a proven operating track record and often fail to become profitable after launch.
"In India and many other emerging economies, where rapid demand growth has spurred market entry by unproven carriers, lessors face the need to reflect higher risk through pricing or potentially stricter concentration limits," says Fitch.
In addition to credit risk, lessors clearly face "substantial legal risk" in India and other countries, where quick recovery of assets and enforcement of creditor rights is less certain than in developed markets.
Lessors have had difficulty in some cases recovering aircraft from Kingfisher as a result of India's failure to cooperate fully in deregistering the aircraft, says Fitch.
India ratified parts of the Cape Town Treaty, an international agreement setting out common standards for treatment of secured aircraft claims, in 2008. However, many of the Kingfisher leases predated that ratification.
"Even with Cape Town in place, local laws and precedent remain critical for lessors and other aircraft creditors to consider."
According to Fitch, the experience of lessors in the Kingfisher situation shows that moves to take assets from lessees at the "first sign of trouble" often pay off.
"This is clear in light of media reports suggesting that Kingfisher-leased aircraft and engines have, in some cases, been stolen or damaged. This points to the need for lessors to remain focused on maintenance reserves, security deposits and solid insurance policies - especially in cases where local laws and regulatory protection of creditor rights may come up short."
Fitch says exposure to Kingfisher among its rated lessors is small relative to their total leased aircraft portfolios. "The outcome of the dispute is therefore not a ratings issue for these firms."