India has taken one step forward in making it easier for lessors to repossess aircraft, but it remains a challenging jurisdiction to work with.

The country’s reputation among aircraft financiers and lessors took a battering in 2012 following the grounding of Kingfisher Airlines in October of that year. As lessors moved in to take their aircraft back, they were met with the country’s famous bureaucracy, a regulator that upheld objections from the defaulting airline, and in some cases aircraft in various states of disrepair with parts spread across the country.

Fears that history would repeat itself emerged in late 2014, as budget carrier SpiceJet looked to be on the edge of bankruptcy. With the Kingfisher episode still fresh in memories and SpiceJet’s unpaid dues mounting, a number of lessors, including AWAS, BBAM and BOC Aviation moved quickly to the courts seeking orders that would force the Directorate General of Civil Aviation to deregister their aircraft – a key part of the repossession process.

BBAM also launched an action in the Delhi High Court to have SpiceJet wound up, as it moved to take back the aircraft it manages.

“You see it escalate quite quickly from a lessors perspective if they can’t get the cooperation on the ground,” says Evgeny van der Geest, senior analyst risk advisory at Flightglobal’s Ascend consultancy. “That’s when instead of being kind and waiting, lessors in tough jurisdictions just go in straight away and in courts. It sounds like an overreaction, but nobody wants to see a second Kingfisher.”

Heightened awareness

He adds that with recent events in Russia and Ukraine, lessors have already “increased their watch level” for geopolitical and credit risks, and have been managing them accordingly.

Van der Geest points out that as most of the aircraft under lease were 737-800s, lessors had real impetus to move quickly to take possession of the assets, as the type’s high liquidity meant that placing them with new operators was rather easy.

Flightglobal’s Ascend Fleets database indicates that the airline returned 10 Boeing 737-800s and four -900ERs during the last quarter of 2014 to lessors including BOC Aviation, AWAS and BBAM. Not all of those aircraft were subject to early lease returns or repossession.

SpiceJet’s situation also impacted on AWAS’s long-running portfolio sale. Nine aircraft leased to the carrier were excluded from the sale to Macquaire AirFinance, which closed in March.

As 2015 rolled around and SpiceJet founder Ajay Singh took control of the distressed carrier, some of those court actions were still in motion.

Amid that, in February the government of India brought in a change to local regulations aimed at making it easier for lessors to deregister aircraft.

“The government introduced a sub-rule that gives effect and requires the DGCA to deregister an aircraft when there is an application by the data holder,” explains Ravi Nath, chairman of RNC legal, a law firm in New Delhi that acts on behalf of a number of foreign lessors.

He says that while the rule change is not a law, in a judgement on 19 March the Delhi High Court upheld the ruling, ordering the DGCA to deregister the aircraft “forthwith”, or face contempt of court charges.

Since then however, under Singh’s leadership SpiceJet has cleared most of its debts, and subsequently those lessors that sought the deregistration orders have withdrawn their requests. It also reached a settlement with BBAM that has ended the winding-up application.

Although the change to the civil aviation rules has made it much more straightforward for lessors to deregister aircraft in India, there are other changes needed to reduce the geopolitical risk for them.

Capetown Convention vs. local laws

India ratified the Cape Town Convention in 2008, but has not yet passed underpinning legislation that would enshrine it into local law. Nath says that there are no inherent issues with the Convention itself, but its effect is somewhat dulled when it conflicts with local laws.

“Without having the underpinning of legislation under the Indian constitution it still applies, and so the courts must enforce it, subject to any municipal law,” says Nath.

It is the latter that poses issue. With municipal law taking precedence, the Airports Authority of India or any other party with possession of the aircraft can legally hold it until all debts associated with the aircraft are cleared. In the Kingfisher case, AAI refused for some time to allow aircraft to depart from its airports, creating major headaches for lessors trying to re-lease their aircraft.

Nath says that legislation that enshrines Cape Town would provide more clarity and certainty, rather than just relying on the rules and court ruling, but he does not expect that to be coming any time soon.

“Ideally we would like that short form legislation so any conflict with Indian law is avoided. That is very unlikely to happen. The government of India has a pig's hide: these things don’t bother it.”

Nevertheless, he adds that as New Delhi and the DGCA are “deadly scared of courts”, the judgement on deregistration should at least make it easier for lessors to reposess their aircraft in future.

Source: Cirium Dashboard