Distressed Assets: JOLs and JOLCOs

As a result of the COVID pandemic, with the resulting payment defaults amongst several airlines , the past few years have seen a surge in interest in distressed debt opportunities within the aviation sector. One particular area which has seen a lot of attention has been Japanese tax leasing – namely the Japanese operating lease (“JOL”) and Japanese operating lease with call option (“JOLCO”) products.

JOLs and JOLCOs have been staples of the aviation market for many years. Both are essentially operating leases with an investment of Japanese equity, typically provided by a Japanese corporation with tax capacity. This is usually twinned with limited recourse senior debt from a Japanese bank or a Japanese branch of an overseas bank, such that the credit of the underlying lessee is integral to the transaction as the revenue flowing from the lease would be used to pay the debt.

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Hop to it: Vertiports as an asset class

Hop to it: Vertiports as an asset class

The sums invested in the development of electric vertical take-off and landing (‘eVTOL’) aircraft have been well publicised. It seems that not a week goes by without a new partnership announcement, a new SPAC combination, or another large investment being reported in the press – such as the additional $450 million being invested by Boeing in Wisk, announced at the end of last month. The Financial Times recently referred to a McKinsey finding that ‘investors have bought into the dream, pumping more than $7bn into such projects, mainly through special purpose acquisition vehicles (Spacs) listed on US stock markets,’[1] The article goes on to note that ‘while all kinds of vehicles are planned, from cargo planes to surveillance drones, almost 75 per cent of the money went to companies developing manned electric vertical take-off and landing (eVTOL) craft.’[2]

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Flying into the future of global air freight

As the global economy becomes more interconnected, aviation takes on an increasingly central role in our collective economic growth. The aviation industry supports 65 million jobs and enables the best part of $3 trillion in global GDP annually. If aviation were a country, it would rank among the world’s largest economies.

With the loss of nearly two years of passenger traffic, however, the COVID-19 pandemic has hit aviation harder than nearly any other industry. Yet there are reasons for optimism as the industry looks to emerge from the crisis stronger than before. In this report, Reed Smith’s aviation team examines how the industry can reconfigure itself and continue to connect the people and economies of the world, long into the future, with a much different footprint.

The report explores the dynamics in four key areas for the aviation industry:

  • Tomorrow’s world
  • Business continuity – ensuring a solid business model
  • Avoiding unnecessary disruption (increasing number of disputes)
  • Navigating the given external considerations

We hope you enjoy reading the report and as always, we welcome your feedback and questions. Please feel free to reach out to any of the authors, or to your usual Reed Smith contact.

Please see link to site: Global Air Freight

Unruly passengers are on the rise

Unruly passenger numbers have been on the rise, with many of these incidents related to compliance with COVID-19 mask-related regulations. There are concerns of further issues during the holiday period with Omicron on the rise and an increase in travel as people visit family.

Our U.S. litigation team have set out some of the considerations for airlines in dealing with these potential issues.

Supporting the African aviation market to recovery

As with the rest of the world, the Covid-19 pandemic has not been kind to African aviation industry stakeholders. To paint a broad picture of market performance, the African Airlines Association’s (AFRAA) recent report noted a 50% drop in capacity since April 2019 with the continent facing greater declines in 2020 in passenger numbers, seats offered and aviation-related jobs than the worldwide average[1]. The continent also faces the twin challenges of limited financing options and difficulties with current policies. However, despite these challenges, there are positive aspects to the market’s recovery and opportunities for sustainable growth. There are several initiatives available to market participants and governments to counter the difficulties in the current operating environment, if these are adopted. Opportunities also abound in this unsaturated market for regional growth and in air cargo. Continue Reading

FAA and Homeland Security issue warnings as unruly passenger incidents increase

According to the Centers for Disease Control and Prevention (CDC), those who are fully vaccinated with an FDA-authorized vaccine or a vaccine authorized for emergency use by the World Health Organization can now travel safely within the U.S.  Face coverings, however, must still be worn at the airport and during flight. Continue Reading

U.S. Court refuses to dismiss indemnity claims against U.S. Government in Kobe Bryant helicopter crash lawsuit

On Monday May 3, 2021, the California federal district court judge handling the Kobe Bryant helicopter crash lawsuit denied the United States Government’s motion to dismiss claims made against it by Island Express Helicopters, Inc.—the helicopter charter company operating the fateful helicopter flight—for indemnity. Continue Reading

Connected Aircraft: modernising technology in the skies

It is still remarkable when you board a flight, after trying to squeeze a few final minutes out of the airport WiFi connection, when you see that your aircraft has its own internet connection. Although the technology to connect an aircraft to wireless internet-providing satellites has been around for the best part of the last ten years, the global fleet rollout is less than half of global seat capacity, yet the in-flight connectivity market is set to increase from US$1.5bn in 2020 to over US$5bn by 2027. However, evolving technology is taking the concept of a ‘connected aircraft’ further and deeper than simply allowing passengers to scroll through their Instagram feed at 35,000 feet. Continue Reading

Aviation manufacturers take note as the U.S. Supreme Court rules on the extent of specific personal jurisdiction under the Due Process Clause and opens the door to future suits

On March 25, 2021, the U.S. Supreme Court handed down a decision which rejected a narrow construction of specific personal jurisdiction under the Due Process Clause. In Ford Motor Co. v. Mont. Eighth Judicial Dist. Court, the Supreme Court clarified the limits of specific personal jurisdiction and litigants’ due process rights and held that Ford Motor Co. can be sued in Montana and Minnesota over accidents involving used cars in those states even though the cars were not designed, manufactured, or sold in those states. The decision has significant implications for the scope of personal jurisdiction under the Due Process Clause, including for aviation manufacturers in product liability actions that are filed outside of their home jurisdiction.

The court’s ruling was 8-0, with Justice Alito filing a concurring opinion and Justice Gorsuch filing a separate concurring opinion that was joined by Justice Thomas. Justice Barrett did not participate.

In 2017, the Supreme Court held in Bristol-Myers Squibb Co. v. Superior Court of California, 137 S. Ct. 1773 (2019), that specific personal jurisdiction can be exercised over a defendant pursuant to the Due Process Clause only when (1) a defendant “ha[s] purposefully availed itself of the privilege of conducting activities within the forum state” and (2) when the plaintiff’s claim “arise[s] out of or relate[s] to” the defendant’s forum conduct. The Supreme Court’s decision in Ford Motor Co. examined the limits of the second prong—that a plaintiff’s claim must “arise out of or relate to” the defendant’s forum conduct. Continue Reading

Hoping for the best but preparing for the worst

It is now a unanimous conclusion that the COVID-19 pandemic has resulted in the worst ever crisis in the history of the aviation industry. In 2020, we saw major airlines such as Avianca, LATAM, Thai Airways, Virgin Atlantic and Virgin Australia enter into formal insolvency or restructuring proceedings, with the majority of other airlines being kept afloat by a combination of government aid, cost-cutting measures and concessions from shareholders, employees, bondholders, lessors and other creditors. As we enter the spring of 2021, the inevitable question is: what will happen next? Which airline may fail and which will be well-positioned to benefit from an eventual recovery in international air travel? Continue Reading

Greening pains: How are we going to finance sustainable aviation fuel?

In an article a few weeks ago on ‘How tech went big on green energy’, the Financial Times referred to a report released in February by Lancaster University and Small World Consulting, which found that the information and communication technology sector (i.e. IT)  ‘is estimated to form ca. 1.8-2.8% of global GHG emissions in 2020’[1]. That, the FT noted, ‘is roughly the same as emissions from the aviation sector’[2]. Continue Reading

Masks but no tests: U.S. CDC requires masks but will not require COVID-19 testing for domestic travel

After considering whether to implement a COVID-19 testing requirement for domestic travel, including air travel, the United States Centers for Disease Control and Prevention (“CDC”) recently stated that it is not recommending point of departure COVID-19 testing for U.S. domestic travel. Federal officials had indicated that the CDC was considering a rule that would require all U.S. domestic flyers to test negative for COVID-19 prior to boarding a domestic flight. However, following industry opposition, including opposition from U.S. based air carriers, the CDC stated that it was not recommending point of departure COVID-19 testing prior to domestic travel. The statement by the CDC follows its January 29, 2021 Order which requires the wearing of masks by travelers. Continue Reading

U.S. DOT issues new final rule on bumping

On January 13, 2021, the Department of Transportation (DOT) issued a new final rule amending its rules regarding oversales and compensation due to passengers who are denied boarding involuntarily — a practice known as “bumping”. The final rule was issued in accordance with the Transparency Improvements and Compensation to Keep Every Ticketholder Safe Act of 2018 (“TICKETS Act”)[1] which required the DOT complete a rulemaking to clarify that:

  1. there is no maximum level of compensation an air carrier or foreign air carrier may pay to a passenger who is involuntarily denied boarding as the result of an oversold flight, and
  2. the denied boarding compensation levels set forth in DOT regulations are the minimum levels of compensation an air carrier or foreign air carrier must pay to a passenger who is involuntarily denied boarding as the result of an oversold flight.

The final rule prohibits airlines from involuntarily denying boarding to a revenue passenger after the revenue passenger has checked-in for the flight and the passenger’s boarding pass has been collected or scanned and the passenger has been “accepted by the gate agent”, subject to safety and security exceptions that may require removal of the passenger. In addition, the final rule states that the passenger can be removed if the passenger is engaging in behavior that is “obscene, disruptive, or otherwise unlawful.” The final rule also makes clear that it does not limit the authority of the pilot of the aircraft provided for in 14 CFR 121.533. Continue Reading

The return of the MAX…once again

2020 was a challenging year for the aviation industry as a whole due to the COVID-19 pandemic, but for Boeing it has been an even more challenging time as it has also had to deal with the global grounding of its flagship product, the 737 MAX, since March 2019.

The 737 MAX was launched with the intention of becoming Boeing’s market-leading narrow-body aircraft, trying to break through the stiff competition in the narrow-body market from its main competitor, Airbus. However, that aspiration has so far failed to materialise due to the global grounding of the aircraft in March 2019 following two catastrophic incidents. At its peak, with over 750 MAXs grounded and unable to generate revenue, Boeing faced a significant challenge to return the MAX to the skies and restore the confidence of regulators and safety authorities, its customers and the flying public around the world. Continue Reading

DOT issues new rule addressing emotional support animals on flights

On December 2, 2020, the U.S. Department of Transportation (“DOT”) announced its final rule revising its Air Carrier Access Act (“ACAA”) regulation on the transportation of service animals by air.[1] The final rule constitutes significant changes to the ACAA regulations regarding the transportation of service animals. Significantly, the final rule restricts the types of service animals allowed on U.S. flights to dogs and frees airlines from having to accommodate a variety of emotional support animals. However, the rule does not bar emotional support animals from traveling in passenger cabins.

Prior to the issuance of the final rule, the DOT published an Advance Notice of Proposed Rulemaking titled “Traveling by Air with Service Animals” on May 23, 2018. On February 5, 2020, the DOT issued a Notice of a Proposed Rulemaking providing notice of a proposed rule amending its ACAA regulation on the transportation of service animals by air.[2] The DOT then received more than 15,000 comments on the proposed rule before announcing the final rule on December 2, 2020. Continue Reading

2020 hindsight: Finding opportunity in distress

The aviation financing industry has undergone a monumental shift in the past decade. As traditional bank lenders have come under increasing regulatory pressure, by virtue of their systemic importance in a decade of low interest rates and a search for yield, private capital (private equity, hedge funds, distressed debt funds, etc.) has been attracted to the relative stability of cash flows and value retention of aviation assets. It is no secret that private equity and other alternative funds have long been accumulating capital, waiting for the opportune moment.

The COVID-19 Pandemic (the “Pandemic”) has wreaked havoc on the aviation and travel sectors. As difficult as this has been to be involved in, distress is attractive to private equity. As airlines restructure and revisit their global fleet compositions, the market reprices distressed assets to reflect evolving operating conditions. In this relatively illiquid market, therefore, there are unprecedented opportunities for longer term investors with experience in distressed assets. Continue Reading

Investing in the future: France’s bet on the aviation industry

The French government, through its investment bank Bpifrance, has recently invested in the newly created Ace Aéro Partenaires fund, which aims to support French SMEs in the aviation industry that have been badly hit by the COVID-19 pandemic and the subsequent drop in aircraft deliveries. 630 million Euros have been raised so far, with the French State (through Bpifrance) contributing 150 million Euros, Bpifrance (from its own funds) 50 million Euros, the “big four” French manufacturers (Airbus, Safran, Dassault and Thales) 200 million Euros, and the fund manager, Tikehau, the remaining 230 million Euros.

The investment is part of the French government’s 15 billion Euro plan to revive and transform the sector in three steps:

  1. providing emergency relief to the industry and its workforce, through export credits, government orders and emergency funding;
  2. investing in SMEs and the technological transformation of French aviation; and
  3. investing in R&D to design and build tomorrow’s aircraft.

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Case Note: What does ‘give possession’ mean under the Cape Town Convention?

Original decision: Wells Fargo Trust Company, National Association (trustee) v VB Leaseco Pty Ltd (administrators appointed) [2020] FCA 1269

Appeal: VB Leaseco Pty Ltd (Administrators Appointed) v Wells Fargo Trust Company, National Association (trustee) [2020] FCAFC 168

The Federal Court of Australia has provided important guidance on the meaning of the phrase “give possession of the aircraft object to the creditor” as used in Article XI of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the Aircraft Protocol) in the context of an insolvency. It is likely that other common law (and possibly civil law) Cape Town jurisdictions would reach a similar conclusion. Continue Reading

Updated Air Transport guide 2021: regulatory framework

The newly updated European Union chapter of the Getting The Deal Through Air Transport guide provides a useful and succinct overview of the European Union regulatory framework applicable to the aviation sector.

It offers highly practical insights into the various European measures that regulate the industry relating to:

  • Aviation operations and market access (safety regulations, licensing, public service obligations, regulation of airfares)
  • Ownership and control (financial fitness, nationality)
  • Aircraft and airports (maintenance, economic regulation, access, slot allocation, ground handling, air traffic control)
  • Liability and accidents
  • Competition law and state aid
  • Consumer protection

The chapter also provides a summary of the recent measures adopted by the European Union to deal with the devastating effects the COVID-19 pandemic has had on the industry.

To download the chapter please see our client alert here.

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