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Navigating successful exits in investments is a strategic endeavour that requires planning, and adaptability to market conditions. This is the case across industries, including the aviation space. As market conditions and investment landscapes evolve, firms and asset owners in this space are increasingly exploring alternative exit strategies to maximise returns and mitigate risks.

Traditional Exit

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The successful issuance last year by Ashland Place Finance of ASHLAND 2023-1, the aviation loan asset backed securitization (ABS), together with the engine ABS, WEST VII, issued by Willis gave glimmers of hope to aircraft lease ABS market participants. This year’s BJETS 2024-1 by Global Jet Capital marks a further significant development for the aviation…

The European Union, through its aviation safety authority (EASA) has taken steps to address the future VTOL traffic management challenge with the development of an unmanned traffic management system, called the “U-Space.”…
Continue Reading EASA’s U-Space: The future of air traffic management for drones and VTOL

“Fly along with me,” sings Dave Grohl, “I can’t quite make it alone.” We can imagine eVTOL developers singing along to this as they work towards autonomous flight, as so many of the vehicle models will have to commence operations – however briefly – with a pilot onboard.

But the ultimate viability of the eVTOL proposition relies in no small part on achieving certification for (and confidence in) autonomous flight as quickly as possible. It will take time for aviation authorities, local councils and the travelling public to get comfortable with this, but the economic reality is that the industry will only be able to operate at a sustainable scale if each vehicle’s full capacity is available for paying passengers or revenue-generating cargo. We need to find a way to facilitate safe pilot-free flight while also managing the technological and operational challenges autonomous flight presents – as Dave sings, hook me up a new revolution.Continue Reading Learn to fly: eVTOLs and autonomous flight

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…

Developments in environmental regulation for the aviation industry have gathered momentum over the last year, notwithstanding the challenges arising from the pandemic and the related groundings.

Last month saw the publication of plans for the UK Emissions Trading System, which is proposed to take the place of the European Union Emissions Trading System when the UK leaves the EU at the end of 2020. The baseline emissions reference period for the International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation has also very recently been adjusted to reflect the dramatic drop in 2020 aviation emissions resulting from responses to the COVID-19 pandemic, in the context of a heated debate over long-term environmental goals and the aviation industry’s survival. You can read more about this in our earlier blog on the topic here.

Aviation is reportedly responsible for 2 per cent of global carbon emissions, and in the last 12 months we have all had to come to terms with Extinction Rebellion protests and ‘flyksgam’ (discussed in this piece by Ashleigh Standen last autumn). The industry is very aware of the need to reduce its carbon footprint – both for green reasons and to help mitigate its exposure to oil price fluctuations. However, the drivers are frequently external factors. We had become familiar with the push by financial institutions, which are subject to increased regulatory requirements and public scrutiny, as part of a drive for increased sustainability. However, as attention turns to what emergence from the pandemic might look like and our prospects of entrenching green imperatives in our recovery infrastructure, one of the major points of discussion in aviation is the ‘green strings’ attached to government bailouts of airlines.
Continue Reading Airline bailouts: a golden opportunity to take balance sheets from red, to black, to green

On 24 May 2020, the German government announced that it had agreed an extensive €9 billion rescue package for Lufthansa, including a significant recapitalisation leading to a government shareholding of 20 per cent. The European Commission indicated that any approval of the proposed bail out would be subject to slot divestitures at Lufthansa’s Frankfurt and…

The impact of COVID-19 (“Coronavirus”) on aviation is becoming more pronounced by the day, with the International Air Transport Association (“IATA”) yesterday asking that airport slot allocation rules be suspended to prevent airlines from losing their take-off and landing slots on the basis of failure to meet the required 80% usage rates, as flights continue to be cancelled globally[1]. About 54 countries, including the US, have now introduced travel restrictions to China and the wider Asia/Pacific (“APAC”) region.
Continue Reading Reed Smith update on the impact of Coronavirus on the aviation industry

Background

Leasing has been a staple of the aviation industry for more than 40 years, and has become increasingly attractive to the shipping industry over the last five years, particularly given the scarcity of traditional bank finance.

Until 2017, Chinese money was the dominant force – particularly in aviation finance. However, the Chinese government has since put pressure on domestic corporations to sell assets and deleverage. With Chinese money no longer so readily available, a product that was better known in aviation (and container box leasing) has become increasingly common in shipping over the last few years: the Japanese Operating Lease (more commonly known as the “JOL”).

The JOL has been a feature of aviation financing for nearly 20 years. Common in the wider maritime sector, there has also been a noticeable increase in the desirability of this product in the vessel-financing market over the last five years.

Traditionally, JOLs were more popular in aircraft finance because investors were comfortable with the residual value risk. Shipping, by contrast, is a much more diverse asset class, with value being a direct consequence of the country in which a ship is built and the specification of each particular vessel.
Continue Reading JOL-ted into action

Speed read

A party should not assume that the failure of its counterpart to provide or satisfy conditions precedent gives rise to an automatic right to terminate or not perform a contingent obligation, where it could have obtained or satisfied those conditions precedent itself.

Summary

The recent Odyssey Aviation Ltd v GFG 737 Limited[1] in the English High Court saw both the buyer and seller under an aircraft purchase agreement (the ‘APA’) claiming the deposit, as both parties attempted to terminate the APA on the basis of various alleged breaches of warranty, failure to satisfy conditions precedent and non-payment of purchase price and fees.

The case is significant for aviation sale and leasing practitioners, especially in relation the satisfaction of conditions precedent which is noteworthy for transactional lawyers more generally. It was held that a term should be implied in the APA where a party was to ‘have received’ certain documents, evidence or confirmations, or that the sale would take place ‘subject to the fulfilment’ of conditions precedent, the recipient should take ‘reasonable steps’ to obtain them themselves. This was held to be the case even where there is no express obligation to this effect. Failure to take these steps will mean that the intended recipient would not be able to rely on the other party’s failure to satisfy the condition precedent as a ground for termination.
Continue Reading Case Note: Odyssey Aviation Ltd v GFG 737 Limited

It turned out to be an unhappy Valentine’s Day for the Airbus A380 and her admirers, as Airbus announced the scrapping of the A380 programme, with the last deliveries scheduled for 2021.

It’s hardly a shock, however, after the fleet’s first retirement last year and with two of them already being parted out. The economics of operating these fantastic beasts just never really made sense, however game-changing the concept (or indeed the passenger experience).Continue Reading (Un)Happy Valentine’s Day

At the end of last year I wrote a published piece entitled “The Allure of Investing in Aviation”. A client asked me this week whether, a year later, I stood by what I’d written.

To answer that, you have to decide whether or not you think 2018 was a good year for the airline industry as a whole. There were many highs, but some telling lows as well. There can be no doubt that we are still in a ‘supercycle’ of sorts, but this has to be balanced against both macro and sectoral environmental conditions.

The expectations as we headed into 2018 were that profitability would improve over the year, with 56 per cent of airline CEOs in a positive mood[1]. However, this positivity has to be tempered by IATA’s adjustment of its own profit forecast from US$38.4 billion in December 2017 down to US$33.8 billion by June last year[2].

So what should investors be looking at? Is aviation still an attractive investment?Continue Reading Elusive, yet still alluring: What did 2018 show us about investment in aviation?

The Hong Kong conferences are over for another year, and our Aviation Finance team had another very productive week at the various sessions. It was great to see so many familiar faces and connect with new people, and doing so in what is fast becoming one of the world’s new aviation finance powerhouse jurisdictions gave the meetings a real buzz.
Continue Reading Aviation Finance: The Hong Kong Report

In this blog post we take a brief look at export credit agency (“ECA”) supported finance in the asset finance industry, and the development of a new template loan agreement by the UK’s Loan Market Association.

The role of the ECAs

 ECA finance describes transactions where states (whether by direct sovereign bodies or by separately mandated organisations) provide (financial) support to would-be purchasers of certain goods or equipment constructed in that ECA’s home jurisdiction.

ECA support can make deals both more bankable and more affordable, and has long been a useful feature of asset and project finance. Over the last two decades, a significant amount of export credit support in the form of both guarantees and insurance has been provided to capital-intensive global projects.

With the increased capital adequacy requirements of the Basel III and Basel IV accords, the importance of the sector has continued to grow. ECAs were once seen as insurers of “last resort” and were largely confined to support high risk financings in emerging markets, with much export credit agency insurance having been counter-cyclical. Whilst the perception remains that ECA support increases in importance as traditional financiers become more reluctant to lend (and so provides a bridge where the required debt finance exceeds the available bank liquidity) they just as often will now be found providing specialised products not available elsewhere, for example political risk insurance.Continue Reading An Introduction to ECA Finance

Summary

In last week’s case of Triple 7 MSN 27251 Ltd v. Azman Air Services Ltd,[1] Azman Air Services argued that two aircraft lease agreements were void under the English law doctrine of common mistake.

The High Court considered this question and found that common mistake is only sufficient to void a lease agreement (or any other contract) where:

  1. the mistaken assumption on which the parties acted was fundamental to the contract; and
  2. the mistake was such that the “contract or its performance would be essentially and radically different from what the parties believed to be the case at the time of the conclusion of the contract”.

Continue Reading When will a lease agreement be void for common mistake?

What a year it has been! At the start of 2017, Reed Smith had no aviation finance team. We have now established teams in London, New York and Abu Dhabi (and we’re not done yet!). Across the board we have structured and closed a diverse range of transactions for lenders, lessors and operators alike (and we still have one or two to go as we all race for the finishing line that is the Holidays).

Throughout, we have been grateful for the support of our clients who have stood by us during our respective moves, and we are excited to close the book on the first phase of our project as we move into 2018. The new year will see the continued development of our practice and will, we hope, give us the opportunity to form deeper partnerships with our existing clients as well as to establish new partnerships to support additional players in the aviation industry.

Establishing a new practice from scratch is inevitably somewhat turbulent for all involved and this got us thinking about the other turbulence and interruptions experienced on a sectoral basis by the industry this year. With this in mind, it seemed like a good moment for us to pause and take stock of 2017.
Continue Reading Farewell to 2017, and to the 747: An exciting year in review

As we open our Advent Calendars each December, thoughts inevitably turn to Christmas, the New Year, and to what the next year will bring.

But this year we are also looking 12 months ahead to New Year 2019.

Why? Because January 2019 will see International Accounting Standard (IAS) 17 replaced by International Financial Reporting Standard (IFRS) 16.

Now accounting standards may not be the most festive or exciting of topics, and to many of our readers that may sound like an insignificant change. Indeed the legislators themselves have said that it should cause “only minor changes from the current standards”. However, the general consensus is that in the aviation industry, the effects may be more profound.
Continue Reading An eye on the New Year

The Reed Smith aviation team have returned to their offices in London, New York and Hong Kong but memories of this year’s Airline Economics “Growth Frontiers” Hong Kong conference are still fresh in the memory (or as fresh as they can be with jet lag!).

Hong Kong’s Grand Hyatt was packed to the rafters with all of the leading industry stakeholders. Many of the key players we spoke to touched on recurring themes that seem to be the focus of the industry’s attention. For those of you who missed out (or who enjoyed the conference too much…) here our some of the Reed Smith team’s key take-away points, scribbled down on the long flight home.Continue Reading Airline Economics – Hong Kong