Bankruptcies and insolvencies are a natural part of the business life cycle, and by no means are airlines exempt, with high-profile failures and dramatic rescue efforts occurring regularly. As peak season wanes, winter becomes a genuine concern for many operators. The drop in demand and falling yields brought on by the winter season are often enough to force financially-vulnerable airlines to declare bankruptcy and ultimately restructure or liquidate. As a result, we see the highest concentration of airline failures, and subsequent release of aircraft into the secondary market, occurring in the winter period, typically between September and December each year.
Across 2021 and 2022, more than 20 airlines ceased operations, leaving more than 60 aircraft to be recovered and reabsorbed into the market. In addition to those ceasing operations, several airlines have entered restructuring or protection schemes between 2020-2022, including LATAM, Copa Airlines, Garuda Indonesia, and several Norwegian Air businesses. While these airlines continued to operate, the restructuring schemes allowed them to scale down their fleets significantly, returning many aircraft to their lessors and lenders.
Aircraft rejections and repossessions are a costly and painful exercise; however, they are an unfortunate cost of doing business for aircraft lessors and lenders. When rejections and repossessions do occur, the primary objective must always be to preserve the value and remarketability of the aircraft. This editorial covers important technical and remarketing considerations that financiers must consider when undertaking such a process.
A last resort, but be first
Repossessing an aircraft is a complex, expensive, and time-consuming process that most aircraft financiers try to avoid. Financiers need to weigh the relative value of the aircraft’s current placement (and associated challenges) against the direct costs and opportunity costs of a follow-on placement or sale to an alternative operator or owner.
With the current operator, factors to consider include the likelihood of resuming regular payments and, often more importantly, whether the operator has the financial means to maintain the value of the aircraft. In some cases, there is significant risk in continuing with the current operator, especially when maintenance is not being performed, components are being robbed, or if there is a heightened risk for damage against the aircraft or risk of records being destroyed by bad actors. On many occasions, we have seen operators run aircraft to the end of their maintenance utility, after which they rob parts to support the remaining fleet, eroding significant value from the financier’s asset or collateral. In such cases, financiers could have saved considerable value by taking a more proactive approach.
While repossession is the last resort, you want to be first when it does happen. Support of the operator is critical, with the operator’s technical team providing access to the aircraft and records and addressing questions related to the location of removed titled components and related debts. Consequently, financiers should look to repossess while the operator’s technical staff remains employed and paid. The longer a financier waits, the less support they are likely to receive. The existing support will likely be stretched across many other financiers with competing demands.
There is a first-mover advantage in a repossession, extending beyond operator support into value. The aviation market does not absorb large numbers of aircraft well. The first to market is typically the one that achieves the best pricing, all else equal.
In the case that repossession is necessary, proactivity is key to minimising costs and mitigating the risks that arise in such a scenario. Across the term, financiers need to be proactive in monitoring the operator’s financial condition, the aircraft’s physical condition (including its records), and market conditions for the type.
Information gathered through financial reporting requirements, and other sources (including intelligence gathering during inspections) informs financiers when it’s time to increase the intensity of asset management activities and prepare for a repossession.
The value of inspections
Like insurance, performing regular inspections and records audits of the aircraft are an undesirable cost. However, when faced with a repossession scenario, having performed this activity is of critical importance. Performing regular inspections provides information which informs the financial condition of the operator (is maintenance being performed on time, are components being robbed, are staff being paid? etc.). It also allows the financier to build parallel data that will put it on the front foot when a repossession and remarketing event occurs, shortening time-to-market. Annual audits of the aircraft (and records) enable financiers to determine the condition of the aircraft and whether they have a complete set of records. It also allows financiers to engage with the operator to address discrepancies before a repossession event occurs, after which the risk of non-cooperation from the operator is significant. Building and maintaining a parallel set of records improves time-to-market significantly in a repossession scenario. Reducing the number of records that need to be audited and digitalised is critical, as it is one of the most time-consuming activities – and one which is often met with non-cooperation from the operator either due to hostility or the absence of staff. Facing a repossession scenario on an aircraft eight years into its term and not having performed an audit or collected any records is not a desirable situation for a financier to be in.
Consider market conditions
Market conditions are also an important consideration. Financiers must consider the balance of supply and demand in the market for the aircraft type and its prospects for timely placement. There is a strong rationale for why few financier-driven repossessions occurred during the Covid-19 pandemic. The market conditions for secondary placements could have been better. A non-paying operator who insured and maintained the aircraft was better than no operator. Repossessing an aircraft means financiers become responsible for an array of ownership-related expenses, including insurance, storage, maintenance, and parking.
Holding responsibility for these costs for as short a period as possible is a vital objective of any repossession event. To mitigate this risk, there need to be secondary market placement opportunities available. Where it is possible to do so, there is significant value in securing placement opportunities for the aircraft before commencing the repossession.
Relationships are important
Proactive asset management includes maintaining close, professional relationships with the operator and their technical team. While this is often done at a commercial level, it is also essential to do so at the technical level. A strong relationship increases transparency around the operator’s financial situation and the asset’s condition, helping to inform the timing of a repossession decision. When a repossession occurs, the unfortunate truth is that financiers must lean heavily on the operator’s technical staff. They are the gatekeepers to aircraft records and other critical information, which is not easily collected without their support and can be withheld. When a resource-constrained operator needs to prioritise one financier’s demands over another, the financier with the better relationship typically prevails. While maintaining strong operator relationships may sound secondary, it’s a necessary risk mitigation factor and component of proactive asset management.
Advanced preparation is critical
Financiers will want to secure the aircraft, relocate it to a safe location, and have it placed with its next operator or owner as quickly as possible. Advanced preparation is critical to minimise the time it takes to secure and relocate an aircraft. Greater transition time leads to greater direct ownership and opportunity costs for financiers.
While there are many legal considerations, this section focuses on the technical and remarketing considerations that need to be factored into a repossession and remarketing plan.
Asset and market analysis.
As an initial step, financiers must consider their asset’s or collateral’s technical condition and its value in the secondary market, either for lease or outright sale. This will help to set internal expectations and validate whether it is more beneficial for the financier to manage the existing situation with the operator or to repossess and remarket the asset.
When time permits, financiers should source placement opportunities for the aircraft before initiating the repossession. Future operators may assist with ferry flights, parking and storage, insurance, maintenance, and other activities, shortening and streamlining the transition process.
Storage, maintenance, and insurance.
The ownership costs that pass to financiers during a repossession can be high. One of the objectives of a repossession is to keep this period as short as possible. Where a “friendly” or consensual repossession takes place, it is often possible to keep the aircraft under the insurance policy of the operator, stored at its location, and under its continuing airworthiness organisation while the future placement or sale of the aircraft is finalised. Provided that the aircraft is not at risk, this is almost always the optimal outcome, though the defaulting operator may charge the financier for these services. Retaining the aircraft under the defaulting operator’s control allows the aircraft to transition directly from the prior operator to the new operator or owner, simplifying the transition process and reducing costs for the financier.
Unfortunately, where there is a non-consensual or “hostile” repossession, the financier will need to arrange all these third-party services themselves, which is time-consuming and expensive.
Securing the aircraft.
Financiers must establish well in advance which location they plan to arrest the aircraft, ideally at an airport that can provide the required services or from which they can easily ferry the aircraft to the desired storage location. This consideration is likely driven by legal rights and each location’s ability or willingness to grant arrest of the aircraft. If the repossession is consensual and low risk, this can easily be at the operator’s base.
Potentially the highest risk area in a hostile repossession, financiers need to consider how they can gain access to and collect the physical records of the aircraft. Relationships are paramount as operator technical teams are the gatekeepers to the records, which can be stored in one or multiple locations, or with multiple parties, some of whom can hold them hostage until their debts are repaid. A robust inspection and records audit/collection regime will help mitigate the risk of this workstream.
Depending on the nature of the repossession, friendly or hostile, and the risk of the operator or its personnel acting against the aircraft or robbing components, varying levels of security may be required. Where the risk is low, the aircraft can remain at the operator’s base with or without protection. Where there is a high risk, the aircraft should be positioned to a neutral location.
Deregistration and export.
Depending on the situation, financiers may wish to deregister and export the aircraft to an alternative aircraft register. This becomes more important where the aviation authority of the current register may be subject to influence by the aggrieved operator. In doing so, the appropriate transaction documentation must be executed appropriately, such as an IDERA. Otherwise, a financier may face difficulty with the authorities.
How we can help
Our consulting team has extensive experience across aircraft repossession and rejection scenarios, working with the industry’s leading financiers to take possession of and transition their assets as quickly as possible while minimising risk to value loss in the assets. Combining our asset management, technical, valuation, and advisory capabilities, ACC Aviation is regularly engaged by aircraft lenders, lessors, and investors to advise them on their aviation exposure and, where required, to lead on aircraft repossession, recovery, and remarketing projects.