IV Comments from the Practice
Analysing the Effects of the Cape Town Convention on Four Selected Issues That Hinder the International Financing and Leasing of Aircraft and Engines
B. Patrick Honnebier
Due to the worldwide economic problems, currently there exists a very strong competition in the air transport industry. A successful business strategy of the airlines in developed, emerging and undeveloped countries alike is to advertise that they only fly with new aircraft. However, this kind of business promotion requires that they regularly update their fleets. Therefore, despite the existing recession there is an ever-growing need of modern aircraft and aircraft engines (aircraft objects). At present, the total demand for helicopters seems to have decreased. However, it is assumed that this specialized market will recover before 2019. The present publication focuses on the topics that relate to aircraft and engines. Nevertheless, it should be noted that to a large extent these issues also arise in regard to helicopter- specific finance and lease transactions. Historically, in most countries the aircraft and engines were acquired and owned by the local ‘flag-carriers’. In turn, the ‘national airlines’ were financially controlled by the governments of the states in which they had their head-offices. The purchase of the aircraft and engines was realized by means of public funds. Today, most of the flag-carriers have been priva- tized which implies that private funding is needed to acquire these aircraft objects. As the price of a large aircraft can exceed more than $ 200 million and of an engine to $ 20 million, the financing and leasing of these objects is extremely capital intensive. Besides, it is estimated that for every four aircraft engines, one spare-engine is needed. Accordingly, it is necessary that a financier or lessor (owner) can adequately uphold its proprietary interests in the certain aircraft (i.e. airframe) or engine in the event that the debtor is in default or becomes insolvent. Moreover, aviation financing and leasing transactions are often structured by means of Special Purpose Vehicles (SPV’s). For valid legal, tax, accountancy, air safety supervision and other reasons, the SPV’s will be established in different jurisdictions. On the one hand, this useful scenario makes the related finance and lease agreements inherently international in kind. On the other hand, the transnational nature of aviation finance and lease arrangements imposes a burden on the financiers, lessors and operators. For example, it has been submitted that this is because:
“[T]he widely differing approaches of legal systems to security and title reservation rights [engender] uncertainty among intending financiers as to the efficacy of their rights. The result is to inhibit the extension of finance [...] and to increase borrowing costs” (emphasis added).
More specifically, at the global level exist excessive discrepancies between the applicable national substantive property laws that govern the financing and leasing of aircraft and engines. Additionally, not many countries have properly established aviation-specific finance and lease laws (lex specialis). For example, the European Netherlands has created aviation finance laws. These special regulations provide a substantive property regime for recorded aircraft and a new conflict of laws rule. Unfortunately, as far as the finance and lease of aircraft engines is concerned these rules are not adequate. See further Sect. 21.5 and Sect. 21.6 of this contribution. Besides, it is noted that the majority of the Member States of the European Union have neither adopted aviation-specific legislation nor general laws covering financial and operational lease agreements. Consequently, the legal systems governing the creation, validity, effects and enforcement of proprietary rights in financed and leased aircraft objects vary between all the countries in which they are operated. In addition, globally the conflict of laws rules of the states that cover international aviation finance and lease contracts differ fundamentally. Accordingly, it is not guaranteed that the proprietary interests of the financiers, lessors and operators in aircraft which have been validly created in a certain jurisdiction, can be upheld abroad. It is concluded that due to the lack of uniformity of local aviation-specific substantive laws and conflict of laws rules, the financing and leasing of aircraft objects is severely frustrated. The devastating outcome of the English case Blue Sky v. Mahan Air (2010) confirmed that the above-described problems do not just concern an academic discussion. To the contrary, it demonstrates that these matters are of ample practical significance for the aviation industry at large. This is because the English mortgage that was established in the certain English aircraft could not be enforced. Consequently, the financier was damaged for $ 43.1 million. The fact that the property interests of the financiers, lessors and operators may not be enforceable in other jurisdictions is a considerable economic risk. This prospect negatively influences the position of the stakeholders of the international aviation finance and lease practice. In turn, the existing economic challenges lead to unnecessary high finance and lease costs. These expenses undesirably increase the prices of airline tickets and cargo-transport. Consequently, an international uniform substantive property law treaty is needed to solve the existing global problems. 
-  Not only in the Middle East, Asia, Western Europe and the U.S.A. the airlines operate modernaircraft. A prime example is Ethiopian Airlines which keeps ordering new aircraft, also in June,2015. Ethiopia was the second state to adopt the Cape Town Convention in 2003. Since that timeit has benefitted from the substantial advantages of the treaty. www.unidroit.org Moreover, in theglobal aviation industry it is a well-known fact that the financial effects of the treaty, particularlyas a result of obtaining the ‘Cape Town Convention Discount’, have been very beneficial for AirCanada, Cargolux, several Eastern European carriers and other airlines which recently acquirednew aircraft.
-  For example, Airbus obtained orders and commitments for aircraft worth US $ 57 billion andBoeing for aircraft worth US $ 50.2 billion during the June, 2015 Paris Air Show in France. SeeReuters, 18 June, 2015. See also Boeing’s forecast, http://www.boeing.com/boeing/commercial/cmo/; Airbus Global Market Forecast 2015-2035, available at http://www.airbus.com/company/market/forecast/
-  See for example: Global helicopter market forecast and opportunities, 2019.
-  For instance, the Portuguese state-owned airline TAP was intended to become totally privatizedin June 2015. However, these plans did not materialize due to local political reasons. It is one ofthe few commercial carriers in the Member States of the European Union in which a nationalgovernment still had a controlling stake.
-  Unfortunately, the fundamental legal and practical differences between the financing and leasingof ‘engines’ on the one side and ‘spare engines’ on the other are not understood by all legal practitioners. See B.P. Honnebier, The merits and pitfalls of the Handbook ‘Aviation Financing andLeasing 2014’, Zeitschrift fur Luft- und Weltraumrecht/German Journal of Air and Space Law(ZLW), 2014-4, p. 559, at p. 577.
-  In this publication the term ‘proprietary interest’ or ‘property right’ includes all the interests andthe right of ownership.
-  For example, well-known ‘Flag-States of Choice’ where the needed SPV’s are purposely established are Aruba, the Caribbean Netherlands, the Cayman Islands and Bermuda. See B.P. Honnebierand A.P. Berkhout, The Caribbean Netherlands is the Flag-State of Choice for cross-border aircraftlease transactions, Tax Planning International Review (TPIR), 2014-10, p. 30; The new legal andfiscal regimes that facilitate the financing and leasing of aircraft in the Netherlands and DutchCaribbean, TPIR, 2012-6, p. 18; The new legal and fiscal aviation finance and lease opportunitiesin the Kingdom of the Netherlands, Journaal LuchtRecht/Netherlands Journal of Air Law (JLR),2012-2, p. 38; B.P. Honnebier, Comparing the property laws of the aircraft registries of choice the(Caribbean) Netherlands, Bermuda, Ireland and Malta, JLR, 2014-3, p 55.
-  R.M. Goode, The Cape Town Convention on International Interests in Mobile Equipment, ULR,2002-1, p. 4.
-  Similar issues occur in relation to the finance and lease of trains and space assets. However, thisarticle concentrates on aircraft and engines.
-  B.P. Honnebier, JLR, 2014-3, p 55.
-  B.P. Honnebier and J.M. Milo, The Convention of Cape Town: the creation of international interests in mobile equipment, European Review of Private Law (ERPL), 2004-1, p. 3.
-  See for example the English cases in which the transfer of title to the aircraft was disputed: BlueSky One Limited & O’rs v Mahan Air  EWHC 3314 (Comm); Blue Sky One Limited & O’rsv Mahan Air & Ano’r  EWHC 631 (Comm); Air Foyle Ltd v Center Capital Ltd EWHC 2535 (Comm), 2 Lloyds Rep 753. The rights of the mortgagee could not be enforced in thelatter case.
-  B.P. Honnebier, The devastating ‘Blue Sky’ judgment compels the member states of the EuropeanUnion to adopt the Cape Town convention, The Aviation & Space Journal, 2012-2, p. 10; TheEnglish Blue Sky case shows that the aircraft finance practice needs uniform international substantive mortgage laws as the existing conflict rules fail, Tijdschrift Vervoer en Recht (TVR), 2011-2,
-  70; The Rectified contribution to Contemporary Issues and Future Challenges in Air and SpaceLaw, November 2011; ZLW, 2011-1, p. 47.
-  B.P. Honnebier, The need for clear rules to facilitate the international financing of the acquisitionand use of aircraft, Notarius International, 2000-4, p. 146; The European air transport sectorrequires an international solid regime facilitating aircraft financing: the Cape Town Convention,TVR, 2007-5, p. 151.