Home Law Implementing the Cape Town Convention and the Domestic Laws on Secured Transactions
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. 
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