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Aviation Industry
Sunday, February 1, 2009
Uncertain Times

For the last 20 years, the International Bureau of Aviation (IBA) has been actively involved working on behalf of Receivers, Export Credit Agencies, Banks, Lessors and Investors in order to manage aircraft during default periods and to repossess all types of aircraft (and helicopters) in most regions of the world.

Every case is different in terms of ease of process. Key factors are the location of and completeness of the aircraft and records, the airline employee’s goodwill, the cost of return to service with another operator and ease with which the assets can be remarketed.
IBA provides a turn-key service covering all aspects of repossession from contingency planning through to return to service. As a UK CAA Approved organisation, we have a unique blend of regulatory experience as well as technical, commercial and appraisal related skills.

Average Case Example: Narrowbody Bombardier, Boeing, Airbus and Embraer aircraft (-US S-).

Note — this figure can increase significantly if the engines are due a shop visit or the airframe is due a heavy check. An “odd ball” interior configuration can also lead to additional costs to prepare the aircraft for optimal remarketability.
Downtime expectation for remarketing to a price to within 95% of the expected market value for this category of aircraft is three to four months. This includes the time required for any maintenance or delivery requirements of the next purchaser/lessee.
In the above circumstances the market will perceive an element of distress and it is likely that offers will be made at substantially lower than expected values - circa 20% below market value in the initial period of remarketing. The remarketing agent will have to judge the market conditions at the time as to whether the initial offers are taken seriously enough to warrant further investigation.
The requirement that any bid is backed up with a deposit usually flushes out those players who are not serious. The model should provide for a reasonable period as shown above to ensure that the optimum price of sale or value of lease is achieved.
IBA has tracked defaults and repossessions over time and reviewed the various industry sources to analyse the remarketing periods for aircraft in the same category (Please see Footnote). The extremes in each case are as few as one week to sell or re-lease through to a year. Clearly the downtime is a function of aircraft pricing, aircraft condition and the market conditions. IBA would need to understand whether the lending bank or lessor has an ongoing monitoring programme in place. This process means that copies of key records are held away from the airline offices so that in the event of a difficult repossession where the airline does not co-operate (or because the airline fails totally) that there is back up available.
An aircraft without ‘back to birth’, up to date and accurate technical records in the English language could be worthless.

Operational and cost considerations

Gaining possession of the aircraft and its records following a default situation can be an unpredictable process. As mentioned above, the process can be easily and quickly effected if the operator is co-operative. But for practical purposes one should assume that the process will not always go according to plan.

The legal process

The contingency plan will need to involve and be ratified by the legal team. It is IBA’s experience that working closely with lawyers, aviation authorities, insurers and backup maintenance providers can occur prior to the immediate need to repossess. Defaults do not normally happen instantly but develop over time and the specific act of repossession is merely a part of the distress cycle.
Once the legal clearance and permission to repossess has been given by the courts, the physical process can begin. Some believe that the act of repossession takes place under cover of darkness with a team of camouflaged pilots and technicians; this is not the case, although each member of the repossession team has to be well briefed and prepared for any eventuality.

Legal Costs

We have provided our estimate of the likely costs for the legal process on a cost per aircraft basis. There is little difference in the cost whether the aircraft is large or small. We have considered that the aircraft is located abroad at the time of repossession. The cost includes fees that may have to be cleared such as Euro control, outstanding landing fees and airport charges for each aircraft.

Securing the aircraft

It is unlikely that all aircraft will be at the same place at the same time. Of course in an ideal situation the plan will call for a single, legal friendly location to be the point of repossession.
Wherever the aircraft are, each will need to be made secure until moved to the storage location. This may require the physical presence of a security team at each plane to ensure the safety and security of the aircraft. Local arrangements will need to be made with the airport and ground handling facilities to establish a “departure” procedure.
All round security 24 hours a day must be obtained to protect the asset especially if local companies are owed monies since history has shown that they may take it upon themselves to take aircraft parts as their own security.

Pre ferry flight parking and maintenance

The Aviation Authority will need to be consulted if the period of downtime from repossession to departure exceeds a defined period. This may be as little as 24hrs for some types of aircraft and will require proof that the plane remains airworthy and that no crucial maintenance is outstanding. In some cases the authorities may require maintenance to be performed prior to the ferry flight. This is a further reason why the retention of key maintenance documents is useful, since without them it would be impossible to establish the maintenance status to prove to the authorities what should be required in the absence of a ‘going concern operator.

Ferry flight and suitable parking facility

Arrangements will be made to move the aircraft to a suitable storage facility. The determination of the storage facility will be made as a result of understanding the situation surrounding the repossession. For example, if the process is supported by the operator, the jurisdiction is flexible and the facilities exist to store aircraft and provide a welcoming environment to remarket the aircraft then the operator’s base could be used.
A standby facility may need to be sourced since it is often the case that the operator’s base is targeted by the media, creditors and disgruntled employees.
Sources of ferry flight crews include the current operator since many of their pilots will be looking for work. This is the most efficient source since the crews should be knowledgeable and current on the aircraft types operated. Other sources will be various flight crew agencies and operators of similar types.
In some cases, the local authorities will need to verify the licensing credentials of crews. The process of validation can be relatively quick so long as the proposed crew’s training and medical records are complete and transmitted in a timely fashion to the authorities. Such validation does not normally occur at weekends
Submission of flight plans is normally by the ferry crews as well as the determination of fuel requirements and overfly permissions. In some cases other parties with specific knowledge, such as SITA or Jeppesen may be required.

Possible liens

In the course of operations several debtors may have been able to impose liens against the aircraft(s). This is one area that would need to be assessed during any pre-default stage to assess the overall indebtedness of the operator.
Maintenance facilities such as component overhaulers, Airports and Eurocontrol may require debts to be cleared prior to the release of aircraft.
With a large fleet of aircraft it is likely that some will be undergoing maintenance. Components, including engines and landing gears could be in various states of disassembly. Also the aircraft may contain parts to which other parties hold title. It may be necessary to work closely with other parts suppliers to ensure that they do not remove parts that immobilise the aircraft.
Euro control powers are wide and the pursuit of debts includes the ability to claim against the aircraft owners and not just the failed operator. It is important that the owners have the authority to regularly check the outstanding debts of the operator. The debts are specific to the aircraft serial number and it will be important that any acquired aircraft are checked prior to their purchase to ensure no previous debts have been built up.
Airports may often physically prevent the movement of aircraft that are associated with the operator’s non payment of airport landing fees and other support fees.

Securing the records

The location of aircraft records is normally at the main maintenance base of the Operator. It will be important to understand fully the whereabouts of the key records. It would not be unusual for the technical records staff to request payment to collate and package the aircraft records prior to their release. Whilst this practice may not be ethical or even legal, it is IBA’s experience that it is essential to keep the records staff (or those that remain) on side during the phase of repossession.
Of course the diligent upkeep of copies of the aircraft records in the pre-repossession phase will ensure that in the worst case scenario, sufficient records will be available in any case. Some records may also be available from the manufacturer and/or outsourced maintenance, repair and overhaul facilities (IVIROs).
It will be important that the “ongoing asset manager” understands the contracts and relationships in place between the operators and the support organisations.

Inspection of Aircraft

The aircraft should be thoroughly surveyed before the repossession to provide evidence of the physical condition. This is important for two reasons:
o Firstly, if there is any chance that the aircraft may be placed back with the original operator the evidence of condition will ensure that there is no claim against the ‘Repossessor’ for damaging or degrading the aircraft whilst in its possession;
o Secondly, further claims against the operator may be made if there is any evidence of misuse.

Regulatory considerations

Close liaison with the applicable authority will be necessary in order to secure an Export C of A and / or ferry flight permit. Placing a US registered aircraft in Europe may lead to avionic upgrades and emergency equipment installation.

The remarketing process

As mentioned above, it is likely there will be a pre-repossession phase and the market will be thoroughly researched at this stage. Aircraft may be listed as available in several of the prominent aircraft sales journals and via known contacts.
The appointment of the asset manager or standby remarketing agent is recommended as part of the set-up. The fees can vary considerably. We have used an IBA figure applied to each aircraft that is ‘typical’, based upon the value of the aircraft as a fixed fee. Clearly if there were significant numbers of aircraft the overall fee may reduce through an ‘economy of scale’ process.
Possible remarketing agents:
• The manufacturer — although there may be a conflict of interest if they are selling other new or used aircraft;
• An operating lessor - although again there may be a conflict of interest if they are selling other new or used aircraft from their own fleet; or,
• “Boutique” remarketing agents — including IBA - we have worked with KPMG, Kroll, Diamond Lease, Ryoshin, etc as agents of their aircraft. Others that IBA recommend include, Cabot Aviation (UK), Focus Aviation (UK and USA), Bristol Associates (UK and USA), SH&E.

Maintenance and refurbishment
There will always be an element of maintenance required and we have included an element of buyer consideration in this. There may be changes according to how the overall market is at the time of the sale. When demand exceeds supply an as-is where-is sale may be an easy option but in ‘softer’ times the buyer will often be required to enhance the condition of the aircraft, such a new paint or upgrade of interior.
Unfortunately a default usually means that the airline has neglected some of the maintenance tasks in the same period. Hopefully these will not be important technical areas but the interior of the cabin may well be much more heavily worn if costs have been cut.

Insurance

It is important to establish the insurance status of the aircraft prior to repossession taking place, since insurance may be invalidated in the event of default or repossession under the policy terms. Standby insurance may need to be put into place to cover the exposure to ground risk and ferry flight cover will need to be in place prior to the ferry flight taking place.
As part of the next phase, discussions with the operator’s insurers should take place to understand the process in event of repossession e.g. grace period may apply.

On-going asset management

The process of repossession and remarketing will be a quicker and more efficient process if the aircraft are being regularly monitored and key records copied from time to time.
The programme also serves the following purposes:
• Collation of data allows the creation of a useful back-up if any key documents are lost, damaged or stolen. Even without default this can aid the process of selling the aircraft (or the debt) to other parties.
• Regular visits provide useful contact points within the airline and will create a rapport with key operator staff. This can provide useful ‘shopfloor’ insights into the operation and to the attitudes held by staff.
• The procedure shows the operator that the financier takes a serious view towards its assets and will instil disciplines within the operation.

At this stage we have to assume a worst case scenario and that includes the prospect where the operator may not co-operate in the process of repossession. If records are found to be missing, the value of the aircraft will be significantly impaired. An aircraft without records is almost worthless since any new purchaser (and indeed the aviation authorities) will require evidence of the aircraft maintenance history.
If such evidence is not available then expensive work tasks may have to be performed. In some cases this has meant major airframe, engine, landing gear and component overhauls being required. Not only is a direct cost incurred, but the additional non-revenue downtime could be as much as 3-6 months to take into account the maintenance planning phase, sourcing of suitable facility, performance of the tasks and liaison between the manufacturer and the aviation authorities.
Therefore IBA considers that it is imperative to build ongoing technical asset management into this facility.
Footnote: The IBA has carefully researched repossession history, reasons for default, downtime, value pre and post repossession, for both leased and financed aircraft. This report is available on a commercial basis.
 

Copyright © Insurance Times and Investments® Vol:22.2 1st February, 2009
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