AWG has “issued a positive watchlist notice in their Cape Town Convention (CTC) compliance index with projected increase in India’s score,” the aviation ministry said in a statement Friday.
India this week delinked expensive aviation assets like aircraft, engines and helicopters from the moratorium – or protection from repossession – that Insolvency Bankruptcy Code (IBC) provides to broke airlines, something that has allowed GoAir to retain 45 leased planes even after shutting down this May. The aviation ministry said lessors factored in the difficulty in repossessing planes and engines to India by adding about $1.3 billion in lease costs to Indian carriers, something that will now go making leasing cheaper for strong desi players.
“Legal entities dealing in aircraft financing and leasing estimate the impediment being caused by the present Indian legal regime of IBC which is hampering repossession of aircraft by lessors is costing Indian airlines an extra $1.2-1.3 billion more than before in terms of lease costs…. there could be a reduction in supply of aircraft on favourable terms to our airlines which would adversely affect the entire aviation industry,” the ministry said.
“Further, the cost of higher lease rentals would be passed on to the public causing high fares on all routes…. there would be an overall impact on not only the aviation sector but all sectors dependent on connectivity… (Hence) the notification has been issued. India is committed to keeping lessors’ confidence in the Indian aviation market intact by reducing their risks,” the statement added.
The GoAir fiasco shook lessors’ confidence. In keeping with international norms, the Indian Directorate General of Civil Aviation (DGCA) de-registers aircraft on lessors’ request when a desi player has been defaulting on rental payment. Cash-strapped SpiceJet has seen a number of planes being repossessed this way.
In GoAir’s case, lessors’ had filed requests for repossessing 45 planes. But before the five working day period, the NCLT admitted Go’s plea for voluntary insolvency. And as soon as that happened, Go got protection from these 45 planes being repossessed as IBC got priority over IDERA. This Go model set the alarm bells ringing in the global leasing community. AWG issued a “watchlist notice” for India, warning the Go case “would have a direct and material impact on future financings and leases to Indian airlines.” AWG) is non-profit entity co-chaired by Airbus and Boeing and comprises of the world’s biggest aviation manufacturers, leasing companies, and financial institutions.
Finally this Tuesday, the government issued a gazette notification saying: “…provisions of…. IBC… shall not apply to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters.”
This notification was needed as India has so far not legislated the long pending Cape Town Convention (CTC) which enables lessors to get their aircraft back from defaulting or defunct airlines. The aviation ministry had five years back sought comments on the CTC Bill 2018 to implement the treaty India had signed in 2008 to basically assure lessors their expensive assets like aircraft and engines will not get stuck here when Indian carriers default on paying rentals or go belly up. However the move has remained stuck since then. No irrespective of when this Bill is passed, cash-strapped or defunct airlines will no longer be able to hold on to expensive aviation assets under IBC.
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UN’s aviation arm, International Civil Aviation Organisation (ICAO), says the “primary aim of CTC is to resolve the problem of obtaining certain and opposable rights to high-value aviation assets, namely airframes, aircraft engines and helicopters which, by their nature, have no fixed location. This problem arises primarily from the fact that legal systems have different approaches to securities, title retention agreements and lease agreements, which creates uncertainty for lending institutions regarding the efficacy of their rights. This hampers the provision of financing for such aviation assets and increases the borrowing cost.”