Stemming Risk, Misunderstanding In Aircraft Leasing

Leasing is an efficient means to fulfill short-term capacity requirements without burning the balance sheet. This, however, comes with a lot of risks for the airline and lessor, writes WOLE SHADARE

Fairy tale

It sounds like a fairy tale, but it is not. It is far from it. A few months ago, Arik Air’s passengers had filed out to board one of Arik’s leased aircraft from Lagos to Abuja. Some wondered why Arik was flying them on an ‘unmarked’ airplane.

The few worried ones kept the fear to themselves, praying for safe arrival, but Special Adviser to President Muhammadu Buhari on Political Matters, Mr. Babafemi Ojudu, who was one of the passengers, took to Facebook and other social media outlets to question the decision of Arik to fly them in an ‘unmarked’ aircraft.

Ojudu said in a Facebook post that the plane also had foreign hosts and hostesses. This drew the ire of many readers who were oblivious that the aircraft was leased from Syphax Airlines and equally oblivious of the type of aircraft leases in the aviation industry. One would not totally blame Ojudu.

 

For some air travellers, flying with an airline aboard one of its fleet – emblazoned with its livery and decked out with its branding – offers a sense of familiarity, trust, and even pride. However, in the current era, it is highly likely that aircraft is rented from a leasing company.

For many in the aviation industry, it was crying over nothing and raising the rooftop over a non-issue as long as the aircraft and airline take them safely to their destinations.

Not a few believed that Ojudu should have used his contact to engage the carrier instead of crying wolf when there is actually nothing to worry about as the lease rental has rules of engagement over how the airplane should be operated either with a foreign crew, indigenous crew, or a mixture of both. Again, in case of any eventuality, Arik or any other carrier that issues a ticket is liable and takes responsibility.

Navigating risks          

The above narration brings to the fore issues around aircraft leasing and how airlines can navigate it for their own benefits as they come with a lot of risks for both the lessor and airlines.

The easiest way for cash-strapped or start-ups airlines to survive is through leasing but comes with its own risks too. Aircraft leasing is big business, the subject of major international conferences, and the catalyst for significant international travel.

Before the pandemic, some estimates suggested around half of all operational aircraft were leased, either by other airlines or leasing companies. Some lessors don’t just lease, they provide a full package to their customers, comprising almost every element of fleet management.

 

The Nigeria example

In Nigeria, nearly 45 percent of aircraft in operation are leased. This situation was more pronounced last quarter of last year when airline operators had to lease aircraft to take care of their surging passengers occasioned by Yuletide.

In the last quarter of last year, Air Peace operated two AirbusA320s on a damp lease from Latvian-based wet-lease specialist – SmartLynx. Damp Lease is a wet-leased aircraft that includes a cockpit crew, but not cabin attendants.

The agreement was signed between SmartLynx Airlines and Air Peace on November 11, 2021, and will last until May 11, 2022. Nigeria’s fastest-growing airline, Ibom Air, equally leased A220 airplanes to expand its operations as the carrier profited heavily from the Christmas traffic as its Bombardier airplanes were inadequate for its huge traffic.

The Assets Management Corporation of Nigeria (AMCON)-owned Arik, in December 2021, leased a Boeing 737-700 aircraft from Eznis Airways to boost its operations.

The aircraft, which was deployed on December 2, 2021, enabled Arik Air to return to some routes, which were suspended at the beginning of COVID-19. The aircraft was leased to help the carrier boost its fleet in readiness for the Yuletide. Carriers such as Aero Contractors, United Airlines were also very busy in the market as they leased airplanes to boost their operations.

Complex business

Leasing agreements are complex, strewn with legalities and an abundance of operating contracts. In their simplest terms, there are three types of leases: dry lease, wet lease, and damp lease.

These leases are further complicated when one or both parties are non-native to their country of operation. For airlines, leasing aircraft has its advantages, particularly in today’s difficult and challenging climate, but it also comes with risks too.

There are many cases in the Nigerian aviation sector over disagreements between operators and lessors that had warranted the intervention of the Nigerian Civil Aviation Authority (NCAA) despite the fact that Nigeria is a signatory to the Cape Town Convention.

Respect for agreement

Under the Cape Town Convention treaty, if there is any default or compromise on the leasing agreement, the government, through the civil aviation authority, is expected to assist the lessor to recover his aircraft. Some airlines in Nigeria had gone to court when NCAA attempted to help lessors recover their aircraft.

The nation has, however, not seen airlines default in recent times by not allowing lessors to take back their airplanes at the end of the lease agreement or in a situation where there is a disagreement between the lessor and the operator.

Expert’s view

Recently, a former Chief Executive Officer of Aero Contractors, Capt. Ado Sanusi suggested that government should intervene by reinforcing the Cape Town Convention and assuring the leasing companies that whenever there is a default on leasing aircraft by airline operators, it would step in to recover the aircraft.

The problem of airlines and lessors going to court to sort out their disagreement is not peculiar to Nigeria. A recent ‘frustration’ case was brought against a lessee in the United Kingdom as a result of the pandemic.

Other examples

Salam Air brought the case against Latam Airlines Group, arguing the crisis had led to extraneous circumstances and that as a result it should not be held to the terms of its leasing contract for three aircraft.

The low-cost carrier had been using the aircraft since 2017 to operate routes out of Oman, but the pandemic had seen authorities suspend almost all flights in and out of the country, essentially grounding Salam Air’s fleet.

The court ruled Salam Air was contractually obliged to continue with the terms of the agreement. However, it served to highlight the risks associated with leasing. “Aircraft leasing involves a number of risks for both parties,” said Andrew Barham, partner of the aerospace team at specialist insurance, risk management, and consulting services provider, Gallagher.

“For the lessor, operational risks include the possibility of a loss of or damage to the aircraft itself, along with the risk of being sued by passengers and third parties in the event of an aircraft accident,” he added.

Sean Kelly, another partner on the team, who told Airport Industry Review (AIR), added: “There are also a range of financial risks to consider, including credit risks associated with the lessee’s ability to maintain lease payments – a key area of concern at the moment, with many airlines facing severe financial challenges as a result of COVID-19.”

As a result, many airlines are looking to defer lease payments creating a disruption to cash flow for aircraft lessors and an increased risk of defaults.

Insurance hiccup

Insurance plays a crucial role in facilitating aircraft lease transactions. “The lessor will look for protection from the lessee for as many operational risks as possible,” says Kelly.

As part of the contractual agreement, the lessee will be required to arrange comprehensive aircraft hull and spares insurance in order to protect the asset in the event of accidental (‘all risks’) or malicious (‘war and allied perils’) loss or damage… they will also be required to arrange comprehensive aviation liability insurance.

Many lessors seek additional insurance protection in the form of their own contingent hull and spares, as well as aviation liability insurance policies, which will protect the lessor in the event the lessee’s insurance policies fail to respond following a loss.

Last line

Aircraft have been mothballed or simply parked up for better days. That has its own problems. The industry is awash with aircraft no one is prepared to use right now and will likely not wish to use in the future. This leaves lessors with a conundrum – what do they do with their aircraft on the ground?

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