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Aircraft Leasing in India – A Case of Running into the Same Walls

By – Ramesh Vaidyanathan & Mansi Singh

The Indian aviation regulator, the Directorate General of Civil Aviation (“DGCA”), has put on hold requests from lessors to repossess aircrafts leased to Go First Airlines at the behest of India’s bankruptcy courts. This is despite the fact that several lessors had already terminated leases and filed repossession requests with the DGCA prior to the commencement of the bankruptcy proceedings. The DGCA has put the deregistration applications on hold as the Indian bankruptcy proceedings supersede the deregistration requests of the lessors.

Ghosts of the past reappear

In the not too distant past, lessors struggled to repossess their aircrafts when Kingfisher went belly up, and many aircrafts were eventually recovered in such a bad state that they could only be sold as scrap. India amended its laws after the Kingfisher fiasco to make it easier for lessors to repossess aircraft, i.e., within 5 days of filing a repossession request. However, bankruptcy protection supersedes repossession requests. The pleas of the Go First lessors to deregister their aircraft was rejected by the National Company Law Tribunal as well as the National Company Law Appellate Tribunal on appeal. This means that the lessors may not be able to repossess their aircrafts for almost a year as the moratorium may last up to 270 days. The lessors have now been asked to go back to the National Company Law Tribunal with a fresh application that seeks to exclude terminated leases from the purview of the bankruptcy proceedings (that became effective after the lease termination).

The same frustrating story playing out again is terrible news for Indian lessees that have been betting big on India’s anticipated aviation growth. These recent travails of the leasing companies are expected to push up lease rentals and financing costs that only established players like Indigo and the Tata Group airlines may now be in a position to afford. This will most likely lead to an increase in air fare, thereby seriously impairing the ability of Indian airlines to compete with their international counterparts.

Now at the first sign of trouble in an Indian carrier, the chances are that the lessors will line up to repossess their aircraft to avoid a situation where airlines use the bankruptcy route to prevent deregistration. The Go First mess has also punched a hole in the dream of making India an aircraft leasing hub through the Gujrat International Finance Tec City. The government is wooing leasing companies to set up shop in India. However, thanks to the complex regulatory and tax structures, apart from the uncertainty over quick repossession, most prominent players are likely to stay away.

The Aviation Working Group, a group of aircraft manufacturers, lessors and financiers, has put India on the watchlist with a negative outlook. The longer the lessors are made to struggle to repossess their aircraft, the more it will impact India’s credibility as a nation wanting to uphold the Cape Town Convention.

High risk but high reward market – a continuing conundrum

Despite all of the above, India is still the world’s fastest growing aviation market. In the period April 2023 to March 2024, India’s domestic passenger traffic is projected to rise to 160 million from an estimated 137.5 million for the same period in the previous year. By 2029-30, it is expected to reach 350 million. As per a PricewaterhouseCoopers report, around 80% of India’s commercial fleet is leased compared to 53% globally, underscoring the tremendous potential for leasing companies to do business in India.

Cape Town Convention Bill

Amidst this chaos, there is an immediate need to give full force to the Cape Town Convention treaty through domestic law. A Cape Town Convention Bill (“Bill”) has been proposed that will accord primacy to the provisions of the Convention in case of conflict with any other law including the bankruptcy law. The Bill is awaiting Parliamentary consent; however, it is hoped that the Indian Parliament will expedite the passing of the Bill given the intense pressure and adverse impact created by yet another Indian airline collapse. In the meanwhile, lessors should keep a close watch on the financial health of the operators and take swift action if there are delays on the part of the airline in fulfilling lease obligations.

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