Aviation leasing is a study in the notion that where there is reward, there is risk (which is to say that, sometimes, return on capital becomes more about return of capital). Yet, in an environment where there appears in certain circles to be a barely finite amount of investor confidence (especially among newer investors, and especially in the Far East), it seems that some market participants may occasionally lose sight of the fact that aviation is a risky enterprise. Good lease deals can go bad, and bad lease deals–if, for whatever unfortunate reason, they were done in the first instance–can get far worse.
The worst case scenario of having to "get the plane back" from an uncooperative airline requires adequate consideration, before it is time to get the plane back. Repossession risk in any given lease deal should be a known-known rather than a known-unknown. That said, the actual act of getting the plane back–what is generally considered legal "repossession"–is often the anticlimax that follows the physical detention of the aircraft. It is beyond simple semantics, and not widely appreciated outside of a relatively small circle of in-house and external counsel. Little guidance exists on the very critical step of actually getting the plane, before getting the plane back, by those who have "been there and done that" many times, and look forward to doing it many times again. In that light, the following are some insights that could otherwise only be gained after a great deal of experience actually repossessing aircraft on behalf of lessors (and lenders) worldwide. The following is not exhaustive (and has not been exhausting to write), and is intended for mature audiences.
Prelude to a Prelude to a Repo
There are, of course, many intervening steps between an initial default and a termination of a lease. While not the focus here, experience shows that there are always early warning signs that an airline is in trouble that are overlooked in hindsight. Among these are delayed payments and/or requests to reschedule payments, covenant breaches and/ or requests for waiver, failure to undertake required maintenance, failure to maintain insurances, market "chatter," adverse press articles, fall in share price (if publicly traded), restatement of accounts, failure to provide accounts, new limitations on operating licenses, and so on. In military parlance, it is important for a lessor to stay frosty.
When financial distress does become evident, it is best to start by evaluating the need or possibility of a restructuring or workout, while also beginning to formulate the repossession strategy–or, the proverbial nuclear option: the insolvency strategy. Restructures and workouts are preferred, if the life of the deal is to continue, since they are discreet (reducing risks from other creditors and loss of passenger business), maintain income from aircraft, avoid the need for distressed sale of the aircraft and usually do not involve third party interlopers like pensions regulators, suppliers, unions, et cetera.
It is important to assemble a team consisting of commercial, legal and technical players to analyze the situation at the outset when trouble first arises. If there is a willingness to consider engaging in a restructure or workout such that the life of the deal continues, key considerations are (i) the lessor's relationship with and total exposure to the airline and (ii) the airline's prospects for recovery (which should include an objective competitive analysis of its routes, operating costs, equipment, management strength, franchise value, and market/industry position).
At this juncture, a good question to ask is: do we even want the aircraft back? "Get the plane back" is a practically innate reaction, and this question is therefore often-overlooked. This is especially true with older generation aircraft where the cost of repossession negates the benefits in favor of a restructure/workout–or, if the life of the deal is to end early, debt recovery by means other than aircraft repossession. The aircraft value, condition, carrying costs and remarketability are the key considerations in this respect at each stage.
The Best Repossession Is No Repossession
Aircraft repossession is, at best, an unpleasant and disruptive affair. If the life of the deal is to come to an end, then a "friendly return" of the aircraft, ideally in expected return condition, should always be the next option that the parties work toward as part of what amounts to mitigation and a negotiated settlement of the lessor's losses. Often, however, it is necessary for a lessor to employ the Rooseveltian edict of "speak softly and carry a big stick"–which embodies the principles of coercive diplomacy–to promote friendliness in this context. Use the "carrot and the stick" approach by offering a combination of enticement and threat of harm to try and induce the desired "friendly return" behavior. This idiom (a reference to a cart driver dangling a carrot in front of a mule while holding a stick behind the mule) is used in diplomacy to describe the realist concept of "hard power." It is worth highlighting that it is both carrot and stick (and not carrot or stick) that are to be used. The threat of disruptive, costly (and public) court action itself is likely the most common stick that can be used (and the avoidance thereof can be considered a carrot). In this light, keep in mind that discretion is to be earned by a defaulting party, not assumed.
"Worst Case Scenario" Strategy
As soon as it becomes evident that a friendly return is unlikely to be achieved, lessors need to be as strong and aggressive as possible going forward. Once the final decision to repossess has been taken, the time for further indulgences has passed. Map out a final repossession strategy rooted in a clear understanding of commercially rational and legally sound objectives. Do not take or make it personal. The decision to repossess an aircraft and how to do so should be a rational decision, whereby passion and chance are subordinate to commercial and legal reason. Apply the principle of "real options analysis," and avoid what is known as "negative target fixation." Successful aircraft repossession requires intelligent strategy and decisive leadership, foremost by lead (internal or external) counsel. Aircraft repossession is a legal task necessitated by commercial failure. It could be argued that the technical aspects are of near-tantamount importance, but this point will be not argued here. In any case, be aware that aircraft repossession can be an all-consuming affair for those involved in the day-to-day handling of the legal, technical and commercial issues that will arise. The decision maker(s) with responsibility for the repossession must be empowered to make quick decisions.
If all else fails–and assuming that the lessor (or lender) actually wants the aircraft back then, by all means, repossess, but focus first on securing physical possession of the aircraft somewhere "nice"–which, as discussed further below, is not just a reference to the jurisdiction's weather.
It is useful at the outset of an aircraft repossession to (re-) analyze the underlying deal documents with fresh eyes (i.e.: with external counsel) and ask the basic questions such as to (i) ascertain what (if any) debt recovery alternatives to repossession may still be available, (ii) confirm when repossession can take place, and (iii) perform a "sanity check" to ensure that there are no relevant defects in the original deal documents that could frustrate the repossession.
Select the right local counsel because having an adept and experienced local counsel is critical to the success of your repossession efforts. That noted, do not expect any counsel to work miracles. Request an early honest assessment and encourage frankness, because it is critical that expectations be managed and realistic objectives and timelines be formulated.
Do not select counsel based solely on their skills as an apparent fortune-teller, and bear in mind that "tell us what we want hear" is not a productive instruction to local counsel. The most important considerations in appointing the right local counsel are (i) the firm's and lead lawyer's experience in the substantive and procedural law relevant to aircraft repossession, (ii) domestic aviation industry experience/familiarity, and (iii) their fees. The order of importance is as presented.
Be aware that there are likely to be other creditors, including super-priority creditors that may be able to assert statutory or possessory liens and/or exercise detention rights over the aircraft. These creditors can present very significant and firm hurdles to effective repossession. Most often, it is best that these creditors, including the airport authority, are paid (rather than fought in the local court) in order to facilitate the repossession, de-registration and re-positioning of the aircraft. In this sense, it is a good idea to hope for the best, but expect the worst. This is especially true when it comes to issues with aviation and airport authorities (which can be a repossessing lessor's best friend or worst enemy in this context, but seldom in between).
Location, Location, Location
To state the obvious: aircraft are designed to cross borders, and almost all ( jet) engines are designed to be swapped. In that light, it is critical to determine a friendly venue or venues for repossession, which may not be the state of aircraft registration. Flight schedule visibility is necessary to ascertain when the subject aircraft (and/or engines) may be located in a jurisdiction that is amenable to taking interim subject matter jurisdiction and granting injunctive relief in favor of the repossessing party.
One tried and tested method of persuading courts in common law jurisdictions, for example, is to claim that the tort of conversion is being perpetrated in the jurisdiction in question by virtue of the fact that the aircraft and/or engines are located in such jurisdiction in the possession of the airline despite the fact that the airline's bailment of the aircraft and engines was terminated following an event of default.
While on the topic of location, the location and status of the aircraft records are of almost tantamount importance. From a logistical perspective, it is critical to have flight schedule visibility and awareness of records location so that arrangements (such as facility and ramp access, and access for contract flight crew) can be made wherever required in advance, including ensuring that ground handling, insurance and storage arrangements are in place.
Ground and Pound
The ultimate key to any successful aircraft repossession is usually, first and foremost, physical control of the aircraft in a creditor-friendly jurisdiction. Self-help may not always be available–and even where it is technically available pursuant to local law, it may not be desirable–and so repossession via court action, or multiple court actions in different jurisdictions, may be required. Typically this takes the form of applications for interim injunctive relief. In most cases, the repossession–or, rather, detention–of an aircraft will not immediately secure full possession such that, for example, the lessor can deregister and fly the aircraft away at its will. Regardless, it is almost always in the lessor's best interest to gain physical (although limited) control of the aircraft without delay. Simple physical control can often be acquired more quickly and therefore less expensively through self-help, freezing/mareva, replevin writ (or other injunctive order) than full possession. A replevin writ enables an interim injunction that orders the airline to return the aircraft to the possession and control of the lessor, pending final judgment or settlement, whereas a freezing order (formerly called a mareva injunction) is an interim injunction that restrains an airline from dealing with the aircraft in order to preserve the aircraft until a final judgment can be enforced.
The lessor will often gain significant leverage in negotiation after securing the detention of the aircraft, even though it has not yet secured actual repossession. Typically at this stage, a defaulting and formerly unfriendly airline becomes highly incentivized to engage in damage control since its strategy to stall the process while continuing to operate the aircraft will have failed. Most often, physical control in this manner yields "friendly return" behavior after the fact, and signals the conclusion of the aircraft repossession–though ongoing debt recovery may continue.