Aviation leasing is a huge business – and Ireland is a world leader in the sector. An ideal solution for aircraft downtime – lease planes to another airline with a busier schedule – it also offers smaller, younger airlines an opportunity to fly the latest models. But sometimes things don’t go according to plan. Airlines can and have defaulted on leases, for instance, and when that happens what can be done? An aircraft might be on the other side of the world, the airline in no hurry to give it back – as was the case when Russia seized a large number of aircraft following its invasion of Ukraine.
How do leasing companies recover their assets from delinquent customers? Are they covered by insurance? And can leasing companies insure against other risks such as faulty maintenance?
The aircraft lease agreement between a lessor and an airline will set out the events of default and the remedies available in the event that they are breached, says Marie O’Brien, partner and head of aviation and transport finance at A&L Goodbody.
“There are several practical and legal matters that need to be considered in this situation but most would agree that time is of the essence and termination of the lease and potential repossession will be one of the options being considered,” she says. “Defaults can be complex to resolve as many different jurisdictional rules need to be considered and understood. For example, where is the aircraft located, where is it registered – all aircraft in operation need to be registered with a civil aviation authority – and is there financing and security involved?”
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Cape Town Convention
The Cape Town Convention is an international treaty designed to standardise transactions involving movable property, such as aircraft, and improve asset recovery in the event of default, explains Marina Efthymiou, professor of aviation management at Dublin City University Business School.
“It provides lessors and financiers with legal protections, such as the right to repossess aircraft quickly through international co-operation,” she says. “If the country where the aircraft is located has ratified the treaty, lessors can leverage its provisions to expedite recovery.
“One key mechanism, the Irrevocable De-registration and Export Request Authorisation (IDERA), allows lessors to deregister an aircraft from the operator’s registry and export it without needing the lessee’s consent. The convention also provides for faster judicial or administrative relief, aka expedited relief, reducing delays in repossession.”
However, this process can be complicated when geopolitical factors exist, Efthymiou adds. “In cases such as Russia’s seizure of aircraft following its invasion of Ukraine, international treaties like the Cape Town Convention offer limited recourse,” she explains. “Acts of expropriation or requisition by local governments can override treaty protections, making repossession effectively impossible without government co-operation.
“In many cases, seized aircraft are cannibalised for parts, with components removed to support other operational aircraft. This not only diminishes the value of the aircraft but also creates significant challenges for lessors seeking to recover their assets. An aircraft stripped of critical components is often rendered inoperable and requires substantial investment to restore its airworthiness.”
Asset recovery
In addition to consulting with lawyers for advice on the remedies available under the lease, most leasing companies will employ or engage repossession experts to assist in the recovery of the asset and to ensure its value is maintained, says O’Brien.
“Part of this process will certainly involve representatives of the leasing company going to the location of the aircraft to assist in securing its repossession.”
Safety is the top priority for the industry, and maintenance and repair services are integral to overall safety and efficiency, says O’Brien.
“There are several different types of insurances available that are typically taken out relating to aircraft operations including cover for ‘war-risk’ or ‘total loss’ and also around maintenance and repair or damage to the aircraft while it is on the ground,” she says.
Leasing companies typically rely on insurance to protect against such risks, but coverage depends on the policy terms and the nature of the seizure, says Efthymiou.
“Many lessors affected by the Russian aircraft seizures held war risk insurance, which should theoretically cover these losses. However, such claims are often contested due to the scale of the losses and ambiguities in policy terms.
“The magnitude of the Russian seizures has also strained the global reinsurance market, adding further complexities to claim resolution. In response, lessors are adopting more cautious strategies, including reducing asset concentration in politically volatile regions and revising policies to include broader political risk coverage.”
