Jetrader - Fall 2014 - (Page 44)

Restructuring Aircraft Leases in Bankruptcy The process and considerations for airlines A By John T. Curry, III, Jasmine Ball and Jaeyong So An airline seeking to restructure its aircraft fleet in bankruptcy must develop a viable fleet plan providing sufficient aircraft for its restructured operations at an acceptable overall cost. The airline will also need to formulate restructuring proposals consistent with the fleet plan to negotiate with its financing parties. This article discusses the process and considerations involved in formulating restructuring proposals for leased aircraft. A critical early step is the collection and analysis of information for each aircraft: * Age and maintenance condition; * Lease economics (rent, term, maintenance reserves, return conditions and security deposits); * Appraised current market rental and sale values; * Structure of the lease and any related financing; * Lease parties' identities and current notice addresses; * Factors affecting lessor bargaining power (e.g., control over a large block of aircraft, lease cross-default provisions or lessor involvement in other transactions with the airline); and * Structural or other potential hurdles to implementing a restructuring (e.g., the lessor's pledge of the lease in its financing or debt-equity and foreclosure issues in a leveraged lease). Also at this early stage, the airline must analyze the protections available to it and the rights and remedies available to the lessor under applicable law. Applicable law will affect the bargaining power and tactics of the parties and the timing and process for the restructuring. If lessors are stayed from exercising repossession remedies for only a limited time under the applicable bankruptcy or insolvency law, the airline should be prepared to distribute restructuring proposals to lessors immediately upon its filing for bankruptcy court or insolvency protection in order to have the maximum standstill period to try to reach agreement with each lessor. For example, under section 1110 of the U.S. Bankruptcy Code, a U.S. carrier leasing a section 1110 eligible aircraft would have only 59 days from the bankruptcy filing date to agree to perform the lease as-is or reach agreement with the lessor to extend the standstill period before the lessor could demand the return of its aircraft. With a very short standstill period, the airline may need to stage the overall process such that the airline first reaches agreement with the lessors during the standstill period on the fundamental restructured economics, together with extensions of the standstill period allowing the airline's continued possession of the aircraft during the negotiation of the final lease restructuring documentation. Each airline will have different objectives and priorities shaping its fleet plan. These may include rationalizing the number of aircraft models in the fleet, transitioning out of fuel-inefficient aircraft, or moving to larger/smaller capacity aircraft. The airline 44 The official publication of the International Society of Transport Aircraft Trading may wish to formulate its restructuring proposals to offer more generous terms for the aircraft that are a priority to keep in the fleet and less generous terms for the aircraft that it can afford to lose. The lessor's opportunity cost of accepting the airline's restructuring proposal is the lease or sale economics that another operator or buyer is willing to pay minus the lessor's costs of repossession, remarketing and any additional refurbishment to meet the required delivery condition for lease or sale. Accordingly, the airline must consider how its restructuring proposal economics compare to current market values. A premium over market economics may speed the lessor's agreement to a restructuring proposal, and locking up more aircraft restructurings early in the process will improve the airline's flexibility and options with respect to aircraft not yet restructured. The airline also should consider the inter-relation of the different elements of

Table of Contents for the Digital Edition of Jetrader - Fall 2014

A Message from the President
Reach for the Stars
Beauty Contest
Boeing’s Current Market Outlook for 2014
Aircraft Recyclers Debate the Coming ‘Tsunami’ of Retired Aircraft
Engine Support Plans Shift Market
The Second Life of Aircraft: Does It Still Exist?
Restructuring Aircraft Leases in Bankruptcy
Aviation History
Aircraft Appraisals
ISTAT Foundation
Advertiser Index

Jetrader - Fall 2014