Jetrader - July/August 2010 - 20

Legal Issues Clouded by Ash
By Don Mitchell Eyjafjallajökull?? At least you can pronounce volcano—and what it spewed has been a huge disruption for the industry. Operators, particularly in Europe, have been critical of the EU airspace closure following the eruption of Iceland’s volcano. Fear of immediate and catastrophic engine failure, among other things, was the justiﬁcation. Such fear may have been misplaced in this instance. And while damage to the airframe and its component systems is a concern, volcanic ash probably has the potential to cause more expensive damage to an aircraft’s engines. Eager to resume service, operators conducted test ﬂights during the eruption. Post-ﬂight examinations reportedly showed no outwardly visible damage. But latent, longer-term damage is probably of more concern. Owners, operators and ﬁnanciers should be aware of this and plan accordingly. Ingestion of volcanic ash can very quickly sandblast the internals of the engine. It can also insidiously impair engine performance as internal parts are coated and cooling holes are plugged by ash that turns molten as it enters the engine’s hot section. As a consequence, EGT increases, EPR degrades and an early overhaul results. And while operations into areas of known volcanic ash can be avoided, in some instances an aircraft can transit through volcanic dust clouds without the ﬂight crew knowing it. Like thunderstorms, ash clouds can be embedded and appear on radar as a simple vapor cloud. As a result, ﬁnanciers may ﬁnd their operators under-reserved for the ash-induced overhaul and will have to rely on the operator’s creditworthiness to make up any shortfall. If there is a return or repossession before the engine comes off wing, the ﬁnancier could be left with an unexpected early overhaul with insufﬁcient funds in reserve to pay for it. Indeed, does the ﬁnancier even have the right to reject an engine on return if evidence of ash ingestion exists but the engine is otherwise within operational limits? No doubt follow on operators and purchasers will be looking for evidence of volcanic ash ingestion and will seek protection or compensation accordingly. Operators, on the other hand, could have an early and unexpected overhaul expense and perhaps, given the term of the lease or ﬁnancing, one that was never budgeted for. Moreover, MCPH programs could exclude from ﬁxed price protections the cost to repair damage resulting from the ingestion of volcanic ash. Of course the best way to manage this situation is to avoid it entirely. But to the extent the unexpected happens, can damage caused by ingestion of volcanic ash be considered “foreign object damage” and thus covered under the operator’s insurance? The answer is, as you might expect, it depends. Some policies address the issue very broadly. For example, one sample policy reviewed will cover damage to an aircraft that results from an accident, including continuous or repeated exposure to conditions which results in property damage neither expected nor intended. This would appear to not only cover damage resulting from the ingestion of a stone, but also damage resulting from the ingestion of volcanic ash, even where the damage does not immediately manifest itself. Just be mindful that what the policy gives, the exclusions may take away. Some policies address the issue speciﬁcally. Another sample policy reviewed expressly excludes coverage for, “any damage caused by or attributable to the ingestion of stones, grit, sand, ice and any corrosive or abrasive material or any other substances which have a progressive cumulative engine damage effect…” Even so, it could be argued that a one time ingestion of ash that causes immediately resulting damage is not “progressive” and thus traceable to a single ingestion event. Continued operations over time following this event would work against the operator’s successful claim. To the extent the policy language is unclear in either case, the operator will need to rely on its broker to leverage its relationship in order to champion a cause for coverage if it is denied. As the ring of ﬁre reignites and as Eyjafjallajökull and other volcanoes erupt, ﬁnanciers and operators should remain mindful of not just the operational risks, but the ﬁnancial risks and impact of operating in and near volcanic activity. Perhaps the time is now to dust off those ﬁled insurance policies, lease and ﬁnance documents, and repair and MCPH agreements in order to better expect the unexpected. Don Mitchell is a partner with the law ﬁrm of Smith, Gambrell & Russell, LLP and concentrates his practice in U.S. and cross-border aviation equipment ﬁnance transactions and litigation. Please e-mail any questions, comments or suggestions for future topics to: dbmitchell@sgrlaw.com.

Financiers and operators should remain mindful of not just the operational risks, but the financial risks and impact of operating in and near volcanic activity.
20 The ofﬁcial publication of the International Society of Transport Aircraft Trading

Jetrader - July/August 2010

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