Lessors to get first right on planes when airlines default

MUMBAI: The civil aviation ministry has finally acquiesced to international pressure brought upon by major aircraft leasing firms to formulate a policy that gives aircraft lessors the first right over other creditors to repossess aircraft, when an airline defaults on dues. The move comes after aircraft financing firms labeled Indian environment as being ‘hostile’ to investors.


This broad policy initiative is being drafted by the civil aviation secretary KN Srivastava and would incorporate major international aviation convention signatories such as the Cape Town Convention and their aircraft equipment protocols, the official said.

On contentious issues of repossession of aircraft, India still does not have a clear policy. The absence of a policy on repossession of aircraft became a major irritant after Kingfisher Airlines defaulted on lease payments as well as payments to Indian state-owned firms, such as Airport Authority of India (AAI), oil marketing firms and banks.

These government entities held the aircraft ‘hostage’ for recovering dues, ignoring the rights of aircraft leasing firms. “There is an absence of policy on aircraft repossession. There is a clear need for guidelines and a policy directive. We were ignoring certain conventions despite India being a signatory member of these conventions. We do not want to make the leasing companies insecure in this market and make them feel that their interests are not protected here,” the top government official said.

“The fact is that most of the aircraft flying here are leased aircraft and interests of leasing firms need to be protected,” he explained.

India had ratified the Cape Town Treaty in 2008, which clearly stipulates the financial security of the investors and their asset. It protects them from local laws, and gives them the first right to remove an asset (aircraft). The treaty stipulates the civil aviation authority of the signatory country to deregister aircraft if the creditor seeks to withdraw the asset. The problems surrounding the Kingfisher were compounded due to the fact that a few aircraft were procured from lessors prior to the Cape Town agreement. According to the senior official, the government is in discussion with the stakeholders, including airports and the airlines.

According to industry sources, opinions of airlines have already been sought on the matter and they have responded positively to the ministry.

The airlines are favourably disposed to a policy that gives aircraft lessors the first right to repossess aircraft over other creditors as they are feeling the heat after risk premium for aircraft leasing in the Indian market has increased.

International Lease Finance Corporation, after reclaiming two of its aircraft through a court order in March, had said that India needs a comprehensive policy change to make it easier for the leasing companies to remove aircraft from here. Another leading aircraft financier, DVB, won a case on Monday for getting two of its aircraft de-registered so that the asset can be used by another airline. “Anything that improves the situation (for the leasing firms) is welcome. But how good or bad that would turn out to be is another thing,” Carsten Gerlach, seniorV-P, aviation finance, DVB Bank said.