The battle over aircraft at Avianca Brazil is proving to be a true test for the Cape Town Convention's efficacy.
Since the carrier filed for bankruptcy protection with the local courts, several lessors – including Aircastle, Aviation Capital Group and GECAS – have publicly stated their intentions to repossess their aircraft in what is heating up to be one of the more contentious airline bankruptcies in several years.
Aircastle says the decision to extend the stay on Avianca Brazil's aircraft is "contrary to well-established Brazilian law and the Cape Town Convention, a treaty adopted by Brazil".
During a 12 February earnings call, the lessor's chief executive Mike Inglese sharply criticised Brazil's implementation of the Cape Town Convention. "A predictable judicial system and reliable framework for the recovery of aircraft is a principal factor in the cost and availability of capital to airlines," said Inglese.
On 11 December, Synergy Aerospace-owned Avianca Brazil filed for bankruptcy protection, noting that it would return four Airbus A330-200s and scrap international flights to New York JFK, Miami and Santiago from 31 March.
The carrier, Brazil's fourth-largest airline, had been working with lessors to reach tenable lease agreements after being in arrears, but failed to find common ground before it filed for protection. The company leases 50 of its 58 aircraft.
Since the initial filing when the court issued a stay for 30 days until 14 January, the court has twice granted the airline a relief period from lessors taking action, first until 1 February and now until mid-April.
Several lawyers who've spoken to FlightGlobal are unequivocal in their view Brazil is in noncompliance of the treaty.
TIMING IS EVERYTHING
"We are disappointed how the process is being implemented and playing out in Brazil," Inglese told investors during the 12 February call. "But the actual timeframe involved in making this come together is not exactly a surprise to anyone who's been in this business for a while."
Prior to filing for bankruptcy protection, however, lessors were able to repossess four aircraft. Even in cases where Cape Town was misinterpreted, all four aircraft were exported and deregistered within approximately two weeks, notes Basch & Rameh partner Kenneth Basch in a paper published on 16 January.
"In respect of the four aircraft that were repossessed before Avianca Brazil had obtained bankruptcy protection, the Brazilian judiciary and civil aviation agency procedures worked reasonably well and Brazil's overall performance complied with its obligations under the Cape Town Convention," writes Basch.
"In cases where judges handed down rulings that violated Cape Town, these decisions were reversed relatively quickly," he adds.
Aircastle, which has 10 Airbus A320s with the carrier, said it would "aggressively pursue its rights, including the immediate appeal of the judge's decisions" in a statement issued on 4 February. Inglese describes the 10 narrowbodies as "modern, desirable aircraft", adding: "We expect the aircraft to be placed in a timely manner after repossession."
Prior to 11 December, BOC Aviation took back two A320neos (MSNs 7918 and 8086), which are now out on lease to Azul, while Aircastle was able to repossess one A330-200 (MSN 1492) not yet on lease to a new customer. The fourth aircraft, a 2015-vintage A320 (MSN 6651), was taken back by owner Infinity Aviation Capital and is set to be released to EasyJet in March, Cirium's Fleets Analyzer shows.
FUTURE FINANCING RISKS
However, one lessor who wishes not to be identified and does not lease aircraft to the airline, says the way in which the Avianca Brazil bankruptcy is unfolding "is just another blow to Cape Town" and argues that lessors are better off having a commercial solution rather than waiting for legal remedies to get aircraft back.
Many people with whom FlightGlobal has spoken remain hopeful that Cape Town will prevail, as there is simply too much at stake for it to fail.
We believe the judge's decision will negatively impact Brazil's civil airline industry with higher costs and less funding," states Inglese in the 4 February statement.
While some may view Cape Town as a failure in this instance, implementing law, especially international law, can take time.
"There is no 'after Brazil'; we are in the middle of Brazil," Aircastle's Inglese told investors on 12 February, adding that he remained confident that the higher courts will rule according to the treaty. Inglese has stated that he still expects Aircastle to recover its aircraft on a "timely basis".
In the case of Kingfisher's collapse in 2012, even though India ratified Cape Town in 2008, Indian municipal law allowed the airports authority AAI or any other party with possession of an aircraft to legally hold them until all debts associated with the aircraft were cleared.
At the time, AAI refused for some time to allow aircraft to depart from its airports, creating major headaches for lessors trying to re-lease their aircraft.
While aircraft were eventually returned to lessors, commentators have noted that lessors demanded premiums to cover risk in leasing aircraft to Indian airlines as a result. In some cases, lessors even sought government guarantees for the aircraft.
BRAZILIAN AIRLINES' RELIANCE ON COMPLIANCE
Brazil has an opportunity to show the world that it can implement international law.
"The filing of the appeals by the foreign financiers, in Avianca's case, will be a good opportunity for Brazilian higher courts to reflect on the importance of enforcing the remedies provided under the Cape Town Convention and hopefully overrule the decision rendered in this case," write lawyers Ricardo Bernardi and Lucas Bernardes, of Bernardi & Schnapp Advogados, in a paper published on 12 February.
In its 2017 Global Market Forecast, Airbus predicted that Brazil's domestic traffic would nearly treble over the next two decades. The aircraft requirement is sure to be a significant part of the $360 billion market of equipment that Boeing forecasts in its 2018 Commercial Market Outlook.
As one of the fastest-growing emerging markets, Brazil will have a continuing demand for aircraft. Cirium's Fleets Analyzer shows that Brazilian carriers already have 360 passenger aircraft on order.
Compliance with the convention appears essential if the country hopes to have continued access to capital at reasonable rates. Otherwise, investors will start to price in to the price of capital the risk of not being able to retrieve the asset.
As one of the major advocates of Cape Town, the Aviation Working Group will be introducing a scoring process for implementation and interpretation of the treaty, according to its website. Perhaps a red-light system would pressurise countries to comply.
Source: Cirium Dashboard
