The Impact Of Covid-19 Pandemic On Aircraft Leasing.

It is a common knowledge that airlines around the world do from time to time as a means of boosting capacity and expansion of route network do lease aircrafts as the case may be. Aviation Roundtable blog takes a look at the effect of covid-19 pandemic on aircraft leases.

A lack of cash flow has resulted in airlines resorting to laying off employees or having their employees take leave without pay. Under these unprecedented social and economic conditions, airlines who lease aircraft may face severe challenges making rental and maintenance reserve payments to lessors.The impact on covid-19 pandemic on the aviation industry in general was extensively analysed in our previous post. Read here.https://aviationroundtable.blogspot.com/2020/04/an-overview-of-impact-of-covid-19-on.html

The fall out of the pandemic on aircraft leasing is our focal point in this write up. The implications of COVID-19 pandemic on an aircraft lease agreement vary from one agreement to another, depending on the terms and conditions set out in the said agreement and the governing law thereof. Standard commercial operating lease agreements generally governed by English law typically do not include force majeure clauses and are characterised by two principal features: 

The first feature relates to the delivery of the aircraft to the lessee on a ‘as is, where is’ basis, whilst the second feature involves the inclusion of a ‘hell or high water’ clause, rendering the lease a net lease. Arguably, taken together, these two features leave the lessee helpless in a situation where the lessee’s use of the aircraft, through no fault of its own, is suddenly severely curtailed.

The latter feature, in particular, is key to understanding the implications of Covid-19 on airlines as such clauses render the lessee unconditionally and completely responsible for payment of the rent, irrespective of the unforeseen circumstances which have affected the airline’s operations. Effectively, a ‘hell or high water’ clause places an absolute, irrevocable and unconditional obligation on the lessee to make the necessary lease payments, notwithstanding the happening of any circumstance of any nature whatsoever, which conditions the lessee’s use of the aircraft.

The operation of the ‘hell or high water’ clause must be considered in tandem with the delivery of the aircraft on an ‘as is, where is’ basis. Once the lessee accepts the aircraft at delivery, the lessee is often required to take on most of the operational and financial risk with the lessor’s obligations being limited to the bare minimum. This is desirable and expected, particularly in the context of finance leases, since it provides an incentive to the lessor to procure the necessary funds for a finance lease transaction. Naturally, this places a lot of importance on the delivery and acceptance procedure of the aircraft.

The lessor in an operational lease is therefore left with two options: adopt a strict approach and allow the lessee to default under the lease agreement and thus resume possession of the aircraft; or renegotiate the terms of the agreement in such a way which allows the struggling lessee to temporarily stall lease payments.

In the latter scenario, the lease payments may be simply deferred to a later date rather than excused in their entirety. However, whether this is optimal for the lessor depends on the particular circumstances, including its liquidity and, or the commitments of the other parties (typically finance parties) involved.

It is pleasing to note however that some Governments are offering to bail out and offer the much needed financial backing to airlines in other for the airlines to stay afloat and be able to meet their financial commitment in this challenging period. Alot more need to be done by all concerned in ensuring the survival of the airlines in this turbulent uncharted territory.

Simon Ogboji.