The recent temporary grounding of the world’s first all-composite construction airplane, the Boeing 787 Dreamliner, is relatively unusual in that it has affected the worldwide fleet. At Ince & Co we have been watching developments with interest and discussing the consequences that a fleet grounding of a specific aircraft model can have for aircraft operators, including airlines, and the knock-on consequences for their financiers and lessors.

All new airplanes entering service will at some point experience complications . The 787 Dreamliner is no exception. Since the delivery of the first Dreamliner in September 2011, this technologically advanced aircraft has experienced a number of teething problems in service. These have included fuel leaks, a cracked flight deck window, brake issues and a fire in lithium-ion batteries. The US, European and Japanese aviation authorities have ordered the grounding of all Dreamliners currently in service, until they have completed their investigations into the causes of the problems and are satisfied that they have been resolved.

The grounding of the B787 fleet has affected eight airlines, together operating 49 Dreamliners. There are currently 799 B787-8 and B787-9 aircraft on order.

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Mitigating the consequences of a Fleet Grounding

What contractual and other safeguards should airlines consider to mitigate against the loss of the use of their fleets?

Firstly, this particular occurrence highlights the importance of obtaining from the manufacturer an adequate Guarantee against Fleet Grounding and its commercial consequences. The commercial consequences of grounding an entire fleet of aircraft can be severe in terms of lost use and revenue, additional costs and damage to passenger confidence. There may also be further costs incurred in making modifications to aircraft to regain a certificate of airworthiness. Every effort must be made to try to match the financial compensation provided under the Guarantee against the likely losses.

When negotiating Fleet Grounding-related Guarantees, care must be taken regarding framing events that qualify as a Fleet Grounding, quantifying remedies and dealing with the aircraft operator’s obligations to modify the aircraft so that the grounding can be lifted. These modifications often have cost consequences in terms of performance and future direct operating costs, so are of importance to the operator’s business model.

Fleet Grounding can also have serious implications for aircraft lessors and financiers. The economics of financing an aircraft are generally dependent on the income earned by that aircraft. If that income flow is disrupted this may cause a default under the loan documentation, unless the owner makes up the shortfall from an alternative source. Fleet Grounding-related Guarantees can therefore be of importance as financiers look for security for their loans.

Depending on the contract wording, the mandated grounding of an entire aircraft type may entitle the lessee under an operating lease to stop making rental payments to the lessor while the aircraft is grounded. Whilst this is usually resisted by the lessor we have seen such terms negotiated into contracts. This may have serious implications for the lessor’s finance arrangements which the lessor may in turn look to mitigate through Fleet Grounding-related Guarantees.

Airlines should also consider the potential impact on any chartering and/or code sharing arrangements and whether a fleet grounding would constitute a “force majeure” or other event entitling the airline to suspend or delay performance of its obligations under these agreements.

An airline that has publicly listed shares, bonds or other securities, needs to be ready to make regulatory and public announcements in relation to a fleet grounding. As well as being aware of and ready to comply with its legal requirements, airlines would be well advised to have a communications plan in place in respect of any fleet grounding to seek to manage the public relations (and securities price) impact. Recent events both within and outside the aviation industry amply demonstrate the perils for share price of (inept or) unprepared responses to events with a high media profile.

As a means to resolve any disputes which may arise as a result of the groundings, all the relevant agreements will provide for a dispute resolution clause. This is usually a reference to arbitration which is confidential, rather than a preference for open Court, which is not. It is also now common to have an escalation clause, which sets out a series of agreed steps which the parties may take before commencing arbitration. Those involved can choose whether the escalation clause allows either party to arbitrate at any time, which some think can operate to negate some of the usefulness of an escalation clause; others prefer to require the parties to go through the procedure outlined in the escalation clause as a means of requiring “jaw, jaw” to take precedence over “war, war”.

In our experience the time periods set out in an escalation clause for the relevant personnel of each party to seek to resolve the dispute are often too short to be meaningful, especially if the matter requiring resolution is significant. Most claims of this type do get resolved through discussions, although often these can themselves rightly be protracted as the relevant issues are fully explored. It is interesting to note that All Nippon Airways have already said publicly that they will be adopting just this route in relation to their claims against Boeing.