Every aircraft owner, leasing company and airline should be looking into GATS and how it can (will) change the way in which they will acquire, own, lease and trade aircraft. GATS is the new Global Aviation Trading System which is being established through the auspices of the Aviation Working Group (AWG). This briefing doesn’t re-state what has been said by AWG itself and so we invite you to log on to their website at www.awg.aero/projects/gats. Having said that, the reason for drawing GATS to your attention is that we agree with the promoters and supporters – who now include a good cross-section of the aviation community – that it will be a platform that not only has the potential to revolutionise the way aircraft are bought and sold but could realise that potential quite quickly. The AWG GATS website underlines the significant advantages for aircraft lessors of the new platform – speed and cost of execution being the principal ones; but are rightfully careful to not present GATS as a vehicle designed purely for lessors by also highlighting the protections and interests for airlines, investors and lenders. Just as the standardisation of investment grade loan documents by the Loan Market Association led to an increase in secondary trading of loan assets and a deepening of the market so too has GATS the potential to open up the trading of aircraft assets to a broader market.
From our own experience advising leasing companies, airlines and lenders know how much of a time consuming and administrative burden getting through the necessary paperwork and negotiations of lease novations and ancillary documents can be. It’s relatively expensive too, once you take account of all the costs of the ancillary filings and re-registrations. It is probably fair to say that most airlines find having to deal with lessors’ requests to facilitate transfers of ownership an unfortunate (if necessary) burden of the flexibility that comes with taking aircraft on operating leases. The fact that some airlines now seek to charge fees to cover their internal administrative costs (in addition to passing on the costs of their external lawyers) is not a new line of business for them but a recognition of the cost to them of being obliged to have full time staff dedicated to handling lessor requests. A reduction of that administrative burden for lessees will, we think, outweigh the loss of opportunity for an airline to re-negotiate terms with an in-coming lessor which current lease novation negotiations can provide.
The GATS platform is not yet fully operational and indeed it is not the intention that the full suite of options on the platform should go live and be adopted overnight. The platform will be almost entirely virtual and will adapt existing technologies (e-ledgers/block chain etc.) and build on lessons learned from the operation of the International Registry for aircraft objects. To ensure confidence in the platform the transition to a fully operational virtual GATS platform will be phased in and it will be possible to opt in to use the full e-platform capabilities without prejudice to the key core elements. The British Government’s failed favoured solution to the issue of there being no hard border in Ireland (which has been at the heart of the BREXIT chaos) illustrates the importance of having working tech solutions in place before proposing a radical change to day–to-day operations.
The set-up and recurrent cost to a leasing company of using professional trust structures in which to hold ownership of aircraft should be (over time) significantly less than the transaction specific costs incurred in trading those aircraft. Leasing companies will still incur professional and other costs (including those of the trustee itself) but those will be more focused on the terms of the deal than on the administrative tasks of transferring ownership. Initially GATS Trusts will be established under Utah, Irish or Singapore law. Those are the laws (legal systems) which have been identified as ones that have either a long association with aircraft ownership trusts (in the case of Utah) or are otherwise accepted as having highly developed and stable trust laws and practices. Trusts are legal (technically they are “equitable”) structures not corporate ones nonetheless it is likely that the GATS Trustee (the likes of Bank of Utah or Wilmington) will be established in the jurisdiction of the law governing the trust. The GATS Beneficiary (the leasing company’s chosen legal entity) could be incorporated in any jurisdiction which will recognise the foreign law GATS Trust. Recognition by other systems of law of trust relationships is one of the challenges (and possible stumbling blocks) for the rapid and widespread adoption of GATS as it will be important that the trust structure does not prejudice the beneficial ownership of the aircraft or upset the tax treatment of lease payments. AWG proposes to publish a list of jurisdictions in which they have been advised that the GATS Trusts will be recognised.
AWG has issued a series of exposure template agreements to establish the contractual structures for GATS Trusts and transactions. It is now possible for transactions to be converted into or set up using GATS trusts. Any such structures will, once the e-platform goes live (scheduled for end Q1 2020), be eligible to be restated on the e-ledgers.
The committee within AWG that has been developing GATS has been very conscious to build a system that respects the interests of all parties. The interests of the airline lessees (e.g. to ensure that they incur no greater cost by reason of a transfer and to require incoming beneficial owners to meet financial and experience criteria set out in the lease) have been protected via their control over certain mandatory steps in the registration mechanisms. Lenders will be familiar with the forms of security over the beneficial interests that are part of the platform as they will have seen them in the context of existing trust structures used primarily in the US. But no doubt they will look to their legal counsel for sign off opinions. The platform needs to be seen by owner lessors, trustees, airlines and lenders as protective of their interests and the broad industry consultations that have taken place (and which continue) should ensure that this is the case.
We would be delighted to provide more guidance on GATS. We can only recommend and praise the AWG website for the breadth of its commentary and support for the project.