This article is an extract from GTDT Aviation Finance & Leasing 2022. Click here for the full guide.

When will aviation recover?

Aviation has traditionally been one of the world’s fastest-moving sectors, combining technology, innovation, entrepreneurialism, economic development, infrastructure support, demographic growth, contribution to globalisation and more than a touch of glamour. Progress in this sector is impressive in its speed and diversified in its nature.

After a number of years of encouraging growth, the covid-19 pandemic has of course had an unprecedented impact on the aviation industry. Overall, airlines carried 2,699 million fewer passengers in 2020 than in 2019, which resulted in a US$371 billion loss in gross passenger revenue according to the International Air Transport Association. After a US$51.8 billion loss in 2021, net industry losses are expected to reduce to US$11.6 billion in 2022. Dozens of airlines have sought insolvency protection or ceased operations permanently, though surprisingly fewer airlines ceased operating than might have been expected – about 30 in 2020 and about 20 in 2021 – and there were probably more start-ups replacing these. The sympathy of the aviation community is extended to all of those who have lost loved ones, jobs and investments in these frightful past two years.

The aviation industry has, however, proved capable of meeting major challenges in the past and will no doubt do so again. In the last 20 years, we have seen major security incidents (9/11, and airport bombings in Brussels, Karachi, Tripoli and Shanghai), health scares (SARS, MERS and now covid-19) and economic events that have had a material negative impact on air travel. However, each time, the industry has bounced back. Globally, the industry is expected to recover strongly from and continue to expand after the pandemic. Boeing’s Commercial Market Outlook 2021–2040 forecasts over 19,000 new aircraft deliveries by 2030 and over 43,000 new aircraft deliveries by 2040.

Airbus plans to deliver 720 commercial aircraft to customers in 2022, a nearly 18 per cent increase on its delivery output in 2020 (in 2021, Airbus delivered over 611 commercial aircraft). In 2021, gross commercial Airbus orders totalled 771 with net orders of 507 aircraft after cancellations, compared with 383 gross commercial aircraft orders and 268 net orders in 2020. Airbus says the A320 family ramp-up is on a trajectory to achieve a rate of 65 per month by summer 2023. Airbus’s order backlog stood at 7,082 commercial aircraft on 31 December 2021, down from 7,184 aircraft at the end of 2020.

Boeing delivered 340 aircraft in 2021, the vast majority of which were 737 MAX. Additionally, 65 per cent of widebodies delivered to airlines were dedicated cargo aircraft. In 2021, Boeing recorded a total of 909 gross new orders from airlines around the world. This figure is more than double that of 2020 and 2019 gross orders, which totalled 184 and 246 respectively.

Today, the overall fleet is more than 23,700 aircraft. By 2031, Oliver Wyman forecasts that the fleet will number more than 36,500. This is 2,500 aircraft short of pre-pandemic predictions but is nonetheless substantial growth. Oliver Wyman envisages the current fleet recovering to pre-pandemic levels by the second half of 2022. In addition, after many years of an Airbus and Boeing duopoly, new aircraft types are entering the market:

  • the Bombardier C Series (in 2016 the CS100 was delivered to launch customer Swiss and the CS300 to launch customer Air Baltic; since the programme was taken over by Airbus in July 2018, these aircraft are now the A220-100 and A220-300 respectively);
  • the Comac ARJ21 regional jet;
  • the Comac C919;
  • the Sukhoi Superjet;
  • the MC-21; and
  • the Mitsubishi Regional Jet.

Of all these new aircraft, 40 per cent are predicted to be required in the Asia-Pacific region, 20 per cent in Europe and North America, and 20 per cent in the Middle East, South America, the Commonwealth of Independent States and Africa.

People want to travel

While demand for flights has fallen to levels few could have foreseen at the start of 2020, all the signs are that the sector will bounce back and, for so many reasons, it needs to.

According to the Air Transport Action Group (ATAG) ‘Aviation: Benefits Beyond Borders’ report published in 2018, over 10 million people working within the air transport sector made sure that 120,000 flights and 12 million passengers per day were guided safely through their journeys. The wider supply chain, flow-on impacts and jobs in tourism made possible by air transport showed that at least 65.5 million jobs and US$2.7 trillion (3.6 per cent) in global economic activity were supported by the then air transport industry.

Alexandre de Juniac, the Director General and chief executive officer (CEO) of the International Air Transport Association, said at ATAG’s Global Sustainable Aviation Summit in Geneva on 2 October 2018:

Airlines empower people’s lives and turbo-charge the global economy through a worldwide network that safely carries more than 4 billion passengers and 62 million tonnes of freight each year. The ability of aviation – the business of freedom – to sustainably connect cultures and spread prosperity beyond borders has never been more important.

Travel is indeed important and an intrinsic part of our lives. People need to travel for a variety of reasons. We crave new experiences and new challenges. We want to experience something unfamiliar and leave with new skills or knowledge (for example, a greater appreciation of our planet and the diversity of its people, exploring new languages, cultures and cuisines, or a deeper appreciation of faith or spirituality). Travelling is one of the best ways to learn more about oneself. It tests us and it expands our minds and horizons. It helps to strengthen bonds. It enables us to meet new people. Travel can also be a great relief from work, stress and unhappiness. It can help us to relax and heal, both physically and emotionally. Travel also represents freedom and is essential for business and trade. These are things that cannot be achieved by telephone or videoconferencing. With travelling in our DNA and our horizons having been broadened, there will not be a significant desire from people to drastically modify their flying habits forever. Staycations only go so far. Domestic tourism has its limits.

Many millions of people are desperate to travel again and trade by air is needed. This is particularly acute in smaller nations and city states that depend heavily on imports, but all countries are trading nations and not everything or everyone can be transported in time by ship, road or rail. It is also acute in nations that have experienced a full lockdown, with their residents locked in houses and apartments for months.

The International Civil Aviation Organization, the World Health Organization, and regional (such as the European Union Aviation Safety Agency) and national governments and organisations (including aviation industry forums such as the International Air Transport Association, the Airports Council International, airports, operators and airport service providers) have already taken steps to ensure that the risks of air travel are minimised. The airline industry has also continued to save lives as emergency transportation by air of expertise, medicines and medical equipment (eg, ventilators), personal protective equipment and other humanitarian aid have been a feature of the covid-19 pandemic.

Russia–Ukraine war

As at March 2022, the impact of the Russia–Ukraine war on aviation’s recovery is unknown. Export bans and flight bans imposed by the United States, the European Union and the United Kingdom in particular have effectively isolated Russian aviation from the West.

Russian airlines have 980 passenger jets in service, of which 777 are leased, according to analytics firm Cirium. Of these, 515 jets with an estimated market value of about US$10.3 billion (according to aviation analytics firm Ishka) are leased from non-Russian companies. Most of the leased aircraft are registered in Bermuda under an International Civil Aviation Organization 83-bis arrangement. It appears that the Bermuda Civil Aviation Authority (BCAA) has been withdrawing Air Operator's Certificates (AOCs) on the basis that the BCAA no longer has any insight into aircraft maintenance in Russia. The suspension of the AOCs by the BCAA took effect on 12 March 2022. On 2 March 2022, Boeing and Airbus confirmed that they had ceased the supply of aircraft parts to Russian aircraft. CFM, Embraer, Jeppesen, Lufthansa Systems, Dassault, Bombardier and GE all appear to have followed suit.

In response, a draft Russian government regulation on the performance of lease and charger agreements concerning foreign aircraft used by operators in 2022 applies to contracts entered into on or before 24 February 2022. The draft regulation sets out rules on the operation, maintenance, insurance and return of aircraft used for flights by Russian lessees and owned by lessors of listed states that have adopted sanctions against Russia. The draft regulation requires payment obligations between lessors and lessees to be settled in Russian roubles for the duration of 2022 and any security interests to be arranged as required by the Russian Central Bank. The draft regulation further requires the lessee to operate and arrange the maintenance of the foreign aircraft and engines in accordance with Russian Federal Aviation Regulations, and to arrange insurance and reinsurance of the aircraft with Russian insurance organisations on terms equivalent to those set out in the relevant lease. In the event that a lessor terminates the lease or requires the early return of leased aircraft, the decision of the Commission on Import Substitution indicating the procedure and conditions for such a return will be followed. In the absence of such a decision, the lessee will continue to operate the foreign aircraft or engine under the provisions of the lease until the date of return of the aircraft to the lessor. At the time of writing, the draft regulation has passed all three readings in the Duma.

Any such response by Russia would breach international aviation norms that have been in place for over 80 years, in particular the Chicago Convention and the Cape Town Convention. It is difficult to see how investors would have any faith in leasing aircraft into Russia once the war is over.

How will aircraft be financed?

Unlike the global financial crisis of 2008–2009, the pandemic has not had a material impact on aircraft finance liquidity. However, given market uncertainty, the traditional aviation banks have retrenched and bank risk appetite has been understandably muted. On the positive side, the capital markets are alive and well – the enhanced equipment trust certificate has come back in a tangible way, financing over US$9 billion in transactions in 2020. All major export credit agency (ECA) products remain available across aircraft types, along with their Finance Insurance Consortium (AFIC), Balthazar, Piiq and Aviation Capital Group equivalents.

Aircraft lessors felt the impact of the pandemic from the outset as they dealt with widespread deferral requests from their airline customers. As the challenging environment prevailed, these deferrals in some cases have morphed into more complicated lease restructurings. However, by the end of 2020, the level of deferrals had reduced significantly. The years 2020–2021 saw a number of sale and leasebacks as airlines looked to raise cash reserves. The leasing community is predicted to become an increasingly important source of funding as deliveries of traditional means of support for aircraft financing in a downturn is restricted. Overall, lessors have a much stronger credit rating than airlines and so have access to financing, debt and hybrid equity at significantly lower rates than the airlines. It is estimated that over half of the global airline fleet will be leased in the near future.

By Boeing’s estimates, commercial aircraft delivery funding volume for the industry totalled US$59 billion for 2020. That is a 40 per cent drop relative to 2019 and a 53 per cent decrease relative to 2018, when aircraft delivery funding peaked industrywide at US$126 billion. Industry funding volume in 2020 was also down relative to the level seen a decade ago, when it was US$62 billion. This is, of course, reflective of fewer deliveries during the covid-19 pandemic. There are no concerns that there is not ample liquidity for aircraft finance requirements as we move into the post-pandemic period.

In addition, airlines have of course been seeking additional exceptional corporate funding during the pandemic, in many cases in substantial amounts, including state support. For example, in April 2020, a French state-backed loan of €4 billion was granted by a syndicate of six banks to Air France–KLM. The French state guaranteed this loan up to 90 per cent. In addition, there was a direct shareholder’s loan of €3 billion from the French state. In February 2021, EasyJet achieved a double first, becoming the first airline to secure a loan through UK Export Finance’s Export Development Guarantee (EDG) scheme while the transaction also marked the first secured EDG facility to reach financial close. Valued at US$1.87 billion, the financing was underwritten by a syndicate of 10 banks, allowing EasyJet to refinance existing commercial debt and further boost liquidity. The loan was secured against a portion of its existing fleet of aircraft.

Financing products

Commercial banks, lessors and ECAs account for the majority of aircraft financing, and the use of capital markets has expanded considerably over the past decade. Following the credit crunch of 2008, the availability of traditional debt was severely constrained, but has seen a resurgence in recent years. To fill the subsequent funding gap, the ECAs (and, indeed, the manufacturers themselves) stepped up to the plate, but are now not needed as much. It is expected that it is the areas of capital markets and operating leasing that will see the most financing activity in terms of volume. The emergence of a strong new insurance market since 2017 has enhanced the diversity of financing options.

Taking the last normal year as a benchmark, according to Boeing, US$143 billion worth of finance for the purchase of aircraft in 2019 was required and was broken down as follows:

  • bank debt: 34 per cent;
  • capital markets: 30 per cent;
  • cash: 26 per cent;
  • export credit: 7 per cent; and
  • insurance: 3 per cent.

In this overview, we shall look at:

  • capital markets;
  • ECA financing;
  • commercial bank finance;
  • leasing; and
  • insurance.

Capital markets

Capital markets for aviation were off to a slower start early in the covid-19 pandemic, but they ended up coming into play in a very meaningful way. Issuances during the pandemic have seen more equity, convertible bonds and secured issuances than in a typical year. In 2020, the capital markets for aviation began to loosen up around early June and finished the year with volumes over 70 per cent ahead of 2019. Airfinance Journal estimates that US$142 billion of capital markets transactions closed in 2020. The collateral for secured bonds includes aircraft, engines, spare parts, slots, gates and loyalty programmes. The substantial uptick in sales and leasebacks has led to the development of the modern lessor enhanced equipment trust certificate (EETC) for aircraft leasing companies.  

Since 2016, lessors have been the largest issuer group compared to US and non-US airlines. However, this changed during the pandemic: in 2020, US airlines were the biggest issuers, followed by non-US airlines and lessors sequentially. In 2020, lessors raised US$16 billion in the unsecured bond market and, in 2021, raised over US$40 billion (including AerCap’s record US$21 billion issuance in October 2021 to fund the acquisition of the GE Capital Aviation Services business (GECAS)). Some of the biggest deals in history occurred during the pandemic, including the US$6.5 billion United loyalty programme financing in September 2020 and the US$9 billion Delta loyalty programme financing in the same month. The Delta deal marked the largest airline financing in history at time of closing.


An EETC is a publicly (but sometimes privately) issued rated security that relies on the credit of a single issuer and is secured by aircraft. While EETCs have traditionally been issued by US airlines, because of the availability of section 1110 of the US Bankruptcy Code, the product should now be increasingly available to airlines in countries that have adopted the Cape Town ‘Alternative A’ insolvency regime (eg, recently, Air Canada, British Airways and Virgin Australia).

EETCs are well suited to repeat issuances and carriers with established histories in the market can achieve very competitive rates. One of the key developments of recent years has been a growing cadre of non-US investors in EETCs. According to Boeing’s annual finance report, the growth in international EETC investors over the past several years is being driven by ‘healthy airline fundamentals, a broader understanding of the strength of commercial aircraft as an asset class, and active outreach efforts by investment banks and manufacturers’. As global EETC issuances gain further traction – and as non-US investors learn more about the aviation industry and the value of commercial aircraft – it is Boeing’s expectation that this positive trend will continue.

Asset-backed securities

Asset-backed securities (ABS) are issued in the private and capital markets, and secured by aircraft or lease rental cash flows. The predominant forms of ABS are transactions structured as collateralised loan obligations and collateralised debt obligations (EETCs are not characterised as ABS as they are reliant on the single issuer). The newly reopened ABS market provides an efficient means for lessors to sell off portions of their portfolios. The volume of ABS deals has increased steadily over the past few years. Increased investor sophistication, strong fundamentals and a lack of alternatives that provide good returns are driving the changes.

ECA financing

ECA-guaranteed loan products covered only about 7 per cent of new aircraft financings in 2019, substantially down from previous years. This is a financing supported by an ECA, of which the primary ones are:

  • Brazil: Brazilian Development Bank – supports Embraer;
  • Canada: Export Development Canada – supports Bombardier;
  • France: Coface – supports Airbus and ATR;
  • Germany: Euler Hermes – supports Airbus;
  • United Kingdom: UK Export Finance – supports Airbus and Rolls-Royce; and
  • United States: Export–Import Bank of the United States (US EX-IM) – supports Boeing, CFM, IAE, GE and Pratt & Whitney.

ECA financings are currently regulated by the Organisation for Economic Co-operation and Development (OECD) Aircraft Sector Understanding (ASU) arrangements; however, not all aircraft manufacturing countries are subject to the ASU rules (eg, China, Japan and Russia), which will be of increasing significance as these countries develop new aircraft types and products.

Having been of critical importance when filling the funding gap during the downturn in availability of traditional debt finance during the liquidity crisis and associated recession, ECA financing is likely to reduce over time in the light of the ASU’s requirements to impose market-level fees and rates. The 2011 ASU requires each ECA to classify its borrowers into one of eight risk categories, based on these senior unsecured credit ratings. The new ASU thereby raises the export credit premium for all buyers and borrowers.

Both Airbus and Boeing lacked access to their domestic ECAS for a lengthy period since 2017 for well-publicised reasons; however, any downturn should likely see renewed usage. According to Boeing, ECAs ‘remain an integral part of the financing ecosystem, injecting critical support in the event of market distress and covering situations where commercial financing is not available’. By US dollar volume, ECAs accounted for 2.6 per cent of Boeing deliveries in 2020, up from 0.4 per cent in 2019. The year 2020 saw the first deal supported by US EX-IM close since the bank had its charter reinstated for Turkish Airlines. Overall, ECA pipelines grew notably during the second half of 2020, with continued growth for export credit volumes in 2021. However, no one anticipates ECA financing levels getting back to anywhere near those seen in the financial crisis in 2008.


A new market development is the provision of insurance risk capital to aircraft finance. AFIC is a ground-breaking collaboration between Marsh LLC and a panel of highly rated global insurance companies to offer a new way to protect the financing of commercial aircraft purchases. Developed with Boeing and available exclusively through Marsh LLC, AFIC’s aircraft non-payment insurance protects banks or institutional investors from payment default. Marsh LLC launched the AFIC product in June 2017 with the consortium of insurers made up of Allianz, Fidelis, AXIS Capital and Sompo International, each of which has a credit rating of at least A according to Standard & Poor’s. AFIC has financed more than 80 aircraft since 2017, supporting over US$6 billion in financing.

For Airbus aircraft, Marsh SAS – a different team from Marsh LLC with separate reporting lines and appropriate Chinese wall barriers in place – has been working as an exclusive broker with Airbus, certain lenders and a pool of highly rated insurers to launch Balthazar. Balthazar is a non-payment insurance product for lenders and investors to fund new Airbus aircraft under which insurers will typically provide 100 per cent cover for up to 12 years. The first Balthazar transaction was the financing of an Airbus A321 for Turkish Airlines in February 2019.

The basic concept of non-payment insurance (NPI) is similar to export credit support except that it provides an insurance policy to lenders, rather than a guarantee. However, there are key differences: insurance law and guarantee law, a different bank capital regulatory analysis, and a risk analysis based on a corporate credit rating of the insurance companies rather than sovereign risk applies. Further, with NPI, the OECD restrictions on the percentage of national content in the aircraft are not relevant. Crucially, the informal home country rule for export credit is also not applicable, meaning that NPI can also be used by airlines in the United States, the United Kingdom, Germany and France.

Commercial bank finance

Commercial banks funded approximately 36 per cent of new aircraft deliveries in 2020, demonstrating sustained recovery from the lean years of the credit crunch. This was up from 20 per cent in 2019. According to Airfinance Journal, this category accounted for almost US$167 billion in financing last year, up from US$75 billion in 2019. The traditional western European (mainly French and German) banks and US banks are now joined by new market entrants in Australia, Japan, the Middle East and (in the case of financing Chinese airlines) China. China and Japan now account for 40 per cent of all bank debt for new aircraft deliveries.

Early in the covid-19 pandemic, commercial banks shored up the aviation industry’s need for liquidity. Commercial banks funded large facility drawdowns and provided new facilities and new loans to airlines, lessors and original equipment manufacturers. However, according to Boeing, commercial banks quickly faced aviation sector risk management limits and pulled back from new lending. As the pandemic continued, long-term delivery debt became one of the scarcest forms of financing in 2020. Banks that did continue to fund became very selective, funding only top-tier airlines, strong strategic relationships or domestic airlines viewed as national champions.

Structured leases

As well as traditional mortgage finance, more specialised structured finance lease products remain available to a greater or lesser extent, principally:

  • French lease: a cross-border tax lease where the lessor is domiciled in France, which is traditionally the preserve of the French commercial banks; and
  • Japanese operating lease (JOL) and JOL with a call option (JOLCO): Japanese investors put up equity and the balance of funding is provided by a bank loan and, as the debt must be booked in Japan to avoid withholding tax, this product has historically been the preserve of Japanese banks.

Prior to the pandemic, JOL and JOLCO markets were evolving at a rapid pace. The year 2019 saw the closing of the first credit-enhanced-supported JOLCO, and innovative ECA- and EETC-supported JOLCOs. The year 2019 saw almost 110 deals closed, representing about two-thirds of the structured lease market. However, according to Boeing, the tax equity market – particularly JOLCOs – effectively shut down in covid-19-dominated 2020. Airlines continued to be preoccupied with securing bailouts rather than structuring new aircraft deals and the number of debt providers contracted significantly. That said, 55 deals closed in the structured lease market in 2020 and a strong recovery is underway, in line with Japanese economic recovery and the bounceback of the aviation industry. More debt providers will return to the market. The equity market never really left despite some investor hesitancy and a significant number of equity-only JOLCOs were closed during the pandemic.

Operating leases

Activity in the operating lease sector restored momentum lost in the aircraft finance sector during the liquidity crisis as well as during the subsequent downturn in the finance sector and in the wider economy, but was hit by the covid-19 pandemic and was not very active in 2020 (the number of transactions halved compared to 2019). About 41 per cent of new aircraft deliveries are currently facilitated by way of operating leases and most analysts suggest that this proportion will rise to 50 per cent within the next few years. At the end of 2018, Boeing Capital noted that the overall share of the industry-wide leased fleet had grown past the 40 per cent mark to 41 per cent, taking several years to move one percentage point. By the end of 2020, the industry-wide leased fleet climbed three percentage points to 46 per cent. There are currently about 11,000 aircraft leased by the top 50 lessors, with a collective value of US$293 billion.

In addition to traditional investors in aircraft equity – such as operating leasing companies – hedge and private equity funds have recently become increasingly significant in this market. The ABS market remains important for lessors to finance portfolios of aircraft. According to Boeing, the sources of funding for lessors are currently as follows (for Boeing deliveries):

  • bank debt: 22 per cent;
  • capital markets: 48 per cent;
  • cash: 24 per cent;
  • export credit: 2 per cent; and
  • insurance: 4 per cent.

The number of aircraft leasing companies has grown over the past decade and 100 new names have entered the commercial aircraft operating lease sector, especially in Asia and the Middle East, where traffic has (prior to the pandemic) been booming and plenty of capital is available. There are now over 60 leasing companies in China. Of the top 25 aircraft lessors in the world in recent years, fewer than half were operating only a decade ago. Some are very recently established, such as ICBC Leasing and CDB Leasing in China or DAE Aerospace in Dubai. Others are set up by serial entrepreneurs, such as Air Lease Corporation and Avolon (now owned by HNA Group). Some airlines with large order books have also set up leasing companies, such as Indonesia’s Lion Group, which has already leased out 737 Next Gens into the Chinese market. Regional concentration is continuing – for example, two-thirds of the Chinese lessor fleet is leased by Chinese carriers (the majority of Bohai Leasing’s aircraft are leased to carriers owned by HNA Group, such as Hainan Airlines). The balance of lessor ownership continues to move eastwards following a natural expansion of the growth in commercial aviation in East Asian emerging markets, with lessors in the Asia-Pacific region now owning or managing 25 per cent of the global fleet.

A trend has been consolidation amongst lessors, with 2021 ending in spectacular fashion in this context. In November 2021, AerCap announced today that it had completed its acquisition of GECAS from General Electric. The acquisition positions AerCap as the worldwide industry leader across all areas of aviation leasing: aircraft, engines and (through Milestone) helicopters. The combined company serves approximately 300 customers around the world and will be the largest customer of Airbus and Boeing. AerCap now has a portfolio of over 2,000 aircraft, over 900 engines and over 300 helicopters, as well as an order book of approximately 450 aircraft. ‘Completion of this transaction represents an important milestone for AerCap that will generate benefits for our customers, partners, employees and investors for many years to come,’ says Aengus Kelly, CEO of AerCap. ‘In GECAS, AerCap has acquired the right business, for the right price, at the right time, as air travel continues to recover from the pandemic and demand for aircraft leasing continues to accelerate.’ Under the terms of the transaction agreement, General Electric received 111.5 million newly issued AerCap shares, approximately US$23 billion in cash and US$1 billion in AerCap notes. General Electric now owns approximately 46 per cent of AerCap’s outstanding shares.

Sale and leaseback transactions are being used more and more by airlines owing to competitive pricing. According to Peter Chung, CEO at CDB Aviation Lease Finance, airlines have over-ordered with the intent of flipping aircraft to lessors: by placing bulk orders, airlines can order aircraft for lower prices than leasing companies and can then sell these aircraft to lessors in securities lending and borrowing transactions that value the aircraft at more than the capital cost, using the difference for working capital purposes. ‘We will come to the point where many lessors are providing working capital to sustain an airline.’ According to Boeing, the number of used single-aisle sale and leaseback transactions in 2020 was more than double the number of transactions in 2019, and the used widebody sale and leaseback transaction count was up 40 per cent over 2019 levels. Lessors have certainly used their balance sheets during the pandemic to help airlines bolster liquidity with sale and leaseback transactions. Also, pre-delivery payment finance is being increasingly offered by lessors.

Early in the covid-19 pandemic, lessors’ first priority was to shore up their own liquidity as they faced stressed funding markets. At the same time, they were being asked to grant rent deferrals and to navigate airline bankruptcies. Lessors generally continued to have access to capital, but it was very expensive. Once the capital markets began to open up for aviation, lessors with access were able to turn to the capital markets for lower-cost capital. Leasing companies are increasingly securing cheap debt in large-scale facilities. There is a trend for warehouse facilities as lessors build up aircraft portfolios to refinance into the ABS market. However, rising interest rates (which appear to be an inevitable part of the post-pandemic world, as a consequence of rising inflation) could cause difficulties for lessors says Robert Korn, president of Carlyle Aviation Group: ‘A lessor who is rolling in commercial paper and has a lot of fixed rate leases is going to be hit quite hard.’

One of the world's largest aircraft leasing companies, Nordic Aviation Capital (NAC), filed for Chapter 11 bankruptcy in December 2021 to implement a financial restructuring plan. Under the terms of its restructuring support agreement, NAC’s debt obligations will be comprehensively restructured – including the conversion of a substantial amount of its debt to equity – with an infusion of US$537 million in additional capital through a US$337 million new equity rights offering and a new US$200 million revolving credit facility. Furthermore, NAC has obtained an additional US$170 million debtor in possession financing facility from its existing creditors to help fund operations during the Chapter 11 process. NAC is the aviation industry’s leading regional aircraft lessor, serving almost 70 airlines in approximately 45 countries with a fleet of 475 aircraft.

Force majeure and frustration

There have been a number of interesting cases in the English courts relating to operating leasing during the covid-19 pandemic, following lessee arguments that the pandemic has been either a force majeure event or has frustrated lease contracts. The English law doctrine of frustration relieves a party from its contractual obligations where performance of the literal terms of a contract has been rendered so radically different from those contemplated as a result of extraneous circumstances that it would be unjust to insist on compliance with those terms. These cases have emphasised that risk allocation under aircraft leases is very much weighted (indeed, almost entirely weighted) in favour of the lessor and that this risk allocation will be supported by the English courts.

For example, in Salam Air SOAC v Latam Airlines Group, the court determined that Salam Air’s case that its lease had been frustrated was ‘highly improbable’. The court noted that it would be ‘challenging’ for any lessee under a ‘hell or high water’ aircraft lease to establish frustration.

In Wilmington Trust SP Services (Dublin) Ltd & ors v SpiceJet Ltd, the same argument failed and Goshawk obtained summary judgment in respect of rent payments. The court indicated that, if a ban on flying imposed by the Indian Directorate General of Civil Aviation had been imposed for a longer period (for example, three years in respect of a 10-year lease), then it could potentially amount to frustration. Interestingly, the court also ruled that the judgment should be stayed for a period of time for alternative dispute resolution and mediation, on the grounds that forcing the airline to pay could result in SpiceJet’s insolvency.

Cape Town Convention

One of the most significant legal developments in the past 15 years has been the introduction of the Cape Town Convention, which established a system of recognising international rights in aircraft and certain aviation assets. It came into force in 2006 and, depending on whether a particular jurisdiction has ratified the relevant sections and absorbed the principle into local law, it gives genuine rights and the ability to give effective notice to third parties of ownership and security interests. This has, in certain circumstances, provided encouragement for prospective lessors and financiers considering the financing of aircraft and engines in jurisdictions that may hitherto have been viewed as difficult. An immense debt is owed to the Aviation Working Group and to all those who have worked on the Cape Town Convention for over almost two decades.

The Cape Town Convention has been ratified by 83 contracting states and the Aircraft Protocol has been ratified by 80 contracting states (the Cape Town Convention also applies to rolling stock, satellites and mining equipment, and its applicability to aviation is governed by ratification of the Aircraft Protocol). The Cape Town Convention will become increasingly important in international aviation finance as it gains more universal coverage. It is highly likely that, within the next few years, the Cape Town Convention will be the standard reference point for the creation, recognition and enforcement of aircraft security interests in the vast majority of countries with any relevance to aviation (which, to a greater or lesser extent, means all countries in the world).

The OECD Aircraft Sector Understanding stipulates that ASU participants shall charge no less than the applicable minimum premium rate (MPR) to account for credit risk when providing officially supported export credit. A premium is charged in addition to the interest rate, as it is meant to cover the risk of non-repayment of the export credits. Appendix II of the ASU stipulates that members of the Cape Town List may benefit from a reduction of the MPRs, if these countries have made appropriate qualifying declarations.

Aviation Working Group’s global electronic aircraft trading system

Trading of aircraft leases between lessors is a very significant component of the leasing market, but lease novations are frustrating for lessees and lessors alike, often involving protracted negotiations and a seemingly disproportionate amount of time and cost. To address this, in May 2018, the Aviation Working Group announced plans for a global electronic aircraft trading system (GATS) based on blockchain technology. Under GATS, aircraft will be owned by trusts in the United States, Ireland or Singapore. Instead of using lease novations and selling legal title to aircraft, the beneficial interests in those aircraft trusts will be traded electronically. Any restrictions on lease transfer will be negotiated and agreed in the lease in the normal course no differently from the way in which they are today. GATS is not seeking to interfere with those negotiations. GATS uses the term ‘advance requirements’ to refer to such restrictions and will allow such advance requirements to be uploaded to the GATS platform (either immediately prior to each transfer or at the commencement of the lease) should the lessor and lessee agree to do so in the terms of the lease. Once uploaded, and in lieu of the lessee needing to sign an acknowledgement or novation agreement (GATS provides solutions for avoiding this), the lessee will need to confirm electronically through the GATS platform that each such advance requirement has been satisfied or waived before the transfer is permitted to take effect. GATS went live in June 2020.

Business jets

Business aviation has been booming. There is a possibility that business aviation has fundamentally changed, but recent increases in demand could also fall away upon airline recovery. There are signs that high net worth individuals and companies will want to continue to fly privately for safety reasons when travel restrictions are lifted but, as we all know, there is a big difference between wanting something and being able to afford it. Business aviation demand typically follow the economic cycle: we have never seen business aviation demand return quickly when businesses are struggling.

The broker Jetcraft expects 12,261 pre-owned transactions worth US$57 billion in the next five years. There will be over 600 new aircraft delivered every year.

Prior to the liquidity crisis, manufacturers ramped up production only to be hit hard in 2008. This time, manufacturers appear to be planning for continued expansion, but more cautiously. Bombardier delivered 120 jets in 2021 and could deliver as many as 144 in 2022. It sold 1.5 aircraft for every one it delivered, ending 2021 with a backlog up from US$1.5 billion to US$12.2 billion. Gulfstream delivered 119 aircraft in 2021 and is expecting to deliver 123 aircraft in 2022, 148 aircraft in 2023 and 170 aircraft in 2024. Textron Aviation ended 2021 with a US$4.1 billion backlog, which works out at about 12 months of wait time for customers.

Business jet finance is a niche field in which private wealth banks (eg, Credit Suisse, UBS, Bank of America, JPMorgan and Citibank) and specialist asset financiers (such as Global Jet Capital) tend to dominate, though export credit and now AFIC insurance are also available.

On the finance side, an interesting development was that, in February 2022, Credit Suisse closed an innovative transaction that transferred risk from its private bank’s business jet and superyacht portfolios. As reported by Corporate Jet Investor, the US$2 billion synthetic securitisation frees up risk-weighted assets, enhancing the economic return of the underlying portfolio. Synthetic securitisations – which typically use a mixture of credit default swaps and bonds – allow banks to transfer the risk from loans and leases. This allows Credit Suisse to reinvest risk capacity into more lending. Credit Suisse says that the transaction offers competitive terms to investors while increasing the capital velocity of the bank by a significant amount. Although business jet securitisations are regularly issued by Stonebriar Commercial Finance and Global Jet Capital, bankers think that this is the first time that yacht or corporate jet debt has been securitised by a private bank. Because the transaction is synthetic, Credit Suisse did not sell the loans and leases, just the default risk.

Structured Credit Investor reports that there is an US$80 million first loss tranche and a US$10 million second loss tranche. These pay much higher interest than the interest on the underlying portfolio –the first loss tranche offers interest of 11.5 per cent over the secured overnight financing rate (SOFR) – but are the first to stop paying if there are any losses and therefore carry most of the economic risk. This interest equates to less than 50 basis points on the underlying portfolio, which shows the high quality of the underlying loans. The super senior tranche, on top of the first loss tranche and second loss tranche, is retained by Credit Suisse. The junior notes are listed on the International Stock Exchange.

Green finance

A growing portion of financing comes with sustainability requirements. Green bonds are already being used to finance fleet renewals and sustainable aviation fuel research. Financing new equipment with lower emissions is a key plank in most financiers’ environmental, social and governance (ESG) initiatives. This is a trend that will become very strong – if not dominant – in the post-covid-19 world as financiers are increasingly required to align with green initiatives and sustainability projects.

For example, in December 2019,  ATR delivered the first-ever green-financed aircraft to Swedish regional airline Braathens Regional Airlines (BRA). The aircraft is leased from Avation and is financed by Deutsche Bank. It is part of a new order for five ATR 72-600s, all purchased by Avation from ATR and leased to BRA. Vigeo Eiris, one of the world’s leading independent agencies that provides ESG ratings, expressed the opinion that the project of replacing ageing regional jets with new ATR 72-600 aircraft is aligned with the Green Loan Principles established by the Loan Market Association in 2018.  

LIBOR remediation

Finally, as if that was not enough going on during a pandemic, industry participants were engaged in the convoluted process of LIBOR remediation during 2021. This is the movement away (by the end of 2021) from using LIBOR as the interest rate benchmark for financings to using alternative risk-free benchmark rates, such as the SOFR and the sterling overnight interbank average rate.


An annual financing requirement of more than US$140 billion is a daunting target by any standard, but the aviation finance community has proved itself capable of meeting the challenge in the past and will no doubt do so again, especially with new entrant capital, albeit this time in the context of an unprecedented aviation industry-wide crisis. This is a robust, innovative and entrepreneurial part of the global finance community, working in a fast-changing sector, and can look forward with confidence to the next 20 years. ‘The reports of my death are greatly exaggerated,’ said Mark Twain in a cable from London to the press in the United States after his obituary had been mistakenly published. The aviation industry as a whole could send a similar cable today and its survival is, in many respects, thanks to the continued availability of aircraft finance and the confidence of the aircraft financing community in the sector’s rebound.

Each chapter of this book will examine the legal context within which the aviation finance community works across a variety of jurisdictions.