Summary: By 2035, India is expected to be a market of 442 million passengers. Notwithstanding these forecasts in recent weeks some Indian airlines have been in the headlines for all of the wrong reasons with reports of falling profits, cash flow concerns, and payment defaults.
India is often touted in aviation circles as a market with great promise. IATA’s recent 20-year air passenger forecast estimated that India will overtake the UK to become the third largest market with 278 million passengers in 2025.
Given the region’s promising future what is it that is having such an impact on the fortunes of Indian airlines? Commentators appear to universally agree that the most damaging factors affecting all players in the market are rising fuel rates, the weak rupee and unrealistically low fares. In addition airlines such as Jet Airways are said to be impacted by bloated costs, archaic processes and too varied a fleet. Although in the latter case, each of these factors are being addressed, as evidenced by the phasing out of certain aircraft and the introduction of new and more fuel efficient aircraft. These developments are a welcome change, but undoubtedly will take time to implement.
The question all of the above inevitably raises for suppliers, lessors and financiers with exposure to Indian airlines is how should they react in the face of such fortunes. Those who were exposed to the Kingfisher bankruptcy will understandably feel nervous about the prospect of any downturn in the aviation sector in India. It should be noted however that since that time a number of legal changes have been implemented, including, importantly, the recognition by the Indian courts and the DGCA of the application of the Capetown Treaty in India, and these changes should go some way to mitigating such fears. SpiceJet’s near collapse in 2014/2015 and its subsequent rescue also provides a contrasting example of how things can be turned around provided willing investors can be found. Given the promising long term forecasts for the Indian market it is understandable that industry participants would not want to be hasty in their decision making or to risk burning bridges in the long term.
What steps then should those suppliers, lessors and financiers adopting a “wait and see” approach be taking in the interim to preserve their positions? From a legal perspective we regard it as prudent for such parties to:
- In the event of any default, ensure robust reservation of rights letters are sent to the defaulting airline.
- Ensure that they have been given accurate and up to date information by the airline so that they are in a position to make informed decisions. Typically lease and financing documentation will have provisions which will require this information to be provided on request.
- Request assurances from the airlines that payments are being made to any third party creditor who might be entitled to a lien over the aircraft for unpaid invoices e.g. for maintenance work or navigation charges. Where the airline has provided authorisation for such information to be obtained directly from a third party this right should be exercised.
- Ensure that any security or credit support documentation have the necessary authorisations and Government approvals to ensure that they could be promptly enforced.
- Review supply, leasing and finance documentation so that they are clear on their rights and of any steps they may be bound to take upon becoming aware of defaults.
- Familiarise themselves with what processes and actions might need to be taken in India if any enforcement action was required. This will include not only understanding the legal formalities, time lines and documentation required but also the practicalities on the ground that may be required in repossessing an aircraft. Ramesh Vaidyanathan, the managing partner of Advaya Legal in Mumbai has noted that in an enforcement scenario the speed of reaction becomes extremely critical when multiple stakeholders are trying to access the same airline assets for the satisfaction of their claims. He has noted further that the order of priority under India’s recently enacted Insolvency and Bankruptcy Code and its overall impact in a potential default situation must also be carefully considered.
- Ensure they are aware of where all technical records and documentation are stored by the airline as they will need to be recovered with the aircraft.
By taking such steps those parties who are wanting to take time to see how the situation in India evolves can also ensure that they are best placed to act quickly should action be required.