29th Annual Canadian Airline Investment Forum

We are pleased to inform you of the upcoming Canadian Airline Investment Forum taking place in Toronto from June 4–5, 2018. It is a great time to be a Canadian airline, and the future remains bright. To stay ahead in the evolving world of aviation finance, we invite you to join leaders in our industry and their advisers. If you would like more information about the 29th Annual Canadian Airline Investment Forum, please visit www.insightaircraft.com.

Canadian EETCs: Air Canada Continues to Be a Trailblazer!

Aviation & Aerospace Group Air Canada marked another first in enhanced equipment trust certificate (EETC) history when it closed the private offering of the world’s first EETC fully denominated in non-U.S. dollars. The ability to raise funds in Canadian dollars is a significant benefit to the Canadian airline, as it contributes to lowering the overall cost of debt and the risk profile of the company, according to Michael Rousseau, Air Canada’s executive vice-president and chief financial officer.

EETC 2018-1 closed in March 2018, and the proceeds from the private offering will be used to finance the acquisition of one new Boeing 787-9 aircraft and four new Boeing 737 MAX-8 aircraft, which are scheduled for delivery in April and May 2018. This historic offering has the following features:

• Class A and Class B certificates

• Full Cape Town Convention benefits on an unqualified basis

• A 3.93 per cent weighted average interest rate and an 18-month liquidity facility

This marked the second EETC offering Air Canada has closed in a fourmonth period. In December 2017, Air Canada closed EETC 2017-1 for four new Boeing 787-9 and nine new Boeing 737 MAX-8 aircraft. This USD EETC offering served as the template for the EETC 2018-1 private offering and featured Class AA, Class A and Class B certificates, with a weighted average interest rate of 3.422 per cent and an 18-month liquidity facility.

Since Air Canada closed Canada’s first EETC offering in 2013, the airline has closed five EETC issuances, raising approximately US$3-billion.

Members of the Blakes Aviation & Aerospace group represented the structuring agents and lead placement agents (Morgan Stanley & Co. LLC and TD Securities Inc.), and the liquidity provider (The TorontoDominion Bank), in the EETC 2018-1 private offering, and the joint structuring agents and lead bookrunners (Credit Suisse, Deutsche Bank Securities and Citigroup), and the liquidity provider (Natixis), for the EETC 2017-1 offering.

Drones: Out of Sight, Out of Mind 

Visual Line of Sight Operations 

Last summer, the federal government released draft regulations that proposed to modernize the regulation of unmanned aerial vehicles (UAV) operations within visual line-of-sight (VLOS). The proposed regulations would apply primarily to UAVs weighing more than 250 grams but less than 25 kilograms, and operated within VLOS. These regulations would introduce requirements for UAV users commensurate with the level of risk of a UAV operation, based on the weight of the UAV, the operating environment and the complexity of the operation. The proposed regulations would also set out the requirements in the areas of licensing, insurance, training and manufacturing, all based on the type of UAV.

The proposed regulations aim to address safety concerns, as well as the issue of regulatory predictability, to foster further development of the UAV industry and appropriately handle the increase in special flight operations certificate (SFOC) applications that result in an administrative burden for TCCA.

The regulations would include such safety requirements as minimum age to operate a UAV (at least 16 years old); passing a written knowledge test to demonstrate aeronautical knowledge in specific subject areas such as airspace classification and structure, effects of weather, etc.; and minimum and maximum altitude requirements. The regulations also aim to put procedures in place for emergencies, lost command and control link, fly-away contingencies, flight termination contingencies, and altimeter-setting, among other things. More importantly, the proposed regulations seek to create regulatory predictability as well, as the case-by-case approach of SFOC processing often leads to inconsistencies in issuance and procedures.

The proposed regulations are viewed as an important step in the maturation of Canada’s growing UAV industry focusing on operational services. As well, government agencies are increasingly interested in using UAVs for such things as law enforcement, disaster response, northern sovereignty, and so on. The growth in Canada’s UAV industry is driven by a number of global and domestic trends, including rapid technology advancement, the increasing availability of UAVs to the general public and a broad range of industry sectors in which UAVs could facilitate work tasks more effectively.

By introducing these proposed regulations, Transport Canada is proposing an approach that balances mitigating safety risks with the possible inconvenience for recreational UAV pilots to find an appropriate location to operate. While preventing an accident to a manned aircraft would be the greatest benefit economically, reducing the need for the SFOC process for operations where a UAV weighs less than 25 kilograms, and thereby reducing what has been an increased service standard for businesses to obtain permission to operate, would also prove to be economically beneficial. The reduced administrative burden is expected to increase the overall number of non-recreational (commercial) UAV operators in compliance with UAV regulations in general.

Beyond Visual Line-Of-Sight

While the proposed regulations are a welcome addition to Canada, they do not address the next regulatory hurdle: operating beyond visual line-of-sight (BVLOS). One of the main benefits of UAVs is that they can boldly go where no person has gone before (or wants to go!). Many of the business opportunities in Canada relate to package delivery, equipment inspections and monitoring of inclement wilderness. Unfortunately, all of these tasks require the UAV to be operated BVLOS.

There is hope on the horizon. Transport Canada has recently agreed to be a part of pilot projects this summer that involve emergency responders and select private companies operating BVLOS in order to gather safety information about such operations and help the government understand how to regulate such operations.

As always, Transport Canada’s primary concern is safety. While they recognize that BVLOS is the future, they will only allow such operations if they are confident that the technology is reliable and that the public is protected.

With Transport Canada so focused on drone operations, Canada is sure to be a leader in UAV operations for many years to come!

Air Transport Liberalization in Africa: A Promising Future 

With the commitment of 23 African states, on January 28, 2018, the African Union launched the single African air transport market (SAATM), otherwise coined as the “African Open Sky.” Such decision, which will be implemented by the African Civil Aviation Commission, constitutes a prime example of the current trend towards closer economic integration on the African continent. The objective is to dismantle existing bilateral air agreements between member states in order to open up Africa’s skies to African airlines, with a view to increasing air travel across the continent and promote a competitive market by permitting airlines from member states to fly freely between any other member states. The SAATM will, therefore, eventually evolve towards a common aviation area, thereby replicating the European Common Aviation Area, which allows airlines from member states to fly between any member states.

The liberalization of air transport in Africa has been a project in the making for almost 30 years. Back in 1988, a number of African states committed to the Yamoussoukro Declaration with a view to liberalizing Africa’s aviation sector, and such commitment was reiterated with the Yamoussoukro Decision in 1999 (Yamoussoukro Decision). Yet, there was little to no change in such sector of the African economy until recently. Today, the African air transport market is growing at a fast pace. However, it remains fragmented, with some regions relatively untapped, and air transport is inefficient compared to other regions of the world. While new routes have opened up, they remain convoluted, and African travellers must often detour to the Middle East or Europe in order to reach a destination on the African continent itself.

As a result, the announcement of the SAATM is a game changer. Open skies between the signatory member states of the SAATM are to be attained through the immediate implementation of the Yamoussoukro Decision. The group of member states that are committed to the SAATM includes some of the most important economic players on the African continent, such as Nigeria and Egypt, as well as countries with prominent air carriers, such as Ethiopia, Kenya and South Africa. These member states account for more than half of the continent’s population and over 70 per cent of the intraAfrican air traffic. Therefore, the recent announcement is a significant step in the direction towards the creation of a single, unified air market covering the entire African continent.

Once implemented, the SAATM will change the air transport market and the overall economy of the African continent in many ways:

1. It will provide African carriers with the opportunity to avoid market restrictions arising from the current bilateral air agreements, thereby making optimal use of the existing infrastructure

2. It will provide African carriers with improved connectivity with increased access to “flight freedoms” as defined under the Convention on International Civil Aviation of 1944 (known as the Chicago Convention), including the crucial fifth freedom rights that would allow scheduled flights by an African airline from one country to land and take off from a second country before continuing towards a third country (without having to return to the original country of the airline). Such fifth freedom rights have been overly absent in the African market to date, and the SAATM is expected to have an impact on the connectivity between numerous regions of the continent through new routes and destinations offered by African carriers. We should note that the lack of connectivity has been a recurrent problem that has benefited foreign airlines, accounting for close to 80 per cent of the air transport in Africa

3. By connecting markets, making prices more affordable,facilitating trade and simplifying leisure travel across the continent, a liberalized African air transport market is expected to boost economic growth in various regions of Africa Blake, Cassels & Graydon LLP The SAATM is in line with one of the main objectives of the African Union’s overall ambition to create an integrated economy on the African continent. The recent announcement of the signing of an agreement by 55 African countries to launch the African Continental Free Trade Area, making it one of the world’s largest free trade areas, is another sign of this ambition.

Although the implementation of the SAATM is likely to improve the competitiveness of African carriers against foreign competitors by providing new and easier intra-African routes, there is still a lot of work to do before African airlines can fly freely across the continent, mainly because more than half of the African states have yet to commit to air transport liberalization. We will continue to monitor any development regarding the liberalization of the air transport market in the region.

Passenger Rights and Foreign Ownership in Canada: An Update 

After the Minister of Transport presented the government’s strategy for the future of transportation in Canada, Transportation 2030, on November 3, 2016 (which we have covered in our previous newsletters), the industry has been eagerly waiting for the announced policy changes to be rolled out. And finally, the sausage is being made! Bill C-49, the Transportation Modernization Act, has gone through three readings in the House of Commons and had its second reading in the Senate on December 8, 2017.

In the latest development, the Senate Committee on Transport and Communications has presented certain amendments to the bill. As passed by the House of Commons, the bill would require the Canadian Transportation Agency to create an air passenger bill of rights that would force airlines to compensate passengers who are delayed on the tarmac for more than three hours. The amendment reduces this to 90 minutes. Another amendment would require Senate or House committees to regularly review and report to Parliament on the effectiveness of the air passenger bill of rights. The amended bill also preserves the ability of consumer rights advocates to bring public interest complaints. In arriving to these changes, the committee held 13 meetings to analyze the bill and heard from a number of experts and interest groups. No changes were made in respect of the new foreign ownership requirements summarized in our last newsletter.

So what’s next? There will be a third reading in the Senate to adopt the amended bill. Once the bill is adopted by the Senate, the House of Commons will also need to consider the Senate’s amendments and can either accept the amendments or reject them outright. We expect that the bill will become law prior to the end of 2018.