Airlines to benefit from Cape Town Act

At a time when Indian airlines have placed orders for more than 1,000 aircraft with the aircraft manufacturers, the central government is planning to introduce in Parliament the Cape Town Convention protocol Act, which will help reduce the country's risk-profile among the lessors and provide airlines with access to lower aircraft lease rentals.

The civil aviation ministry has put out the draft Cape Town Convention Bill for public consultations, which also has a clause that would accord primacy to the provisions of the convention/ protocol in case of conflict with any other law.

The convention/ protocol provides for basic default remedies for a creditor such as de-registration and export of aircraft as part of speedy interim relief as well as a universally applicable legal regime in case of disputes. Implementing various measures under the protocol would help reduce the level of risk for the intending creditors or lessors. This would, in turn, lead to "reduction in the cost of aircraft financing/ leasing and eventually to a reduction in the cost of operation", the ministry said in a document posted on its website.

Reacting to the development, Australia-based aviation consultancy firm CAPA in a statement on social media said, " Plan by the minister of civil aviation to fully implement Cape Town Convention by introducing a Bill in parliament is a very positive & welcome development. This will reduce India's country risk-profile amongst lessors and provide airlines with access to lower aircraft lease rentals."

Analysts and industry insiders said that an Act of Parliament would provide greater confidence to intending creditors resulting in a reduction of the risk applicable to asset-based financing and leasing transactions. This is crucial because international financial institutions don't tend to give due weightage to accession to the Cape Town Convention/ Protocol by any country unless it is accompanied by an implementing legislation. An executive with a private airline said that it would help domestic airlines "in more than one ways, the benefits of which will finally trickle down to the end consumer".

The development comes at a time when policymakers in the government are toying with the idea of creating an aircraft leasing sector in the country. India, which is amongst the fastest growing aviation market in the world, has placed more than 1,000 aircraft valued at around $50 billion, which in unit terms is third only behind the US and China.

Importantly, the vast majority of these aircraft will be taken on lease from offshore lessors. Further, around 30 years from now, India's commercial airline fleet is expected to cross 5,000 aircraft, which will require a massive aviation eco-system including maintenance, crews, lessors, etc. thus prompting the government to think on those lines, the ministry sources reveal.

Devesh Agarwal, a Bengaluru-based aviation expert said that its high time India should create the right environment to help aircraft leasing industry take off in the country.

A recent study report published by the Market Research Future showed the aircraft leasing market is projected to grow at a rapid pace and gain further prominence during the forecast period (2016 – 2023). The market is projected to demonstrate an elevated growth by 2023, surpassing its previous growth records by posting a decent CAGR during the period 2016-2023. The global aircraft leasing market is expected to reach $62,221.8 million by 2023 at a CAGR of 4.75%.

In November 2001, the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on Matters Specific to Aircraft Equipment was adopted. The Organisation for Economic Cooperation and Development (OECD) has set a norm that said 10% discount would be provided towards the processing fee for a loan to acquire aircraft for airlines of any country that is party to the Cape Town Convention/ Protocol. This is subject to the condition that an implementing legislation has been passed by that country, the ministry said.

As per the ministry, there is a need for a separate legislation as certain provisions of the convention/ protocol that are in conflict with the provisions of some other laws. Such laws include the Civil Procedure Code, 2008, the Specific Relief Act, 1963, the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. "A separate legislation also appears necessary in view of the fact that the international financial institutions are not giving due weightage to accession to the Cape Town Convention/ Protocol by any country unless it is accompanied by an implementing legislation," it noted.

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$62,221mn – Global aircraft leasing market expected to reach by 2023

1,000 – aircraft Ordered by Indian airline companies are valued at around $50 billion

5,000 aircraft – India’s commercial airline fleet is expected to cross in next 30 years