Leasing and legal experts talk to Dominic Lalk about the challenges that remain when hoping to convince airlines that their leased aircraft should be moved onto the GATS ledger.
The Aviation Working Group (AWG), in 2020, launched the online platform for the Global Aircraft Trading System (GATS), enabling leasing companies to trade aircraft electronically by executing documents for the first time using digital signatures and migrating their existing owner trusts onto the GATS platform or by establishing new trusts directly on the platform.
AWG proclaims GATS reduces the burdens on lessees, lessors and financiers while also promoting aircraft equipment trading and financing in an efficient, secure and predictable manner.
The rights of lessees will be protected by prohibiting transfers unless agreed conditions in favour of the lessee have been satisfied or waived. GATS will further reinforce “no increased obligations” lease provisions in favour of lessees.
Watson Farley & Williams assisted AWG in developing the GATS standard form trust and security documentation and the e-terms, and initially acted as its single point of contact with Fexco, which developed and operates the platform.
Airfinance Journal queried that if it is so easy and so convenient, why are industry players not rushing to get all their aircraft onto GATS immediately? What is not being said? Why may some stakeholders deliberately opt out?
“Getting every interested party involved in an aircraft trade can be challenging. There’s not just the buyer and seller, you need to obviously consider the airline operator, too. Sometimes, there are lender interests to accommodate as well,” says Singapore-based Milbank partner Paul Ng.
“You’re right in that it’s not yet universally happening. In fact, on all the leases we’ve worked on since the platform went live, we haven’t seen one, or been asked to draft one, which is expressed to be a GATS lease - although many are structured through owner trustees so could be relatively easily transitioned down the line,” says Leo Fattorini, Singapore-based partner at Bird & Bird.
“Even some of the keenest lessor proponents of GATS don’t seem to be using them across the board. That’s not to say that they’re not being used, but I don’t believe they are prevalent in Asia.
As to why, I suspect it’s a factor of the market over the past 18 months. There have been fewer lease transactions (and transfers) as a result of the pandemic and on this basis, lessors perhaps don’t want to over-complicate deals (or slow things down) by bringing lessees up to speed on GATS,” says Fattorini.
He adds: “GATS is in many ways a good concept. It could be that things change as the market recovers – but the educational piece will still be needed. While lessors, financiers and their lawyers are aware of GATS, for many airlines themselves, it has possibly passed them by - and learning about it definitely isn’t a priority right now.”
Another Asia-based lawyer talks about airlines looking to take potential advantage of a situation in which they are being approached with a request to move their leased asset onto the GATS ledger.
“We have seen some bad behaviours on the airline side. Often airlines are unconvinced about GATS because they see it as extra work and potential trouble for them. A lot of airlines don’t like it when their leases are being transferred from one lessor to another lessor as lessors trade assets. There are various reasons for that, including reputational and lease management concerns,” says the aviation legal expert.
“For example, if your aircraft is being traded from a large tier-one lessor to a small player with just a handful of aircraft, then some operators may question the new lessor’s capabilities. The way they might look at it is that the original lessor had 80 people doing client management, but the new owner only has 10 people involved.
So, they may feel like they are receiving a downgrade and it is not uncommon that they then demand certain concessions on their leases. In short, they gain bargaining power and some lessees have used aircraft transfers between owners, including requests to move the asset onto GATS, to reshape their lease deals or demand sizeable transfer fees compensating them for their time and extra work. We are talking about six-digit ‘fees’ for their extra time,” adds the legal expert based in Hong Kong.
“It is true that lessees might push back. Many will not be used to the concept of trusts in their jurisdiction, although this hasn’t tended to hinder lessors leasing through them. Others have tax concerns, and there’s also the issue of the lessee having to effectively sign off on the GATS platform that they agree they will suffer no additional obligations or reduced rights as a result of a GATS beneficial owner transfer,” says Bird & Bird’s Fattorini.
“Once they’ve done this, they might perceive that they lose the right, which they believe they have in a typical non-GATS transfer, to come back to the transferring parties if something, for example, a tax crops up down the line. And some lessees try to use the opportunity of a transfer to improve the terms of their leases. Although the documentation doesn’t permit this, it does happen, and GATS would put a stop to it,” adds Fattorini.
Other experts warn of “resistance” they have observed in certain jurisdictions about moving assets onto GATS, in Russia, India and China, in particular, potentially because of perceived confidentiality and privacy concerns.
No official statistics on the take-up of the GATS ledger has been provided by AWG. Notable transactions recorded by Airfinance Journal include GECAS migrating a portfolio of 40 aircraft comprising a mix of Airbus A320 and A321 units along with Boeing 737 Max and 787-9 aircraft onto GATS, while BOC Aviation and SMBC Aviation Capital added A321neos on lease to Scoot and Air Busan to the digital ledger.
“We have worked on quite a number of aircraft which have been enrolled into the GATS system, but a mass migration onto the GATS platform will take time,” says Milbank’s Ng. “As with most things, there is always some inertia adopting a new system and Covid has slowed the roll out to some extent.”