By Campbell Wilson
The last decade has seen India’s aviation sector on a steady upward path, recovering quickly from the impact of COVID-19 and returning to its growth runway. As the Hon’ble Prime Minister, Shri Narendra Modi said, India has evolved from a country exclusive to aviation to one that is inclusive of aviation. With the government’s commitment to the aviation sector, and the efforts of the industry, it is a matter of pride that India is today the third-largest domestic aviation market in the world and the fastest-growing aviation market with passenger traffic increasing at twice the global growth rate.
The growth journey is just beginning. With established carriers adding aircraft to their fleets, new carriers entering the market, and the aspirations of an expanding population eager to travel by air, the requirement for aircraft by 2040 is projected to be around 2,200 as against the present 700 in the country today. The demand is also expected to be higher for wide-bodied aircraft with the ratio of wide-bodied to narrow-bodied increasing to 1:4 from 1:9 currently.
While the government has successfully implemented a series of strategic initiatives to make air travel safe, affordable and accessible to all, there is one crucial step that could provide a major boost to the sector. This is the ratification of the Cape Town Convention, an international agreement that establishes a consistent legal framework for financing and leasing high-value mobile equipment, including aircraft, helicopters, and aircraft engines, aiming to create a secure environment for creditors. Specifically, it allows creditors to register their interests in aircraft assets on an international registry, enabling them to recover their investments swiftly in the event of defaults. Although India acceded to this treaty in 2008, it has yet to be ratified in Parliament.
With the Cabinet now having cleared the new Protection and Enforcement of Interests in Aircraft Objects Bill, 2024 for approval by the Indian Parliament, India is on its way to have consistent regulations all across the country whenever and wherever planes are leased, financed, or repossessed. A smooth and transparent system for asset repossession would add to India’s reputation as an investor-friendly market and also bring in innovative financing options. In the long run, this will attract more investment into the sector, help airlines grow their fleet, and give them more flexibility to meet passenger demand.
In the absence of an act of Parliament that ratifies the Cape Town Convention, lessors and other creditors face significant risk if there’s no clear way to repossess the aircraft in which they have a financial interest in case of default. At present, the moratorium under India’s insolvency rules brings to a sudden halt any recovery efforts being made and also blocks lessors from repossessing aircraft for a significant period. By the time the lessors can assert their rights, the aircraft may have already lost value or become entangled in lengthy legal disputes. This has been seen in a few recent cases with the resultant scenario increasing the perception that India is a risky market for aircraft lessors.
Due to the uncertainty in India’s legal system regarding aircraft repossession, leasing companies often compensate for the risk by charging higher lease rentals. This results in more expensive operations for the airlines and ultimately constrains the industry’s potential for market-beating growth.
The Cape Town Convention addresses that risk by setting out rules that create legal certainty for these transactions. This in turn reduces the risk for lessors and financiers as they then have a smooth and transparent system for asset repossession in case of airline default and helps in bringing down the interest and cost of leasing planes. The airlines can then pass on the lower cost to the flying public in the form of more competitive ticket prices, helping to democratise access to flying as a mode of transport.
It is not as if the government has not made attempts to address these issues. India acceded to the Cape Town Convention and the Protocol in 2008, signifying its intent to uphold its principles. In the past, pending approval of Parliament, there have been efforts such as the Ministry of Civil Aviation making changes to the Aircraft Rules, 1937 to expedite the de-registration of planes when a lessor issues an irrevocable request. The Ministry of Corporate Affairs also notified the exemption of certain aircraft leasing transactions including agreements relating to aircraft, aircraft engines, airframes, and helicopters from the scope of the moratorium under the Insolvency and Bankruptcy Code (IBC).
While these initiatives were welcome, they do not provide the overall level of certainty and uniformity with international civil aviation protocols that a single, comprehensive legislative act would bring. Lessors have to navigate varied processes, which can be costly and time-consuming. Further, with potential intervention in courts at present, there could be different interpretation of the rules stretching out the bankruptcy proceedings.
As we work towards Indian aviation to lead internationally, we cannot ignore the importance of a well-defined legal framework. The ratification of the Cape Town Convention, once this new bill is enacted by Parliament, is more than a legal formality. It sets the stage for more resilient growth that will put India’s aviation sector on a global footing. It will reduce costs, improve competitiveness, attract fresh investments, and boost the confidence of lenders and lessors. Along with other reforms, it will ensure that Indian aviation becomes robust, competitive, and ready to soar to new heights!
The writer is CEO & MD, Air India.
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