The Road to Repossession: Airlines in Default of

The Road to Repossession: Airlines in Default of
Lease Contracts and the Role of banks
Lemonade from Lemons
The Tale of Four A340-311’s
Charles T. Cleaver - Cabot Aviation
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Where did it all start?
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Four 1992-93 A340-311 leaseholds acquired 2007
Each aircraft valued at $36 million
Two on lease to Virgin Atlantic till 3rd Quarter 2011
Acquisition financing with senior and junior debt plus equity
• Two moved from Virgin to Air Comet in January 2007
• One aircraft acquired on headlease/sublease structure
• Second aircraft with senior, junior debt and equity
Charles T. Cleaver - Cabot Aviation
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Post-Virgin Saga – Air Comet
Charles T. Cleaver - Cabot Aviation
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How it all Went Wrong
Air Comet absorbs bankrupt Air Madrid without infrastructure
Payment defaults (rent and reserves) begin immediately
These disrupt loan amortization and degrade aircraft assets
Lessors and lenders exposed to new investment to safeguard
the aircraft if repossession occurs
• Spain is difficult repo country; “arrest” elsewhere better
• Air Comet shuts down 2009. Aircraft returned not meeting
return conditions, rent deficiencies, and negative reserves
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Charles T. Cleaver - Cabot Aviation
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Death in Madrid – Msn 013
Charles T. Cleaver - Cabot Aviation
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Sad End of Airbus 340-311 msn 013
• Headlessor terminates lease blowing up Lessee’s investment
and income stream of post Air Comet lease part-out revenues
• Msn 013 is “dead” on airframe check
• All four engines fail boroscope inspection
• Headlessor stuck with parking fees and part-out costs
• $30 million write-off
Charles T. Cleaver - Cabot Aviation
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Msn 015’s Afghan Misadventure
Charles T. Cleaver - Cabot Aviation
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Frying Pan to the Fire - SAFI
• 2nd defaulted Air Comet A340 placed with Dubai-based SAFI
Airways, an Afghan start-up flying Kabul-Frankfurt 2010
• Extensive airframe check at LHT funded by lenders and msn
015 re-registered in Afghanistan. Formerly EASA-registered
• Load factors disappointing, German managers de-camp, and
EU blacklists all Afghan airlines due to poor DGAC oversight
• SAFI sought to return aircraft early with small penalty. Records
are an issue at first. Afghan Export Certificate of Airworthiness
generally viewed as worthless to FAA or EASA.
• Repo in Kabul impossible given government corruption but
peaceful return in France agreed
Charles T. Cleaver - Cabot Aviation
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Now what? What Else Could Go Wrong?
• 18 suspicious holes in forward fuselage not repaired per
Airbus Structural Repair Manual. Proper repairs uneconomic
• Senior lender forecloses blowing out junior lender and equity.
Rumored part-out value 30% of senior loan balance
Charles T. Cleaver - Cabot Aviation
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What about the Other Two?
Charles T. Cleaver - Cabot Aviation
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Re-lease Options for Old A340-311’s Scarce
• 19-year old A340 in 240 pax config of limited appeal; needs
300 seats if fuel disadvantage to be offset
• Market cannibalized by A330 and 777 – two vs. four engines
• Lessees likely in scary jurisdictions and/or weak credits or
start-ups facing major international competition
• Poor records, irregular payments, parts “robbing”, mechanics’
liens, and hostile repo environment are all risks. Any one of
these expose lessor and aircraft to huge risks of loss
• Lessors in these predicaments best be well-advised
• Cabot is helping write final chapter on these aircraft as we
speak. Stay tuned and thank you
Charles T. Cleaver - Cabot Aviation
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