KFA plane lessors miffed with govt, raise lease costs

New Delhi: India has no bankruptcy law to speak of and therefore lenders and Government departments resort to underhand tactics to recover their dues from large companies which go bankrupt.

The latest case where this has happened is Kingfisher Airlines. Eager to get their dues, airport operators and tax departments are twisting the knife into Kingfisher but there is a catch: instead of the airline, these people have ended up upsetting aircraft lessors. Aircraft lessors, or companies which lease out aircraft globally to airlines for a fee, have been suffering interminably in taking back their aircraft leased to Kingfisher.

[caption id=“attachment_677476” align=“alignleft” width=“380”] In fact, AAI went as far as barring lessors from taking possession of aircraft parked across airports. AFP[/caption]

Lessors are bitter with Indian authorities because even though Kingfisher stopped operations in October 2012 and has not operated a single flight since then, Indian airport operator Airports Authority of India (AAI), service tax and other Government departments have not helped lessors repossess planes.

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In fact, AAI went as far as barring lessors from taking possession of aircraft parked across airports such as Delhi and Mumbai, saying it was owed Rs 290 crore by Kingfisher and these aircraft were collateral against payment of dues by the airline. The tax authorities are also reluctant to let lessors repossess aircraft since this leaves them with precious little collateral to recover dues.

Aghast at this turn of events, some lessors have begun to either refuse leasing more aircraft to other Indian airlines or have raised the lease rentals exorbitantly.

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Still others have even begun asking for more advance rentals than ever before. Earlier, there were suggestions in some quarters that India’s tax authorities could introduce additional charges to lessors in order to reclaim some of the taxes owed by Kingfisher. This could be a double whammy for lessors, who are already accumulating monthly losses because they cannot commit on re-renting the aircraft to another customer. All in all, this is a potentially dangerous scenario for airlines which largely depend on a lease and buyback programme to operate aircraft fleet worldwide, as also in India.

World over, signatories to something called the Cape Town Convention (India is a signatory too) are bound to release aircraft to lessors. This means Indian authorities have been blatantly violating the Cape Town Convention in letting rogues like AAI and other departments to hold back aircraft which are the property of lessors.

Earlier this week, the Government earned itself some saving grace when aviation regulator DGCA allowed 17 Kingfisher aircraft to be deregistered, which means they can now be repossessed by the lessors. But this decision is still too little, too late and there could be other interested parties - like the service tax department which is owed huge sums by Kingfisher - which may eventually not permit the aircraft to be repossessed by lessors.

Civil Aviation Secretary K N Shrivastava had confirmed on Tuesday that 17 Kingfisher aircraft had been deregistered after consultations with all stakeholders but 12 others were not. “These 12 aircraft are part financed by Kingfisher itself and are shown on the airline’s books as assets. The service tax department has attached these aircraft……we need to settle this issue after talks with all concerned parties”.

He had also said that on six other aircraft of Kingfisher, there were no claims by lessors. To a question on how AAI will now recover its dues from Kingfisher, Shrivastava said “AAI cannot use these aircraft as an interim tool to get their dues. It will have to find other ways of recovery. We are signatories to the Cape Town Convention and cannot hold back aircraft”.

Aviation consultancy CAPA’s Kapil Kaul said it’s good that 17 aircraft were deregistered but “it doesn’t explain the rationale behind the delay. Why did it take 7-8 months to deregister these aircraft?” Kaul said, CAPA expects total compliance to the Cape Town Convention and there must be a clearly written CAR (Civil Aviation Requirement or rules which govern aviation in India) which allows for quick and decisive action on deregistration of aircraft as and when required. The Ministry of Civil Aviation has said it is in the process of framing this CAR but has not given any timeline.

In a report this morning, CAPA notes that lessors which have exposure to Kingfisher Airlines include International Lease Finance Corporation (ILFC), German Bank DVB, AWAS, BOC Aviation, Dubai Aerospace, Kf Turbo Leasing, TP Leasing (Cayman) and Turbo 72-500 Leasing. It says ILFC has managed to remove just one A321 aircraft after a Delhi High Court decision on March 15 in its favour. But ILFC still has five A320 aircraft parked at airports in India.

CAPA has quoted ILFC CEO Henri Courpron as saying “One of the hostages has been freed; we are worried about the others…..while the (other) aircraft have been de-registered, de-registration is only one of the steps you need to get the airplanes out of the country. There are other authorities in the country, like airports and tax authorities, who have an axe to grind against Kingfisher and we are being held hostage to this process.”

But DVB Bank may have something to cheer about if its aircraft are included in the 17 which were deregistered by DGCA on Tuesday. The Delhi HC is scheduled to hear DVB Bank’s lawsuit against the DGCA on April 8. Frustrated at Indian authorities’ attempts to prevent it from repossessing its own aircraft, DVB Bank had warned in February that India could be “shut out” of the global aircraft financing market if carriers such as Kingfisher failed to return aircraft they were unable to finance and the government fails to provide the conditions for suppliers to repatriate their assets.

DVB has around $450 million of direct and indirect financing to Air India, IndiGo and Jet Airways. After Kingfisher’s defaults, some lessors decided to discontinue financing to the Indian aviation market.