As the aviation leasing industry matures, the trading and financing of aircraft portfolios subject to existing leases is a more frequent occurrence. The growth in portfolio sales has led to increased time and cost being spent by airlines, lessors and financiers in negotiating and re-negotiating lease terms and conditions and the re-registration of the change of ownership associated with these trades.
The Aviation Working Group (AWG) in recognition of the inefficiencies inherent in this process has developed a new voluntary electronic e-ledger system called the Global Aircraft Trading System (GATS) which proposes to revolutionise current practices by allowing the electronic trading of aircraft in an efficient, secure and predictable manner.
The GATS e-platform is proposed to go live on 31 March 2020 and there will be a ‘simulated transaction period’ where interested parties can become familiar with the new digital platform.
The basic premise of GATS is to build upon the existing practice of holding aircraft equipment in owner trust structures. Trading and e-trading occurs through the sale of the beneficial ownership of the trust assets. In other words, while the legal title to the aircraft asset remains and continues to be held in trust by the identified and continuing legal title holder, the aircraft and its related lease can be traded by transferring the beneficial interest in the trust.
The AWG has provided draft GATS trust instruments in jurisdictions which frequently use and recognise trusts such as Ireland and Singapore and the States of Delaware and Utah, USA.
The use of trusts allows for the economic and beneficial ownership of the aircraft or aircraft equipment to be transferred from the existing beneficial owner to a new beneficial owner, without impacting the contractual rights, remedies and protections agreed in the underlying lease between the lessor and the airline lessee. The professional trustee holds the bare legal title to the aircraft both before and after the transfer, removing the need to create a novation or to assign the lease agreement as a result of the beneficial interest transfer.
Aim of GATS
The aim of GATS is to simplify and facilitate the trading of aircraft equipment (and in particular, leased aircraft) by streamlining and standardising the current novation process.
GATS also aims to increase confidence and transparency in the aircraft trading market and to protect contract parties by creating a secure, live and searchable register which, together with the International Registry, shall display details of ownership, lease interests and security interests in such aircraft.
The GATS platform, operated by Fexco, will be fully digital, employing the use of e-signatures and e-delivery of documents. While GATS has been created with a strong focus on aircraft lessors in mind, there are measures designed to protect the rights of lessees, investors and airlines. GATS is proposed to strengthen the principle that a lessee’s contractual obligations cannot be increased as a result of aircraft equipment trading. GATS does this by enabling both a transfer of the beneficial interest and the creation of a security interest in a GATS trust to take effect without changing the contractual provisions of the lease agreement. With the consent and agreement of all parties, technical amendments can be effected by a notification mechanism. Any agreed requirements in the lease to be met prior to a transfer of an interest in the aircraft equipment held in a GATS trust can be added to the GATS platform. The GATS system will not permit the beneficial interest in such GATS trust to be transferred unless each of the agreed requirements has been marked satisfied by the lessee.
To further increase the efficiency of the process, GATS features standard forms of transfer documents that are executed electronically, which will allow the elimination of practices such as obtaining new IDERAs to reflect changes in ownership or security interest. However GATS will not standardise leasing documents as these will continue to be negotiated and agreed between lessors and lessees.
The AWG guidance materials for GATS contain a template provision that may be included in lease agreements which will assist any future novation’s addition to the GATS system. This provision, that may be modified, includes lessee protections, a ‘no increased obligations’ clause and permits advance requirements. The lessee would be required to electronically confirm that the advance requirements have been satisfied.
Issues / considerations
Some issues still remain for GATS before it becomes operational on a global scale. Trusts are not a universally accepted legal concept. Not all jurisdictions are familiar with trust structures and some jurisdictions do not recognise the legal concept of a trust. This may require additional training and information for the lessee and their local regulators at the stage of lease negotiation.
Tax considerations are a usual feature of most transactions involving the sale, purchase and leasing of aircraft. However, in addition and upon the use of GATS, there are likely to be further tax issues to consider for the exiting beneficial owner assigning the trust assets, the new beneficial owner acquiring the trust assets, the continuing owner trustee and the lessee. Taxes such as the withholding tax and corporation tax treatment for the parties and the transactions should be analysed.
While it is still unclear as to the overall level of participation and engagement by lessors, lessees and financiers in the GATS system in 2020, the early signs are promising.
It is proposed that the GATS system will officially go live by the end of March 2020 and there already has been recent activity. In late 2019, SMBC Aviation Capital was the first aircraft leasing company to sign a lease through GATS and have also signalled their desire to continue to implement the process in the future. GATS support from the key industry players and and the engagement by AWG members will be vital to its success. If airlines embrace and accept the GATS platform in new leases, it should reduce the disruption associated with aircraft trading and lease novations. GATS can be seen as the start of the process of digitisation of the industry with more anticipated projects by AWG to follow.
For more information on how the introduction of GATS could potentially impact your business, contact a member of our Aviation & International Asset Finance team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.