Will Aircraft Leasing Companies Be Able To Repossess Their Aircraft in India?

By Roopesh Jha

India’s aviation sector has been on a meteoric rise over the past decade, fuelled by increasing demand for affordable air travel, government initiatives like UDAN (Ude Desh ka Aam Naagrik), a scheme which was launched in October 2016, and the country’s growing economy. However, this growth is largely underpinned by aircraft leasing, as airlines avoid the capital-intensive process of purchasing planes outright. Currently, over 80% of commercial aircraft operated by Indian airlines are leased, making leasing companies vital stakeholders in this sector.

This dependence on leasing raises a critical question: “Can leasing companies repossess their aircraft in the event of a lessee’s default in India?” The Cape Town Convention (CTC) and its Aircraft Protocol, adopted by India in 2008, provide an international legal framework to secure lessor rights. Yet, the convention’s implementation in India has faced significant hurdles, from conflicting domestic laws to operational inefficiencies. This article explores the legal, regulatory, and practical dimensions of this issue, delving into whether India’s legal framework adequately supports lessors.

The Evolution of Aircraft Leasing in India

The Indian aviation market has experienced a meteoric rise in recent years, driven by factors such as liberalization of the aviation sector, increased disposable incomes, and a growing middle class. This surge in demand has necessitated a rapid expansion of the airline fleet to cater to the growing passenger traffic. Aircraft leasing has emerged as a pivotal financing mechanism for Indian airlines, offering several advantages.

Leasing provides airlines with the flexibility to adjust their fleet size based on seasonal demand fluctuations, enabling them to optimize their operations and minimize capital expenditure. Furthermore, leasing allows airlines to conserve capital for other operational expenses, such as marketing, maintenance, and staff training. Additionally, leasing provides access to the latest aircraft models, incorporating cutting-edge technology and enhanced fuel efficiency, thereby improving operational efficiency and reducing environmental impact.Despite these advantages, the sustainability of the leasing model in India swings on the ability of lessors to enforce their rights effectively, particularly in cases of default and bankruptcy.

The Convention: A Global Shield for Lessors

The Cape Town Convention (CTC) also known as “Convention on International Interests in Mobile Equipment” and the enforcing document which is the Aircraft Protocol also known as “Protocol on Matters Specific to Aircraft Equipment” was established in 2001, it seeks to create a unified system for securing and enforcing international interests in high-value, mobile assets like aircrafts – aircraft engines and helicopters. The Aircraft Protocol, a critical annex to the convention, grants lessors and financiers’ remedies such as expedited deregistration, repossession, and export of aircraft in cases of lessee default or bankruptcy.

India’s accession to the Cape Town Convention in 2008 marked a pivotal moment for its aviation sector. By agreeing to implement the CTC’s provisions, India signalled its commitment to protecting lessor rights and creating a secure environment for aircraft financing. Among its key features are:

1. Lessors can register their interests in an international database, ensuring priority over local creditors.
2. Irrevocable Deregistration and Export Request Authorisation (hereinafter referred to as “IDERA”): This allows lessors to bypass local courts and directly request deregistration and export of their aircraft in case of default.
3. Expedited recovery procedures, including repossession and interim relief measures, are central to the convention’s framework.

Despite these provisions, India’s domestic legal and regulatory framework has not seamlessly integrated the CTC’s principles, leading to practical challenges.

Aircraft Types Commonly Leased in India

India’s aviation sector operates a diverse fleet, with different aircraft types leased based on operational needs. The most widely leased aircraft in India include:

• Airbus A320 Family: Known for its fuel efficiency and versatility, the A320 is the backbone of Indian carriers like IndiGo, Go First, and Air India. It typically accommodates 150 to 186 passengers and serves both domestic and regional routes.

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• Boeing 737: Widely used by airlines such as SpiceJet and Akasa Air, the Boeing 737 is another narrow-body jet favoured for its reliability and cost-effectiveness.

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• ATR 72: A turboprop aircraft used extensively in regional connectivity programs under UDAN. This aircraft, with a seating capacity of 68 to 78 passengers, is particularly suited for short-haul flights.

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• Boeing 787 and Airbus A350: These wide-body aircraft are increasingly leased by carriers like Air India for long-haul international operations.

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These aircraft are leased from prominent global lessors, including AerCap, GECAS, SMBC Aviation Capital, and BOC Aviation. The reliance on such international players underscores the need for a cemented legal framework to ensure their interests are safeguarded.

Major Airlines in India and Their Dependence on Leased Craft

1. IndiGo:India’s largest airline, operates a fleet of over 300 aircraft, with a significant portion leased. The airline primarily uses Airbus A320s and ATR 72s, focusing on a cost-efficient model. Its heavy reliance on leased aircraft enables rapid network expansion and frequent fleet upgrades. This leasing strategy helps IndiGo maintain its dominant position in both domestic and international markets.
2. SpiceJet:As a low-cost carrier, SpiceJet depends heavily on leasing to operate its fleet, primarily composed of Boeing 737 aircraft. Leasing helps the airline manage costs and navigate financial constraints while maintaining competitive pricing for passengers. The strategy also allows flexibility in fleet management, enabling adjustments based on market demand.
3. Air India:Now under the Tata Group, Air India has strategically leased modern aircraft like the Boeing 787 and Airbus A350 to revitalize its international fleet. Leasing has allowed the airline to modernize its operations and offer a world-class travel experience. This approach is central to Air India’s efforts to reclaim its position as a leading global airline.
4. Akasa Air: A recent entrant in the Indian aviation market, has adopted a leasing-heavy approach to facilitate rapid scaling. By focusing on leased aircraft, it minimizes upfront capital expenditure and achieves quicker market penetration. This strategy enables the airline to compete effectively with established players in the industry.

The insane dependence of these airlines on leased aircraft highlights the importance of frameworks, like the CTC, to guarantee lessor rights and ensure smooth growth in the aviation sector.

Legal Challenges in Repossessing Aircraft in India

India’s aircraft regulatory structure presents various challenges for lessors attempting to repossess their aircraft. These include conflicts between international commitments under the CTC and domestic laws, procedural delays, and judicial inconsistencies.

1. Conflict with Insolvency Laws

Under Section 14 of The Insolvency and Bankruptcy Code (IBC), 2016,imposes a moratorium on legal proceedings against companies undergoing insolvency. This moratorium often prevents lessors from repossessing aircraft, even when lessees default. A notable example is the Go First insolvency case in 2023, where lessors faced significant delays in reclaiming their aircraft due to the IBC’s restrictions. Despite filing deregistration requests under IDERA, many lessors found themselves entangled in procedural and legal hurdles.

• Airport Operators’ Lien Rights

Airport operators, under Section 22 of the Airports Authority of India Act, 1994, can exercise lien rights over aircraft for unpaid dues. This practice complicates repossession efforts, as seen in the Kingfisher Airlines insolvency case, where lessors had to navigate prolonged disputes with airport operators to reclaim their aircraft.

• Judicial Inconsistencies

Courts of various judicature in India have delivered mixed rulings on lessor rights, reflecting a lack of uniformity in interpreting the Cape Town Convention. While in the matter of “Boc Aviation (Ireland) Limited v. Directorate General of Civil Aviation”the Delhi High Court directed DGCA to allow lessors to deregister Go First’s aircraft under IDERA, it stated:

“A bare reading of the aforesaid would show that with the insertion of sub-rule (7) in Rule 30, the doubt, if any, as to whether the DGCA had any discretion in the matter has got removed. Upon the creditor fulfilling the conditions prescribed COR – Certificate of Registration in clause (i) and (ii), of sub-rule (7), of Rule 30, the DGCA is mandatorily required to cancel the registration. 22.4[sic:22.5]Therefore, keeping in mind the aforesaid, in my view, a mandamus shall issue to the DGCA to act in a particular manner, as the conditions prescribed for acting in that manner, as required by law, stand fulfilled. Any other direction would only frustrate the object and purpose with which the amendment has been brought about in Rule 30. I am, thus, persuaded to direct the DGCA to de-register the aircraft objects, which are subject matter of the captioned writ petitions.”

The Future of Aircraft Leasing in India

India’s aviation sector is on the verge of significant expansion, driven by rising passenger demand, growing fleet requirements, and government initiatives aimed at bolstering the country’s infrastructure. As India becomes one of the world’s largest aviation markets, addressing challenges such as aircraft repossession rights and the development of a robust legal framework is essential for sustaining this growth, various schemes and programs in this regard has been launched by the government, some of which are:

1. UDAN (Ude Desh Ka Aam Naagrik):

The UDAN scheme, launched by the Indian government in 2016, aims to make air travel affordable and accessible to the common man. This regional connectivity scheme subsidizes airfares to underserved and unserved airports, increasing passenger traffic in tier-2 and tier-3 cities. By improving accessibility, the government is contributing significantly to the growth in passenger demand, especially in rural and smaller urban areas.

• Atmanirbhar Bharat Package:

Under the Atmanirbhar Bharat initiative, the government has rolled out various programs to revive and strengthen the aviation sector, which includes providing financial support to the aviation industry during the pandemic and improving the competitiveness of Indian airlines in the global market. The scheme aims at improving infrastructure, enhancing capacity, and promoting air travel, with a focus on increasing passenger numbers.

• National Civil Aviation Policy (NCAP) 2016:

The NCAP sets ambitious targets for increasing passenger traffic by enhancing airport capacity, improving connectivity to smaller airports, and making air travel more affordable. This policy also focuses on supporting the growth of domestic airlines and making flying more accessible to the broader population.

• Bharatmala Pariyojana:

Under this program, the government aims to develop new airports, upgrade existing ones, and improve air connectivity across the country. This includes constructing more regional airports in smaller cities and improving the capacity of metro airports. The program is designed to decongest major airports and provide better connectivity to more parts of the country.

• PPP Model for Airport Development:

The Indian government has actively promoted the Public-Private Partnership (PPP) model to expand and modernize airports. This has resulted in the successful privatization of several airports, such as those in Delhi, Mumbai, and Bengaluru, and has encouraged private sector investments in infrastructure development.

The Cape Town Convention provides a robust framework for the protection of lessor rights; however, its effective implementation in India necessitates harmonization with local legal standards. Recent court decisions favouring lessors, along with governmental initiatives aimed at reform-oriented legislation, indicate a positive shift towards a more stable and secure leasing landscape. India’s goal of becoming a prominent global aviation hub hinge on finding an equilibrium between safeguarding lessor rights and accommodating the interests of local stakeholders. The ratification of the Cape Town Convention and its Aircraft Protocol is essential for achieving this equilibrium, as it will enhance legal clarity, streamline repossession processes, and attract international investment into the Indian aviation sector. By addressing existing challenges and adopting global best practices, India can secure sustainable growth that benefits all participants in the aviation ecosystem.

—Roopesh Jha is a second-year student of Government Law College, Mumbai