Airlines could save around $1.3 billion as leasing costs decrease: Civil Aviation Ministry

The government is working to address problems in the aviation industry, particularly regarding leasing costs for Indian airlines and the difficulties faced by aircraft lessors during insolvency cases. The Ministry of Civil Aviation stated that Indian carriers could save around $1.3 billion as leasing costs decrease. This reduction comes after leasing costs were raised due to complications in repossessing assets when airlines went through insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

To tackle these issues, the government has made changes to the IBC. These changes now allow lessors to reclaim their planes during insolvency proceedings, which was previously a major obstacle.

Under the old IBC rules, agreements between Indian airlines and foreign lessors were negatively impacted. Experts estimate that Indian carriers were paying an extra $1.2-1.3 billion in lease rentals because of the challenges in reclaiming aircraft within India. It’s essential to note that nearly 80 per cent of the Indian airline fleet is leased. 

As a consequence, “The cost of higher lease rentals could be passed on to the public causing high fares on all routes. As such, there would be an overall impact on not only the aviation sector but all sectors dependent on connectivity like tourism, cargo.”

‘In line with CTC’

Earlier this week, the Ministry of Corporate Affairs issued a notification exempting aircraft equipment covered under the Cape Town Convention (CTC) from the moratorium imposed by IBC. This aligns with international conventions and treaties, including the Cape Town Convention, which aims to protect the rights of aircraft lessors and financiers.

The Ministry stressed that these changes are in line with India’s commitment to the convention. This move is expected to reduce the risk associated with aircraft financing, leading to lower costs and more predictable legal processes, even in insolvency cases.

“This step is to fulfill its commitment to the convention, wherein it is helping the lessors or financiers when insolvency against the debtor commences,” the MoCA said.

Compliance to improve

The impact of the old IBC rules went beyond the aviation sector. It could have led to higher lease rentals, potentially resulting in higher airfares for the public. Additionally, difficulties in aircraft recovery could have disrupted the supply of aircraft to Indian airlines, affecting the entire aviation industry and sectors relying on connectivity, like tourism and cargo.

The Aviation Working Group (AWG), a global watchdog representing aircraft manufacturers and leasing firms, has welcomed these changes. They had downgraded India’s compliance score in the Cape Town Convention compliance index previously due to delays in insolvency proceedings preventing lessors from repossessing aircraft. With the recent amendments to IBC and the exemption of aircraft equipment under CTC, India’s compliance outlook is improving.

AWG has urged the government to implement these new rules promptly to benefit the aviation industry and maintain compliance with international standards.

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