Fitch: Lessons Emerge for Aircraft Lessors in Kingfisher Dispute
CHICAGO -- April 23, 2013
An ongoing dispute among major aircraft leasing companies, local Indian
authorities, and Kingfisher Airlines, which has been grounded since late last
year, provides some critical insights into risk factors for lessors seeking to
safeguard interests in emerging markets, according to Fitch.
While plans to relaunch the airline are still being considered by Indian
regulators, Kingfisher has not operated since December, when it lost authority
to fly in the midst of a liquidity crisis. Most of the largest global aircraft
lessors, including ILFC, AerCap, BOC Aviation, Aviation Capital Group, and
AWAS, had leased equipment to the carrier, whose fleet of approximately 60
new-generation aircraft was primarily leased. Since Kingfisher's grounding,
major lessors have taken a number of different approaches to asset recovery,
with varying results.
Above all, we see the Kingfisher experience as important in underscoring the
risks associated with leasing to start-up airlines that lack a proven
operating track record and often fail to become profitable after launch. In
India and many other emerging economies, where rapid demand growth has spurred
market entry by unproven carriers, lessors face the need to reflect higher
risk through pricing or potentially stricter concentration limits.
Kingfisher had been operating in a fast-growing, but still young, Indian air
transport industry only since 2005, and it had never turned a profit prior to
its grounding in 2012.
In addition to credit risk, lessors clearly face substantial legal risk in
India and other countries, where quick recovery of assets and enforcement of
creditor rights is less certain than in developed markets. Lessors have had
difficulty in some cases recovering aircraft from Kingfisher as a result of
India's failure to cooperate fully in deregistering the aircraft.
India ratified parts of the Cape Town Treaty, an international agreement
setting out common standards for treatment of secured aircraft claims, in
2008. However, many of the Kingfisher leases predated that ratification. Even
with Cape Town in place, local laws and precedent remain critical for lessors
and other aircraft creditors to consider.
The experience of lessors in the Kingfisher situation shows that moves to take
assets from lessees at the first sign of trouble often pay off. This is clear
in light of media reports suggesting that Kingfisher-leased aircraft and
engines have, in some cases, been stolen or damaged. This points to the need
for lessors to remain focused on maintenance reserves, security deposits, and
solid insurance policies -- especially in cases where local laws and
regulatory protection of creditor rights may come up short.
Exposure to Kingfisher among Fitch-rated lessors is small relative to their
total leased aircraft portfolios. The outcome of the dispute is therefore not
a ratings issue for these firms. More broadly, aircraft lessors tend to lease
to airlines that have weaker credit profiles than their own, which places a
natural limitation on the lessors' ratings.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Ilya Ivashkov, CFA, +1 212-908-0769
Bill Warlick, +1 312-368-3141
70 W. Madison
Chicago, IL 60602
Brian Bertsch, +1 212-908-0549
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