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COVID-19 and the Thai Aviation Sector24 March 2020

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Global aviation faces an unprecedented crisis as borders are closed and demand for flights disappears. Although this is a global and industry-wide crisis, this article considers factors and issues unique to Thailand and Thai operators and lessees.

Multiple threats

In the past 18 months, and well before the outbreak of the coronavirus disease (COVID-19) pandemic in Wuhan, Thailand experienced a significant reduction in inbound Chinese tourists. In 2019, Chinese tourists represented approximately 30% of Thailand’s 39.8m tourist arrivals.

"Thai carriers may not see a return of demand for travel until Q3 or Q4 of 2020."

This reduction has already led to the demise of a number of carriers, which focused almost exclusively on the inbound Chinese market. Larger carriers, which have a broader network and focus, were better placed to manage the reduction in inbound tourists, but all Thai operators suffered a significant reduction in demand. Some sought to address this by focusing on other large markets, notably India, Japan, South Korea and Europe.

However, a combination of excess domestic capacity, the high value of the Thai Baht and the seasonal nature of the Indian market has meant that these strategies have provided limited assistance in rebalancing capacity with demand. Thai operators were focused on the 2020 Lunar New Year and the Chinese May Day holiday week to improve their financial position and as a means of rebuilding Chinese interest and demand.

As neither is likely to provide any meaningful increase in tourist arrivals this year, and given the current Thai government restrictions on inbound tourists, Thai carriers may not see a return of demand for travel until Q3 or Q4 of 2020.

On the ground

At least one Thai operator has announced a complete suspension of services until 1 May 2020. Aircraft are increasingly being grounded and Thai carriers have drastically reduced or entirely suspended flights. Some Thai operators have sought to defer deliveries and to fully or partially suspend lease payments on their fleets.

Other than the majority state owned Thai Airways, Thai carriers are privately owned or listed companies. Although the government is expected to continue to provide support to Thai Airways, it is unclear to what extent it will provide direct financial assistance to other Thai carriers. In addition, the hotel and tourism industry has been publicly pressing for assistance and support and the government may need to consider an industry-wide approach to ensure it responds to all the parts which comprise the Thai tourism sector. This may mean that there are no specific and tailored policies and support for Thai operators or the aviation sector.

Given the prevalence of regional and low-cost carriers, the ability of Thai operators to turn to cargo flights to increase revenue appears limited.

This may mean that there are no specific and tailored policies and support for Thai operators or the aviation sector.

In the sky

In previous downturns and during periods of weak demand, lessors sought to remove aircraft from Thai operators and deploy them with other carriers with a stronger financial position and performance. As a number of Thai operators are part of regional airline groups, in many cases, aircraft were expeditiously and discretely transferred to other affiliate airlines.

However, as this is a global crisis affecting airlines across the world, the ability of Thai operators and lessors to do so in this crisis appears limited, as we consider further in our recent article about COVID-19 and a new paradigm in airline restructuring.

The unprecedented situation may demand unprecedented responses and outcomes, particularly in circumstances where the current crisis is expected to have a short-to-medium impact. Lessors and lessees will need to balance the need for short-to-medium term responses and solutions with longer term demand projections and commercial objectives.

"Lessors should ensure that any agreement to vary lease obligations neither constitutes nor results in a breach of any regulatory requirements, relating to air operator licences and certificates"

A long way to Cape Town

Lessors and lessees are faced with several options in responding to the crisis, which are analysed in our coronavirus and the impact on aircraft lessors article.

Renegotiation of lease payment obligations: This may be the most expedient means of addressing the immediate issues. However, if the carrier’s financial position was already weak prior to the outbreak of COVID-19, any renegotiation should be realistic and commercially acceptable to both parties.

Lease payment standstill: Although this may be more attractive to operators as immediate and intermediate relief, any standstill agreement or other form of suspension of payment obligations should clearly define the period of suspension and the payments and other obligations which are being suspended.

For both options, care should be taken to ensure that lessor’s rights to enforce the variations, as well as the original obligations after the period of variation expires, are clear and protected. Lessors should also ensure that any variations do not constitute a waiver of any rights under Thai law or the applicable foreign law.

Lessors should also ensure that any agreement to vary lease obligations neither constitutes nor results in a breach of any regulatory requirements, particularly in relation to air operator licences and certificates issued by the Civil Aviation Authority of Thailand (CAAT). In addition, the variations should not interrupt hull and third-party aircraft insurance and that notice to underwriters, where necessary, is given as expeditiously as possible. Lessors may also require further guarantees and confirmation of payment of insurance premiums, particularly in light of a recent focus on ensuring aircraft are properly and fully insured, which is addressed in more detail in our recent article Could you be grounded? Changes to Thai aviation insurance requirements.

Additional security/guarantees: Lessors should review existing letters of credit and guarantees and, where appropriate, seek confirmation of their current validity and enforceability and the financial status of guarantors. Operators should be prepared to respond to requests for additional security and guarantees (also discussed in the coronavirus and the impact on aircraft lessors article).

Lessors should also ensure that they have an understanding of the current Thai law on enforcement of guarantees and on the prospects of enforcement in Thailand of foreign judgments and awards arising out of enforcement of foreign letters of credit and guarantees issued outside the country.

Given the preference for leased rather than owned aircraft, the ability to benefit from sale and leaseback transactions appears limited. Airport slots cannot be traded and do not currently have any commercial value which could be converted into some form of security.

Repossession: With the consent and co-operation of the lessee, deregistration and repossession can be straightforward and achieved relatively expeditiously.

"Lessors should ensure that they have an understanding of the procedures for bankruptcy under Thai law and how leased aircraft, guarantees and security will be dealt with in any bankruptcy."

The CAAT requires Thai operators to have a minimum number of aircraft to hold an Air Operating Licence (AOL) and Air Operator Certificate (AOC). For smaller carriers, court proceedings to prevent repossession may be their only means of ensuring that they maintain the minimum number required for these regulatory purposes. A contested repossession is more complex and can be significantly more time consuming. Thailand is not a party to the Cape Town Convention and repossession can only be in accordance with local law. Thai and foreign law-governed aircraft mortgages are neither recognised nor enforceable under Thai law and many lessors rely on a pledge as Thai law security.

Thai court proceedings have been used to protect the rights of lessees and to prevent lessors from repossessing aircraft. Watson Farley & Williams acted for a leading international lessor in such proceedings, which lasted over two years, without any tangible benefit to the lessee, as the court ultimately recognised the rights of the lessor to ownership and possession after termination of the lease over the aircraft.

Recent regulatory changes appear to have increased the powers of the CAAT to deregister aircraft without the consent of the lessee. Although this appears to be a positive development, the position remains far from certain, particularly in these unprecedented times. This was discussed in our article on new procedures for lessors to deregister aircraft in Thailand.

Given the current global environment, lessors should carefully consider the commercial benefits of repossession.

Insolvency/bankruptcy: In the absence of focused and adequate government support, and if the impact on demand does not abate in the short term, there are concerns that some operators may not have the financial means to continue operations.

Lessors should ensure that they have an understanding of the procedures for bankruptcy under Thai law and how leased aircraft, guarantees and security will be dealt with in any bankruptcy. As the position is not entirely straightforward, appropriate advice should be sought well in advance of any threatened bankruptcy. This is particularly in circumstances where the risk or threat of bankruptcy plays a role in renegotiation of lessee obligations.

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