The main source of revenue for most aviation practices in Asia has been the business of leasing and financing. But since the credit crunch aviation lawyers have been watching as funds from the traditional sources (banks) have dried up. It also didn’t send a positive sign this year when some of those sources (from RBS to ING) exited the Asian region.
One of the region’s top aviation lawyers sketched this portrait of the current market. “Liquidity scarcity has dampened the amount of transactions coming out of the banks, several of the big lending houses are undergoing restructuring, and some have withdrawn from the Asian market altogether,” explains Paul Ng, the global head of aviation at Stephenson Harwood & Lo. “That leads to fewer transactions – and means fewer deals for lawyers.”
The market was adverse towards the end of 2008 and early 2009 but some improvement has been seen thanks to government funding and export credit agencies (ECAs) in Asia and Europe who have guaranteed the funds to finance new aircraft. “The fact that governments are supporting the credit risk of the airlines has allowed some banks to lend, so that’s one source of work taking over from your regular bank financing,” says Ng.
Whereas project finance lawyers found relief from the crisis thanks to government economic stimulus packages, aviation lawyers have found the same relief from ECAs. “The main deals have been the ECA-supported deals, and nearly all utilise a special purpose entity – often established in Cayman Islands or Ireland – to enhance the security position of the lenders and, ultimately, the ECAs who provide the debt,” says Mark Western (pictured), a partner at the Hong Kong office of Maples and Calder.
says Mark Western (pictured), a partner at the Hong Kong office of Maples and Calder.Amir Fazael Zakaria, the senior legal counsel with Asia’s largest low-cost carrier, AirAsia, explains why ECAs have been the “saviours of the industry” at this time. “They are the only players in town, and no banks would dare to lend money if it wasn’t for the ECAs backing these loans,” he says. “If it wasn’t for them there’d be a lot of people not picking up their aircraft deliveries.”
Regulatory work
Relying on the big-ticket asset financing will not be enough for aviation practices during the credit crunch. While both Ng and Western say that leasing and financing remains a significant proportion of work in their practices, it’s no surprise that increasingly more work is seen in regulatory advice. “In the good times financing and leasing work would comprise 100% [of our practice]; but right now I would say that 25% is non-financing leasing work,” says Ng.
AirAsia’s Zakaria says that groundwork regulatory business practice is inescapable for aviation lawyers. “Financing would be the glamour kind of work … there are other nitty-gritty things in the regulatory side dealing with embassies, lost luggage, flying permits, joint ventures … there’s a whole breadth of work there.”
The biggest advantage for law firms investing in the regulatory side is that, like shipping practices and ‘wet work’, it will remain largely unaffected by financial crises. As Zakaria points out, regulatory work is “still as troublesome as ever, despite the crisis” and he’s seen UK law firms (whose pre-crisis mainstay had been large aircraft financing transactions) deliberately diversifying.
“A number of firms are positioning themselves to do work other than financing. Even if it’s not as lucrative, they’re now willing to do it,” he says. One aviation practice recently approached his department offering IP and trademark work. “They’re quick to find a solution and that shows the order of the day.”
In the mid-to-long term scenario, another source of work for Asian firms will be generated from legal developments. For example, the Cape Town Convention came into effect in 2006 to standardise international aviation transactions such as asset-based financing and leasing contracts, and the EU Emissions Trading Scheme (ETS), which is expected to come into effect from 2013.
Airlines in Asia will continue to seek regulatory advice on their commitments and liabilities towards both these frameworks – and this is where law firms will come in. As Stephenson Harwood’s Ng says, “You would not be a credible firm if you could not provide advice on these issues.”
Lessons learned
Diversifying into regulatory work has been one strategy which has helped aviation practices. For Ng (pictured), who has flown in from a big international employer (Freshfields) to a specialist operation (Stephenson Harwood), it is clear why some firms have remained stable where others haven’t. “It’s a lesson to firms to have a diversified portfolio of clients,” he says. “It also requires some foresight on the side of the partners to see trends in the market and to position the practice against the downturn. Clients can see how you’re performing and it’s the firms who see their clients through the good and the bad, and still maintain good relationships, that will see high levels of activity.”
Diversifying into regulatory work has been one strategy which has helped aviation practices. For Ng (pictured), who has flown in from a big international employer (Freshfields) to a specialist operation (Stephenson Harwood), it is clear why some firms have remained stable where others haven’t. “It’s a lesson to firms to have a diversified portfolio of clients,” he says. “It also requires some foresight on the side of the partners to see trends in the market and to position the practice against the downturn. Clients can see how you’re performing and it’s the firms who see their clients through the good and the bad, and still maintain good relationships, that will see high levels of activity.”Zakaria’s company has engaged Ng on several deals in the last few years and he couldn’t agree more. External legal counsel must have an understanding of not only the company’s business model, he says, but the operational aspects of an airline’s business too. “The main criteria to choose any legal firm would be their understanding of the business,” he says. “We’ve seen lawyers from the other side who look at [matters] entirely from a commercial perspective, but they should also understand the operational needs of the airlines – from engineering requirements to the lease and sublease of aircraft within the group of companies. That can make negotiations smoother,” he says.
| “A number of firms are positioning themselves to complete work other than financing. Even if it’s not as lucrative, they’re now willing to do it,” Amir Fazael Zakaria, AirAsia |
Domestic firms – even if they are among the biggest in the country – are retained by aviation clients largely on regulatory work such as assisting on local taxation, employment or tenancy issues. “When we go into a new territory we’d need a local firm to guide us through the process and procedures,” says Zakaria.
“We don’t find any reason not to employ Malaysian or Singaporean firms and find that we’re often happy with the work. But there have been times when some have been ill-equipped and had to bring in other firms to assist.” Unfortunately that will result in a larger legal bill which, for any client, is unwelcome.
Companies like AirAsia are inadvertently facilitating the development of smaller players in the aviation legal industry by bringing them in on innovative transactions. “It doesn’t matter to us if they need to engage someone else but we’re actually paying their lawyers to learn. That means in the next assignment they don’t need to employ another firm,” adds Zakaria. “Some of our transactions are quite complex, we’ve won awards for our aircraft financings and it would be a great opportunity for a local Malaysian firm to learn some of the things we do here.”
Regardless of the financial crisis, it’s clear that Asia’s aviation lawyers have many challenges ahead. Whether it’s dealing with new market conditions, new players in the industry or new legal developments, aviation lawyers are enduring the same turbulence as their clients.
As Zakaria says, “law firms will have to sink and swim with us.”
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