VOLUME 1 GENERAL PRINCIPLES 2nd Edition DONALD H. BUNKER
Table of Contents List of Figures... viii Preface... ix Index of Relevant International Conventions and Agreements... x Abbreviations... xi Introduction... xiv Section 1 The Market Environment... 1 1.1 The Aviation Marketplace... 1 1.2 Operators... 3 1.2.1 Scheduled Airlines... 3 1.2.1.1 Classes of Scheduled Airlines... 3 1.2.1.2 Global Airlines... 4 1.2.1.3 Countries without Airlines... 10 1.2.1.4 Low Cost Carriers... 11 1.2.1.5 Premium Carriers... 14 1.2.2 Non-Scheduled Airlines (Charter)... 14 1.2.3 Regional Airlines (Commuters)... 18 1.2.4 Cargo Airlines... 19 1.2.4.1 Freight Forwarders and Consolidators... 22 1.2.4.2 Couriers... 23 1.2.5 General Aviation... 24 1.2.6 Fixed Base Operators... 25 1.2.7 Corporate Operators... 25 1.2.7.1 Managed Aircraft... 28 1.2.7.2 Blocked Seats... 29 1.2.7.3 Charter Flights on Demand... 30 1.2.7.3 (a) Card Programs... 30 1.2.7.3 (b) Empty-Legs... 31 1.2.7.3 (c) Grey Market... 32 1.2.7.3 (d) Air Charter Brokers... 34 1.2.7.4 Fractional Ownership... 36 1.2.8 State and Military... 41 1.3 Equipment... 41 1.3.1 Aircraft... 42 1.3.1.1 Definition... 42 1.3.1.2 Types, Classes, Categories... 45 1.3.1.3 Commercial Classification... 45 2 nd Edition 2015 i
1.3.2 Engines... 54 1.3.2.1 ETOPS, EROPS & LROPS... 56 1.3.2.2 Auxiliary Power Unit (APU)... 59 1.3.2.3 Hush Kits... 59 1.3.3 Major Equipment... 60 1.3.3.1 Traffic Alert Collision Avoidance System... 60 1.3.3.2 Ground-Proximity Warning System... 60 1.3.3.3 Terrain Awareness and Warning System... 61 1.3.3.4 Flight Recorders... 61 1.3.3.5 CNS/ATM System... 62 1.3.3.6 Flight Simulators... 63 1.4 Airline Personnel... 64 1.4.1 Flight Crew... 64 1.4.2 Cabin Crew... 66 1.4.3 Ground Staff... 67 1.4.4 Training... 67 Section 2 The Commercial Environment... 69 2.1 Money and Exchange... 69 2.2 World s Requirements for Aircraft Financing... 69 2.3 Historical Background... 71 2.4 Basic Types of Business Organizations... 72 2.4.1 Governmental Agencies... 72 2.4.1.1 Direct Liability... 72 2.4.1.2 Restricted Liability... 72 2.4.1.3 Cooperatives... 72 2.4.2 Private Organizations... 72 2.4.2.1 Sole Ownership... 72 2.4.2.2 Partnerships... 73 2.4.2.3 Corporations (Companies)... 73 2.4.2.4 Special Purpose Vehicles... 75 2.4.2.5 Joint Ventures... 78 2.4.2.6 Groupement d Intérêt Économique (GIE)... 83 2.5 Accounting... 83 2.5.1 Country Rules... 83 2.5.2 Financial Statements... 86 2.5.2.1 Balance Sheet... 86 2.5.2.2 Income Statement... 91 2.5.3 Financial Ratios... 93 2.5.4 Off-Balance Sheet Financing... 95 2.5.5 Depreciation... 97 2.5.6 Time Value of Money... 103 ii 2 nd Edition 2015
Table of Contents Section 3 Fleet and Financial Planning and Implementation... 107 3.1 Fleet Planning... 107 3.1.1 Types of Fleet Planning... 108 3.1.1.1 Start-Up Airlines... 108 3.1.1.2 Fleet Expansion... 109 3.1.1.3 Disposition of Aircraft... 112 3.1.1.4 Modification of Existing Fleet... 112 3.1.2 Used or New Aircraft... 113 3.1.3 Criteria for Aircraft Selection... 114 3.1.3.1 Mission Requirements... 114 3.1.3.2 Aircraft Size... 119 3.1.3.3 Financial Considerations... 120 3.1.3.4 Spares Provisioning... 120 3.1.3.5 Optimum Life of Aircraft... 121 3.1.3.6 Manufacturer Technical Support... 121 3.1.4 Aircraft Commonality... 122 3.1.5 Aircraft Conversions... 124 3.1.6 Aircraft Completions... 126 3.2 Financial Planning... 126 3.2.1 History of Aviation Finance... 126 3.2.2 Investors... 126 3.2.2.1 Senior (Debt)... 127 3.2.2.2 Junior (Equity)... 128 3.2.3 Sources of Funds... 129 3.2.3.1 Internal Funds... 129 3.2.3.2 Capital Markets... 130 3.2.4 Types of Financing... 139 3.2.4.1 Equity... 139 3.2.4.2 Debt... 143 3.2.4.3 Leasing... 145 3.2.4.4 Countertrade... 202 3.2.5 Considerations and Constraints... 205 3.2.5.1 Interest... 205 3.2.5.2 Currency... 212 3.2.5.3 Exchange and Currency Controls... 215 3.2.5.4 Qualification of Investments... 216 3.2.5.5 Taxation... 217 3.2.5.6 Risk Management (Credit)... 226 3.2.5.7 Safety Management... 244 3.2.6 Governmental Support... 245 3.2.6.1 Export Credit Agencies (ECAs)... 247 3.2.6.2 International Trade Organizations... 250 3.2.6.3 Subsidies and Export Credit Competition... 251 3.2.7 Manufacturer Assistance... 266 2 nd Edition 2015 iii
3.3 Implementation... 269 3.3.1 Task Force... 269 3.3.2 Business Plan... 270 3.3.3 Negotiation... 271 3.3.4 Brokers... 271 3.3.5 Letters of Intent... 272 Section 4 Ownership, Title and Security... 273 4.1 Ownership... 273 4.1.1 Generally... 273 4.1.2 Fractional Ownership... 275 4.1.3 Substantial Ownership and Effective Control... 275 4.2 Acquisition of Aircraft and Engines... 278 4.2.1 Purchasing... 278 4.2.1.1 New Aircraft... 278 4.2.1.2 Used Aircraft... 284 4.2.1.3 Engines... 285 4.2.2 Pre-Delivery Payments... 287 4.2.3 Bills of Sale... 288 4.2.4 Auctions... 289 4.2.5 Buyer Furnished Equipment (BFE)... 289 4.2.6 Seller Furnished Equipment (SFE)... 291 4.2.7 Pre-Purchase Evaluations... 291 4.2.8 Purchase Checklists... 292 4.2.9 Aircraft Storage... 293 4.3 Security... 294 4.3.1 Independent Security Devices... 294 4.3.1.1 Chattel Mortgages... 295 4.3.1.2 Conditional Sale Agreements... 295 4.3.1.3 Leases... 296 4.3.1.4 Trust Deeds... 298 4.3.1.5 Equipment Trust Certificates (ETC)... 299 4.3.1.6 Enhanced Equipment Trust Certificates (EETC)... 300 4.3.2 Security Interests and Liens... 300 4.3.2.1 Security Interests... 300 4.3.2.2 Registration of Security Interests... 300 4.3.2.3 Liens... 302 4.3.3 Guarantees and Indemnities... 303 4.3.4 Letters of Comfort... 306 4.3.5 Security Deposits... 310 4.3.5.1 Defeasance... 310 4.3.5.2 Escrow Arrangements... 311 4.3.6 Bank Instruments... 312 4.3.6.1 Letters of Credit... 312 4.3.6.2 Bank Guarantees... 314 iv 2 nd Edition 2015
Table of Contents 4.3.7 Treaty Protection... 314 4.3.8 Securitization... 315 4.3.8.1 Commoditized Securitization... 316 4.3.8.2 Export Credit Securitization... 317 4.3.8.3 Aircraft Securitization... 317 4.3.8.4 International Equipment Trusts (IET)... 320 4.3.9 Assignments... 324 4.3.10 Novation... 325 4.3.11 Set-Off... 325 4.3.12 Take-or-Pay Arrangements... 326 4.3.13 Options... 326 4.3.13.1 Put Options... 326 4.3.13.2 Purchase Options... 327 4.3.14 Financial Insurance... 329 4.3.14.1 Political Risk... 329 4.3.14.2 Residual Value... 332 4.3.14.3 Asset Value Shortfall... 334 Section 5 Special Requirements... 337 5.1 Contractual... 337 5.1.1 Insurance... 337 5.1.1.1 Aviation Insurance... 342 5.1.1.2 Policies... 360 5.1.2 Maintenance... 366 5.1.2.1 Service Bulletins and Airworthiness Directives... 367 5.1.2.2 Minimum Equipment List... 370 5.1.2.3 Deferred Maintenance... 371 5.1.2.4 Maintenance Costs... 371 5.1.2.5 Maintenance as Seen by Interested Parties... 374 5.1.2.6 Maintenance Covenants... 375 5.1.2.7 Third-Party Maintenance... 378 5.1.2.8 Maintenance Reserves... 382 5.1.2.9 Return Conditions... 386 5.1.2.10 Inspections... 388 5.1.2.11 Logbooks and Records... 389 5.1.2.12 Spare Parts... 390 5.1.3 Defaults and Remedies... 394 5.1.3.1 Defaults... 394 5.1.3.2 Remedies... 397 5.1.3.3 Arbitration and Alternative Dispute Resolution... 398 5.1.3.4 Workouts and Debt Restructuring... 401 5.1.3.5 Bankruptcy... 403 2 nd Edition 2015 v
5.2 Regulatory... 408 5.2.1 Operations... 408 5.2.1.1 Nationality and Registration... 408 5.2.1.2 Traffic Rights... 418 5.2.1.3 Code Sharing... 418 5.2.1.4 Alliances... 421 5.2.1.5 Codes and Designators... 422 5.2.1.6 Slot Allocation... 422 5.2.1.7 Licensing of Personnel... 424 5.2.1.8 Aircraft Documentation and Records... 424 5.2.2 Safety... 424 5.2.2.1 Type Certification... 425 5.2.2.2 Airworthiness Certification... 426 5.2.2.3 Bilateral Airworthiness Agreements... 428 5.2.2.4 Maintenance Manuals... 429 5.2.2.5 Air Operator s Certificate (AOC)... 429 5.2.2.6 Aging Aircraft... 432 5.2.2.7 Safety Boards... 432 5.2.2.8 IATA Operational Safety Audit... 433 5.2.2.9 Unsafe Foreign Operations (Blacklisting)... 433 5.2.3 Public Policy... 435 5.2.3.1 Export and Import Permits... 435 5.2.3.2 Environment... 436 5.2.3.3 Economic Sanctions... 441 5.2.3.4 Forfeiture of Aircraft... 443 5.2.3.5 Corruption... 447 5.2.4 Liability... 451 5.2.4.1 Lessors and Lenders... 451 5.2.4.2 Maintenance Providers... 453 5.2.4.3 Appraisers and Inspectors... 454 5.2.4.4 Products... 454 5.2.4.5 Navigation Charges... 455 5.2.4.6 Immigration... 456 5.2.4.7 Drugs... 457 Section 6 Air Law... 459 6.1 Treaties... 461 6.1.1 Chicago Convention (1944)... 462 6.1.2 Warsaw Convention (1929) and the Warsaw Systems... 463 6.1.3 Montreal Convention (1999)... 465 6.1.4 Geneva Convention (1948)... 466 6.1.5 Cape Town Convention on International Interests in Mobile Equipment and the Protocol on Matters Specific to Aircraft Equipment (2001)... 468 vi 2 nd Edition 2015
Table of Contents 6.1.6 Unidroit Convention on International Lease Financing (1988)... 474 6.1.7 United Nations Convention on Contracts for the International Sale of Goods (1980)... 476 6.2 Organizations... 476 6.2.1 International Civil Aviation Organization (ICAO)... 476 6.2.2 International Air Transport Association (IATA)... 486 6.2.3 International Chamber of Commerce (ICC)... 487 6.2.4 International Federation of Airline Pilots Associations (IFALPA)... 487 6.2.5 European Civil Aviation Conference (ECAC)... 487 6.2.6 Airlines for America (A4A)... 489 6.2.7 African Airlines Association (AFRAA)... 490 6.2.8 Arab Air Carriers Organization (AACO)... 490 6.2.9 European Organization for the Safety of Air Navigation (Eurocontrol)... 492 6.2.10 Société Internationale de Télécommunications Aéronautiques Société Coopérative (SITA)... 492 6.2.11 Association of European Airlines (AEA)... 494 6.2.12 The International Business Aviation Council (IBAC)... 494 6.2.13 International Institute for the Unification of Private Law (UNIDROIT)... 494 6.2.14 Organization for Economic Co-operation and Development (OECD)... 495 6.2.15 World Trade Organization (WTO)... 496 6.2.16 International Organization for Standardization (ISO)... 497 6.2.17 North American Free Trade Agreement (1994) (NAFTA)... 497 6.2.18 International Maritime Satellite Organization (1979) (INMARSAT)... 497 6.2.19 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1985)... 498 6.2.20 European Union (EU)... 498 6.2.21 Society for Worldwide Interbank Financial Telecommunications (SWIFT).. 498 6.3 Bilateral Treaties and Agreements... 499 6.3.1 The Bilateral System... 499 6.3.2 Freedoms of the Air... 502 6.3.2.1 Negotiated in Bilateral Air Services Agreements... 502 6.3.2.2 Supplementary Rights... 503 6.3.3 Tariffs and Fees... 503 Index... 505 2 nd Edition 2015 vii
VOLUME 2 SPECIFIC DOCUMENTS 2nd Edition DONALD H. BUNKER
Table of Contents List of Figures... iii Recommended Additional Sources... v Books... v Journals and Services... v Abbreviations... vi Introduction... ix Section 7 Documentation and Special Clauses... 1 7.1 Documentation... 1 7.1.1 Typical Japanese Leveraged Lease Structure... 3 7.1.2 Common Provisions in Aviation Financing Documents... 13 7.1.3 Letter of Intent... 16 7.1.3.1 Model Letter of Intent... 20 7.1.4 Lease Agreements... 38 7.1.4.1 Model Aircraft Dry Lease Agreement... 38 7.1.4.2 Model Aircraft Wet Lease Agreement... 205 7.1.4.3 Model Short Form Dry Lease Agreement... 273 7.1.4.4 Model Short Form Wet Lease Agreement... 276 7.1.4.5 IATA Master Short-Term Engine Lease Agreement... 280 7.1.4.6 Lease Due Diligence... 280 7.1.5 Purchase Agreements... 282 7.1.5.1 New Aircraft Purchase Agreement... 282 7.1.5.2 Model Used Aircraft Purchase Agreement... 285 7.1.6 Ancillary Transaction Documents... 338 7.1.6.1 Director s Resolution... 338 7.1.6.2 Power of Attorney... 340 7.1.6.3 Incumbency Certificate... 341 7.1.6.4 Legal Opinions... 342 7.1.6.5 Bill of Sale... 342 7.1.6.6 Acceptance Certificate... 343 7.1.6.7 Quiet Enjoyment Letter... 343 7.1.6.8 Deregistration Undertaking Letter... 345 7.1.6.9 Guarantee... 345 7.1.6.10 Letter of Comfort... 362 7.1.6.11 Assignments... 362 2 nd Edition 2015 i
Section 8 Terms and Definitions... 431 8.1 Financial and Legal... 431 8.2 World Airlines Technical Operations Glossary (WATOG)... 452 8.3 Frequently Used Technical Terms... 452 Index... 453 ii 2 nd Edition 2015