By Neil Denslow
Airlines in the region are lobbying governments to ratify an international treaty that could reduce their leasing costs by millions of dollars.
Airlines in the region are lobbying governments to ratify an international treaty that could reduce their leasing costs by millions of dollars. The only Arab country to have ratified the Cape Town Convention so far is Oman, and it has already greatly benefited Oman Air. Other airlines and the Arab Air Carriers Organisation (AACO) are now pushing for more regional governments to do the same, so that they can also benefit from these savings.
Central to the Cape Town Convention, which comes into effect in March, is the creation of an international registry of mobile asset ownership. This database, which will be run by a SITA SC/Irish government joint venture called Aviareto, will then be used to resolve any disputes that arise over the ownership of aircraft, engines or helicopters. Creditors will gain from this greater protection, which will then enable them to lower the risk premium that they charge to lessors.
“At present, no central repository exists that records ownership and financial interests in aircraft and engines and that provides clarity about the priority of claims that exist against [them],” explained Dr. Hans-Peter Kohlhammer, SITA SC’s CEO & secretary general in a speech at the AACO AGM in November. “As a result, financial institutions charge risk premiums on loans, which in turn increase purchasing and leasing costs. Those costs are as massive as they are unnecessary,” he added.
The convention will particularly benefit airlines in countries that have less sophisticated legal systems, which includes many in the Arab world. As such, Kohlhammer suggested that the convention’s ratification could save a typical AACO member tens of millions of dollars each year in financing costs. Leasing companies also agree with this assessment. “The convention is an unambiguous positive for the countries in question,” said Ray Sisson, GECAS’s senior vice president & regional manager, MEA & CIS. “If I was the CEO of an airline in a country who uses export financing support, I would certainly push for it [ratification],” he added.
Although the convention is yet to come into effect, Oman Air is already seeing the benefits of Oman’s ratification. In March 2005, for instance, the US Export-Import Bank cut its exposure fee for a 737 by one-third after the Sultanate ratified the convention. “That alone was a significant saving for us,” said Japeen Shah, head of finance, Oman Air.“What is not quantifiable, however, is [the saving from] the premium or the margin that the banks charge,” he added. “They would certainly charge a lower margin once you have Cape Town in place… and I would say that if you assume one or two base points for the tener of the loan, then it is a very significant amount.”
Furthermore, with the banks now afforded greater protection they are also more willing to lend the money in the first place. “I am already getting enquiries from banks and other financial institutes that would like to participate in our next financing,” said Shah. “My ability to rise financing for future aircraft has definitely gone up.”
Airlines will also benefit from the fact that leasing companies will be more willing to place aircraft in what were difficult jurisdictions. Previously, if a leasing company had a choice between a European airline or one from sub-Saharan Africa, for instance, then it would always lean heavily towards the former because of the greater legal protection on offer. However, with the Cape Town Convention in place, the non-European airline will have a much more equal chance of getting the aeroplane. “Cape Town levels the playing field, and gives the airline a look-in,” said Sisson.
So far, eight countries around the world have ratified the convention, which is enough to bring it into force. Within the Arab world, Saudi Arabia, Jordan and Sudan have all signed the convention, but they are still to formally ratify it. However, with pressure from the airlines, the vast majority of which are government-owned, more countries within the region can be expected to ratify the treaty soon. “I cannot see which countries would not sign it,” said Sisson. “And, those that do not, risk being left behind, because of the higher costs and the difficulties in getting aircraft.”