Financial Leasing as a Method of Aircraft Financing
The risks and benefits of ownership belong to the lessee even though the lessee is not the legal owner of the aircraft during the course of the leasing agreement.
Financial leasing offers many advantages such as increased financing flexibility/ability, tax benefits, allocation of the burden of risk between lessor and lessee. Applying financial leasing as an aircraft finance method is widely used both in Turkey and all around the world. For instance, Turkish Airlines’ financial leasing agreements constitute 90% of all leasing agreements.
Turkey doesn’t have an industry-based legislation for financial leasing. The main code that regulates the aircraft financial leasing is Law no. 6361 which is titled as the Code of Financial Leasing, Factoring and Financing Companies. Besides, Turkey ratified the Cape Town Convention and its Protocol on Aircraft Equipment.
An aircraft leasing agreement may take place between a lessor which is authorized pursuant to the Law no. 6361 and an airline. According to the 18th Article of the Code, financial leasing is an agreement in which the lessor provides possession of an asset to the lessee with the all rights that have arisen from it in return of a lease fee. The leased asset can be purchased from a third party or the lessee itself upon request and selection of the lessee. The lessor may also lease an asset that has already been owned. The Code contains a specific provision regarding aircraft leasing. Pursuant to 2nd Article of the Code, a leasing agreement is considered as financial leasing if: the lessor is a factoring/financing company which has the authority to lease according to the legislation of the country that it has been established; the lessee is an airline which performs passenger and/or cargo transportation; the agreement is about the transaction of an aircraft, its engines, or other parts from abroad and; the agreement is at least for two years.
Rights and Responsibilities of Parties
Parties are free to decide on rental and payment schedule as they wish. If the parties agree, rental can become collectible with the beginning of the contract, even before the asset’s delivery to the lessee. The asset must be delivered to the lessee within 2 years by the beginning of the contract unless parties agreed otherwise.
Ownership of the leased asset belongs to the lessor. However, if the parties agree, the lessee may obtain a right to purchase by the end of the contract period.
The lessee possesses the asset and acquires all rights to benefit from it in accordance with the contract. The lessee must use the leased asset orderly in compliance with the provisions of the leasing contract. All expenses that arise from maintenance and protection of the leased asset belongs to the lessee including payment of insurance premiums which has been made obligatory by the applicable statute. In addition to this, defects liability is also the responsibility of the lessee.
If a defective asset has been purchased by the lessor from a third party or the lessee (leaseback) due to a specific demand of the lessee, the lessor can’t be held liable for the defects. On the other hand, the lessor becomes liable when the lessor doesn’t deliver the asset due to his/her gross negligence or negligence. As set out by the Turkish Code of Obligations, the lessee can demand damages for delay in performance besides of fulfillment of the contract or can annul the contract and claim compensation for losses that arise by nullity of the contract in such a situation.
As it is stated at 5th Article of the Directive for Rules and Procedures of Aircraft Leasing, subleasing of an aircraft which is imported in Turkey by financial leasing and registered in Turkish Civil Aircraft Registry depends on owner’s permission for such an operation. This issue must be regulated within the financial leasing agreement. If the contract does not address subleasing, the lessee shall receive a written approval from the lessor to sublease the aircraft.
Form of the Leasing Contract
According to the 19th Article of the Code, the contract shall be made in writing. The leased aircraft also need to be registered and annotated in the Turkish Civil Aircraft Registry. In addition to this, the lessor must inform the Association of Financial Leasing, Factoring and Financing Companies about the operation. The process aims to protect the lessor against third party claims over the rights that arise from the asset. The lessee is considered as the owner for the purposes of the 49th Article of the Turkish Civil Aviation Act in order to decide on the nationality of the aircraft. The papers regarding a leasing contract including but not limited to financial leasing contracts, papers regarding transfer and amendment of the contract, contracts that are regulated between the lessor and the lessee in terms of procurement of the asset and papers that are regulated as an assurance for such contracts are exempted from legal fee by the 37th Article of Law no. 6361.
Donald H. Bunker, International Aircraft Financing, International Air Transport Association, Montreal-Quebec, 2006, p. 183.
Peter S. Morrell, Airline Finance, 3rd Edition, ASHGATE, Hampshire, p. 198
Adrian Simon, Economic Aspects Of Financial Leasing In Business Investments, Scientific Bulletin - Economic Sciences, vol. 9, 65-70, p. 69.
You can reach more info regarding this topic by the following link: http://investor.turkishairlines.com/en/creditor-relations/financing (accessed: 11.2.2019)
Author: Kaan Erdoğan