Daniela Walteros Rivera*
Abstract
The
COVID-19 outbreak in the first quarter of 2020, triggered the adoption of
strict State measures to respond to the pandemic. Among these measures, some
drastically impacted the aircraft financing and leasing industry. Numerous
investors of many different nationalities are involved in this industry and, therefore,
affected by the COVID-19 crisis.
I.
Understanding the aircraft financing and leasing industry
The
robust demand for commercial aircraft and their high price made the perfect
equation for the development of the aircraft financing and leasing industry.
The
aircraft financing and leasing operations are quite complex and sophisticated. Numerous
parties and funding sources are involved. Namely, airlines, aircraft lessors, banks,
manufacturers, lenders, investors, export credit agencies, trusts, owner
trustees, beneficial interests owners, guarantors, among others.[1]
Generally,
airlines do not buy their aircraft but lease them from lessors, both financed
by different funding sources. As a result of the multiplicity of actors, there are
numerous methods for structuring aircraft financing. Some of the principal
structures are secured loan structure, operating or true lease, finance lease, leveraged
lease, Japanese operating lease with or without call option, export credit
agency financing, and pre-delivery payment financing.[2]
These
complex financing structures are developed in several different jurisdictions
and involve numerous parties in different States. In brief, there are several
types of actors of different nationalities investing their resources in the
aircraft financing and leasing industry in foreign States.
II.
States measures and their impact on the aviation industry
The
COVID-19 outbreak in the first quarter of 2020 triggered the adoption of strict
State measures to respond to the pandemic. For instance, States have closed
their territorial, maritime, and aerial borders, imposed social distancing,
ordered national lockdowns, and other restrictions on movement.
Since
the beginning of March 2020, a vast number of States prohibited national and
international air traffic. These measures have severely impacted the aviation
industry. By April 16, 2020, more than 16,000 commercial aircraft were
grounded. In other words, more than 62% of the global fleet is on the ground
and unable to fly.[3]
Furthermore, another 10,000 aircraft remain underutilized.[4]
As
a result, share prices of some of the major international airlines have dropped
by about 50%.[5]
Analysts estimate that by the end of May 2020, the majority[6] or at least half of the
world’s airlines, approximately 800 airlines, will be bankrupt.[7] In March 2020, United
Kingdom´s airlines Flybe and Virgin Australia entered into reorganization
proceedings.[8]
Trans States Airlines and Compass Airlines are shutting down in April 2020.[9] Avianca, the second oldest
airline in the world, sent more than 14.000 employees on voluntary unpaid leave[10] and declared itself in
default with several creditors in March.[11] Delta Airlines asked its
employees for cash-savings suggestions and to consider taking voluntary unpaid
leaves.[12]
The
unprecedented measures adopted by States to respond to the COVID-19 pandemic
have impacted the aviation industry in a manner never seen before.
III.
State responsibility under international investment law
The
principal source of law and the one that must apply primarily in an investment
dispute’s resolution are the substantial rules enshrined in the relevant
treaty. The assessment of a breach of the treaty and the possible preclusion of
its wrongfulness should be based upon the same rules established thereto.
Notwithstanding,
it is not common to find rules precluding the wrongfulness of State measures in
investment treaties. Although, the new trend in investment treaty negotiations
is to include exceptions to the violation of investors’ substantial
protections. For example, the first bilateral investment treaty celebrated in
1959 by Germany and Pakistan did not include provisions that could be
interpreted as exceptions. However, treaties negotiated during the last decade
allow States to adopt measures related to health, national security, public
order, labor rights, and environmental protection, among others[13]. These exceptions aim to
give more deference to State measures adopted for purposes of public interest.
These
provisions enable States to adopt measures for the protection of public health,
such us measures to respond to the COVID-19 pandemic, without the obligation to
compensate investors that may be affected. However, for these measures not to
be tantamount of a breach of an investment treaty, they must comply with
certain requirements.
The
tribunal in the Philip Morris v. Uruguay[14]
case analyzed the measures adopted by Uruguay for the protection of public
health. The tribunal concluded that Uruguay did not violate Philip Morris’
rights because Uruguay has the sovereign right to exercise its police powers to
regulate public interest matters, and it should be granted deference to that
exercise. In the tribunal’s opinion, public health is a matter of public
interest, Uruguay was allowed by the treaty to protect public health, and the
measures were proportionate, not discriminatory, and adopted in good faith.
Similarly,
during the smallpox outbreak in Venezuela, the tribunal in the 1903 Bischoff
case concluded that “[c]ertainly during an epidemic of an infectious
disease there can be no liability for the reasonable
exercise of police powers.”[15]
Accordingly,
State measures adopted to respond to the COVID-19 pandemic may not imply the
international State responsibility for the breach of investment treaties.
The
national and international air traffic’s prohibition and the closure of State
borders can be seen as expropriation or contrary to other standards of
treatment. Nonetheless, these measures were adopted in the exercise of police
powers to prevent the virus’ transmission and to protect public health. In
other words, they were adopted in good faith and to regulate matters of public
interest.
However,
the proportionality of these two measures can be criticized. Some may consider that
there are less restrictive measures for the achievement of said objective, and that the impact on the
aviation industry is excessive compared to their capacity to achieve the
objective.
Discrimination
in these measures can also be claimed. The closure of borders for some States
and the prohibition of some flight routes could entail that airlines of certain
nationalities could continue to operate, and airlines of other nationalities
could not. Notwithstanding, a legitimate public policy reason might justify
this distinction.[16]
Another
factor that must be taken into account are the financial reliefs that States
are giving or not to airlines and other aviation industry actors. These reliefs
can show the State’s good faith and due diligence. Nevertheless, not all States
have the same ability to support them financially.
One
thing is clear: the few efforts made by some States to support the aviation
industry are not enough.[17]
IV.
Lessons from the Argentinean crisis of 2001 and the global financial crisis of
2008
The
State measures adopted to respond to the Argentinean financial crisis in the
beginning of the century and the global financial crisis of 2008 resulted in
numerous international disputes. The lessons left by these cases can help to
understand when and how States can react to times of crisis.
In
2001, the Argentinean economy entered into an extreme recession due to the
abolition of the parity between the American dollar and the Argentinean peso.
As a result, in the Continental v. Argentina case, the tribunal
held that its “objective assessment must contain a significant margin of
appreciation for the State applying the particular measure: a time of grave
crisis is not the time for nice judgments, particularly when examined by others
with the disadvantage of hindsight.”[18]
In
contrast, in CMS v. Argentina,[19]
the tribunal considered that Argentina contributed to its grave crisis. Thus,
the tribunal concluded that its state of necessity did not preclude the
wrongfulness of Argentina’s measures. Regarding the COVID-19 crisis, it could be
claimed that States did not contribute to this situation.
In
2008, the depreciation in the subprime mortgage market in the United States resulted
in an international banking crisis and the collapse of the most important
investment banks. The case Marfin Inv. v. Cyprus[20]
derived from measures adopted by Cyprus to respond to the crisis. The
tribunal considered that during a crisis, States have the right to exercise
their police powers to mitigate the situation and that they should not be
internationally responsible if the measures are proportionate, adopted in good
faith, and non-discriminatory.
However,
in the Pezold v. Zimbabwe[21]
case, the tribunal considered that deference should only be granted to State
measures if the relevant investment treaty orders it.
These
two crises are not analogous to the COVID-19 crisis. For instance, the
Argentinean and the global crises were caused by the economic system, whereas the
COVID-19 crisis had an external cause. Further, the financial crises did not
affect all States, while the pandemic crisis affected mostly all States in the
world. These two factors can influence future tribunals to be more deferential
in studying the State measures adopted to respond to the pandemic.
V.
Conclusion
The
unprecedented crisis caused by the COVID-19 outbreak has severely impacted the
world’s economy. One of the industries most affected by this crisis is the
aviation industry. The restrictions of air traffic grounded the majority of the
global fleet and prevented airlines from performing their economic activities.
Notwithstanding,
airlines are one of the key actors in the aircraft financing and leasing
industry. By preventing airlines from obtaining profits, these restrictions are
also affecting all other investors in the industry.
Hence,
foreign investors in the aircraft financing and leasing industry can claim the
State measures adopted to respond to COVID-19 are violating their rights under
international investment treaties. States can be responsible for the
compensation of these violations if they do not act in good faith and with due
diligence.
*
Lawyer graduated from Universidad de los Andes and candidate for a Master in
International Law from the same University. Associate of the area of financial
and banking law of Parra Rodríguez Abogados. E-mail:
dwalterosrivera@hotmail.com.
[1]
Vitaly S. Guzhva, Sunder Raghavan, and Damon J. D’Agostino, Aircraft Leasing
and Financing: Tools for Success in International Aircraft Acquisition and
Management (Amsterdam: Elsevier, 2019), 6.
[2]
Richard Furey, Structuring Aircraft Financing Transactions, (Thomson
Reuters, 2019), https://www.hklaw.com/-/media/files/insights/publications/2019/02/structuring-aircraft-financing-transactions-w0016292.pdf?la=en
[3] Anurag Kotoky, David Stringer, and Ragini Saxena,
“Here’s What You Do With Two-Thirds of the World’s Jets When They Can’t Fly”, Bloomberg,
April 16, 2020, https://www.bloomberg.com/news/features/2020-04-16/coronavirus-travel-what-happens-to-planes-grounded-by-covid-19
[4] Andrew Doyle, “Tracking the in-storage fleet and utilization in a time
of uncertainty”, Cirium, April 15, 2020, https://www.cirium.com/thoughtcloud/tracking-the-in-storage-fleet-at-a-time-of-uncertainty/
[5]
“COVID-19. By the end of May 2020, most world airlines will be bankruptcy”,
Center for Aviation CAPA, Accessed April 27, 2020, https://centreforaviation.com/analysis/reports/covid-19-by-the-end-of-may-most-world-airlines-will-be-bankrupt-517512
[6] Ibid.
[7]
Dan Reed, “Could Coronavirus Really Wipe Out Half the World Airlines and Change
Aviation Forever? One Keen Observer Thinks So”, Forbes, March 17, 2020, https://www.forbes.com/sites/danielreed/2020/03/17/could-covid-19-really-wipe-out-half-the-worlds-airlines-and-change-global-aviation-forever-at-least-one-keen-observer-thinks-so/#f323d820bffe
[8]
David Slotnick, “Many of the world’s airlines could be bankrupt by May because
of COVID-19 crisis, according to an aviation consultancy. These airlines have
already collapse because of the pandemic”, Business Insider, April 21,
2020, https://www.businessinsider.com/coronavirus-airlines-that-failed-bankrupt-covid19-pandemic-2020-3
[9] Ibid.
[10] El Tiempo, “En Avianca Holdings
14.000 empleados han aceptado licencia sin pago”, El Tiempo, March 30,
2020, https://www.eltiempo.com/economia/empresas/van-14-000-empleados-de-avianca-que-aceptan-licencia-no-remunerada-por-crisis-del-coronavirus-478586
[11] United
States Securities and Exchange Commission, Avianca Holdings S.A’s Form 6-K
Report of Foreign Private Issuer, April 23, 2020, https://sec.report/Document/0001193125-20-115767/d119111d6k.htm
[12] Rob Mark,
“Airlines Wrestle With Fallout From COVID-19”, Flying, March 17, 2020, https://www.flyingmag.com/story/news/airlines-wrestle-with-covid-19/
[13]
Comprehensive Economic and Trade Agreement of the European Union and Canada;
Free Trade Agreement of Colombia and the United States; Free Trade Agreement of
Colombia and Costa Rica; Free Trade Agreement of Colombia and Korea; Bilateral
Investment Treaty of Colombia and France; among others.
[14] Philip Morris Brad Sàrl, Philip Morris Products
S.A., and Abal Hermanos S.A. v. The Oriental Republic of Uruguay, Award,
July 8, 2016, ICSID CIADI No. ARB/10/7.
[15] Bischoff Case, GermanVenezuelan Commission, Decision 1903, 10
U.N.R.I.A.A. 420, (RLA-138), p. 421.
[16] GAMI
Investments Inc. v. Mexico, UNCITRAL Award, November 15, 2004; Parkerings-Compagniet
SA v. Lithuania, Award, September 11, 2007, ICSID Case ARB/05/8.
[17] “COVID-19.
By the end of May 2020, most world airlines will be bankruptcy”, Center for
Aviation CAPA, Accessed April 27, 2020, https://centreforaviation.com/analysis/reports/covid-19-by-the-end-of-may-most-world-airlines-will-be-bankrupt-517512
[18] Continental
Casualty Company v. Argentina, Award, September 5, 2008, ICSID
Case ARB/03/9, para.181.
[19] CMS Gas Transmission Company v. The Republic of
Argentina, Award, May 12, 2005, ICSID Case No. ARB/01/8.
[20] Marfin Investment Group v. The Republic of Cyprus, Award, July 26, 2018, ICSID Case No. ARB/13/27.
[21] Bernhard von Pezold and Others v. Republic of Zimbabwe, Award, July 25, 2015, ICSID Case No. ARB/10/15.
Fuente de imagen: https://www.internationalairportreview.com/
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