7 May 2020
Introduction
Covid-19 crisis has severely impacted almost all industries but disruptions in the airline industry is so profound that it is assumed to be greater than the combined crises of 9/11 and the 2008 global financial put together. The Government of India (acting through DGCA) (“GoI”) has vide its (i) order dated March 23, 2020 passed under Section 88(1) of the Aircraft Act, 1934; and (ii) orders dated March 26, 2020 and April 14, 2020 directed inter alia all aircraft operators to suspend the operations of all the domestic flights and all scheduled international commercial passenger services until May 3, 2020. The forward air travel bookings are far outweighed by the cancellations. Air travel demand is drying up in ways that are unprecedented with no semblance of normalcy on the horizon. For an industry which is already stressed, Covid-19 has only accelerated the process of bankruptcy filing by several companies (like Virgin Australia and Air Mauritius). Those airline companies which are still in business have also suffered misfortunes as coronavirus-forced lockdowns have kept their fleets grounded. Per the market sources, apart from the pay cut, several airline companies (Indigo, Go Airlines) have also taken other cost cutting measures including furloughs.
Given the turbulence caused due to the outbreak of Covid-19, it is crucial for the airline industry to focus on the horizon to successfully navigate the challenges (including legal, financial and operational) which are likely to surface once the pandemic is behind us. Future flight plan for the airlines will be influenced to a great extent by factors such as avoiding countries that have been virus epicentres and gauging government responses on the type and duration of travel restrictions and the conditions under which they might be relaxed.[1] It is likely that governments across the globe may consider imposing specific restrictions/limitations (akin to the security measures put in place after terrorism events[2]) for inbound and outbound passengers. These restrictions/ limitations may include a mandatory health screenings or certificates (form prescribed medical practitioners) prior to the boarding. In this article we analyse and identify various operational challenges and legal issues which may arise because of the nationwide shutdown and explore mitigants, if any.
The most critical question today vis-à-vis Covid-19 concerns the duration of the crisis in light of government responses and the progression of the virus. For the aviation industry, besides lifting of the current lock-down, relaxation on the ban of air travel both within and outside India should also be considered. Nevertheless, the duration of Ccovid-19 crisis is likely to differ by region and by country. International Air Transport Association has identified India amongst the priority countries that need to take action for relieving the already struggling airline companies from the stress caused due to the pandemic. There are several industries including Travel and Tourism which are heavily dependent on the aviation industry and jobs across many sectors will be impacted if airlines do not survive the Covid-19 crisis.
Post Covid, megatrends such as the dramatic rise in remote working, government or organisation-imposed limitations/restrictions on air travel, greater reliance on locally-oriented supply chains as well as avoiding non-essential travels will impact the recovery demand in the aviation industry and may lead to major overhaul in the management and operation of the airline industry.
In order to fly safely through this turbulent time, it is of utmost importance that the airline companies launch a crisis management team or as its being coined by some in the industry – “Plan Ahead Team”. This Plan Ahead Team will be responsible for collecting forward looking intelligence and provide a Post Covid-19 flight plan to guide and accelerate decision making. Following are some of the of the challenges/considerations which airline companies in India may consider while formulating their Post Covid-19 flight plan:
a. Third party contractor agreements/Hedging arrangement for jet fuel prices: Determination of the optimal size and dimensions of their networks and fleet will hold the key to the survival of airline companies. These companies may have to revamp their strategies vis-à-vis the air travel restrictions imposed by the governments to identify routes that are most likely to recover basis demand, regulatory and market structure scenarios. The determination of routes that are most likely to recover will determine which fleet/route to recommission. For the routes that could not be recommissioned or are partially commissioned post Covid-19 and withdrawal of lockdown orders , the airline companies may have to renegotiate/re-assess the legal risk that may arise pursuant to their contracts with third party contractors engaged for inter alia refueling; catering; runway/taxiway construction and repair; aircraft maintenance and overhaul; crew training; and flight dispatch. Further, airline companies must also consider revisiting/re-negotiating their existing contracts for hedging the jet fuel prices. Most of the airline are locked into contracts for hedging the jet fuel prices. There has been a steep drop in the prices of jet fuel as an upshot of the current crisis. Accordingly, the airline companies will have to pay their higher hedged amount for jet fuel, creating hedging loses. In this context, the existing provisions of these contracts become relevant to determine the leverage of discussions from a legal rights perspective.
b. Financing Arrangements: Given that the airline companies have suspended all their business, it would imperative to ascertain if defaults would get triggered under the various financing agreements entered by the airline companies. Where an event of default is only triggered upon a ‘voluntary’ suspension of business, it may be argued that such temporary cessation of business due to the virus outbreak is a direct consequence of the government regulations and therefore outside the scope of such provision. Further, it would be relevant to check if an event of default is qualified by a requirement that a suspension of business has a “material adverse effect” on the borrower’s ability to perform its contractual obligations. If there is a significant impact on the borrower’s ability to pay, this will likely satisfy the test of ‘material adverse effect. Additionally, it is expected that post-Covid-19 and lifting of the lockdown orders, for reasons including financial and operational difficulties, the airline companies may not be able to commence operations in all the sectors or may not be in a position to recommission their entire fleet. Given the aforesaid, it would be relevant for airline companies to review the event of default provision relating to ‘cessation of business’ in their financing agreements. Cessation of Business would typically include events where a company ‘threatens’ to suspend or cease to carry on its business and therefore, one may argue that such temporary closures post Covid-19 and/or lifting of lockdown orders, would constitute a ‘cessation’ of business. It would be prudent for airline companies to review their facility agreements when contemplating Covid-19 related measures and consider the impact of such measures may have on their financing arrangements. These tests can be carried out during the period of lockdown, such that the provisions can be re-considered by the parties.
c. Aircraft Lease Agreements: The airline companies may have to revisit/review their aircraft lease agreements. The airline companies may consider approaching the lessors for seeking concessions in relation to the lease obligations including ‘rental holiday’ on account of liquidity crunch consequent to fall in ticket receipts post Covid-19. While the lessors may be entitled to decline requests for concessions on lease obligations, the commercial reality may well be that lessors will have to assess whether supporting an airline in some way may improve their financial health in the aftermath of the crisis or whether such benevolence will only delay the end of a business that was struggling in any case. It may be worthwhile to consider that the relief package/concessions which an airline company may seek from the lessors may include inter alia a standstill for an agreed period with an agreed repayment schedule to recapture the unpaid rents, forbearance on event of default at a cost.
d. Governmental Support: Globally, the market structure for airline industry is set to witness a major revamp. This change will be significantly influenced by government responses to the crisis and types and levels of support extended to the airline industry. For instance, several European countries have announced support for airline employees as a panacea to the airline companies for drastically reducing their employee costs. The United States is offering a rescue package for all carriers that comprises a mix of payroll grants and loans. Similar support has been extended or is likely to be extended (to the employees directly or to airline companies) in the Middle East and some Asian countries. In the absence of specific announcements/ relief measures, the airline companies in India may consider approaching the Ministry of Civil Aviation and/or the GoI for relaxation/waiver in relation to various fees/licenses including airport charges, AAI and Private Airport Operators’ space rentals and infrastructure charges which are to be paid by them. This waiver may specifically be sought in relation to air spaces/sectors, which the airline companies suspect will not be recommissioned or sectors where the travel demand likely to rebound slowly.
e. Resolution/Restructuring: Globally there are several airline companies which have filed for bankruptcy. Per CAPA-Centre of Aviation, most world airlines would be bankrupt by the end of May. In this context, the Ministry of Finance (“MoF”) has on March 24, 2020, indicated that if Covid-19 crisis continues beyond April 30, 2020, it may consider suspending Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 for a period of six months to stop companies from being forced into insolvency proceedings in such force majeure causes of default under the commercial agreements (e.g. financing agreements, lease agreements). Additionally, RBI has issued several circulars dealing with the measures to alleviate the Covid -19 impact on corporate India. With this background, the airline companies may consider engaging in dialogues with their creditors/lenders for preparing and implementing a resolution/revival plans which may involve sale or purchase of minority equity stakes, merger and other consolidation opportunities for resolving the financial crisis and liquidity crunch.
f. Import Duties and Trade barriers: Government of India is considering putting in place several trade restrictions/embargo on the import of goods from China. The airline companies in India import spare parts including generator control units for their inventory from China. The prices of these spare parts may be increased due to the embargo/trade restrictions imposed by the Government of India.
As Covid -19 continues to spread across the globe, the challenges triggered by it are numerous and unprecedented. In order to successfully navigate through this challenging and uncertain environment, a thoroughly crafted and a comprehensive flight plan will be pivotal. The dramatic reduction in passenger numbers represents a threat to the solvency of the airline companies. The airline companies may consider restructuring their business and debt. However, it would imperative that any such restructurings (business or debt) will have to be agreed and implemented relatively quickly, in order to avoid collapses. It may be worthwhile to note that in stressed situations like Covid-19, being on the fastest trajectory may matter more than having a great plan that may quickly become outdated. Therefore, after the pandemic is contained, GoI may have to provide a relief package for the aviation industry to support economic recovery and prevent collapse of the aviation industry.
The Indian tourism and hospitality industry are severely affected by the outbreak of COVID-19. Once COVID-19 crisis is contained, the GoI may inter alia consider developing an appropriate messaging/advertising campaign (similar to ‘Incredible India’ tourism campaign) so as to provide necessary impetus to the recovery of the aviation industry post COVID-19.
For further information, please contact:
Subhojit Sadhu, Partner, Cyril Amarchand Mangaldas
subhojit.sadhu@cyrilshroff.com
[1] The Government of India had vide its circular dated April 14, 2020 has decided that all scheduled international commercial passenger services shall remain closed until May 3, 2020. Additionally, a collated list of the Global and regional Government measures related to Covid-19 are available at https://www.iata.org/en/programs/safety/health/diseases/government-measures-related-to-coronavirus/
[2] Post 9/11, it is customary to have long lines at the airport and extensive security checks. The enhanced security measures are being monitored and implemented by the Transportation Security Administration (TSA). The TSA was created as a direct result of the 9/11 attacks. Available at https://www.insider.com/world-changed-after-september-11-2018-9#2-airport-security-has-gotten-a-lot-stricter-2 and https://www.dhs.gov/preventing-terrorism-and-enhancing-security.
