When Covid tightened its grip on the world between February and April 2020, the effect on the aviation industry was devastating. As the borders closed, the skies calmed down and airlines searched for a place to park planes on the ground.
Industry had to press ‘pause’ – but, at corporate headquarters, activity peaked as they raised cash, sold assets and, in many cases, restructured their businesses.
The aim was to survive the collapse in passenger numbers and avoid corporate bankruptcies – and lawyers were involved every step of the way.
Few airlines had time to waste. With high fixed costs, the industry spent about $ 150 billion in cash in a matter of months, according to the International Air Transport Association. The calls with the lawyers must have been arranged in haste.
âIt was obviously a difficult time. . . even to this day, I have never met the clients despite this colossal work with them, âsays Craig Montgomery, partner at Freshfields Bruckhaus Deringer in London.
Freshfields has helped state-owned Malaysia Airlines reduce its obligations on aircraft leases as part of its restructuring. These leases are one of the main objectives of any reorganization in the aviation industry, as they represent a significant portion of a company’s costs.
Malaysia Airlines wanted to “get started,” Montgomery says. He still fulfilled his obligations in full and “needed to find a solution.” . . as quickly as possible â. At the same time, lessors did not want to see the abrupt return of their assets, especially large airliners, as they faced logistics, storage and maintenance costs with no hope of new leases for months.
Freshfields turned to the English courts and a scheme of arrangement – a tool that is often used in financial restructuring but never before with aircraft leases. The tenants agreed to a collective arrangement to replace previous ad hoc leases, which made the settlement for Malaysia Airlines more efficient.
The crisis has underlined the international character of the industry. While many airlines have a country’s name on the fuselage of their planes, their assets are mobile and they have entities in various jurisdictions.
For Malaysia Airlines, the English law was preferable to the courts of its country of origin because it is recognized worldwide. A plan of arrangement turned out to be “an obvious solution for a lease,” says Montgomery.
Lawyers had to look for innovative solutions. Allen & Overy helped Virgin Atlantic with the first restructuring as part of the July 2020 Companies Act Update, which allows courts to approve a plan even if all categories of stakeholders do not. have not argued. White & Case helped Air France-KLM navigate EU ownership and state aid rules when refinancing its debt.
Many airlines have declined over the past 18 months, and one of the most publicized victims has been Norwegian Air Shuttle (NAS). The Oslo-based carrier grew rapidly in the 2010s, switching to low-cost transatlantic flights, but fragile finances exposed it to the effects of the pandemic. Bankruptcy proceedings in 2020 effectively wiped out its shareholders and its operations declined dramatically.
NAS shareholding is complex, but mainly consists of Irish subsidiaries within a Norwegian umbrella company, which has allowed restructuring in the Republic of Ireland, with a parallel program in Norway. It was the first time that an Irish exam had been used to restructure the obligations of a non-EU company.
The move slashed the NAS fleet from 150 to 50 aircraft, reduced Norwegian’s debt by about $ 7.5 billion, included a capital increase, and ended orders for aircraft worth around $ 7.5 billion. ‘about $ 10 billion. Lawyers in the case say the restructuring could not have been achieved under Norwegian law alone, in particular the termination of leases that were covered by the Cape Town Convention, which protects high-value aviation assets.
Ruairi Rynn, partner at William Fry law firm, who represented the examiner in the Irish process, said working in an Irish court with a Norwegian company was “unique and unusual, but ultimately very successful”.
Throughout the process, the lawyers and airline management got used to meeting virtually and in some cases there was no face-to-face physical contact. The rapid adoption of video conferencing has been a success, but executives of airlines, whose fortunes are based on business travel, are happy to hear companies say they still prefer face-to-face meetings.
âIf I had to do it again and I had the option, I would still go see the client,â says Montgomery. âThere’s no substitute for doing it in person, which of course is good news for the client,â he says.
Best practice case studies
Researched, compiled and classified by RSGi. “Winner” indicates that the organization has won an FT Innovative Lawyers 2021 award
When Covid-19 resulted in travel bans, lawyers navigated the complexities of processes such as restructurings, while limiting losses of control.
WINNER: Freshfields Bruckhaus Deringer
As the pandemic hit airline revenues, state-owned Malaysia Airlines considered Chapter 11 insolvency. Lawyers devised an alternative solution using the English scheme of arrangement to create cost savings in contracts. aircraft rental from the client. This reduced liabilities by $ 3.6 billion and rents by up to 40%.
Freshfields Lab, the tech arm of the law firm, used artificial intelligence to review contracts and created a tool to search for a specific language in documentation, which sped up negotiations. This approach has prevented a state-owned enterprise from going bankrupt.
Allen & Overy
In April 2020, Virgin Atlantic Airways, owned by Virgin Group and Delta Air Lines, called on Allen & Overy to help it avoid going into administrative proceedings.
Virgin Atlantic was the first company to implement the UK Insolvency and Corporate Governance Bill of 2020, designed to prevent companies from filing for bankruptcy due to the pandemic. His lawyers lobbied to remove terms in the legislation that would have excluded Virgin from benefiting from it. They helped the company come up with and agree to a new restructuring plan with creditors, and had the Chapter 15 bankruptcy court proceedings recognized. The plan will inject Â£ 1.2bn over 18 months.
White and case
The ownership structure of Air France-KLM includes the French and Dutch states, Delta Air Lines and China Eastern Airlines, supported by the state. Thus, rather than seek a direct loan from the French state, which would have made France the majority owner, the lawyers reached a financing agreement whereby a shareholder loan of 3 billion euros was recapitalized by an issue of highly subordinated hybrid securities. In addition, they combined this with a capital increase of one billion euros by way of a public offering. This meant that the financing was classified as debt, which does not carry voting rights and does not affect the shareholder’s balance.
TAP Air Portugal was unable to apply for state aid under EU rules because it was already in financial difficulty at the start of the pandemic. But lawyers have instead helped the airline secure state aid under the restructuring laws, including negotiating with private shareholder Atlantic Gateway to sell a 22.5% stake in the airline to the Portuguese State.
The lawyers represented Examiner KPMG in connection with the restructuring of Norwegian Air. The airline is mainly made up of Irish subsidiaries, while the parent company is Norwegian. The lawyers reached a settlement agreement in Irish courts, demonstrating to Norwegian courts that it was in accordance with Norwegian law. The restructuring included a reduction of the airline’s fleet from 150 to 50 aircraft, raising capital of up to 6 billion Norwegian kroner ($ 725 million) and debt reduction of 65 billion kronor (7.5 billions of dollars).
Voyager Aviation Holdings, an Ireland-based aircraft rental company, was hit hard when the pandemic left its airline customers unable to pay their bills or had to renegotiate leases. This left Voyager unable to pay $ 415.3 million in senior tickets due in August 2021. The law firm demonstrated how an Irish scheme of arrangement could be used to restructure existing tickets, convincing 98 , 49% of noteholders support a legal-deal to help Voyager reduce debt and avoid Chapter 11 insolvency.