Fiona Sun discusses her experiences navigating the pandemic as senior legal counsel of aviation giant Minsheng Financial Leasing. She talks to Lynn Zhang about the challenges faced in handling transactions and contracts, and the opportunities that can avail, even in a crisis
The covid-19 pandemic nearly grounded the global aviation industry in 2020. While China managed a quicker recovery, the international nature of the industry meant that businesses continued to suffer. Civil Aviation Administration of China figures show that passenger throughput in China’s airports dropped 36.6% in 2020 compared with the previous year.
However, the pandemic turned out to be a blessing in disguise for business aviation, as high net worth individuals (HNWIs) chose to buy private jets to meet their travel needs. Minsheng Financial Leasing, one of Asia’s largest business aviation leasing companies, while making the best of this opportunity, has also had to handle a fair share of turbulence. Here, Fiona Sun offers us a co-pilot’s seat to view the challenges she managed in keeping the business flying a steady course.
China Business Law Journal: You are involved in the financial leasing industry. What impact did the pandemic have on the aviation industry last year?
Fiona Sun: If you break it down, since the 1920s the aviation industry has been divided into three mutually independent but closely related industries, namely, aerospace manufacturing, civil aviation and military aviation.
Civil aviation is the general term for all aviation activities of a non-military nature (i.e., not defence, police or customs). Civil aviation is further divided into commercial aviation and general aviation. Commercial aviation refers to the aviation activity of carrying passengers and cargo by aircraft on a for-profit basis. The airlines or air cargo companies that we commonly see fall into this category. General aviation is then the catch-all term for civil aviation that does not fall into the category of commercial aviation.
Last year, commercial aviation faced great challenges due to travel bans and the closure of borders around the globe, and many of our regular commercial flights were reduced or cancelled.
In contrast, last year proved a pretty good year for general aviation. General aviation is more about private business flights. Because of the pandemic, certain entrepreneurs and HNWIs with travel needs opted to buy their own private aircraft to meet their travel needs, thereby making their travel safer and more convenient.
Last year was a very active year for market transactions in private aircraft, or what we call the business aviation industry.
CBLJ: Have general aviation transactions rebounded? What challenges does the pandemic pose for the financial leasing industry?
Sun: Transactions in general aviation have been quite active compared with the past. We had a lot of new aircraft change hands, along with some used aircraft, which was one of the better things we saw.
We also encountered many challenges. We are in financial leasing, mainly offering two types of service, one being financial leasing – that is to say, providing financing services; additionally, we are the largest business aircraft leasing company in Asia. We faced major challenges in both aspects.
The first issue is the financing aspect. The term of a financial lease is three to five years, being the period during which the lessee is required to repay the principal and pay the interest. The pandemic hit the lessee’s quite hard. Certain lessees are engaged in tourism or manufacturing, and the industry chain has had a major impact on them, they have problems repaying and their assets have also become overdue. This is a dilemma we encounter from the financing perspective.
From last year to the present, we have been actively addressing the impact of such non-performing or problem assets, or late repayments. From a legal perspective, or a contractual perspective, we may institute legal actions or take related measures.
The second issue is the difficulty in aircraft transactions, with the pandemic hampering aircraft transactions globally. A business aircraft is a global thing, not limited to a certain region or country, like a used car. Often our aircraft may be sold to Europe or North America, and our customers may ask us to assist them in purchasing and financing used aircraft from Europe or North America.
However, because of the pandemic, we are unable to send technicians to inspect the aircraft on site, our only option being to engage local technicians to help us inspect the aircraft, write reports, or to ask them to take videos for us. This is the sort of problem we face when we act as buyers. Then, when we are the seller, the counter-party, as the buyer, faces the same problems, because he/she can’t see the aircraft, placing a major obstacle to the progress of the entire transaction.
It is much easier to build confidence between people when analysis, inspection, ex-change and communications are conducted face to face. Accordingly, our aircraft sales and purchases, including the entirety of the transaction and customs formalities, are taking much longer than in the past.
CBLJ: Are there any proven strategies to deal with the difficulties involved in aircraft transactions?
Sun: Transactions in this industry rely on all the professionals to move them forward. We can only move forward with urgency and flexibility, in light of the obstacles that the pandemic creates for us and the things that we are able to do at the moment.
For example, in addition to hiring local technicians to conduct aircraft inspections, we can also rely on our trust in the aircraft manufacturer, and require that the aircraft go to the aircraft manufacturer’s designated maintenance facility for inspection. Other aspects, I think, are not much different from before, e.g., contract negotiations, where everyone is in different countries and there are time differences. I don’t think the impact is that big. But we now have more frequent phone calls and video conferences than before, where in the past we might have just flown over and met with everyone and talked about it, and it might have gone very smoothly.
Now we may have to spend more time and energy, be more patient in answering each other’s questions, be more patient in negotiations, as we cannot make decisions as quickly as before, and the two sides to the transaction do not feel as secure as before.
In technical terms, our technicians face a big challenge. Now, we set out the technical terms more clearly. In the past, based on the inspection of the aircraft, the technical terms were not, comparatively speaking, set out so specifically in a contract. Now, as it is impossible to conduct the technical inspections in person, or one is required to rely solely on third-party reports, the technical requirements are more stringent and specific.
Another important point is that we have revised the force majeure clause in the contracts. In the past, force majeure mainly referred to natural causes such as earthquakes, flash floods, tsunamis, or such causes as wars, riots or government acts.
Now, when we negotiate, we will explicitly enumerate covid-19 or epidemics as force majeure. Earlier, we would expect completion of aircraft inspection or delivery in one to two months. However, due to the pandemic, the local government may impose a lockdown order, extending our delivery time beyond the agreed upon schedule – this is force majeure.
We are also now making it clear in our contract terms that we require that covid-19 – a factor that is impossible to control, and could have a major impact on the timing – be put into the terms as force majeure. As time is a key factor, the value of an aircraft, like that of a car, will be impaired over time.
CBLJ: Recovery from the pandemic has varied from place to place. How are transactions and market recovery faring in different places?
Sun: This does not have much of an impact on domestic transactions. Basically, everyone in mainland China is now free to travel, so our domestic transactions are progressing smoothly, just as before. However, ours is a global market, and if an aircraft is in Europe or North America, it presents us with a major problem.
For example, if we wish to buy an aircraft from North America, when the aircraft returns to China the pilot and crew will be required to self-isolate after entering China, something certain pilots may not be willing to do.
Furthermore, pilots may only fly a certain model of aircraft. If pilots wish to fly another model of aircraft, they can only do by taking a course that allows them to change aircraft. If we have to find a pilot who can directly fly a particular model of aircraft, then we will find that the number of such pilots is quite limited.
These are some of the myriad problems that we have encountered during the pandemic. The timetables for a lot of transactions have been difficult to control, with a lot of force majeure, or numerous unforeseeable factors. Like the pilot factor I mentioned, these are factors that we don’t normally encounter, and to which we have to give extra consideration.
CBLJ: How do you think the general aviation industry will develop in the next year?
Sun: I believe it will get better. The majority of commercial aviation and general aviation customer groups do not overlap. The reason why I say that the business aircraft industry, as a whole, was good last year is that there may be some individuals who have a high net worth but would not usually consider buying a business aircraft. However, because of the pandemic, we were able to develop such customers last year or this year. The number of people in this group is very small, so even if the pandemic takes a turn for the better, there is no competition between the customer groups for business aviation and general aviation.
The second point is that if the pandemic situation improves, many industrial sectors in China will start doing better, especially foreign trade. Lessees that are not doing well economically due to the pandemic may see an improvement in their economic situation. From our perspective, such a lessee’s ability to repay improves. From a financing perspective, this will certainly be good for us, as we are also a financing company.
Finally, if the doors of the country are thrown open after the pandemic takes a turn for the better, the circulation and trading of used aircraft globally will be more convenient.