This document summarizes key points about aircraft operators and how they can provide protection to financiers: 1. Operators who hold an Air Operator's Certificate (AOC) take on full responsibility for operational, maintenance, and regulatory compliance of aircraft placed under their AOC, reducing risk for financiers. 2. "Tripartite agreements" between financiers, borrowers, and operators impose covenants on operators to protect aircraft standards and provide financiers recourse if covenants are breached. 3. Operators' pre-purchase inspections, insurance policies, payment of taxes/charges, and safety management systems further mitigate risks for financiers compared to owner-operated aircraft.

1. Aircraft Finance and Asset Protection – Operators Adding Value
By Aoife O’Sullivan, Partner, Gates and Partners
Introduction
The general feeling of manufacturers at EBACE this year appeared to be one of
cautious optimism. For the 20-year period from 2011 to 2030, the Bombardier
Business Aircraft Market Forecast predicts a return to sustained growth in business
aviation, with business jet manufacturers delivering a total of 24,000 business jets in
all segments in which Bombardier competes, representing total revenues of
approximately $626bn for the industry. For the 10-year period spanning 2011 to
2020, 10,000 deliveries worth $260bn are anticipated, and 14,000 deliveries worth
$366bn are anticipated in the 10-year period from 2021 to 2030.
Embraer have stated that they believe the market for business jets will not begin to
recover from its post-financial crisis slump until 2012 at the earliest. Almost 14% of
the global business jet fleet - around 2,500 aircraft - is up for sale, up from 12%
before the crisis, as key reasons for the apparent delivery lag. Smaller aircraft have
been hardest hit and as a result, manufacturers will reduce production in 2011 to
cope; for example Embraer will cut the output of its Phenom 100 and 300 business
jets to 100, down from 126 in 2010.
While industry deliveries are not expected to improve significantly in 2011, key
indicators are showing an upward trend, and it is expected that business aircraft
deliveries will continue to grow in 2012. In addition, with a widening customer base
for business aircraft - especially in high-growth economies - Bombardier anticipates
that North America, Europe and China will be the three most active markets going
forward and will generate the most revenues over the next 20 years.
Gulfstream President Joe Lombardo echoed this forecast at EBACE, saying that
Gulfstream continues to see strong and growing demand from countries outside
North America, even as its home market in the U.S. recovers. “Although about 70 per
cent of sales in the last quarter were international, with about half of those coming
from Asia, corporate customers in the U.S. are returning to the market as well,” he
said. “Additionally, we are seeing positive market indicators, including Gulfstream
fleet hours, which have just about returned to 2008, pre-recession levels. We remain
optimistic and are committed to our investment plans, which will position us well for
the future.”
Summary of Zenith Jet Business Aviation 10 Year Market Forecast (2011-2020)
Total deliveries over forecast period (2011-2020): 11,103 units
Total billings (revenues): $240 billion
Expected compounded annual growth of new aircraft deliveries, 2011-2016:
15%
A notable increase in demand for long range and large business jets will
continue from emerging markets

2. Increased price competition will characterize the long range business jet
market as OEMs look to capitalize on demand
Order backlog levels likely to decline in short-term as manufacturers manage
the alignment of their order intake and production rates
Demand for light and mid-size business jets remains weak, but production
levels will ramp up quickly as market recovers
Opportunities exist for OEMs to develop new clean sheet designs as existing
airframe platforms are increasingly unlikely to yield successful derivatives
Zenith Jet believes the fiercest competition between the manufacturers is mounted in
the Super Midsize segment. “Virtually every single competitor has a particular value
proposition it successfully leverages to secure market share. All six aircraft OEMs will
have a product in this segment as of 2017. The segment is arguably the most
strategic in business aviation as it occupies a “sweet-spot” where manufacturers
draw on the installed bases of several segments (up and down the segment scale) to
secure orders. In terms of unit delivery and revenue performance for the Super
Midsize segment over the forecast period, it will secure over 1,300 units and
approximately $30 billion in revenues”.
Zenith Jet sees discernable regional trends taking shape over the next 10 years. “For
example, the international market will favour primarily a wide body profile. In terms of
narrow body demand internationally, it will be predominantly split between Cessna
and Embraer. Also, the percentage of new customers to business aviation (primarily
coming from emerging markets) will be unprecedented over the next 10 years.
Regarding regional unit delivery performance, the trend of emerging markets
contributing to growth and favouring the international market for orders over the
North American installed base will continue. Latin America, Asia, the US, Russia and
Africa will be significant drivers for growth while Europe and the Middle East deal with
indigenous issues that may prevent them from realizing their true demand potential”.
The Financing Requirement
Clearly not all buyers are cash buyers and the ability of the industry to be supported
by bank finance is essential to keep order books open and encourage secondary and
subsequent sales. Reluctance on the part of major banks and financiers to re-enter
the market has eased and we are seeing a lot of the major players open their
balance sheets to aircraft finance again. All the major players (e.g. Credit Suisse,
SocGen, Barclays, BAML, GE) were at EBACE this year and all say they are very
much back. Some indeed, never left the market, but all in all the approach to aircraft
as a credit risk was and has been very cautious and this looks set to continue. 100%
non recourse financing is very much a thing of the past (and that’s no bad thing). The
trend of private wealth banks has been to insist on the borrower placing funds with
the investment bank as a condition of lending. Leasing companies such as Milestone
are offering alternative finance structures (e.g. operating leases) and we expect more
to enter the market offering genuine finance leases (i.e. lease with a purchase option)
which can have the added attraction of tax benefits and allowances.
Up to recently, financiers have tended to look at aircraft finance from a repossession
or loss risk: “what happens if the lessee defaults / what if the asset is destroyed”. The
knock on effect of lessons learned through the recession is that the banks and
financiers are taking (or should take) a lot more interest in the operation of the
aircraft, training of crew, application of correct safety procedures etc. They have

3. noted the effect good operation can have on the credit profile of a transaction
towards protecting the current life of the asset through to residual value. So, good
news for operators, you are back in demand. A respectful and on-going working
relationship between the borrower, operator and bank should assist all three if any
issues arise and in many cases, may help to prevent such issues arising at all.
What is an Operator?
The operation of private and business jets tends to be divided into three separate
categories:
1. Business Aviation Commercial - aircraft flown for business purposes by an
operator having a commercial operating certificate under public transport
regulations and an air operators certificate (“AOC”);
2. Corporate Private - non-commercial operations by professional crews
employed to fly the aircraft; and
3. Owner operated - Aircraft flown for business or private purposes by the owner
of the business.
The commercial decision behind the choice of the owner tends to fall on cost but also
on regulatory restrictions. Private aircraft do not have the same restrictions as those
flown for public transport (most notably in respect to flight time limitations and runway
length).
In terms of financing risk, there is a very real difference between all three. A valid
AOC and operating license is mandatory for companies offering charter flights in
Europe. Similar legislation, Part 135, is issued by the Federal Aviation Administration
(FAA) for operators doing business in the United States. The licenses certify
compliance with regulations, the competence of personnel and flight safety. An
operating licence is granted if the operator shows, not only sufficient financial
strength, but also that it meets all legal requirements put in place including adequate
insurance coverage. Aircraft placed « on an AOC » will be subject to an operation or
management agreement, an essential term of which will be passing all responsibility
for operational, maintenance and regulatory compliance to the AOC holder and away
from the owner.
In all other cases, the responsibility for operation of the aircraft rests with the owner
to varying degrees. It is possible to contract the services of a private management
company but they will rarely take full operational risk and responsibility – they tend to
act as subcontractors for various aspects of the operation of the aircraft. The owner
operated category is exactly that – the owner takes on operational responsibility
himself and does not assign or novate that responsibility to anyone else.
A genuine concern in recent times has been a trend for public transport flights being
carried out by unscrupulous operators or owners who do not hold AOCs, contrary to
regulation. The resurgence of this type of illegal charter flight caused EBAA
representatives to issue warnings about the dangers for passengers. The EBAA
publicaiton « Is my flight legal » urges passengers to thoroughly check the licensing
and other information related to their flight and the company they have chosen and
remind them that in the case of non compliance with the legislation by the operator,
the passenger can be taking the risk of flying without insurance coverage.
It is fair to say that operation of aircraft by AOC holders is not necessarily at a higher
standard. Some owner operators and private management companies will have

4. undertaken a full conversion course on the aircraft and will be willing to undergo
regular refresher training plus the mandatory checks in accordance with regulation.
The problem for the financiers however is that they are usually not well equipped to
gauge the professionalism of the owner operator and the private manager – taking
the aircraft to the AOC holder tends to be a way of relying instead on the regulators
who issue them their licence to operate and keep them under regular audit. Banks
who lease instead of finance through loans in legal terms remain the owner of the
aircraft – the borrower becomes the lessee. Allowing the borrower to operate the
aircraft itself instead of insisting on using a professional management company can
put the bank itself at risk – no matter how well drafted the loan agreements, some
civil and criminal liability remains strictly with the legal owner of the aircraft.
For example, it is the aircraft operator's responsibility in Europe to ensure that
insurance cover, in accordance with EU regulations, exists for each flight. The
regulation defines aircraft operator as the person or entity, not being an air carrier,
who has continual effective disposal of the use or operation of the aircraft; the natural
or legal person in whose name the aircraft is registered shall be presumed to be the
operator, unless that person can prove that another person is the operator.
Protection Operators can give Financiers:
1. The Tripartite Agreement
An increasing trend in aircraft finance has been for financiers to insist that
both the borrower and the operator sign what is generally known as a
“tripartite” or “multi-party agreement”. Often predicated by certain banks as
“standard in the industry”, “every other operator signs it”, the tripartite
agreement is a powerful document in a Banks hands and it should be taken
very seriously by Operators. The Tripartite agreement is, as the name
suggests, a three way agreement between the Bank, the borrower and the
operator. In all cases it will seek to impose certain covenants on the operator
which will usually mirror those covenants the Bank seeks of the borrower in
the loan documents (e.g. to ensure their asset is properly protected and
operated to a high standard).
So why do operators sign these agreements? The good news is that
professional operators should not have an issue with most if not all of these
covenants except to note that in signing the tripartite agreement they are now
contracting themselves to the Bank and not just the borrower. Breach by an
operator of a covenant will not only entitle the borrower to take action against
the operator, it will also entitle the Bank to take direct action against the
operator.
On a day to day level the form and content of these agreements should not
trouble operators provided the agreement has been negotiated sensibly with
the Bank and does not contain unusually onerous clauses. The challenge can
be in getting both parties to accept that they need each other and should
negotiate on a level playing field – without the finance, there may not be an
aircraft for the operator to manage. Without the operator, the bank does not
have the added protection for its asset.
Importantly for the financier, the operator will be the person in possession of
the aircraft at all times – the AOC does not allow them to part with control

5. save for the purposes of maintenance. In the event of a default under the loan
agreements, the operator can become the most useful person in the room to
a financier wanting to move the aircraft quickly to a safe and secure location
away from an errant borrower.
2. Pre purchase process
A pre purchase inspection (PPI) should be part of any sensible acquisition
process. Incredibly, financiers do not always insist on this, nor do they even
seek sight of the report. The PPI report will highlight any issues with the
aircraft and will indicate any previous maintenance or damage history. Most
good operators will have the facility on hand to carry out the inspection – it is
in their vested interested to get the PPI right as they will otherwise have to
deal with the issues on that aircraft doing the course of management.
Operators will have teams familiar with different types and models of aircraft
and in many cases will bring a lot of previous experience and insight to the
PPI process.
3. Insurance cover
On 30th April 2005, EC Regulation EC 785/2004 on insurance requirements
for air carriers and aircraft operators came into force. The Regulation was
subsequently amended on 6th April 2010. The Regulation, as amended,
specifies the minimum levels of insurance required by aircraft operators and
air carriers in respect of third party cover, passenger cover and cover for risks
of war and terrorism. It is a legal requirement that aircraft carry this cover.
Keeping the premiums up to date is essential to ensure compliance with
regulation but also to ensure the liability of the owner and the financier is
protected.
Many operators offer what is known as “fleet policy” insurance. The operator
takes out a policy and aircraft under its management can be added to the
policy. Due to economies of scale, the operator may be able to obtain better
premiums and more extensive coverage that that available to an owner under
a single policy.
Operators have a vested interested in keeping the insurance cover current as
they themselves are covered in the event of a loss and in many cases the fact
that they were the operator at the time of a loss will mean they will be
implicated in any claim. There is no benefit to an operator withholding
premiums or putting insurance at risk. For Banks this is an important issue –
many borrowers who are heading into default will often stop paying everyone
else before the bank becomes aware there is an issue. Financiers tends to
rely on brokers letters of undertaking which promise to inform the bank if the
owner stops paying premiums or if the insurance is about to lapse – the
security risk however is that the broker is not legally bound by such letters
and in any case the letter may arrive too late. Better to rely on the operator’s
policy in such case.
4. Taxation and charges, liens and detentions
The world of aviation is fraught with taxes and charges. Non payment of such
taxes and charges can result in an aircraft being grounded by the relevant
authority until the charges are paid. Examples of bodies having the power to
exert such statutory liens include Eurocontrol, Revenue and Customs and

6. local Aviation Authorities. Regardless of the small print in the loan documents
and the fact that the bank has a first charge on the aircraft – the aircraft will
quite simply not be released until the charges are paid.
Operators who run a professional operation will have systems and
procedures in place to ensure such charges are paid in a timely manner.
Following the change in VAT rules this year as they apply to aircraft imported
into Europe, many member states of the EU will recognise AOC holders as
having the right to import an aircraft into the EU at the same 0% rate currently
afforded to airlines. The 0% rate is permitted where an aircraft is imported
and used by an airline operating for reward chiefly on international routes.
This rate is not afforded to private individuals importing the aircraft for their
own use.
5. Professional management and safety
Operators are now required to run a safety management system (SMS) which
should benefit safety performance in the long run. The relevant standard is
laid out by the International Civil Aviation Organisation in Annex 6 Part 2. This
states a requirement for operators of business aircraft with a take-off mass of
more than 5,700kg (12,500lb) to run an approved SMS. The system is one of
reporting issues and taking steps to resolve them – operators are trained and
kept regularly updated. Any good operator should have a strong SMS system
in place and the financiers should satisfy themselves that the systems work
and are respected.
Many operators will have taken the issue one step further and will have put in
place emergency response plans (ERP) which are effectively procedures the
operator will follow should an emergency happen. Evidence of an ERP in
place should let the financier know that the operator takes safety seriously
and has trained its management and staff in responding to any issues. For
example, even basic media training can prevent mistakes being made – the
press today picks up almost in real time where there has been an incident.
The threat to the financier is that if any misinformation is given to the press,
the resulting investigation may be affected or delayed which will have a knock
on effect on any insurance pay out. Operators who have systems in place
protect not only their own business and reputation but also that of the
financiers.
6. Warranty claims and Support contracts
Part of the value attributable to an aircraft will be the residual life left in any
manufacturer or supplier warranties and whether or not it is supported by any
programs such as CAMP/Smart Parts etc. In the event of a warranty claim,
the insight and expertise of an operator can be invaluable to a financier in
assessing the merit of a claim, what should be covered and how to progress
the claim with manufacturers and suppliers. Such claims are complicated and
are best left to those experienced in handling them.
In terms of support contracts, operators tend to name themselves on the
programs where the aircraft is under their management – as part of their
service, they will ensure the service programs are kept current and fully paid
up. If for example an expensive engine overhaul is required, the contributions
made over time to the support program will be used instead of requiring the

7. borrower to pay large sums of money he may not have anticipated. Support
programs act as a type of savings policy against such large maintenance
items and should be kept current – hiring a professional operator to do so will
alleviate any concerns of the financiers in this regard.
7. Maintenance oversight
The operator will provide maintenance oversight to the aircraft which is
extremely important in terms of protecting its residual value. All aircraft have
scheduled and base maintenance requirements and operators will usually be
happy to assume responsibility to ensure these requirements are met. A well-
maintained aircraft will always have a higher residual value than one that is
not. Well-maintained however does not necessarily mean just compliance
with regulatory standards – the regulatory standards establish the baseline for
airworthiness. Airworthiness is related to safety, not value. Being well-
maintained means more than keeping up with the required inspections and
component overhauls. It means the aircraft has its equipment in functioning
order, non-critical wear and tear items are taken care of, and cosmetics are
protected. Who maintains the aircraft is vital to the aircraft value. The MRO
(Maintenance, Repair and Overhaul) facility must have the knowledge and
skills to perform the required maintenance, and when necessary, troubleshoot
and repair the aircraft.
8. Aircraft and record protection
According to Conklin & DeDecker, the aircraft maintenance records not only
need to be a true and exact representation of an aircraft, they are also the
written proof as to the quality of the maintenance. This is the tool to use to
communicate the health of your aircraft to your maintenance staff, MRO, and
any future buyer. If things are well-documented and thorough, it gives the
inspector confidence in the aircraft. If the records are sloppy, but technically
correct, the inspector will assume the aircraft is technically airworthy, but not
be in as good a condition as it could be. Missing and incomplete maintenance
records call into question even the basic airworthiness of an aircraft.
If the aircraft has damage history, a well-documented explanation of the
damage and repairs can minimize the negative effect of the damage on the
aircraft's value. This information will also be invaluable in the event of any
loss or damage to the aircraft and in bringing a claim against the insurers.
Hiring an operator who has the correct facilities to safely and secure the
aircraft records and to ensure they are kept up to date and complete will
protect the value in the asset.
Conclusion
Concentration by financiers on the operation of aircraft is a welcome change. It is in
every party’s interest to have an on-going working relationship so that any issues
surrounding the operation of an aircraft is quickly addressed. Hiring an operator to
manage the aircraft should not be about the ability to put the aircraft to charter and

8. earn revenue income against finance: it is also about ensuring the asset is protected
to the best extent possible.
Contact details:
Aoife O’Sullivan
Partner
T: 0844 692 4966
M: 07709 432 350
F: 0844 692 4901
E: aosullivan@gatesandpartners.com
GATES AND PARTNERS
Solicitors
5th Floor, Capital House
85 King William Street
London EC4N 7BL
Tel: 0844 692 4900
Further information is available from our website at www.gatesandpartners.com.