Negotiate a redelivery of leased aircraft.

A Success Story:

Negotiate a redelivery of leased aircraft.

Objective:

To reconcile the situation created when the owner of the aircraft decided to stop paying the loans that financed their purchase. He did not meet the due dates of the outstanding installments coinciding with the termination of the leases of the aircraft. The non-payment implied the incorporation of the banks as a party directly involved before redelivery was conducted.

Context in which the actions took place:

1. The aircraft were acquired through mortgage loans taken out with two financial institutions. The aircraft themselves served as collateral for the granting of the loans.
2. Three Boeing 757 aircraft were involved. The outstanding balance of each loan was USD 7m. The amount recoverable through the sale of each aircraft in its state at that time was around USD 2m.
3. The banks, after several months of fruitless negotiations, had not been able to market any of the aircraft. Therefore, already in a first contact, they informed us that they must try to recover the differential of 5m USD for each one of them.
4. The company could not record in the fiscal year an amount for the total cost of returning the aircraft at more than USD 3m
5. The company also did not have sufficient liquidity in the short term to pay an amount over USD 2m.

Actions we took:

– Review the contractual return conditions established in the leases.

– Collect information on the technical situation of the aircraft.

– Assessment of the revisions, repairs and spare parts required in each case.

– To approach the whole matter from a practical point of view, trying to reach from the beginning a figure acceptable to both parties.

Challenges we had to overcome:

– The tremendous anger of the banks for the non-payment of the loans and for having to take over the airplanes, which had been flying for some twenty years.

– The deliberate delay of the whole redelivery process, as the lease of the aircraft continued to run every month.

– The enormous difference in size and resources between the banks and the company.

Limitations that we had to respect:

1. Some calculations and studies elaborated by the company’s Technical Management.
2. The clear non-compliance with certain contractual conditions of the redelivery, which gave rise to litigation to determine the appropriate compensation.
3. The maximum amount of cash that was available almost immediately to make the initial payments. In addition, the cash flow projections to be able to meet the deferred amounts.
4. The assumable impact on the income statement of the redelivery costs. The reasonableness of considering some items to be applied in the following fiscal year.
5. The respect of generally accepted accounting principles (GAAP) and auditing standards, so that the financial statements showed the company’s equity situation.

Results achieved:

– Economic agreements for a total amount of USD 3.2m for two aircraft and USD 1.75m for the third.

– Initial disbursement, at the time of repayment, of USD 1.35m and USD 0.5m.

– Financing the remaining amount in equal installments, payable during a period of 16 months and 5 months, respectively.

– No additional costs and no need to provide guarantees beyond an acknowledgement of debt or promissory note.

– Delivery and de-registration of the aircraft as soon as possible after the agreed settlement.

– Savings for the company of more than 10m USD over the requested starting figure.

Demonstrated competencies:

– Ability to coordinate approaches: legal, technical, and economic-financial.

– Negotiation skills in a clearly disadvantageous situation: urgency, size, and language, among other aspects.

– Pragmatism in the resolution of extraordinarily complex and cross-cutting issues.

– Maintenance of a firm and coherent position throughout the entire process.

Throughout this process, it was clear that the teamwork was fruitful and magnificent. By combining efforts with a professional, pragmatic, and well-defined approach, it is possible to negotiate a redelivery of leased aircraft in advantageous conditions. Even in a situation as extreme and unbalanced as the one shown in this success story.