European Union (Definition of Treaties) (Convention on International Interests in Mobile Equipment and Protocol thereto on matters specific to Aircraft Equipment) Order 2014

Monday 12th May 2014 Grand Committee

Motion to Consider

15:55

Moved by

[Viscount Younger of Leckie]

That the Grand Committee do consider the European Union (Definition of Treaties) (Convention on International Interests in Mobile Equipment and Protocol thereto on matters specific to Aircraft Equipment) Order 2014.

Relevant documents: 26th Report from the Joint Committee on Statutory Instruments

[The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie) (Con)]

My Lords, this is quite a technical order whose purpose is to specify the Convention on International Interests in Mobile Equipment and the Protocol thereto on matters specific to Aircraft Equipment as a European treaty under Section 1(3) of the European Communities Act 1972. For the ease of discussion, I shall refer to the convention and the protocol as “the treaty”. Once the order has been made by the Privy Council, it will enable the Government to make regulations to implement the provisions of the treaty using the powers in Section 2 of the European Communities Act.

I shall take a few moments to explain the background to the treaty to which the order refers. The treaty aims to make it easier to finance the purchase or lease of helicopters, airframes and aircraft engines over a certain size and engine capacity. It excludes military, police and customs equipment. Light aircraft are unlikely to meet the treaty’s minimum size and engine capacity requirements.

The treaty supports an important part of the UK economy—the aviation and aerospace sectors. Before outlining the treaty itself, I shall take a step back and consider these sectors, which make a significant contribution to the UK economy. The air transport sector’s annual turnover is £26 billion. This refers to the aviation sector, which provides around 120,000 jobs in the UK and supports many more indirectly.

Aerospace was among the first of the joint industry/government industrial strategies—one of 11—to be published last year. The aerospace sector, which covers manufacturing, has an annual turnover of £24 billion and supports 230,000 jobs across the UK. UK aerospace has a 17% global market share, making it the number one aerospace industry in Europe, second globally only to the US.

UK companies have key strengths in the most complex parts of aircraft such as wings, engines and advanced systems. The UK is also one of the few countries that can build and design advanced helicopters. The joint government and industry Aerospace Growth Partnership is investing in research and development projects through the Aerospace Technology Institute to keep the UK aerospace sector at the forefront of technology developments.

The Government recently announced a series of projects to be funded through the ATI. This includes £60 million of investment in a new aerospace facility at the manufacturing technology centre at Ansty, near Coventry; £13 million to improve the research capacity of wind tunnel facilities at seven universities—Imperial, Southampton, Oxford, Cambridge, Cranfield, City University London and Glasgow; and £60 million investment in seven new R&D projects spanning all four pillars of the ATI—wings, engine, aerostructures and advanced systems.

Having set the treaty in context, I return to the purpose of the treaty itself and how it supports the aviation and aerospace industries. The aviation and aerospace sectors are growing, and Airbus estimates that air traffic will increase globally by 4.7% over the 20-year period 2013-32, requiring approximately 29,000 new aircraft with a total value of approximately $4.4 trillion.

Purchasing or leasing the aircraft equipment is very expensive. Boeing estimates that global aircraft financing requirements in 2014 will be $112 billion. Average prices of aircraft can range from around $60 million to $400 million, depending on factors such as aircraft size, engine choice, performance capability and other design requirements. When purchasing or leasing aircraft equipment, most airlines are likely to raise finance through third parties, such as banks or capital markets, or, on occasion, manufacturers may provide financial support.

Airlines may also seek support in the form of guarantees from government or government-supported export credit agencies. ECA guarantees or insurance may be used in cases where banks are reluctant to lend the full amount due to the large risks associated with the loan and the airlines. Many of these financing sources are on an asset-secured basis. Should an airline default on its loan or enter insolvency, the financier would usually step in and repossess the aircraft to make recoveries against the debt.

16:00

Following the economic downturn, the availability of commercial bank finance decreased as many banks sought to build up their capital reserves. The Organisation for Economic Co-operation and Development’s new aviation sector understanding has increased the cost of export credit support to airlines. The proportion of support provided by banks and export credit agencies is expected to fall between 2013 and 2014, while the proportion of finance provided by the capital markets is expected to increase. As a result, there is evidence that airlines are looking to alternative sources of finance.

For the third party, providing aircraft finance is risky: first, due to the high value of the assets; and, secondly, due to the international nature of those assets—a creditor cannot be certain in which country an aircraft will be located should they need to repossess it. Since different countries have different laws regarding the repossession of assets, a creditor cannot be certain how easy or difficult it will be to repossess and export aircraft equipment, if necessary.

As a result of those challenges, the International Civil Aviation Organisation and the International Institute for the Unification of Private Law tried to reduce some of those risks to creditors, and thereby reduce the cost of raising finance to purchase high-value, mobile international assets. The result was the Convention on International Interests in Mobile Equipment, commonly called the Cape Town convention, which is an overarching international legal framework to provide creditors with greater certainty that they can recover an asset from or take enforcement measures in any jurisdiction that is a party to the convention. However, the convention is effective only if accompanied by a protocol addressing the particular difficulties faced in financing a specific class of asset. Three protocols have so far been concluded, on aircraft equipment, railway rolling stock and space assets. The Government intend to ratify the protocol relating to aircraft equipment.

The treaty created an International Registry, which acts as a registration and prioritisation system for interests over aircraft equipment—such as mortgages and leases—and a framework to resolve disputes, such as the ability of creditors to recover an asset should an airline fail to keep up with repayments. It will not be mandatory to register with the International Registry, and businesses will be able to choose how best to protect their interests.

The treaty offers a number of other benefits. First, it allows interests against engines to be registered separately. Currently, interests against an aircraft engine cannot be registered on the UK’s national register of aircraft mortgages: they have to be included as part of an aircraft mortgage. Since aircraft engines are high-value assets in their own right, and are routinely moved between aircraft for maintenance reasons, the ability to register a mortgage or lease against an individual aircraft engine would reduce the level of risk for financiers, which is expected to reduce the cost of raising finance for aircraft engines. Secondly, the International Registry is open 24 hours a day, seven days a week, and is an electronic filing system. That may make it more convenient for creditors to register their interests, since aircraft finance transactions tend to involve multiple parties located across different jurisdictions and time zones.

As I have mentioned, the aim of the treaty is to reduce the cost of raising finance for airlines. That benefit is difficult to quantify, as each airline will choose to raise finance in different ways, and creditors will consider a number of other factors, such as the credit rating of the individual airline, the finance structure and the type of asset. However, the benefits to UK businesses are expected to outweigh any small familiarisation costs involved. The majority of respondents to a call for evidence on whether the UK should ratify the treaty were strongly supportive, believing UK airlines would benefit from a reduced cost of raising finance.

The treaty is a shared-competence treaty, which the EU has already ratified. It contains a number of optional provisions which are under the competence of the UK. They include, first, the courts that have jurisdiction over claims under the treaty; secondly, remedies available to creditors without leave of the court; thirdly, remedies on insolvency; and, fourthly, allowing the expeditious deregistration and export of an aircraft object. The Government will consult on how the UK should implement the treaty in order to bring the greatest benefits to UK businesses.

In conclusion, this draft order will specify the treaty as a European treaty under the European Communities Act 1972. This will enable the Government to implement the provisions of the treaty using the powers in Section 2(2) of that Act. It will also allow UK businesses to benefit from the provisions of the treaty, which I have outlined to the Committee: the potential reduction in the cost of raising aircraft finance; the ability to register interests against engines separately; and the ability to register interests on the International Registry 24 hours a day, seven days a week. I commend the order to the Committee and beg to move.

Motion agreed.