Chambers Practice Area Overview 2019 - Transportation: Aviation
I. Overview of the Portuguese aviation market
According to the 2017 Annual Report issued by the Civil Aviation Authority in Portugal (“Autoridade Nacional de Aviação Civil” or “ANAC”), which oversees all aspects of civil aviation in the territory of Portugal and all its dependencies, there were around 1227 aircraft registered in Portugal in 2017. The report for 2018 is not yet available for consultation but we would expect a slight increase in the number of aircraft registrations in 2018. The same is also expected to happen in 2019 as result of the ongoing fleet expansion and renewal programme by the flag carrier airline Transportes Aéreos Portugueses (TAP).
A large proportion of the commercial fleet registered in Portugal is leased and around 90% of the fleet operated by TAP is subject to financial or operational leasing. Our experience shows that this is the same approach followed by other local carriers (a limited number of private airlines) that a have a higher percentage of leased aircraft versus owned.
Portuguese legislation governing the aviation sector results from the implementation of EU law and, therefore, any potential regulatory changes that may impact the Portuguese aviation market should arise more from European legislation than from any legal and/or regulatory alteration implemented by the authorities in Portugal (in particular, the ANAC).
Portugal has not ratified the Cape Town Convention. Therefore, the ANAC, which is also responsible for the national registry of aircraft (RAN), will not process the registration of any lien over an aircraft created by a mortgage agreement with the International Registry that operates under the legal framework of the Cape Town Convention. Likewise, there is no IDERA (Irrevocable Deregistration and Export Request Authorisation) form available in the Portuguese jurisdiction and the ANAC will not recognise and/or register any IDERA with the RAN.
Although there are several virtues of the Cape Town Convention, which are very interesting from the perspective of aircraft financers, it is difficult to say how long it will take for Portugal to become a ratifying state, because this matter has not been considered as priority by successive governments. The publication of an aircraft registration act should also be treated as a matter of great importance and priority on the agenda of the Portuguese government.
II. Highlights and opportunities
The main player in the Portuguese aviation market is the flag carrier TAP, which is Portugal’s leading airline operating since 1945. It is also a member of Star Alliance.Following the long privatisation process of TAP, the airline is now 50% owned by the Portuguese state (through the state holding company Parpública) and the remaining share capital is held by Atlantic Gateway with 45% and by a diverse group of TAP Group employees with 5%. These shares are held in TAP SGPS which is the holding company that wholly owns TAP. Another important step in the privatisation process was the resolution of the Board of Directors of the ANAC of 20 September 2018 confirming that the new shareholding structure of TAP complies with Regulation (CE) no. 1008/2008, pursuant to which airlines that hold EU air operating licences must be owned and effectively controlled by Member States and/or nationals of Member States.
In 2018, TAP continued its fleet expansion and renewal programme and new deliveries are expected to take place in 2019. In this respect, it is worth emphasising the order placed by TAP for the delivery of fourteen A330-900neo and thirty-nine A320neo family aircraft, and the order made by the Portuguese airline Azores Airlines (previously known as SATA Internacional) for the lease of six new A321neo family aircraft.
Portuguese carriers have played a very important role in the most significant deliveries that took place in 2018. In this respect, we should highlight the deliveries of the first Airbus A380 to the Portuguese wet lease specialist Hi Fly and of the world’s first A330neo to TAP.
It is clear that Portuguese airlines are making a big financial effort to increase their average seat capacity and passenger comfort, improve their performance and expand their capacity with additional frequencies and schedules. Some of the most reputable international aircraft leasing companies are playing a major role in these transactions and new investors are already entering the aviation finance sector.
We expect the strong airline industry growth to continue and attractive opportunities to emerge in the Portuguese aviation sector. By way of example, foreign airlines with excess capacity could consider subleasing their aircraft to local carriers. Furthermore, banks and financial lessors could look to Portugal as an opportunity for the lease of new aircraft and/or the purchase of second-hand aircraft. Finally, the other players in the industry should pay particular attention to the ongoing works to refurbish, modify and upgrade the cabins of existing aircraft fleets.
Generally speaking, we expect that the growth in seat capacity of the local carriers will continue to result from the leasing of aircraft from international financial/leasing groups or from the subleasing of aircraft from other airlines. The reason for this lies in the difficulty in raising finance, but also in the costs of such a structure, particularly the stamp duty payable on the financing or the creation of mortgages over aircraft and possible difficulties associated with the enforcement of the security.
A special reference should also be made to the agreement that was recently signed between the Portuguese Government and ANA – the Portuguese airport management company – for the construction of a second airport in Montijo. The opening of the new airport is scheduled for 2022 and the total investment of EUR1.15 billion is expected to cover the works required for the conversion of the Montijo air force base and the extension of the current structure of the Humberto Delgado (Lisbon) airport. This agreement had been long-awaited by the Portuguese aviation and tourism sectors since it is expected to improve the operational efficiency of the Lisbon airport and mitigate the exposure of local airlines (notably TAP) to the consequences of the current saturation problem (e.g., costs of flight delays and lack of gates). Needless to say, these investments in the Montijo and Lisbon airports should also represent a great opportunity for airport technology companies to enter into the Portuguese market and present innovative solutions from the security and passenger experience perspectives.
III. The Portuguese space lawAs to the recent changes in local law, the publication of Decree Law no. 16/2019 of 22 January should be highlighted. This new law establishes the legal framework applicable to accessing and engaging in space activities in Portugal or abroad by Portuguese operators or foreign operators established in the Portugal. It is also worth mentioning that Portugal’s new space agency will be headquartered on the island of Santa Maria which is part of the Azores archipelago and this is also the selected location for the construction of a microsatellite launching base.
The new legal environment and Portugal’s ideal geography for this type of activity should be a great combination to promote and facilitate investment inflows and stimulate Portuguese space activity.BY: Nuno Luís Sapateiro (Managing Associate)