Aviation 2018: Discussion

Who’s Who Legal brings together Ricardo Bernardi of Bernardi & Schnapp Advogados and Mert Hifzi of HFW to discuss issues facing aviation lawyers and their clients in the industry today.

Aviation Discussion








To what extent are emerging economies changing the landscape of the aviation industry and increasing competition?

Mert Hifzi: To a huge extent. The past 10 years have seen a shift in the power balance of global aviation from West to East. A new breed of powerful Middle Eastern and Far Eastern carriers has emerged during a painful period of restructuring for most established North American and European carriers. While the Western manufacturing duopoly still dominates, there are a growing number of products manufacturers in emerging economies such as China and India and Indonesia that will increase their market share due to central government support. Issues and concerns will, however, remain as to both quality and safety of such products.

In Asia we have also seen the continued emergence of several low-cost carriers, to add to the existing “heavyweights” such as Air Asia, Lion Air and Indigo. There is a direct correlation between a developing economy and the desire for air travel, the thirst of consumers fuelled by an increase in their disposable income. The aviation community has responded to this demand with investment (often by foreign investors. eg, by Chinese companies, where the regulations allow) in emerging markets such as Cambodia and Myanmar. We are seeing a large number of start-ups in such countries, but only the fittest tend to survive.

Ricardo Bernardi: Emerging economies such as Brazil have been gradually liberalising the regulations applicable to industry under an economic perspective, and thus encouraging completion. After deregulation of tariffs, we have seen new players in the air transportation market, as well as a trend towards mergers aiming at gaining efficiency to deal with competition, not only between domestic carriers, but also with foreign carriers. In the international perspective, we have seen expansion of open skies-type air service agreements, triggering more competition as well. There has been significant growth in the demand for air carriage, regardless the economic crisis which affected particularly the Latin American region in the past three years. Deregulation plus increase of demand caused expansion in the capacity offered by carriers. 

What has the effect of low-cost airlines and other disruptive innovations been for the aviation market and aviation lawyers?

Mert Hifzi: While some legacy carriers have struggled to change their business model to counter increased competition from low-cost carriers (LCCs), certain carriers – especially in the Gulf region and to a lesser extent in Asia – have risen to the occasion and have successfully adapted. As the name suggests, LCCs watch all costs carefully so lawyers must tailor their product accordingly, if we want to work for such carriers. In terms of disruptive technology, we expect that blockchain technology will have increasing part to play in terms of both passenger and cargo transport through the use of smart contracts. While the blockchain is considered by many to be safer than conventional data storage and transfer systems, concerns from both an industry and a legal perspective remain as to whether blockchain can be implemented in the aviation arena. 

Ricardo Bernardi: Low-cost airlines definitively have a crucial role in the expansion of the aviation market or development of new markets. By offering lower fares and operating in routes not traditionally attended by legacy carriers, low-cost airlines have been enhancing the boundaries of the aviation industry, reaching more remote locations. Such a phenomenon also increases competition not only among low-cost carriers, but also legacy carriers. Aviation lawyers must also adapt to this new scenario by finding new ways of providing legal services, improving technology associated with legal services, investing in training and always seeking quick response capacity, to attend the needs of this continuously evolving industry.

As the industry has become more heavily regulated and travel has become safer, have you witnessed a decrease in litigious activity in your jurisdiction?

Mert Hifzi: Travel has undoubtedly become safer over recent years. To my mind, it would be over-simplifying matters to say that this has resulted purely from increased regulation. There is no doubt that, in Asia in particular, increased regulation has played an important part in making air travel in jurisdictions such as Indonesia much safer, but there are undoubtedly other factors: better training, newer and more sophisticated aircraft with enhanced safety features, better communication systems, etc, have also all played a part. The obvious result is fewer accidents, which means less work for litigators who deal with disputes arising out of such unfortunate events.

While major aircraft accidents (and the litigation that results) are certainly occurring on a less regular basis, passengers are now, more so than ever, acutely aware of their rights as consumers. We have, therefore, seen a significant increase in consumer-related complaints, and carriers are inundated with claims arising out of consumer protection legislation. In addition to consumer complaints, we have also seen a significant increase in airside disputes and on-ground collisions due to increased congestion at most major airports.

Ricardo Bernardi: On one hand, there has been a decrease in demand for legal services associated with aircraft accidents and incidents, as a direct result of the very positive fact that travel has become safer; but we have not seen a decrease in the overall litigious activity, especially in Brazil. The greatest volume of litigation in the Brazilian jurisdiction results from small issues, such as flight delays and cancellations, overbooking, baggage loss or delays. It is also common to see suits filed as a result of cargo loss or damage. The main reason for this high volume of cases is the legislation in Brazil, which is extremely protective towards consumers; and the fact that Brazilian courts, until recently, refused to apply the provisions of the Montreal Convention of 1999 and the Brazilian Aeronautic Code. Recently, the Brazilian Supreme Court rendered a binding judgment which found that the International Convention shall apply in a baggage case. The Brazilian Senate is preparing a new Aeronautic Code, which has rules similar to the Montreal Convention of 1999 about airlines’ liability. Therefore, at some point in the future we may see a decrease in the volume of litigation in Brazil. 

To what extent are the traditional parties in the industry still investing in aviation? Has there been a diversification in buyers and lenders in aviation transactions?

Mert Hifzi: Aircraft financing is booming in mainland China, with most banks having set up leasing arms in recent years. This has provided increasing completion for the traditional aircraft financing hubs of Dublin and New York. This is partly fuelled by the fact that most industry commentators anticipate that China will account for up to one-fifth of global demand for large commercial aircraft in the coming years. Other regions where notable new funding sources appear to have reached critical mass include the Korean institutional market as well as regional banks from Taiwan, Japan and Australia.

Ricardo Bernardi: In jurisdictions such as Brazil, air carriers used to be owned either by the government or local Brazilian citizens. The remaining companies controlled by governments were privatised and new companies were set up, with substantial investments from foreign sources. Foreign participation in local carriers is limited to 20 per cent of the voting capital, but the Brazilian government has already made clear that such limitation will be eliminated in the near future. At that time, we expect to see a substantial increase of foreign investors in the local aviation industry. Under the perspective of aircraft transactions, we have seen sales between carriers, especially Brazilian airlines selling aircrafts to foreign carriers, partially as a result of the decrease in the traffic demands caused by the economic crisis. In the general aviation market, volume of transactions has been relatively small, also due to the crisis.

What is the biggest challenge you expect to see in aviation law in the coming year?

Mert Hifzi: It is difficult to pick out only one (Brexit?!) as there are several big challenges aviation lawyers will face. Increased compliance and regulation (not just for aviation lawyers but all lawyers) is a real challenge for all law firms, who are already seeing their profit margins eroded by the time and personnel required to deal with it. The industry itself is extremely cost-sensitive and the means that the service providers to the industry cannot be immune from the consequences. Clients have always sought to drive a hard bargain but are pushing ever harder. In Asia specifically, one can hope to see further liberalisation and an increase in passenger rights legislation (aping previous EU legislation in this regard). Perhaps the number one challenge, therefore, for aviation lawyers is to remain relevant and competitive in a very challenging environment.

Ricardo Bernardi: There are a number of limiting factors pushing back the improvement of the aviation industry in emerging countries. In the case of Brazil, we can quote the high costs with fuel, airport fees, archaic labour laws, limitations to foreign participation in the capital of local airlines, poor infrastructure, among others. One can realise the multiple challenges to be seen in the aviation law to deal with all these problems. The biggest challenge in terms of law is the approval of the project of the Aeronautic Code, which is currently being reviewed at the Senate. The Code will deal with all ranges of matters related to aviation, which have a direct impact on the problems that have been limiting the growth of the aviation industry. I believe that if the new Code is approved, the players of the aviation industry will have much better tools for developing their businesses, improving capacity, creating more jobs and better contributing to the emergence of the economy.

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