Who’s Who Legal brings together Berend Crans of De Brauw Blackstone Westbroek, Laura Pierallini of Studio Pierallini, Ulrich Steppler of Arnecke Siebold, Stephan Eriksson of Advokaterna Liman & Partners, Randle Craft of Holland & Knight and Audrey Robertson of Conyers Dill & Pearman to discuss key regulatory developments, client pricing pressures and the future of the aviation bar.
De Brauw Blackstone Westbroek
Rome Ulrich Steppler
Arnecke Siebold Rechtsanwälte
Frankfurt Stephan Eriksson
Advokaterna Liman & Partners
Stockhom Randal Craft
Holland & Knight
New York Audrey Robertson
Conyers Dill & Pearman
British Virgin Islands
WWL: Reports suggest that, globally, the volume of contentious work is down, and so lawyers are having to diversify their practices. Is this a trend in your jurisdiction, and if so how has it affected the aviation legal market?
Berend Crans: I’m not sure whether the suggestion that the volume of contentious work is reducing is correct. In general terms we see an increase in contentious work, in particular in arbitration. To the extent it concerns aviation liability cases, changes in the liability regime, such as the Montreal Convention, as well as increased aviation safety may have resulted in less litigation, but at the same time the aircraft leasing market has seen a substantial number of operator insolvencies and other lessee defaults resulting in an increased number of lease terminations and repossessions, with related litigation.
Laura Pierallini: Unlike other countries, in recent years contentious work has steadily increased in Italy and has particularly involved the aviation market. This trend is mainly owing to the general airline crisis, resulting in insolvency issues and the need to collect credits. Also, contentious work regarding air passengers has played an important role in the said increase, based on the large number of judicial claims for compensation of flight delays/cancellations according to Regulation (EC) No. 261/2004. Such judicial claims often constitute a satisfactory and fast remedy for passengers, since the airlines – in light of the legal framework oriented towards passenger protection – tend to settle disputes before the relevant proceedings are decided by the Italian courts.
Ulrich Steppler: In the case of Germany and its aviation legal market I cannot confirm this trend – the opposite is actually true. Airlines are being confronted with a huge volume of passenger complaints before various legal fora (small claims courts, ADR bodies, civil aviation authority) and the number of claims is increasing. German courts and judges are very consumer-friendly and easily show solidarity with stranded passengers. On top of that, many passengers hold legal expenses insurance and thus have almost no financial exposure when taking a carrier to court.
On the other side of the coin, more and more carriers are tending not to shy away from lengthy trials if the matter at hand is crucial and has an impact on its operations.
Stephan Eriksson: In Sweden there are just a handful of lawyers practising contentious work, so it’s hard to say where the market is going. My practice is mainly aviation liability abroad and worldwide and I would say it is not declining.
Randal Craft: The pattern of major airline crashes has always been irregular, and aviation contentious attorneys have always had a cyclical and unpredictable workload that has caused them to develop expertise in other areas of the law. In the US, this has been accentuated by the shrinkage of the aviation legal market due to fewer heavily-staffed major airline crash cases, but there are high-profile corporate and other crashes that involve numerous attorneys in National Transportation Safety Board (NTSB) investigations and intense litigation. Although these may not be major disasters, they often present major problems requiring high-level experience. Lawsuits involving passenger-rights claims are another important category of aviation cases. Of course, non-US crashes have generated litigation in the US, though much of it has been dismissed on the ground of forum non conveniens. In addition, some defence firms like ours are handling high-stakes commercial aviation litigation arising out of soured transactions, which continue to be a source of much work.
Audrey Robertson: In the British Virgin Islands we have not witnessed a downturn in the volume of contentious work. In fact, my litigation colleagues would say that quite the reverse is true. That said, we do not see a great deal of contentious aviation work in the British Virgin Islands. Contentious aviation work in the British Virgin Islands would, in the main, concern enforcement of a charge over the shares of the owner of an aircraft, typically a British Virgin Islands special purpose vehicle (SPV) or advice on insolvency risks on an aircraft purchase.
WWL: Environmental concerns and the issue of safety remain very hot topics. Have you seen, or are you expecting, any related regulatory developments?
Berend Crans: Following Regulation No. 421/2014 in April 2014, flights to and from countries outside the European Economic Area (EEA) are fully excluded from the EU aviation emissions trading scheme (ETS) from 1 January 2013 to 31 December 2016. During that period emissions from flights within the EEA are still subject to aviation ETS (with limited exceptions). The EU has stated that it will reinstate aviation ETS in full, with effect from 1 January 2017, if the International Civil Aviation Organization (ICAO) fails to provide a global market-based measure (MBM) – as proposed at the ICAO assembly in September 2013 – prior to that date. The MBM should be implemented by 2020. Until such time I do not expect any major environmental regulations. With respect to safety, the recent MH17 disaster will hopefully prompt ICAO, states and operators to share safety concerns in relation to certain routes or areas more quickly.
Laura Pierallini: The aviation industry is subject to an increasing level of protection with respect to the production of greenhouse gas and the emission of noise from nearby airports, both caused by the operation of aircraft. The EU rules governing the matter are:
• Regulation (EU) No. 421/2014 established a scheme for greenhouse gas emission allowance trading within the Community, in view of the implementation by 2020 of an international agreement applying a single global market-based measure to international aviation emissions. The provisions of the said Regulation will apply, until 2016, only to flights within the European Union, while starting from 2017 they will also include flights operated on international routes (ie, to/from extra-EU destinations); and
• Regulation (EU) 598/2014 established rules and procedures with regard to the introduction of noise-related operating restrictions at Union airports within a balanced approach. Such Regulation repeals Directive 2002/30/EC.
Besides this, Italian Tax Law No. 342/2000 established, inter alia, a tax on aircraft noise emissions caused by take-off and landing operations at Italian airports. Afterwards (in 2011) the said tax was redefined by the Italian parliament as a regional tax and, as a consequence, its implementation is currently assigned to the legislative autonomy of each region. The relevant regional rules implementing the noise tax have been challenged by Italian carriers complaining of the distortive effects that such tax can have on competition and also the inconsistency of the tax with its stated purposes (ie, implementing measures to reduce the impact of aircraft noise).
Ulrich Steppler: We are experiencing an increased number of administrative claims in Germany, especially in relation to flight routes, night flights and against planning approval notices for the expansion of airports. Further bans on night flights at German airports as well as a further increase of litigation in this field seem likely.
Notably, the German Federal Constitutional Court handed down a judgment on 5 November 2014 in relation to the German air traffic tax, in which it was held that the air traffic tax is compatible with the German Constitution.
The claim was brought by the German Federal State Rhineland-Palatinate. It was, inter alia, argued that the tax leads to a disproportional increase in prices, in particular with respect to short and budget flights. It was further claimed that the federal government is not responsible for the tax and that the alleged environmental goals are not being achieved. The court disagreed and took the view that the federal government is responsible for transactional taxes and that the air traffic tax is also compatible with the German Constitution.
Despite the judgment, carriers and associations in the aviation industry are determined to continue fighting the air traffic tax on a political level, as they still believe that it distorts competition and damages Germany as a business location.
The German air traffic tax was introduced in 2011 and remains a hot topic, as the aviation industry has demanded for years that the tax should be abolished. The tax is levied on all commercial passenger flights that depart in Germany, regardless of whether the carrier is a national or international carrier. The tax rate is graded according to the distance of the flight. It remains to be seen how the discussion will develop on a political level in the near future.
Randal Craft: Airlines are targets of environmental and other regulatory constraints that aren’t similarly applied to non-aviation enterprises. As to safety regulations, they will naturally continue to be promulgated, and they can encourage welcome advances in aviation safety, but they are sometimes (especially when political winds are blowing hard) counterproductive and needlessly harm the aviation industry. In view of the Republican Party’s recent election victories, there will likely be legislative efforts to reduce government regulation in the US. NextGen is a controversial safety-related plan, and another safety-related matter is the NTSB’s current proposal to revise and expand the regulations applicable to aviation accident investigations.
Audrey Robertson: We have not seen, nor do we expect, any regulatory developments in the British Virgin Islands.
WWL: The EU Regulation 261/2004 has been a hot topic over the past year. What do you think the pending suggested law amendments will result in, and how will the industry deal with this regulation in the future? Are there any other key legislative developments in your jurisdiction affecting your clients?
Berend Crans: The proposed changes to Regulation 261/2004 are a mixed bag for airlines and passengers, in that in some areas additional airline liability is introduced, while passenger rights are limited to some extent. On the one hand, the proposed amendments provide that airlines can be liable for missed connections if caused by a delay in the preceding flight. On the other hand, the currently unlimited right to assistance in extraordinary circumstances will be restricted to the provision of accommodation for three nights at €100 per night. Whatever the changes to Regulation 261/2004 may be, the most important aspect will remain what type of circumstances qualify as “extraordinary circumstances” for the purposes of the (revised) regulation. Annexe 1 to the proposed regulation is a non-exhaustive list of extraordinary circumstances (and also describes which circumstances do not qualify as such) and I believe that this will continue to be in the core of disputes regarding compensation under the new rules. In this context it is regrettable that the UK Supreme Court did not allow appeal in the Jet2/Huzar case. In June 2014, the English Court of Appeal held that technical problems, whether foreseeable or not, arise “as a matter of course in the airline’s activity” and all should be regarded within its control. This clearly restricted carriers’ ability to invoke the Regulation 261 defence on extraordinary circumstances to situations where technical problems arise as a result of “extraneous acts of third parties”. Although the UK CAA, IATA and the European Low Fares Airlines Association all filed submissions in support of the view that the Court of Appeal should hear an appeal and emphasised the economic impact of the judgment of the Court of Appeal, the Supreme Court decided in October 2014 to reject the application made by Jet2, considering that “it does not raise a point of general public importance.” The Supreme Court also found that a referral to the European Court of Justice was not necessary as that Court’s current jurisprudence already provides “a sufficient answer”.
Laura Pierallini: Notwithstanding the open discussion on the topic, currently the process of amending Regulation (EC) No. 261/2004 is not progressing. However, even were the proposed changes to be approved, the system would remain basically unchanged as the rights and remedies granted to passengers are now reflected in the European legal framework. Owing to this trend, air carriers are adapting to the current regime.
In addition to Regulation (EC) No. 261/2004, significant taxes and duties affect air carriers’ attempts to limit the costs of flight operations in Italy. Besides having airport duties and handling fees higher than in the rest of Europe, we can refer to the recent application of a regional tax on aircraft noise emissions (so-called IRESA) caused by take-off and landing operations at Italian airports – to date only implemented in certain Italian regions, including Lazio and Lombardy – which entails an average increase of €5 (per each passenger) for a ticket price on medium-haul flights (see also above under question 2).
Ulrich Steppler: The revised version of Regulation (EC) No. 261/2004 contained some positive aspects for carriers, yet seeing that the implementation of the revised version is currently stalling, it looks as though the European legislator will miss a chance to learn from the past and to rectify unacceptable developments with regards to passenger rights. This will presumably lead to an increase in ticket prices in the long run.
In Germany, a conciliation body for air passenger rights was also established at the end of 2013, which gives passengers another forum alongside the court proceedings to bring their claims against airlines pursuant to Regulation (EC) No. 261/2004.
Stephan Eriksson: Since the implementation of EU Regulation 261/2004 all airlines have strongly opposed it. But we have witnessed their defeats in the Sturgeon and Nelson cases. The EU Commission has in its proposal for changes also made it very clear that passenger rights to compensation for delay are here to stay.
I believe there is now a slow shift in opinion where airlines realise they have to live with the 261 regime. Airlines are seeing that the regulation and passenger rights are here to stay. It will develop further and airlines have to deal with it. I predict airlines will start thinking about how to be more proactive and how to mitigate the financial impact of 261. See, for example, Ryanair’s 261 surcharge of €2.5.
Another problem the airlines face is the handling costs of the 261 claims, which on many occasions are higher than the compensations themselves. Many airlines do not have the expertise and resources to handle the claims properly and leave them to their customer service departments. Outsourcing the claims handling to specialist 261 claims adjusters might be the way forward.
One of the most contentious areas has been extraordinary circumstances and technical faults. It will be interesting to see how the recent UK case Jet2.com vs Huzar will change the EU map. In one of my Swedish 261 cases I recently asked the Swedish local court to put the same question to the Swedish Supreme Court: whether an airline is liable for technical faults that were neither discovered nor discoverable by a reasonable regime of maintenance or on reasonable inspection and therefore were unforeseen and unforeseeable.
Randal Craft: I defer to the EU lawyers on EU regulations and will simply note that, although the US government currently desires to expand passenger rights, the US approach has been different. There will continue to be efforts at harmonisation between the US and the EU, and the success of these efforts will probably depend largely on the nature and extent of the amendments adopted by the EU. The incoming Republican Congress is not likely to favour regulations similar to those of
Audrey Robertson: I, too, defer to the EU lawyers on EU Regulations. There are currently no key legislative developments likely in the British Virgin Islands that would affect aviation clients.
WWL: Given the implications of Basel III for banking institutions, are there any indications that banks have less appetite for aircraft financing and that airlines and lessors are seeking other sources of funding?
Berend Crans: In my view banks have become more cautious and spreading the risk will have become more important than previously. Rather than taking the full risk on a transaction, banks tend to prefer taking a partial risk, be it through syndication or by going for a club deal or some form of risk participation. I also believe that banks indeed realise that aircraft financing requires in-depth expertise of the industry to properly assess future aircraft values. If we go by the industry forecasts provided by Boeing and Airbus, more than 36,000 new aircraft will be manufactured over the next 20 years, requiring US$5.2 trillion in financing. Even if we assume that the banks will have a healthy appetite for the financing of aircraft, this may be too much. Another factor is also that since the introduction of the 2011 Aircraft Sector Understanding, the costs of export credit agency (ECA) guarantees have increased substantially, making it less attractive for airlines with a low credit rating to enter into ECA-supported transactions. This implies that the number of these transactions, where commercial banks can take comfort from an ECA guarantee, will probably dwindle. I would expect an increasing number of structured transactions, enhanced equipment trust certificates (EETCs) by airlines and lessors and similar structures, including EETC securitisations as well as aircraft lease portfolio securitisations, which will allow airlines and lessors to tap into the capital markets.
Laura Pierallini: The rules recently introduced by Basel III have been deemed extremely strict in respect of the possibility for financial institutions to fund specific economic sectors. Based on our experience, this situation has resulted in the European banks being more reluctant to finance the aviation industry, and for the following reasons: (1) the “country-factor”, as in Italy (and generally across Europe) the crisis in civil aviation is not enticing the financial institutions to invest in the sector, while in other countries (such as Brazil or China) there are broad investments boosted by the growing domestic demand for air transport; (2) the “sector-specific factor”, as the aviation business is continuously subject to uncertainty and risks; (3) finally the “meritocracy-factor”, ie, the common tendency of the banks to finance sectors and businesses with a reliable financial stability.
Randal Craft: Basel III is expected to translate into higher loan pricing as banks pass on higher liquidity costs, and according to some manufacturers, commercial debt will likely be available only on shorter tenors and for better credits. Other sources of funding are common, and it is not clear what percentage of future aircraft financing will come from bank debt once Basel III is fully implemented.
Audrey Robertson: We have not seen any indication as yet, but anticipate the rising cost of traditional capital will bring about more innovative financing structures.
WWL: We have heard reports of continued pressure on pricing and a greater demand for more flexible fee arrangements. How has your firm met these challenges? Has this affected the legal market where you are?
Berend Crans: Pressure on pricing is here to stay as clients are seeking to reduce legal cost and get “more value for less money”. Alternative fee arrangements, such as capped or fixed fees have been around for quite a while, but we see requests for an alternative for hourly rates more frequently than before. This goes not only for transactional work but also for litigation. There is a broad variety of alternative fee arrangements (AFAs), but what is a suitable AFA depends on the relevant transaction or matter and what the client prefers. Recently De Brauw presented a Guide to Alternative Fee Arrangements, which can be found on the firm’s website (debrauw.com/de-brauw/alternative-fee-arrangements/). The AFAs offered include blended hourly rate arrangements, various forms of fixed-fee arrangements, risk-sharing arrangements and hybrid fee arrangements. It is difficult to predict how quickly the market will really change, but I’m convinced that it will change. With our approach to AFAs we aim to anticipate our clients’ changing needs.
Laura Pierallini: We can confirm that our firm is experiencing continued pressure on pricing and demand for flexible fee arrangements. This situation is due to the economic downturn of the aviation sector as well as a direct consequence of air carriers not being willing to spend money on legal services. Besides the invoicing based on the hours spent assisting clients, we are receiving increasing requests for setting a cap on fee arrangements. We tend to accept such requests providing there is a possibility of revision in unexpected circumstances where the forecast can then be exceeded.
Ulrich Steppler: We are open to offering discounts at hourly rates if and when certain thresholds are exceeded. Actually, the pressure on pricing is acceptable when dealing with prudent businessmen who are aware that sometimes you only get what you pay for and quality has its price. I heard a smart general counsel once say: “If you pay peanuts, you get monkeys.”
Stephan Eriksson: There is a demand for caps and fixed rates, which I find healthy. Lawyers need to update themselves and to get competitive. This means a greater risk taking and sometimes also greater rewards.
Randal Craft: There is more downward pressure on the fees for contentious defence lawyers handling casualty litigation than on the fees of other aviation lawyers. In major cases against insureds, the casualty-lawyer fees are usually paid by insurers, and some insurers’ claims departments are seen only as cost-centres. This leads them to focus more on paying low fee-rates than on the risk-avoidance and good results (including favourable early settlements) that can most often be provided, not infrequently at lower total cost, to the insurers and their insureds by higher-rate but efficient law firms with top-of-the-line experience and expertise. Of course, when such insurers are themselves sued, they quickly retain the very highest-priced, big-firm attorneys to defend them.
Although there has been a lot of talk about alternative fee arrangements, which we and others offer, most clients have ultimately decided that they are more comfortable with traditional hourly fees. Indeed, one major airline has noted that the litigation risk cannot be fully shifted to the lawyers and that alternative rates seldom lower costs in the long run. A partial shifting of the litigation risk involving initial discounts, success fees, etc, may, however, be an appropriate compromise in many instances.
Audrey Robertson: I believe law firms the world over are experiencing continued pressure on pricing and demands for flexible fee arrangements. We as a firm tend generally not to cap fees, but rather give realistic fee estimates. We manage clients’ expectations when it comes to fees and aim to provide a service which is second to none.
WWL: What do you see for the future of the aviation bar in your jurisdiction? Is there a promising next generation emerging? Do you expect to see specialisation or diversification among lawyers and firms in order for them to hold their own in this competitive legal market?
Berend Crans: The aviation bar of the Netherlands is quite small and one cannot really speak of an “emerging next generation”. Aviation law is certainly not a mainstream business and requires specialisation. In my view the best way to offer comprehensive services to clients is to work with a multi-disciplinary working group or “industry group” which combines the expertise and know-how of lawyers from various practice areas (ie, corporate, regulatory, insurance/liability, tax and finance) with an aviation law background and a certain knowledge of the aviation industry. This will enable law firms to provide legal services based on industry and market knowledge combined with in-depth knowledge of the various practice segments.
Laura Pierallini: Actually we’re not seeing a promising next generation of aviation lawyers in our country. In Italy, except for a very few, there are generally no firms focused full time on providing legal services to the aviation industry, both because of the economic downturn in the sector (which correspondingly has lowered the demand for services) and because most of the time Italian lawyers are used to assisting the industry on an ad hoc basis (thus resulting in a lack of high standards of experience, skills and professionalism). The trend also involves the largest Italian law firms, which usually do not have aviation departments among their practice areas.
Ulrich Steppler: I serve as a judge in air law moot courts and see a lot of promising talent from many different nations there. But also in my own firm I have the privilege of working with younger, enthusiastic and ambitious colleagues who have an auspicious career in the legal profession – and in particular as aviation lawyers – ahead of them.
I believe that highly specialised aviation lawyers and firms will continue to be vital as trusted advisers for the aviation industry in the future. At the same time, it is important to be able to advise clients regarding all issues arising in relation to their businesses. At Arnecke Siebold, we try to act as a one-stop shop for the aviation industry and in this regard work closely with our colleagues from the corporate and commercial, employment, competition, IP and property departments of the firm on a regular basis.
Stephan Eriksson: My answer to that is, what next generation? I have a background from McGill University in Montreal, Canada and I try to advertise the McGill University and its Institute of Air and Space Law here in Sweden whenever I can. Sorry to say, the interest in aviation law in Sweden is minimal.
Randall Craft: At this point, the contentious aviation bar has shrunk somewhat, but we should keep in mind that, in addition to non-US accidents that generate US litigation, there have been a number of near-accidents in the US that, had they occurred, would have led to extensive investigations and litigation, which in turn would have led to the growth of the contentious aviation bar. In any event, the leading law firms will continue to prosper because there will continue to be legal tasks and problems that require aviation legal expertise and experience.
Audrey Robertson: In recent years, the British Virgin Islands has seen a significant upturn in aircraft finance work. The British Virgin Islands SPV is becoming an increasingly popular vehicle for use in aircraft financing structures due, in the main, to the flexibility of our corporate statute, a safe and stable political environment and certainty as to how security and contractual rights may be enforced in our bespoke commercial court. The number of aviation legal professionals in the British Virgin Islands is relatively small, but will inevitably increase with demand.