Canada: Aviation Finance Update: Canada - Issue 2017 – 1, June 2017

28th Annual Canadian Airline Investment Forum

We are pleased to inform you of the upcoming Canadian Airline Investment Forum taking place in Toronto from June 13–14, 2017. It is a great time to be a Canadian airline, and the future remains bright. To stay ahead in the evolving world of aviation finance, we invite you to join leaders in our industry and their advisers.

If you would like more information about the 28th Annual Canadian Airline Investment Forum, please visit www.insightaircraft.com.

For Sale: Canadian Airlines

Auriol Marasco
Associate – Aviation & Aerospace Group

Currently, non-Canadians can only own up to 25 per cent of a Canadian air carrier. There are a variety of policy arguments that support such restrictions. For example, there is a perceived need to ensure that strategic decisions regarding air services conducted within Canada are made by Canadians. Further, Canada's bilateral air transportation agreements are based on an understanding that Canadians hold substantial ownership and effective control of its airlines. Such restrictions are not unique to Canada. In many circumstances, Canada and its bilateral partners have the authority to refuse entry, among other rights, to a foreign airline if it is not substantially owned and effectively controlled by that state or its nationals.

This is all set to change. On May 17, 2017, the Government of Canada introduced legislation that would raise the international ownership restriction from 25 to 49 per cent of voting interests for Canadian airlines. However, (1) a single non-Canadian investor could not own more than 25 per cent of the voting interests, and (2) foreign air carriers could not, in the aggregate, own more than 25 per cent of a Canadian air carrier. In addition, a Canadian air carrier must still be "controlled in fact" by Canadians. This requirement means that no non-Canadian can exert control, by any direct or indirect influence, on the air carrier. Determining "control in fact" is, in many ways, an art and not a science, which gives the Canadian Transportation Agency significant discretion in determining how foreign investors may invest in Canadian air carriers. It remains to be seen whether new foreign investment will actually start flowing into Canada.

The new legislation follows the announcement made by the Minister of Transport, on November 3, 2016, regarding the Ministry's "Transportation 2030" plan for the future development of the Canadian transportation system. The plan is the result of extensive public consultations on key recommendations of the Canada Transportation Act Review Report, also known as the Emerson Report. The Emerson Report noted that there was a need to allow for increased foreign investment in airlines, particularly for any new market entrants. At the time of such announcement, the Minister issued specific foreign ownership exemptions to two companies, Enerjet and Canada Jetlines. This allowed such companies to immediately pursue increased foreign investment, as the legislative amendments necessary to complete the policy change are enacted. Both companies intend to operate in Canada as ultra-low cost carriers.

Passengers Get More Frills

Lisha Li
Associate – Aviation & Aerospace Group

A part of the newly proposed Canadian legislation that seeks to increase foreign ownership caps on airlines is a new regime of rights for airline passengers. The passenger "bill of rights" is one of the five pillars of Transportation 2030: A Strategic Plan for the Future of Transportation in Canada.

The new regime, which will affect flights to, from and within Canada, includes the following:

  • Minimum standards of treatment of passengers and minimum compensation for delays, cancellation or denial of boarding
  • Provision of timely information and assistance to passengers
  • Minimum compensation for lost or damaged baggage
  • The seating of children close to their guardians at no additional costs
  • Terms and conditions with regard to the transportation of musical instruments
  • Minimum standards of treatment of passengers in the case of tarmac delays over three hours

The airlines will also be required to make these new terms and conditions, and information regarding recourse against the air carrier, readily available to the passengers in simple, clear and concise language.

The proposed legislation also includes a provision that would allow the Transportation Minister to approve joint venture applications between two or more carriers on public interest considerations.

Should the draft legislation receive royal assent, the Canadian Transportation Agency, supported by Transport Canada, would initiate consultations with various stakeholders to help inform the drafting of the new regulations under this bill. It is expected that these new regulations would come into force in 2018.

Air Canada's EETC: Fourth Time's a Charm

Auriol Marasco
Associate – Aviation & Aerospace Group

Air Canada made EETC (enhanced equipment trust certificate) history in April 2013, when it closed the EETC 2013-1 issuance for five new Boeing 777 300ERs. It was historic for the following reasons:

  • Canada's first EETC and the world's first EETC to enjoy full Cape Town Convention benefits on unqualified basis
  • The world's first EETC issued by non-U.S. Airline to receive "pure" EETC pricing and terms
  • A 4.66 per cent blended rate effectively priced better than U.S. benchmarks (significant NPV savings over next best alternative)
  • An 18-month liquidity facility

Air Canada followed the success of its first EETC with two other EETC transactions. In March 2015, Air Canada closed the EETC 2015- 1 for one Boeing 787-8 (previously delivered) and eight new Boeing 787-9 aircraft, including the following features:

  • Class A, Class B and Class C Certificates – same as 2013
  • 3.81 per cent blended rate and an 18-month liquidity facility

In December 2015, Air Canada closed the EETC 2015-2 for three new Boeing 787-9 and two new Boeing 777 aircraft, including the following features:

  • 4.044 per cent blended rate and an 18-month liquidity facility
  • Certificates offered: Class AA, Class A and Class B certificates – different than 2013 and 2015-1

With such success, it is no wonder why Air Canada recently announced that, assuming the market conditions continue to be ripe, they plan to issue further EETCs in 2018.

CHC Bankruptcy in Canada

Auriol Marasco
Associate – Aviation & Aerospace Group

Sealand Helicopters was formed in 1976 by Newfoundland real estate developer, Craig Dobbin, who was looking for a better way to get customers to his outpost fishing camps. In 1987, Mr. Dobbin headed a group that purchased Okanagan Helicopters, then Canada's largest helicopter operator (founded in 1947), and Toronto Helicopters to form Canadian Helicopters, the operating subsidiary of CHC Helicopter Corporation. From its humble origins, Canadian Helicopters grew to be the world's largest helicopter operator. The CHC Group and over 40 directly or indirectly owned subsidiaries (collectively, CHC) had a fleet of more than 230 helicopters located in various locations around the world, such as the U.S., Canada, the United Kingdom, Ireland, the Cayman Islands, Luxembourg, Bermuda, Brazil and Barbados, primarily focusing on serving the offshore oil and gas industry. Its corporate headquarters moved to Dallas, and it had maintained an operating office in Richmond, B.C.

The insolvency of CHC has had a large impact on Canada given the size of CHC's Canadian operations. Given the nature of the assets, namely helicopters, there was much anticipation that the Cape Town Convention and the Aircraft Protocol (collectively, the CTC), each as implemented in Canada pursuant to the International Interests in Mobile Equipment (aircraft equipment) Act (Canada), as amended by the Jobs and Growth Act, 2012 (Canada), would be tested in Canada. In general, the CHC insolvency could have raised a range of core CTC issues if the applicable aircraft objects were subject to CTC international interests. In Canada, however, the CTC was not applicable as the relevant aircraft with a nexus to Canada were financed before the CTC came into force in Canada. As such, the CTC was not referenced in the Canadian pleadings.

On September 30, 2016, CHC filed a petition to the Supreme Court of British Columbia under Part IV of the Companies' Creditors Arrangement Act (Canada) (CCAA) for an Initial Recognition Order (Foreign Main Proceeding) and a Supplemental Order (Foreign Main Proceeding). These orders were granted on October 13, 2016, and, among other things, they:

  • Recognized the U.S. Chapter 11 proceedings (commenced on May 5, 2016) as a "foreign main proceeding"
  • Recognized CHC Group Ltd. as the foreign representative of the debtors
  • Recognized certain orders granted by the U.S. court in the Chapter 11 proceedings
  • Stayed all proceedings against the Canadian debtors and their directors and officers

Prior to these orders being granted, the Canadian court had to determine whether, under the CCAA, the centre of main interest (COMI) was Texas, as a local Canadian creditor (a landlord) had opposed such a finding because of the potential advantages to such creditor under Canadian law. Under Part IV of the CCAA, which is modelled on the UNCITRAL Model Law on Cross-Border Insolvency, in the absence of proof to the contrary, a debtor company's registered office is deemed to be the COMI. In order to make such a determination, the Canadian court considered the following principal factors:

  • The location is readily ascertainable by creditors
  • The location is one in which the debtor's principal assets or operations are found
  • The location is where the management of the debtor takes place

In addition to such principal factors, the Canadian court also referenced the following factors in conducting its COMI analysis:

  • The location where corporate decisions are made
  • The location of employee administration, including human resource functions
  • The location of the company's marketing and communication functions
  • Whether the enterprise is managed on a consolidated basis
  • The extent of integration of an enterprise's international operations
  • The centre of an enterprise's corporate, banking, strategic and management functions
  • The existence of shared management within entities and an organization
  • The location where cash management and accounting functions are overseen
  • The location where pricing decisions and new business development initiatives are created
  • The seat of an enterprise's treasury management functions, including management of accounts receivable and accounts payable

In granting the orders, the Canadian court found that the COMI was in Texas, though no reasons were given in the order.

In general, the analysis under COMI should produce a similar result to an analysis conducted to determine the primary insolvency jurisdiction (PIJ) under the CTC. Under the CTC, the PIJ is the location "in which the centre of the debtor's main interests is situated, which for this purpose shall be deemed to be the place of the debtor's statutory seat, or, if there is none, the place where the debtor is incorporated or formed, unless proved otherwise." As such, a conflict between the COMI test and the PIJ test could arise where the corporate seat is located in a different jurisdiction to where administrative decisions are made, which has been the case with CHC, at least to a limited extent.

CHC emerged from the Chapter 11 proceedings earlier this spring. The legal landscape, however, has changed significantly from when CHC first financed its fleet. While the 2016 insolvency proceedings merely taunted Canadian aviation lawyers with CHC's seemingly strong connection to the CTC, going forward, the CTC will, no doubt, play a critical role to the financing of CHC.

Blakes Aviation in the News

In May 2017, Donald Gray, Head of Blakes Aviation Group, was awarded the prestigious "Global Lawyer of the Year Award" for Aviation Finance by Who's Who Legal in London.

Canadian Aviation in the News

HEADLINES

  • In February 2017, Brazil, on behalf of Embraer, launched a formal complaint to the World Trade Organization alleging that the CSeries is being subsidized by the Canadian and Quebec governments.
  • In April 2017, WestJet Airlines announced its plans to launch a ULCC by the end of the fiscal year.
  • In May 2017, WestJet Airlines announced a definitive purchase agreement for up to 20 Boeing 787-9 Dreamliner aircraft, including commitments for 10 Boeing 787-9 aircraft to be delivered between the first quarter of 2019 and December 2021, with options for an additional 10 aircraft to be delivered between 2020 and 2024.
  • In May 2017, Air Canada announced its plan to launch its own rewards program to replace Aeroplan. As a result, Aeroplan's parent lost 70 per cent of its stock market value.
  • In May 2017, the U.S. Department of Commerce announced it will investigate allegations made by Boeing that the CSeries is subsidized by the Canadian and Quebec governments. As a result, the Canadian federal government announced that it suspended negotiations with Boeing to purchase the Super Hornets as an interim measure to replace Canada's existing fleet of legacy Hornets.
  • In May 2017, Viking Air announced a three-month production halt to allow sales to catch up with production.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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