Uncertainty in the airline industry: an overview of the slots, doors and routes pledged as collateral in the wake of COVID-19 | King and Spalding
In recent years, several major US airlines have entered into loan facilities guaranteed only by certain of its slots, doors and routes (“SGR”). This alert provides (i) a brief overview of SGR, (ii) how SGR guarantees can be refined, (iii) regulatory overlay of SGR and (iv) monetization of SGR.
WHAT ARE SLOTS, DOORS AND ROUTES?
A “slot” is the authorization granted by the relevant government authority for an aircraft to take off or land at a particular airport at a given time. Likewise, “gates” are the authorization for passengers to embark and disembark planes at a specific gate of an airport and “routes” are the authorization to follow a specific route through the airways. Collectively, SGR acts as a limitation on air operations for the purpose of managing air and airport traffic, particularly at the busiest airports in the world.
Whether or not an airport uses slots depends on its occupancy rate as determined by the International Air Transport Association (“IATA”). Typically, airports are classified into three levels, with level 3 being the only airport to require slots (level 2 airports are less strict in allocating slots and level 1 airports do not. need at all due to their minimum capacity). Globally, there are approximately 177 Tier 3 airports, which include:
- In the UK, all airports in London, Manchester, Bristol and Birmingham
- In the United States, JFK, LaGuardia and Washington National
- In Asia, Hong Kong, 11 domestic airports in China, Kuala Lumpur, Singapore, Tokyo, Narita and Haneda, Fukuoka, Mumbai, Delhi and Chennai
In addition, some airports are only controlled seasonally, such as those in Italy and Greece during peak summer seasons.
SGR COMMITTED IN GUARANTEE
RMS has proven to be extremely valuable assets for airlines. Historically, allowing the use of busy take-off and landing times, boarding gates at busy airports, and coveted routes have provided airlines with long-term strategic competitive advantages. Therefore, SGR has been instrumental in raising capital for airlines, especially when they have been pledged as collateral in debt financing.
In the past, RMSs have been incurred as part of a package of blanket guarantees as part of aviation financing, which would typically include an airline’s tangible assets such as its equipment and fleet. Over the past ten years, however, as the liquidity needs of some airlines have exceeded their traditional collateral base, SGR has been engaged as the sole source of collateral to secure certain aviation financing. For example, American Airlines, Delta and United recently received billions of dollars under multiple loan facilities, guaranteed only by their respective RMSs.
HOW ARE SECURITY INTERESTS PERFECTED IN SGR?
In the context of secured finance, “perfect” collateral gives a lender rights and remedies against a borrower’s pledged assets if the borrower defaults to the lender or if there is an event of default. If security is not properly returned, a court will not recognize a lender’s claim against the collateral and the lender will have no recourse against the underlying collateral.
As a general rule, the perfection of a security interest is governed by section 9 of the Uniform Commercial Code (“UCC”), unless applicable federal law preempts it. While the perfection of some aircraft warranties is governed by the Federal Aviation Act (for example, aircraft, engines and parts), the perfection of slots, doors and routes are not.
Slots and routes are general intangibles and perfection under UCC can be achieved by filing a UCC-1 funding statement. Gates are general leasehold interests that are considered chattel papers and perfection under UCC can be achieved by filing a UCC-1 financing statement or by actually taking possession of the lease. A UCC-1 financing statement must contain (i) the legal name and mailing address of the grantor, (ii) the legal name and mailing address of the lender, and (iii) a description of the collateral covered by the UCC-1. The description of the underlying collateral can be as broad as possible. While a lender may wish to specifically identify a particular item of collateral, doing so without including terms such as “all replacements and substitutions of” and “all proceeds as such” could inadvertently leave the lender flawed. In order to maintain perfect security, declarations of continuance must be filed every 5 years and within 6 months before expiration – if the declaration of continuance is filed earlier, it will be ineffective.
While gates are considered traditional leasehold interests governed by real estate law, slots and routes are rights granted by certain regulatory authorities and, as such, come with non-existent complexities when it comes to more traditional guarantees. The slots and routes are only the authorization to perform certain operations, which authorization may be revoked in certain circumstances, as indicated below. The ability of a regulator to revoke its authorization to use slots and routes not only makes it difficult to assess SGR guarantees, but has led some to question the enforceability of privileges against SGR guarantees. However, the courts have generally recognized the validity of such privileges. In the previous American Airlines bankruptcy, for example, the bankruptcy court approved debtor-in-operator financing and exit financing secured by SGR guarantees and, in so doing, recognized the legitimacy of these privileges.
The Federal Aviation Administration (“FAA”) oversees slot allocation in the United States, which generally follows the IATA Global Slot Guidelines which provide a comprehensive set of procedures for the allocation and management of slots. global slot administration. Typically, airlines provide airports with their proposed schedules twice a year, for the summer and winter seasons, and the FAA will allocate slots based on these requests in conjunction with the historical slots that have been allocated. to a particular airline and how often these slots are used. throughout the season. One of the problems with slots is that if they are not 80% used by the airline, they can be subject to confiscation (which is one of the main reasons airlines airlines will always perform empty flights). Recently, in light of COVID-19, the FAA temporarily suspended the minimum slot usage requirement at U.S. airports, but this waiver is currently expected to expire on October 24, 2020.
Routes are governed by multilateral agreements between countries and are subject to capacity restrictions at each airport and limitations imposed by the country concerned under the respective agreement. In the United States, the Department of Transportation (“DOT”) processes requests from US airlines for permission to serve foreign markets. If more carriers search for routes than what is available, the DOT must allocate routes among US air carriers using a comparative selection process.
In addition, the US Department of Justice (“DOJ”) can order the divestiture of SGR in the event of competition concerns, including following airline mergers. For example, following their merger in 2013, US Airways and American were forced to cede 17 pairs of slots (i.e. take-off and landing slots) to LaGuardia and 52 pairs of slots to Ronald Reagan. Washington National to obtain DOJ approval. Likewise, DOT also plays a role in the management of RMS. In 2016, it granted immunity to the alliance agreements offered by Delta Air Lines and Aeroméxico on condition that carriers cede slots in favor of competing airlines. In 2016, the DOT also granted American Airlines the authority to link Los Angeles to Beijing over Delta, due to American’s superior connectivity (which allowed more American travelers to benefit from single connections over Los Angeles).
In 2016, United Airlines announced a charge of $ 412 million on profits based on the FAA’s decision to eliminate slots at Newark Liberty International Airport. The FAA ruling rendered the once-valuable landing and take-off slots owned by United in Newark worthless.
The above are just a few examples of the impact regulatory authorities can have on RMS and, ultimately, their value as collateral.
MONETIZATION OF SGR
SGR can be monetized in several ways. Slots and routes can be traded between airlines, leased to other airlines, or bought or sold. However, as noted above, such transactions, rentals or sales of SGR will be subject to restrictions and oversight by the relevant government authority.
In March 2008, Continental Airlines paid $ 209 million for four pairs of GB Airways landing slots at Heathrow Airport. In February 2016, Oman Air paid Air France $ 75 million for a coveted set of early morning slots at Heathrow Airport. In 2015, American Airlines paid Scandinavian Airlines $ 60 million for some of its slots at Heathrow Airport.
There are several third-party appraisers who are often hired to assign a value to a particular element of the RMS guarantee. However, such a value is tied not only to a specific airport, time of day and / or flight route, but also to overall demand and any government restrictions in place or planned. In addition, the relatively small number of SGR sales transactions completed makes any sale difficult to evaluate on a comparative basis, as route sales are even less frequent than slot sales.
With the airline industry’s recent depression due to COVID-19, airlines and their lenders are concerned about the current value of SGR collateral and the ability to monetize SGR in the current economic climate. That said, RMS is a critical asset that will likely remain critical for the airline industry as the pandemic hopefully abates.
 In AMR Corporation, et al., Case No. 11-15463 (SHL) (SDNY Bankr. 2011).