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THCounsels Legal Services > Aviation  > COVID-19: Catalyst for Philippine General Aviation?

COVID-19: Catalyst for Philippine General Aviation?

COVID-19: Catalyst for Philippine General Aviation?

By: Kerwin K. Tan

  1. General Aviation in the Philippines By the Numbers

Philippine aviation in general is a relatively small, tight-knit community. Let’s look at the official numbers of the Civil Aviation Authority of the Philippines (“CAAP”). As of 2019, there are only forty-two (42) active air operators (with one currently suspended as of this date), thirty (30) of which are classified as “small” operators; a little over a hundred domestic Approved Maintenance Organizations or AMOs (i.e. MROs) and similarly a little over a hundred foreign AMOs; only five (5) AMT/AMS skills test facility; forty (40) active ATOs (i.e. pilot schools); and a little over 2,800 aircrafts listed by the CAAP (covering general aviation, commercial, and military, and includes fixed wing and rotorcraft and even drones) some of which do not have current registration.

  1. Aircraft Acquisition and Owner Protection

Having been in the general aviation practice for more than a decade, and having worked with mostly foreign financing companies and aircraft lessors, as well as their various Philippine customers of different background and operations, a lot of aircrafts in the Philippines we assisted with were acquired through some sort of finance lease arrangements, and we believe this would certainly be the continuing trend in the foreseeable future. This can be for as small as a Cessna Caravan or to the larger mid-sized business jets such as the Cessna Latitude, and everything in between like helicopters and King Airs. While these aircrafts were ultimately RP-C registered, we were fortunately enough to have had the experience to assist with a unique transaction in which an aircraft was based in the Philippine but under an N registration. One concern that aircraft lessors have is that, in the Philippines, an aircraft cannot be registered on RP-C unless the operator is at least sixty percent (60%) owned by a Philippine national, and an aircraft that is not RP-C registered is generally not allowed to fly within the Philippines. In either scenarios, proper annotation of the aircraft lessor’s interest can and should be done, as well as de-registration powers of attorney (“DPOA”) which should be accompanied by the Philippine lessee’s duly issued board resolutions. Based on our recently experience at aircraft de-registration with the CAAP, the lessee’s and/or operator’s DPOA resolution are as important as the DPOA itself. Moreover, the DPOA itself should not merely concern itself with de-registration per se, but also with the gamut of requirements to represent the aircraft owner with the various requirements pertaining to de-registration such as but not limited to lessee/operator’s accounting clearances at CAAP. All these are important to take into consideration as the Philippines is not a Cape Town convention signatory (yet).

For Philippine aircraft owners or lessees/operators using the aircraft for general aviation purposes, there will be some who would have the financial capacity to acquire but not necessary have the inclination or expertise (or licence) to maintain and operate. And that is where the licensed Philippine air operators come in to fill the gap.

  1. Pre-COVID-19 Aircraft Maintenance and Operation

For Philippine general aviation, in the course of our various representation of foreign aircraft lessors, mostly we have identified and worked with third party Philippine air operators (that is vetted by us and by the lessor) who will ultimately put the RP-C registered aircraft under its own company as aircraft operator and for use by the main aircraft lessee. This structure, which we have utilized for more than a decade, is a win-win-win solution to the aircraft lessor, lessee, and operator in terms of not only maintenance and operations, but also significant upfront and on-going fiscal incentives which will ease the burden of aircraft acquisition for the lessee. At the same time, it also allows the aircraft lessor to keep a closer eye on its asset.

  1. Post-COVID-19: Spreading Aircraft Fractional Leasing

To be sure, aviation (OEMs, commercial airline, general aviation, and their related industries) worldwide will be taking a huge hit, forcing some into bankruptcy. International air travel will grind to an almost full stop in the next few years as governments restrict air travel to and from various countries (travelers themselves being cautious as well). We believe Philippine domestic air travel, while certainly also affected, will bounce back much faster. Business travelers in the country would likely lead the way, with domestic tourism following suit. However, it remains to be seen how the current Philippine airlines will still be able to serve business travelers with the same efficiency and “good” flight schedules. 

While currently we do not see much market for the more high end business jets in the Philippines, the turboprops like the Cessna Caravans and King Airs, as well as the small to mid-size jets like the CJ4 and Latitude will still continue to find its market here. Incidentally, Textron Aviation just recently inaugurated its official MRO partner in the Philippines to service the ever growing population of Caravans and King Airs, and we are most pleased to have been a part of making that happen – surely a sign of growing confidence for Philippine aviation. Moreover, just before COVID-19 landed on Philippine shores, we were consulted on the Honda Jet’s possible entry into the Philippines. All these will surely provide business flying with an alternative solution to the business folks needing to fly domestically.

Because of this constant and enduring need for business related travel and coupled with the potential reduction of domestic flights by commercial airlines (or even reduction of airlines themselves), fractional ownership (or fractional leasing by several lessees) may be worth exploring more deeply this time around, which has not been that popular in the Philippine general aviation, or at least, utilized to its full potential. This may spur again the acquisition or leasing of aircraft for general aviation purposes. Normally, these same aircrafts can still be income-generating by letting it be chartered from time to time. And for the more sensitive business traveler, it allows them to a certain degree of control as to whom they get to share their seat on the plane.

But for aircraft lessors who are offshore (i.e. doing business from outside the Philippines), dealing with several Philippine-based aircraft lessees, even together as a “group,” might be cumbersome and it is advisable then to use a newly registered offshore company (e.g. in the BVI) which is together owned by the group of “fractional lessees” to act as head lessee and, in turn, this same offshore company enters into a sublease or operating agreement with the actual on-shore Philippine company operator. This offshore-to-offshore head lease and offshore-to-onshore sublease structure can then take advantage of the win-win-win situation previously discussed.

Times are tough and there is much uncertainty everywhere. Aviation just needs to look for and fly into the cloud with the silver lining.

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