An ongoing dispute among major aircraft leasing companies, local Indian authorities, and Kingfisher Airlines, which has been grounded since late last year, provides some critical insights into risk factors for lessors seeking to safeguard interests in emerging markets, according to Fitch.

While plans to relaunch the airline are still being considered by Indian regulators, Kingfisher has not operated since December, when it lost authority to fly in the midst of a liquidity crisis. Most of the largest global aircraft lessors, including ILFC, AerCap, BOC Aviation, Aviation Capital Group, and AWAS, had leased equipment to the carrier, whose fleet of approximately 60 new-generation aircraft was primarily leased. Since Kingfisher's grounding, major lessors have taken a number of different approaches to asset recovery, with varying results.
 
Above all, we see the Kingfisher experience as important in underscoring the risks associated with leasing to start-up airlines that lack a proven operating track record and often fail to become profitable after launch. In India and many other emerging economies, where rapid demand growth has spurred market entry by unproven carriers, lessors face the need to reflect higher risk through pricing or potentially stricter concentration limits.

Kingfisher had been operating in a fast-growing, but still young, Indian air transport industry only since 2005, and it had never turned a profit prior to its grounding in 2012.

In addition to credit risk, lessors clearly face substantial legal risk in India and other countries, where quick recovery of assets and enforcement of creditor rights is less certain than in developed markets. Lessors have had difficulty in some cases recovering aircraft from Kingfisher as a result of India's failure to cooperate fully in deregistering the aircraft.

India ratified parts of the Cape Town Treaty, an international agreement setting out common standards for treatment of secured aircraft claims, in 2008. However, many of the Kingfisher leases predated that ratification. Even with Cape Town in place, local laws and precedent remain critical for lessors and other aircraft creditors to consider.

The experience of lessors in the Kingfisher situation shows that moves to take assets from lessees at the first sign of trouble often pay off. This is clear in light of media reports suggesting that Kingfisher-leased aircraft and engines have, in some cases, been stolen or damaged. This points to the need for lessors to remain focused on maintenance reserves, security deposits, and solid insurance policies -- especially in cases where local laws and regulatory protection of creditor rights may come up short.

Exposure to Kingfisher among Fitch-rated lessors is small relative to their total leased aircraft portfolios. The outcome of the dispute is therefore not a ratings issue for these firms. More broadly, aircraft lessors tend to lease to airlines that have weaker credit profiles than their own, which places a natural limitation on the lessors' ratings.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.