GATS is Coming - A Revolution in Aircraft

Trading
September 13, 2019

Every aircraft owner, leasing company and airline should be looking into GATS and how it can (will)
change the way in which they will acquire, own, lease and trade aircraft. GATS is the new Global
Aviation Trading System which is being established through the auspices of the Aviation Working Group
(AWG). This briefing doesn’t re-state what has been said by AWG itself and so we invite you to log on to
their website at www.awg.aero/projects/gats. Having said that, the reason for drawing GATS to your
attention is that we agree with the promoters and supporters – who now include a good cross-section of
the aviation community – that it will be a platform that not only has the potential to revolutionise the way
aircraft are bought and sold but could realise that potential quite quickly. The AWG GATS website
underlines the significant advantages for aircraft lessors of the new platform – speed and cost of
execution being the principal ones; but are rightfully careful to not present GATS as a vehicle designed
purely for lessors by also highlighting the protections and interests for airlines, investors and lenders.
Just as the standardisation of investment grade loan documents by the Loan Market Association led to
an increase in secondary trading of loan assets and a deepening of the market so too has GATS the
potential to open up the trading of aircraft assets to a broader market.
From our own experience advising leasing companies, airlines and lenders know how much of a time
consuming and administrative burden getting through the necessary paperwork and negotiations of
lease novations and ancillary documents can be. It’s relatively expensive too, once you take account of
all the costs of the ancillary filings and re-registrations. It is probably fair to say that most airlines find
having to deal with lessors’ requests to facilitate transfers of ownership an unfortunate (if necessary)
burden of the flexibility that comes with taking aircraft on operating leases. The fact that some airlines
now seek to charge fees to cover their internal administrative costs (in addition to passing on the costs
of their external lawyers) is not a new line of business for them but a recognition of the cost to them of
being obliged to have full time staff dedicated to handling lessor requests. A reduction of that
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administrative burden for lessees will, we think, outweigh the loss of opportunity for an airline to re-
negotiate terms with an in-coming lessor which current lease novation negotiations can provide.
The GATS platform is not yet fully operational and indeed it is not the intention that the full suite of
options on the platform should go live and be adopted overnight. The platform will be almost entirely
virtual and will adapt existing technologies (e-ledgers/block chain etc.) and build on lessons learned from
the operation of the International Registry for aircraft objects. To ensure confidence in the platform the
transition to a fully operational virtual GATS platform will be phased in and it will be possible to opt in to
use the full e-platform capabilities without prejudice to the key core elements. The British Government’s
failed favoured solution to the issue of there being no hard border in Ireland (which has been at the heart
of the BREXIT chaos) illustrates the importance of having working tech solutions in place before
proposing a radical change to day–to-day operations.
The set-up and recurrent cost to a leasing company of using professional trust structures in which to
hold ownership of aircraft should be (over time) significantly less than the transaction specific costs
incurred in trading those aircraft. Leasing companies will still incur professional and other costs
(including those of the trustee itself) but those will be more focused on the terms of the deal than on the
administrative tasks of transferring ownership. Initially GATS Trusts will be established under Utah, Irish
or Singapore law. Those are the laws (legal systems) which have been identified as ones that have
either a long association with aircraft ownership trusts (in the case of Utah) or are otherwise accepted as
having highly developed and stable trust laws and practices. Trusts are legal (technically they are
“equitable”) structures not corporate ones nonetheless it is likely that the GATS Trustee (the likes of
Bank of Utah or Wilmington) will be established in the jurisdiction of the law governing the trust. The
GATS Beneficiary (the leasing company’s chosen legal entity) could be incorporated in any jurisdiction
which will recognise the foreign law GATS Trust. Recognition by other systems of law of trust
relationships is one of the challenges (and possible stumbling blocks) for the rapid and widespread
adoption of GATS as it will be important that the trust structure does not prejudice the beneficial
ownership of the aircraft or upset the tax treatment of lease payments. AWG proposes to publish a list of
jurisdictions in which they have been advised that the GATS Trusts will be recognised.
AWG has issued a series of exposure template agreements to establish the contractual structures for
GATS Trusts and transactions. It is now possible for transactions to be converted into or set up using

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 GATS trusts. Any such structures will, once the e-platform goes live (scheduled for end Q1 2020), be
eligible to be restated on the e-ledgers.
The committee within AWG that has been developing GATS has been very conscious to build a system
that respects the interests of all parties. The interests of the airline lessees (e.g. to ensure that they incur
no greater cost by reason of a transfer and to require incoming beneficial owners to meet financial and
experience criteria set out in the lease) have been protected via their control over certain mandatory
steps in the registration mechanisms. Lenders will be familiar with the forms of security over the
beneficial interests that are part of the platform as they will have seen them in the context of existing
trust structures used primarily in the US. But no doubt they will look to their legal counsel for sign off
opinions. The platform needs to be seen by owner lessors, trustees, airlines and lenders as protective of
their interests and the broad industry consultations that have taken place (and which continue) should
ensure that this is the case.
We would be delighted to provide more guidance on GATS. We can only recommend and praise the
AWG website for the breadth of its commentary and support for the project.

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This document provides a general summary and is for

information/educational purposes only. It is not intended to be
comprehensive, nor does it constitute legal advice. Specific legal
advice should always be sought before taking or refraining from taking any
action.

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