When we were approached by The Legal 500 to contribute our insights and practical knowledge for the inaugural Aviation Comparative Guide, we wanted to go beyond the usual offering. After going over the Aviation Comparative Guide, we wanted to discuss two topics that are usually glossed over or at least, require more in-depth discussion based on actual experience. The first topic covers important legislative updates on Philippine aviation. The second topic is more specific to aircraft finance and lease and discusses issues an aircraft owner or lessor may face if and when it encounters difficulty with the lessee or debtor.
Going straight into the first topic, the first major legislative change happened with the amendment of the Philippine Public Service Act (PSA).
The PSA, which aims to regulate both public services and public utilities in the Philippines, was first enacted into law in 1936 and provides for the definition of a public service. However, it made no mention of what activities fall within the scope of a “public utility,” the operation of which is considered a nationalised activity under the Philippine Constitution. Hence, public utilities were only allowed for Filipino citizens or corporations organised under the laws of the Philippines with at least 60% of its capital owned by Filipino citizens. This means that foreigners could only own up to a maximum of 40% of a business that is deemed to be a public utility.
The definition of a public utility can only be found in case law as defined by the Philippine High Court instead of in a clear and definitive language through statute. Case law then broadly defined a public utility as a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. Because the enumerated services are not exclusively, this paved the way, over the decades, for various regulatory agencies to have their own interpretation of what is public utility. Thus, by way of example, the following were interpreted as a public utility which restricted foreign ownership on those businesses: freight forwarding services, air transport services, airport ground handling services, logistics and trucking services, ride hailing apps such as Uber and Grab, and cold storage facilities among others. Since there was no clear definition, this situation caused confusion and uncertainty over the years.
After more than 80 years, the Public Service Act was recently amended. The amendment now provides for specific and limited industries that are considered as public utilities, which are (i) distribution of electricity; (ii) transmission of electricity; (iii) petroleum and petroleum products pipelines transmissions systems; (iv) water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems; (v) seaports; and (vi) public utility vehicles.
With such specific limitations, air transport is no longer considered as a public utility and can now be fully owned by foreign entities. Other aviation-related industries that can also be fully foreign-owned are freight forwarding business and ground handling services.
With the amendment of the PSA, the two major implementing rules and regulations that were affected are the Philippine Civil Aviation Regulations (PCAR) of the Civil Aviation Authority of the Philippines (CAAP) and the policy resolution of the Civil Aeronautics Board (CAB).
The CAB has released its Board Resolution No. 35 series of 2024 (CAB Resolution) to serve as the guidelines in implementing the amended Public Service Act. This CAB Resolution confirms that the provisions on foreign ownership and participation of foreign investors in the governing body of air carriers, general sales agents, cargo sales/breakbulk agents, and airfreight forwarders that can be found in the Civil Aeronautics Act of the Philippines are no longer applicable.
With the issuance by the CAB of the updated regulation, this means that a Philippine company with 100% foreign ownership may now file a petition for the issuance of a Certificate of Public Convenience and Necessity (CPCN) or Letters of Authority (LOA), as the case may be, before the CAB. Additionally, in order for such company to be registered in the Philippines, it should still follow the minimum capitalisation requirement as provided under the Foreign Investment Act of 1991 and CAB Regulation No. 32, series of 2018, CAB Resolution No. 54, series of 1999, and Economic Regulation No. 8, as the case may be.
Once issued, such certification or authorization shall continue to be in effect for a period of not more than five (5) years, and may be renewed for a successive five-year period, or shorter periods as the CAB may deem proper. CAB may also suspend or revoke such permit or certify that operation as such has ceased. CAB may also suspend or revoke such permit if any service authorized by the permit given is not inaugurated within a period as may be set by CAB.
We noticed that the CAB Resolution seems to highlight two important topics as its rolls out and liberalises Philippine air travel for full foreign ownership. First is that the CAB Resolution provides that an annual performance audit will be conducted by an independent third party evaluator to monitor the cost, the quality of services provided to the public, and the ability of entities regulated by the CAB to immediately and adequately respond to emergency cases. This provision seems to imply that there would be greater scrutiny over foreign-owned public utilities to protect the general public.
This is because, while air transport is no longer considered as a public utility, it is still considered a public service, being a business affected with public interest. The Philippine Constitution provides that, in times of national emergency, the State may take over or direct the operation of privately owned public utilities or businesses affected with public interest. Further, the Philippine Constitution also provides that the State may, in the interest of national welfare or defense, transfer over to public ownership the utilities and other private enterprises to be operated by the Philippine government.
Another topic highlighted in the CAB Resolution is the regulation and approval of fares, rates, and other charges. For routes or links operated by more than one (1) air operator, passage rates are deregulated. For routes serviced by a single operator, passage rates shall continue to be regulated. All freight rates, charges, and passage rates will be closely monitored by the CAB.
The CAB Resolution also provides for the regulation of the fares, rates, and charges of foreign designated carriers. Reciprocity and value for the Philippines shall be considered in granting discount or promotional fares and rates. The CAB shall ensure that substantially similar benefits given by it to a foreign air carrier shall also be given to Philippine air carriers by the home country of that foreign air carrier.
As for the PCAR, as of this writing, the CAAP has not released any updated PCAR in relation to the amended PSA. However, just in October of this year, the CAAP has already issued the proposed amendments relative to the foreign citizenship requirement for the registration of aircraft, application of air operator certificate, and certificate of authorization for aerial work operations.
The proposed amendments will include that a foreign-owned aircraft not registered under the laws of any foreign country may be eligible for Philippine registration if the aircraft will be used exclusively for commercial air transport. We are closely monitoring the final approved PCAR and how it will actually be implemented.
With these proposed amendments, the nationality restrictions on investments in public utilities will be removed from the PCAR, and will allow foreign investors to fully own public utilities companies engaged in air transport, as long as such companies complies with other requirements as may be set by the Philippine government. Greater investment protection is thus accorded to foreign investors in the Philippine aviation industry, especially for capital-intensive businesses such as air transport, ground handling, and freight forwarding.
Going next into the second topic, the following are the “hot issues” insofar as dispute and repossession are concerned.
While repossession is certainly a topic covered in most guides which is discussed in a general manner, most discussions are fairly the same across the board. What we wanted to cover in this hot topic is to give our readers a glimpse into our actual experience regarding disputes involving aircraft finance and lease in the Philippines. Our experience handling both contentious and voluntary surrender of aircrafts has contributed immensely to how we advise on the deals we handle as well as how we prepare the transaction documents. Moreover, as we frequently handle several aircraft finance and lease transactions every year, we are regularly updated with the official and unofficial (or ad-hoc) requirements of the CAAP which serves our clients well going into a dispute situation. The following are the hot issues in dispute and repossession:
I. The Issue of the IDERA
The IDERA is not recognised in the Philippines because it has not ratified the Cape Town Convention. While a de-registration power of attorney is useful, it must not only be tightly worded, but also broadly covers all relevant Philippine government agencies that would be relevant to possession, de-registration, and export (which goes beyond the CAAP). In addition, since a power of attorney is normally issued by a person, the authority of that person to bind the entity to which the aircraft is registered must also be drafted properly. In fact, the CAAP will not necessarily recognise a de-registration power of attorney but nonetheless, in a past transaction acting for the aircraft lessor, we have had success in using such power of attorney to de-register an aircraft.
For a voluntary surrender, a de-registration power of attorney is quite helpful especially if the lessee stops being cooperative. However, for a contentious repossession, it might not be that helpful not because of the insufficiency of the power of attorney itself, but because other usual requirements for de-registration and repossession may not be readily available to the lessor. The purpose then of the power of attorney is to use it as a stepping stone to represent with the various Philippine government agencies.
II. The Issue of Ownership
We have had the opportunity to advise a foreign lessor on a highly contentious repossession for a financed aircraft wherein the Philippine lessee was claiming ownership over an aircraft even though not fully paid. While the Philippine lessee had no legal ownership, nonetheless it was claiming it was dispossessed of ownership through fraudulent means. Working with and advising for that lessor, we are thankful that the lessor won that case and successfully repossessed the aircraft.
In handling that case, we have gained a lot of useful and practical insights into how the transaction documents should prepared and executed. Appropriate provisions should be inserted in the transaction documents to ensure that the same allegations by the lessee would be foreclosed and in addition, we have prepared specific Philippine-centric documents to be executed by the lessee to counter its potential claim of ownership (including beneficial ownership).
III. The Issue of Practical Considerations
Over the years, we have been consulted by several aircraft owners, lessors, and creditors, both domestic and foreign, and here are the factors to consider when faced with a potential repossession, whether contentious or voluntary surrender. Our experience and relationships cultivated over more than a decade with various supply chains relating to the operations of an aircraft in the Philippines, as well as being counsel to several fixed-based operators, maintenance repair and overhaul providers, and licenced air operators, have given us the practical insights for an end-to-end roadmap to repossession.
The first and major consideration for any repossession is the aircraft’s certificate of registration. Once an aircraft owner or lessor gains actual possession of the aircraft, its certificate of registration is still attached to the current operator. For Philippine domestic owners and lessors, that should not be much of an issue since they can easily transfer the certificate of registration over to their Philippine entity. However, for foreign owners and lessors, the Philippines is an operator registry and thus, can only issue an aircraft’s certificate of registration to a Philippine entity. However, with the right structuring and planning, this challenge can be overcome.
The second consideration for any repossession is the availability of the pilot to operate the aircraft. Depending on the make and model of the aircraft, it may either be easy to source a pilot or extremely hard to find a qualified pilot. Therefore, right at the start when leasing or financing an aircraft, having the proper data regarding the availability of the same make and model aircraft in the Philippines would give an idea if there are readily available pilots to hire if needed.
The third consideration would be the maintenance provider. Similar to the availability of qualified pilots to operate the aircraft, a factor to consider is the ready availability of the aircraft maintenance technicians with the proper rating for the engines, avionics, instruments, gauges, landing gear, etc. If the aircraft is not as common in the Philippines, this may pose a challenge later on.
A fourth consideration is the hangarage and parking. The major airports in the Philippines will have hangars and parking for lease but the Manila airport will pose a challenge in terms of hangarage and parking costs due to the recent privatisation of the management of the Manila airport. This fourth consideration is more of a cost issue rather than an availability issue.
A fifth consideration would be the insurance coverage of the aircraft. This factor is also more of a cost issue. However, since insurance covers both the aircraft and the pilot, there may be a coverage issue for pilots and is related to the first and major issue on which entity will have the aircraft’s certificate of registration.
The sixth and last consideration would be the export requirements which not only involve the Civil Aviation Authority of the Philippines but also customs. In certain situations, the department of finance may also require a clearance.
The Philippines has taken significant steps towards opening up its aviation industry to foreign investors, which gives greater legal protection in terms of recognising full ownership over their aircrafts as well as allowing wholly-owned air operator companies. With these changes also come the need to overcome potential challenges usually associated with leasing aircrafts. We trust our checklist of hot issues to consider will prepare the aircraft owner or lessor in dealing with Philippine lessees and operators.