Keeping Track of Sub-Lessees
Engine leasing is a fiendishly complex business, with asset managers in the space needing a granular understanding of maintenance condition, engine build and life-limited parts if they are to maximize residual value.
If that wasnâ€™t challenging enough, an extra complication has arisen following a recent fine against Apollo Aviation (now Carlyle Aviation Partners) for the actions of one of its sub-lessees. Carlyle acquired Apollo in December 2018, and Carlyle was not involved in the transactions.
In 2013 Apollo leased three engines to a UAE-based company, which subleased them to a Ukrainian company that went on to install them on aircraft wet-leased to Sudan Airways, which was on a U.S. sanctions list at the time.
Apollo was unaware until lease return that Sudan Airways had operated its engines, but notified the U.S. treasury departmentâ€™s Office of Foreign Assets Control (OFAC) once it did. Even so, OFAC fined the lessor more than $200,000.
The fine was levied despite a provision in Apolloâ€™s original lease that the engines not be transferred to any country on a U.S or UN sanctions list, with OFAC effectively ruling that the lessor should have conducted further oversight.
"The take-away from OFACâ€™s Apollo decision is clear: aircraft lessors cannot rely on a boilerplate lease clause to protect them; they must exercise pro-active vigilance over the products they are leasing out, know their customers, and in some cases know their customersâ€™ customers,â€ wrote Mark Atwood, a lawyer for Cozen Oâ€™Connor, in Lexology.
Atwood also advised that non-U.S. lessors should exercise similar care, and cautioned that non-U.S. aircraft or engines might also be caught up in the ruling if they contain at least 10% parts made in the U.S.
If lessors do fall foul of sanctions again, they should report the violation as soon as possible, as doing so mitigated what would have been a minimum $3 million fine for Apollo.