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 wasn’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 department’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 Apollo’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 OFAC’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 customers’ customers,” wrote Mark Atwood, a lawyer for Cozen O’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.