December 2004/January 2005 
Volume 03, Issue 8 
Focus on Finance

Repossession is nine-tenths of the law

Boeing helps lead Cape Town Treaty effort


How do you get a low-cost car loan? It's not just your good credit.

For inexpensive car loans, you need laws that make the lenders feel secure, essentially by protecting their right to the asset as collateral if the buyer can't make payments. The same is true for airplane loans. In the United States, lending laws give airplane financiers security. But there is no equivalent provision in international law.

Scott Scherer, vice president of Aircraft Financial Services for Boeing Capital Corporation, said the lack of guaranteed security in international markets makes aircraft loans difficult to obtain. When loans are granted, they usually come with high financing costs. And if an airline can't afford these terms, it means lost sales for Boeing and lost economic opportunities for international customers and the people they serve. "The more risk there is, the higher the cost," said Scherer.


Here are some of the benefits expected from the Cape Town Treaty.

Lower risk for aviation industry investors—with enhanced security, higher value on investments and better returns

Lower risk to exporters' governments when they provide export credit to support aircraft sales

Cost savings to importers' governments along with lower external debt. This is especially true for developing economies that provide credit in the form of sovereign guarantees, or use their national debt to finance aircraft acquisitions.

Reduced financing costs for airlines—meaning better access to funds and funding sources, increased operating efficiency and profitability, enhanced fleet planning, and improved employment

Higher sales for commercial aircraft manufacturers and their suppliers—along with increased employment and expanded markets

More airlines and more commerce flow within and between more countries

Cheaper airline tickets for passengers, along with better service and more modern aircraft

Enhanced rule of law worldwide

To address this, Scherer and Boeing have been industry leaders in creating the Cape Town Treaty and promoting its ratification. This treaty, adopted in Cape Town, South Africa, provides a global legal system for asset-based aircraft financing and leasing. Once ratified in the countries that have signed, the treaty will provide legal rights to commercial aircraft financiers so they can repossess their assets in event of default, aided by a sophisticated new international electronic aircraft registry. Ratification also will open new, more affordable sources of capital by reducing financing costs and risks.

While 29 countries have signed the treaty, eight must formally ratify it before it can go into full force and effect. In October, the United States became the fifth country to ratify the treaty. This added momentum and is expected to encourage several more countries to ratify it soon. The U.S. ratification ceremony was held in Rome at the headquarters of the International Institute for the Unification of Private Law, the international body that collects and manages the Cape Town Treaty legal documents. Speaking at the ceremony, Rinaldo Petrignani, president of Boeing Italy, said "Boeing commends the United States for its leadership in ratifying the treaty." He encouraged other countries with a strong interest in promoting aviation to follow suit.

Boeing's Scherer is cochairman of the Aviation Working Group, the primary aviation industry organization behind Cape Town. This is an international coalition of aircraft and engine manufacturers, including Airbus and Boeing; leasing companies; and financial institutions. Along with the International Air Transport Association, the Aviation Working Group has helped develop and promote uniform aviation financing laws and regulations. In his leadership role, Scherer frequently speaks at key worldwide conferences, encouraging government officials to ratify the treaty.

Even prior to full ratification, benefits of the treaty (see box at right) are emerging. For example, the U.S. Export-Import Bank has provided a one-year extension to its policy of reduced loan fees for airlines residing in countries that have ratified the treaty.

And when the treaty becomes law, it should become even easier and cheaper to finance airplanes in the international marketplace.


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