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Fall in passenger demand due to COVID-19
Over the past two years, COVID-19 has presented a significant challenge for the aviation industry as passenger demand has fallen in response to the worldwide pandemic. Although the introduction of vaccines suggested a brighter future for air travel, the recent rise of the Delta and Omicron variants of the coronavirus may dampen expectations of a robust increase in passenger demand. In the midst of this uncertainty, one of the few bright spots for the aviation industry during the pandemic has been an increase in air cargo revenue. According to estimates from the International Air Transport Association, air cargo will rise to 36 percent of carriers’ revenue this year, up from 12 percent in 2019.
A switch to freight
To meet this increased demand and in response to the reduction in air passenger travel, passenger aircraft are being converted into freighters. For example, in May 2021, it was reported that Boeing was adding two production lines to convert Boeing 737-800s into freighters. Conversions can be temporary or permanent, and may include cabin removal, the installation of cargo loading systems, the plugging of windows, reinforcements and other modifications. In some instances, manufacturers have published service bulletins laying out possible cargo conversion solutions, such as Airbus with its A330 and A350 aircraft. However, there are legal risks posed by the passenger-to-freighter conversion process.
Contractual concerns
Aircraft operators seeking to convert passenger aircraft into freighters must ensure that the new contemplated use is permitted by the lease. In addition, the conversion process will require that modifications be made to the aircraft. A lessee must review the lease carefully to make sure that modifications are permitted. Aircraft lessees may also need the aircraft lessor’s consent prior to making any modifications depending on the wording of the lease. Moreover, an aircraft lease agreement commonly requires the aircraft to be redelivered at the end of the lease in its initial configuration. Any modifications made to the aircraft as part of the passenger-to-freighter conversion process may have to be reversed unless the modifications are acceptable to the lessor. As a result, an aircraft lessee should engage the lessor early in the process to make sure the lessee avoids violating the lease and obtains any necessary consent.
If a passenger-to-freighter conversion occurs resulting in a violation of the lease, an aircraft lessor could pursue a claim for breach of contract. In the United States, such a claim is likely to be made under state law. While each state’s law is different, in general, a lessor will only need to establish that a lease existed, the language of the lease was breached, and the lessor was damaged as a result. If a contractual violation is established, the lessor would still have to prove its damages at an arbitration or in a court and each state’s law could approach the damages calculation differently.
- Increased air cargo revenue has been a bright spot for the aviation industry during the COVID-19 pandemic
- As a result of the increase in air cargo demand and the drop-off in passenger demand, aircraft operators are increasingly converting passenger aircraft into freighters
- The conversion process should be approached carefully to make sure it does not violate lease documents and create contractual liability