Research Trends and Conclusions: Aviation 2011
With the benefit of over 14 years of research and thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the aviation legal marketplace worldwide.
Our research since 2006 identifies a shift in the balance of the top rated lawyers worldwide. The scope of this publication covers finance, contentious and regulatory lawyers who are highly experienced in the aviation industry. We have collated the evidence gathered from thousands of votes and interviews with lawyers and corporate counsel specialists since 2006. In doing so, we have identified the 40 most highly nominated individuals in each edition. We then calculated the proportion of finance, contentious and regulatory lawyers contained in the top 40 bracket for each publication.
This analysis illustrates that there has been a move towards the financial and regulatory fields in the aviation industry. It is clear that the proportion of contentious lawyers has fallen significantly between 2006 to 2010 and slightly increased in 2011. On the other hand, aviation finance lawyers have steadily increased their representation in the top 40 through the years of the recession and have experienced a plateau effect in 2011. Regulatory lawyers experienced a blip in 2010 and have recently made a strong come-back
Overall, the aviation sector has proved resilient to tough market conditions, and has seen off what looks to be the worst of the recession. The aviation industry continues to perform well across the finance, contentious and regulatory practice areas, despite original predictions of lower gains. The International Air Transport Association estimated the airline industry would make a net profit of $8.9 billion in 2010, only later to revise their forecast to $15.1 billion. So far predictions for net profit in 2011 have risen from $5.3 billion to $9.1 billion. While air cargo growth was not as strong as predicted in 2010, passenger and cargo demand is forecast to increase from 5.2 per cent to 5.5 per cent in 2011.
Litigation
Our conversations with litigators reveal that 2010 has overall been a busier year and this is reflected in an increase in the number of disputes specialists included in the top 40 in 2011. However, this is compared to previous years, which have seen the prominence of litigators in the top 40 fall from 26 in 2006 to 18 in 2010. This indicates not only that a reduction in this kind of work has occurred, but that finance and regulatory work has grown since 2006. This has been a result of the activity of Export Credit Agency (ECA) financing and tighter regulation on an international scale. Consequently, finance and regulatory lawyers are developing their expertise and therefore securing a greater number of nominations.
Transactional
We reported in 2010 that ECAs stepped up to the mark and ensured that finance lawyers had a better than expected year. This has meant that the number of transactional lawyers in the top 40 bracket has maintained a steady level in the 2011 edition. The question lawyers are now asking is not whether ECAs will fund the gap in financing, as such agencies have proved this successfully, but whether the market for credit can be rationalised so that funding from the private sector can make a stronger return. At the time of publication a new Aircraft Sector Understanding agreement is about to be signed in Paris by aircraft exporting countries in a meeting set up by the Organisation for Economic Cooperation and Development. It is largely expected that the premiums charged by ECAs will be increased to bring this kind of financing into line with commercial markets. Despite this, interviewees expect 2011 to be another significant year for ECA financing and so positions on ECA panels by law firms will continue to be highly valuable. Aviation finance departments can expect to see a continued stream of revenue coming from this kind of work.
Transactional experts also noted that the secondary market for used aircraft is still weak due to a general lack of finance, highlighting the damage done to the industry by the exit of a large number of commercial banks in 2008 and 2009. Nevertheless, a notable development has been the influx of finance for operating leasing companies. Venture capital groups and hedge funds have been attracted by the low price of aircraft, which has led to a number of start-ups in this area and large portfolio transactions, keeping law firms relatively busy. One interviewee stated that “this is a flavour of the next boom”. If so, law firms will need to take notice and assess the needs and requirements of these potential new clients. In the foreseeable future at least, lawyers can expect to see alternative sources of finance prosper in an industry that requires an estimated $70 billion in financing annually and like many others has yet to see more banks investing again.
The consolidation of the market continued with a number of significant transactions in 2010. The merger of United and Continental Airlines formed the world’s largest airline with annual revenue expected to be $30 billion flying 144 million passengers a year to 59 countries. The British Airways and Iberia merge was also signed in 2010. These developments have kept select transactional lawyers very busy.
Regulatory
Regulatory lawyers have seen a growing level of work. Unforeseen incidents such as volcanic ash clouds in Europe and Indonesia in 2010, attempted terrorist attacks and poor weather experienced at the end of the year in some countries have led to further questions regarding the responsibilities of airlines. These events occurred during a climate of a tightening regulatory regime particularly in North America and Europe. As of October 2010, the US Department of Justice imposed over $1.6 billion in criminal charges, suing 18 airlines and several executives in cases relating to price fixing in the air transportation sector. The environment continues to be a significant issue for the authorities and the recently enacted Emissions Trading Scheme in Europe has received particular attention. In addition, some regulatory lawyers note that airline consolidation has become a significant part of their practice as large mergers have raised competition concerns. On the other hand, consolidation has also been an important issue for those firms that have lost clients as a result, highlighting the importance of a diverse and international client base in comparison to those firms that are tied to domestic clients and are more vulnerable to such market developments.
Outstanding Firms
Across the finance, contentious and regulatory areas of the aviation industry lawyers noted that clients are assigning more work in-house in an effort brought about by the recession to reduce their costs. Despite this, clients are still making use of the breadth of resources provided by magic circle law firms for finance and transactional work in particular. White & Case performs excellently in 2011 as its aircraft finance team has doubled its representation in this book compared to 2010. Similarly, Clifford Chance continues to demonstrate its market share of aircraft finance lawyers in the publication. Other impressive firms such as Allen & Overy and Vedder Price PC that have strong finance practices have maintained a steady representation over the years. In terms of contentious and regulatory work, the market leans towards mid-sized firms such as Clyde & Co and Barlow Lyde & Gilbert LLP who have outstanding expertise in these fields and have increased their profile over the years. Clyde & Co’s strength in the aviation sector was bolstered by its merger with Beaumont and Son in 2005 and has continued to be the stand out firm winning the Who’s Who Legal Aviation Law Firm of the Year Award consecutively since 2006.
On the whole, the trend is upward in terms of the number of inclusions for the best firms in this sector, indicating an increase in expertise being developed across the board in the aviation industry.
Growth Areas
This is also the case when looking geographically at the number of countries and individuals included in the publication, which has seen a steady rise over the years. The number of countries in the publication has risen from 48 in 2006 to 61 in 2011. Similarly, the number of internationally recognised aviation experts has risen from 300 in 2006 to 409 in 2011. New jurisdictions in 2011 include Cyprus, Egypt and Puerto Rico as these developing nations see their aviation industry garner international recognition. Our researchers report that Brazil was mentioned regularly during interviews as a jurisdiction that is experiencing huge activity. Prior to Tam’s merger with Chile’s Lan Airlines, the former grew its revenue-passenger-kilometres three times as fast as Brazil’s GDP over the last decade. The Brazilian economy expanded by 6.5 per cent in 2010, and is expected to grow by 4.5 per cent in 2011. Airlines in the country have become attractive borrowers. Azul, an airline established in 2008 in Brazil, became the first airline in the world to board more than two million customers in its first year of operation and achieved the highest load factor in the Brazilian domestic market in 2009. This activity in the aviation sector has led firms such as Barlow Lyde & Gilbert LLP to open offices in the country.
The number of experts identified in Asia has grown significantly since 2006 with Australia, China, Hong Kong, India, Japan and Singapore holding a significant market share of aviation experts. Law firms have recognised the growth opportunities on this continent and have established aviation practices in these countries to reflect the demand from their clients to expand their operations in the region. Many interviewees noted the aviation practices in these countries as significant potential growth areas in the future.
There is no doubt that the aviation industry in general has been affected as a result of the most recent recession. However, those most experienced in this industry are very aware that the root cause of tough market conditions is not a lack of profitability in the aviation industry itself, but is rather a by-product of the problems banks have faced in recent years that has led them to reconsider their lines of business. It is only a matter of time before a large number of banks re-enter the market. Furthermore, the industry is in a period of transition whereby weaker entities have been burned off, profit margins remain low in North America and Europe, and clients face increasing pressures from government agencies related particularly to the environment and security. It is up to the experts identified in this publication to remain receptive to these trends, to guide clients through the unforeseen hurdles that may arise and provide solutions that above all are good for business.