Wednesday, June 27, 2012 5:16 PM
Verne, B. Michael
Proposed Transaction Involving Subleases and Leases of Aircraft
CompanyA and Company B, two large US commercial airline companies, are proposing toenter into various lease arrangements involving 88 aircraft. The other keyparties involved in the transactions are Company A's wholly-owned subsidiary("Sub-A"), and the manufacturer of the 88 aircraft("Manufacturer").
Currently78 of the 88 aircraft involved in the proposed transaction are owned byaffiliates of the Manufacturer (the "Manufacturer Aircraft") and areleased to Sub-A under individual lease agreements with the Manufacturer (the"Manufacturer Leases"). The lease agreements terminate at varioustimes, but all have several more years to run. The useful lives of these 78aircraft extend well beyond the term of these Manufacturer Leases, and theleases provide that the aircraft will be returned to the Manufacturer at theend of each lease. The lease payments are normal for the industry.
Theremaining 10 aircraft are the subject of financing arrangements with thirdparties (the "Financing Company Aircraft") and are leased to Sub-Aunder individual lease agreements. These lease agreements terminate in 2017 and2018; the useful lives of these 10 aircraft extend well beyond thesetermination dates. Affiliates of Company A will own the Financing CompanyAircraft at the end of the term of the financing arrangements. The leasepayments for the Financing Company Aircraft are also normal for the industry.
B.Proposed Lease Transactions
Underthe proposed lease transactions (which are described in more detail below),Company B will sublease the 88 aircraft from Sub-A for the duration of Sub-A'sexisting leases. At the end of those leases, Company B will enter into newleases or purchase the aircraft (depending on the options available under theindividual leases). The specific transactions are as follows:
1.Between Company B and Sub-A:Company B and Sub-A will enter into an Agreement whereby:
a. Sub-A will sublease the 78Manufacturer Aircraft to Company B for the remainder of the terms of Sub-A'sManufacturer Leases.
b. Sub-A will, subject to obtainingconsents, sublease or otherwise transition its arrangements relating to the 10Financing Company Aircraft to Company B. The sublease or other arrangements mayinclude a purchase option in favor of Company B for these Financing CompanyAircraft at the end of the sublease. If a purchase option is included, thepurchase price at the end of the subleases will be set at the then fair marketvalue for each aircraft.
Note:All subleases are intended to be treated as "leases" for U.S. Federalincome tax purposes. Under all of the subleases between Company B and Sub-A,Company B (the Lessee) must meet certain requirements set forth in the lease orget prior written consent of Sub-A (the Lessor) before it may sublease orotherwise transfer the aircraft. Company B must maintain the aircraft and isresponsible for carrying insurance on the leased aircraft during the terms ofthese subleases. The subleases would take effect and the aircraft would betransitioned from Sub-A to Company B over a 3 year period beginning in or aboutAugust 2013 and ending in or about December 2015.
2.Between Company B and the Manufacturer:Company B will enter into a separate agreement directly with the Manufacturerto lease the 78 Manufacturer Aircraft from the Manufacturer (the "CompanyB Manufacturer Leases") after the original Manufacturer Leases with Sub-Aexpire (and thus the point at which the aircraft would otherwise be returned tothe Manufacturer by Sub-A). The new Company B -Manufacturer Leases will extendfor several years, though again not for the useful life of the 78 aircraft.These leases will include a purchase option in favor of Company B at the end ofthe leases. The purchase price at the end of the leases will be set at the thenfair market value for each aircraft.
Wedo not believe that any of the proposed lease transactions trigger HSR filingrequirements, but wanted to confirm this conclusion with you.
Generally,entering into leases or subleases do not constitute an acquisition of theunderlying assets unless the lease amounts to an installment sale of theproperty, where a lease exhausts the useful life of the property or where thelease otherwise results in the "present acquisition of the underlyingasset." (See interpretations 4, 26 and 97 of the ABA Antitrust Section,Premerger Notification Practice Manual.) Examples of a lease being viewed as a"present acquisition" of the underlying assets referenced in informalinterpretations include: an example where an unduly high rental charge iscoupled with an option under which the lessee may subsequently purchase theproperty as a nominal price. On the other hand if the lease agreement providesfor normal rental payments and/or a subsequent purchase option at fair marketvalue, the PNO has stated that the transaction is not an"acquisition" subject to HSR. It should be noted that theinterpretations indicate that the HSR analysis for entering into a sublease isnot affected by whether the sublease payments to the sublessor exceed the paymentsby the lessee/sublessor to the original lessor.
Theinterpretations indicate that to distinguish between a "purchase styled asa lease" and a "routine leasing transaction" the PNO looks tosee whether the lease amounts to a present transfer of beneficial ownership.The PNO considers such factors as: the duration of the lease (e.g. whether theduration of lease encompasses the useful life of the asset); how the parties tothe lease allocate the risk of loss or damage to the underlying property duringthe lease term; whether the lessee has a right to transfer its interest withoutthe consent of the lessor; whether the lease is or will be shown as an asset onthe financial books of either party; and how the lease is treated for taxpurposes.
Noneof the leases or subleases involved in the proposed lease transactionsdescribed above constitutes the present transfer of the underlying assets.
Asto the Company B -Sub-A subleases:Sub-A, with the knowledge and approval of the Manufacturer (for 78 of theaircraft) and the various Lessors for the Financing Company Aircraft (for theremaining 10 aircraft), is subleasing the 88 aircraft to Company B for theremaining time it has under its original leases. Its original leases and thenew subleases are standard commercial leases within the airline industry. Theduration of the leases and proposed subleases are far shorter than the usefullife of the aircraft. The sub-lessee (Company B) either has no right to theaircraft after the end of the sublease (in the case of the ManufacturerAircraft), or can only acquire the aircraft for a payment of fair market value(in the case of the Financing Company Aircraft). The subleases are intended tobe treated as leases for tax purposes, and the sub-lessee may not transfer orsublease the aircraft for the duration of the sublease unless it meets certainrequirements set forth in the lease or secures Sub-A's consent. All of thesefactors are characteristic of "routine leasing transactions," not"purchases styled as leases."
Asto the Company B -Manufacturer leases:These leases, which are effective for the 78 Manufacturer Aircraft once theCompany B -Sub-A subleases expire, are also standard leases within theindustry. The duration does not exhaust the remaining useful life of theaircraft, Company B must pay fair market value to the Manufacturer to acquirethe aircraft at the end of the lease, and the lease payments are set at normalmarket rates. Again, these facts are characteristic of "routine leasingtransactions."
Forthe above reasons, we believe that none of these lease transactions trigger HSRfiling requirements. Please let us know if you agree with our conclusions.