July 1, 2015

Are Your Portfolio Aircraft Flying to Havana?

Holland & Knight Aviation Law Blog
Jonathan M. Epstein

Many U.S. aircraft lessors and lenders contractually prohibit U.S. lessees from flying to Cuba. However, President Obama's easing of sanctions on Cuba earlier this year have expanded opportunities for U.S. citizens to travel to Cuba and more U.S. airlines and charter operators are now flying (or planning to start flying) to Cuba. The list of DOT Public Charters shows numerous charters every week from the U.S. to Cuban destinations. Hence, there will be increasing pressure on U.S. aircraft lessors and lenders to permit such operations. 

What Has Changed for Aviation?

As a practical matter, U.S. air carriers may still only carry passengers on charter flights to Cuba if such passengers fall into a category authorized by the Treasury Department Office of Foreign Assets Control (OFAC) to travel to Cuba (authorized travelers), and there are still a number of special regulatory requirements for such flights. However, the changes do ease the regulatory requirements. In particular, prior to the rule change, U.S. air carriers providing charter service to Cuba either had to hold an OFAC license to provide "carrier services" to Cuba, or (as was more typical) act as a direct carrier for a public charter operator licensed by OFAC. In January 2015, OFAC removed the requirement to use a licensed carrier service provider, and now authorizes any person to provide air carrier services and make payments to Cuban entities associated with such carrier services, subject to certain requirements discussed below. Although OFAC also removed the prohibition on scheduled air service to Cuba, there is no mechanism yet for scheduled service because there is not yet a bilateral agreement with Cuba. 

What Approvals Does the Air Carrier Need?

For flights carrying authorized travelers between the U.S. and Cuba, the U.S. carrier would not need any further OFAC approval. Under U.S. export regulations, a U.S. air carrier may temporarily export the aircraft to Cuba for purposes of such flights, provided the flight meet certain criteria. In particular, the aircraft cannot be based in Cuba, wet leased, dry-leased, or chartered to Cuban entities, and the air carrier cannot pre-position spares/equipment in Cuba. There are also FAA, U.S. Customs & Border Protection requirements, OFAC recordkeeping requirements, and DOT public charter requirements (assuming the flights are operated as public charters).

We note that U.S. private aircraft operations to Cuba still generally require both OFAC and Commerce Department approvals.

What Are the Risks for Lessors, Lenders?

Before affirmatively consenting to flights to Cuba, a U.S. lessor or lender should: (i) conduct diligence or obtain assurances that the air carrier will be operating in accordance with the restrictions discussed above; (ii) verify insurance is valid for Cuba operations (in particular war-risk (expropriation) and breach of warranty provisions); and (iii) check other finance parties' or trustee agreements to ensure there are no prohibitions in those documents. In addition, while Cuba is a signatory to the Cape Town Convention, a repossession in Cuba likely would require a license from OFAC, in addition to presenting practical challenges if, for example, the Cuban government had liens against the airline. 

Not long ago the common practice may have been to summarily prohibit lessee operations to Cuba. However, as the potential risks decline and the business demand for flights to Cuba increase, lessors and lenders will increasingly have to address these issues.

For additional information on this topic, please contact Jonathan Epstein.

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