Indian Aviation and Cape Town: Part I

In this first installment of a multipart series, we explore the historical landscape that has led to significant regulatory development in Indian aviation. Part II will discuss how The Protection of Interest in Aircraft Objects Bill, 2025 changes Indian aviation, and part III will address the practical impact of regulatory changes on dealmaking and continuing challenges.

WATERSHED WEEK

In a significant development for the Indian aviation industry, both houses of Indian parliament approved The Protection of Interest in Aircraft Objects Bill, 2025 (Cape Town Bill), a law that that fully implements the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (Cape Town Convention). While India did agree to the Cape Town Convention in 2008, lack of local regulatory implementation meant that the Cape Town protections were never practically available to creditors.

A TRICKY AND TROUBLED MARKET

As the most populous nation in the world, India has seen an unprecedented surge in air passenger traffic. In 2023–2024, total air passenger numbers exceeded 220 million, and by 2030, domestic passenger traffic alone is expected to reach 300 million annually. To cater to this rising demand, Indian airlines have aggressively expanded their order books. In 2023, Indian carriers accounted for close to 1,300 aircraft orders (with Air India and Indigo being the major purchasers). However, amid this growth, systemic and historical issues have plagued key stakeholders for decades.

Foreign creditors, especially aircraft lessors, have consistently struggled with debt recovery in Indian airline insolvencies. In the past few decades, India has seen the collapse or bankruptcy of major domestic airlines such as Air Deccan, Kingfisher Airlines, Jet Airways, and recently Go First.

In Jet Airways’ case, there was minimal actual recovery. Go First’s insolvency further exposed recovery vulnerabilities, as disputes over aircraft repossession delayed creditor claims, and the Go First liquidation ruling intensified concerns, leaving lessors uncertain about their ability to reclaim assets.

Similarly, the collapse of Kingfisher Airlines in 2012 resulted in substantial losses for foreign creditors, though precise recovery figures remain unclear.

It can be argued that there were business strategy and other specific issues for each of the failed airlines, but they also undeniably faced macro challenges specific to the Indian aviation industry. Extremely high aviation turbine fuel costs, expensive financing options, and lack of robust creditor/lessor protection are some of the key issues that have plagued Indian airlines and the aviation sector.

These cases underscore the challenges faced by foreign lenders and lessors in India, where regulatory hurdles, insolvency moratoriums, and legal complexities often extend disputes and diminish recovery rates.

PROACTIVE POLICYMAKERS

With this backdrop it is remarkable to note the efforts of Indian policymakers to ensure that India’s aircraft leasing and financing ecosystem can align with global standards and to strengthen investor confidence in India’s rapidly growing aviation market. In a historically slow regulatory environment, the Cape Town Bill was passed in record-breaking time, receiving approval from both houses of parliament in the same week. While final presidential approval is pending, it is understood that this is merely a formality.

The passing of the Cape Town Bill follows a string of positive regulatory and judicial measures. Recently, during the insolvency proceedings of Go First, the Directorate General of Civil Aviation (DGCA) refused to deregister the leased aircraft due to application of an insolvency law moratorium. This led to significant risks for the lessors and financiers resulting in Aviation Working Group downgrading India’s risk profile. Cognizant of the issues and the criticism, Indian policymakers issued an extraordinary notification in October 2023 that clarified that the moratorium under the insolvency laws would not be applicable to arrangements and assets covered under the Cape Town Convention.

Indian judicial authorities (including the Supreme Court), while adjudicating the deregistration requests filed by Go First’s lessors, held that the October 2023 notification was also to be applied retrospectively for the Go First’s ongoing insolvency proceedings. This was a significant change from the precedent in India where laws typically have only prospective application. The judicial authority reasoned that India’s international treaty obligations are required to be followed strictly, and the October 2023 notification had been issued to address this significant gap in lessor/creditor protection that was highlighted in the Go Air insolvency. The judicial authority also directed the DGCA to deregister all 54 aircraft leased to Go First within five working days, streamlining the repossession process for lessors.

CAUTIOUS OPTIMISM: NOW LESS “CAUTIOUS” AND MORE “OPTIMISTIC”

The evolving regulatory landscape reflects a broader transformation in India’s approach to aircraft financing and leasing. It also illustrates that Indian policymakers are becoming aware of and are actively working to solve the practical challenges faced by the industry. Such policy shifts are designed to create a more creditor-friendly environment, fostering confidence among foreign lenders and investors while aligning India’s aviation framework with international best practices. If sustained, these reforms could position India as a robust and very attractive jurisdiction for aircraft financing, mitigating risks for foreign investors and bolstering the country's aviation sector.