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03 January 2018
Interchange agreements are relatively new and have been increasingly used by commercial aircraft operators in Brazil. In response to industry requests, the Brazilian Civil Aviation Agency (ANAC) and the Brazilian Aeronautical Registry (RAB) recently clarified several rules applicable to interchange agreements. Due to their novelty, interchange agreements are not always understood in the industry. Interchange agreements share some similarities with interline and code-share agreements, but have important distinctions.
An 'interchange agreement' is a bilateral agreement between an interchangee and interchangor. The interchangor assigns possession and the right to use an aircraft to the interchangee during a specific period. This simplified definition implies an agreement similar to a sublease. The main difference between an interchange agreement and a sublease is that the periods during which an aircraft may be interchanged are short and occur multiple times during the overall term of an interchange agreement. In essence, an interchange agreement creates terms for a series of multiple short-term subleases. For example, an interchange agreement with a 12-month term could result in the aircraft being interchanged dozens or even hundreds of times. In some cases, interchanges can occur on the same day. That is, the interchangor might operate an aircraft at the beginning of a particular day and the interchangee could operate the same aircraft later in the day.
In most cases, interchange agreements are employed by airlines that are based in different countries but part of a single economic group. A few such groups in South America control separate airlines in different countries. Interchange agreements permit those groups to enable their operating entities based in different jurisdictions to use the same aircraft during the term of an interchange agreement. This can dramatically increase efficiency for multinational groups in the region.
Initially, the main obstacle to interchange agreements was the reluctance of civil aviation authorities to allow their operators to use foreign-registered aircraft. Due to the extremely short term of each interchange, it is impractical for an aircraft's national registration to be changed. In an interchange agreement, the registration of the interchanged aircraft remains unchanged even though the interchangor and interchangee are from distinct countries. Both the interchangor and the interchangee have separate air operator certificates in their respective countries.
Traditionally, operators in Brazil have been prohibited from operating aircraft registered in other countries. Consequently, the first interchange agreements in the country related to Brazilian-registered aircraft. The RAB recently allowed registration of interchange agreements for aircraft with foreign registration, provided that the interchangee is a Brazilian operator.
Aircraft interchange agreements were first mentioned in a 2013 restatement of ANAC's general regulations. Those regulations stipulated that the RAB would register interchange agreements of aircraft with Brazilian registration. The regulations include a list of documents to be submitted to the RAB, including the following:
These regulations lack clarity in a few respects. For instance, they require a Central Bank of Brazil registration that is usually needed for purposes of remitting foreign currency; however, the Central Bank rules do not always require such registrations. For example, they are not required for agreements with terms shorter than 360 days. Thus, if an interchange agreement is under 360 days, the airline might not meet this requirement. In addition, Central Bank registrations require the registrant to indicate some level of fixed payments. However, with interchange agreements, the parties rarely know in advance how often the interchangee will use the aircraft. Thus, interchangees may again be unable to meet this requirement even with interchange agreements with terms longer than 360 days. That said, the main problem with the 2013 regulations is that they do not clarify whether an interchange agreement involving an aircraft registered in another jurisdiction can be interchanged to enable a Brazilian airline to operate it.
In 2016 a few articles of the Aeronautical Code were amended and one of the amendments stipulates that aircraft operated by Brazilian airlines, regardless of the aircraft's registration, must be operated by Brazilian individuals holding the specific permits issued by ANAC. Although this amendment directly relates to crew requirements by mentioning the use by Brazilian airlines of non-Brazilian registered aircraft, there is a clear inference that such use is permitted. However, the Aeronautical Code provides no detail about the registration or other requirements for such use.
In addition, in mid-2016 the Senate began deliberations of a new draft bill. The draft bill has not yet been adopted. It aims to modernise the code and an entire section referring solely to interchange agreements. The original text of this draft bill included a statutory definition of 'aircraft interchange', which is a transaction through which:
"an airline that holds the right of use of a particular aircraft or engine – the 'interchangor' – assigns its rights of use to another Brazilian or foreign airline – 'the interchangee' – which will operate the aircraft in exchange for consideration during an established term."
The draft bill also provides that foreign aircraft being interchanged with Brazilian airlines undergo technical inspection conducted by ANAC even though they will maintain their original (foreign) registration marks. It also provides that an interchange agreement executed between any Brazilian airline as interchangee must be registered at the RAB, even if the interchanged aircraft is a foreign aircraft. This provision will fill the abovementioned gap in the 2013 regulations.
In its existing form, the draft bill form would require interchanges of an aircraft to comply with international treaties and conventions to which Brazil is a party and the interchangee to comply with the laws of the country in which an interchanged aircraft is being operated. Although the draft bill represents a considerable advance in terms of clarity in the law applicable to interchange agreements in Brazil, it is still under discussion by Congress and its provisions may change before a final text is approved.
Despite the lack of clarity, Brazilian airlines have been executing and implementing interchange agreements recently, both in respect of Brazilian-registered aircraft and foreign aircraft to be operated by Brazilian interchangees on a frequent basis. For purposes of registering an interchange agreement – regardless of whether the aircraft is registered in Brazil or abroad – the RAB requires a letter from the aircraft owner consenting to the interchange and evidence that such aircraft was included in the interchangee's operational specifications if the interchangee is a Brazilian entity. Further documents may be required depending on each particular case.
Due to the increase of interest in interchanging aircraft registered outside Brazil, the RAB expects to develop a database for purposes of registering interchange agreements of foreign aircraft interchanged to Brazilian operators. Until the end of October 2017, only one foreign interchanged aircraft with an interchange agreement was registered at the RAB. At present, a few more are in the process of being registered.
Another important aspect of interchange agreements arises under the Cape Town Convention. The Cape Town Convention became effective in Brazil in mid-2013. It defines a 'leasing agreement' as an agreement by which one person grants another a right to possess or control an object (ie, an airframe, helicopter or aircraft engine), with or without an option to purchase, in return for a rental or other payment. Aircraft interchange agreements meet the criteria provided by this definition and therefore create international interests in favour of the interchangor, as the creditor, with the interchangee as the debtor.
Aircraft interchange agreements are a useful technique to enable airline groups with operators based in different jurisdictions to maximise efficient use of their combined fleets across national borders. The use of interchange agreements has increased significantly in Brazil in recent years and is expected to increase further. The initial use of such agreements concentrated on freight aircraft but has expanded into passenger aircraft. Although most interchange agreements involve interchangors and interchangees under common control, there is no impediment to use of such agreements among unrelated parties. Brazilian laws and regulations relating to interchange agreements initially left many interested parties in doubt as to the types of aircraft that could be interchanged and the documents required for implementation. Many of these uncertainties have been clarified recently and the relevant authorities are accepting interchange agreements even in advance of legislation that is expected to provide more clarity.
For further information on this topic please contact Kenneth D Basch or Isabella Vilhena at Basch & Rameh by telephone (+55 11 3064 8599) or email (email@example.com or firstname.lastname@example.org). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
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