Sweden - The Strategic View - Aviation 2017

PG Ekbom of Hamilton Advokatbyrå discusses the prominence of environmental concerns in Sweden’s aviation sector, as well as the impact of oil prices on carrier strategy, and expected changes to the jet market

Contributing firm

1. Currently, what are the main issues (strategic and political) affecting those in the aviation sector in your jurisdiction?

As in most countries, environmental aspects relating to travel and, in particular, air traffic, are always at hand.  This includes not only emissions from aircraft, but also general environmental considerations with regard to the location of airports, time restrictions, etc., in order to limit the environmental impact generally; in terms of noise, for example.

2. Where has your jurisdiction seen the most growth in the aviation sector over the past 12–18 months? And, if any, where do you anticipate growth coming from during the next 12 months?

The main area of growth in regular air traffic has been that of leisure travel, with a rather modest increase in business travel.  Low-cost carriers have continued to increase their market share and have clearly impacted on pricing, forcing the traditional airlines to reduce cost and adapt to new demands and market conditions.

A separate field which has seen an increase over the last 12–18 months is the market for corporate/executive jets.

3. Does the GDS distribution model continue unchallenged as the most popular model for flight distribution?

Yes.  However, the increased supply of web-based booking services has simplified bookings and made more alternatives for bookings easily accessible.

4. In your jurisdiction, does airport capacity require boosting and, if so (and even if not), what plans and/or processes are in place to address this (or increase or re-organise airport capacity, as the case may be)?

For a number of years there has been constant growth in air travel, mainly for leisure, but also for domestic business travel.  This, linked with larger aircraft on international routes, has created demand for an increase in airport capacity.  To date, no real expansion has occurred, but it is planned for.  Equally, environmental concerns have created a debate around “city airports”, and at least in Stockholm it may well be that, over time, air traffic will be redirected from the city airport, Bromma, to the major Arlanda airport.  That will, however, require additional capacity at Arlanda during peak hours.

5. Does the national “flag” carrier carry the most passengers into and out of the national airports and: (a) if so, what competition exists and how significant is it?; and (b) if not, what are your thoughts on the reasons for this, and why do competing airlines have higher load factors?

Competition in the market is functioning well, and it is fair to say that on international routes passengers are well distributed among a variety of airlines, both for national and foreign “flag” carriers as well as low-cost carriers.  On the domestic market, the number of active airlines is, for obvious reasons, more limited.  The domestic market is a competitive market with several players, with no domination by the previously mentioned “flag” carrier.

6. What trends, in terms of regulatory intervention and involvement, has your jurisdiction observed over the past 12–18 months in relation to airline acquisitions and alliances?  Do you anticipate a change in the regulatory environment of your jurisdiction during the coming 12 months, and if so, how?

In real terms, none.  No significant changes have occurred in terms of acquisitions or alliances.

7. What trends are being observed in relation to new technologies – such as UAVs/drones – and what impact are these technologies having on the aviation regulatory environment?

The use of unmanned aerial vehicles (UAVs) and drones, predominantly smaller drones for recreational use and mid-sized drones for, e.g., photography assignments, is common.  Regulatory restrictions apply to restricted areas near airports and certain other areas.  A specific committee was established by the government during the summer to assess and co-ordinate the need for additional restrictions and regulation in relation to UAVs and drones, not only for air traffic safety reasons, but mainly to prevent the use of UAVs/drones for criminal activities and terrorism.

8. Legal issues in the “lease-to-part out” market.  A major market development is the interest of investors purchasing mid–end life aircraft on lease for the purposes of making returns on a leasetail and component margin model.  What challenges are inherent in this segment of the aviation finance market, and what techniques and disciplines are required to manage the risks involved?

This segment of the market has been rather limited in Sweden, and where certain investors have engaged in it, the relevant “lease-to-part out” aircraft has been registered and located in other jurisdictions.  The main challenge in managing risks is to cater for a predictable cash flow in the structures where the relevant aircraft is not on lease and parts are sold when there is a demand.

9. Manufacturer support in the new cycle of new OEM products, e.g. MRJ, E2, C-series, etc.  In an increasingly sophisticated and competitive environment, in what way is the type of OEM financial and product support for this new era of aircraft more complex and far-reaching than in previous cycles?

Although the regional jet market is growing and of increasing interest, rather few orders of these aircraft have been placed by Swedish investors to date.  MRJ and C-series orders have been placed, and the exact terms for manufacturer support have yet to be determined.  The general view, though, is that those aspects will not be more complex than in earlier cycles.

10. The advent of cheaper oil and the knock-on effects.  What are the consequences that arise as a result of the unexpected purchasing power of a number of third/fourth-tier airlines? What will challenge lessors and suppliers in particular as they are faced with speculative judgments on an airline’s longer-term financial viability?

The impact of the oil price on new players in the market has thus far been non-existent.  The most notable impact is that certain carriers have postponed new deliveries of aircraft and continued to use older aircraft with higher fuel consumption, which was motivated by the fact that the low oil prices make it more economic to use older aircraft rather than newer, more fuel-efficient but more expensive aircraft.

11. Iran and the market return.  What remain as barriers, including sanctions-related issues to navigate, where Iran and aerospace and aircraft transactions are concerned?  What sort of jurisdiction is Iran from a risk perspective, and what techniques from a supply perspective are likely to be needed so that Iran’s potential and promise for OEMs, lessors, suppliers and service providers is realised and does not become the latest example of a disappointing gold rush?

Most aspects of this remain to be seen.  Commercial constraints and obstacles will follow on from actual restrictions (if any) and barriers, while business opportunities will re-emerge from previous trade and cultural relations.  In short, techniques, risk assessments and methods for handling related issues have yet to be developed.

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