A general introduction to aviation finance law in the UAE

12 October 2024

Josleen Deeb

Aviation finance law in the United Arab Emirates (UAE) is a crucial part of the country’s legal landscape, designed to support the rapidly growing aviation sector, which is a significant contributor to the UAE economy. The legal framework surrounding aviation finance is governed by a mixture of federal laws, regulations, and policies that regulate the financing, leasing, and operation of aircraft in the UAE.

Dubai: With the UAE being home to some of the world’s leading airlines and hosting major international air hubs, a strong and well-structured aviation finance system is essential for sustaining the industry's expansion. This framework is tailored to ensure efficient transactions and operations, while also providing adequate legal protection for all parties involved in aircraft financing, leasing, and operation.

Key Legislation and Regulatory Bodies

Several key laws and regulatory bodies form the foundation of aviation finance in the UAE:

1. Civil Aircraft Law (Federal Law No. 20 of 1991): The cornerstone of aviation law in the UAE is Federal Law Number 20 of 1991, which lays out the rules for civil aviation, including the registration, operation, and financing of aircraft. This law is vital for ensuring the orderly management of the aviation sector, providing a structured legal environment for stakeholders such as operators, financiers, and lessors.

2. General Civil Aviation Authority (GCAA): The GCAA is the primary regulatory authority overseeing civil aviation activities in the UAE. It ensures compliance with federal aviation laws and international aviation standards. The GCAA plays a central role in regulating aviation financing, including the registration of aircraft, oversight of leasing arrangements, and ensuring adherence to safety and operational protocols.

3. Federal Law No. 8 of 2018 (Financial Leasing Law): This law specifically addresses financial leasing in the UAE and provides a framework for leasing agreements, including those applicable to aircraft. It outlines the rights and obligations of the lessor and lessee and covers key aspects of leasing arrangements, such as termination, transfer of ownership, and financial reporting.

4. UAE Commercial Code (Federal Law No. 18 of 1993): The Commercial Code of the UAE includes important provisions related to movable assets, including aircraft. This law is especially relevant in the context of aircraft mortgages, as it sets out the framework for registering mortgages and securing financial interests over aircraft assets.

Aircraft Financing and Leasing

Aviation finance in the UAE is underpinned by a variety of leasing and financing structures, which are used to facilitate the acquisition of aircraft by airlines and other operators. Some of the common aspects of aircraft financing and leasing include:

1. Leasing Structures: Aircraft in the UAE can be financed through different leasing structures, the most common being operating leases and finance leases. Each structure has unique financial, tax, and legal implications. Operating leases are generally used for shorter terms without transferring ownership to the lessee, while finance leases typically involve long-term arrangements with an option for the lessee to eventually own the aircraft.

2. Registration of Aircraft: The GCAA operates the national aircraft registry, where all civil aircraft operating in the UAE must be registered. Registration is critical not only for establishing ownership but also for securing financing. Aircraft registration allows financiers to safeguard their interests by having a public record of the aircraft and any associated liens or mortgages.

3. Aircraft Mortgages: In the UAE, aircraft mortgages can be registered with the GCAA to provide lenders with security over the financed aircraft. While the UAE does not have a specialized registry for aircraft security interests, registering the mortgage with the GCAA helps protect financiers from unauthorized transfers or transactions involving the aircraft.

Legal Considerations in Aviation Finance

Several key legal considerations are important for stakeholders in the aviation finance sector:

1. Choice of Law: Parties involved in aircraft finance transactions often opt to apply foreign law, such as English law or New York law, to their agreements. These jurisdictions are chosen due to the maturity and predictability of their legal systems, which provide a reliable foundation for enforcing contracts, especially when dealing with international aviation assets.

2. Liability Issues: Determining liability in aviation transactions can be complex, particularly when it involves multiple parties such as aircraft owners, lessors, and financiers. In the UAE, the GCAA allows for certain types of lease registration, but does not maintain a separate lease registry. Liability concerns may arise in situations involving operational control and insurance.

3. Insurance Requirements: Aviation-specific insurance policies are mandated under UAE law to ensure adequate protection for operators, financiers, and other stakeholders involved in aircraft operation. These policies cover a range of liabilities, from damage to the aircraft to third-party claims resulting from accidents or operational failures.

Additional Considerations for Aviation Finance in the UAE

As the aviation sector continues to evolve, several emerging considerations may impact the future of aviation finance in the UAE:

1. Sustainability and Green Financing: With global attention shifting toward environmentally friendly practices, the UAE’s aviation sector may see a growing interest in green financing models. These involve financial instruments designed to support investments in environmentally sustainable aircraft, such as those with lower carbon emissions. As the UAE pursues its sustainability goals, green financing could become a key trend in aviation finance.

2. Islamic Finance in Aviation: Given the prominence of Islamic finance in the region, Sharia-compliant financial structures are also gaining traction in the aviation industry. Islamic finance principles, such as profit-sharing and asset-backed transactions, align well with the leasing models used in aviation finance. This presents an opportunity for further innovation in Sharia-compliant aviation financing solutions.

3. Technological Advancements: The adoption of new technologies, such as blockchain and smart contracts, could significantly streamline aviation finance processes. These technologies have the potential to enhance the transparency, security, and efficiency of aircraft financing and leasing agreements, benefiting both financiers and operators.

Conclusion

The UAE’s aviation finance legal framework is comprehensive and designed to support the dynamic growth of the aviation sector. From regulations governing leasing and aircraft registration to liability and insurance issues, understanding the intricacies of aviation finance law is essential for industry stakeholders. As the demand for air travel continues to rise, aviation finance law will remain a critical component of ensuring the industry’s sustainability and success in the UAE.

Moreover, as new trends such as green financing and technological innovations emerge, the aviation finance landscape in the UAE is likely to evolve, offering new opportunities and challenges for financiers, operators, and regulators alike.