Lawyers focusing on servicing the aviation sector will have an increasing amount of work to keep them busy, as the industry becomes more market-oriented and the regulatory skies become clearer for private flyers

In 2002 when the nation's aviation industry underwent its first major restructure, Gao Feng, now a partner of Grandall in Beijing, decided to trade in an in-house position for the opportunity presented in private practice. In that year, a key step was taken by the government to consolidate 13 smaller domestic airlines into three dominant groups - Air China, China Southern Airlines and China Eastern Airlines.

Having more than ten years of practice experience, including several years spent as the head of legal for China Northern Airlines (which merged with China Southern Airlines in 2002), Gao senses another major restructuring is underway, if not already taking place. A second wave of opportunity is in the air for aviation lawyers. "The past year has been a period of significant changes for many market participants," he says.

"There have been a number of landmark M&A transactions between airline companies - and some companies have undertaken restructuring to improve operations and finances. Changes came after the industry suffered a total loss of RMB28bn in 2008 - the biggest loss over the past 30 years - which was caused by a mix of triggers, including the effects of the GFC."

Among the more conspicuous events/transactions in the past 12 months is the merger between China Eastern Airlines and Shanghai Airlines, and the bankruptcy of privately-owned East Star Airlines. In July 2009, in a deal valued at US$1.3bn, China Eastern Airlines announced its plan to merge with Shanghai Airlines through a share swap. The deal is set to consolidate China Eastern's market share, improve its profitability and enable it to compete more effectively with its two main rivals. China Eastern turned to its long-standing legal advisor Commerce & Finance for advice, while Shanghai Air sought out Fangda as its counsel.

The fate of Wuhan-based East Star, however, is more turbulent. The four-year old company became the country's first ever airline to go bankrupt in March this year, with  liquidation proceedings ongoing. The bankruptcy case involves six main creditors and a number of potential bidders and investors, and has kept a raft of law firms busy, including Run Ming, W&H and Grandall. "Due to the waning demand for both freight and passenger flights in the past year, all airlines have been hit to a certain extent," says Liu Yi, executive partner of Run Ming.

"But the current market conditions make it much tougher for private companies to stay afloat than the state-controlled ones." Liu is a highly reputed legal advisor for aircraft finance, and has been involved in many large and complex aircraft sales, and purchase and leasing transactions in the industry.

In addition to the East Star case, United Eagle Airlines' takeover by the state-run Sichuan Aviation Group, and Okay Airways' three-month suspension from operations, are two other examples of the turbulence that the private sector is flying through. However, a couple of private operations have managed to stay away from experiencing unfortunate events. Spring Airlines and Juneyao Airlines - both based in Shanghai - have achieved ideal results in the past few years. Both airlines are planning to launch an IPO in Shanghai to fund their future growth.

The type of aviation work on which law firms are advising has also shifted. "Since the end of last year, the volume of aircraft finance and sales work has gone down, but more clients have engaged us for matters such as restructuring, insolvency and dispute resolution," Run Ming's Liu says. He is currently leading a team representing a foreign aircraft leasing company in its dispute against Okay Airways, over contractual obligations.

While both state-run and private-owned companies will still have to face their own sets of challenges in coming years, the restructuring and M&A trend in the industry is expected to continue. "The three dominant airlines - and some leading private airlines - will be actively acquiring smaller airline companies or sideline companies, and restructuring their business and finances," says Grandall's Gao. "Consolidation in the sector will keep going [on] for years to come. There will be many exciting times ahead for lawyers."

Private participation growth
The government's encouragement towards private capital to enter the civil aviation market signifies a new direction in future developments for the industry. While there are well-established legal practices such as general corporate, M&A and restructuring, other  services will be increasingly needed when private capital flows into establishing cargo and passenger services, financing airport projects and the general aviation area.

In April, the State Council issued an important administrative regulation for civil airports, Administrative Provisions for Civil Airports, which has clearly categorised them as infrastructure for the first time.

"The new regulation has laid the foundation for private investment and participation in airport financing and management," says Gao, who has been involved in formulating this particular set of provisions.

With the regulations in place, financial institutions like insurance companies are now able to invest in civil airport and gain long-term, steady returns. On the other hand, private investment will provide much-needed funds for new airport construction projects.

"This regulatory change will fundamentally change the way and structure with which new airports are to be financed, constructed and operated," Gao says.The government has set an ambitious plan to build 97 new airports by 2020 at an estimated cost of US$62.5bn, in an attempt to meet soaring domestic passenger and cargo demand.Private capital's participation in this plan will generate a considerable amount of legal work for law firms' aviation and project finance teams.

The regulators' efforts in ratifying important international conventions on civil aviation will also encourage more private operations to set up. "China ratified a new convention in May this year, taking a further step to protect shareholders' rights and asset in aviation companies. I believe that more mid-level private aviation companies will be established in the future resulting in more regional airlines," says George Wang, a partner of Beijing firm Kingfield, who specialises in aviation law.He is particularly experienced in representing freight forwarders and airline companies. The firm is on Air China's external advisor panel list and has a long-standing relationship with the company.

As the aviation industry largely abides by international laws and rules, having international capacity and knowledge is essential for law firms focusing on this industry.

Kingfield extends its international reach through Forwarderlaw - which is an alliance of lawyers in 20 countries who specifically practice international transport law for clients in the freight industry, particularly freight forwarders and logistics companies. This network is Kingfield's first point of reference for client referrals.

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