Ownership, Diligence, and Downside Planning: An Aviation Investment Primer for Fund Managers

Growing demand in the aviation sector continues to present compelling opportunities for private fund investors. As one of the most highly regulated and complex industries to navigate—from ownership/control requirements to evolving geopolitical and litigation risks—investing in aviation demands careful structuring and informed decision-making.

Even at a time when commercial aviation is highly regulated, capital-intensive, cyclical, and exposed to international geopolitical forces, global demand for air transportation continues to rise and investment opportunities remain significant across airlines, leasing platforms, aircraft portfolios, maintenance businesses, and related aviation infrastructure.

For fund managers, these opportunities require a disciplined approach to legal structuring, aviation-specific diligence, and disputes planning. Aviation investments often turn less on whether investors understand the commercial thesis and more on whether they can effectively structure investments to comply with regulatory requirements, control assets, enforce rights, and recover value when market conditions, sanctions, counterparties, or regulators shift.

This Insight, based on a recent Morgan Lewis Global Sponsor Forum webinar, breaks down key structuring, diligence, and disputes considerations for fund managers evaluating aviation investments.

KEY TAKEAWAYS

• Airline investments require early analysis of ownership and control restrictions and structuring options considering in the United States these requirements are stringent, narrowly applied, and evergreen. In addition to meeting the numerical ownership/voting interest requirements, the airline must at all times be under the actual control of US citizens.
• Diligence should be keyed to the aviation business being acquired, and diligence scope will differ based on whether the target is an air carrier providing scheduled service, charter operations or ACMI operations, a leasing platform, or a platform that provides maintenance services or aircraft management services.
• To mitigate potential disputes and enforcement challenges, governing law, jurisdiction, insurance, and enforcement provisions should be evaluated as core investment protections rather than boilerplate contractual terms.

STRUCTURING AIRLINE INVESTMENTS UNDER OWNERSHIP AND CONTROL RULES

While investors may think first of large scheduled carriers, airline ownership and control apply to all commercial operators, from charter operators and drone operators, to electric vertical takeoff and landing operators and traditional airlines.

The international framework begins with the principle that each country retains complete and exclusive sovereignty over its airspace, and by extension over its air carriers. Through national laws, bilateral and multilateral air service agreements, and Open Skies arrangements, domestic airlines are required to be substantially owned and controlled by nationals of their home country.

US law requires that air carriers meet the statutory definition of a US citizen in 49 USC § 40102(a)(15) as applied by the US Department of Transportation (DOT).

For corporations, this means:

• The company must be organized in the United States
• The president and two-thirds of the board and managing officers must be US citizens
• The company must be under the actual control of US citizens
• At least 75% of the voting interests must be owned or controlled by US citizens

For partnerships, including many funds, all individual partners must be US citizens for the partnership to qualify as US.

The analysis looks up the chain of ownership, and each entity in the ownership structure that is used to qualify the air carriers as US must meet the same citizenship test (e.g., if a partnership owns a corporation, each intermediate and ultimate partner in the partnership must be US to count its ownership toward US).

Beyond the numerical tests above, the air carrier must be under the “actual control” of US citizens. DOT applies a totality-of-the-circumstances test to determine actual control, which is broadly thought of as control over the day-to-day operations of the airline.

Several factions may implicate this control, including control over board appointments, sources of business, debt covenants, license agreements, board committees, options, puts, buyouts, and even family relationships. DOT looks beyond the form of the agreement to the substance of the control provisions.

Non-US investment can also be structured but must be well thought out. Potential tools include maximizing non-voting equity, using warrants without indicia of control, separating qualifying US funds from non-US investors, considering LLC structuring alternatives, and ensuring commercial agreements (e.g., debt covenants) do not result in control over the carrier (e.g., non-US lender provisions with veto rights over routine business decisions of the airline, such as which markets to serve).

KEY DILIGENCE ISSUES IN AVIATION TRANSACTIONS

The goal of diligence in an aviation investment is the same as with other investments: identify risks for liability or loss of revenue and address them in the transaction structure or documentation. The difference is that the aviation industry is heavily regulated, cyclical, and prone to exogenous events that can change the risk and liability profile quickly, and operating aircraft or providing aviation services entails different liability risks. Consequently, there are important variations for diligence in an aviation investment.

The first step is understanding the target’s aviation business. Is it a certificated air carrier, scheduled service provider, charter business or ACMI operator, or a leasing platform that leases aircraft or engines? Does the target provide freight or passenger service, aircraft management services, or maintenance services? The answer will drive the diligence requests and risk analysis.

The second focus area for aviation diligence is regulatory matters. Required licenses will differ based on the target’s aviation business. Reviewing the target’s corporate structure from an aviation regulatory perspective is important to ensure the post-investment structure is correctly crafted and implemented.

Another diligence area is the review of the aircraft fleet. Fleet diligence will be keyed off the value of the fleet to the target’s business and will differ based on whether the aircraft are owned, leased, or managed and the type of aircraft, such as freight- or passenger-configured. Registration and financing status will be reviewed to determine whether title searches or lien diligence may be necessary. Other factors that impact aircraft value, such as maintenance and insurance, will also be analyzed.

Sanctions diligence is also distinct for aviation investment as aircraft are export controlled assets. Given the current geopolitical climate, aircraft are operated in a fast-changing sanctions regime globally. Analyzing compliance profiles and sanctions policies is a must, and this analysis can be even more critical if the target has government contracts as a part of their aviation business.

Lastly, diligence of material contracts will also be different for aviation investment as there will be aviation-specific commercial agreements to be reviewed in addition to aviation-specific provisions on pricing, regulatory compliance, indemnities, subcontracting, delivery and redelivery conditions, and other provisions that materially affect risk and value. Having expertise in aviation-specific commercial agreements allows a more efficient and cogent diligence process and analysis.

EMERGING DISPUTES RISKS

From a disputes perspective, the key questions are practical: when something changes, can the investor still control the asset, enforce its rights, and recover value quickly and effectively?

Geopolitical disruption, sanctions, insurance gaps, and cross-border disputes often do not arise in isolation. Recent market events have shown that conflict, sanctions, aircraft that cannot be repossessed, frozen payment flows, and contested insurance claims can interact at the same time. Legal ownership may not equal practical control.

Investors should:

• Reduce concentration risk
• Build operational flexibility allowing aircraft to be redeployed
• Negotiate clear termination, suspension, step-in, and reporting rights
• Require strong visibility into lessee and operator performance

The goal is not to predict every disruption but rather ensure the structure can absorb disruption when it occurs.

With this in mind, insurance should not be treated as a simple safety net. Investors should review full policy wording, not just certificates or broker summaries. It is critical to understand who controls claims, where proceeds go and in what order, how insurance aligns with the structure and financing, and where disputes would be heard.

On that last point, governing law and jurisdiction clauses should not be treated as boilerplate. Investors should align governing law, forum, asset location, and enforcement strategy and avoid fragmented documents that create multiple proceedings. Arbitration may offer neutrality and cross-border enforceability, while litigation may provide stronger tools such as freezing orders, injunctions, disclosure, and procedural control.

LOOKING AHEAD

Aviation investment opportunities remain compelling, and the sector rewards careful structuring, aviation-specific diligence, and early disputes planning. Fund managers should structure for the downside and regulatory compliance, focus on control of assets, cash, and information, treat insurance as a diligence issue, and design for enforcement across jurisdictions.

In aviation, the most important rights are not only the rights written on paper, but the rights that can be used when conditions change.