The Downside of America's Big Used Airplane Export Push

Last Updated Jul 21, 2011 9:53 AM EDT

The airline industry's little noticed but long-standing practice of leasing or selling older, beaten-up planes to airlines in developing countries that don't have the maintenance experience to deal with potential problems could turn out to be a huge liability. That trade in dilapidated aircraft may well have led to some horrific air accidents, according to a lawsuit over an Air Philippines crash that was settled a few years ago.
Documents from that case obtained by BNET give a clear view for the first time of how U.S. firms can send badly worn airplanes overseas to developing world airlines that may not have the maintenance wherewithal to keep them safe. Airlines that many people from around the world -- maybe you -- will take.

It's important business to the $150 billion aircraft-leasing industry. The Air Philippines suit shows that big leasing companies, which thought they were protected by the terms of complex agreements, can find themselves on the losing end of huge settlements when serious accidents result.

The crash and how it happened
In April 2000, Air Philippines flight 541 crashed on a clear day, killing 131 passengers and crew. One official said that smoke came out of the plane while it was still in the air and preparing to make a second landing approach at a runway at Davao airport.

Originally, the Boeing 737-200 had been in service at Southwest Airlines (LUV). It was "worked extremely hard over its life" during the roughly 20 years Southwest operated it, according to a deposition taken from consulting aircraft inspector Sal Caracciolo of Avtrac Limited by aviation attorney Jerry Sterns, who represented the families of some of those killed on the flight.

As you might expect for any type of complex machinery, there's a regular maintenance program that requires various degrees of inspection. When still in Southwest's possession, the 737-200 came due for what is called a C-4 check, which requires the company to remove most of the panels on the outside of the plane and remove all the seats, galleys, and lavatories. It's a major -- and, according to Sterns, expensive -- procedure. Someone would have to examine the entire structure down to the welds.

"They decided not to do that and decommissioned it and put it out in the Arizona desert," Sterns told me.

Enter the leasing company
Southwest moved the aircraft to an Arizona boneyard, which is when aircraft leasing company AAR Corp. (AIR) considered whether to acquire the plane and lease it to a non-American airline. (If kept in the U.S., FAA regulations would have required the major inspection.) Avtrac inspected the craft for AAR. According to Caracciolo's inspection report:

Continued operation of this aircraft will undoubtedly result in an ever-increasing maintenance burden, and extended maintenance downtime.
The inspector also wrote that "AAR should proceed with caution if considering acquiring this aircraft."

AAR decided to buy the craft and subsequently leased it to Air Philippines. Leasing is a popular option for the air industry. Airlines can buy planes without the large capital outlay upfront and leasing companies make a lot of money on the payments.

Doing the D-check
"They did some work on it and fixed it up, but what they did not do was a D check," Sterns says.

I asked AAR whether it makes any formal determination of whether an airline had the necessary experience and ability in maintenance to deal with such a worn plane. The company never made a spokesperson available nor provided a statement to address the question.

The plane crashed and plaintiffs alleged that the condition of the plane could have contributed to the accident. "Our expert said that it had several things wrong with it when it left the US that could have caused [the accident]," Sterns said.

Plaintiffs wanted to sue in the U.S. because of the potential for higher damage awards than in the Philippines. But that meant finding a U.S. company, and the only candidate was AAR.

According to Sterns, the leasing company tried to use a defense called "lessor out of possession." AAR claimed that the plane was not in its possession or control, and so it couldn't, under U.S. law, be held liable for accidents. But the AAR lease had a lot of conditions giving the company forms of control, Sterns says:

We can take the plane back at any time, we can have it grounded at any time, we can walk in any time, we can dictate the training of your pilots and we can keep back a maintenance reserve in case you don't maintain the plane.
AAR agreed to a $165 million settlement.

Global ramifications?
What makes this case interesting is that it might foreshadow liability in more recent foreign-airline disasters. Sterns, who is not professionally involved in either case, points to two recent crashes that could attract similar treatment. In June 2009, a Yemenia Air plane crashed at sea, killing all but 1 person. The families of the victims filed suit against International Lease Finance Corporation, which owns a fleet of 1,000 aircraft and whose corporate parent is infamous insurance company AIG. An Air India Express crash in 2010 could potentially be another such case.

More business for plaintiff lawyers, and greater potential business uncertainty for leasing company executives who thought that they had walled their companies off from liability issues.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.