Wet Leasing and Insolvency: Examining the Legal Ramifications for Airlines and Employees

The German Federal Labor Court made a largely unnoticed ruling last year on whether a German airline must take over employees of another airline flying on its behalf in the event of that airline’s insolvency. A question with potentially far-reaching consequences.

Wet Leasing is of great economic importance to airlines. Wet Leasing involves the leasing or renting of aircraft with crew. An agreement is made between airlines under which the aircraft is operated under the Air Operator Certificate (AOC) of the lessor.

The implementation of Wet Leases is legally regulated (in the EASA area, among others, in EC (Reg) 1008/2008, EC (Reg) 965/2012) and requires the approval of the relevant national aviation authorities. Wet Leases come in various forms, such as ACMI (which stands for the essential contents of the agreement: Aircraft, Crew, Maintenance, Insurance).

Wet Leases offer airlines various advantages, such as the use of additional aircraft that are not included in the AOC, as well as the spontaneous replacement of their own aircraft in the event of failures or delays. Seasonal and long-term Wet Lease agreements also allow for capacity expansions without the need to own or deploy proprietary aircraft or crews. However, this practice also has its critics. Some interest groups accuse Wet Leasing of being used for wage dumping and undermining working conditions when aircraft and crews from other companies are used by the airline at lower costs than their own production costs over the long term.

In the case of the insolvency of a German operator that provided aircraft, including crew, maintenance, and insurance, to a German airline under a wet-lease agreement, a dispute arose over whether the personnel of the insolvent company had to be employed by the German airline under the framework of a business transfer ("Betriebsübergang", § 613a BGB, German Civil Code). Due to the insolvency and dismissal of employees, it was argued that the provision of personnel under a wet-lease agreement indicated a business transfer in accordance with § 613a BGB.

If a business transfer had occurred in the current case, this could potentially have far-reaching consequences for the practice of Wet Leasing, at least in Germany.

The Federal Labor Court recently ruled on the legal issue of a possible business transfer in a partial judgment (6 AZR 121/22 (A)), finding that no business transfer exists. When a business transfer occurs under § 613a BGB, there is generally a change of employer. Whether a business transfer in the sense of this provision has occurred is assessed in practice based on numerous labor court rulings, which have developed a bundle of indicators. Although Wet Lease operations can constitute a business for the lessor, no change of ownership occurs during its execution. Consequently, the lessor does not cease its economic activity by leasing aircraft and personnel but continues to exercise it. This is not contradicted by the fact that the lessor’s aircraft and personnel may be used on the lessee’s routes and presented as part of the lessee’s market presence. This is precisely what the wet-lease arrangement aims to enable. Furthermore, the Federal Labor Court clarified that, in the present case, there was no unlawful employee leasing ("Arbeitnehmerüberlassung"), as the pilots were not integrated into the lessee’s organizational structure under managerial authority.

The Federal Labor Court’s decision not to recognize a business transfer in the context of Wet Lease agreements provides valuable legal and economic clarity for German airlines. However, it is a bitter disappointment for the employees affected by the insolvency.

We at GMP, together with our network partners, including the co-author of this article, attorney Philip Wagner, specialize in aviation-related contracts, such as Wet Lease agreements or aviation terms and conditions. Learn more on our website www.goetzemueller.com

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