28 3 Reduction of External Funding Needs
There are nevertheless some international conventions in this area,^22 in particu-
lar the 1988 Unidroit Convention on International Financial Leasing (the Ottawa
Convention) and the 2001 Convention on International Interests in Mobile Equip-
ment with its associated Aircraft Equipment Protocol (the Cape Town Conven-
tion).^23
The Ottawa Convention and the Cape Town Convention have entered into force
for a handful of countries.
The Cape Town Convention and the supporting Protocol (collectively the Con-
vention) were designed to facilitate asset-based financing and leasing of high-
value mobile equipment. The Convention provides an international regime cover-
ing the financing of interests in aircraft objects, railway rolling stock and space as-
sets through secured loans, sales under reservation of title and leases. The Conven-
tion created an international interest which is recognised in all contracting states
and an electronic international register for the registration of international inter-
ests.
The Cape Town Convention supersedes the 1948 Geneva Convention on the In-
ternational Recognition of Rights in Aircraft with regards to aircraft and aircraft
objects and the 1933 Rome Convention for the Unification of Certain Rules Relat-
ing to the Precautionary Attachment of Aircraft with regards to aircraft. The Con-
vention also replaces the 1988 Unidroit Convention on International Financial
Leasing with regards to aircraft objects.
Operating Leasing
Operating leasing is a form of short-term financing. There are two parties to an
operating lease. The lessor is typically a manufacturer or a rental company, and
the lessee uses the asset in its operations. Unlike the sale of goods, operating
leases do not transfer ownership to the party that uses the goods. The lessor typi-
cally wants to lease the asset to a new customer, and the lessee will not become its
new owner after the termination of the lease.
Reasons to use operating leasing. In principle, the firm can use operating leas-
ing for financial reasons. Operating leases are a source of off-balance-sheet fi-
nancing, and help the firm to show a higher return on assets than would have been
possible had the asset been purchased.
As a rule, though, the firm uses operating leasing for operational reasons. (a)
The decision whether to buy the asset or to lease it is an operating decision which
would be made according to which of the two approaches would be cheaper. (b)
Operating leases are often short-term contracts. The firm may prefer to hire an as-
set that is required only occasionally. (c) Operating leasing also allows equipment
to be updated flexibly and transfers the risks associated with the ownership of
technologically-advanced assets to the lessor. Usually, the lessor agrees to carry
out any necessary maintenance. (d) There may also be other risk aspects. Under
(^22) See, for example, Goode R, Contract and Commercial Law: The Logic and Limits of
Harmonisation, Electronic Journal of Comparative Law, vol 7.4 (November 2003).
(^23) Generally, see Frick J, op cit, pp 242–250.