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Aircraft Lessor AerCap Files Claims for $3.5 Billion in Assets Seized by Russia

Madhu Unnikrishnan
March 30th, 2022 at 4:45 PM EDT

Airbus aircraft at the Dubai Airshow

AerCap had hoped to take something of a victory lap in the fourth quarter of 2021 as it closed its $30 billion acquisition of GECAS to become far and away the world’s largest aircraft lessor. But when the war in Ukraine began, the company found itself the most exposed of all the lessors and now is working to reclaim the $3.5 billion in assets it has in Russia.

AerCap has repossessed 22 aircraft and three engines from Russian airlines since the West imposed sanctions on Russia for invading Ukraine. That leaves 135 aircraft 14 engines remaining in Russia, or 5 percent of the combined AerCap-GECAS fleet by value. “It’s a setback, but a manageable one,” AerCap CEO Aengus Kelly told investors on March 30.

The company will continue to try to recover its aircraft, but it also has admitted it may never do so. AerCap has filed insurance claims and will “pursue every legal remedy” to recover the $3.5 billion in assets leased to Russian carriers, Kelly said. Industry analysts have said this process, if successful, could take years. AerCap said it could report an impairment charge this quarter for that amount.

Sanctions require that Western aircraft leases be terminated by March 28. Lessors have thus far repossessed about 70 aircraft at airports outside Russia. Several Russian airlines, including Aeroflot and S7, have halted international flights to avoid seizure of their airplanes. Before the war, Russian airlines leased about 500 aircraft from lessors based in countries that have now sanctioned Russia. Of those, a little more than 400 are thought to remain in the country.

The aircraft that remain are operating illegally, Kelly said. Before the war, foreign-owned and foreign-built aircraft could not be registered in Russia. Russian Federation President Vladimir Putin changed the law to allow foreign aircraft to be reregistered as Russian, but international law prohibits an aircraft to be registered in two jurisdictions simultaneously. This makes flying them illegal.

An even bigger problem from the lessor’s perspective is maintenance. Boeing, Airbus, and other manufacturers are no longer providing parts and aftermarket support in Russia, raising questions about how aircraft will be maintained in the country. Just this week, Pobeda said it is grounding a number of aircraft to mine for parts to support the rest of its fleet. Aircraft used in this way are generally uninsurable and cannot be recovered.

“We continue to make efforts to repossess additional aircraft and engines from our former Russian airline customers, but it is unclear if we will be able to do so, or what the condition of these assets will be at the time of repossession,” the company said in a statement.

AerCap’s Russia problem isn’t deterring the lessor from going into other emerging or politically unstable markets, however. “This is a black swan event,” Kelly said. “Over the course of 50-60 years of aircraft leasing, we haven’t seen an event of this magnitude,” he said. “It’s a temporary aberration that I don’t believe will have an impact on other jurisdictions around the world in the long term.”

The lessor had a number of aircraft scheduled for delivery to Russian airlines this year, but these have been re-marketed to airlines outside of Russia. Before the war, AerCap had no delivery slots available this year, and had a “handful” that now have been filled, Kelly said.

Outside of Russia, things are looking good for AerCap. Demand has started to pick up in Thailand, Malaysia, Vietnam, and Indonesia — countries where air travel demand all but collapsed during the pandemic. Domestic demand in those countries is rising, now up to 80 percent of pre-pandemic levels, fueling the need for more narrowbody aircraft, Kelly said. Widebody aircraft demand continues to lag as international travel has lagged domestic travel, particularly in Asia. “We are confident of the recovery of air travel as Covid restrictions are unwound,” Kelly said.

This demand is strong enough to withstand higher ticket fares that result from rising fuel prices, Kelly said. Pent-up demand coupled with high household savings rates will more than offset higher fares. “The propensity to travel has not diminished,” Kelly said, adding, AerCap is “confident airlines can pass through higher fuel prices.”

Airlines managed prices north of $100 per barrel of oil between February 2011-September 2014, Kelly noted. “I have every confidence they will do so again this year,” he said.

The merger with GECAS closed on November 1 and AerCap already has realized benefits. GECAS brought with it several business lines that AerCap did not have before the acquisition, including engine leasing, helicopters, and cargo. The latter two, in particular, show promise, thanks to soaring demand for air cargo. Demand for helicopters will rise as more countries explore offshore oil in pursuit of energy independence, Kelly said. The engine leasing business also benefits from leasing only GE and CFM engines, which power all Boeing 737s and half of the Airbus A320-family fleet.

AerCap reported fourth-quarter revenues of $1.4 billion, up 40 percent from 2020, and full-year 2021 revenues of $5.2 billion, a 16 percent increase over 2020. Including charges and costs associated with the GECAS deal, net income for the quarter was $89 million and $1 billion for the full year. AerCap ended the year with 3,701 aircraft, helicopters, and engines in its owned fleet.

Madhu Unnikrishnan
March 30th, 2022 at 4:45 PM EDT

Photo credit: Airbus aircraft at the Dubai Airshow Airbus

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