Photo credit: Russia's nationalization of leased aircraft will be manageable for most lessors. Flickr / Anna Zvereva
Aircraft lessors face the potential loss of hundreds of aircraft in Russia as the country moves quickly to prevent lessors from repossessing Western-owned planes at Russian airlines amid Western economic sanctions.
“The door is closing,” Aircastle Chief Legal Officer Christopher Beers said of lessors’ ability to repossess aircraft at the ISTAT Americas conference on Monday.
Since the EU imposed sanctions on Russia on February 25, lessors have succeeded in recovering some aircraft. But Russia has moved quickly to protect its aviation assets, including allowing airlines to re-register foreign-registered planes in Russia, which violates international law if an aircraft is registered in more than one jurisdiction. The Russian government has recommended that carriers do not fly foreign-owned jets outside of the country to avoid the risk of repossession. And, in what is in part a move to protect its assets, Aeroflot and its subsidiaries will suspend flights to destinations outside of Russia on March 8.
Russian airlines operated 861 aircraft, of which 695 are Western-built — including 304 Airbus and 332 Boeing models — in February prior to the invasion of Ukraine, according to Cirium’s Fleet Analyzer. Foreign lessors owned 515 aircraft with AerCap, SMBC Aviation Capital, and Air Lease Corp. having the most exposure.
“You’ve got 500-plus aircraft at risk and maybe a dozen or two seized,” said Dean Gerber, executive vice president and general counsel of aircraft finance firm Valkyrie BTO Aviation. “The reality is those other aircraft are land-locked in Russia right now with significant unlikelihood that you’re going to get them out.”
The financial exposure of those aircraft for lessors and lenders is roughly $10 billion, said Airbus Head of Trading Francois Collet.
And lessors likely face losses even on the aircraft they have recovered. Without an aircraft’s records — most of which are still kept on paper rather than electronically — an aircraft “has very little value,” said Clifford Chance Partner Emily Wicker. The lack of documentation poses real safety and airworthiness questions for an aircraft.
Insurance claims for aircraft held in Russia are also likely to take “years,” said Beers.
The silver lining for lessors is that Russia is a relatively small market globally. For comparison, China Southern Airlines — China’s largest airline — operated 878 aircraft, or 17 more than the entire in-service Russian fleet, at the end of December.
Still, the economic and industry implications of Russia’s invasion of Ukraine will spread far and wide. The closure of Russian airspace to most major global carriers has disrupted many long-haul flights to Asia. Finnair, which relied on overflying Russia for much of its long-haul network, will operate flights to Shanghai, Seoul, and Tokyo with at least three hours of additional flight time when they resume later in March. That additional flight time burns more fuel, requires additional aircraft, and — if the ban on overflights endures — puts Finnair’s very business connecting European and Asia in jeopardy. Other carriers, including Nippon Cargo Airlines and United Airlines, have suspended select flights.
Lufthansa Group CEO Carsten Spohr on March 3 identified one benefit from avoiding Russian airspace: No overflight fees. He did not specify how much it paid Russia, but said the savings could offset the added fuel expenses from longer flights.
But the broader fallout is already evident. Oil and other energy prices have skyrocketed since the invasion. Brent crude closed at $118.11 per barrel on March 4 — and was trading around $123 per barrel on Monday — up 51 percent since the beginning of the year, according to Bloomberg and U.S. Energy Information Administration data.
“It will act as a serious brake on global GDP [gross domestic product] if we sustain oil prices at this level,” said Geoff van Klaveren, managing director of advisory at aviation advisor IBA Group. This could force airlines to cut capacity and raise fares to adapt, and — more broadly — slow the travel recovery from the Covid-19 pandemic, he added.
Airbus Executive Vice President of Aircraft Leasing, Trading, and Financing Paul Meijers said at ISTAT that he now expects global air passenger traffic to recover by late 2024 or early 2025, or a year later than he forecast before the invasion.
“This crisis will be much more constrained [than Covid] but with a long tail,” said Beers.
Updated with Aeroflot’s plan to suspend international flights.