UPDATE – AerCap, the world’s largest leasing company, expects to recognize an impairment on its assets leased to Russian airlines that have not been returned following the sanctions on Russia. The exact amount hasn’t been determined, but the impairment will be included in the results of the first quarter that ends tomorrow, March 31. Still, the lessor refers to the situation in Russia as a “manageable setback.” AerCap to make impairment on aircraft ‘lost’ in Russia.
AerCap released its Q4 and full-year 2021 results on March 30, but the focus of the market is on its exposure in Russia. Together with SMBC Aviation Capital, AerCap has leased most aircraft in Russia: 25 percent to state-owned airlines and 75 percent to private airlines. Following the invasion of Ukraine on February 24 and the sanctions imposed by the European Commission, the UK, the US, Australia, and Singapore, trading in aircraft and aircraft parts in Russia is forbidden. Russian airlines were supposed to return leased aircraft no later than March 28 to the lessors, but only some eighty have actually been repossessed. The majority are still in Russia and have been re-registered from Bermuda or Ireland to the Russian register.
AerCap has terminated all contracts with Russian lessees in accordance with the sanctions. It confirmed that on December 31, 2021, it had leased 135 owned aircraft and fourteen engines to Russian customers with a net book value of $3.3 billion, generating monthly revenues of $33 million. This represents five percent of the lessor’s net book value. It also has $0.5 billion in maintenance rights assets. Deducting $0.7 billion in maintenance reserves and other liabilities leaves a net carrying value of $3.1 billion as of December 31, 2021. AerCap had some $260 million in letters of credit for aircraft and engines that are not on the balance sheet, of which it has received $175 million to date from various banks.
As of today, 22 of its aircraft and three engines have been repossessed and are outside Russia with a net carrying value of $400 million. It is assessing the technical condition of these aircraft right now. Taking the value of these aircraft into account and deducting this from the $3.1 billion, AerCap’s current net carrying value for assets in Russia is around $2.5 billion. “This is a setback but a manageable one. (…) We have taken aggressive steps to recover these assets”, CEO Aengus Kelly said. “Let me add that are lessees are required to provide insurance coverage with respect to leased aircraft. And we are insured under those policies in the event of a total loss of an aircraft. We will vigorously pursue these policies with respect to assets leased to Russian airlines as well as all legal remedies that might be available to us.”
Insurance claim of $3.5 billion
That’s where the impairment and insurance come in. “We expect to have to make an impairment based on the fact that the leasing has been terminated, the airlines aren’t returning their aircraft and in many cases continue to fly them”, said Chief Financial Officer Peter Juhas. AerCap will calculate the extent of the impairment when it will go over its Q1 results.
It is likely that AerCap will then be trying to claim the loss on its insurance. Juhas confirmed a report in The Insurer that AerCap has submitted a $3.5 billion claim on its $5.0 billion all-risk policy for aircraft and engines that are still in Russia and “are flown illegally by our former airline customers.” He added that AerCap will “pursue all other avenues for the recovery of the value of our assets, with other legal claims available to us. However, it is uncertain if the efforts might be successful.” Air Lease Corporation too said recently that it isn’t ruling out submitting insurance claims, although it acknowledged that insurance claims will be contested and become lengthy ones, but Aengus Kelly said that the $3.5 billion claim is “valid.”
While AerCap will be more cautious in doing business with Russian airlines again if sanctions might be lifted in the future, the lessor isn’t changing its policy to other countries with potential risks. The Russian situation seems to be too unique for that.
Slide showing the owned and managed fleet by AerCap, plus its backlog. (AerCap)
Net income $1.0 billion for AerCap/GECAS combination
Apart from the prolonged effects of the Covid-crisis, 2021 was dominated by the acquisition of GECAS, the leasing arm of General Electric. The $30.2 billion transaction was completed on November 1, so the annual results reflect those of the two companies. The net income for the year was $1.001 billion compared to $-299 million in 2020. Excluding transaction and integration expenses, the income was $1.294 billion.
In Q4, the net income was $89 million compared to $20 million in 2020, or $211 million excluding transaction and integration expenses. Q4 revenues were $1.442 billion versus $1.032 billion, expenses $1.353 billion versus $970 million in the previous year, but the one-off costs were $139 million. AerCap ended the year with $18 billion in liquidity, including $9 billion in ‘unsecured revolvers.’
AerCap’s order backlog on December 31 consisted of 417 aircraft. (AerCap)
AerCap’s fleet, including aircraft of GECAS, includes 1.685 owned passenger aircraft, 71 owned freighters, 450 engines, and 339 helicopters. The managed fleet consists of 189 aircraft, seven freighters, and 497 engines. AerCap inherited the freighters from GECAS but is most happy with them as there is strong demand for new and converted freighters. Kelly is seeing good prospects for the Boeing 777-300ERSF conversion program with Israel Aerospace Industries (IAI) which was originally launched by GECAS.
Backlog of 417 aircraft
The lessor has 417 aircraft on the backlog, of which 265 Airbus A320neo-family, 67 Boeing MAX, 33 Embraer E1s and E2s, 25 Boeing 787s, twelve Airbus A330neo’s, ten Airbus A220s, plus five other types. It expects to take delivery of eighty aircraft this year, 91 in the coming two years, and 92 in 2025. Kelly said it has no visibility on when deliveries of the 787 will restart: “From our own unique position as the largest supplier of capacity to the airlines, the longer airplanes don’t deliver, the more positive it is for us”, said Kelly. “However, I do believe that the 787 is a great airplane and we look forward to getting it. When they will, it will really be the pace at which they deliver. The same is true of the MAX.”
Overall, AerCap is seeing a strong recovery of demand for air travel across the world, with many countries in Asia now also recovering from the pandemic in their domestic and regional markets. International travel to Asia remains low. “The demand for travel has not gone away and it comes back faster than the airlines realize in every region”, said Aengus Kelly. Before the crisis in Russia, AerCap had no aircraft anymore to place this year. A handful might become available now from Russia, but there is a strong demand for them so placing them elsewhere won’t become an issue.
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
In 2022, he has gone full-time freelance. Richard has been contributing to AirInsight since December 2018. He is also writing for Airliner World and Aviation News. From January 2023, he will add a part-time role with Dutch website and magazine Luchtvaartnieuws. Twitter: @rschuur_aero.