As if the pandemic wasn’t enough.  After dealing with collapsing airlines the world over as traffic almost stopped, aircraft lessors now have to confront another crisis. And they have to do this before they fully recover from the pandemic. The Russian situation, with crippling sanctions, means trying to recover a lot of aircraft, quickly. The race to recover aircraft is on. Imagine what it takes to get crews into Russia now? Moreover, who would want that job right now? We have several stories focused on the Russian situation, here, here, here, and here.
Lessors are facing the difficulty of recovering aircraft, as EU Regulation 2022/328 effectively prohibited leases to airlines in Russia, requiring their cancellation effective 28 February 2022, but with a 30 day period in which to recover the aircraft. Â This resulted in a race to recover aircraft, some of which also stand uninsured because of similar sanctions on EU insurers or re-insurers covering Russian-located assets. Â
Lessors know and are counting on the fact that once the war ends, Russian airlines are going to wish to lease airplanes again, and have the “we won’t lease again unless we get our airplanes back” card to play. Â Russian airlines can still fly aircraft out of Russia to neutral destinations, such as Dubai, where aircraft could be returned and stored until the war, and sanctions end.
There are 236 leased aircraft operating with Russian airlines, with Rolls-Royce, AerCap, SMBC Aviation Capital, and Avolon having the most exposure. The race to recover assets hits these companies hard. Â While these companies are strong enough to absorb a total loss on an aircraft, the loss of a large fleet would be a serious financial blow. Â A number of smaller companies that also serve the Russian market are not as strong, and could be in difficulties should default or a total loss occurs. Â AerCap has the highest exposure, with 154 aircraft at risk. Â
The race to recover assets is complicated by the fact that there simply aren’t enough repossession crews in the world to be able to retrieve all of these aircraft in the remaining 28 days. Â Full recovery would require the airlines to help by having their crews fly aircraft to neutral destinations to ensure future cordial relationships with lessors. Â But that may be wishful thinking.
The wild card in this race to recovery is Vladamir Putin, who could restrict these assets to Russian airspace or conscript the aircraft into military service. Â Either of those actions would be considered theft of an aircraft. Â An airline not returning an asset could be considered theft, and where insurance applies, the conscription into the Russian air force would trigger war risk exclusions.
Insurance has also been ordered to be canceled under the EU sanctions regulation, so lessors may find their insurance policies canceled or no longer applicable. Â While many policies are Russian issued and could remain valid, many have coinsurance provisions with EU reinsurers that could void at least a portion if not all of the cover. Â That determination will keep lawyers busy for some time.
At a minimum, it appears that lessors have substantial asset risk from uninsured airplanes and significant uncertainty whether airlines will return their assets via third countries or whether those assets will be seized and stolen. Â Since insurance coverage looks dubious, lessors are in a race to recover as many airplanes as possible. Â Larger lessors may be able to absorb the loss of several aircraft, but smaller lessors may find themselves in financial difficulty.
The situation with Iran, also subject to harsh sanctions, does not seem as onerous today as the sanctions placed on Russia. Â If the industry needs a ready customer for several formerly Russian-operated aircraft, Iranian carriers would be a potential destination for such aircraft. Â Our intelligence contacts indicate that diplomatic breakthroughs with Iran are likely over the next couple of months, so stay tuned – the Russian aircraft may end up in Teheran, which can also help with deficits in oil production and ease pricing. Â In politics, the good guys and bad guys sometimes change positions, and the enemy of my enemy can become a friend.
Aircraft leasing has overcome more extensive economic crises and the pandemic, even if Putin decides to keep airplanes in Russia. Â Aircraft flying outside Russia, including Aeroflot flights that still operate to many destinations would be subject to seizure under the Cape Town accords. Â It remains to be seen how aggressive lessors will be in their race to recover aircraft operated by Russian carriers, but it is in their best interest to take possession as quickly as possible given the lease termination requirements under the sanctions. Â This will be playing out with some difficulty over the next few days and weeks.
As with any situation, compromises must be made. Â Which aircraft should be repossessed first? Â Will airlines be cooperative? There are so many unknown issues, it is difficult to predict how this will play out. Â One of the options is to break the lease and allow Russian airlines to park the aircraft in safe storage until the crisis ends. Â While that may entail a significant revenue loss, it could also eventually mean a deferred return of the asset should sanctions end, or the possibility of a sale to a non-sanctioned country lessor (e.g. China) and future re-lease of the asset with the carrier. Â Neither is a winning situation for the lessor, but better than a total loss.
Commercial aviation seems to take it on the chin with shocks every few years. Yet it keeps on going, in an almost a Ukrainian sort of way.  We will soon know whether lessors can win the race to recovery, and how many will remain trapped and unavailable under sanctions.
