All’s fair in love and war, right? For aircraft lessors, the kind approach has thus far failed, but reclaiming leased aircraft is not going to be easy in a country that has isolated itself from the rest of the world and could soon close its borders. Meanwhile, Russian airlines have respond to demands to return leased airplanes by stopping payments and breaking off contact.
War In Ukraine Turns The Leased Aircraft Market Upside In Russia
When the war in Ukraine broke out, western powers moved swiftly to impose sanctions upon Russia. Those included the instruction that aircraft leasing companies cease and desist doing business with Russian companies. But what’s a leasing company to do when most or all of their aircraft are within the borders of the Russian Federation…to the tune of 400 jets worth over $10 billion?
While lessors technically face a March 28th deadline, several firms are encountering a familiar pattern: radio silence from their Russian counterparts. Yes, it seems that Russian airlines using leased aircraft will simply stop payment and hold onto the aircraft as long as they can. If war and sanctions continue, that could be for a very long time.
Before Aeroflot suspended international flights, it almost faced aircraft seizure in Abu Dhabi, Bangkok, and Cairo, but managed to narrowly avoid repossession in both instances. However, aircraft were seized in Mexico City and Istanbul according to Reuters.
The global aircraft leasing sector holds roughly half of all the world’s commercial airliners. Traffic from Russia, long seen as a stable investment prior to the war, represents only about 5% of global airline traffic, but still represents a whopping portfolio of value.
Some leasing companies have been trying to unload their portfolios to Chinese companies, which have not severed diplomatic or economic ties with Moscow. However, most offers have been turned down for fear there is no practical or legal enforcement mechanism to get Russian companies to comply.
Now lessors will use their insurance polices to try to collect, representing further uncharted waters of legal uncertainty. Does a war in Ukraine and Western reaction to it trigger payouts? How will lessors prove that airlines or Russia itself has confiscated airplanes when there is only radio silence and they find themselves shut off from entering the country?
And there’s even further peril. Airbus and Boeing have announced, with immediate effect, that Russia is shut off from buying spare parts. If an economic embargo persists, missing maintenance records will permanently diminish the value of the leased aircraft. Furthermore, if outside parts are shut out, Russian aircraft operators will likely pull parts from existing planes, the sort of swapping that severally undermines the confidence in future lessees from that inventory of aircraft.
The War in Ukraine has created a global mess in the leased aircraft market. This is an unprecedented event and it is not clear how things will play out in the months ahead, but it appears to be a grim time for aircraft lessors and the insurance underwriters backing them up.