DALLAS – How do you repossess US$12bn in aircraft from airlines based in a country controlled by a hostile government that has closed its airspace? And how do you get it done by a March 28 deadline?
That’s the challenge facing western aircraft leasing companies as they figure out how to meet the sanctions put into place against the Russian Federation following its invasion of Ukraine. All leasing companies based in the European Union must terminate all contracts with Russian airlines in the next 30 days.
A Big Problem
Putting this into context, onemileatatime.com shows the size of the situation. Of the estimated 980 commercial airliners in Russia, about 777 of them are on long-term leases, 515 from foreign aircraft leasing companies.
And what happens if, as was reported today, Russia’s Ministry of Transport follows through with its idea of nationalizing the aircraft that the country’s major airline, Aeroflot (SU), has on contract from foreign lessors?
In some scenarios, assuming aircraft are successfully repossessed, the market could be flooded with planes. That would send global aircraft prices plummeting with hundreds of planes likely sitting idle – on top of the scores of planes still sitting unused in light of the global COVID pandemic.
This would be great news for airlines looking for an inexpensive way to increase the size of their fleets. But it would create huge paper losses for others who would see the book value of their assets fall tremendously.
In other situations, where the Russian government holds the planes hostage, billions of dollars would be written off by lessors causing investors to lose tremendous sums.
Neither result is particularly appealing, to say the least.
Although these sanctions pertain only to European lessors, entities elsewhere in the world will likely impose similar tactics. But until that happens, considering the strangulating sanctions placed on the Russian financial system and the resulting collapse of the ruble, how could any airline in question make payments on their huge lease contracts?
With maintenance and insurance contracts also being canceled, most aircraft in Russia will soon be reduced to hunks of metal and carbon fiber sitting idle at airports.
The New York Times notes that when a lease ends, the airline is obligated to return the aircraft to the lessor in a spotless condition, inside and out with no maintenance issues. However, when a lease is terminated, there is no obligation to maintain the plane.
As noted by ch-aviation.com, most lease contracts are financed with American dollars. And with Russia expelled from the SWIFT system hindering its ability to conduct financial transactions, it becomes increasingly difficult for airlines to make payments at all.
Some observers note that due to the complex nature of financing, insuring and reinsuring leased aircraft, it may take the better part of the month simply to understand who has what kind of risk exposure on which aircraft, let alone put together a plan to retrieve a particular plane.
“The logistics of repossession are immense. We are talking hundreds of planes that need to be flown out,” said Phil Seymour, an aviation specialist with IBA, a consulting firm, in a New York Times article. “Where in the world can [the planes] go? Will [Russian airlines] play ball? Will there be any edict from above, telling them not to cooperate?” he said.
Some sort of special filing of a flight plan would be required due to EU personnel being banned from flying in Russian airspace and vice versa. Great, we’ve got possession of the plane, but do we have a crew of the right nationality who can fly it out? And how many repossession crews are there in the world anyway?
Not enough to fly so many planes out in so little time.
Middle East to the Rescue?
Air Insight Group speculates that the Middle East might be a meeting ground for lessors and airlines. Perhaps Dubai. The United Arab Emirates, although closely allied with the West, has not condemned the Russian invasion or banned Russia from its airspace.
Anwar Gargash, an adviser to the U.A.E. president, said taking sides “would only lead to more violence. The U.A.E. hopes “to encourage all parties to resort to diplomatic action and to negotiate to find a political solution,” he said.
The Unlucky Irish
Ireland, with its status as a corporate tax haven, is one of the locations taking center stage in this fiasco. Leasing companies based in the country account for US$4-5bn of the estimated US$12bn in leased commercial aircraft now involved. AerCap, the world’s largest lessor of commercial aircraft, is based in Dublin.
AerCap itself has, according to the Times, 152 planes – the most of any leasing company, according to consultancy IBA – valued at about US$2.5bn in Russia and Ukraine. Its customers include Aeroflot and Rossiya who hold, by value, about 5 percent of AerCap’s fleet as of December.
In a securities filing, AerCap acknowledged the risk of conducting business in places like Russia. “We may encounter obstacles and are likely to incur significant costs and expenses conducting repossessions.”
Some Forward Movement
There are reports of some aircraft already being repossessed. A report in ch-aviation.com says that Russian news agency TASS indicates that of three B737-800s operated by Pobeda, a unit of the Aeroflot Group, one was detained in Istanbul (IST) on February 27. Also, a B777-300 ER operated by Nordwind Airlines (N4) was detained at Mexico City (MEX) and remains there.
The situation is, of course, a test to the Cape Town Convention, which is an international treaty that deals with moveable property, such as jet planes. It is designed to, essentially, reduce the risk of financing aircraft in geographies with complicated or underdeveloped legal regimes. Russia has signed that treaty.
But lessors may decide that it’s best to take the “wait it out” approach in regard to their planes. Rather than going through the difficulties of repossessing the assets, entities may simply let the planes sit idle and hope the conflict resolves itself quickly through diplomatic actions.
Only time will tell, of course, but in an industry just beginning to recover from the devastating effects of the global pandemic, weathering another unprecedented challenge will be a daunting task.
Featured image: Aeroflot VQ-BVO Boeing 737-800. Photo: Alberto Cucini/Airways