Russian Planes Face Grounding Risk as Leasing Firms Mull Default

(Bloomberg) -- Leasing firms are facing the challenge of recalling jetliners worth billions of dollars from Russian airlines, as sanctions imposed over the Ukraine invasion threaten carriers' ability to operate rented planes. 

EU sanctions announced Sunday ban the supply of “all goods and technology” linked to aircraft. Planes can't be insured, either. That means leasing firms will be required to terminate all contracts with Russian airlines over the next 30 days, said a senior leasing executive with aircraft in the country. 

More than half of the active commercial aircraft based in Russia are leased, mostly from companies based abroad, according to analysis from IBA Group, which advises airlines, planemakers, banks and lessors. That tally includes scores of aircraft at flag-carrier Aeroflot. 

AerCap Holdings NV is most exposed to the crisis, with 152 aircraft across Russia and Ukraine that have a portfolio market value approaching $2.5 billion, according to IBA figures.

Even before the EU decision, Russian carriers were facing a test in coming days in seeking to pay for the jets they hire. With Russian financial institutions also sanctioned, and the U.S., EU, U.K. and Japan taking steps to exclude some banks from the SWIFT messaging system used for transactions, airlines could struggle to submit dues for March, IBA President Phil Seymour said.

“There's a real risk of default as soon as the coming week,” Seymour said in a phone interview. “Leasing firms are aware that the tap will be tightened even further as sanctions are rolled out and there are decisions to be made.”

Plane Seizures

Repossessions may already be taking place. A European lessor is recalling three Boeing Co. 737 aircraft from Aeroflot's low-cost Pobeda unit, Interfax reported, citing an unidentified source at the Russian flag-carrier.

Russian media outlet RBC reported separately that an Irish leasing firm seized a Pobeda 737 at Istanbul's Havalimani airport, citing an unidentified Russian airline source. 

Representatives from the Russian carriers didn't immediately respond to requests for comment from Bloomberg outside of business hours.

Leasing Firms

After Aercap, SMBC Aviation Capital, the Dublin-based leasing arm of Japan's Sumitomo Mitsui Financial Group, ranks next by value among foreign lessors, with Singapore-based BOC Aviation Ltd. and Air Lease Corp. of Los Angeles holding smaller positions.

The sanctions will affect most of BOC Aviation's aircraft in Russia, Asia's biggest lessor said in an emailed response to Bloomberg News. The company said its policy is to comply with all laws applicable to its business. It has 18 aircraft leased to four Russian carriers -- Aeroflot, Ural, S7 and AirBridgeCargo. Another aircraft is on lease to Rossiya Airlines. 

Russian state leasing firm GTLK ranks second overall with a blend of commercial jets and helicopters including the Russian-built Sukhoi Superjet 100 regional airliner, which would likely be unaffected, Seymour said.

AerCap has 96 planes on lease to Aeroflot and 17 to Pobeda, according to aviation consulting firm Avitas, corresponding to about 5% of the Dublin-based firm's total fleet.

Possible Seizures

Efforts to take back aircraft could be made easier by the fact that a large number of Russian jets are registered elsewhere, something that lessors can insist on when there are concerns about their ability to recover them.

Data from IBA shows that 713 leased Russian aircraft are registered in Bermuda and a further 34 in Ireland. Of the 158 registered in Russia itself, a further 11 are owned by foreign banks or lessors, with the rest owned by Russian institutions.

Airlines could maker recovery tougher by asking lessors to collect aircraft from Moscow rather than delivering them to Dubai, for instance. Even so, Seymour said Russian airlines would likely cooperate to safeguard access to planes in future years.

Airspace Restrictions

Lessors might have grounds for seizing jets regardless of sanctions or ability pay, if they view themselves as compromised by the developing situation or deem aircraft to be at risk now or in the future.

Plane-rental contracts generally contain a “material adverse change” clause and leasing firms could argue that airspace closures and sanctions imposed on Russian carriers amount to just such a breach. That would allow them to declare default and seize back their aircraft, Seymour said.

Payments are almost always made in dollars, so steps to keep Russia from transacting in the currency would also comprise leases, he said.

While Russian airlines have been hit by airspace closures that largely prevent them from operating westbound, about 65% of the market comprises domestic flights mostly unaffected by those measures. That means aircraft demand will still be present, IBA says, especially after the country had one of the strongest travel rebounds from Covid-19.

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