Russian Exposure Creates Long-Term Headaches For Lessors
Lessors with Western-built aircraft in the hands of Russian operators face few good options on how to manage their exposed assets—from challenging repossession logistics to uncertainty over whether operators can make payments or secure aftermarket support.
European Union (EU) sanctions imposed in response to Russia’s invasion of Ukraine require lessors to cut ties with Russian operators by March 28. Affected companies, including dozens of lessors based in Ireland that dominate the aircraft leasing landscape, have little choice but to comply. But stopping sales of parts or new aircraft—which the sanctions also require—is far easier than trying to repossess assets in the customer’s hands.
“[Given] current airspace and border closures, we question whether any aircraft will exit” Russia, J.P. Morgan Chase analysts wrote in a March 3 research note following an investor conference the company hosted. “We don’t believe Russia will simply allow Aeroflot or S7, for example, to fly aircraft out of the country to Western jurisdictions simply because leases have been canceled.”
Airspace bans have removed many formerly friendly destinations from Russian airlines’ route maps. In the process, many logical spots for neutral-ground aircraft seizures are gone as well. The situation means lessors must pounce when aircraft are in the remaining markets left open to Russian operators.
Avolon repossessed one of its Boeing 737-800s on lease to Aeroflot subsidiary Podeba when the aircraft was in Istanbul on Feb. 27, the Irish Times reported. Russian operators, including S7 and Smartavia, are responding by cutting all international flying, even to places not affected by airspace closures.
The scenario could put airframe and engine maintenance shops in the spotlight. One lessor told J.P. Morgan chase analysts that it had four Russian customer airframes in heavy checks outside the country.
Lessors not subject to sanctions still face significant hurdles. Broad sanctions are limiting Russia’s access to the global financial system, making routine payments difficult, if not impossible.
“[The] suspension of certain Russian banks’ access to SWIFT, the universally used international bank messaging system that facilitates interbank transfers, could disrupt rent and loan payments owed lessors by their Russia-based airline customers,” Moody’s said in a March 4 research note.
“[While] some Russian airlines may be able to remit lease payments through China, the ability to move U.S. dollars directly from Russia appears next to impossible,” J.P. Morgan Chase said.
Aviation Week Fleet Discovery shows that Russian airlines lease about 670 large transport aircraft—those certified for 19 or more seats—from lessors based outside Russia. At least 100 more belong to lessors with Russian roots and subsidiaries based outside the country.
Another major concern is that the West’s major aircraft and engine manufacturers have ceased aftermarket support for Russian operators, either voluntarily or due to sanctions. Without access to around-the-clock technical support, spare parts sales, and foreign airframe and engine maintenance services, Russian airlines planning to operate Airbus, ATR, Boeing, Bombardier (MHI RJ Aviation) or Embraer aircraft for any length of time seemingly face an uphill struggle.
Two-thirds of the 1,259 aircraft in Russian scheduled and non-scheduled operators’ fleets were built by Airbus, ATR, Boeing, Bombardier (MHI RJ Aviation) or Embraer. Losing access to international markets and any drop in a booming domestic sector will create excess capacity—and open the door for parts cannibalization within sub-fleets. But long-term operation without support probably will require securing parts on the black market, similar to how airlines in targeted countries such as Iran evade Western sanctions to keep their Airbus and Boeing aircraft flying.
While lessors would likely welcome swift and simple repossessions, staggered returns offers some ancillary benefits. Hundreds of available aircraft hitting the market within a short time could put a dent in lease rates, for instance. Getting a few out at a time, however—particularly high-demand narrowbodies—would help satisfy rising demand for lift in many regions that are in traffic-recovery mode.
“Should a lessor succeed in repossessing an in-demand aircraft in the immediate term, demand from airlines ahead of the all-important summer peak would likely prove robust, given the degree to which many of the world’s airlines are clamoring for incremental lift currently,” J.P. Morgan said, citing one viewpoint expressed at its investor conference.