June 2, 2023

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European plane lessors in race to get $5 billion worth of planes back from Russia

European plane lessors in race to get $5 billion worth of planes back from Russia

European aircraft leasing companies are facing a major logistical challenge to take back hundreds of planes valued at about $5 billion from Russia by the end of March under sanctions imposed after the country’s invasion of Ukraine.

Russian aviation is a major target of the sanctions imposed by the European Commission. These procedures prohibit the sale, transfer, import or export of aircraft or any of their components. The chartered planes were included because they fell under “supply,” three people briefed on the situation confirmed. As such, no new contracts can be entered into and existing contracts must be terminated within 30 days.

“The 30 days are going to be really hard for the lessors to figure out how to terminate the service [contracts]said a person in the industry who asked not to be named. “The biggest problem is how do you get so many planes back at that time?”

The lease contracts contain provisions allowing the lessor to take back his aircraft in the event of penalties. However, the situation is rapidly developing, including Increasing restrictions on Russian airlines able to use European airspacemeans that the groups face a difficult task to get the two planes back, according to one person.

All aircraft should be removed from Russia by the end of March. The person said whether the airlines would comply or not.

The Russian aircraft market is dominated by lessors, including Russian state-backed banks and foreign companies. Non-Russian lessors own 515 aircraft in Russia, with a combined market value of close to $10 billion, according to data from aviation consultancy Cirium. One industry executive estimated that European lessors account for up to $5 billion of that amount.

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Among Western landlords, those based in Ireland are the most exposed. The Irish government on Sunday confirmed the March 28 deadline for ending Russian aircraft leases as part of European Union sanctions. It also said it would close its airspace to Russian aircraft.

There are 238 commercial aircraft, with a market value of $4.1 billion, leased to customers in Russia from 10 operating lessors based in Ireland, according to Cirium.

AerCap, the world’s largest lessor, has 154 aircraft leased to Russian customers, with an estimated value of $2.2 billion, 5 percent of the value of its global fleet. The next two companies with the highest exposure are SMBC Aviation Capital and Avolon.

“If these lessors are given just one month to finalize the leases and get the aircraft back from customers to a storage location outside Russia, it will be a major logistical challenge that is perhaps even greater, if not impossible, due to the increasing restrictions on airspace,” said Rob Morris, head of consulting at Ascend by Cirium.

SMBC Aviation said it is “carefully monitoring developments in Ukraine and working with all relevant authorities. The company will respond accordingly to ensure full compliance with any relevant sanctions as full details emerge.”

AerCap and Avulon declined to comment.

Experts said leasing penalties were the industry’s most pressing concern. Initial concerns focused on whether airlines would continue to be able to pay their rents after the European Union, the United Kingdom and the United States imposed sanctions on several Russian banks. Lessors usually take their payments in US dollars or euros.

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Aeroflot, Russia’s national carrier, has leased about 50 percent of its fleet by value from non-Russian lessors, according to industry consultancy Alton Aviation. The airline took delivery of several Airbus and Boeing aircraft last year. Aeroflot declined to comment.

Sanctions on the provision of spare parts – necessary to keep the planes in the air – are already taking their toll, with Dutch carrier KLM on Saturday ordering two flights bound for Russia to return.

Russian airlines may also have maintenance issues. The person close to Aeroflot said that Aeroflot’s technical maintenance is mainly related to the German center, and any restrictions on the part of Germany will be of great importance. If maintenance and supply of spare parts is limited, this will be really critical, because the company will not be able to operate the aircraft. There is a lot of dependence there.”

Rolls-Royce said it has “temporarily suspended all activities effective February 25, 2022” with respect to Aeroflot. UK Pneumatic Group is a major supplier of new engines, services and spare parts to the Russian carrier.