By Vanni Gibertini
Lessors Look To Repatriate Aircraft From Russia
The rapid evolution of the conflict between Russia and Ukraine has seen wide implications for commercial aviation, from the complete closure of airspace above Ukraine and Moldova to the strict limits imposed on Russian-registered aircraft by Western countries and the similar retaliatory measure put in place by Russia.
However, one area that is going to be profoundly affected by the new scenario full of restrictions emerging in Russia is the aircraft leasing market, in particular those companies that own the aircraft being operated by Russian companies. The European country most exposed to this risk is certainly Ireland. According to the Irish Times newspaper, the leasing company Aercap owns 149 aircraft operated in Russia and SMBC Aviation Capital has 34 jets leased to Russian operators.
These are just a fraction of the Boeing 777 leased aircraft currently being operated by Russian airlines, according to aviation data firm Cirium. 515 are owned by foreign firms for an estimated market value of $10 billion.
The Irish press is reporting that these companies are setting up specific task forces to repossess their assets and bring them out of Russia so that they can be repurposed to other operators. In fact, the present situation will most likely force most Russian carriers to ground a number of aircraft given the practical impossibility to fly international routes, and this is going to affect their ability to generate enough revenue to keep up with leasing payments. “You’re talking about roughly $100 million being paid out every month by Russian airlines to Irish-based leasing companies. If the banks that these airlines use are sanctioned, it’s going to be very difficult to make payments,” said Tim O’Connell, a Grant Thornton Ireland partner specializing in aviation advisory to the Irish Times.
Russia’s Banking Restrictions
The cash situation of Russian carriers will also be further hampered by the restriction affecting the financial services. The European Union and the U.S. have decided to exclude select banks from the global SWIFT system used by banks to exchange messages related to financial transactions. As a result, this will make it considerably harder, if not impossible to move funds in and out of Russia. Furthermore, this sanction imposed on the Russian banking system is expected to have a devastating effect on the exchange rate between the rubles and the U.S. dollar, which is the currency in which most if not all leasing contracts are regulated.
According to preliminary indications of the currency markets that were closed last weekend, the Russian ruble should lose more than half its value against the dollar, which in turn means that airlines will see their leasing bills double almost overnight — together with a number of other expenses.
The lessors are also faced with more complicated matters, as these leasing contracts may have as collateral a letter of credit from a Russian bank. However, if these banks are unable to honor these letters due to the sanctions this may lead to an unwanted exposure that may convince the lessor to repatriate their assets.