Frankfurt After the pandemic, the big leasing companies in aviation are threatened with the next serious crisis. Because of the Ukraine war and sanctions, more than 500 aircraft leased to Russian customers by Western leasing companies are stuck. The consulting firm Cirium, which specializes in aviation, estimates the value of this fleet at around ten billion US dollars.
“For leasing companies with customers in Russia, this is a worst-case scenario,” says Peter Smeets, Managing Director of the consulting firm 360 Aircraft Finance (AF), which focuses on aviation and aircraft financing: “The leasing installments are canceled and the values are lost at the same time of assets, that’s a disaster.”
In view of this, the leasing companies should actually do everything possible to get their planes back from Russia as quickly as possible. They only have until the end of March to do so, according to the conditions of the sanctions. But that is an almost impossible task.
AF’s Smeets believes it’s unlikely that the planes will fly out of Russia. “Russia is unlikely to let any plane out of the country. If the West freezes Russian assets, Russia will also secure assets.” Smeets warns that it will also be difficult to find enough pilots willing to carry out such a ferry flight in the current situation.
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It is true that the Russian aviation market is dominated by domestic leasing companies in terms of the number of leased aircraft. Six Russian providers are among the ten largest “landlords”. But by far the largest is AerCap, an Irish company that, since acquiring GE Capital Aviation Service from General Electric, has become the world’s largest aviation leasing group. According to the industry information service IBA, AerCap has leased 154 aircraft worth $2.2 billion to Russian customers – all so far in active service.
European leasing companies are heavily involved in Russia
Among the top ten non-Russian leasing companies in Russia is SMBC Aviation Capital, which is owned by the Japanese bank Sumitomo Mitsui Banking Corporation but, like AerCap, is based in Ireland. Air Lease (USA) and Carlyle Aviation Partners (USA) are also included in the list. Avolon (Ireland), BOC Aviation (Singapore) and Dubai Aerospace Enterprise (Dubai) are also active in the country with a rather small commitment.
Because several providers in the leasing industry have their headquarters in Ireland with AerCap, SMBC and Avolon, the experts at Cirium assume that European leasing companies alone have fleets worth around five billion US dollars in Russia.
AerCap and BOC Aviation have now declared that they want to end the contracts with Russian airlines by the end of March. But according to Smeets, this is anything but easy from a legal point of view. There are so-called “event-of-default” clauses in international leasing contracts. The circumstances that allow termination of the contract are defined there. “But hardly any leasing contract will mention the case of a sanction, as we currently have it, as a specific case of termination,” says Smeets.
So first of all, key legal questions would have to be clarified. For example, the leasing companies could claim that sanctions have the status of a law. So if the planes continued to operate, it would be a violation of this law.
Another possibility would be for the leasing companies to invoke force majeure. It would probably take some time to clarify this – a huge challenge given the deadline of the end of March. BOC itself points out that the consequences of the EU sanctions are very complex.
Even if the contracts could be successfully terminated in the end, the danger has not yet been averted that the value of the fleets will collapse dramatically.
Since it is difficult to get the planes out of the country, they would probably have to stay in Russia for the time being. However, many of them can no longer be operated due to the extensive airspace closures for Russian airlines in Europe or Canada. “Once an aircraft stops flying, it very quickly slips out of the appropriate maintenance schedule that the manufacturer prescribes,” says Smeets of AF.
The operators of the leased aircraft could ignore possible contract terminations or other instructions from the leasing companies and simply continue flying – for example within Russia. But that would also have negative consequences for the lessor. “If the aircraft continue to be operated despite the termination of the lease, but are no longer maintained in accordance with the manufacturer’s specifications, this is a major problem for the leasing companies in terms of residual values,” says Smeets.
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The situation is aggravated because the original parts required for maintenance are missing due to the sanctions. Cooperation with other airlines – so-called pooling arrangements – would also not help, because this exchange of parts is also sanctioned, according to Smeets.
Airplanes are no longer maintained
Another scenario is hardly better: If the aircraft are shut down, but then not maintained and stored as prescribed by the manufacturers for a longer period of time due to a lack of parts, this would also have a very negative effect on the value of the jets, according to Smeets.
Conversely, the EU sanctions will also affect Russian leasing companies. For example, GTLK has leased aircraft to Easyjet through GTLK Europe. The situation here is unclear. Because GTLK Europe is based in Dublin like many leasing companies. Whether that will be enough to keep the subsidiary’s portfolio out of the sanctions remains to be seen.
Especially since the exclusion of Russia from the Swift international payment system generally makes leasing transactions more difficult. Even paying the leasing installments becomes a challenge. This should also affect SB Leasing in Dublin. The parent company is the Russian Sberbank. It is threatened with collapse because of the sanctions.
More: EU countries close airspace for Russian airlines.