More than half of Russian commercials aircraft could be grounded as sanctions imposed by the West over the Ukraine invasion threaten the ability of private carriers to fund and operate rented planes. Leasing firms are now facing the challenge of recalling aircraft costing billions of dollars from Russian airlines because of the latest round of sanctions.
Sanctions imposed by the EU on Sunday prohibit the supply of "any items and technology" related to aviation. Given that planes can't be insured, leasing companies will be compelled to terminate all contracts with Russian airlines within the next 30 days, according to a senior leasing executive with aircraft in Russia. This means, the Russia airline industry will be on the brink of collapse.
Putin's war is now directly impacting Russia's economy and the first signs were seen on Monday with rouble''s value plunging to a record low, following the sanctions imposed by the West. The next in line is the country's civil aviation industry, which may see a complete collapse as airline companies will now struggle to fund and operate the rented aircraft.
According to IBA Group, which advises airlines, aircraft makers, banks, and lessors, over 50 percent of Russia's commercial aircraft are leased, primarily from foreign corporations. This figure includes a large number of planes from Russia's flagship carrier, Aeroflot.
Now, the leasing companies will be forced to end their contracts with the airline companies because of the sanctions, which will make these companies to ground the aircraft, paralyzing the entire aviation sector.
According to IBA estimates, AerCap Holdings NV is the most vulnerable to the crisis, with 152 aircraft spread across Russia and Ukraine with a portfolio market value of $2.5 billion.
The Russian airline industry was already struggling for a while as many were unable to pay the jets they take on lease. The challenge is biggest now as airlines might now struggle to submit dues for March, according to IBA President Phil Seymour, because Russian financial institutions have also been sanctioned, and the US, EU, UK, and Japan have taken steps to restrict some banks from the SWIFT messaging system used for transactions.
"There's a real risk of default as soon as the coming week," Seymour told Blomberg 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."
In fact, the lessors have already started taking actions following Sunday's sanctions. A European lessor has recalled three Boeing Co. 737 aircraft from Aeroflot's low-cost Pobeda unit, according to an Interfax report.
Separately, the Russian news agency RBC said that an Irish leasing company had confiscated a Pobeda 737 at Istanbul's Havalimani airport, citing an unnamed Russian airline source.
After Aercap, SMBC Aviation Capital, the Dublin-based leasing arm of Japan's Sumitomo Mitsui Financial Group, is the second-largest foreign lessor by value, followed by Singapore-based BOC Aviation Ltd. and Los Angeles-based Air Lease Corp.
If the war continues and sanctions stay in place, it's likely that all these foreign lessors will start recalling the aircraft. 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.
However, there also lies a challenge for the lessors to get back the aircraft but that may somewhat be easy as of now. The fact that a big number of Russian jets are registered elsewhere may make recovery efforts easier, something lessors can demand if they are concerned about their ability to reclaim them.