Foreign aircraft owners risk billions of losses in Russia

Passenger planes owned by Russia's airlines at Sheremetyevo International Airport in Moscow on March 1, 2022. PHOTO: REUTERS

LONDON (BLOOMBERG) - Foreign aircraft lessors, which include Singapore-based BOC Aviation, are facing the increasing possibility of writeoffs that could total in the billions of dollars as Russia considers ways to defy worldwide sanctions and keep carriers such as Aeroflot flying.

Russia's Transportation Ministry is weighing options including buying or even nationalising hundreds of Airbus and Boeing planes that lessors have demanded be returned under European Union economic sanctions, the Russian news agency RBC reported.

Holding jetliners in Russia would give the country's airlines plenty to cannibalise for spare parts, so others could keep flying.

"The lessors may end up having to take a writeoff," said Nick Cunningham, an analyst with Agency Partners.

In a normal commercial situation, the firms would have the upper hand because contracts give them rights to repossess aircraft when they can't collect on fees due. "But if Russia tells the airlines just to keep flying the planes, what can they do," he said.

Dublin-based AerCap Holdings NV has the most planes leased to Russia at 152, with a market value approaching US$2.5 billion, according to IBA. Carlyle Aviation Management's exposure is at about 8 per cent of its fleet, while AerCap and SMBC Aviation Capital each have about 7 per cent of their planes in the country, according to an updated report from the aviation consultancy.

Fortress Transportation and Infrastructure has eight planes, or about 6 per cent of its total portfolio, in Russia, a company official said.

AerCap, the world's No. 1 lessor, said Monday has said it will stop doing business with Russian airlines, without commenting on whether it will seek to seize back its aircraft. SMBC Aviation, a division of Japan's Sumitomo Mitsui Financial Group, is terminating all leases in Russia, while BOC Aviation said it will comply with all laws.

It'll be extremely difficult to fly aircraft out of Russia, and lessors will see a loss of value no matter where events turn, said Peter Walter, director of technical and asset management at IBA.

"You're going to see significant amounts of bad debt, long-term litigation and the possibility some aircraft can't be recovered," he said. "Ramifications of this will continue to run for many years."

Lessors will have security deposits and maintenance reserves to offset some of their losses, and also hold insurance. Both Air Lease Corp. and AerCap have said in regulatory filings that they have war-risk insurance which covers nationalization and seizure of aircraft, analysts at Credit Suisse highlighted in a note.

"The question of whether insurance will cover losses on any aircraft that cannot be extracted from Russia is an open question," said analysts Moshe Orenbuch and James Ulan.

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