Russian takeover of foreign-owned aircraft portends higher lease rates

Air Lease Corp. disclosed Friday it is writing off $802.4 million for leased aircraft trapped in Russia it doesn’t expect to recover following Western sanctions against the country for the invasion of Ukraine. 

The broader significance of the impairment charge is that “lessors are going to treat country risk differently than they had in the past and will charge airlines accordingly,” Cowen equity analyst Helane Becker said in client note. “We expect lease rates to trend higher.”

So far only 32 of 513 Russian-operated aircraft managed by foreign leasing companies have been returned to their owners, aviation consulting firm IBA Aero said in an analysis published Monday. The returned aircraft include two Boeing 747-400 freighters, a 747-8 freighter and a 757-200 converted freighter. 

The 747s were operated by Volga-Dnepr Group subsidiary AirBridgeCargo, based on the types of fleets operated by Russian carriers and U.S. Commerce Department lists of sanctioned aircraft. The 757-200 likely was operated by Aviatstar, which last week was hit with U.S. enforcement action for illegally flying Boeing-built aircraft. 

Los Angeles-based Air Lease Corp. (NYSE: AL) leases Airbus, Boeing, Embraer and ATR aircraft to carriers worldwide. At the end of March, it terminated leases for 21 owned aircraft remaining in Russia, representing 3.4% of its fleet by net book value. 

The company said in a filing with the Securities and Exchange Commission that it is unlikely to regain possession of those aircraft, plus six aircraft it manages for clients, that Russian customers have not returned. It opted to write off the assets after determining, along with its auditors, that there wouldn’t be any future cash flows from the aircraft.

Air Lease had 29 aircraft in Russia when the Ukraine invasion started in late February but was able to repossess eight of them, according to Becker. IBA said Air Lease has recovered three aircraft. 

The U.S., European Union and United Kingdom have imposed widespread sanctions on Russia’s aviation sector, including the closure of airspace to Russian-owned or -controlled aircraft; prohibiting exports of technology, spare parts and services; and freezing the operation of Boeing and Airbus aircraft by Russian carriers. 

The EU also ordered aircraft lessors to terminate their lease agreements with Russian carriers by March 28. 

Russian airlines had about 513 aircraft worth $10 billion leased from non-Russian lessors at the start of the conflict, according to IBA. The number of foreign-managed aircraft operated by Russian entities decreased to 484 by the March 28 deadline for lease terminations. More than 400 of these aircraft are currently located in Russia. 

The 32 aircraft that have left Russia since the invasion and been returned to non-Russian lessors include three that were subleased to Russian airlines. IBA said it believes several aircraft are currently being returned to leasing companies in May. 

AerCap has had the most success recovering aircraft and reducing its exposure in Russia, according to IBA. AerCap last month said it had retrieved 22 of the 135 aircraft it had placed with Russian carriers before the start of the war. 

Russia reneges on aircraft repatriation

Russian authorities blocked aircraft from leaving its airspace about three weeks into the Ukraine conflict. In mid-March, Russian President Vladimir Putin signed a law circumventing moves by Bermuda and Ireland, where most foreign-leased aircraft operating in Russia are registered, nullifying the airworthiness certificates of Russian-operated aircraft over concern that sanctions degraded their ability to verify the planes were safe to fly. 

The Kremlin ruling allows Russian carriers to transfer Western-made aircraft to the Russian aviation registry and use the foreign aircraft to fly domestic routes, making it more difficult for leasing companies to recover their aircraft. The legislation violates international law, which requires aircraft be deregistered from the original registry and operators get the owner’s permission before they can be placed on another registry.

IBA said it had identified nearly 300 aircraft with terminated leases, about 60% of the foreign-owned Russian fleet, that were active during the third week of April, mostly operating on domestic routes inside Russia.

Aviation analysts say Russian operators risk permanently poisoning relationships with foreign lessors.

Airspace restrictions in Western countries have made it extremely difficult for leasing companies to retrieve their aircraft because they can’t send people to fly them out and engage with technical specialists on the ground about upkeep. Appraisal and financial experts also say that the value of leased aircraft is falling without access to aircraft maintenance records. 

As Russian airlines continue to operate these foreign-owned aircraft, they will burn downtime until major maintenance without the ability to pay for them and diminish the value of the aircraft, said Peter Walter, IBA’s director of technical and asset management, in a March webinar.

With little chance of recovering assets trapped in Russia or ever earning any revenue from them, leasing companies have begun filing billions of dollars worth of insurance claims. AerCap recently filed a claim for $3.5 billion for its fleet stranded in Russia and said it also expects to take an impairment charge.

AerCap, the world’s largest aircraft lessor, had the largest exposure of any leasing company to Russia, with 5% of its fleet assigned to Russian airlines.

The Air Lease aircraft are unlikely to ever be used in commercial service outside of Russia where they could be repossessed, according to aviation and financial industry experts.

Air Lease said it “does not expect that the write-off of these assets will result in material future cash expenditures for the company” and that it is “vigorously pursuing insurance claims to recover losses relating to these aircraft.”

How long it will take to secure insurance proceeds is unclear. Insurers have canceled the policies of some lessors, including for war risk, and are likely to challenge claims on coverage still in place, according to media reports. Becker predicted that insurers will start to create reserves for payouts to leasing companies and that claims could be litigated for years.

The largest aviation insurer, Lloyd’s of London, has exposure of $1 billion to $4 billion but expects reinsurance to cover some losses, the Financial Times recently reported.

Air Lease will report first-quarter earnings on May 5. 

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

RECOMMENDED READING:

US targets Russian cargo airline Aviastar over sanctions violations

Bermuda suspends flight certificates for Russian-registered aircraft

Source: freightwaves - Russian takeover of foreign-owned aircraft portends higher lease rates
Editor: Eric Kulisch