Sanctions on Russia for Ukraine War Could Reorder Global Aviation

Photo credit: Aeroflot is increasingly isolated as more countries ban Russian aircraft, and lessors begin repossessing aircraft. Flickr / Kevin Hackert

President Joseph Biden’s State of the Union announcement on Tuesday that the U.S. is closing off its airspace to Russian aircraft topped off a week of extraordinary upheaval in global aviation that shows no signs of settling down. The repercussions for the industry have spread far beyond the conflict zone, potentially setting back airlines’ planned recovery from the Covid-19 pandemic by months if not years.

With the U.S. airspace closure, which goes into effect on Wednesday, Russian aircraft are prohibited from flying over almost 40 countries, including the 27 members of the EU, the UK, and Canada. Russia retaliated with its own airspace closures, directly affecting Europe-Asia flights. Several carriers, including Air France-KLM, Finnair, and the Lufthansa Group have cancelled flights to North Asia, while flights to Southeast and South Asia are being rerouted to avoid Russian airspace. After an initial suspension, Finnair will resume flying to Tokyo Narita on March 9, but the new flight path adds more than three hours of flying time, the carrier said Wednesday.

Currently, traffic to Asia remains depressed due to ongoing Covid-19 travel restrictions. But as traffic between Europe and North Asia recovers, Chinese carriers, not subject to Russian airspace restrictions, could reap a competitive advantage, especially if flight times are significantly shorter on their routes.

Finnair and Wizz Air have both warned investors of financial implications from the Russian invasion and subsequent airspace closures. The former, in addition to suspending flights to North Asia, suspended its guidance for the first half of 2022, and CEO Topi Manner said the “situation has a considerable impact on Finnair.” In 2019, nearly half of Finnair’s capacity was flying to or from Asia, per Cirium schedules.

Wizz expects the closure of Moldovan, Russian, and Ukrainian airspace to “slightly” increase its forecast operating loss in the March quarter. The discounter is the only EU carrier with bases in both Russia and Ukraine, which amounted to roughly 7 percent of its schedule in March.

“I think it’s the worst you can have as an airline when you have to deal with a war,” AirBaltic CEO Martin Gauss said on February 28. The Latvian airline is less affected than either Finnair or Wizz but Gauss said it does expect some financial impact from the airspace closures, and run-up in oil prices since the invasion.

And for U.S. airlines, Biden’s announcement is less dramatic. Beginning last week, flights to India and Southeast Asia were rerouted to southern flight paths, adding about an hour to most of those flights. U.S. airlines can fly over Anchorage for North Asia routes, particularly from the West Coast. However, on March 1, United Airlines suspended flights between San Francisco and Delhi, and Newark and Mumbai as it evaluates alternative routings that avoid Russian airspace.

But the war’s impact on Russian airlines is immeasurably worse than it will be for Western carriers.

Turmoil Just Starts For Russian Airlines

Data from FlightRadar24, an airline tracking site, show the circuitous flight paths Aeroflot flights from the Caribbean must now take to avoid Canadian airspace. And they have not always been successful. NavCanada, which manages Canadian airspace, is investigating two airspace violations by Russian aircraft en route from the Caribbean to Russia. An Aeroflot flight earlier this week en route from Moscow to New York turned back to Moscow four hours into the flight after Canada closed its airspace. The industry expects Caribbean flight paths will only get more circuitous as the U.S. closure goes into effect.

Meanwhile, Russian airlines are completely cut off from Europe and the UK. Of the approximately 130 flights that operated between the London and Russia in January, half were flown by Aeroflot, with only about 30 flown by British Airways and the balance operated by smaller airlines from the Russian Federation, Cirium data show. Aeroflot has continued to operate to neighboring countries, like Azerbaijan and Turkey, and to countries in Asia, like China, that have not restricted its overseas operations. In practice, Russian citizens are not completely disconnected from international travel. They can access destinations in Europe and elsewhere by flying via Turkey or Dubai, and other Middle East hubs.

But the turmoil is only just beginning. Russia’s domestic air travel market has been a rare pandemic-era success story. Demand started to recover in the summer of 2020 and began to surpass 2019 levels, making it one of the few markets in the world where this occurred. Passenger traffic last year was 24 percent higher than in 2019, IATA data show.

But two factors could imperil this success as the war intensifies. First, and most dramatically, could be the shortage of aircraft. Almost 1,000 of Russia’s domestic fleet of 1,300 aircraft are Western-built Airbus and Boeing jets as well as ATR turboprops. Of these, 780 are leased, with about 300 held by Western lessors. The EU’s sanctions prohibit the sale of European aircraft and parts to Russian airlines, and also require lessors to repossess their leased aircraft by March 28.

In a filing with the U.S. Securities and Exchange Commission, the world’s largest lessor, Ireland’s AerCap, said 5 percent of its fleet value is in Russia, and it would immediately cease leasing to Russian airlines. It is by far the most exposed to the market, with more than 135 aircraft in service with Russian airlines, and eight aircraft on order, and 19 in storage, Cowen & Co. analyst Helane Becker wrote in note to investors. Los Angeles-based Air Lease Corp. has 14 aircraft in service in Russia, one on order, and two in storage. BOC Aviation has 24 aircraft in service and two in storage. And SMBC Aviation Capital has 36 aircraft in service in the country and two on order. A clutch of about 20 smaller lessors, both Western and non-Western, make up the rest of Russia’s leased fleet.

Returning aircraft to lessors is a process that usually takes months. It remains unclear if Russian airline will even be able to comply by March 28. But if they do, their ability to serve the once-booming domestic market is an open question. The logistics of returning the aircraft will take the rest of the month and could be a “nightmare,” Becker said.

The availability of spare parts will also become an issue as aircraft in Russia become due for regular maintenance. The EU’s sanctions were specific about aircraft parts. The U.S. sanctions are less so. However, Boeing on March 1 said it would no longer provide aftermarket support for aircraft in Russia. GE followed suit on March 2 and said it would not provide aftermarket support for engines and components in Russia. As airlines in the country run down their inventory of spare parts, keeping aircraft operational becomes more tenuous.

Another factor that will directly affect Russia’s domestic market is the parlous state of the country’s economy. Sanctions imposed by the U.S., EU, UK, Switzerland, Japan, and South Korea, among others, directly target the country’s largest banks and its central bank. The ruble lost more than 30 percent of its value against the dollar in the two days since the sanctions began to take effect. Russia banks have been disconnected from the Visa and Mastercard networks, Apple Pay, and Google Pay. These sanctions will directly affect Russian travelers’ ability to buy tickets and to spend money when abroad. In addition, the Russian government has imposed currency controls and is allowing citizens to take a maximum of $10,000 in cash out of the country.

Russia does have domestic credit systems that can be used for tickets within the country. But with the economy in freefall — the central bank raised interest rates from 9.5 percent to 20 percent — and the currency plummeting, the amount of discretionary income Russians have to buy domestic tickets is imperiled. Data on domestic traffic was not immediately available to assess the short-term impact, however.

Additional reporting by Edward Russell.