Ukraine War Updates
President Joseph Biden’s State of the Union announcement last week 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 went into effect on March 2, 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. Lufthansa said North Asia flights likely will take two hours longer on their new routings. 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.
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.
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 last 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.
Meanwhile, the Russian government has ordered carriers to suspend their international networks to prevent lessors from repossessing aircraft.
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 after 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.
Global Distribution Systems Cut Off Aeroflot
Amadeus, Sabre, and Travelport said last week they would stop distributing Aeroflot’s tickets to travel agencies. Sabre was the first of the three companies to announce action against the Russian flag carrier in response to Russia’s invasion of Ukraine. The companies run desktop computers used by travel agents to make and handle reservations.
“We are taking a stand against this military conflict,” said Sabre CEO Sean Menke.
While Russian airlines have been banned from North American and Western European airspace, they’ve been able to fly abroad in other directions. Removing Aeroflot from agency platforms made it harder for agents worldwide to book Aeroflot tickets.
Amadeus had the largest share of distribution in Russia, Sabre had the second most, and Travelport had the third most, according to statistics from Travelport that covered the past 12 months and the pre-pandemic year of 2019. For internal domestic flights, travel agents can use Sirena, a Russian distribution player.
The moves came as a stampede of Western companies are feeling pressured to retreat from Russia while that country invades Ukraine.
Not everyone was impressed by the announcements.
“Sabre has left Aeroflot with a fully functioning PSS [passenger service system], enabling it to continue to operate,” said Jonathan Hinkles, CEO of Loganair, which offers scheduled flights on Embraer aircraft in Europe and is a Sabre customer for distribution services.
“In my view, if Sabre was serious about taking action, it would be turning off Aeroflot’s PSS, not just its distribution to the Sabre [global distribution system],” Hinkles said. “It’s a total half-measure at a time when half-measures aren’t enough.”
First, some context: There are broadly three sides to the services the travel tech vendors provide.
One side is their reservation services used by online and retail travel agencies and corporate travel management companies worldwide. Aeroflot has been kicked out of this channel. Agents now need to book directly through those airlines’ websites to buy tickets.
Separately, Amadeus and Sabre, but not Travelport, provide so-called passenger service systems, which help airlines to help run their operations.
“Passenger service, operations, network planning, and management are core automation, commercial, and operating systems, without which airlines cannot function, except minimally and manually,” said Robert Mann, an industry consultant.
Lastly, Amadeus and Sabre sometimes run “central reservation systems” for airlines, helping the airlines take bookings. That is a harder product to shutter, and it is unclear if any airline in Russia uses a Western tech provider for its central reservation system.
“It’s reasonable for GDSs to decide not to sell Russian flights if they so choose,” said Brett Snyder of Cranky Flier. “But it’s a lot harder to make the decision to turn off the airline reservation system. That effectively shuts the company down.”
Some analysts thought any action at this point would be superfluous.
“I give it five to seven days before domestic aviation is grounded,” said Mike Boyd, president of Boyd Group International. “With many planes repo’ed [being reposessed], with Boeing and Airbus suspending the supply of parts, and with passengers being hard up for cash, Russian airlines will mostly stop flying.”
However, Russia might try to follow a policy of carriers grounding two planes to use for spare parts for every plane it kept in service, on average, according to Djois Franklin, CEO of Quicket, a Germany-based seat map data vendor. That policy could keep domestic aviation flying for much longer.
Some analysts noted that legal contracts can make things complicated.
“For example, Amadeus hosts the Russian airline S7,” said Eric Leopold of the aviation consultancy ThreeDot. “Will Amadeus suspend their service, meaning that S7 cannot board their flights? These relations are based on contracts, which are difficult to suspend unless there are clear sanctions to apply.”
“We will not sign any new contracts in Russia and we continue to evaluate our existing portfolio of work in Russia in parallel,” an Amadeus spokesperson said.
“Our immediate focus remains the safety and wellbeing of our colleagues and their families in Ukraine,” the Amadeus spokesperson said. “In light of the attacks on Ukraine, we immediately stopped any new planned commercial projects in Russia. At the same time, we continue to assess and evaluate the potential impact of international sanctions imposed on Russia and any countermeasures by Russia.”