Private Russian Airlines May Be Open to Lease Returns
Some of Russia’s private airlines appear open to returning their Western-owned aircraft to lessors despite a new law that allows them to seize the planes.
Russia’s state airlines, including the Aeroflot group’s eponymous carrier, Pobeda, and Rosiya, appear to be hanging on to their leased aircraft. Those three airlines hold more than 50 Western-owned planes, and have suspended all international flights to avoid potential aircraft seizure. But lessors are finding the country’s private carriers, including Nordwind and S7, more amenable to working with them in order to maintain access to European and U.S. aircraft after the war ends.
Privately owned Russian airlines “very much see the endgame beyond this current crisis or believe that there is life after this crisis, and they are doing everything possible knowing that they need our aircraft and other Western supplied aircraft on the leasing side,” Air Lease Corp. CEO John Plueger said at a J.P. Morgan conference on March 16. “So they’re doing I think an excellent job of trying to manage this balance to try and work with us as cooperatively as possible.”
ALC has 14 aircraft leased to S7, 11 to Nordwind, four at Ifly, and a handful at other private carriers, according to IBA data via J.P. Morgan. None of its 32 aircraft in Russia are flown by Aeroflot or its affiliates.
That’s good news for lessors that feared the industry may have to write off as much as $10 billion in aircraft assets. Cirium data show that 79 Western-owned aircraft have been recovered by lessors to date, leaving some 428 aircraft in either Russia or Belarus. Russian airlines leased 515 aircraft from foreign lessors on February 24 when Russia invaded Ukraine.
Nationalizing foreign-owned aircraft became a very real risk for lessors after Russian Federation President Vladimir Putin signed a law allowing the re-registration of foreign-registered aircraft in the country on March 14. Russia’s civil aviation regulator can issue new airworthiness certificates under the legislation. This permits Russian airlines to operate the aircraft on domestic routes even if their certification was rescinded by their country of registry — in most instances Bermuda — according to Russia’s TASS news service.
AerCap has the largest exposure among Western lessors with 142 aircraft placed at airlines in Russia, IBA data show. ALC is a distant second with 32 aircraft and Avolon third with 16 aircraft.
But a consensus is building that the market’s fears may be overblown. Only 5 percent of AerCap’s portfolio is in Russia, Cowen & Co. analyst Helane Becker wrote in a recent note to investors. The loss of its Russian assets would result in a $2.5 billion write-down, she said, adding that the market’s reaction is “overdone.” And J.P. Morgan analyst Jamie Baker concurred, saying the costs to lessors will be “manageable.”
The bigger fight now for lessors is with insurers. While assets are insured against war risk and seizure, recouping that money can take years of litigation. The Russian law allowing the re-registration of aircraft flouts international laws, and this bolsters the lessors’ arguments with insurers. “This is going to play out for years,” Aircastle Chief Legal Officer Christopher Beers said at the ISTAT Americas conference earlier in March.
“I think it helps the insurance question because it demonstrates the intent to confiscate which is, I think, a critical aspect of our war risk insurance,” ALC Executive Chairman Steven Udvar-Hazy said at the J.P. Morgan event.
The crisis will redound to lessors’ benefit in one way: Increasing the supply of in-demand airplanes. Fears that the market would be saturated with repossessed aircraft were squashed by Russia’s move on the in-service fleet. Instead, lessors can re-market aircraft previously bound for Russian airlines to other carriers. ALC already is in talks with airlines to take Airbus A320neo and Boeing 737 Max-family aircraft that were slated for Russian operators.
“That was a major earthquake. That was an 8.0 earthquake,” Udvar-Hazy said of the pandemic. “This is like a 2.5 aftershock.”
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