The European Union (EU) and the United States (US) have introduced various sanctions on Russia over its invasion of Ukraine. The sanctions, which are primarily economic in nature, have targeted several industries in Russia, including the airline and aviation sectors. These sanctions prohibit the supply of aircraft and aircraft components to Russian entities or for use within Russia. As a result, western aircraft lessors must terminate their leasing arrangements with Russian airlines by 28 March 2022, a thirty-day window from the first announced sanctions.
Size of the Challenge
Over Half of the Commercial Aircraft Fleet in Russia Is Leased
Our fleet data shows there are over 1,049 active commercial aircraft operated by Russian carriers. Of these, 597 aircraft are on operating lease contracts with an estimated current market value of just under $15bl. Russian-owned/domiciled leasing entities account for 113 of these aircraft (approximately $3bl.), and although not EU-headquartered, the majority of their ownership/financing vehicles are EU entities, likely implicating them in the sanctions despite their Russian ownership.
50 Aircraft Lessors Have Direct Exposure to Russia
A significant number of aircraft lessors have exposure to Russia and will need to terminate their leasing arrangements under the newly implemented sanctions. Fortunately, the relative exposure level of non-Russian lessors is not high, with the majority of lessors exposed to no more than 10% of their total fleet. Aercap has the largest gross exposure with 150 aircraft, followed by the Russian lessors, VTB Leasing and SberLeasing, with 41 and 37 aircraft respectively.
The following illustrations summarise the aircraft lessors with the largest gross Russian exposure, based on the number of aircraft on lease – not market value – as well as their relative exposure given the overall size of their aircraft portfolios.
Gross Exposure – Number of Aircraft on Lease to Russian Airlines
Relative Exposure – Percentage of Portfolio Size on Lease to Russian Airlines
Source: ch-aviation fleet data and ACC Aviation analysis
Fleet data excludes non-western aircraft and aircraft with fewer than 30 seats.
Russian-headquartered lessors are highlighted in grey.
The Challenge
Repossession from a single non-performing airline is a challenging undertaking in itself. Repossessing up to 600 aircraft from over 25 airlines under current market conditions is unprecedented in commercial aviation history and will pose a significant challenge to the global aircraft leasing community. To put the task at hand into perspective, Kingfisher Airlines – the pre-eminent case study of a difficult aircraft repossession – accounted for 30 leased aircraft at the time, 5% of what the market is potentially looking at today. What is already a challenging project is further compounded by airspace restrictions, travel bans, sanctions on trading with Russia, and the potential for unfriendly airline and government interference.
The following section of this report summarises the various issues aircraft lessors will need to navigate over the coming months as they move to terminate lease agreements and repossess aircraft.
Challenge 1 – 30-Day Window to Terminate Leases
Lessors exposed to these sanctions will have until 28 March 2022 to terminate their operating lease agreements. To execute this, lessors will look to various termination rights found in an operating lease agreement. These rights are not limited to non-payment of lease rentals or maintenance reserves but extend to cover external shocks such as sanctions and war.
Typically, a lease agreement will have clauses related to “material adverse change”, “force majeure” and “unlawful”, which will provide avenues under which a lessor can terminate the lease agreement. Depending on how the lease agreements are drafted and negotiated, and how long the required notice and cure periods are, some lessors may find it easier or more challenging to achieve lease termination before the mandated deadline.
Termination of the lease agreement itself is not the primary challenge; recovering the aircraft thereafter is.
Challenge 2 – Cannibalisation of Aircraft
The EU and US sanctions prohibit the supply of aircraft and components to Russian entities or for use in Russia. Effectively, other than parts and materials already held on site by Russian airlines, Russian operators will be significantly limited in importing the parts and materials needed to maintain their aircraft.
Combined with the requirement to terminate leases, a situation arises where there are several hundred grounded lessor aircraft and a restricted ability for Russian airlines to acquire components to service the fleet. This creates an ideal environment for cannibalisation of components from grounded aircraft to support the operating fleet.
Russian airlines may still procure parts and materials; however, this will be through non-EU or US entities and will likely come at a premium given reduced supply. Furthermore, with the Rouble losing 30% of its value against major currencies, the currencies in which parts and materials are procured, cannibalisation becomes even more attractive.
Another challenge faced by lessors, where their aircraft have been subject to cannibalisation, is how they procure and import the parts required to prepare the aircraft for repatriation. Questions remain regarding what government licences will be needed to legally import parts and whether lessors will be prohibited from contracting Russian MROs to perform the work.
Challenge 3 – Repossession
Physical Repossession
For aircraft grounded outside Russia, physical repossession is not the major challenge. The major challenge rests with those aircraft located within Russia.
Given the ban on EU and US flights and the restrictions on EU and US citizens entering Russia (along with many other nationalities), lessors will face significant challenges in sourcing and deploying the technical resources needed to perform repossessions.
Given the circumstances, there is an expectation within the aviation community that, as a retaliatory measure, the Russian government may choose to limit or block western lessors’ ability to repossess aircraft.
Aircraft Records
The value of an aircraft is a combination of the physical aircraft and its maintenance records. An aircraft without records cannot be re-registered in another country or operated by an airline, rendering it of little value.
Aircraft records are managed by the operating airline and are typically stored at its base of operations. In this case, Russian airlines will have control of and access to the majority of the records.
Although lessors do keep copies of key records, the extent of this practice varies from lessor to lessor. It is unlikely that lessors will possess all available records, and where records are held only in physical form, they may have none. Recovering aircraft records will therefore be one of the key challenges lessors must address.
Deregistration
Largely unique to Russia, at least in scale, is the use of foreign aircraft registration to optimise taxation. Of the leased fleet, 552 units (93%) are on the Bermuda aircraft register, 34 units (6%) are on the Irish register, and 10 units (2%) are on the Russian register.
Foreign registration removes a significant challenge in repossession: the process of deregistering the aircraft from the lessee country’s aircraft register. Deregistration has historically been one of the primary hurdles to a successful repossession and featured heavily in the Kingfisher Airlines case.
The aircraft registries of Bermuda and Ireland are far more likely to be constructive in enforcing lessors’ deregistration rights than the Russian registry would otherwise be under the current circumstances.
Resource Bandwidth
Repossessions, when they occur, are typically limited to single-digit numbers or tens of aircraft. Even under normal circumstances, lessors generally engage third-party technical consultants to perform on-ground work because the technical human capital required for repossession is substantial.
With the sheer volume of aircraft that may be subject to repossession, sourcing the required technical expertise will be a significant challenge. This issue is further exacerbated by airspace bans and travel restrictions affecting several nationalities, further limiting the pool of qualified resources available to support a large-scale repossession.
Lessors’ best course of action, where possible, will be a negotiated repossession whereby Russian carriers ferry the aircraft to a neutral location, handing over possession together with the aircraft records. Whether that is practical under the current circumstances remains a key question. Any alternative approach will be highly challenging and likely destructive to aircraft value.
It is also in the interests of Russian airlines to work cooperatively with lessors. A hostile or uncooperative repossession would likely prevent those airlines, and the country more broadly, from accessing leased aircraft for the foreseeable future.
There is industry optimism that Russian airlines will be supportive throughout this process. The ultimate decision, however, is likely to be made at the highest levels of government.
Challenge 4 – Aircraft Insurance
New UK legislation is expected to be passed in the coming days that will prohibit UK-based insurance and reinsurance providers from undertaking financial transactions connected with a Russian entity or for use in Russia.
This is significant, as a substantial number of insurance policies purchased by Russian operators are expected to have been insured or reinsured in the London market.
The exact wording of the legislation is not yet known. Nonetheless, there is a high degree of confidence that, once implemented, the outcomes will be twofold:
- Russian airlines will no longer have access to the London insurance market for aviation asset insurance.
- Existing coverage will no longer be valid.
Once coverage lapses, aircraft will be grounded and Russian airlines will need to seek alternative insurance markets.
For lessors, the challenge arises if Russian airlines choose not to procure alternative insurance. Lessors will need to obtain their own policies, and it remains to be seen whether they will continue to have access to the London market or need to source cover elsewhere.
Lessors typically hold other policies or are named as additional insured parties under airline policies. Some of these include AVN 67N and Hull War Insurance (LSW 555D), which provide cover for state seizure of assets, aircraft cannibalisation and the reconstruction of unrecoverable records.
However, these policies do not provide the cover required to operate the aircraft, which will be necessary for aircraft repatriation. One of the challenges is whether policies procured by airlines, with lessors listed as additional insured parties, will remain valid given the restrictions imposed by the new legislation.
Clarity will emerge once the final wording of the legislation is published, and it may be possible that limited derogations or exemptions are available for contracts predating the legislation.
Challenge 5 – MRO and Transition Capacity
It is unlikely that lessors will be able to transition and remarket aircraft as quickly as they would hope. Should mass repossessions occur, MRO capacity will become a major bottleneck within the aircraft transition process.
Maintenance, Repair and Overhaul (MRO) capacity is largely fixed and designed to accommodate the natural flow of aircraft through maintenance cycles and transitions between lessors and airlines.
With the easing of Covid-19 travel restrictions and the gradual increase in travel demand, airlines are returning aircraft from storage to active service, placing additional demand on the MRO sector, which is already approaching capacity limits.
These limitations will be further intensified by the volume of aircraft transition work likely to result from the repossession situation.
As a result, we expect the majority of repossessed aircraft to enter storage and only gradually return to the market as they work through MRO capacity constraints.
Challenge 6 – Lessor Opportunity Cost and Aircraft Oversupply
Aircraft lessors, particularly those with significant Russian exposure, are likely to face substantial financial losses as a result of lease terminations and fleet repossessions.
These losses will arise in several forms, including:
Lost Rent
Aircraft lessors will not receive rental payments due for the remainder of the lease term, which may extend beyond 10–12 years. They will also need to remarket aircraft at lower lease rates and typically shorter lease durations.
Given the number of aircraft likely to enter the market within a short timeframe, oversupply is expected across many aircraft types, placing further downward pressure on achievable lease rates.
Lost Redelivery Conditions and Redelivery Compensation
Airlines are normally required to return aircraft in a defined technical condition and pay additional compensation for maintenance life consumed on various components and maintenance events.
Under a repossession scenario, the lessor will recover the aircraft in its current technical condition and will not collect redelivery compensation.
Although lessors may seek recovery of these amounts, where a negotiated repossession is pursued—which represents the best-case scenario—it is likely the aircraft will be delivered “as is, where is”, with no recourse regarding return conditions or compensation.
Cost of Repossession
The cost of repossession is substantial. Technical and legal teams must be deployed over extended periods, any claims or liens against the aircraft must be cleared by the lessor, aircraft repatriation costs must be borne by the lessor, and until the aircraft is remarketed, ongoing insurance and maintenance costs remain the responsibility of the lessor.
In addition, the lessor must fund transition costs associated with preparing the aircraft for placement with another airline. This may include major component overhauls such as engines and landing gear, cabin reconfiguration, and compliance with Airworthiness Directives (ADs) and Service Bulletins (SBs).
These costs can easily amount to tens of millions of dollars per aircraft.
Western aircraft lessors face a herculean task in executing these repossessions. The situation is unprecedented in the history of aviation.
How ACC Aviation Can Help
Leveraging our multidisciplinary capabilities across the aircraft transaction lifecycle, ACC Aviation can provide various forms of support to aircraft lessors during these unprecedented times.
Our Technical Services team can deploy resources to project manage and execute repossessions, physically inspect aircraft, and collect, digitise and review records. We can also provide technical representative services during subsequent aircraft transitions and maintenance activities.
Our Aircraft Asset Management team can provide remarketing support, leveraging global airline networks to place aircraft with new lessees or owners.
Our Valuations and Advisory team can provide value opinions, impact assessments, forecasting services and other advisory support to assist with decision-making and compliance requirements.
As the largest arranger of ACMI leases globally, we are well positioned through our operator network to place lessor aircraft onto host AOCs and monetise aircraft within the ACMI and charter markets while longer-term operating lease placements are secured.
