Global leasing companies eyeing a looming sanctions deadline to repossess more than 400 planes worth nearly $10 billion from Russian airlines have received mostly radio silence as experts warn against legal wrangling that could last a decade.
Western bans imposed after Russia invaded Ukraine give most leasing companies until March 28 to sever ties with Russian airlines – setting off a game of cat-and-mouse of Asia to Africa as lenders frantically try to seize planes.
The aviation insurance market will struggle to make payments potentially eclipsing the $1.8 billion from 9/11.
Leasing companies are terminating leases and requesting that planes be returned with the paperwork that needs to be secured in order for the planes to be placed with new airlines.
But so far, Western observers say that is not happening.
“There is nothing official, but Russian airlines are not returning the planes. The only ones are a handful that were already outside Russia and could be taken back,” independent aviation adviser Bertrand Grabowski said.
These include two jets seized in Istanbul and Mexico City, according to the specialist journal ch-aviation.
Others snuck into the repo net.
An Aeroflot Boeing 777 narrowly escaped seizure at the initiative of a non-Russian bank in Southeast Asia and the Gulf last week, two people familiar with the matter said.
An Airbus A321neo leased from the same flag carrier was the target of a failed repossession in Egypt, aviation publication The Air Current reported.
Aeroflot did not respond to a request for comment.
Ground fault risk
In total, nearly 780 jets are leased by Russian airlines, including 515 abroad. Even some rentals in Russia are subject to claims from foreign banks.
Some 425 of them are most at risk in what looks set to become aviation’s biggest mass flaw, according to consultants Ascend by Cirium who have seen “virtually no progress” in seizing the jets.
For a maturing industry with portfolios worth up to $300 billion, that remains a far cry from the global impact of the pandemic which has grounded more than 15,000 planes.
But the loss of a market representing 5 to 6% of global traffic has shocked a sector that owns more than half of the world’s airliner fleet.
The resulting flood of claims and potential write-downs could trigger a lengthy liability dispute.
“It will end up in court forever. Overall, the picture is very bleak,” said Jerrold Lundquist, managing director of advisers Lundquist Group.
“Between airlines, lessors and insurers, you’re most likely looking at a decade of lawsuits,” Grabowski added.
Rating agency Moody’s warned last week that a prolonged escalation in sanctions could put pressure on the leasing industry, which has grown from shaky roots in the 1970s to become a dominant force.
As Russia launched what it described as a “special operation” in Ukraine last month, some financiers reported the first signs of panic.
“Someone offered to sell me seven freighters – and two other international lessors asked me if I wanted to buy their entire Russian portfolio,” said a person at a China-based lessor, adding that the offer had been refused.
Faced with multiple hurdles in seizing the jets – from lack of cooperation and possible security risks on the ground, to airspace bans and questions about permission to fly to storage sites – donors are betting on a record war risk insurance payout.
But the aviation insurance market will struggle to make payments potentially eclipsing the $1.8 billion from 9/11.
According to insurers, a declaration of war is not necessarily required to claim a war risk insurance policy, as nationalization, seizure and seizure under government orders are also covered.
But lawyers say proving that Moscow did indeed confiscate hundreds of jets could be a daunting task.
“This is totally uncharted territory. It is possible that insurers will cancel policies, leaving lessors with a plane but no insurance,” Lundquist said.
The war also threatens to erode the Cape Town Convention, an industrial circuit breaker designed to make contracts more enforceable across borders.
Its 83 countries, including Russia, have set up an international registry to facilitate seizures, but it relies on cooperation widely seen as unlikely after Russian President Vladimir Putin told airline workers that Western sanctions amounted to a declaration of war.
Most lessors are already using Bermuda’s registry rather than Russia’s due to legal uncertainties.
A person at a Chinese lessor with planes at Aeroflot said transferring the deal to another entity would require layers of approvals that are unlikely to materialize.
“We’re completely stuck,” said the person who has spoken to an Aeroflot representative almost every day since the invasion.
Even if the conflict subsides, Russia’s near isolation could permanently hurt valuations by interrupting the continuity of maintenance records or encouraging airlines to swap parts.
The indirect effects could spread even further, forcing Airbus and Boeing to remarket dozens of planes and halting plans by others to convert older Russian planes into freighters amid a cargo boom.
Also in the spotlight are asset-backed securities used by lenders to facilitate funding and now contain high Russian risk.
All this, while soaring oil prices threaten to poke another hole in airline balance sheets and hurt the solvency of all carriers.
UK-based aviation consultancy IBA said the crisis had already delayed the industry’s pandemic recovery by two months.
Critics say the crisis calls for a rethink of how the industry manages risk. For years, its selling point with investors has been its ability to move assets around to escape regional volatility. But a global pandemic, and now a sequestered Russian fleet, have left the industry struggling to restore balance.
“There was a perception that Russia was a good risk and capable of absorbing significant capacity that others couldn’t take due to the COVID-19 crisis,” Grabowski said.
“For those with surplus aircraft, Russia was a place of last resort. Most of the market also thought Aeroflot was impeccable credit, but forgot about political risk.
(Reporting by Tim Hepher, Engen Tham, Carolyn Cohn; Additional reporting by Jamie Freed, Alexander Cornwell, Allison Lampert; Editing by Jason Neely)
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