Three days after the invasion of Ukraine, a Boeing 737 — operated by Russia’s Pobeda but owned by Dublin-based Avolon — was impounded after landing in Istanbul.
The plane’s seizure came as European sanctions on Russia’s aviation sector prompted a global scramble among overseas leasing groups to recover more than 500 aircraft, worth an estimated $10bn, that were stuck in the country.
But it was among the last to be repossessed, after the Kremlin moved to block such efforts last week by signing a new law allowing foreign jets to be re-registered in Russia.
“The Russian government is playing a game of what I call ‘Grand Theft Aero’,” said Paul Jebely, global head of asset finance at law firm Withers.
Russia’s actions could force the world’s largest leasing companies to write off billions of dollars worth of assets, raising the prospect of lengthy battles with insurers over who should foot the bill.
Rating agencies have warned that the lost income from the leases has increased risks to bondholders in deals backed by the aircraft.
Moscow has flouted decades-old international treaties that provided security to lessors operating in more risky jurisdictions and helped underpin a boom in international travel.
“This is the worst-case scenario, where a country unilaterally takes control of an aircraft’s register,” said Phil Seymour, president of aviation consultancy IBA. “It has never really been contemplated. There will be repercussions in terms of aircraft lease agreements.”
Some industry executives have insisted that it was too early to write off the chances of these planes flying internationally again. Others, however, believe the chances are slim.
“From a planning perspective, we should assume that those aeroplanes are gone for all intents and purposes,” one executive said.
Dublin: the world’s aircraft leasing capital
The crisis has sent shockwaves through the aviation finance industry of Ireland, which is home to 14 of the world’s top 15 lessors, including market leader AerCap.
Irish lessors manage more than €100bn in assets, 22 per cent of global aircraft and more than 40 per cent of those that are leased, according to IDA Ireland, the country’s investment promotion agency.
The leading position dates back to Ryanair co-founder Tony Ryan, who propelled Ireland into a leasing powerhouse with his company Guinness Peat Aviation (GPA), which he started in the 1970s with an investment of just £5,000.
A failed stock market listing led to the company’s downfall and the acquisition of its assets by GE Capital, but it left industry experts behind who were ready to compete in the niche leasing market.
GPA’s heritage is not the only reason Ireland became a global hub for the industry. Attractive tax and capital allowance rates have been a big draw. The country’s 12.5 per cent corporate tax rate has been one of the lowest in Europe, although Ireland has signed up to the OECD reform to lift it to 15 per cent.
The sector’s influence in Ireland’s economy has increased over the years, as other industries such as professional services have grown to support it. But despite the size of the industry, companies involved in aircraft leasing paid just €105.5mn in Irish tax in 2020, though additional tax liabilities were deferred.
Irish-owned aircraft leased to Russian airlines are worth more than $4bn, according to estimates by aviation consultancy from Cirium.
AerCap is the most exposed, with 152 planes valued at €2.1bn before the outbreak of the conflict, according to IBA data. Japanese-controlled SMBC Aviation Capital had 34 valued at $1.3bn, while Avolon had 14 valued at €320mn when the war broke out. All three groups declined to comment.
While the crisis may prove to be a significant financial hit to the companies’ balance sheets, it is not an existential threat. The lessors’ exposures are in the single digits in terms of the percentage of the total net book value of their fleets. At the end of last year, about 5 per cent of AerCap’s fleet by net book value was on lease to Russian airlines.
“It’s a big headache, maybe a migraine, but not a fatal one,” said Ross Harvey, leasing analyst at Irish stockbrokers Davy.
One senior Irish official ruled out any bailout for the sector.
The most immediate question for the lessors will be to ensure they have terminated all of their contracts in Russia by March 28, the deadline imposed under EU sanctions.
In the very short term, most will have at least some protection in the form of security deposits, typically three months worth of lease rentals. IBA’s Seymour estimated that a carrier would typically have paid about $1mn a month in lease rental for a five-year-old Boeing 777.
Wrangles with insurance companies have already begun. Some lessors are reviewing whether their aircraft hull insurance coverage will help them recover prospective losses, according to one industry consultant.
One expert in aviation finance based in Dublin said he was aware of some lessors already receiving cancellations of war risk policies related to the coverage of aircraft. What is accepted as the trigger for a claim will be key.
Steven Udvar-Hazy, chair of US company Air Lease, said the new Russian law showed that Moscow intended to “confiscate” planes, adding that this would help lessors in claims with insurers.
“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,” he told a JPMorgan conference on Wednesday.
Withers’ Jebely, who is also chair of an international arbitration court for aviation set to launch in May, said Russia had painted itself as a “target for aircraft lessors and others to use investment treaty rights” to pursue “investor-state” arbitration claims in international tribunals.
One senior leasing industry executive tried to strike a more sanguine tone, noting that: “[T]he war will be over at some stage. Russia has about 700 aircraft and the bulk are western-manufactured. The reality is a deal will have to be done . . . People have to be practical.”
Longer-term, there are concerns that the problem might arise elsewhere.
“We spent decades trying to open up the Russian market to western finance and technology,” said one industry veteran.
“If this could happen in Russia, then could it happen in China? Russia is a market that the aviation industry can afford to lose in terms of a leasing and financing perspective. China is not.”