(Bloomberg) – Russian airlines face the risk of jetliner grounding as sanctions imposed during the invasion of Ukraine threaten their ability to finance leased planes and leasing companies consider apply default measures.
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More than half of Russia-based active commercial aircraft are leased, mostly to foreign-based companies, according to an analysis by IBA Group, which advises airlines, aircraft manufacturers, banks and lessors. This count includes dozens of aircraft from the flag carrier Aeroflot.
Testing is expected to take place over the next few days as carriers make payments for the jets they lease. With Russian financial institutions sanctioned and the United States, European Union, United Kingdom and Japan taking steps to exclude certain banks from the SWIFT messaging system used for transactions, airlines may struggle to submit dues for March, IBA President Phil Seymour said Sunday.
“There is a real risk of default as early as next week,” Seymour said in a phone interview. “Leasing companies are aware that the tap will be tightened even more as sanctions are put in place and there are decisions to be made.”
Under EU sanctions announced on Sunday, leasing companies will be required to terminate all contracts with Russian airlines within the next 30 days, an official of aircraft leasing in the country has said. This requirement is independent of SWIFT bans, the person said, based on his understanding of the measures.
Read more: European Union bans Russian flights in bid to contain Putin
Resumptions can already take place. A European lessor is recalling three Boeing Co. 737 planes from Aeroflot’s low-cost Pobeda unit, Interfax reported, citing a source not identified to the Russian flag carrier.
Russian media outlet RBC separately reported that an Irish leasing company seized a Pobeda 737 at Istanbul Havalimani Airport, citing an unidentified Russian airline source.
Representatives of the Russian carriers did not immediately respond to requests for comment from Bloomberg outside of business hours.
AerCap Holdings NV is the most exposed to the crisis, with 152 aircraft in Russia and Ukraine whose portfolio market value is approaching $2.5 billion, according to IBA figures.
Among foreign lessors, SMBC Aviation Capital, the Dublin-based leasing arm of Japanese financial group Sumitomo Mitsui, ranks second in value, along with Singapore-based BOC Aviation and Air Lease Corp. of Los Angeles holding smaller positions.
Russian state-owned leasing company GTLK ranks second overall with a mix of commercial jets and helicopters, including the Russian-built Sukhoi Superjet 100 regional jetliner, which would likely not be affected , said Seymour.
AerCap has 96 planes on lease with Aeroflot and 17 with low-cost subsidiary Pobeda, according to aviation consultancy Avitas, which is around 5% of the Dublin-based company’s total fleet.
While Russian airlines have been hit by airspace closures that largely prevent them from operating westbound, around 65% of the market includes domestic flights mostly unaffected by the measures. This means that demand for these aircraft will remain strong, according to IBA, especially after a strong rebound in travel from Covid-19.
Even if Russian airlines manage to remit the charges, lessors will review the grounds for seizure of the planes if they consider themselves compromised by developments or believe the planes are at risk now or in the future.
Aircraft leases typically contain a “material adverse change” clause and leasing companies could argue that airspace closures and sanctions imposed on Russian carriers amount to such a breach. This would allow them to declare a fault and get back on their plane, Seymour said.
Payments are also almost always made in dollars, so measures to prevent Russia from transacting in the currency would also include leases, he said.
Plane recovery efforts could be aided by the fact that a large number of Russian jets are registered in Bermuda, something donors can stress when concerned about their ability to recover them.
Airlines could ask lessors to collect planes from Moscow rather than deliver them to Dubai, for example, which would make recovery more difficult under the current circumstances. Even so, Seymour said Russian airlines would likely cooperate to protect access to planes for years to come.
(Updates with lease recall plans, Pobeda aircraft reports from fifth paragraph)
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