Russian Planes Face Grounding Risk as Leasing Firms Mull Default

Russian airlines face the risk of jetliner groundings as sanctions imposed over the Ukraine invasion threaten their ability to fund rented planes and leasing firms look at enforcing default measures.

More than half of the active commercial aircraft based in Russia are leased, mostly from companies based abroad, according to analysis from IBA Group, which advises airlines, planemakers, banks and lessors. That tally includes scores of aircraft at flag-carrier Aeroflot.

S7 Airlines has two 737-800BCFs on lease from AerCap. (Photo/Moscow Domodedovo Airport)

Tests are likely to come over the next few days as carriers go to make payments for the jets they hire. With Russian financial institutions sanctioned and the U.S., European Union, U.K. and Japan taking steps to exclude some banks from the SWIFT messaging system used for transactions, airlines may struggle to submit dues for March, IBA President Phil Seymour said Sunday.

“There’s a real risk of default as soon as the coming week,” Seymour said in a phone interview. “Leasing firms are aware that the tap will be tightened even further as sanctions are rolled out and there are decisions to be made.”

Under EU sanctions announced Sunday, leasing firms will be required to terminate all contracts with Russian airlines over the next 30 days, said a senior leasing executive with aircraft in the country. This requirement is independent of the SWIFT bans, the person said, based on their understanding of the measures.

Repossessions may already be taking place. A European lessor is recalling three Boeing Co. 737 aircraft from Aeroflot’s low-cost Pobeda unit, Interfax reported, citing an unidentified source at the Russian flag-carrier.

Russian media outlet RBC reported separately that an Irish leasing firm seized a Pobeda 737 at Istanbul Havalimani airport, citing an unidentified Russian airline source.

Representatives from the Russian carriers didn’t immediately respond to requests for comment from Bloomberg outside of business hours.

AerCap Holdings NV is most exposed to the crisis, with 152 aircraft across Russia and Ukraine that have a portfolio market value approaching $2.5 billion, according to IBA figures.

Among foreign lessors, SMBC Aviation Capital, the Dublin-based leasing arm of Japan’s Sumitomo Mitsui Financial Group, ranks next by value, with Singapore-based BOC Aviation and Air Lease Corp. of Los Angeles holding smaller positions.

Russian state leasing firm GTLK ranks second overall with a blend of commercial jets and helicopters including the Russian-built Sukhoi Superjet 100 regional airliner, which would likely be unaffected, Seymour said.

AerCap has 96 planes on lease to Aeroflot and 17 to low-cost subsidiary Pobeda, according to aviation consulting firm Avitas, corresponding to about 5% of the Dublin-based firm’s total fleet.

Airspace Restrictions

While Russian airlines have been hit by airspace closures that largely prevent them from operating westbound, about 65% of the market comprises domestic flights mostly unaffected by the measures. That means demand for those aircraft will remain strong, IBA says, especially after a strong travel rebound from Covid-19.

Even if Russian airlines manage to hand over fees, lessors will be examining grounds for seizing jets should they view themselves as compromised by the developing situation or deem aircraft to be at risk now or in the future.

Plane-rental contracts generally contain a “material adverse change” clause and leasing firms could argue that airspace closures and sanctions imposed on Russian carriers amount to just such a breach. That would allow them to declare default and seize back their aircraft, Seymour said.

Possible Seizures

Payments are also almost always made in dollars, so steps to keep Russia from transacting in the currency would also comprise leases, he said.

Efforts to take back aircraft could be made easier by the fact that a large number of Russian jets are registered in Bermuda, something that lessors can insist on when there are concerns about their ability to recover them.

Airlines could ask lessors to collect aircraft from Moscow rather than delivering them to Dubai, say, making recovering tougher in the current circumstances. Even so, Seymour said Russian airlines would likely cooperate to safeguard access to planes in future years.

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