[LONDON] Foreign aircraft lessors are facing the increasing possibility of writeoffs that could total in the billions of dollars as Russia considers ways to defy worldwide sanctions and keep carriers such as Aeroflot flying.

Russia’s Transportation Ministry is weighing options including buying or even nationalising hundreds of Airbus and Boeing planes that lessors have demanded be returned under European Union (EU) economic sanctions, the Russian news agency RBC reported.

Airlines would then be able to operate, though to a limited degree, given the measures barring EU companies from supplying Russia with aircraft, parts or technology, backed up by parallel restrictions in the US and elsewhere. Holding jetliners in Russia would give the country’s airlines plenty to cannibalise for spare parts, so others could keep flying.

“The lessors may end up having to take a write-off,” said Nick Cunningham, an analyst with Agency Partners.

In a normal commercial situation, the firms would have the upper hand because contracts give them rights to repossess aircraft when they can’t collect on fees due. “But if Russia tells the airlines just to keep flying the planes, what can they do,” he said.

Lessor exposure

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Dublin-based AerCap Holdings has the most planes leased to Russia at 152, with a market value approaching US$2.5 billion, according to IBA. Carlyle Aviation Management’s exposure is at about 8 per cent of its fleet, while AerCap and SMBC Aviation Capital each have about 7 per cent of their planes in the country, according to an updated report from the aviation consultancy.

Fortress Transportation and Infrastructure has 8 planes, or about 6 per cent of its total portfolio, in Russia, a company official said.

AerCap, the world’s No 1 lessor, said Monday (Feb 28) has said it will stop doing business with Russian airlines, without commenting on whether it will seek to seize back its aircraft. SMBC Aviation, a division of Japan’s Sumitomo Mitsui Financial Group, is terminating all leases in Russia, while Singapore-based BOC Aviation said it will comply with all laws.

It’ll be extremely difficult to fly aircraft out of Russia, and lessors will see a loss of value no matter where events turn, said Peter Walter, director of technical and asset management at IBA.

“You’re going to see significant amounts of bad debt, long-term litigation and the possibility some aircraft can’t be recovered,” he said. “Ramifications of this will continue to run for many years.”

Lessors will have security deposits and maintenance reserves to offset some of their losses, and also hold insurance. Both Air Lease and AerCap have said in regulatory filings that they have war-risk insurance which covers nationalisation and seizure of aircraft, analysts at Credit Suisse highlighted in a note.

“The question of whether insurance will cover losses on any aircraft that cannot be extracted from Russia is an open question,” said analysts Moshe Orenbuch and James Ulan.

Tightening sanctions

Sanctions from the EU, the US and Canada cover a range of activities, from providing services to Russian firms to conducting financial transactions that allow for payments. Many companies are still working through what’s barred and what’s allowed, but sweeping measures have been applied across aviation.

A series of escalating, reciprocal flight bans have cut off Russian flag-carrier Aeroflot and smaller airlines such as S7 and Rossiya from serving destinations including the EU, the US and Canada. Russia, in turn, has denied access to key flight paths over its territory, straining European services to Asia.

Airbus and Boeing have said they’ll suspend the supply of spare parts and support to Russian customers, while Deutsche Lufthansa’s Technik maintenance arm – one of the largest in the world – has stopped services there.

Aeroflot has 13 Airbus A350 wide-bodies on order whose deliveries are suspended, according to the European planemaker. Boeing’s unfilled orders include a batch of 737 Maxes for western Siberia-based Utair Aviation PJSC and a handful of 777 freighters for cargo firm Volga-Dnepr Group, according to the US manufacturer’s website.

‘Frankenstein fleet’

Russian carriers do almost 2/3 of their business domestically, and some markets, such as Turkey, China and many others in Asia, are still open to Russian airlines if they have access to working planes.

One approach could be following the example of Iran, which has been banned from purchasing new aircraft, for most of a stretch encompassing more than 40 years. It has kept flying by relying on access to an opaque secondary market for used planes and spare parts.

Beyond cannibalising its fleet, Russia could acquire unauthorised spares, potentially through China or India, or reverse-engineer parts and repair metal engine blades using its own aerospace industry, which has significant technical abilities, Cunningham said.

“Even if you can notionally keep aircraft flying, you’d still be creating effectively a Frankenstein fleet that would be worthless outside the former Soviet Union,” he said. “It’s really a policy decision, do they want to keep aircraft in fully certified condition or just keep flying.”

Effects of time

Such an approach could suffice over the coming months and even years, but not without a cost. Aircraft unable to meet international safety standards wouldn’t be allowed to fly to foreign markets due to airworthiness regulations, if and when more routes reopen.

Iran’s break from the US following the 1979 revolution has left it with an outdated, worn fleet that it’s sometimes struggled to keep safe – from 2010 to 2016, the European Union banned most of Iran Air’s planes over safety concerns linked to access to new planes and parts.

The country managed to order new aircraft after the 2015 nuclear deal, when the US briefly lifted sanctions but received only 13 ATR turboprops and 3 Airbus jets from the more than 200 it sought, including Boeing models, before Washington re-imposed sanctions in 2018.

The restrictions on Russia “will bite”, said independent aerospace and defence analyst Howard Wheeldon. “It won’t necessarily hurt straight away, because aircraft are reliable. But it will eventually hurt.” BLOOMBERG