Three days after the invasion of Ukraine, a Boeing 737 – operated by Russia’s Pobeda but owned by Dublin-based Avolon – was seized after landing in Istanbul.
The seizure of the plane came as European sanctions against the Russian aviation sector prompted it global scramble among foreign leasing groups to recover more than 500 aircraft valued at an estimated $10 billion that were stuck in the country.
But it was among the latest to be repossessed after the Kremlin last week tried to block such efforts by signing new law allowing foreign jets to be re-registered in Russia.
“The Russian government is playing a game 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 protracted battles with insurers over who should foot the bill.
Rating agencies have warned that lost revenue from leases has increased Risks for bondholders in business supported by the aircraft.
Moscow has flouted decades-old international treaties that offered security to rental companies operating in riskier 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 registry,” said Phil Seymour, president of aviation consultancy IBA. “It was never really thought about. There will be an impact on aircraft leases.”
Some industry executives have insisted it’s too early to write off the chances of these planes flying internationally again. Others, on the other hand, think the chances are slim.
“From a planning perspective, we should assume those planes are practically gone,” said one manager.
Dublin: the aircraft leasing capital of the world
The crisis has sent shockwaves through Ireland’s aviation finance industry, home to 14 of the world’s top 15 lessors, including market leader AerCap.
According to IDA Ireland, the country’s investment promotion agency, Irish lessors manage more than €100 billion in assets, 22 percent of the world’s aircraft and more than 40 percent of leased aircraft.
Leading the way dates back to Ryanair co-founder Tony Ryan who turned 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 IPO led to the company’s demise and GE Capital’s takeover of its assets, but left industry professionals willing to compete in the niche leasing market.
GPA’s legacy is not the only reason Ireland has become a global hub for the industry. Attractive tax and capital allowance rates were a major draw. The country’s corporate tax rate of 12.5 percent was one of the lowest in Europe, although Ireland joined OECD reform to raise it to 15 percent.
The sector’s influence on the Irish 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 active in aircraft leasing paid just €105.5m in Irish tax in 2020 despite additional tax liabilities being deferred.
According to estimates by aviation consultancy Cirium, Irish aircraft leased to Russian airlines are worth more than $4 billion.
AerCap is the most vulnerable, with 152 aircraft worth €2.1 billion before the conflict broke out, according to IBA data. Japanese-controlled SMBC Aviation Capital had 34 worth $1.3 billion while Avolon had 14 worth €320 million when war broke out. All three groups declined to comment.
While the crisis may prove to be a significant financial blow to corporate balance sheets, it is not an existential threat. Lessors’ risks are in the single-digit percentage range of the total net book value of their fleets. At the end of last year, about 5 percent of AerCap’s fleet, by net book value, was leased to Russian airlines.
“It’s a big headache, maybe a migraine, but not a fatal one,” said Ross Harvey, leasing analyst at Irish stockbroker Davy.
A senior Irish official ruled out any bailout of the sector.
The most pressing issue for lessors will be to ensure they have canceled all their contracts in Russia by March 28, the deadline imposed by EU sanctions.
In the short term, most have at least some protection in the form of deposits, typically three months’ worth of lease rent. IBA’s Seymour estimated that an airline would typically have paid about $1 million a month in lease rent for a five-year-old Boeing 777.
have disputes with insurance companies already started. According to an industry adviser, some lessors are evaluating whether their aircraft hull insurance will help them offset potential losses.
A Dublin-based aviation finance expert said he knew some lessors had already received cancellations of war risk policies related to aircraft coverage. What is accepted as triggering a claim will be crucial.
Steven Udvar-Hazy, chairman of US company Air Lease, said the new Russian law shows Moscow intends to “seize” planes, adding that it would help lessors with claims against insurers.
“I think it helps the insurance issue because it shows intent to confiscate what I think is a critical aspect of our war risk insurance,” he told a JPMorgan conference on Wednesday.
Withers’ Jebely, who also chairs an international aviation arbitration tribunal due to open in May, said Russia has presented itself as a “target for aircraft lessors and others to use investment treaty rights” to resolve “investor-state” arbitrations to pursue in international courts.
A leasing industry executive tried to strike a more confident tone, noting: “[T]Someday the war will be over. Russia has around 700 aircraft and the majority are manufactured in the West. The reality is that a deal needs to be struck. . . People have to be practical.”
In the longer term, there are concerns that the problem could arise elsewhere.
“We have spent decades opening the Russian market to Western finance and technology,” said an industry veteran.
“If this could happen in Russia, could it also happen in China? Russia is a market that the airline industry can lose from a leasing and financing perspective. China is not.”
https://www.ft.com/content/61a2daab-2251-4a8b-8960-f69fde1f5642 ‘Grand Theft Aero’: Russia’s $10B plane robbery signals losses for rental companies