By now, the entire industry has heard the news that yesterday the Russian government drafted new legislation to allow foreign-owned aircraft to be registered in Russia after Bermuda and Ireland suspended certificates of airworthiness for aircraft currently in the country.
The law contains clauses that allow Russian carriers to withhold their aircraft from lessors seeking to repossess them by the March 28 deadline before sanctions are enacted. According to the draft law, lessors that wish to terminate a lease early, that request will have to be approved by the Russian government. If denied, the airline will be allowed – under the terms of the new Russian law – to continue to operate the aircraft until the original lease ends. It also states that these leased aircraft will be insured by Russian insurance companies, after the UK government blocked Russian firms’ access to Lloyd’s of London and the London market for aviation and space insurance.
The law also deals with the tricky issue of aircraft maintenance. Most Russian airlines utilised foreign MROs before sanctions effectively shut them out of that market. The new law states that Russian aircraft will be maintained according to Russian civil aviation regulations, and so will be able to continue to fly domestically. However, these will likely not be maintained to the expected standards as set out in the original lease contract and it’s also likely should the aircraft be returned at the end of their original lease period, they will not adhere to the stated return conditions, impacting values. In fact the only way to “maintain” them will be to part out Boeing and Airbus aircraft to keep others in the air – the question remains will they do this to their own aircraft or to the leased aircraft.
Leasing companies are all working to get aircraft out of Russia but the general consensus is that this window has closed and the focus now is how to manage the loss. But there is doubt that maintenance reserves, security deposits and possible insurance payouts will cover the loss and impairments will need to be made – for some lessors this could run into billions of dollars.
In a note this morning from Cowen regarding AerCap’s exposure, Helane Becker notes that although investors may be pricing in a write-down of the 5% of the fleet trapped in Russia judging by the 20% drop in the company’s share price, that action is “overdone” and that if AerCap needs to take a write-down it will be more in the range of $2.5bn, which the lessor could absorb. AerCap will report its fourth quarter results on March 30, when more detail on the situation is expected from the world’s largest lessor.
A small silver lining in the darkest of times for civil aviation is for those lessors without aircraft in Russia, or Ukraine, since the last thing they want is for those 500-odd aircraft to leave Russia and flood the remaining global market.