Aircraft lessors to take unprecedented step to recover tens of billions worth of aircraft within days as part of ratcheting up of EU sanctions
Irish leasing companies are expected to be terminate all leasing deals with Russian aircraft in the coming days as the next phase of sanctions ratchets up pressure on the Kremlin after its invasion of Ukraine, according to senior aviation sources.
Most commercial aircraft in Russia are leased, so if the requests are honoured the move has the potential to massively disrupt travel in and out of Russia as well as internally.
Irish based lessors own hundreds of modern commercial aircraft in Russia with a combined value running to tens of billions of euro.
Dublin-based international aircraft lessors, such as AerCap, SMBC Aviation Capital, Avolon and others – including Russian-controlled lessors based here - have aircraft leased into the Russian market. AerCap – the world’s largest aircraft leasing company by a significant margin – is the most exposed with 118 of its aircraft managed or operated by Russian airlines.
GTLK is the biggest player in the market from Russia itself and also has base in Dublin with about 20 people in an office off St. Stephen’s Green. It has portfolio of planes and ships worth about $1.5bn
Three-quarters of GTLK’s clients are Russian, including the state-owned Aeroflot airline. Sberbank, Russia’s largest lender and VTB, a state development bank, also have small operations in Dublin.
Roman Lyadov, chief executive officer of GTLK Europe, and Alexander Lukashin, head of communications for Aeroflot, didn’t reply to requests for comment.
The bulk of Russia’s commercial airline fleet, much of it leased from companies based in Ireland, will be affected within weeks according to sources in Moscow and Dublin.
The move, which will affect almost all of fleet currently used by Russian carriers, will require them to be flown to neutral destinations outside of Russia. It is believed that insurance will be cancelled for Russian airline companies, which will effectively ground all of the country’s airplanes anyway.
“All lessors are working to try to understand the implications of sanctions and to best protect their position,” said a senior executive at a major aviation leasing company.
Russian airlines, including state carrier Aeroflot, S7 and Rossiya, could try to flout the order for internal flights, but industry sources say that would risk losing future access to leased aircraft again or spare parts - even when the embargo is lifted.
“If I was Russia, I would try to keep as many airplanes in the air as possible,” said one executive. “Defying a ban is definitely a risk but if they are only flying domestically, it’s a different set of circumstances. A sanctioned airplane is different to a sanctioned oil refinery, which is stationary.”
One Dublin leasing source said repossessing an aircraft on a lease is never straightforward even in normal circumstances, the current war footing will pose unique and significant challenges.
The loss of access to hundreds of aircraft, worth billions of dollars, will pose a major problem for Russia’s carriers, including Aeroflot, but it is also a massive development for lessors in Ireland as they attempt to extract the jets from the country.
It’s impossible to know how the Russian government and military will react. Between 75pc and 80pc of Russia’s commercial aircraft fleet is estimated to be leased.
Russian companies have 980 passenger jets in service - of which 777 are leased by airlines, according to industry estimates.
Aeroflot's fleet includes 186 aircraft with an average age of 6.2 years. Since September 2013, Aeroflot has operated Boeing 737-800 medium-range passenger aircraft and currently owns just 37 of them. S7, a private-owned company, has a fleet of 101 planes.
Industry sources suggested a friendly neighbour of Russia’s could set into backstop insurance for airlines. “This is a pressing point, but the Kremlin could request another state steps in to provide emergency cover.”
The Irish government is already in the process of finalising plans to ban all Russian flights from the country’s airspace as Europe steps up its response to Vladimir Putin’s invasion of Ukraine. Aeroflot on Saturday cancelled a direct flight from Moscow to Dublin due to the Russian carrier being banned from UK airspace.
The European Union, U.S. and other Western nations on Saturday announced they would cut off a "certain number of Russian banks" from the SWIFT international payments system and impose unprecedented restrictions on Russia’s Central Bank.
Irish airline leasing companies may find it difficult to get paid by Russian airlines due to cutting Russia from SWIFT.
“There will be no differentiation for lessors or for an oil gas traders,” said a senior aviation source. “The payment flow is going to be an issue for us.”
Industry analysts have long been puzzled why Sberbank, which was barred in 2014 from accessing EU or US capital markets for long-term funding after the annexation of Crimea, could still be involved in aviation leasing.
The loss of hundreds of aircraft, worth billions of dollars, will pose a major problem for Russia’s carriers, including Aeroflot, and also for lessors in Ireland as they attempt to extract the jets from the country.
While repossessing an aircraft that has defaulted on a lease is never straightforward even in normal circumstances, the current war footing will pose unique and significant challenges.
It’s impossible to know how the Russian government and military will react to any efforts to decapitate its commercial airline sector.
It was reported over the weekend that Russia’s Ministry of Transport had scheduled an emergency meeting regarding the new sanction, and on whether or not airlines would be forced to comply with it.
Ireland is the biggest global centre for the international aircraft leasing sector. Irish firms control about 60pc of the world’s leased aircraft.
In response to Russia’s unprecedented invasion of Ukraine, the European Union has introduced a swathe of sanctions. It has prohibited the sale of aircraft and spares to Russia, as well as all related repair, maintenance and financial services.