Just days after Putin invaded Ukraine, European sanctions on Russia saw lessors scrambling to retrieve some 500 planes from the country, worth an estimated $10 billion. Some were already overseas, making it a little easier to secure the aircraft. What came next was almost unbelievable.

Within hours, Putin ordered the western-owned planes in Russia to remain there, and to place them on the Russian registry. This effectively blocked them from being repossessed. Speaking on today’s Eurocontrol Hard Talk session, Avolon CEO Domhnal Slattery didn’t mince his words when it came to his take on the situation there,

“What ultimately happened in Russia is that they effectively nationalized the fleet. I've used the word ‘stolen’ in the past, because that's exactly what's happened.”

This theft of $10 billion worth of leased planes was described by Jon Ostrower of The Air Current as ‘the largest single civil fleet destruction activity in the history of aviation.’

In the short term, the insurance firms may pick up the tab for the losses incurred by these lessors. in the longer term, it will inevitably have knock-on consequences for the wider aviation market. And it’s likely to affect the airlines operating in places where they can least afford it.

Insurance companies provide the cushion

By the end of March, insurance claims were starting to pour in. The theft of these planes is considered a hull loss, and with lessors keen to recoup the value of their airframes, claims were in the billions. According to the Financial Times, AerCap lodged a claim for $3.5 billion on March 30th to cover the potential loss of planes and engines stuck in Russia.

The world’s biggest insurance broker, Marsh, estimated that the sector could take a hit of around $5 billion, but Fitch, the ratings agency, noted it could go up to as much as $10 billion. The exact figure is likely to be some time in coming, once lessors know for sure what’s gone for good and what, if anything, is retrievable.

Avolon is yet to put in its own claim, although Slattery noted that it would be doing so in due course.

“We believe that our aircraft are fully insured under the terms and conditions of our policies, and we will proceed to pursue the appropriate claims in due course. My sense is that it’s going to be a really interesting and bumpy ride between the lessors and the insurance market.”

Avolon A321neo
Avolon will be seeking to recoup its losses via insurance claims, as will many other lessors. Photo: Avolon

Emerging markets will pay a higher price

Slattery noted that, although the insurance is a welcome cushion for the lessors, claims of this magnitude will cause ripples throughout the industry for many years to come. He said,

“How big that number ultimately ends up being, I don't know, but it is many billions of dollars. So the net impact of that will be that insurance rates will go up, for lessors, for airlines. The terms and conditions of the insurance policies will probably be fundamentally reviewed. There's a possibility that insurers may not offer certain forms of insurance going forward. So I think the implication of this will be a multifaceted insurance marketplace.”

With the potential for more expensive insurance and some elements of insurance not even being offered at all, lessors are going to be thinking very hard about where they put their investments in the future. Slattery noted that, particularly in emerging markets, airlines can expect to pay a premium if they want to lease aircraft in the future.

“I think about the sector, about our competitors and us as a sector and what the implications are for the aircraft leasing community … together, we're going to figure out what our attitude is to financing aircraft in the emerging markets and in some of these more challenging jurisdictions around the world. What are the lease rates? What is the risk premium that will be required for us to put our capital to work for some of these jurisdictions? Our view is, it’s going to go up”

Aeroflot Boeing 777-3M0(ER) VQ-BUC (3)
The United States Department of Commerce has since criminalized third-party sales and maintenance of Russian-operated Boeing aircraft, limiting the jets to just domestic operations. Photo: Vincenzo Pace | Simple Flying

The consequence of Putin’s actions are that emerging airlines in places like Africa, parts of Asia, and other less-well-established parts of the world will be punished. Through no fault of their own, they’ll be paying more to lease their aircraft, and will have to work hard to win back the trust of the leasing community.

How Avolon fared

Slattery was less than keen to get into the financials of the effects of the Russian plane grab. Unsurprising given that Avolon’s quarterly results are due out fairly soon. But he did shed some light on the exposure the firm had at the time.

Avolon didn’t fare too badly. Indeed, with only 14 aircraft leased to Russian airlines, its exposure was minimized from the start. The lessor managed to secure four of those 14 airplanes outside of Russia, leaving just 10 ‘lost’ to the great grab. Slattery noted,

“The net exposure was in the small number of hundreds of millions of dollars in debt. Some of our other competitors obviously had much more significant exposure.”

Reporting by the Financial Times shows that AerCap was the most exposed of the lessors, with 152 planes in the country, around 5% of its fleet by book value. Japan’s SMBC Capital was the next most exposed with 34 planes worth $1.3 billion in Russia.

Whether the world will ever see any of those aircraft returning to the global fleet remains to be seen.

Source: Financial Times