Owners Outfoxed as Russia Absconds With $10 Billion of Jets
(Bloomberg) -- Aircraft owners are coming to grips with the loss of hundreds of Airbus SE and Boeing Co. jets that Russian carriers have effectively shielded from seizure behind a new incarnation of the Iron Curtain.
With the window just about closed, foreign leasing firms have succeeded in repossessing only about two dozen of the more than 500 aircraft rented to Russian carriers, according to Dean Gerber, general counsel for Valkyrie BTO Aviation. The planes in limbo have a market value of about $10.3 billion, aviation analytics firm Ishka estimates.
Technically, lessors have until March 28 to retrieve the planes under European Union sanctions. But state-owned Aeroflot PJSC and other Russian airlines have already gathered the vast bulk of them back inside the country, out of reach of their owners. The government aided the effort by instructing carriers to stop flying internationally and return the jets to Russia by Tuesday.
“The number one fear right now is that these aeroplanes are gone forever,” said Steve Giordano, managing director of Dover, Delaware-based Nomadic Aviation Group, one of a handful of firms specializing in aircraft repossessions.
The shock from the rapid turn of events rippled through the roughly 2,000 attendees gathered at the annual ISTAT Americas convention in San Diego, where Valkyrie BTO’s Gerber spoke on Monday. There, elation over the fading omicron wave of coronavirus -- the bane of aviation for the past two years -- gave way to talk of spiking oil prices and doomsday scenarios for the stranded jets.
“The more we talk with insurers and other people at this conference, the clearer it’s becoming that these aircraft aren’t coming back,” said George Dimitroff, head of valuations for consultant Ascend by Cirium.
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The Russian government’s response to the economic restrictions has stunned the leasing industry by flouting decades-old international treaties that had helped spur a boom in global travel. Conventions guaranteeing lessors the right to cross borders to claim aircraft from defaulting customers helped attract a gush of money as other investors came to view aircraft as a safe investment.
In telexes over the weekend, Russian authorities urged the nation’s airlines to restrict flying to domestic routes and friendly Belarus to prevent their jets being grabbed by repossession crews lying in wait, Emily Wicker, a partner with law firm Clifford Chance, told the lessor conference. The Russian government also advised operators to re-register foreign-owned aircraft in Russia from their traditional base of Bermuda, another move that could thwart efforts to revoke an aircraft’s certification -- or track its maintenance and upkeep.
Lessors are now weighing their next steps. While it’s possible the war ends quickly, or that Russian airlines cooperate with repossession efforts, they’ve hired lawyers to parse insurance and re-insurance policies as they gird for long, costly fights and try to recover their losses. They’re also poring over complex financings to avoid running afoul of trade restrictions.
Those able to react quickly have been able to salvage a handful of planes whose insurance and airworthiness certifications are being revoked one by one.
Aircastle Ltd., a Stamford, Connecticut-based lessor, used the confusion over the insurance status of one of its jets to take possession as it made a stopover in Mexico City.
“These are really small victories,” Christopher Beers, Aircastle’s chief legal officer, said in San Diego. “The doors are closing.”
In another case reported by The Air Current, an Airbus A321neo on its way to Cairo had its airworthiness certificate revoked by authorities in Bermuda mid-flight after it lost its insurance. Its owner, lessor SMBC Aviation Capital, attempted to repossess the plane after it landed but it was able to return to Moscow, the outlet said.
Dublin-based AerCap Holdings NV has the most planes leased to Russia at 152, with a market value approaching $2.5 billion, according to aviation consultancy IBA. Carlyle Aviation is among others with exposure, IBA said.
Aercap shares have lost about a quarter of their value since the EU banned companies from supplying Russia with aircraft, parts or services in response to the invasion of Ukraine. Kroll Bond Ratings said it may downgrade nine aviation asset-backed securitizations exposed to planes in Russia and Ukraine.
The crisis has shone a spotlight on the small staff running Bermuda’s Civil Aviation Authority. The tiny island has oversight of almost 800 aircraft -- some 777 of those Russian, according to the agency’s 2020 annual report.
Russia’s recent actions raise questions about another aviation staple: records documenting every detail of a jet’s upkeep, from maintenance visits to the remaining life for key parts. Without such paperwork, a jet’s value rapidly diminishes, said Chris Sponenberg, a vice president at Wilmington Trust.
“You can’t prove anything was done to it, can’t prove it’s safe,” he said. “Civil aircraft authorities may not register it as airworthy.”
That’s just one of the side-effects of the sanctions, whose full impact could take years to play out.
“These are really, really complicated issues that we’re facing with no roadmap,” said Gerber, of Valkyrie BTO.
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