Lessors in Asymmetric Fight to Repossess Russian Aircraft

 - March 6, 2022, 9:54 AM
An S7 Airlines Boeing 737-800 takes off from Moscow's Domodedovo Airport in 2016. (Photo: Flickr: Creative Commons (BY-SA) by Anna Zvereva)

Russia’s civil aviation authority on Saturday told airlines with aircraft leased from foreign companies to suspend international flights, further complicating efforts by lessors to repossess airliners from Russian airlines that have ceased lease payments amid international sanctions.

According to aviation consultancy Cirium, foreign companies own about 515 of the 777 leased aircraft in Russia, many registered outside the country in offshore jurisdictions such as Bermuda.

Sanctions announced last week by the EU gave lessors until March 28 to repossess aircraft. However, the fact that EU, U.S., and Canadian sanctions have effectively prevented Russian-controlled aircraft from flying in European and North American airspace has severely complicated the task.

On March 3, before the latest guidance from the CAA in Moscow, an executive with a leading leasing group speaking with AIN on condition of anonymity said that companies face serious legal and logistical challenges in recovering their assets. Some have looked for ways to get aircraft flown to countries such as Kazakhstan, where they could repossess the assets in a process that could involve hastily switching the jets to new registries. The executive added that about 12 months ago, his company started reducing its exposure to the Russian market in anticipation of political instability. However, he conceded that no one in the industry had anticipated the extent to which the Putin administration would violate international legal conventions.

Russia is a signatory to the Cape Town Convention, which governs international leasing transactions, but in the wake of the country’s international isolation, it seems doubtful whether foreign companies can effectively enforce its provisions in Russian courts. On Saturday, President Vladimir Putin declared that international economic sanctions amount to an act of war. In any case, sanctions and travel restrictions will make it hard to send legal and logistics teams to the country or pay for local services.

Given the sensitivity and fluidity of the situation, most leasing groups were reluctant to comment on the record. Publicly listed companies showed particular sensitivity about speaking out.

Dubai Aerospace Enterprise (DAE) said on March 3 that Russian airlines operated some 7 percent of its leased fleet by net book value. Its current fleet size totals 425 aircraft serving 114 airlines, with a total aircraft portfolio value of $16 billion and an average age of 6.6 years. “DAE intends to fully comply with all applicable sanctions including those which currently prohibit the leasing of aircraft to an entity in Russia or for use in Russia,” it told AIN.

According to DAE, it is now trying to implement an orderly unwinding of the existing leases with Russian operators and the removal of aircraft from the country to allow for their placement with other carriers. “The rapid lifting of Covid-related travel restrictions is translating into higher levels of demand for short- and long-haul passenger aircraft," the company said in a statement. "DAE is actively responding to inbound requests from clients for additional aircraft.”

Boeing’s 2021-40 Commercial Market Outlook estimated a total of 1,260 aircraft based in Russia and Central Asia in 2019, including 770 single-aisle, 140 widebody, 190 regional-jet, and 160 freight aircraft.

New York-based CreditSights analyst Roger King said that of around 1,500 commercial aircraft based in Russia today, one-fifth came from international lessors. His note, published on February 28, cited 298 aircraft leased from nine international lessors to 21 airlines, including three under the Aeroflot umbrella.

IBA data showed that the world’s top ten lessors to Russian airlines provided just over 680 aircraft. Four—including AerCap, SMBC Aviation Capital, Air Lease Corporation, and Carlyle Aviation Management—were international, furnishing a total of 248 aircraft, while six were Russian, responsible for a further 435 airplanes. In a year-end financial statement for 2021, AerCap, which ranks as the industry’s largest airline lessor, said that Russian operators account for about 5 percent of its fleet by net book value.

Simon Wong, partner at law firm Stephenson Harwood in Hong Kong, characterized three-quarters of the aircraft as "mainstream narrowbodies." He explained that lessors would more easily repossess an aircraft situated outside of Russia as aircraft might be arrested quickly upon application for an interlocutory injunction.

“For aircraft situated in Russia, the Russian lessee’s cooperation may be critical as the Russian legal system is ‘uncertain,' even in normal times, notwithstanding that Russia has acceded to the Cape Town Convention,” he said.

“Although lease agreements typically appoint English courts as the venue for dispute resolution, you still need to enforce an English court’s judgment against the aircraft through the Russian legal system if the aircraft is in Russia," he said. "According to one account, only 20 percent of the aircraft leased by Russian airlines are situated outside of Russia and that percentage may change every day.”

Wong added that many lessors had taken care to register aircraft offshore, typically in Bermuda, and to a lesser extent in Ireland, under the name of their own special purpose vehicles before transferring them to Russian airlines, based on certain international treaty arrangements, pursuant to which Bermuda or Ireland transferred certain safety oversight responsibilities to Russia's State Civil Aviation Authority.

“This gives lessors a bit more control over the nationality registration of their aircraft, which is essential for international flights,” he said.

“Cape Town bankruptcy provisions for owners or secured lenders to airplanes set up an international register for owners and lenders,” said CreditSights’ King. “But all law is administered at the local level.

“Each country is supposed to modify bankruptcy laws to reflect knowledge of that legislation and the ability of people to repossess aircraft. Here we are with Russia as a signatory; that doesn't mean anything. It’s up to Putin; that's the problem with Cape Town.”

Mounir Kuzbari, co-CEO, Novus Aviation Capital in Dubai, told AIN the company did not currently have any exposure in Russia. “We have estimated that there are over 500 aircraft across the various types owned by international lessors in Russia,” he said.

Asked how lessors could respond if Russian airlines refused to hand aircraft over before March 28 but simply continued to operate them, he wouldn't venture an opinion. “It is too early to tell, but even if the Russian airlines continue to operate them domestically, they will only be able to do so for a short period of time, as they will require parts for maintenance, which will then lead to cannibalizing other aircraft for parts,” he commented.

Kuzbari said Cape Town Convention rules would not necessarily allow international aircraft lessors to repossess their aircraft. “Technically, they should, but if airlines are not cooperating and access to the country is limited, Cape Town doesn’t necessarily help in such situations,” he explained.

King speculated that Russia faced a danger of becoming a pariah state, in the same way the West viewed Iran as an aviation outcast for almost 40 years. “Iran has 270 planes, with an average age of 26 years,” he said. “They are all basically over 20 years old, except a few ATRs. They have 92 orders outstanding with Airbus. If Russia becomes a pariah like Iran, it will have to find parts on the black market; engine overhauls will be another problem, and will have to be done outside of Russia, making that a non-starter.”