Air Lease cancels 27 planes held in Russia
Air Lease Corp. revealed on Friday that it was writing off $802.4 million for booby-trapped rented planes in Russia that it does not expect to recover following Western sanctions on the country for invading Ukraine.
The broader significance of the impairment charge is that “lenders are going to treat country risk differently than they have in the past and charge airlines accordingly,” said Helane Becker, equity analyst at Cowen, in a client note. “We expect rental rates to trend higher.”
So far, only 32 of the 513 Russian planes managed by foreign leasing companies have been returned to their owners, aviation consultancy IBA Aero said in an analysis released on Monday. Returned aircraft include two Boeing 747-400 freighters, one 747-8 freighter and one converted 757-200 freighter.
The 747-400s were operated by Sky Gates Airlines and taken over by Silk Way West Airlines. Lessor BOC Aviation also said it had recovered a 747-8 from AirBridgeCargo, a subsidiary of the Volga-Dnepr group. The 757-200 was likely operated by Aviatstar, which faced US enforcement action last week for illegally flying Boeing-built planes, based on a list of sanctioned planes on the lists. US Department of Commerce sanctioned aircraft.
Based in Los Angeles, Air Lease Corp. (NYSE:AL) leases Airbus, Boeing, Embraer and ATR aircraft to carriers around the world. At the end of March, it terminated the leases of 21 owned aircraft remaining in Russia, representing 3.4% of its fleet in net book value.
The company said in a filing with the Securities and Exchange Commission that it is unlikely to repossess those planes, along with six planes it manages for clients, that Russian clients have not returned. . He chose to write off the assets after determining, with his auditors, that there would be no future cash flows from the aircraft.
Air Lease had 29 planes in Russia when the invasion of Ukraine began in late February, but was able to take back eight, according to Becker. IBA said Air Lease had recovered three planes.
The United States, the European Union, and the United Kingdom have imposed sweeping sanctions on the Russian aviation sector, including closing airspace to aircraft owned or controlled by Russia; prohibit exports of technology, spare parts and services; and freezing the operation of Boeing and Airbus aircraft by Russian carriers.
The EU has also ordered aircraft lessors to terminate their lease contracts with Russian carriers by March 28.
Russian airlines had about 513 planes worth $10 billion leased from non-Russian lessors at the start of the conflict, according to IBA. The number of foreign-owned aircraft operated by Russian entities fell to 484 by the March 28 deadline for terminating lease contracts. More than 400 of these aircraft are currently located in Russia.
Of the 32 aircraft that have left Russia since the invasion and been returned to non-Russian lessors, three have been sub-leased to Russian airlines. IBA said it believed several aircraft were being returned to leasing companies in May.
AerCap has had the most success recovering planes and reducing its exposure in Russia, according to IBA. AerCap said last month it had recovered 22 of the 135 planes it placed with Russian aircraft carriers before the war began.
Russia denies plane repatriation
Russian authorities blocked planes from leaving their airspace about three weeks after the start of the Ukrainian conflict. In mid-March, Russian President Vladimir Putin signed legislation bypassing measures taken by Bermuda and Ireland, where most foreign-leased aircraft operating in Russia are registered, voiding aircraft airworthiness certificates operated by Russia, fearing the sanctions would impair their ability to verify the planes could fly safely.
The Kremlin’s decision allows Russian carriers to transfer Western-made planes to the Russian Aviation Registry and use the foreign planes for domestic flights, making it harder for leasing companies to get their planes back. The legislation violates international law, which requires aircraft to be removed from the original registry and operators to obtain permission from the owner before they can be placed on another registry.
IBA said it identified nearly 300 planes with terminated leases, or around 60% of Russia’s foreign-owned fleet, which were active in the third week of April, operating mostly on domestic routes inside of Russia.
Aviation analysts say Russian operators risk permanently poisoning relations with foreign donors.
Airspace restrictions in Western countries have made it extremely difficult for leasing companies to collect their planes as they cannot send people to fly them and speak to technical specialists in the field for the maintenance. Appraisal and financial experts also say the value of leased aircraft declines without access to aircraft maintenance records.
As Russian airlines continue to operate these foreign-owned planes, they will burn downtime until major maintenance without being able to pay for it and diminish the value of the plane, said Peter Walter, director of technical and asset management of IBA, in a webinar in March. .
With little chance of recovering assets trapped in Russia or earning revenue from them, leasing companies have started filing billions of dollars in insurance claims. AerCap recently filed a $3.5 billion claim for its stranded fleet in Russia and said it also plans to take an impairment charge.
AerCap, the world’s largest aircraft lessor, had the largest exposure of any leasing company to Russia, with 5% of its fleet assigned to Russian airlines.
The Air Lease planes are unlikely ever to be used in commercial service outside of Russia where they could be repossessed, aviation and financial industry experts say.
Air Lease said it “does not expect the write-off of these assets to result in any significant future cash outlays for the company” and that it is “vigorously pursuing insurance claims to recover losses related to these planes.
It is unclear how long it will take to obtain insurance proceeds. Insurers have canceled some lessors’ policies, including for war risk, and are likely to dispute claims over coverage still in place, according to media reports. Becker predicted that insurers will start creating reserves for payments to leasing companies and that claims could be disputed for years.
The largest aviation insurer, Lloyd’s of London, has an exposure of $1 billion to $4 billion, but expects reinsurance to cover some losses, the Financial Times recently reported.
Air Lease will release its first quarter results on May 5.
(Correction: An earlier version of this story incorrectly stated that three aircraft had been taken over from the Volga-Dnepr group. Only one was fired.)
Click here for more FreightWaves/American Shipper stories by Eric Kulisch.
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