Last Saturday, as the EU imposed sanctions on Russian aviation, Avolon and the lessors learned they had 30 days to get their aircraft back. 

Terminating contracts is one thing, but getting the planes back from a belligerent Russia is another. On Sunday, Avolon spotted that one of its aircraft — a Boeing 737 that had been leased to an Aeroflot subsidiary — was on the tarmac in Istanbul. Avolon moved to seize the plane before it could escape to Russian airspace.

Avolon was able to seize that 737, but not many lessors have been as lucky. There are 204 Irish-owned planes leased to Russian airlines, worth an estimated €2.2 billion.

If sanctions drag on, the big worry for the lessors is that Russia’s aviation industry starts to resemble that of Iran during the time it was sanctioned. If you go to Tehran airport on Google maps, near some hangars at the north side of the airport can be seen an untidy heap of passenger aircraft and jet engines. These aircraft have been cannibalised — that is, stripped for parts, to be re-used on other aircraft.

Iran resorted to cannibalising aircraft when it was under heavy sanctions between 2006 and 2016. The sanctions made it difficult for Iran to get its hands on new aircraft, or spare parts to keep the existing ones in the air. 

For AerCap, the Irish-headquartered lessor with the biggest single exposure to Russia — 149 aircraft — this is the nightmare scenario. Russia is now thoroughly shut out of the global economy. Manufacturers like Boeing and Airbus won’t do business with it. Without trade, specifically with the manufacturers, Russia is going to struggle to keep its aircraft operational. In this circumstance, “[Russia] may cannibalise the aircraft on the ground to keep the rest of the fleet flying,” said Mark Simpson, aviation analyst at Goodbody.

The scenario the lessors are hoping to avoid is heaps of aircraft at the fringes of Russian airports, their bones picked clean by scavengers. Who’s most exposed to this risk, and what’s the chance of it happening?

Assets and exposure

The sanctions imposed by the EU ban the sale, transfer, supply or export of aircraft or any components. Any existing contracts in contravention of the sanctions have to be terminated within 30 days. 

Even with the full cooperation of Russian airlines, it would be hard to get the planes out in 30 days. Normally the process of returning a plane to its lessor takes between 15 and 24 months. There are maintenance standards to be met, paperwork to file and so on. Right now, there are too many planes for the lessors to process at once.

Given that Russia has been kicked off Sabre, a system airlines rely on for booking tickets; that Russian airlines can’t fly over European airspace; and that the Russian economy is forecast to shrink 11 per cent this year, it seems there won’t be much demand for aviation in Russia in the next while. It’s not a great sign for the lessors if the Russians keep their planes. It suggests they’re being kept, not necessarily to be used, but to be bargained with, or used for parts. 

Dublin-headquartered AerCap has the biggest exposure to Russia of any lessor worldwide — 149 aircraft, worth an estimated $2.4 billion; SMBC Aviation Capital, also based in Dublin, has 34 aircraft leased to Russia; Avolon has 14 aircraft; and Goshawk has eight aircraft.

AerCap is the world’s biggest lessor, so it would be expected to have a big Russia exposure. The following chart shows non-Russian lessors exposure to Russia, scaled to the size of their fleet. The Irish lessors are in bold. 

(Note: the chart shows IBA’s like-for-like estimate of lessors’ exposure scaled to the size of their portfolio; AerCap’s own estimate is that five per cent of its net book value is exposed to Russia.)

Publicly traded lessors Aercap, BOC Aviation and Air Lease are down 23 per cent, 20 per cent and 20 per cent respectively since the invasion started on 24 February. By comparison the JETS index of airlines is down 9 per cent. Why are the lessors feeling the pain?

Mark Simpson of Goodbody says they have three problems: “The first is existing exposure to assets in Russia. They may find getting the assets out is not possible. And then, if they were to get them out, where would you re-allocate them? The second issue is aircraft due to go into the Russian market next year — I doubt they will find a home there. The third is, in the broader market, will there be the same appetite for aircraft, given big fuel bills? 

Lessors are looking at less appetite for flying in general, given higher fuel costs. They’re looking at billions of euro worth of assets stranded in Russia. And they’re looking at a sizeable business going offline for the foreseeable future. The second crisis in two years will test the industry's resilience.