Ukraine conflict hits aviation leasing sector

The Russian invasion of Ukraine and the subsequent introduction of an international sanctions regime have had a significant impact on the aviation leasing sector, with estimates suggesting over 500 commercial aircraft with a value of around £7.7bn are currently stranded in Russia and are likely to prove unrecoverable. According to analysis from aviation industry consultancy IBA, 589 aircraft, operated by Russian airlines and owned by lessors based outside of Russia, have been impacted by the crisis. As of the end of February 2022, IBA located 80% of those aircraft as in Russia.

The sanctions that have been imposed on Russia by the EU require lessors to receive those aircraft by 28 March, 2022. However, with flights between Russia and many other countries currently prohibited, this will be a very difficult for lessors to achieve, the consultancy predicts.

The lessor with the greatest exposure to the Russian market is currently Dublin-headquartered AerCap, with 152 aircraft placed in Russia. They are followed by PSB Leasing (78), VEB-Leasing (76) and VTB Leasing (74).

The non-Russian lessor with the greatest proportion of its fleet currently placed in Russia is Fortress Transportation and Infrastructure (23.23%), followed by Carlyle Aviation Management (10.08%), AerCap (7.53%) and SMBC Aviation Capital (7.45%).

In Ukraine, there are currently 57 lessor-owned grounded aircraft, with the lessors with the largest exposure as Dilorsano Consulting (7) and Nordic Aviation Capital (6).

Phil Seymour, President of IBA, said: “Many industry stakeholders will feel the impact of the tragic situation in Ukraine, from banks and other sources of finance, lessors, aircraft manufacturers and of course, airlines. At this point in time, we forecast that this will delay the industry’s recovery from the pandemic by at least two months.”

New law

In addition, Russia has implemented a new law making it harder for foreign aircraft leasing companies to repossess their planes by the deadline. The legislation allows foreign jets to be registered in Russia “to ensure the uninterrupted functioning of activities in the field of civil aviation”.

The law will allow airlines to deploy these aircraft on domestic routes, and is aimed at “preserving the foreign airplane fleet with Russian operators for purposes of smooth operation of civil aircraft as part of anti-sanction measures”. It was passed after Ireland and Bermuda, where nearly all foreign-leased planes operating in Russia are registered, said they were suspending certificates of airworthiness for those aircraft. According to data analysis specialists Cirium, this suggests “limited if any opportunity for western lessors to re-possess the remainder of the close to 500 western built aircraft (total value likely to be significantly >$10bn), still with those airlines.”

ABS worries

As a result of the difficulties, Fitch Ratings has placed 27 classes of aircraft asset-backed securitization (ABS) transactions on Rating Watch Negative (RWN) driven primarily by the presence of collateral assets in Russia and Ukraine, the impact of military actions and sanctions, and the uncertainty of enforcement and recovery timing. In total, Fitch reviewed 40 tranches across 14 transactions; two classes remain on RWN and a further 11 have ratings below ‘CCCsf’ and thus do not warrant RWN.

The affected transactions have 5% or more exposure in Russia and/or Ukraine as of the most recent servicer reports; however, the credit ratings agency notes several lessors have been in the process of reducing this exposure over the recent weeks.

Explaining the grading, Fitch said expectations for re-leasing and sales are diminishing due to challenges lessors will face when repossessing, remarketing and selling aircraft. Finally, there is heightened risk of aircrafts being lost and written off with uncertainties surrounding insurance coverage and claims paying process.

Rating pressure is more acute for these transactions due to their concentrations in the two countries and continued underperformance relative to Fitch’s Covid recovery expectations. The conflict is a credit negative for the overall aviation and airline sector, and a prolonged ban on conducting leasing in Russia and more widespread geopolitical risks in the region will further pressure ratings within this cohort.

A total of 37 assets impacted are on lease to either Russian and Ukraine airline lessees across the 14 transactions. There were 30 and seven Russian and Ukrainian leased assets, respectively. Three transactions had lessee concentrations in both countries.