WHO WILL STILL FLY ON A RUSSIAN COMPANY?

March 20, 2022

The collateral damage associated with the Russian-Ukrainian conflict is just beginning to be felt. It is likely that they will be considerable, at least as far as air transport is concerned. The ban on overflights of Western countries for Russian aircraft taken very quickly after the start of hostilities led, almost automatically one could say, to the ban on overflights of Russia and more particularly Siberia for Western aircraft, which leads companies to make long detours for continue to operate routes between Europe and East Asia, including Japan. As a result, many routes have been cancelled. Admittedly, this penalizes the carriers concerned, but it is nothing compared to what awaits the Russian companies. 

The swift exchange ban prevents the payment of rents due to leasing companies. However, the latter own almost all the fleets of Russian carriers, at least as far as high-performance aircraft are concerned. Of the 1600 aircraft used in the country, 900 are leased to Western companies. The 5 largest carriers: Aeroflot, S7 Airlines, Ural Airlines, Rossiya and Nordwind Airlines alone  use more than 400 Western aircraft mainly leased from AerCap, Air Lease Corporation and Avolon, the big "lessors " Westerners. The response of the Russian government was expected, it was the nationalization of the devices that suddenly become the property of their operators. 

But the matter is not so simple. First, the Western countries in which leasing companies are registered have imposed an export embargo on all spare parts in the aeronautics sector. This will inevitably lead Russian carriers to cannibalize some aircraft to fly others and mechanically the number of operational aircraft will very quickly decrease. And then the miners reacted to the nationalization of the leased aircraft , most of which, 713 in fact, are registered in Bermuda. However, the aircraft certification body BCAA notes that it can no longer guarantee, under the current conditions, especially after the embargo imposed on spare parts, the reliability of aircraft. As a result, it removed the CTA in plain text the certificate of airworthiness from all aircraft registered in its territory.

In theory, the planes in question should be grounded. But the Russian authorities have proposed a national certification, so as not to completely interrupt air traffic that the country desperately needs. Still, this certificate may be valid for the domestic market, yet it is doubtful whether it will be accepted for international flights. However, the immediate consequence will obviously be the abolition of insurance coverage.  Under these conditions, which companies will still take the risk of continuing their operations?

To be honest, we are entering into a considerable imbroglio. First, the leasers must recover the planes whose rents are not or no longer paid. It's not that simple. Certainly it is possible to get their hands on it if by chance they arrive in a country where the renters can assert their rights. But faced with the likelihood of this measure, the companies had taken the precaution of repatriating their aircraft to Russian territory, just before the outbreak of hostilities on February 24. As of 8 March, only 24 aircraft had been recovered out of the 900 leased. There is no doubt that the blow is hard for leasing companies. Let us recall if necessary that it is they who buy the aircraft from the manufacturers. They are paid before they leave the car park. On average, each machine is worth $100 million. The theoretical risk is therefore 900 times 100 million dollars or 90 billion dollars. The sums make you dizzy even if a probably significant part has already been paid, coming in reduction of the risk.

Nevertheless, this will be a very severe blow to these thriving companies. As a result, if they default, the banks that have advanced the money will also find themselves in great difficulty.

In this case, everyone loses and not just a little. Ukrainians are fighting to keep their freedom, but their cities are gradually being destroyed. The Russian economy will suffer enormous damage, starting with air transport. And this will inevitably have important consequences on the financial chain of the global air market.

How are we going to get out of this ludicrous situation?