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Doing business in a country without the rule of law can be pretty risky — as aircraft leasing companies are finding out.
The companies, many based in Ireland, leased 515 airplanes worth about $10 billion to Russian airlines. They may never get them back. On Monday, Russian President Vladimir Putin approved a law switching the jets over to the Russian airplane registry, making their return very difficult.
In doing so, Russia is breaching the Chicago Convention, the international rules that underpin civil aviation, according to European Transport Commissioner Adina Vălean.
The European Commission is working with regulatory agencies to get the jets back, she told the European Parliament on Tuesday.
But her comments are unlikely to inspire much faith from lessors.
“We are in the process to try to do our best,” she said. “But to be honest, we’re not very trustful because when you have such abusive behavior from a country like Russia, it’s difficult to say what the outcome will be.”
The bloc has given leasing companies until March 28 to wrap up their contracts and get their planes home. However, only a few dozen airplanes have made it back to their owners — largely those that were outside Russia when the skies closed.
The rest are in Russia and Putin’s new measure moves them onto shaky legal territory, said Donal Hanley, a professor at the Institute of Air and Space Law at Montreal’s McGill University.
“This would be the equivalent — for an aircraft — of taking an Irish citizen in Russia, and forcibly making them a Russian citizen,” Hanley told RTÉ.
Unfortunately for the lessors, unless Putin changes his mind, there’s not a lot they can do other than hope the invasion ends and sanctions against Russia are rapidly lifted.
Bermuda and Ireland have both revoked the airworthiness certificates of many aircraft based in Russia, essentially stripping them of their “safe to fly” status. Russia’s new law will substitute those airworthiness certificates with ones issued by Moscow, but that won’t be accepted outside the country.
It means the jets are left in limbo. The planes can’t be seized unless they fly outside of Russia. A quick glance at the departure board of Russia’s biggest airports show a largely domestic schedule.
“How do you even get them out? You can’t even send a pilot there to go and get them out because you can’t get into Russia,” said Patrick Honnebier, an Amsterdam-based aircraft finance lawyer.
Money for nothing
What makes the current situation so tricky is the sheer number of planes involved, and the murkiness over whether the leasing companies will get any of their investment back.
“We’re talking about huge money,” Tadas Goberis, chairman of AviaAM Leasing, said at an industry event last week.
Honnebier cited a previous leasing case in which a lessor was able to successfully claim insurance when sanctions prevented the company from retrieving its plane. But that only involved one jet.
“This involves all the Russian aircraft,” said Hanley.
Even if insurance is valid, he said, policies tend to include fleet caps that limit the amount insurers will pay as no one predicted that an airline’s entire leased fleet could be nationalized.
“The caps on those policies, in the case of the larger airlines, are highly unlikely to be sufficient to pay out the agreed value of every aircraft in the fleet,” he said. “Somebody is going to have to bear the loss.”
Then there’s the question of what Russia will do with all those stolen airplanes. Flight bans prevent Russian airplanes from flying through much of the world’s airspace, and even countries with open skies could balk at allowing in airplanes with dodgy certification and uncertain maintenance records.
The Western ban on aircraft part sales — criticized by industry lobby group IATA which said it threatens safety — could mean Russian airlines will have to cannibalize foreign-leased planes for parts. They’d become “involuntary organ donors to the host aircraft within Russia,” Hanley said on the same panel.
Even if the sanctions against Russia are lifted, it’s unclear what reception Russian airlines will get if they come calling to leasing companies to get more airplanes.
“In a way, they’re protected by the fact that the Russian government has made it illegal for them to honor their obligations,” said Hanley. “Because now in a way they can say, ‘It’s nothing personal and we would love to honor our obligations, but you know, we’ll be sent to Lubyanka if we do.’”
That will allow them to maintain some credibility in a sanctions-free future, he argued.
Goberis, the leasing CEO, said he believed many airlines — private ones, at least — would have been willing to cooperate with the leasing companies if Putin hadn’t stepped in.
“But then, we have this political aspect where most probably they will not be empowered to make their own decisions,” he said, something that undercut what had been a fairly cooperative atmosphere with Russian airlines.
“Our experience with Russian operators on the safety, operational, the payment side even, was really good — just to honor the efforts from the airlines in those areas,” he said. “All these relationships, all these partnerships, all this business, which is important for both parties, can be ruined overnight by the political decisions.”
While leasing companies insist no one could have predicted this turn of events, the European Commission’s Director General for Mobility Henrik Hololei said companies did business in Russia with their eyes open.
“These have been commercial decisions and relationships,” he said. “There have been known risks dealing with Russia that all parties have been aware of. And the relationship with their insurers is equally a commercial relationship, with risks part of the insurance premium. So we are absolutely not a party when it comes to their business decisions. And of course, it’s their profits and losses.”
AerCap, an Irish company, which reportedly has as many as 142 planes in Russia, wrote in its 2020 company filing that the international nature of its business “exposes us to geopolitical, economic and legal risks associated with a global business, including many of the economic and political risks associated with emerging markets.”
If customers refuse to return aircraft following lease terminations, “we may encounter obstacles and are likely to incur significant costs and expenses conducting repossessions,” it said.
Irish leasing companies got a taste of the region’s risk last year when sanctions were placed on Belarus after it diverted a Ryanair passenger plane to Minsk to arrest a blogger on the flight. Those sanctions also hit state airline Belavia, and the leasing companies faced pressure to drop their contracts with the carrier.
But the bitter experience of potentially losing billions in Russia doesn’t mean that companies won’t be back.
“Shouldn’t we, the aviation industry, including aviation finance, the lease industry, as a whole practice, not be more cautious in the future?” Honnebier asked.
The answer is likely to be no. Limiting leasing to “law-abiding, politically acceptable” countries might not be good for business. “Where do you end up with all these aircraft? Where can you go?” he said.
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