Since Russia’s invasion of Ukraine, and the EU’s subsequent sanctions against Russia, the aircraft-leasing industry has been facing an unprecedented challenge in asset recovery of aircraft and parts which had been leased to Russian airlines and were effectively stranded within Russia.
Jamie Ensor, partner and head of insolvency and corporate recovery at Dillon Eustace, says: “Reports indicate that, so far, only a small proportion of Western leased fleets have been recovered from Russian operators, and that the figure may be about 10 per cent of the total aircraft. We understand most of those were recovered in the immediate aftermath of the invasion in February 2022.”
Any early lease termination or repossession scenario is both complex and costly. Given the difficulty of recovering aircraft from Russia, many lessors looked to write off their losses and claim against insurance – huge amounts that insurance companies were understandably unwilling to part with, leading inevitably to legal battles.
Paul P Jebely, chaimanr and founder of The Hague Court of Arbitration for Aviation (CAA), says: “The task of ensuring that a resolution in one jurisdiction holds force in another is no small feat, and often a prescription for failure.” Little wonder that he would, under normal circumstances, proselytise in favour of arbitration, given his experience as an aviation lawyer, that litigation within the industry (particularly that involving multiple jurisdictions and complex engineering and technical subject matter) has frequently shown itself to be “ferocious, unedifying, publicly embarrassing and astoundingly expensive”.
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“When Russia invaded Ukraine, there were over 400 aircraft leased to Russian airlines,” says David McGovern, partner and head of the aviation and international asset finance team at Mason Hayes & Curran. “Global lessors took swift action to seek to recover aircraft wherever possible, and while they had some success, it is estimated that between $12 billion and $15 billion in aircraft assets remain within Russian territory.”
Reuters reported recently that Russian carriers had 541 Western planes in active service or under maintenance, as at May 1st, 2023, according to data compiled by Swiss aviation intelligence provider Ch-Aviation. The Irish Aviation Authority (IAA) lists a number of aircraft for which it has cancelled the Certificate of Airworthiness. However, it is believed that many of these Irish registered aircraft continue to operate in contravention of international rules and that they have been illegally re-registered.
Russian airlines can still fly freely both within Russia and to many other parts of the world including China, India, South America, and Africa, which are unaffected by EU and US sanctions, and according to Russia’s Federal State Statistics Service, Russian airlines carried 10.1 million passengers in June 2023, a 13.9 per cent increase in passenger volumes year-on-year.
Irish lessor AerCap, the industry leader, was the most exposed in terms of numbers and value of aircraft affected (reports stated 152 aircraft believed to be valued at €2.1 billion were affected), although given the breadth of AerCap’s business this represented less than 5 per cent of its overall fleet value.
[ Irish aircraft lessors due in London court over planes leased to Russian carriersOpens in new window ]
“Over the last 12 months a number of aircraft lessors have been successful in agreeing Russian insurance settlements under certain airlines’ insurance policies in respect of certain aircraft lost in Russia,” says McGovern. “There are certain conditions which need to be satisfied including compliance with multiple sanctions’ regimes to achieve these settlements.”
In September 2023, AerCap reached a landmark agreement and settlement of €590 million from insurance company NSK in respect of claims for 17 aircraft and five spare engines leased to Aeroflot and its subsidiary Rossiya.
SMBC Aviation Capital won a similar settlement in October for 16 aircraft and engines, while in December last, AerCap received full settlement (approximately $572 million) of claims against the policies of JSC Ural Airlines and JSC Siberia Airlines (S7), covering 18 aircraft and one spare engine and 29 aircraft and four spare engines respectively.
In its disclosures, AerCap stated: “While insurance settlement discussions are ongoing with respect to our remaining claims under the insurance policies of S7 and other Russian airlines, it is uncertain whether any of these discussions will result in any insurance settlement or receipt of insurance settlement proceeds and, if so, in what amount. In particular, it remains uncertain whether the necessary approvals and funding to complete any such further insurance settlements can be obtained.”
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Many other claims are still awaiting trial, as some insurers attempted to have cases tried in Russia, under whose laws the original contracts were signed.
Peter Bredin, partner in litigation and dispute resolution at Dillon Eustace, notes: “The lessors’ claims under their ‘contingent and possessed’ insurance cover raise complex issues and are denied by the insurers on a number of grounds. The claims are being pursued in the Commercial Court, where the trial is due to start in June 2024 and may take three to six months.”
Looking at how this will affect the future of the industry, and risk pricing, Dr Thomas Conlon, professor of finance in the UCD School of Business, says: “As I see it, the challenge here is precedence. With Russia having been accused of breaking the terms of the Cape Town Convention, aircraft lessors and financiers will be less willing to provide aircraft to countries where there is any shadow of a doubt that the Cape Town Convention will not be upheld.
“Currently, this is not so much of a problem. There is significant demand for new, efficient aircraft from high quality customers, and this is likely to remain the unchanged for the medium term in light of restricted supply of aircraft.
“Historically, asset recovery in aviation was a difficult and risky business, with aircraft seized in volatile locations. This is less the case now, with recoveries usually carried out after significant, and expensive, legal wrangles.”