Aircraft lessors face billions in write-offs as planes re-registered in Russia

Irish aircraft lessors moved a step closer to the possible write-off of billions of euro worth of airplanes leased to Russian airlines after the Kremlin passed a law re-registering foreign-owned aircraft in Russia.

In a move interpreted as retaliatory against EU sanctions on Moscow over its war in Ukraine, Russian president Vladimir Putin signed a Bill to allow Russian airlines continue flying leased aircraft by putting airplanes leased from Irish and other foreign companies on Russia’s aircraft register.

The value of the Irish-owned aircraft leased to Russian airlines is estimated to be between €3.5 billion and €4.5 billion, making the Irish industry one of the worst-affected by the crisis.

The law puts a further obstacle in the way of the foreign lessors as they rush to meet a March 28th deadline set by the EU to terminate leases and recover planes from Russian airlines.

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Western companies fear Putin’s law is a first step towards the seizing of the aircraft, which would trigger the largest mass default in the aircraft leasing industry involving hundreds of aircraft.

Airworthiness certificates

Russia’s law comes after the Bermudian and Irish aviation authorities revoked airworthiness certificates for leased aircraft detained in Russia because the regulators were unable to approve that they were airworthy. The regulators monitor aircraft use and maintenance on a real-time basis but have been unable to continue these checks since Russia’s invasion of Ukraine.

The Bill aims to “ensure the uninterrupted functioning of civil aviation” and keep “foreign aircraft with Russian carriers”.

Moscow’s law permits the airlines to keep flying on domestic routes by granting new safety approvals. It puts Russia in conflict with international rules that prohibit the registration of civil aircraft in more than one country at a time.

“This is just the worst possible outcome. This is an irresponsible dictator-autocrat at work now lashing out at the West,” said one Irish aviation industry executive.

“This law has effectuated the immediate write-off for the lessors and the banks. This is, I suspect, a direct response to the seizing of Russian oligarchs’ super-yachts by European nations.”

More than 500 aircraft owned by foreign leasing companies are rented to Russian operators.

About two-thirds of these are leased by Irish companies, including Dublin-based AerCap, the world’s largest aircraft leasing company, Japanese-owned SMBC Capital Aviation and Avolon.

AerCap is the most exposed, with 152 aircraft valued at €2.1 billion rented to Russian and Ukrainian airlines. SMBC Aviation Capital has 34 aircraft valued at $1.3 billion, while Avolon had 14 aircraft leased to Russian airlines, valued at €320 million, when the war broke out.

The airlines have declined to comment on the latest developments.

Recover aircraft

Aircraft Leasing Ireland, the Ibec body representing the industry, said it was continuing to work with Irish, EU and other authorities in supporting efforts by lessors to recover aircraft.

Most leased aircraft in Russia are registered in Bermuda, with a smaller number in Ireland.

A spokesman for the Irish Aviation Authority said it notified the registered owners of 35 aircraft that the certificates of airworthiness for the aircraft with Russian operators have been revoked.

The loss of the certificates exposes aircraft owners to heavy losses as, without proof of airworthiness, the planes would be devalued, as it would difficult to market them in future.

The re-registering of the aircraft in Russia poses a potentially greater and more costly problem for foreign lessors given the risk that the Kremlin may simply seize the planes.

The loss of the aircraft would trigger mass default, insurance claims and possible litigation by aircraft leasing companies against their insurers over the validity of war-risk protection.