Russia’s planes are often leased in the West

The Russian aviation sector has grown enormously since the end of the Cold War, and Russian airlines, most notably the state-owned Aeroflot, have recently become highly integrated into global aviation. The consequences of the Western sanctions against Russia go far beyond those of previous pressure measures against North Korea or Iran.

Russia has blocked its own airspace for several foreign airlines, and other airlines voluntarily circumnavigate the vast Russian territory. This results in flight routes that are several hours longer, higher fuel consumption and reduced cargo capacities, so that you can fly with full tanks in order to be able to reach the more distant destinations without a stopover.

The effect of the difficulties for non-Russian airlines is obvious: air fares are likely to rise in the future, just like freight rates. Added to this are the effects of the Ukraine conflict on the oil price, which is currently at its highest level since 2008.

However, not only airlines such as Aeroflot, S7, Smartavia and Air Bridge Cargo are affected, but also manufacturers, lessors, insurers and maintenance services. Many of them are based in countries that imposed sanctions on invading Russia after the war in Ukraine began.

Lessors suffer losses

Of the total of 980 passenger aircraft flying the Russian flag, 777 are currently leased, according to British aviation data specialist Cirium. According to Cirium, among the Russian leased aircraft are 515 machines with an estimated market value of around $10 billion that were financed abroad by leasing companies such as Aer Cap and Air Lease.

The EU has given leasing companies until March 28 to end their contracts with Russian airlines and take back the leased planes. Exactly this is likely to be made more difficult by the airspace closure over Russia. In addition, the exclusion of Russian companies from the Swift payment system causes payment defaults.

A simple way of circumventing the financial burdens on Russian aviation would be to nationalize the airlines. According to the Russian business news portal RBC, corresponding consultations on the nationalization of aircraft from Aeroflot and other airlines have already taken place between Deputy Transport Minister Igor Chalik and representatives of Russian airlines.

But to do this, Russia must first ensure that the machines in question are actually on Russian soil. Accordingly, the Russian airlines S7 and Smartavia have suspended all international flights for the time being. Flights to Belarus are excluded. The aircraft remaining in the country escape the threat of confiscation due to outstanding claims from the leasing companies.

However, not all airliners flying the Russian flag have made it back to Russia. A few machines, such as Aeroflot, are currently arrested at airports in the west. This is the technical term for the confiscation of property due to a court claim to secure a monetary claim.

In Milan-Malpensa there is a Boeing 747-8F from the Russian cargo airline Air Bridge Cargo and a 737-400F from Aviatrans. An Aeroflot Airbus A320 is stranded in Munich and another Aeroflot Airbus in Amsterdam. Three Volga-Dnepr transport planes are stuck in Leipzig/Halle and another Aeroflot Airbus is stuck in Geneva.

The fixed line machines are neither serviced on the ground nor dispatched for a restart. At least until the warring parties have reached an agreement and the sanctions have been lifted.

It is striking that most of the aircraft stranded in the west are marked with Bermuda as their origin. They are registered in the island state for tax reasons. Most machines with RA markings (for Russia), on the other hand, were ordered to return to their home country of Russia in good time. It is assumed that the Russian airlines and authorities made a mistake. Because when it comes to ownership – and sanctions – it is not the registration but the origin of the aircraft that is taken into account.

The leasing companies will face a difficult day on the return deadline of March 28 at the latest. There is little chance that Russian airlines will return the 515 planes to the West on time and properly in the coming days. “In most cases, they will ignore the contracts and continue to operate the aircraft within the country, which nobody can prevent,” says aviation expert Andreas Spaeth.

Aviation safety threats

Russian airlines have also been excluded from the insurance and reinsurance market as part of the sanctions. Insurance industry experts fear that lessors whose aircraft are not returned by Russia will get nothing. They cannot handle their losses through their own insurance policies, as most policies include exclusions from government sanctions in the sense of force majeure.

The Russian aviation business is also faltering in other areas. Russian airlines currently have more than 60 aircraft on order from Airbus and Boeing, according to aviation consulting firm IBA. These will not be delivered for the time being. Companies that manufacture aircraft parts and maintenance companies are banned from supplying or handling Russian customers. Lufthansa Technik, for example, has confirmed that Russian customers are no longer being processed. Several hundred aircraft are affected.

Meanwhile, according to Tass, the Russian Ministry of Transport has drafted an aid program that will allow third-party companies to carry out aircraft maintenance until September 2022 and will suspend the obligation to inspect aircraft. The measure could pose a serious threat to the safety of Russian airliners.