Aircraft leasing firms are set to terminate hundreds of leases with Russian airlines following Western sanctions over the invasion of Ukraine that give the sector a month to act.
Dublin-based AerCap, the world's biggest aircraft leasing company, saw its New York-listed shares tumble 12.7% after it said it would cease leasing activity with Russian carriers, while U.S.-based Air Lease (AL.N) fell almost 8%.
Russian airlines have 980 passenger jets in service, of which 777 are leased, according to analytics firm Cirium.
Of these, two-thirds, or 515 jets, with an estimated market value of about $10 billion, are rented from foreign firms.
AerCap said that by net book value, 5% of its fleet was leased in Russia as of Dec. 31. The company, which recently strengthened its leadership of the specialist aviation leasing industry by buying rival GECAS, has the largest exposure to Russia and Ukraine with 152 planes, consultancy IBA said.
Its Russian clients include Aeroflot, S7 Airlines, Rossiya, Azur Air and Ural Airlines, its website showed, involving aircraft worth an estimated $2.5 billion, according to aviation services firm ACC Aviation.
Leasing companies control about half of the world's fleet and are a vital source of financing for airlines that lack sufficient capital to buy or prefer to pay a monthly rent.
The European Union on Sunday gave leasing companies until March 28 to wind up current rental contracts in Russia, presenting lessors with a major new headache hard on the heels of crises over Boeing 737 MAX safety and the COVID-19 pandemic.
Russia warned the West it would retaliate against sanctions targeting its aviation industry.
REPOSSESSING JETS
Bankers have said Russian airlines have been among the most reliable in paying bills during the pandemic, but leasing companies face the prospect of having to abruptly wind up deals and recover aircraft in an uncertain climate post-sanctions.
Russia is a member of the Cape Town Convention, a specialist but vital treaty underpinning the fast-growing air finance industry by making it easier for lessors to recover jets when airlines cannot pay, in return for cheaper finance for airlines.
But the cooperation of courts is often still needed to enforce the rules and it remains unclear how Russia's courts would react to a request to recover jets under sanctions.
ACC Aviation Vice President Viktor Berta said repossessing aircraft could prove challenging, especially if Russian aviation authorities and airlines do not cooperate with lessors. Given the airspace bans, even sending staff to Russia to repossess aircraft could also be a headache, Berta added.
Financial restrictions may also prove a burden.
Avolon, the world's second-biggest leasing company, has fewer than 20 airplanes in Russia and one or two in Ukraine out of a total fleet of more than 550 aircraft, CEO Domhnal Slattery told Reuters this month.
Slattery said at the time that Avolon was concerned that sanctions on international payment transfers through SWIFT could be disrupted, making it hard for airlines to pay their bills.
Avolon declined to comment when asked about the sanctions.
G7 leaders said on Sunday that Western allies had decided to cut off "certain Russian banks" from the SWIFT secure messaging system to ensure rapid cross-border payments, which has become the principal mechanism to finance international trade.
Lessor BOC Aviation said it had 18 planes representing 4.5% of its owned fleet based in Russia. It also manages one other plane.
"Our policy is to fully comply with all laws applicable to our business," BOC Aviation said in a statement. "The practical consequences of the new EU sanctions are complex and at the present time we are unable to provide further information."
Dubai Aerospace Enterprise (DAE) has at least three Russian airline customers, including Aeroflot, according to its website. The Dubai-owned lessor did not respond to a request for comment.
Novus Aviation Capital Co-Chief Executive Mounir Kuzbari told Reuters the firm has no aircraft in Russia but that mass cancellation of leases in Russia could hit global lease rates and aircraft values.