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European Sanctions Could Strand Leased Planes in Russia

BERLIN — Western sanctions meant to punish President Vladimir V. Putin of Russia for invading Ukraine may have also dealt a big blow to European …

European Sanctions Could Strand Leased Planes in Russia
28.02.2022 23:56

BERLIN — Western sanctions meant to punish President Vladimir V. Putin of Russia for invading Ukraine may have also dealt a big blow to European companies that leased commercial aircraft to Russian airlines.

The majority of commercial aircraft flown by Russian companies are leased, more than half of them from companies abroad. Most of those companies are based in Ireland, a member of the European Union, which banned the sale or leasing of aircraft to companies in Russia as part of its sanctions package.

At stake is the fate of hundreds of planes worth an estimated $12 billion, according to Ishka, a consulting firm that specializes in the aviation industry. Those based in Ireland are particularly exposed, with $4 billion to $5 billion worth of aircraft in Russia, it said.

The sanctions give companies leasing the planes until March 28 to terminate existing contracts, the Irish government confirmed on Monday.

But getting the planes back won’t be easy. The repatriation of leased planes is normally planned years in advance. Airlines in Russia may not cooperate or may be ordered by Mr. Putin’s government to throw up obstacles. Another challenge is that Europe and Russia have closed their airspaces to each other’s planes.

“The logistics are immense. We are talking hundreds of planes that need to be flown out,” said Phil Seymour, an aviation specialist with IBA, a consulting firm. He listed off the questions that the companies that own the aircraft now face. “Where in the world can they go? Will they play ball? Will there be any edict from above, telling not to cooperate?” he said.

AerCap, the world’s largest leasing company for commercial aircraft, said on Monday that it would fully comply with sanctions requiring it to cease leasing planes to Russian airlines.

Based in Dublin, AerCap is likely to be the company most heavily exposed to the sanctions, with 152 planes valued at nearly $2.5 billion in Russia and Ukraine, according to IBA. Nine other leasing companies based in Ireland also have planes in Russia.

In a filing to investors, AerCap said its contracts with Russian airlines, which according to its website include Aeroflot and Rossiya, accounted for roughly 5 percent of its fleet, by value at the end of December.

The company acknowledged at the end of the year that doing business in places like Russia was inherently risky. AerCap said at the time that recovering planes would be difficult if it was forced to cancel contracts because of government sanctions.

Russia’s Attack on Ukraine and the Global Economy

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A rising concern. Russia’s attack on Ukraine could cause dizzying spikes in prices for energy and food and could spook investors. The economic damage from supply disruptions and economic sanctions would be severe in some countries and industries and unnoticed in others.

The cost of energy. Oil prices already are the highest since 2014, and they have risen as the conflict has escalated. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes.

Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders have accused Russia’s president, Vladimir V. Putin, of reducing supplies to gain a political edge.

Food prices. Russia is the world’s largest supplier of wheat and, together with Ukraine, accounts for nearly a quarter of total global exports. In countries like Egypt and Turkey, that flow of grain makes up more than 70 percent of wheat imports.

Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.

Financial turmoil. Global banks are bracing for the effects of sanctions designed to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.

“We may encounter obstacles and are likely to incur significant costs and expenses conducting repossessions,” the company said in a securities filing.

For a company as large as AerCap — the company had assets of $75 billion at the end of 2021 — the losses could be bearable, aviation experts said. But the sanctions could devastate companies with much smaller fleets and those with greater exposure to Russia.

Even when plane leasing companies are working with cooperative customers, they have sometimes faced problems. For example, the plane may no longer have the engines that were installed originally because airlines have swapped in others for maintenance or other reasons.

“It could prove very costly for the lessors,” Mr. Seymour said. Normally before a plane is returned, he said, it has to be brought back into shape, it must have a spotless interior, and the paperwork documenting its maintenance history and any problems must be in order.

If leasing companies were unable to recover their planes, they would end up taking on all of the risk associated with the aircraft, said Paul O’Driscoll, a consultant with Ishka. Once contracts are canceled, Russian airlines no longer have to make payments for planes or maintain them.

“The local airline is absolved of its responsibility,” Mr. O’Driscoll said. “You’re really stuck. You have to leave the metal there.”

Niraj Chokshi contributed reporting from New York, and Liz Alderman from Paris.


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