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Aircraft Lessors, Russian Planes and a 10 billion USD Insurance Claim: A Brief Overview

The beginning of the Russo-Ukraine war on February 24, 2022 sent shockwaves through Europe’s economy. On the same day as the invasion, the European Commission held a special meeting that condemned Russia’s “unprecedented aggression,” explicitly stood in “full solidarity” with Ukraine, and issued “further restrictive measures that will have massive and severe consequences for Russia.” The UK promptly followed suit, with former Foreign Secretary Liz Truss simultaneously announcing new sanctions aimed at “inflict[ing] maximum and lasting pain on Russia.


Amongst the sanctions that focussed on restricting banking and financial relationships with Russia and increasing restrictions on Russian individuals and entities, there were also heavy sanctions aimed at Russia’s air transportation industry. These sanctions involved banning Russian national airline Aeroflot from entering UK and EU airspace and strengthening trade restrictions to ban the export of “high-end and critical technical equipment and components” in the aerospace industry.


Once the sanctions fell into place, a deadline of March 28, 2022 was set. By this date, aircraft lessors would have to terminate existing contracts they had with Russian airlines to recover aircraft that were still located in Russia. Typically, a leasing contract will have a clause that covers external shocks such as war and sanctions, which allow a lessor to terminate a contract early and recover aircraft.


An aircraft lessor is a company that leases aircraft to airlines, governments, corporations or individuals. A lessor owns its own fleet of aircraft which allows a client to lease the aircraft at a fraction of the price of buying it. For example, a Boeing 787 would cost 250 million USD to purchase, whereas a one-month lease would cost around just 1.25 million USD. Aircraft leasing has become increasingly popular in the past half-century. In 1970, only 0.5% of global aircraft were leased, whereas in 2021, 51% of global aircraft were leased.


Russia has a big appetite for leasing aircraft. According to the Wall Street Journal, Western leasing companies owned 70% of Russia’s total aircraft (in service or in storage) in 2021. When the sanctions first took hold, Western lessors sought to recover over 500 aircraft worth 10 to 15 billion USD that had previously been leased to Russian airlines. A move to repossess so many aircraft is “unprecedented in commercial aviation history.”


Repossession was also not a move which Russia would take lightly, for the loss of 500 leased aircraft would have led to the collapse of the Russian domestic air transportation system. This was confirmed when on March 14, 2022, Russian President Vladimir Putin signed a law allowing Russian airlines to keep foreign aircraft for use on domestic flights in an effort to maintain the Russian aviation market.


Putin’s move led aircraft lessors to begin insurance claims, as the new law implied insurance coverage by clauses of protection from war and theft, but insurers have pointed out that the aircraft are undamaged, and might be returned.


However, there has been speculation that although the aircraft may not be damaged, many may become unusable as the war continues.


One reason is because UK and EU sanctions against Russia prohibit the export of vital components needed to maintain aircraft. In need of such parts, Russia may resort to “cannibalising” aircraft, which means sourcing components for one aircraft by harvesting parts from another aircraft.


Yet another reason why aircraft in Russia may become unusable is because of the requirement of maintenance documents for the aircraft to be deemed safe enough to use on commercial flights. The lack of upkeep of these documents could mean expensive maintenance checks before aircraft can fly again. Some aircraft that have been recovered from Russia are currently going through this process.


A trial date is set for February 2024 between aircraft lessors and insurers on who should foot the bill for the 10 billion USD in potential losses. 10 aircraft lessors, including Aercap, Carlyle, Avenue Capital Group and Merx Aviation, are set to go against several insurers including AIG.


A London court is now settling the issue of jurisdiction. Insurers argue that the trial should take place in Moscow, as the original insurance contracts were agreed upon under Russian law. However, the lessors have argued that a hearing in Moscow would be impractical and unjust given the ongoing war. It is generally implied that the trial in February 2024 is just the beginning of long litigation proceedings that could last for years.


However, the impact of this case can already be felt. Even if the Russo-Ukraine war ends soon, the huge amount of potential damages at stake suggests that Western aircraft lessors will likely be hesitant to re-enter the Russian air transportation market in the future. Moreover, several of the insurance companies involved have said that their industry may not be able to absorb a 10 billion USD loss – implying a potential need for government intervention–but this comes with its own problems.


Until trial next year, it is likely to remain unclear how insurers, lessors and governments will console the situation.


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