How do airlines that lease planes to Russia suffer damage?

Not only losing property, Western aircraft leasing companies are in danger of not being paid 100% of the insurance money.

In a televised address at the end of March, Russian Deputy Prime Minister Yuri Borivov announced that all aircraft leased from abroad will remain in the country despite the move to terminate the lease by Western airlines. .

The United States and Western countries have imposed a series of sanctions since the time Russia attacked Ukraine as well as forced aviation companies to terminate leases of more than 500 aircraft.

After 78 planes were recovered abroad, Russia said it still holds more than 400. To confiscate assets worth nearly 10 billion USDMoscow passed a nationalization law, allowing this number of aircraft to be registered in the Russian catalog.

At the same time, President Vladimir Putin has instructed the government to find solutions to reduce the burden of paying rent for Russian airlines. Besides, he said that Moscow will support domestic airlines about 100 billion RUB (1.25 billion USD) to remedy the consequences of sanctions.

“With the rental payments, let me remind you that a significant part of it is paid to companies from unfriendly countries, and they have breached their contractual obligations,” he said. Putin announced.

Losses billions of dollars

According to Bloomberg, two decades ago, major airlines such as Airbus and Boeing faced huge profit opportunities when jumping into the post-Soviet aircraft rental market. Today, about half of Russia’s 1,000 aircraft are owned by foreign companies.

Before the strong sanctions from the West, the aviation market in Russia in particular and the world in general fell into chaos. In addition to closing airspace to Europe and some American countries, the country’s aviation industry is also facing a wave of lease terminations and withdrawal from the market by foreign companies.

However, this move did not leave good results for rental companies as well as strongly affected the insurance world.

Dubai Aerospace – the largest aircraft leasing company in the Middle East – estimated damage at about 538 million USD after being seized by Russia. This company is filing an insurance claim for approx 1 billion USD and said the number could increase.

Dubai Aerospace currently serves more than 170 airlines in more than 65 countries. The company’s leasing division manages a fleet of 425 Airbus, ATR and Boeing aircraft.

Similarly, Avolon Holding claimed about 304 million USD after tallying 10 planes stuck in Russia. This incident caused the company’s net loss in the first quarter to exceed $182 million.

“We are working hard to recover these assets and look forward to getting the four planes back,” said Domhnal Slattery, CEO of Avalon.

If Russia’s impact is not taken into account, Avolon would have a quarterly profit of 80 million USD. Much of Avolon’s current fleet is leased to carriers in Asia.

However, compared to rival AerCap, Avolon has not yet penetrated deep into the Russian market. In March, AerCap said it was claiming insurance benefits worth 3.5 billion USD when 113 jets and 11 engines were still kept in Russia.

Air Lease also takes more damage 800 million USD when 27 planes were stuck. Meanwhile, BOC Aviation Capital lost 600 million USD because there are 17 planes.

Disruption of the insurance industry

The aircraft are mainly registered in Bermuda and Ireland. After leased aircraft had their safety certification withdrawn, Russia encouraged carriers to register them domestically, a move that violates international aviation treaties.

“I don’t think anyone in the insurance business would consider Russia re-registering Western planes. The equipment, the fuselage or the engine could be there,” said Garrett Hanrahan, global head of aviation at insurance brokerage Marsh.

The rental business soon contacted the insurance company and demanded payment of the loss. According to Fitch Ratings, with a pricing policy of about 15-150 million USDthe total number of insurance claims can be up to 10 billion USD.

EU sanctions currently prohibit the sale of parts or care services to the Russian airline. As a result, aircraft maintenance seems impossible.

Even returned to hand, the rental company cannot liquidate these vehicles due to lack of verification maintenance.

“Aircraft without a reliable provenance and maintenance record will certainly be worthless to large lessors operating in mainstream markets and reputable customers,” said John Strickland, head of head of JLS Consulting in London, said.

However, the process of performing insurance obligations between the two parties is facing many disputes.

Insurers emphasized that the event that Russia seized the plane took place on March 14. Meanwhile, most insurance policies have been canceled since the time the sanctions were applied at the end of February. On the other hand, the insurance buyer believes that the benefits cannot be revoked after the risk occurs. out.

This event could force us all to rethink the way the airline industry buys insurance

Robert Martin, CEO of BOC Aviation

“Members have been paying for expensive insurance policies for decades. We expect these claims to be paid in full,” said Declan Kelly, President of Aircraft Leasing Ireland, an industry group representing 33 lessors.

Since February, insurance costs for aircraft confiscation and war-related risks have tripled, according to Marsh.

Some in the insurance industry think the losses are overblown. According to ratings agency Lloyd’s of London, insurers pay only 10-15% of the value of stranded planes.

Usually, insurance companies will be faced with single incidents such as equipment failure, aircraft damage or even an accident that results in the loss of the plane and millions of dollars in claims to families. Passengers’ families were killed. As air travel has become safer, those premiums have dropped, leaving the industry unresponsive to the case.