That Was The Week That Was 14-18 March 2022
Russia Saves Global Aviation Leasing, at the Expense of Aviation Insurance
Last week, we pondered what the Russian Foreign Affairs people meant when they said that the ban on flying in Russian airspace would put international aviation at risk. We looked at all sorts of obvious scenarios, but, shame on us, we missed the obvious one. Mea culpa. Mind you, hand up if you predicted that Russia would nationalise the registration of the entire fleet of aircraft leased to Russian operators by Western lease companies? Go on, be honest…
The best bit about this stroke of genius is that as we speak, no-one in the aircraft leasing and financing community has a clue, not a clue, as to what it means. Obviously, we normally want that group of over-paid and over self-estimating group of punks in striped shirts all the very best, but now is that moment when you wish that there was a German word for schadenfreude. The Germans will have to merely admire the nature of English to absorb the best of the best…
What does it mean? Are the aircraft still required to be operated in accordance with their lease terms, but controlled and inspected by Russian authorities? Well, maybe, but that would breach the EU and US sanctions. So, if they operated at all, who bears the risk? Remember too that Russia is also not able to get new spares or other services, so any repairs and maintenance will need to repurpose hub caps, chicken wire and chewing gum, or as we say when dressed in a striped shirt, there will be a break in the auditability of maintenance, thus breaching the lease. And, making the aircraft unreturnable, at least without the deepest, most D checks of all D checks in the history of aviation. Such a check will be very expensive, even before you multiply that cost by all the aircraft likely to need such an inspection.
To put all this in context, there are about 515 planes currently leased to Russian operators, that, by the way, Eurocontrol thinks were operating at about 105% of 2019 volumes before the invasion. That probably has a lease value of about, about $12 billion dollars, a book value of about $15 billion dollars and an insurance value of about $17 billion dollars. These are not negligible numbers.
The very last thing on earth the lease companies wanted was 515 aircraft returned to their lots. Had that happened, the leasing market would have been in huge trouble. They can only thank Russia for saving their businesses. But, in a stroke of genius, the Russians have done even more than that with this move. Rather than hurt the lessors (as fun as that might have been) they have actually struck a blow, as they foretold, to the very heart of international aviation.
Every leasing company will now be filing an insurance claim on the basis that the aircraft, complete with refashioned hub caps, chicken wire and chewing gum repairs, is inoperable in the Western market and thus a total hull loss. There is no way that the aviation insurance market can absorb this loss without huge impact on the way aviation is insured and priced into the future. Assuming that Lloyds of London has a future. $17 billion is a lot to absorb, even for that august institution.
The winners from this are likely to be that other group of punks in striped shirts, the lawyers. We are looking at another lawyers’ picnic. But then again, London’s lawyers (most of the claims will end up there) need to recover their lost revenue from defending oligarchs, so they have the capacity to fill this gap. Win: win, for the lawyers of London.