The sanctions imposed on the Russian Federation by the European Union, the United States of America and many other countries are presenting aircraft lessors with unprecedented challenges. The current situation is also complicated for insurers.

It often happens that there can be discrepancies between lessor and lessee for a variety of reasons, mostly due to non-payment. Under normal circumstances, owners of airplanes have it rather easy to get hold of their machines. Be it that they are chained by legal means or that they are flown out on their own initiative. In Russia, the situation is now completely different, because Vladimir Putin has made sure that lessors cannot rely on legal assistance at all.

Lawyer Adreana Zammit explained during the Mavio conference held in Qawra, Malta, that of the 515 aircraft that Russian carriers have leased from foreign lessors, about 50 percent have now been transferred to the RA register. This, of course, without the consent of the rightful owners of the aircraft. But what can lessors actually do to get their machines? Under normal circumstances, a whole range of legal remedies would be available, but Russia has literally thwarted this by special decrees. As long as the planes remain within the Russian Federation or only fly to countries that do not provide administrative assistance in this matter, it will be extremely difficult, according to the lawyer.

A lack of maintenance and documentation devalues ​​aircraft

In principle, it would be important for leasing contracts to consider every conceivable eventuality so that lessors can quickly get their property if the worst comes to the worst, but the Russian state is currently sponsoring airlines, so the clauses are simply not enforceable. Another point of great concern for lessors: what about maintenance and the supply of spare parts? The planes are threatened with massive devaluation, which can even go to zero euros for young aircraft, because Russian carriers get absolutely nothing for “their” machines through the official channels.

Proper and good maintenance make a massive contribution to value retention. This is particularly for safety reasons, because who wants to buy an aircraft whose technical history is questionable or even unknown? Exactly these circumstances flourish but lessors who do not get their property in Russia. The entry in the RA register alone causes a drastic devaluation of Western aircraft, because even before the Russian army attacked the Ukraine, this had a dubious reputation and many lessors even insisted that it had to be registered outside the Russian Federation.

At some point the Russian carriers will run out of spare parts and what will happen then? Grounding, self-made or black market? The last two scenarios would then deal the proverbial deathblow to the machines in terms of their value, because then they would finally be unsaleable. 

Lessors in law but unenforceable in Russia

Legally, Zammit assesses the situation as follows: EU regulation 2022/328 prohibits, among other things, all transactions with Russian airlines. Leasing contracts had to be terminated by March 28, 2022 and the machines would therefore also have had to be returned. Only a few aircraft actually came back to the leasers, but very often completely without value-preserving documentation - without this, the machine can hardly or not at all be re-registered. Despite the fact that the use of commercial aircraft still in Russia was explicitly forbidden by the owners, they continue to be used domestically – illegally, as Zammit points out. Many would have been illegally transferred to the RA register. 

What can lessors do now? It is of course possible to sue and obtain a title, but the problem is that the execution of the sentence is almost impossible at the moment because Russia is not even thinking about cooperating. Thus, any titles are simply not enforceable. The situation is a bit like suing an insolvent company that is so broke that there is not even enough money to file for bankruptcy, obtain a title and then cannot successfully enforce it because there is nothing to take . There are planes worth many billions of euros to be had in Russia, but the government has done everything to ensure that this does not happen. That is why many lessors are reluctant to take legal action, because they run the acute risk of being left with the costs of lawsuits.

Retrieval on your own very dangerous for pilots

In theory, says Zammit, retrieval on your own would be an option. But only in theory, because in practice the pilots would be exposed to acute danger. Long prison sentences in Russia would ensue and who knows how the Russian government will react, considering the “annexed leased planes” as their property. The lawyer takes the view that doing it yourself is absolutely not a good idea and probably no lessor will risk it either.

However, if aircraft are deployed to countries that provide administrative assistance, speed is required. The machines could then be seized, but both Russian airlines and their government know this very well. Lessors can at best speculate that one becomes careless and affords the lapse with an aircraft that is “at risk of seizure” and flies to the “wrong country” or “right country” (depending on one’s point of view). 

According to Zammit, a legal possibility could also be that, for example, Sukhoi superjets could be chained in cooperative states as a kind of leverage. However, this requires appropriate court orders and to date there has not been a single one who is going in this direction. The reasoning behind it: If you can't get your Airbus A320, for example, then an SSJ-100 could be taken as a "cheat deposit". However, according to the lawyer, it is doubtful whether this increases the chances that the western aircraft will be released.

The current state of affairs is that almost all lessors are not doing anything and are waiting for the further development of the situation. The reasons for this are simple: being right and being able to assert one's rights are two different things in Russia. Since the lessors are dealing with a lot of money and therefore legal and court costs are exorbitantly high, it is better to wait and hack out a strategy in peace. It won't be easy, because 515 machines are worth several billion euros and lessors can't cope with that easily, because one thing must not be forgotten: The aircraft were rarely paid for from the "petty cash", mostly the lessor pays off the loan installments themselves currently have EUR 0,0 income from the machines stuck in Russia.

Insurance industry faces its highest annual loss ever

Unsurprisingly, many lessors are hoping to get compensation from their insurance companies. You can insure airplanes against just about anything as long as you find an appropriate underwriter. Marketplaces like Lloyd's of London are a good place to go to find an insurer for risks that run-of-the-mill insurers would never underwrite. As a rule, Lessors have very good safeguards that can include crashes, hijacking and the like.

Can the approach taken by Russian airlines and their government be equated with classic theft or even hijacking? Insurers don't see it that simply, because it's about a potentially high billion-euro loss that neither insurers nor reinsurers can easily cope with without at least getting severe stomach ache.

Fortunately, according to Suzanne Chambers, Managing Director of Osprey Insurance Brokers Ltd, expensive claims do not occur very often. Crashes are the most costly aircraft insurance event possible and fortunately they are rare. This year, however, the insurance industry had to cope with two total losses: the China Eastern plane and the DHL plane. These two claims alone would not really hurt the insurance companies, but having to pay for the value of 515 aircraft is a completely different dimension.

It is already becoming apparent that many insurance companies that have previously been active in aviation are reducing their business or charging significantly higher premiums. In the case of the latter, it is primarily new business that is likely to be affected, because interventions in existing contracts are not that easy. In the long term, Chambers, who also spoke at the Mavio Conference in Qawra, expects insurance prices for airlines to rise sharply.

It is also to be expected that risks will be checked even more meticulously and airlines from countries that are considered risky will have problems finding insurers at all. Of course, this can also affect western carriers, because it cannot be ruled out that insurance companies will want to contractually exclude insurance cover for a whole range of countries or their airspaces. If you then want to fly to the country that the insurance industry considers risky, extremely expensive additional policies could become necessary, if they are offered at all.

Increasing costs will most likely be passed on to end customers

The insurance expert fears the industry will suffer its biggest financial loss ever as a result of the fallout from the war in Ukraine and the Russian government's behavior on leasing planes. It is very likely that lessors would soon be submitting a large number of claims reports, so that things would then get really serious for insurers and reinsurers. 

In the end, the airlines and their customers will have to pick up the scoop, because the insurance companies don't want to "swallow" the losses, of course, but rather make up for them through higher prices. This factor can then also have an effect in the form of rising ticket prices. So far there has been strong competition and therefore cost pressure, but pretty much every provider active in aviation insurance is directly or indirectly affected by the “Russia problem”. According to Chamber, there isn't a single newcomer this year, so no one is pushing prices down.

So the bottom line is that the lessor's multi-billion dollar property, which Russia considers "Putin's free planes," is a serious financial problem for both lessors and their insurers, and then their reinsurers. It is not to be expected that lessors and insurance companies will go bankrupt on a large scale, but the losses must be “earned back”. This leads to higher costs for lessors, airlines and, as a result, these will most likely sooner or later be passed on to end customers in the form of higher ticket prices.