Jet lessors face 'significant' challenges from Russia sanctions, Fitch says

Lessors have 'sufficient rating headroom and liquidity' to manage impact of sanctions

Russia's flagship airline Aeroflot livery on an Airbus A320-200. Reuters

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Global jet lessors are not yet affected by the Russia-Ukraine conflict and ensuing sanctions, but they face “significant” logistical and operational challenges as repossession of aircraft in Russia could prove more difficult, Fitch said.

Fitch-rated global aircraft lessors could also see negative ratings implications from a prolonged ban on conducting business with Russia and the secondary global macroeconomic effects resulting from the conflict, the credit rating agency said in a research note on March 4.

“The direct effects from expanded economic sanctions imposed upon Russia, including the European Commission's requirement that aircraft lessors terminate existing lease agreements with Russian airlines by March 28, should not materially pressure lessors' net margins, liquidity coverage levels or cash flows over the 12-24 month outlook horizon,” Fitch said.

“However, potential disruptions from indirect effects of the conflict on the broader aviation and airline sector outlook remain in flux and uncertain.”

Plane-leasing firms, many of which are based in Ireland, are seeking possession of the aircraft by March 28 under EU sanctions and a broader set of banking restrictions that make it impossible to legally continue renting and insuring the aircraft to Russian customers.

Lessors have “sufficient rating headroom and liquidity” to manage the impact of the sanctions, given relatively low exposure to Russian airlines, diverse customer bases and solid cash flows generated from long-term leases, Fitch said.

As of January 31, 2022, exposure of Fitch-rated lessors to Russian airlines ranged from 0 per cent to 10 per cent of net book value, according to Cirium.

More than half of the active commercial aircraft fleet based in Russia are leased aircraft, many of which are managed by lessors based outside the Russian Federation, consultancy IBA said in a report examining which aircraft leasing companies were likely to be most at risk as a result of the conflict and sanctions.

“AerCap is likely to be the most exposed to hard-hitting economic sanctions, with 152 active, parked and stored aircraft across Russia and Ukraine,” IBA said.

If airlines fail, or are barred from complying with sanctions, lessors maintain contingent insurance policies, which could potentially cover repossession losses, Fitch said.

“Lessors also often have maintenance reserves and letters of credit associated with leases, which could reduce potential losses,” it said.

Aircraft lessors remain focused on active liquidity management, and issuers will have sufficient liquidity to withstand the potential near-term impact of lease terminations on collections, utilisations and cash flows and losses from unrecovered aircraft, the rating agency said.

Higher oil prices or a sustained oil shock, which can be a major risk for airlines, could in turn pressure aircraft lessors' performance metrics, but may also lead to increased demand for lessors' more fuel-efficient current generation aircraft and favourable order book positions with manufacturers, Fitch said.