The Russia-Ukraine conflict has not only caused flight cancellations and airspace closures, but has also led to the confiscation of several hundred aircrafts by Russian aviation companies.
Confiscated aircraft in Russia: a reminder of the facts
Since the beginning of the hostilities on 24 February 2022, Russian civil aviation has been subject to a series of Western sanctions, the main ones being summarized as follows:
- no-fly zone imposed on Russian aircrafts over the airspace of European Union member countries, the United Kingdom, the United States, Canada among others,
- ban on the sale of aircraft and spare parts to the 43 Russian airlines headed by Aeroflot, which alone has 342 aircrafts,
- suspension on 12 March 2022 of the airworthiness certificates for the 716 Russian aircrafts registered with the Bermuda Civil Aviation Authority,
- European authorities require aircraft leasing companies to repatriate the 515 Airbus and Boeing aircrafts in service in Russia by 28 March 2022. The value of these aircraft is estimated at 12 billion USD. Almost 50% of the 980 aircrafts in the Russian fleet are affected by this measure.
In response to these sanctions, Vladimir Putin signed a decree on 14 March allowing Russian companies to take over aircraft belonging to American and European leasing companies. The Russian authorities also provided local aviation companies with new national airworthiness certificates, which have no international value.
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Confiscated aircraft in Russia: several lessors affected
In 1973, in order to relieve the airlines impacted by the oil crisis, the aircraft rental market emerged with the "lessors" offering airlines the possibility of rapidly increasing or reducing their fleets.
About 50 large leasing companies are dominating the market, led by AerCap, Dubai Aerospace Enterprise, Carlyle Aviation Partners, Avolon, BAM, SMBC, Air Lease.
This market currently has 10 900 aircrafts, that is, nearly half the world's fleet. These aircrafts are made available to airlines, with or without crew, for a fixed period calculated in months or years.
Three of these lessors were particularly affected by the confiscation of aircrafts: AerCap, Dubai Aerospace Enterprise and Carlyle Aviation Partners.
- AerCap
Headquartered in Dublin, Ireland, AerCap is the world's largest aircraft leasing company with a fleet of more than 3 200 aircrafts, engines and helicopters under ownership or management.
As a result of the Russia-Ukraine conflict, AerCap has lost nearly 5% of its fleet, that is, 152 leased aircrafts with an estimated value of 2.5 billion USD.
The aircraft leasing group, which has been able to recover about twenty aircrafts, has turned to its insurer for the compensation of its losses. The amount of the loss amounted to 3.5 billion USD, that is 2 billion USD accounting for the loss of the 135 aircrafts and 1.5 billion USD for the operating loss.
War risks being excluded from aviation policies, AerCap has initiated legal proceedings against its insurers, including AIG and Lloyd's of London.
- Dubai Aerospace Enterprise (DAE)
Based in Dubai, the aircraft leasing company owns and manages a fleet of 450 aircraft for 107 airlines.
After having suffered losses of nearly 600 million USD for 19 aircrafts stranded in Russia, DAE has filed a lawsuit in London against 11 insurers and reinsurers, including Lloyd's, AIG, Chubb and Swiss Re.
- Carlyle Aviation Partners
Based in Miami, USA, Carlyle Aviation Partners has 246 aircrafts serving 93 airlines in 53 countries. The leasing company has filed a lawsuit against a dozen insurance companies. The action follows the denial of compensation for losses related to the seizure of 23 aircrafts leased to Russian airlines.
Among the insurers involved are American International Group UK, Chubb European Group and Berkshire Hathaway International Insurance. Carlyle Aviation Partners is suing these insurers for breach of contract and breach of duty of good faith. The aircraft lessor is seeking compensation for its losses, which amount to several hundred million dollars.
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Aircraft seized by Russia and aviation insurance
Aircraft manufacturers, air carriers and other aerospace companies are required to carry a specific aviation insurance policy. This coverage covers the following three types of risk:
- Hull All Risks which covers loss or damage to an aircraft in flight or on the ground. Excluded from this coverage are losses caused by the following events: war, invasion, acts of foreign enemies, declared or undeclared hostilities, confiscation, nationalization, seizure, immobilization, appropriation or use by or on the orders of any government,
- Aircraft third party legal liability insurance,
- Hull War Risks covers losses excluded by the Hull All Risks policy, namely war, invasion, terrorism, …
Despite the fact that most leasing companies have specific war risks coverage, the aviation market does not currently accept coverage for losses caused by the confiscation of aircraft by Russian companies.
However, the market has built up reserves estimated at 10-15 billion USD to cover any event. Nevertheless, these reserves exclude potential losses related to the aircraft seized by Russian airlines. These losses will probably only be known after lengthy legal proceedings.
According to Moody's, the confiscation of the planes will cost the aviation market up to 10 billion USD. A quarter of Lloyd's losses in Ukraine would come from the aviation market.
The extent of the potential damages will inevitably influence the rates during the next aviation renewals. The war risks coverage, heavily impacted, is likely to jump to unprecedented rates.
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