Russia’s size and close integration into the international aviation industry since the end of the Cold War means sanctions related to its invasion of Ukraine are having outsized consequences relative to before freezes on Iran and North Korea.
Manufacturers, lessors, insurers, and maintenance is given to Russian carriers like Aeroflot (AFLT.MM), S7 Airlines, and AirBridge Cargo are among those outside Russia that are hit instantly by sanctions.
Foreign airlines, meanwhile, are reeling from more elevated oil costs and longer routes required to bypass airspace over Russia that are expected to drive up ticket costs and air freight rates.
Russian airlines have been highly reliant on the international aircraft leasing industry to modernize their fleets with the latest Airbus (AIR.PA) and Boeing (BA.N) aircraft.
Russian carriers have 980 passenger jets in service
- Russian carriers have 980 passenger jets in service, of which 777 are leased, according to analytics firm Cerium. Of these, 515 jets with an estimated market value of about $10 billion are rented from foreign firms such as AerCap (AER.N) and Air Lease (AL.N).
The European Union has given leasing companies until March 28 to wind up recent rental contracts in Russia.
But getting the aircraft back could be challenging due to airspace bans, potential SWIFT payment transfer issues and industry concerns the Russian government could nationalize the fleet to maintain domestic capacity.
Russia’s state aviation authority
Russia’s state aviation authority suggested that airlines with foreign-leased planes ban flying them abroad.
Even if the planes are returned quickly, the huge number needing to be put elsewhere could depress rental costs globally, analysts say. Russian airlines have also been cut off from the insurance and reinsurance markets in the European Union and Britain.
An insurance industry source said it was unclear if lessors unable to repossess planes would be covered for losses under their policies, which typically contain clauses canceling coverage in the event of sanctions. Legal action may be needed to settle the issue, told the source, who was not authorized to speak publicly.
Russian airlines have 62 planes on order with Airbus and Boeing, according to aviation consulting firm IBA, and those deliveries will be barred.
Manufacturers and maintenance firms are also banned from providing parts and services for the existing fleet. Germany’s Lufthansa Technik (LHAG.DE) said it had stopped serving Russian customers, involving hundreds of planes.
the agency said the Russian transport ministry had drawn up a draft bill to support airlines until September 2022 that would allow maintenance by third-party firms and suspend all inspections of carriers.
Some aviation executives are concerned that the sanctions prevent plane makers from sharing service bulletins and airworthiness directives that are key for safety.
Viktor Berta, vice president of aviation finance advisory at ACC Aviation, told there was also a high risk that Russian airlines would need to strip parts from their existing fleet once spares run out.
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United States said
Oil prices have surged to the highest level since 2008 as the United States told it was willing to ban Russian oil imports. Oil hedging, fuel surcharges, and fare growths are among the measures airlines are taking to offset some of the pain at a time when demand remains low due to the pandemic.
High oil prices are in some cases compounded by circuitous flight paths needed to avoid Russian airspace after reciprocal bans that can add up to 3.5 hours of flying.
- The biggest impact is on flights between Europe and North Asian destinations like Japan, South Korea, and China but other affected routes include those between southeast Asia and Europe and the United States and India.
Longer flight times also lead to higher staff costs, less cargo-carrying ability, and higher maintenance costs on contracts that are set on a flight hour basis, informed Brendan Sobie, an autonomous aviation analyst based in Singapore.
“Another concern is the impact on international passenger demand in some markets, resulting in a setback in the overall recovery of international air travel,” he counted.
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