As Russia continues its invasion of Ukraine, the West has imposed sanctions targeting the Russian leader Vladimir Putin and those closest to him. In addition, sanctions targeting Russian airlines have been imposed.
Aeroflot, the Russian flag carrier, was banned from landing in the UK. Russia then introduced counter-sanctions against British planes. It appears that sanctions and counter-sanctions have been put in place by other countries and Russia.
There is, however, a negative effect on everyone as economies stall and prices rise. There is also an effect on global aviation.
Effects of sanctions
The effects on global aviation are far-reaching and extend beyond landing restrictions in certain countries and longer flight times because airlines need to avoid Russian and Ukrainian airspace. Russia’s size and close integration into the world economy mean that sanctions are having a greater negative effect than earlier sanctions that have been placed on Iran and North Korea.
According to Reuters news agency, manufacturers, lessors (those that own the planes which are effectively rented out otherwise known as leasing to Russian flight operators), insurance companies, and maintenance providers to Russian flight operators are among those outside Russia that are hit by sanctions. Those companies connected with Russian operators such as Aeroflot, S7 Airlines and AirBridgeCargo are among those affected.
Leasing And Insurance
In relation to aircraft leasing, Russian airlines have 980 jets in service. Of these, 777 are leased. Out of these, 515 jets are leased from foreign companies such as AerCap and Air Lease. As one can see, a significant number of planes are leased from foreign companies. Out of a total number of 980 jets, they represent over 50% of the total number of planes in use. Because of the sanctions, the European Union has given companies until March 28th to end rental contracts in Russia.
There are a number of obstacles to getting the aircraft back. Airspace bans, potential SWIFT (a type of international payment system) payment transfer issues, and the possibility that Russia may nationalise all aircraft could all prevent lessor companies from getting their aircraft back. The planes leased from them have a market value of ten billion dollars.
To make matters worse, even if planes are returned quickly, the huge number needing to be placed elsewhere would depress global prices, reducing profits for the lessor companies. However, on the flip side, aircraft carriers may benefit from cheaper lease rates and may be able to pass on savings to their customers.
Russian airlines have also been cut off from insurance and re-insurance (companies that provide insurance cover for insurance companies themselves) markets in the European Union and Britain. According to Reuters, an insurance industry source suggested that it was unclear if companies unable to repossess planes would be covered under their policies which typically contain clauses cancelling coverage in the event of sanctions. They may require legal action to settle the issue.
Sales and Maintenance
In terms of sales, Boeing and Airbus both stand to lose as 62 planes on order are to be barred from being delivered according to aviation consulting firm IBA, as stated by Reuters. Manufacturers and maintenance firms are also barred from providing parts or services for the Russian planes. This means that they will be making losses in these areas due to having less work. Germany’s Lufthansa Technik has said that it had stopped serving Russian customers, involving hundreds of planes.
Viktor Barta, vice president of aviation finance advisory at ACC Aviation, said that there is a high risk that Russian airlines would need to strip parts from their existing fleet once spares ran out.
As one can see, sanctions and counter-sanctions will be reducing the profitability of western firms providing services for the Russian aviation sector. However, Russia also stands to lose from the loss of expert services from the west. We have to hope that the combination of both of these will encourage Russia and the West to find a mutually acceptable compromise and stop the conflict.
