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Aviation leasing outlook remains positive amid twin challenges of Covid-19 and Russian sanctions

6 May 2022

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There is growing optimism in the aircraft leasing industry despite some ongoing issues – including Russian sanctions and continued travel disruption in the wake of Covid-19. Read more from Anne Flood, head of capital markets, Ireland; Sean Donnelly, business unit manager, capital markets, Ireland; Sarah McNamara, commercial director; and Ian Hancock, head of trustee services.

A key topic at the forthcoming Airline Economics Growth Frontiers conference in Dublin will be how sanctions against Russia will impact the aviation industry.

Sanctions had not been fully implemented in March, when the International Society of Transport Aircraft Trading (ISTAT) conference met in San Diego. Two months on, many sectors of aviation finance have been hard hit as the industry adjusts to change. Still in question is whether insurers are willing to pay out on aviation lessors’ claims for aircraft stranded in Russia.

The Dublin conference of aircraft leasing firms, banks, asset managers, law firms and service providers will also be keen to hear how the industry is coping with aircraft assets held in Russia as well as with the closure of Ukrainian, Russian and Belarusian airspace and parts of the Moldovan airspace to commercial flights  – which affects key routes to the Far East.

What will happen to aircraft leased to Russian airlines?

Given that sanctions effectively required the termination of approximately 500 aircraft leases to Russian operated or Russian-owned airlines and that the majority of those planes remain in Russia with lessors unable to retrieve them, discussion turns to the costs to the industry.

In accordance with the sanctions and following the spate of lease terminations, income from lease rentals has ceased, with negative consequences on income projections for all lessors impacted.

Focus will then turn to what shape the aircraft will be in if they are ever returned. The inability for lessors to have maintenance crews travel to Russia to inspect aircraft, along with a shortage of parts in Russia, due to sanctions, will have a detrimental impact on the viability and airworthiness of the aircraft. This situation is further compounded following the announcement from  China that it will not provide replacement parts. This may mean parts are cannibalised from other aircraft, causing servicing schedules to be missed.

If aircraft are recovered when sanctions are eventually lifted, it is likely that they will have lost much value and highly unlikely to be airworthy. Already lessors are writing off their assets stranded in Russia and have begun to pursue insurance claims. Insurers may pay out on these claims, but many expect these will be disputed by insurers.

Because of the sanctions, European airlines are unable to overfly Russia and Ukrainian airspace – part of typical flight paths between Europe and Asia – affecting schedules and flight times to the Far East.

More sanctions may be imposed Russian banks, companies and individuals, further affecting aviation financing.

Airline industry bounces back post Covid?

While the aviation sector grapples with the fallout of the Russia sanctions, Covid-related disruptions have begun to ease up.

Airports are busy and flights fully booked. Before the war in Ukraine, demand for business and leisure travel was returning faster than airlines expected.

Globally, people are starting to travel again. Apart from the Far East – in particular China and Hong Kong, where lockdowns are still in force – most countries are learning to live with Covid.

Airlines have also become more flexible as they realise passengers will tolerate cancellations. For example, some flights on high-profile routes, including to Tokyo, have been cancelled or suspended. Before the pandemic, airlines believed they had to continue operating loss-leading routes. Now their bottom line is to stay profitable, even if that means losing key routes.

Non-banks enter aviation financing arrangements

As the industry continues to bounce back, we continue to see more non-bank lending and financing of aviation structures.

Investors still have an appetite to get involved and some buoyancy is returning to the market, despite the difficulties of the past three years.

Aviation financing investors will need to factor in inflation and impending interest rate rises from the European Central Bank (ECB), the Bank of England and the Federal Reserve.

This will affect liquidity and the cost of finance, bringing more demand for alternative lending as bank borrowing becomes more expensive.

ESG data demands for aviation financing will grow

We believe environmental, social and governance (ESG) developments in aviation financing will be another central talking point in Dublin. An estimated 2.5% of all carbon emissions come from global aviation. Despite considerable recent improvements in the efficiency of aircraft; older, less-carbon efficient aircraft remain in use particularly in lower-income countries, so the aviation sector remains a focus of environmental groups.

Both investors and lenders are now more likely to consider the ESG implications of investments which will likely result in increasing demand for more detailed ESG data and lessors will need partner companies to provide that. Those lessors who can clearly show their ESG credentials are well placed to tap into increasing avenues of funding coming into the sector.

New Anti-Money Laundering regulations in Ireland

Recently introduced anti-money laundering (AML) regulations in Ireland following on from the EU’s 4th and 5th Anti-Money Laundering directives mean Irish-based lessors engaging in finance leasing with any lessee must register with the Central Bank of Ireland for AML reporting.

This involves drafting an AML policy, completing an AML risk assessment, appointing a compliance officer/MLRO and the boards of leasing companies/SPVs meeting regularly to discuss any anti-money laundering and reporting any incidents if necessary.

Leasing companies need to be aware of this increased regulation of the sector in Ireland as this AML reporting adds to the existing requirement to report to the Central Credit Register for Irish-registered lessors who enter finance leases to Irish registered lessees.

How Intertrust Group can help with aviation financing

Intertrust Group is experienced as a service provider to the aviation finance industry and can provide full corporate services to aircraft leasing SPVs and aviation ABS structures.

We provide professional directors, company secretarial services, accounting, cash management, loan administration and compliance and regulatory services to structures from inception to end of life.

We act as security trustee with experience in taking security over aircraft in a wide range of jurisdictions, on both commercial and ECA financings.

We can help with ESG data services, and have a network of 50 offices around the world where our experts can provide advice for specific jurisdictions. Intertrust is authorised as a global trust provider for the Global Aircraft Trading System (GATS).

 Why Intertrust Group?

  • Intertrust Group is a publicly listed company with 70 years’ experience providing world-class trust and corporate services to clients around the world.
  • Intertrust Group provides a wide range of financial and administrative services to clients operating and investing in the international business environment. We help companies to expand globally, offering support with restructuring, outsourcing and further developments.

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