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Friday, Sep 29, 2023

Air Lease Sees Putin Move to Seize Leased Aircraft as Bolstering Insurance Claims

At first glance, the fallout from the Russian invasion of Ukraine and resulting economic sanctions on Russia would appear to have slammed Century City-based Air Lease Corp. hard. After all, the largest aircraft leasing firm in the United States had 29 planes worth just over $1 billion leased to Russian airlines – leases that as of March 28 must be terminated under the U.S.-led economic sanctions. That in turn sent Air Lease and other aircraft leasing firms scrambling to repossess any of the aircraft they can get their hands on outside Russia.

And just when things couldn’t seem to get worse, on March 14 Russian President Vladimir Putin signed a law allowing Russian airlines to re-register those leased planes in Russia, essentially authorizing the stealing of them from Air Lease and other leasing firms.

Last week, according to Bloomberg’s newswire service, the Russian government offered to compensate foreign aircraft leasing companies for the planes it would seize. But lessors had not taken up Russia on the offer, citing concerns that any payments from Russia risk violating terms of the economic sanctions imposed by various countries.


Not so bad?

So when Air Lease’s top brass went to speak at an industry conference put on by JPMorgan Chase & Co. in New York on March 16, they had the daunting task of trying to reassure skittish investors. In the days following Russia’s invasion of Ukraine, Air Lease shares fell about 10%.

But this situation is nothing new for the battle-tested executives. Three years ago, Air Lease faced the global grounding of scores of its leased Boeing 737 Max aircraft after two crashes involving the planes. Then, two years ago – while those aircraft were still grounded – the Covid-19 pandemic hit, bringing almost all air travel to a halt. Even now, air traffic is not at pre-pandemic levels.

Now, faced with the current crisis, Air Lease Executive Chairman Steven Udvar-Hazy, Chief Executive John Plueger and Chief Financial Officer Gregory Willis made a case that things weren’t that bad.
First, the executives sought to put their Russian exposure into perspective. Those 29 planes, they said, represented less than 5% of the company’s entire net book value of aircraft – which was roughly $22.9 billion as of Dec. 31.

In contrast, according to news reports, Dublin, Ireland-based Aer-Cap Holdings, the world’s largest aircraft leasing firm by lease volume, has roughly $2.5 billion in exposure to the Russian market.
Another point in Air Lease’s favor, according to Udvar-Hazy, is that none of the 29 planes were leased to Russian state-owned airlines, such as Aeroflot.

“We have a small number of aircraft with privately owned carriers,” Udvar-Hazy said at the JPMorgan conference, though he declined to name any of the airlines. “We have very good relationships and there has been a great deal of cooperation in the recovery of aircraft and in the return of aircraft, and we’re making good headway in minimizing our exposure.”

These private carriers, Plueger added, “very much see the endgame beyond this crisis. They are doing everything possible knowing they will need our aircraft and other Western aircraft on the leasing side.”
As for that Putin law authorizing the expropriation of leased aircraft, in a perverse way, it could turn out to be good news for Air Lease, according to Udvar-Hazy. The reason: it could bolster Air Lease’s claims on the aircraft filed with its insurers.

“I think it (the law) helps the insurance question because it demonstrates the intent to confiscate, which I think is a critical aspect of our war-risk insurance,” Udvar-Hazy said.
What’s more, he said that any Russian seizure of Air Lease-owned aircraft is not likely to be recognized outside Russian borders.

“I just want to make it clear that every one of our planes in Russia today are either registered in Bermuda, a British overseas territory, or in Ireland,” Udvar-Hazy told conference participants. “You can’t have under international law a dual registration. So they can put whatever decals they want, but it won’t be recognized by the international community.”

This is not likely to be put to the test in the short term, because Putin, in signing the law, said the primary intent was to ensure that there were enough planes operating within Russia’s vast territory, which spans 11 time zones.

Udvar-Hazy also noted that Air Lease had signed lease deals with some Russian airlines for some Boeing 737-Max and Airbus A321-Neo single-aisle aircraft, but that those planes had not yet been delivered.


Insurance battle

Investors reacted favorably to the Air Lease executives’ comments at the conference, prompting a 4% rebound in the company’s share price, which closed March 24 at $43.82.
But Air Lease still faces the prospect of a long and potentially nasty battle with insurers over payouts for any planes leased to Russian airlines that face expropriation.
“We think this will be litigated for a long time as insurers will probably push back,” said Helane Becker, analyst with New York-based Cowen.

Until settlements are reached with insurers, Air Lease will have to rely on security deposits and maintenance reserves to help offset the lost lease revenue, she said.
Back at the conference, Air Lease executives raised another possibility if the company were not to prevail in its forthcoming battle with insurers: a government bailout of sorts.

“On the insurance side vis-à-vis Russia, I think it’s within the realm of possibility that both the U.S. government and governments within the EU (European Union) will also possibly step in and provide some support as they did after 9/11,” Plueger said. “There is precedent for it… I can’t say it’s going to happen, but I can say it has happened before. If insurance does become a big issue, I can very easily see governments stepping in at some point in time as they have done in the past.”

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