INSIGHT: Idyll’s end

Russian airlines return over 100 aircraft to lessors in less than a year.

Photo by Artyom Anikeev / transport-photo.com

In less than a year, Russian airlines have returned to lessors more than 100 aircraft. The bankruptcy of the country’s second largest carrier, Transaero, may double this figure. Foreign lessors are souring towards the Russian market amid the mutual sanctions, and the ongoing economic crisis is not contributing to their enthusiasm. This loss of interest, and growing sovereign risks, will most probably result in higher lease rates, complicating market access for second-tier airlines. Russian lessors will also suffer from Transaero’s demise: remarketing the carrier’s fleet under financial lease agreements will not be easy, and the leasing companies are likely to report losses this year.

For the past several years, demand for air travel in Russia was growing at a double-digit rate. The country’s airlines added more than 570 aircraft to their fleets in 2010-14, including 50 domestically built airliners. To the joy of leasing companies, aircraft prices were growing as the average fleet age had halved. Carriers enjoyed an easy access to new airliners irrespective of their scale and business model. It appears that most of the foreign lessors were expecting minimum risks and a growth in passenger numbers that would last at least for the duration of the lease agreements, if not forever. The Russian lease companies, for their part, preferred to work with the four largest airlines, whose reliability did not raise any questions.

Those airlines hoping for air travel demand to keep growing at 12% ran into oversupply problems by the end of 2014, exacerbated by the drastic drop in the ruble exchange rate. ithin less than a year, Russian carrier returned 110 aircraft to lessors (and also grounded a portion of their remaining airliners). In most of these cases, no fees were applied: the lessors were more interested in getting their assets back and remarketing them as soon as possible than suing the financially troubled operators.

Foreign lessors are now much less enthusiastic about the Russian market, what with the growing risks and airliner returns. Some new lease deals are certainly still possible to seal, particularly between current partners, but international lessors have no desire to further expand their Russian operations.

For small airlines, the new market reality means they are having a harder time gaining access to new aircraft. Both Russian and foreign lessors have started treating such carrierswith reserve, favouring customers with reliable credit scores. Only two or three of the largest operators are currently able to fill Transaero’s capacity niche, meaning that market concentration is set to grow.
These economic and political problems will result in higher lease rates even for the lessors’ more reliable clients. Foreign leasing companies will factor in higher sovereign risks, while Russian lessors will need to adjust their financial performance to the effect of the sanctions. Another risk factor worrying foreign lessors is the Russian authorities’ desire to put all commercial aircraft operated in Russia on the national registry.

The cessation of Transaero’s operations is only making the situation worse. As of September 2015, the carrier had 104 passenger airplanes in its fleet, including several grounded Boeing 747-400s. According to Russian Aviation Insider’s sources, 67 of these aircraft belonged to Russian lessors and 27 to foreign ones, and the remaining 10 belonged to the airline. Most of the third-party aircraft were operated under financial lease schemes. There are no doubts that the price of these airliners will now be substantially discounted for the purpose of remarketing or sale abroad. In this situation Russian leasing companies will have to gain expertise in assessing the leased airliners’ technical condition and remarketing them, rather than merely playing the role of financial mediators between banks, airlines, and aircraft manufacturers.

On the other hand, no fees are expected to be imposed in the case of Transaero’s aircraft being returned to lessors. Foreign leasing companies are certainly interested in getting their airliners back from Russia as soon as possible, because grounded aircraft generate hefty losses and the prospect of the bankrupt operator paying up is very vague. Foreign lessors’ confidence in the Russian market will drop once again, while risk expectation will grow. The future does not look at all promising for Russian airlines, which will still need to expand their fleets if demand for air travel rebounds in the near future.

Compared to October 1, 2014, the overall Russian commercial fleet shrank by 77 aircraft year-on-year (See Table 1). The entire Transaero fleet, which comprised 94 airframes as the article was prepared for publication, is expected to be grounded. There is a possibility that part of these airliners will continue to fly in Russia, but the aircraft owners’ desires might prove to differ from those of the manufacturers.

Table 1. Russian operators fleets

Airline Aircraft delivered Aircraft removed from service Change since Oct 2014 Fleet as of 23 September 2015
Aeroflot 15 2 13 161
Aeroflot Group 12 21 –9 85
Transaero 4 10 –6 94
S7 Airlines (including Globus) 2 3 –1 58
UTair Aviation 3 56 –53 64
Ural Airlines 2 2 0 35
Yamal 0 5 –5 23
Yakutia + Alrosa 2 7 –5 13
Red Wings 4 1 3 10
NordWind + Pegas Fly 4 14 –10 26
Azur Air 13 0 13 13
Metrojet 1 4 –3 5
Other 15 29 –14
Total 61 138 -77

The regional market has suffered the greatest, with the Russian fleet of regional aircraft shrinking 23% year-on-year (see Table 2) since October 1, 2014. Despite government support for regional air services, these routes remain unprofitable, so airlines go for them first when reducing their capacity. Even the delivery of 12 Sukhoi Superjet 100s (SSJ 100) did not rectify the situation. This massive removal of regional aircraft from operation means that the volume of regional air services has shrunk as well, and that the announced growth in domestic passenger traffic is related to mainline routes.

Table 2. Russian commercial fleet changes by aircraft type

Aircraft Type Delivered Removed from operation Change since Oct 2014
Airbus A320 (family) 6 18 –12
Boeing 737CL 0 14 –14
Boeing 737NG 24 21 3
Boeing 757 0 13 –13
Boeing 767 5 14 –9
Boeing 777 3 0 3
Boeing 747 0 5 –5
Bombardier CRJ100/200 3 26 –23
Bombardier DHC-8-200/300 0 1 –1
Bombardier Q400 0 1 –1
SSJ 100 12 0 12
Antonov An-148-100 0 6 –6
ATR 42 0 9 –9
Embraer ERJ145 4 0 4
Saab 2000 0 5 –5
Saab 340 0 4 –4
Let L-410UVP 2 0 2
Viking Air DHC-6-400 1 0 1
Total 61 138 –77

The medium-range fleet shrank by 7%, and the long-range fleet dropped by 9%. Depending on how the situation with Transaero plays out, the long-range segment might even get to lead the rest of the fleet in terms of aircraft phase-outs: most of the carrier’s long-range aircraft, in particular its Boeing 747-400s, stand a slim chance of getting remarketed in Russia. Following the repeated decline in the ruble’s exchange value, and in the light of the growing demand for domestic air travel, Russian operators prefer to build medium-haul capacity for greater operational flexibility.

The most significant fleet shrinkage has been reported by the U.S. lessor GECAS, which has 21 aircraft, or 23% of its entire Russian-operated fleet, returned by carriers over the past year. This figure accounts for 15% of the total number of airliners removed from operation in the country since October last year (see Chart 1). Irish lessor AerCap, which became the largest leasing company internationally after acquiring ILFC in 2014, came second, with approximately 11% of its Russian-operated fleet returned by the operators.. PL Panorama Leasing, which is affiliated with UTair Aviation, was also among the leader in terms of aircraft returns with 11 of its airplanes withdrawn from Russian service.

Chart 1 Aircraft returned to lessors, % by owner

Chart 1 Aircraft returned to lessors, % by owner

Russian lessors had a total of 21 aircraft returned to them, or 15% of the overall number of aircraft withdrawn from service since the beginning of the current crisis. VEB Leasing and Ilyushin Finance Co. let the ranking. With Transaero’s fleet grounded, the Russian leasing companies might end up with the lion’s share of the carrier’s fleet on their hands. Their strategy of working primarily with the most financially sound airlines appears to have misfired. Financial lease contracts are signed for the minimum of 10-12 years, during which period, as it turns out, any airline can go bust, bringing problems to those lessors which have little prior exposure to the preowned aircraft market.

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