Sberbank Leasing: a difficult year in review

Sberbank Leasing and Transaero bankruptcy Leasing rates for Russian-built aircraft, such as this Aeroflot's SSJ 100 are denominated in rubles (Photo by Fyodor Borisov / Transport-photo.com)

In 2015, Sberbank Leasing managed to close several major transactions despite the Russian air transport industry’s having fallen on hard times. At the end of last year, this company that is the aviation leasing department of Sberbank, Russia’s largest government-owned bank, exceeded its business target by more than 100%. The lessor also settled a restructuring plan with UTair, one of Russia’s major airlines, which was facing financial difficulty, and is currently working on resolving the issues associated with the bankruptcy of the country’s second largest carrier — Transaero.

“The company negotiated several major transactions, including the project of delivering the third batch of ten Sukhoi Superjet 100s to Aeroflot,” Sberbank Leasing’s international business development director Pavel Piskun told Russian Aviation Insider. In 2015, Sberbank Leasing produced leasing agreements for six of these aircraft, and by now all of them have already been delivered to Russia’s largest airline.

Another major project was the delivery of two cargo Antonov An-124 Ruslans to the airline Volga-Dnepr. These aircraft were previously operated by Polet and were grounded when the operator went out of business. In the end, Sberbank Leasing managed the contract under which Volga-Dnepr accepted these aircraft and agreed to restore their airworthiness. The first of these aircraft is expected to enter service in April.

Pavel Piskun emphasized that the contract is extremely important in terms of developing business relationships with the Volga-Dnepr Group, for which Sberbank serves as a major banking partner. In 2013, the group’s subsidiary AirBridgeCargo leased two new Boeing 747-8Fs from Sberbank Leasing. “As a result, the total amount of business done with the group increased significantly last year,” Piskun summarizes.

Sberbank Leasing also carried out its first successful sale of a Boeing 737-800 to a foreign customer. This Boeing was initially intended for the now-defunct airline Transaero, and was the second out of a batch of 12 aircraft being built in a customized configuration and delivered directly from the OEM. However, because of Transaero’s insolvency, the lessor had to accept the aircraft itself in September 2015.

The first of these aircraft was delivered in April 2015, and flew under Transaero’s brand for several months. It is currently being remarketed, and the negotiations are underway with a number of potential customers.

UTair and Transaero problems

In addition to the mentioned accomplishments, Sberbank leasing oversaw the restructuring of UTair’s debts and reclaiming the aircraft from Transaero. “Last year certainly had its downside, but even here we have something to be proud of. Firstly, at the end of 2015, we signed the restructuring plan for UTair. We acted in close cooperation with Sberbank, which lead the restructuring syndicate. We closed that deal on New Year’s Eve. At the same time, we completed restructuring for Boeing 737 aircraft, which the UTair is now leasing,” Piskun explains.

The problem was a serious one, as UTair had stopped transferring leasing payments in mid-2014—for a year and a half, the airline was not capable of servicing its debt. However, both sides have come to a mutually acceptable solution, and UTair has returned to its payment schedule. “Now the company is servicing its obligations timely. We hope that the intense and ambitious business-plan that UTair has adopted and that was approved by the federal government, creditor banks and leasing companies, will be accomplished, and that this chapter in the airline’s history will be closed for good.”

Sorting out Transaero’s situation is a work in progress. Up until now, the lessor managed to gain control over all five aircraft it had delivered previously—four Boeing 747-400s and a 737-800—to carry out planned maintenance on them, and reposition them to places with mild climate conditions and lower costs of parking and maintenance. The last of these aircraft was taken out of Russia in February, and now all five have been put into a conservation program.

Sberbank Leasing is currently in talks with Aeroflot Group regarding the future of these aircraft, in addition to ten more new Boeing 737-800s ordered by Transaero with deliveries set for 2016 and 2017. The lessor has signed letters of intent for these 10 aircraft, and for four Boeing 747-400s, with Aeroflot’s subsidiary, Rossiya Airlines.

At the moment, since the assembly of the ordered 737-800s has not started yet, the process is underway to coordinate their configuration and other parameters with Aeroflot.

The unscheduled return experience

“In the case of Transaero’s bankruptcy,” says Piskun, “we faced a very serious problem linked to the fact that the carrier first stopped its operations basically overnight, but only later lost its Part 145 certificate, which allowed the airline to continue servicing its fleet even though it wasn’t operating flights. As a result, the aircraft were stuck in Moscow because they required maintenance procedures prior to ferry flights.” Piskun also explains that Sberbank Leasing was lucky that all of Transaero’s fleet was accumulated at one airport, Vnukovo.

The fleet of ageing Boeing 747-400s was the biggest challenge. According to Piksun, these aircraft fortunately had a similar configuration to the aircraft in Sberbank’s portfolio, as they were built as one batch—they are the so called “sister ships”—and were operated by the Japanese JAL at the dawn of their career. These aircraft are equipped with the General Electric engines, which Piskun says are the most efficient in terms of maintenance and repair costs. “We had to start working immediately because if an aircraft is left unattended it starts turning into a scrap pile, and violation of maintenance schedules is a reason for airworthiness certificate suspension,” Pavel Piskun says.

Because Transaero lost its flight operation and maintenance endorsements one after another, the lessor was forced, on emergency basis, to build bridges with Vnukovo Airport authorities and ground services, and then change its maintenance provider. In this situation, Sberbank Leasing’s long-term partner Volga-Dnepr Technics came to help. Its sister company, AirBridgeCargo was the only other Russian operator of Boeing 747-400s besides Transaero. Yet it still wasn’t simple because Volga-Dnepr Technics is based in Sheremetyevo and it had to certify Vnukovo as its second base to be able to perform the maintenance works on the aircraft positioned there.

Throughout the project the leasing company’s staff obtained a level of knowledge and competence that “seriously exceeds the necessary minimum for an average financier.” Piskun concludes on this that, “Now we know how the aircraft are repaired, what they consist of, what their maintenance programs look like, where their spare parts are purchased and how they are imported and exported under different customs regimes. In terms of professionalism, it was a giant leap for the company. Although, from the financial result standpoint, these aircraft still present us with problems.”

Leasing agreement with Russian carriers and state support issues

The Russian aviation market landscape is complicated by the fact that the airlines generate income in rubles, whereas the leasing payments for Western-built aircraft are denominated in US dollars. Aeroflot managed to negotiate their payments for SSJ 100s to be made in rubles. Sberbank Leasing is also ready to discuss the option of transferring those contracts that are denominated in foreign currency into rubles, because considering those limitations that have been imposed by foreign partners, it’s not possible to raise long-term financing on Western markets. Sberbank Leasing is financed by Sberbank out of the bank’s internal resources, so there is not a huge difference between dollar and ruble financing.

Since its parent company is the sole source of financing for the lessor, even in case of transactions that imply external financing, they are structured through Sberbank. At any rate, according to Piskun, Sberbank Leasing act as the bank’s borrower, and it is the bank that will receive financing using one or another export credit scheme.

Commenting on the probability of airlines returning their aircraft before their contracts expire because of unfavorable market environment, Piskun said that is hardly an option. Leasing agreements, with the exception of SSJ 100 and other Russian-made aircraft, are regulated by international law practice, which does not give the lessee the right to terminate the lease ahead of schedule. Operators may return aircraft only by mutual agreement or in the case of insolvency.

Based on its recent experience, Sberbank Leasing believes that for commercial aviation operational leasing is a more logical solution than financial leasing, because it initially means an entirely different level of control over an aircraft’s technical condition. Accumulating maintenance reserves gives lessor peace of mind, because even if a leasing contact is terminated prematurely and there is a situation of reclaiming the aircraft in the ‘as is’ condition, the maintenance reserves already accumulated from the airline’s regular payments may be used to cover the repairs, instead of an airline’s own money or new credits.

Speaking of government relations, Piskun pointed out that leasing companies currently enjoy state support. In particular, Sberbank Leasing received state subsidies to compensate for interest rates in the SSJ 100 deal for Aeroflot. Besides that, the company is in close contact with Ministry of Industry and Trade over new measures of state support. For instance, there was a project in which Sberbank Leasing, in cooperation with other market players, asked the government to provide residual value guarantee for Russian-built aircraft. That project was developed and implemented from concept to a technical solution.

“The subsidy program is working, we are receiving quite substantial volumes of subsidies, which enables us to offer the ruble lease rates in level with nominal interest rates denominated in dollars and euros,” Piskun notes.

Along with that, Sberbank Leasing, in its regular communications with the Ministry of Industry and Trade, is repeatedly raising the issue of supporting operational leasing in a similar way as it does financial leasing. These negotiations are already showing positive results.

2016 Forecast

Sberbank Leasing is expecting the Russian aviation market situation to remain difficult throughout the year. Significant changes are revealing themselves in the structure of passenger traffic, which is shifting its focus towards domestic travel. The loss of such popular destinations as Egypt and Turkey has dealt a serious blow to the industry.

But even now, it is obvious that those airlines that have previously been paying serious attention to their development strategies, sustainability and cost control will stay afloat.

The air transport market is complicated and low marginal. The main direction for 2016, according to Piskun, is “just surviving, working on your costs, and closing the burning issues that are remaining.” As soon as Sberbank Leasing has obtained firm contracts for the Boeing 747-400s and 737-800s, they will be able to say that the 2015 situation has been resolved. “Then, we will start looking cautiously at other business opportunities.”

Piskun concludes in his address: “Russian aviation leasing has accumulated more than enough problems. We realize that there are serious changes in store for the market, but it’s too early to discuss that right now. The year will not be a simple one. It will be a year of survival and concentration.”

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