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In a Less-Globalized World, Be Careful Where You Park Your Plane

Russian airlines like Aeroflot fly a lot of planes leased by Western companies, which may never be able to recover them.
Photo: STRINGER/REUTERS

There may be no better illustration of globalization’s retreat than investors getting burned for owing planes in the wrong place.

This week, Moscow claimed that almost 800 commercial aircraft have already been re-registered from Bermuda and Ireland into its own aeronautical records—implying it has appropriated them—in response to the European Union requiring lessors to terminate contracts with Russian airlines by March 28. Western lessors have repatriated only 78 of their jets in Russia, officials said. Roughly 480—worth around…

There may be no better illustration of globalization’s retreat than investors getting burned for owing planes in the wrong place.

This week, Moscow claimed that almost 800 commercial aircraft have already been re-registered from Bermuda and Ireland into its own aeronautical records—implying it has appropriated them—in response to the European Union requiring lessors to terminate contracts with Russian airlines by March 28. Western lessors have repatriated only 78 of their jets in Russia, officials said. Roughly 480—worth around $10 billion—are stuck there, according to research firm Ishka.

Ireland’s AerCap has the most jets in Russia, 145 in service, analytics company IBA said. Its stock is down 17% this year. As a share of its total portfolio, though, U.S.-based Carlyle Aviation is also very exposed.

Aircraft owners are often insured against physical damage, wars and confiscations. Fitch Ratings said Monday that insurers—most of them belonging to Lloyd’s of London—could foot almost all of the bill, with 30% to 40% covered in turn by reinsurers. It expects the impact to be manageable.

So why aren’t investors buying the dip in lessor shares and ABS? Perhaps because the aircraft-finance ecosystem is unprepared for years of legal battles. Despite emerging in the 1970s, the aircraft-leasing model didn’t take off until the 1990s, eventually expanding to include half of the world’s fleet. Lessors have grown up in an era of globalized aviation and geopolitical calm, in which treaties like the 2001 Cape Town Convention regarding movable property gave them a false sense of security.

Common sense suggests that Moscow has broken the rules by refusing to return planes. However, Russian officials are offering to pay the leases or even buy the jets; it is the Western firms that aren’t allowed by their governments to accept payments from Russia. So the legal situation is unclear and may depend on factors like the timing of insurance cancellations or even who operates the jets: Claiming nationalization could be easier with a state-owned airline like
Aeroflot,
some lessors said.

Part of the solution, banks and insurers hope, is that a sizable part of the lost assets could one day be recovered. They will probably be disappointed.

A jet’s worth is tied to the integrity of the technical records allowing operators and financiers to determine its airworthiness. Tracking back gaps in records often costs about $3 million a plane, New York University professor

David Yu
estimates, and stepping outside the scrutiny of Western regulators will make the entire fleet suspect. Also, Russian aircraft will need to be cannibalized for parts, and bankruptcy procedures show that this takes years and tens of millions of dollars to reverse. Being operated even for a while in such circumstances could mark planes down close to scrap value.

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This mess may ultimately lead to higher insurance premiums and lower aircraft values. The broader lesson is that international law may be no match for rising geopolitical risks. Adding to the complications, Western investors are exposed to Russia through their financing of Chinese lessors, which own 75 Russian jets, Cirium data shows. Not to mention that foreign leasing firms have 806 jets worth $20 billion in China itself, meaning that the industry’s main market is in another country that has a tense relationship with the West.

Even assets that can fly can’t always keep above the fray of a fragmenting world.

Russia is holding more than 400 Western-owned planes inside its borders, giving leasing companies little chance of getting them back. The move could mean billions of dollars in losses for Western insurers and problems ahead for Russian airlines. Photo illustration: Laura Kammermann

The Wall Street Journal Interactive Edition

Write to Jon Sindreu at jon.sindreu@wsj.com

Corrections & Amplifications

Just 6% of Fortress Transportation and Infrastructure Investors’s portfolio is exposed to the war in Ukraine. An earlier version of this article and a chart incorrectly said 23% of its portfolio was affected by the war. (Corrected on March 26)

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