When Western sanctions were imposed on Russia, that voided the aircraft leases on planes operated by Russian airlines. More than half the Boeing and Airbus planes in Russia had to be returned. Airworthiness Certificates were cancelled. The Russian government, though, ordered that the planes not be returned in violation of the country’s Cape Town Treaty obligations. And the planes were re-registered in Russia.
Russian airlines haven’t had normal access to parts. Some have been obtained in contravention of sanctions, on a black market, while some aircraft have bene raided for parts to keep the remains of a smaller fleet operating.
Even if sanctions were to end, the planes will have lost substantial value in world market because their maintenance records cannot possibly be kept up to world standards. What parts have been replaced, what sort of replacement parts were used, and how were those parts obtained?
For the leasing companies, you might think ‘they’ll just file an insurance claim’. And you’d be right! But that’s not the end of the story. In March I wrote that “the question of insurance coverage is something that’s going to be litigated.” That litigation is happening (FT).
Carlyle Group is suing 35 insurers and reinsurers, including AIG, Axis and Chubb and Lloyd’s of London underwriters, for $700 million over 16 Boeing and 7 Airbus planes spread across numerous Russian carriers. Their single largest exposure is with 5 planes operated by UTAir. Carlyle’s insurance claims haven’t been denied. They just haven’t gotten an answer in over 7 months, let alone a check.
It’s a big claim. No one wants to pay. Insurers also would love to see sanctions lifted, and Russian airlines either re-lease the planes or otherwise make good to the lessors – or at least have the planes returned. That would mitigate losses. Once they pay, they’ll be in a position of having to collect later, if there’s any collections to happen. So in the meantime they no doubt will press every ambiguity. For instance,
- Have the aircraft really been lost? Are they in fact unrecoverable? At what point does an airline’s failure to return aircraft after its lease becomes void become a covered event? (The planes are not, for instance, lost when they continue to fly.)
- And is the standard policy that lessors have over their aircraft the correct coverage to file under, or should it be covered by war risk insurance? In other words, which insurance pays?
My sense is that the lawsuit is leverage, because of the potential for punitive damages against the insurers. Now they’ll have a reason to settle rather than delay.
