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Analysis-Aircraft lessors gird to battle insurers over Russia jet default

Economy May 10, 2022 03:11PM ET
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© Reuters. FILE PHOTO: Passenger planes of Aeroflot - Russian Airlines are parked at Sheremetyevo International Airport in Moscow, Russia March 12, 2022. REUTERS/Marina Lystseva

By Padraic Halpin, Conor Humphries and Tim Hepher

DUBLIN (Reuters) - Lessors with hundreds of jets stuck in Russia are preparing for what one said would be a "vigorous" pursuit of insurance claims while maintaining discreet contact with some customers after Moscow blocked the jets from leaving.

The loss of over 400 leased planes worth almost $10 billion since Western countries sanctioned Russia has led to a string of lessors writing down hundreds of millions of dollars in recent weeks.

But the lessors, speaking at a major industry conference in Dublin, said they may have to wait years to find out how much they will secure from unpredictable battles with insurers.

In the meantime they face much higher insurance bills.

"Practically speaking, I don't think anyone's expecting to get their planes back anytime soon ... mentally we're moving past it," said the head of U.S. lessor Aircastle, which has booked $252 million in impairment charges.

"That doesn't mean our teams aren't still working and chasing, preparing for what we expect to be contested discussions with our insurance carriers," CEO Michael Inglese told the Airline Economics conference.

Steven Udvar-Hazy, founder of Air Lease (NYSE:AL) Corp, which has booked an impairment of $802.4 million, said it was pursuing "vigorous" insurance claims.

The largest claim has been made by AerCap, the world's biggest aircraft lessor, which has submitted a $3.5 billion insurance claim for more than 100 jets.

Chief Executive Aengus Kelly acknowledged his firm was on the "wrong side" of the default, with the industry's largest Russia exposure, but said "the insurance companies will have to settle" at some point as he shrugged off higher premiums.

"Costs are going to go up, but I'm not going to listen to what the insurance companies are saying because they're going to face competition themselves at some point," he said.

The head of Ireland's Genesis, Karl Griffin, said it was one of the first lessors to renew insurance after Western sanctions halted all Russian leases - adding it was "not a pretty sight."

Few can say how the looming battle between lessors and insurers will play out. S&P Global (NYSE:SPGI) has forecast a huge range of aviation insurance losses of $6-15 billion.

"No one knows exactly where it will land," said Niels Jensen, co-head of aviation finance at Vinson & Elkins law firm, who said it will come down to the specific policy wording.

Lawyers say the most heated issue involves the number of "occurrences" or trigger events involved in Russia's default. That judgment could sway the value of settlements dramatically.

In London, multiple leading law firms have been lined up to do battle over the implications of that single, sparse term.

Dubai-based lessor DAE Capital, which described its $538 million write-off as "manageable", said it expected to collect on insurance. "It will just takes time," Chief Executive Firoz Tarapore told the conference.

'WE DIDN'T STEAL'

Even as many write off assets and pursue claims, a number of lessors said they were keeping some contact with private Russian airlines, which have in recent years relied heavily on Western lessors and have been good at paying bills.

All said they were adhering strictly to sanctions.

"We're all pursuing the same strategy, making insurance claims, talking to the airlines, private airlines... but there is not much they are allowed to do," said Dan Coulcher, Chief Commercial Officer of Willis Lease Finance, which on Monday took a $20.4 million impairment on two engines left in Russia.

The Russian airlines who leased the planes were a lucrative market before the invasion. Lessors say the carriers want to avoid closing the door completely to future business, but are under heavy pressure from Moscow to cut ties. Russian President Vladimir Putin has said lessors from "unfriendly countries" violated their contractual obligations.

"We have many of them basically tell us on the phone: 'look we're not crooks. We didn't steal your airplanes. We hope you get paid for your airplanes, but we're both stuck'," said John Plueger, chief executive of Air Lease Corp .

Some airline officials have shied away from cellphones, with some adopting 'burner' phones or meeting away from base.

"Obviously their concern (is) we don't know who's listening. And that fear ... escalated as the crisis went" on, Plueger said. Dialogue continues but is "much more guarded" he added.

Russia makes up a modest 4% of global traffic but experts worry the claims battle could sour attitude to risk in general.

"I think the bigger thing is could we see the same thing happening in a much, much bigger country starting with a 'C' in Asia," said Marc Iarchy, a partner at World Star Aviation.

"It will be a much bigger shock to the system. But it's entirely possible," he warned.

Analysis-Aircraft lessors gird to battle insurers over Russia jet default
 

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