Russia-Ukraine crisis impact on global aviation

Russia has halted all international flights, except to neighbouring Belarus, in a bid to keep billions of dollars’ worth of airline jets from being taken back by their foreign owners. More than half of all commercial aircraft based in Russia are lease from companies abroad due to heavy taxation laws set by Moscow. Approximately 700 leased aircraft flying for Russian carriers are registered in Bermuda, with more registered in Ireland. Of the 160 jets registered in Russia itself, 10 are owned by foreign banks or lessors. Russia realises that the moment these aircraft leave Russian airspace and fly elsewhere, foreign leasing companies/banks have stronger grounds and better ability to seize the jets amid sanctions imposed due to the invasion in Ukraine. The government’s move will give Aeroflot and other Russian carriers an attempt to unlawfully hold on to hundreds of Airbus and Boeing jets that their owners are demanding be returned by March 28. In addition to leasing firms demanding the return of their jets, a broader set of economic sanctions make it impossible to legally continue renting and insuring aircraft to Russia. Global financial heavyweights Visa and Mastercard have suspended international banking with Russia, and European sanctions are tightening every day the war in Ukraine continues. AerCap, the world’s biggest leasing firm, has the most planes in Russia at 152, with a market value approaching $2.5bn, according to IBA. AerCap said on February 28 that it would try to retrieve its planes…but 10 days later, it’s not having much luck. Its airline customers include Aeroflot, S7 Airlines, Rossiya and Ural Airlines. While Russian airlines have been hit by airspace closures that largely prevent them from operating westbound, about 65% of the market comprises domestic flights mostly unaffected by those measures. That means aircraft demand and passenger demand for air travel will still be high across Russia — and the country has had one of the strongest travel rebounds from Covid-19. Airspace restrictions are having a global impact. Russia has banned almost all of Europe, along with several other nations from its airspace — a retaliatory move following other countries bans on Russia. Flights between Frankfurt and Beijing are now two hours longer than before, with flights between Helsinki and Tokyo taking up to five additional hours. Eurocontrol has reported significant disruptions to major routes. Korean Air announced it is cancelling flights to Russia for the next two weeks, telling Reuters that it can no longer refuel in Moscow. Korean ordinarily operates regular service between Moscow and Seoul once weekly. IATA said the most heavily hit are flights between the US and Northeast Asia, and between Northern Europe and most of Asia. Finnair has continued to adjust its schedule due to the closure of the Russian airspace. The airline relies on Russian airspace to fulfil its business model as “the shortest route to Asia” – cutting across the Siberian corridor to reach the Far East faster than other airlines without the same Russian airspace access. As the war in Ukraine continues, and with no Russian airspace access due to the sanctions against Putin, Finnair has cancelled multiple Far East routes, including Osaka and Hong Kong. The further increased price of cargo currently enables continuing of passenger services to Finnair’s key Asian markets even with the longer flight times. Finnair now continues to serve Seoul and Shanghai from its Helsinki hub. At the same time, Finnair cancels flights to Osaka and Hong Kong until the end of April. “Avoiding the Russian airspace on flights between Europe and Asia has considerable impacts on flight times, thus impacting fuel, personnel, and navigation costs” Finnair released in a statement. Finnair announced earlier this week that it will continue to fly to Tokyo, going around the Russian airspace – meaning longer flight times and more fuel required. Finnair also taking the longer route to Bangkok, Delhi, Phuket, and Singapore. On top of this, oil is at its highest level in a decade. Airlines are now facing the uncertainty of an ongoing conflict with global ramifications, a higher oil price, and longer routes needed to bypass airspace over Russia that are expected to drive up ticket prices and air freight rates. Fuel accounts for between 35% and 40% of an airline’s operating costs, it is inevitable that the increased costs will eventually trickle down to passengers. For some airlines who hedged out about 80% of their fuel needs, they’ll still be able to pass on low fare to passengers for the upcoming summer season, but eventually this will push fares prices up and that’s not what the industry wanted as it recovers from the worst of the pandemic. Wizz Air has for the moment capped fuel exposure with zero hedges but expect the fare environment “to harden more broadly across the industry,” while EasyJet announced at the end of January it had hedged out 60% of its fuel needs for the financial year to September 30. “Our focus is on our customers and giving them the best service and experience at the most competitive price possible,” a Virgin Atlantic spokesperson told City AM. “Due to the rising cost of oil, we have recently increased our carrier surcharges by £30 and will continue to monitor the situation and keep surcharges under review.” Lufthansa Cargo expects global market capacity will be approximately 10% down because of the Ukraine invasion. Lufthansa Cargo chief executive Dorothea von Boxberg said this is because of restrictions for global fleets. Russian carriers are restricted by airspace sanctions by the European Union, UK and US, European carriers are not able to fly over Russia and Ukraine. Middle Eastern airlines have seen little changes to their operations other than the loss of the Ukraine market. Qatar Airways previously flew to multiple destinations in Ukraine, but has been unable to do so since Ukrainian airspace closed in late-February. Airbus and Boeing, Russia’s main suppliers of commercial aircraft, have cut Russian airlines off from access to spare parts for aircraft as part of fresh sanctions on Moscow. Boeing has also closed a design centre operated in Moscow, and has temporarily closed its office in Kyiv, Ukraine amid the conflict. Airlines rely on a flow of spare parts, and with Russian airlines only now able to rely on its existing inventory, it’s likely to be months before the carriers have no choice but to obtain spare parts by grounding other aircraft in the fleet and dismantling the jets in maintenance. Ordinarily, such practices are strictly prohibited under the terms of the leases that cover commercial aircraft, but we’ve learnt over the last week or so that Russian airlines are not engaging with their European aircraft owners – forcing leasing companies to discuss the potential of ‘writing off’ aircraft it leased to Russian carriers. The author is an aviation analyst. Twitter handle: @AlexInAir