Podcast: What Do Russian Aftermarket Sanctions Mean For MRO

Aviation Week MRO editors unpack the latest developments affecting the aftermarket following the sanctions placed on Russia after its invasion of Ukraine in what remains a fast-moving situation.

Don't miss a single episode. Subscribe to Aviation Week's MRO Podcast in Apple Podcasts, Google Podcasts, Amazon, Audible and Spotify.

Rush Transcript

Lee Ann Shay:

Welcome to Aviation Week's MRO Podcast. I'm Lee Ann Shay, executive editor of MRO and business aviation, and I'm here today with two of my colleagues, Sean Broderick, who's the senior editor for air transport and safety, and James Pozzi, who is the MRO EMEA editor.

            And today we're going to be talking about Russian sanctions on the aftermarket. It seems like it's changing every day. Sean, what's the latest that you're hearing?

Sean Broderick:

First to set the stage big picture, I'm sure most of the audience knows, but we're about two weeks into a war in Ukraine that Russia started with an unprovoked invasion. In response, the west has initiated a series of sanctions. In our world, in the aerospace world, many of them specifically target the aviation industry.

            For Russia's airlines that means essentially they can no longer do business with Western companies or Western companies are no longer going to do business with them.

            For the MRO world that means no part sales, no ongoing maintenance support, no technical support, such as calling a representative from Boeing or Airbus to analyze a non-destructive test inspection result.

            All of it means that if you are Aeroflot, or S7 or the airlines that fly over there, you are now pretty much on your own when it comes to supporting your fleet. Depending on what you count as a Western-build airplane, there are about 850 Western-built planes in the fleet, and most of them are not owned by the Russian carriers, most of them are leased.

            The sanctions in effect mean that the Russian carriers are going to have to, assuming they don't give the airplanes back, that leased their planes, which it doesn't look like they're going to do. It means they're going to have to come with some creative ways to support those airplanes going forward if the geopolitical tensions do not change.

            So that's where we are. Specifically, most of the de jure sanctions, the actual sanctions have come out of the EU. But other jurisdictions like the US, Boeing for example, they've gone beyond what the US sanctions actually impose and say, "We will no longer support the operators in Russia."

            So again, in a sense it's a de facto business ban, and those were rolled into place within a week or two after the February 24th invasion. And so right now I think the Russian operators are trying to sort out what they're going to do. And there's not a lot of clarity on the aftermarket side for any long-term strategy.

            At this point their short-term strategies are probably going to include cannibalizing some of the airplanes that they have if they need. And that could get them a fair piece down the road, depending on how much the domestic travel sector there, which was pretty strong, about 5% of global available seat kilometers before the invasion.

            Depending on how much that's affected, they may have enough Russian build aircraft to carry on for quite a while. Because right now we just don't know. But we do know that their connections to the outside world especially on the MRO side and in general are basically severed.

Lee Ann Shay:

Thanks, Sean. James, a lot of the Russian aircraft that are leased were leased from European lessors. Some of the aircraft were also registered in EASA countries, which means that they would fall under the EASA maintenance standards. What's the latest that you're hearing?

James Pozzi:

Well, there was some pretty interesting research conducted by IBA early this month. Sean mentioned some of the figures before. I think that IBA said there's 589 aircraft lease to Russian carriers, of which 471 are still located in Europe.

            Now, this covers obviously a lot of geography. But from what the industry is saying, the headache could really come when repossession have to occur. The IBA mentioned that the European sanctions mandate the repossession of Western leased aircraft by late March, I believe.

            Which is rather impractical, considering the average time for a lease return could take well over a year into the 15 to 18 month stage. Sometimes in terms of the initial planning and the whole process for that.

            And the Russian government last we heard, although they are quite resilient in terms of what they are saying, you have to sometimes maybe take that with a pinch of salt, but […] accounts are telling carriers to hold onto their aircraft, that's Russian-based airlines.

            So there's all kinds of impracticalities to consider. You got to remember obviously, the sanctions the west has put on Russia, that means that no one can fly into Russia as well. And the relevant staff from the west for example, that would undertake those lease returns would also be unable to enter and do that.

            So, all in all a bit of a mess. And as it has been mentioned, a lot of uncertainty too. It's a continuously changing situation. Aviation as an industry by large is just waiting and seeing what is going to happen next. Will there be a cease fire? For example. Will the war continue for a longer amount of time? And will more sanctions, as it seems likely be imposed in Russia in the near future? So, lots of questions and scenarios to consider.

Lee Ann Shay:

Let's talk about registered aircraft. Jens Flottau, our European air transport editor had written article about more Russian carriers moving their registration from other countries to Russia. The numbers seem to vary depending on the source. But he had written that Utair had moved 29 aircraft since the beginning of the conflict on Ukraine to the Russian registry.

            And other sources had said that up to 176 Western made aircraft had been moved to the local registry since February 24th. In doing that, then if they fall under Russian air worthiness requirements. So, what impact does this have on the spares market and their ability to fly at least domestically, freeze them up, right?

Sean Broderick:

Yeah. Well, the couple of different pots of least aircraft that James talked about, and Lee Ann you referenced there. So there are airplanes that are owned by Russian entities, or even the operators themselves that go back through companies set up in Bermuda or Ireland, a very common setup in the leasing business to take advantage of tax benefits and things like that.

            So there're airplanes that are owned by Russian entities but are registered outside, then there are the normal lease airplanes that are owned by major lessors that are registered outside. What the Russian operators tried to do immediately was take some of those Russian airplanes that they owned and reregister them as Russian.

            Over the weekend, Bermudas regulators, they invalidated the airworthiness certificate. They said they could no longer support Russian airplanes that were on their registry, or airplanes operated by Russian carriers that were on their registry. And that was over 700 airplanes owned by all different sorts of lessors. That in effect canceled the airworthiness certificates for all those airplanes.

            So, those airplanes need to be reregistered within Russia, as you said Lee Ann, to make them airworthy under somebody's jurisdiction. In this case, that would be Russia's. That's one reason they're doing it.

            Another reason is to pull the asset inside and sort of nationalize it, if you will. So that under Russian law, the actual owners don't have rights to repossess the airplane.

            Now, the AerCaps and the Avalons of the world surely will dispute that, the Russian side will say that their laws apply. And Vladimir Putin earlier this week, yesterday I believe, introduced some laws and amendments to existing regulations that made it easier for the Russian operators to do that kind of reassignment. So it's a very fluid situation.

            How does it change the spares market? I mean, James can weigh in. I don't see it changing much other than, the more they hold onto the more they can obviously tap into in terms of cannibalizing parts down the road. Other than that, it doesn't change their ability to source parts from outside of their fleet, at least not in my view.

James Pozzi:

Absolutely Sean. But I'm quite interested in some comments I saw last week at a delegation conference in Russia, attributed to one Valery Chudinov. I think who heads up the continuous airworthiness management at their national regulator in Russia.

            He said how they'll look for part supply opportunities with the lots of India and Turkey among other countries, away from kind of Western suppliers. However, he stated it doesn't seem all rosy at the moment with China, not just in defense. But he stated how China had sort of rebuffed a similar request for kind of spares and materials as was quoted in the media.

            So, it remains to be seen, I think going forward, whether Russia can rely on its sort of few remaining allies, and whether it's continuous actions in Ukraine will lead to it further other becoming an international prior state.

            So, I'm quite interested in where it can source parts kind of later down the line if that becomes a scenario. But yeah, as you said, in the meantime, I agree with you. I don't think a lot will change in the near term.

Lee Ann Shay:

Well, I think it's interesting too. Just if you think about the valuation of all these assets, the after market and air aircraft, and parts are all predicated on like the paper trail, or at least the documentation trail if it's digital.

            And so, what you've got going on now could really just tank the value of all of these assets, whether they're pulled back into register Russia, or even if they are parked, where they properly parked. Because if those aircraft were, let's say somewhere in Europe, a storage aircraft falls under Part 145 maintenance certifications.

            So, if you can't actually properly park the aircraft and they're just sitting there and they haven't been properly prepared, that could impact the valuation too.

Sean Broderick:

I think it's safe to say the owners of the airplanes that are leased to Russian carriers have a significant problems on their hands. A few airplanes have come out. Some of them were voluntarily given back and then some of them were seized, but the Russian operators very quickly pulled airplanes off of most international routes, and then put them back on, or kept them on some of the friendly routes as James referenced to places like Turkey.

            What's going to be interesting to see, there will be some commentary from lessors during this upcoming earning cycle. And it'll be interesting to see what they say about their assets. Most of them are downplaying the impact pointing to the value, the percentage of their book that they have in Russia, it's a significant number of airplanes. I mean, it's in the hundreds. Yet I think the hope is that if those airplanes are removed, it won't help the lessors or their insurers. But it could help maybe jumpstart some retirements or some part outs. It could help other operators or the lessors themselves make some decisions on what to do with some of their fleets.

            But beyond the lessors having to deal with assets that are encumbered, I guess you could say, probably not going to have a huge impact on the global aircraft valuations or parts supply. I wouldn't think. I mean, it's a lot of aircraft, but it's not a large percentage when you look at it in terms of the global fleet. If that makes sense.

Lee Ann Shay:

Last week I was in London attending a conference and speaking with someone who would mentioned that the EC has been doing a really good job of fielding questions, and the industry is working in a concerted effort to try to figure out exactly the implication of the sanctions and exactly what it means, how it trickles down to all parts, whether it be servicing to interiors, to maintenance, to pilot certifications. And he thought that they would be a lot more clarity just on the nuances in the next two to three weeks.

            And he also had mentioned that because the Russian certifications had been suspended and not revoked, hopefully this conflict war will end soon. And at least by having these certifications suspended, once it's done the industry will be able to hopefully ramp up a little bit faster, but clearly we're not there yet.

Sean Broderick:

Another interesting sort of aspect of this, it's not as if Russia has never been here before. Of course, before 1991, they were basically largely a self-contained nation, at least when it came to their commercial aviation services and construction. So it's not as if they have never been self-sustained before.

            And they do have a non significant number of airplane that were built there and are still supported there. This also was not an unprecedented situation in terms of the sanctions. So one of the most obvious examples from the recent history is Iran. Now, Iran didn't have as many airplanes as Russia has. And they certainly, I wouldn't say their domestic market was as robust as Russia's is, but still they managed to source parts that they needed on the black market, or through methods that masked who was ultimately getting the parts.

            It wasn't legal when you looked at the sanctions versus the US sanctions that targeted anything with, I think 10% us content edit, which affected almost everything that's built out there in the west now.

            Those kind of tactics probably will come into play if this conflict drags on. But Russia is, I think near term, they're going to be fine in longer term. There is some precedent for how they can cope, and in spite of the significant challenges that they face.

Lee Ann Shay:

That's really excellent context. And to your point, we just don't know how long this is going to last. Is it going to be another day, week, month, we just don't know. James, any other comments that we should bring up?

James Pozzi:

I think it's fair to say, although there is a lot of uncertainty, particularly in Europe where I'm based in London. One of the saving graces is very kind of relatively how little business some of the Western MROs did in Russia.

            I mean, some companies like Lufthansa Technik with its Vostock business for example, have subsidiaries there. And they're kind of also playing the waiting game at the moment. But even in neighboring states near Russia, for example, the Czech Republic and Estonia with CSAT and Magnetic MRO respectively, they did very small business with Russia. I think CSAT said it saw some impacts to kind of line maintenance services.

            And Melanie Camaro said in the whole of 2021 it's business with Russia was in the single figures percentage wise. So that certainly is a small crumb of comfort for some of the Western MRIs there who do business in the country.

            But as we've been saying, really, it's a bit of a waiting game. First of all, we kind of hope this doesn't escalate any, the war itself doesn't spread or get any worse than it already is, or it's pretty terrible, that goes without saying. But yeah, it's really just something that can change at a very quick rate. So yeah, we'll have to wait and see, unfortunately.

Lee Ann Shay:

I agree. And hopefully we won't be talking about this for too much longer, and hopefully the conflict will be done. But for now it is what it is. And hopefully we can get peace sooner rather than later.

            Sean and James, thank you so much for joining me on this podcast. That's all we have time for today. Join us again in two weeks for the next MRO podcast, and make sure you don't miss it by subscribing to Aviation Week's MRO podcast that is available in Apple podcast, Google Podcasts, Amazon, Audible and Spotify. Thank you.