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      Outlook for airlines negative; pressure on aircraft values
      FRIDAY, 04/03/2022 - Scope Ratings GmbH
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      Outlook for airlines negative; pressure on aircraft values

      After two years of crisis due to pandemic-related travel restrictions and slumping demand, war in Ukraine has brought new risks for aircraft financing. The impact of Russia’s invasion on aircraft financing and on airlines comes from three sides.

      By Christian Vogel, Associate Director, Project Finance

      First, the creditworthiness of the airlines of countries affected is likely to deteriorate (see Europe’s airlines brace for yet more pain on rising fuel prices, no-fly zones amid war in Ukraine). Second, European leasing companies are being forced by 28 March to terminate leases on all aircraft they have leased to Russian airlines.  According to aviation data provider IBA, non-Russian leasing companies have leasing contracts with Russian airlines for 589 aircraft, of which 471 are still in Russia and should be flown out.

      Although it seems hardly conceivable that such a large number of aircraft can be taken out of Russia within the short timeframe, each plane that is repossessed increases the pressure on aircraft market values and lease rates, still struggling with pandemic-related overcapacity.

      Third, for aircraft that cannot be repossessed in time, it is questionable when and in what condition they can be returned to their rightful owners. In the worst-case scenario, aircraft that are part of financing transactions cannot be repossessed. In this case, a total loss is possible.

      Because of this new crisis, the outlook for the airlines sector remains negative, even though extensive pandemic-related travel restrictions have been lifted. In addition, higher fuel prices are weighing on the entire industry, although some airlines are less affected than others due to existing hedges and a younger fleet with lower fuel consumption.

      The closure of Russian airspace to airlines from 36 countries as of 3 March means that many European airlines have to take longer routes to Asia, resulting not just in longer travel times but also in higher fuel consumption. The same applies to Canadian airlines and is expected for US airlines too, since President Biden announced the closure of his country's airspace to Russian airlines in his State of the Union address. Airlines from Asia and the Middle East unaffected by these restrictions this may gain competitive advantages.

      Countries for whose airlines Russian airspace is already closed.

      Source: https://mapchart.net/world.html

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