• Wed. May 11th, 2022

How Russia’s airline industry was pushed to the brink in a week

Banned from swathes of the world’s skies, deprived of access to vital spare parts, deprived of insurance and struggling to keep planes, the Russian aviation industry has been plunged in the space of a week into its most serious crisis. serious for decades.

Western governments have unleashed waves of sanctions since Vladimir Putin sent troops to Ukraine late last month, but few have delivered such a visible punch as those targeting an industry that accounted for 6% of air capacity. world last year.

Flag carrier Aeroflot, which took delivery of its first Western aircraft from Airbus when Boris Yeltsin was in the Kremlin, said on Saturday it would halt all international flights other than to Belarus. S7, Russia’s second largest airline, also cut flights outside of domestic airspace.

The growing crisis in the industry is “unprecedented, unpredictable and unpredictable”, said Max Kingsley-Jones of Ascend by Cirium, the aviation consultancy.

Unsure how long sanctions from US and European authorities will remain in place, experts have warned that in the worst-case scenario, Russian national carrier schedules will shrink to levels not seen in three decades.

EU sanctions prohibit the sale, transfer, supply or export of aircraft or any component, while the United States has introduced export restrictions, including on Russia’s aerospace sector.

“Russia’s aviation sector is now on a similar footing to that of North Korea and Iran – and similar to where it was under Soviet rule,” noted Rob Stallard, an analyst at Vertical Research. Partners.

Russian carriers have been hit just as they drew a line under the disruption caused by the coronavirus pandemic. Expectations of a steady and sustained rebound in domestic demand have given way, at least for now, to extreme volatility.

In a sign of concern, the American, French and British governments this week advised their citizens to leave the country as long as commercial flights were still available.

Yet, with economists predicting that Russia’s economy will soon be dragged into a deep recession, local aviation executives are bracing for a sharp drop in domestic demand.

“There will naturally be a serious correction in demand,” said one executive. “There are a lot of reasons, including the stress on the economy.”

Late Friday, ratings agency Fitch downgraded Aeroflot’s credit rating from BB to B-, predicting the sanctions would “seriously disrupt its business”. Aeroflot declined to comment.

Although Aeroflot is majority government-owned and other carriers may look to the state for help, industry experts said overcoming new restrictions on access to aircraft parts plane would prove more tests.

Airbus and Boeing this week suspended the supply of spare parts and services, cutting vital maintenance support to keep planes in the air.

The two aerospace groups account for 70% of Russia’s commercial fleet of around 880 planes, according to Cirium. Aviation consultancy IBA estimated that 37 new planes were to be delivered to Russian airlines by Airbus and Boeing this year.

Much of the remaining Russian-built fleet consists of Sukhoi Superjet 100s, regional jets that use French-made engines and Western electronics.

Boeing, which has been active in Russia since the late 1990s, has ended operations at its Moscow training campus, where several thousand pilots are trained each year and which also offers flight simulation, maintenance and cabin training. Meanwhile, Brazil’s Embraer, another aircraft supplier to Russian carriers, said it was complying with the sanctions.

Rolls-Royce, Safran and GE Aviation have also suspended the provision of support services

“Because parts are limited, we expect to see planes that are grounded in Russia being stolen [for spare parts] to keep the rest of the fleet operational,” said Peter Walter, Director of Technical and Asset Management at IBA.

This would echo the image of Iran, where airlines have continued to fly despite the country being under economic sanctions for its nuclear program.

Some Iranian airlines have been able to obtain planes and spare parts from abroad by dodging sanctions. In 2013, the United States took action against companies and individuals in Kyrgyzstan, Ukraine and the United Arab Emirates for leasing and selling planes to two Iranian airlines, in what it described as a ” attempt to evade sanctions”.

A Russian aircraft industry executive said the industry may eventually have to try to develop its own parts. According to the Tass news agency, Russia’s Transport Ministry on Saturday drafted a bill to help airlines, including proposals that would allow “third-party” companies to step in and maintain planes.

Another threat, however, comes from the European aircraft leasing industry, which in recent years has proven to be a key aircraft supplier to Russia.

Non-Russian lessors have 515 planes in the country, with a combined market value of nearly $10 billion, Cirium estimated. An industry executive has estimated that European lessors account for up to $5bn worth of planes – the ones they will want back as EU sanctions force them to terminate contracts with Russian carriers by the end of the day. end of this month.

Leaders raced to understand the logistical challenge of recovering their planes. “The practical terms of redelivery and repossession are unclear,” said IBA’s Walter, adding, “You would normally want to commit at least 15 months to two years up front.”

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On Saturday, Russian authorities warned airlines not to fly their foreign planes outside the country in case they are detained.

Now under economic siege, Aeroflot once relied on a fleet of local aircraft as it enjoyed a monopoly on all passenger flights in the former Soviet Union. But in recent years, the airline, founded in the 1920s, has expanded its international network and entered into commercial alliances with 32 companies, including Delta.

While the loss of spare parts will be a daunting challenge if sanctions persist for months, airlines would be plunged into an instant crisis if cut off from the network of backbone technology systems that underpin modern commercial aviation.

“In the field of travel, [these systems] akin to Swift in terms of payments and lifeblood,” said an executive at a payments company, referring to the global financial messaging system.

The prospect grew closer this week when two of the travel industry’s top three technology providers announced they would ban Aeroflot from their sales systems.

Maps showing flight routes affected by airspace closures

“We are taking a stand against this military conflict,” said Sean Menke, managing director of US-based Saber, adding that the ban goes beyond simply complying with Western sanctions.

Saber said it was considering further steps, which could include locking Aeroflot out of its technology that helps manage flight planning and operations, including balancing the weight of passengers, baggage, fuel and freight.

After US President Joe Biden used his State of the Union address on Tuesday to announce a ban on Russian flights from US airspace, the UK government decided 48 hours later to bar the sector from aviation from the London insurance and reinsurance market.

The London specialist insurance market enjoys a significant share of global aviation premiums. It represented 56% of those paid in 2018, according to the latest figures available.

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Garrett Hanrahan, global head of aviation and space at insurance broker Marsh, said: “Even though Russian airlines seek insurance from local insurers or in countries that have not imposed sanctions, such as China, many insurers in these markets typically buy reinsurance through sanctioning countries, such as the UK.

The restriction imposed by the UK “limits the ability of Russian airlines to maneuver”, he added.

Additional reporting by Jude Webber in Dublin and Bryan Harris in São Paulo