$AER going down: Russian airlines and Irish leasing companies

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Sanctions on Russia related to airline industry

My main source comes from this Twitter thread: https://twitter.com/janedvidek/status/1498723248183382020

Someone working in the aviation industry considers that Russian airlines have, at best, about 3 weeks before they’d have to fold.

In addition to airspace closures, it looks like Russian airline planes are owned by leaser (lessor?) companies, with several of them being based in Ireland. A website dedicated to Irish business suggests it’s a $100B+/year industry. This Wikipedia page on aircraft leasing is informative as well.

The primary thesis is that, unless sanctions are lifted, lots of the airframes currently used by Russian airlines could be grounded soon, on account of restricted access to manuals, spare parts and access to maintenance facilities. With Russian banks being cut off from SWIFT, could they even make their lease payments?

Alternatively, it’s possible some of these will have to be returned to their country of registration and/or Ireland. If so, the leasing companies will burn money trying to store the airframes (planes only make money while they fly). If the leasing revenue falls off a cliff and additional costs are in the picture, I can see some of these companies losing value.

Possible Play

There are multiple aircraft leasing companies based in Ireland, and the largest is AerCap Holdings N.V., trading as AER on NYSE. The current stock price is $54.50, up 2.5% on the day.

This Bloomberg article mentions AER shares fell 13% (to $51.64) on Monday when the sanctions were rolled out, and that the company leased 150 airframes out to Russia, which constitutes around 5% of their plane portfolio. It’s unclear if any of these were returned until now, and based on the Twitter thread above I believe the issue can get worse for them.

At the moment, I’m considering puts for 4+ weeks out, but I don’t hold a position atm. I’m going to look into the other large airline leasing companies in Ireland as well, and I’ll update the thread if I find anything new.

Relevant Links


AerCap Halts Russia Contracts as Lessors Seek Return of Jets
 (Bloomberg)


Irish aircraft leasing firms face ‘mission impossible’ recovering planes from Russia
 (The Irish Times)


Hundreds of Russia plane leases to be axed after Western sanctions
 (Reuters)


Sanctions on Russia End Aircraft Leases – Affect About Half of Russian Airlines Planes
 (VOA)

This tweet includes a link to a podcast on Irish airframes returning to Ireland due to sanctions. (disclaimer: I haven’t listened to this yet)

PS. This is my first DD, so go easy on me. Any feedback is appreciated. :raccoon:

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This tweet caught my eye today:

Russian airlines now having their jets seized at international airports by the leasing companies, according to Meduza. S7 has canceled its international flights after having a jet seized in Armenia. Could end most Russian international flights if correct.

Meanwhile, AER is down to $50.84 or -6.23% for the day. I should’ve bought a small put position yesterday when I came across this info. I’m in now with one Apr 14 47.5p contract at 2.65.

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Another interesting tweet today:

:zap::zap:#Russian airline Aeroflot has been removed from the global electronic ticket booking system.

I feel like AER still has room to fall if these developments continue. They reached a low of $18.51 at the height of the COVID crisis, when (presumably) their entire fleet was affected. However, during the COVID crisis, they likely relied on the companies still completing their payments and storing the airframes. I don’t think this will be the case here, especially if they have to either write off 5% of their fleet, or store them indefinitely if they are (ever) returned.

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AER continues to slide today, and it’s currently at $48.92 (-5.03%)

I’ve added a Apr 14 42.5p contract at 1.85.

The Apr 14 47.5p contract I picked up yesterday is now at 3.50, up 37.25% for the day. :tada:

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AER just touched $47.50 and I’m considering cutting at least one put.

If it breaks down through $47.50 I’ll sell the contract I picked up yesterday (it’s now up 65% for the day) and pick up a couple of 45p, also for April.

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I’ve closed my 42.5p for 2.40 when AER touched 47.20, sold for a ~25% gain. I’m looking into some 42.5p contracts at the moment and still holding my 47.5p for now.

I think this security has the potential to slide more in the next few weeks, especially as more news about the Russian airline industries come in.

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AER option flows, courtesy of @Kevin. Thank you!

I suspected this, and I’m looking to add to my position on the next spike. AER continues to slide (currently $47.15).

aerflows
aerflows1463×799 194 KB

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Picked up one AER Apr 14 40p for 1.75 on that spike.

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AER is now trading at $45.53, down -4.50% on the day.

I’m still holding my two puts, but considering exiting them today. The first one I picked up is over 200% profit now. :tada:

FWIW, I think there is further downside here, especially since the initial situation didn’t change at all, and I’m considering buying more puts at this level. I also found that AerCap owns 1035 airframes in their portfolio:

As of June 2020, AerCap had 1,035 owned, managed aircraft in its portfolio.

If 150 of these are leased to Russian companies, that’s more than 10% of their portfolio, whereas Bloomberg reported it was closer to 5%. Quite a big loss for them.

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Fortune is reporting Aeroflot is grounding part of its fleet to prevent foreign govts from seizing their airframes: Russia flag carrier Aeroflot cancels all international flight routes to avoid sanctions | Fortune

AER closed at $43.95 yesterday, around -8% for the day. It’s trading at $45.73 now, and I’m considering adding more Apr 14 40p once/if it reaches $46. I still believe there is further downside here.

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AER is now up 12.87% for the day, trading at $49.58. I looked to see if there were any updates, and found the following LinkedIn post from a couple of hours ago:

AerCap Cargo and IAI - Israel Aerospace Industries have come together to transform the long-haul, large capacity freighters market, with the introduction of the #BigTwin. Watch the cargo conversion of the first Boeing 777-300ERSF aircraft in the world. The Big Twin brings the renowned performance of the most capable widebody ever built, the B777-300ER, to cargo operators across the globe. Perfectly suited to today’s demands, the B700-300ERSF carries more and burns less, offering greater range and commonality. https://lnkd.in/dXQyur6W #BigTwinFreighter #P2F #preighter #B777300ER #AvGeek #aviation #WeAreAerCap

While I’m still significantly up on my 47.5p, I’m down 10% on the 40p. I think this is an excellent re-entry point and I’m going to buy two more 40ps at the current 1.30-1.40 level.

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AER continued to push up today, currently sitting at $50.40 (+3.68% for the day).

I managed to pick up another Apr 14 40p at 1.00 and I’m likely going to pick up a few more when/if I can cash some of my RSX and OZON puts. :pepepray:

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AER barely ended the day green yesterday (+0.78%) and this news came out in the meantime:

The article talks about 500 airframes that will not be returned to lessor companies. I believe this is a good entry point and I’ll be looking to add to my position today, because I expect this news to cause the stock price to tumble further. If they have to write off ~150 airframes from the books, it will be pricy.

I’m looking to add to both my Apr 14 47.5p position (this is the safest bet), and a couple more Apr 14 40p contracts.

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Here’s a slightly better source for the above update, directly from the Nasdaq website:

Russia could refuse to return leased aircraft -draft law

With this being widely reported today and picked up by Reuters and Nasdaq’s websites, I expect $AER to start dumping again.

Even more so, it looks like this is still a draft law. When the law goes into effect, I think we’ll see further ripples in this market.

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Who insures these 500 planes? That has to hurt. Unless they declare force majeure and battles it out in court with the airlines.

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Good question. I don’t know which insurance companies are in play for $AER, but it looks like an Asian lessor company (BOC Aviation, who leased 18 airframes to Russian airlines) mentioned this in their recent financial results:

“The international aviation insurance markets are progressively cancelling certain elements of insurance policies in relation to aircraft located in Russia or leased to Russian airlines,” the lessor said in its financial results. “This is a complex and rapidly developing situation that we are monitoring closely.”

Source is here: https://www.reuters.com/article/ukraine-crisis-boc-aviation/boc-aviation-flags-risks-to-935-mln-russia-portfolio-idINL2N2VD0MP

If “insurance elements” are cancelled, that might mean further risk for the lessor companies themselves.

Weirdly enough, this Bloomberg article from late Feb mentions that leasing firms “mull default” because of the grounding risk. They suggest planes can’t be insured:

EU sanctions announced Sunday ban the supply of “all goods and technology” linked to aircraft. Planes can’t be insured, either. That means leasing firms will be required to terminate all contracts with Russian airlines over the next 30 days, said a senior leasing executive with aircraft in the country

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The above is also noted in this Business Insider article:

https://www.businessinsider.com.au/aercap-stock-price-leased-airplanes-lost-russia-ukraine-invasion-repossess-2022-3

$AER lost about $4 billion in market cap since this was initially reported. The airframes themselves are worth $2.5 billion, so I still believe there is further downside here.

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Not sure how credible this is, but:

“RUSSIAN GOVT ASKS PARLIAMENT TO ALLOW REGISTRATION OF FOREIGN PLANES LEASED BY RUSSIAN AIRLINES AS AIRLINES’ PROPERTY, GIVE THEM RUSSIAN AIRWORTHINESS CERTIFICATES”

Source: https://twitter.com/FirstSquawk/status/1501917862579281920?s=20&t=dzb5auQqmjhOFLFxBezhHQ

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I think today will be an excellent entry point here, since the price has creeped back up to $51 and Russia just announced this:

Putin signs a law allowing the Russian government to seize foreign aircraft leased to Russian companies. It’s gonna be a long time before anybody even considers renting another plane to a Russian entity. https://t.me/tass_agency/118859

Source: https://twitter.com/KevinRothrock/status/1503323929494102017?s=20&t=AdEdt3dJ-BWtsn9u2zS-6A

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Not one to lose the chance to make their mark at these happening times, Bermuda did this:

Bermuda says it is suspending certification of Russian planes licensed in the British overseas territory due to sanctions on Moscow, likely impacting hundreds of Russian commercial aircraft around the world.

The move could have critical effects including the grounding of a significant portion of the Russian fleet, more than 700 of which are believed to be licensed in Bermuda.

That’s about 70% of the Russian fleet.

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