Podcast: Russian Sanctions And The Impact On Business Aviation

Unprecedented sanctions on Russia following Vladimir Putin’s invasion of Ukraine are affecting every aspect of business aviation around the globe. What does it mean and what is to come?

Join Lee Ann Shay, BCA executive editor; Bill Carey, senior editor; Angus Batey, UK-based correspondent; and Molly McMillin, managing editor for business aviation; for a discussion on the impact and the future.

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

Rush Transcript

Molly McMillin:

Welcome to Aviation Week's BCA Podcast today. I'm your host, Molly McMillin, managing editor for Business Aviation. Since Vladimir Putin launched his invasion of Ukraine two and a half weeks ago, Western economies have imposed sweeping sanctions on Russia in the post-Soviet era. Today I'm joined by BCA executive editor, Lee Ann Shay, senior editor, Bill Carey, and our UK-based correspondent, Agnes Batey, to unpack how business aviation is already being affected and what's to come.

Lee Anne, let's start with you. You just returned from London where you were attending the Corporate Jet Investor Conference. What was the general consensus there?

Lee Ann Shay:

Lots of discussion from multiple players and there's so much ambiguity right now in just how the sanctions could be interpreted. But, you know, the big picture is that there are three areas of impact. You know, there's the flights. Aircraft can't be operated right now. Two, the people who are managing the aircraft. And then three, suppliers. You know, everybody from interior specialists to the OEMs, the aircraft manufacturers who can't sell the aircraft. Insurance providers, banks. So it's really having a multifaceted impact on so many different people.

Molly McMillin:

Angus, you just returned from the BBGA, British Business and General Aviation Association Conference as well, where this was a huge topic of conversation. What were your main takeaways?

Angus Batey:

Yes, there was a lot of discussion about this throughout the day, but particularly around lunchtime a fairly unstructured set of conversations that took place for the benefit of media, with a number of different people representing lawyers involved in transactions and advising owners and operators. Owners and operators themselves, other people interested throughout the sector. Everyone's entirely confused. Apart from that they know that doing any kind of business with any kind of Russian owned or operated aircraft is impossible at the moment.

The confusion particularly arises over what is considered Russian. Richard Koe, an analyst with WingX, talked about a fleet that he's tracking of 469 aircraft that are not actually listed as owned by Russian entities but which, based on the last 12 months of usage, his company believes are Russian owned or operated for the purposes of these kind of sanctions.

There's a jet grounded at the moment at Farnborough, which belongs to a subset of 50 from within that 469, that Richard says are definitely owned and operated by Russians. And yet that jet, when you look it up, according to public records, appears to be registered to a corporation in Luxembourg. So none of these things are clear cut. But it's a very, very difficult situation for anybody involved in this sector.

Molly McMillin:

I know I was looking at our own fleet discovery data, and we show that there are 130 Russian registered business jets, and 183 that are Russian operated. But as you point out Angus, it's hard to know  exactly how many are set up by shell corporations or registered in Malta or Isle of Man or other countries.

Lee Ann Shay:

Absolutely. You know, and the term KYC came up a lot at Corporate Jet Investors, "Know Your Customer." To your point and Angus's point. And I think one of things that will be interesting to see in the future is will the structure of these assets need to change. Right now, you know, there's not clarity of that. But whether it be banks or insurance companies, you really need to know, you know, the ultimate customer. And to Angus's earlier point too, there was a gentleman, Mario Armeni, he's a Swiss lawyer who said that because there is so much ambiguity in all of this, people are trying to comply, but they just don't know exactly how to make sure that they are complying. So they're seeing a lot of people just shutting down completely. As he said, we're just saying no to anything that smells of Russia. Which not just hurts the people who are sanctioned and, you know, I agree the sanctions are right. I think most people think that's true. But you know, there's kind of the outcome of all the other people in the services industry.

Angus Batey:

Yeah. To that point, during the discussion yesterday, David Kendrick of the CAA cautioned people in the sector, don't look to the sanctions regulation to try to find loopholes and workarounds, because there's wording in the sanctions that basically says, if you try to work around this, then you will be in breach. And that's really the message that's coming out loud and clear area is that you may feel that there are ambiguities in the way that the legislation is drafted, but those are not intentional ambiguities. And the risk will be on anybody who seeks to do something that skirts close to that boundary.

Molly McMillin:

Bill, we haven't forgotten about you. You recently wrote a very good story about how this is impacting Russian airspace and operators who are not Russian for having to take longer for their flights. Can you talk about what you're finding?

Bill Carey:

Yeah, sure, Molly. After Vladimir Putin's February 24th invasion of Ukraine, as we all know now, the European Union, Canada, the United States, and other countries banned Russian owned or operated aircraft from their airspace, which in turn prompted Russia to close off its own airspace to other countries. And the conflict as of the past week or so has caused a complete closure of Ukrainian, Moldovan, and portions of Russian and Belarusian airspace, which has complicated options to overfly Europe. At a recent NBAA webinar, the chief pilot of the Honeywell international corporate flight department spoke to that and said that it's causing operators to divert from traditional routing between the United States to India and the Asia Pacific region, adding anywhere from one to several hours to their flight time.

And you know, of course that brings into question, range considerations for your aircraft, the destinations you plan to fly to and the cost and availability of Jet A around the world. Just looking at the International Air Transport Association jet fuel monitor, based on everything, all of the sanctions that have been imposed as a result of this crisis, the price of Jet A has increased nearly 30% per price per barrel from just a week ago. And it's up almost a hundred percent from this time less last year. So this is really going to force operators to, you know, reconsider or to recalculate the destinations that they fly to.

Angus Batey:

Yeah, Matt Borie of Osprey which is a risk management consultant specializing in aviation. He spoke yesterday at the BBGA event as well and he spoke about exactly this point, but he also raised the issue that the re-routings that are required of some people now will take them over conflict zones, which introduces another level of risk and may put them in difficulties with their insurance providers.

Bill Carey:

Yeah. And just to add on to that, Osprey has partnered with the European Union Aviation and Safety Agency to host a new European information sharing and cooperation platform on conflict zones, which is available to operators as a part of the due diligence they should do before any sort of international trip. And let's never forget the July 2014 downing of a Malaysia airlines flight MH 17 over Eastern Ukraine, which was eventually attributed to Russian backed separatist operating in Eastern Ukraine.

Molly McMillin:

Angus, you recently wrote a story that Russian business aviation is on death ground. You quoted a partner at Withers Worldwide who said, if this continues, it is the end of Russian private aviation for a generation. What's the finding behind that?

Angus Batey:

I think the point that was being made was that you've got a lot of western jets that comprise the majority of the Russian fleet that now can't be serviced, maintained, or kept in a flyable condition. Unless those operators are actually flying them to the handful of places that they can still fly them to, they're not going to be able to use them. They're not going to be able to sell them. They're not going to be able to pay any payments that may be due if those aircraft are leased.

And a point that was raised yesterday at the BBGA event, was that even if you hold a lease, you might think you can cancel it. It's a clear case of default. But what are you going to do to recover your asset? If it's in Russia, you can't get it out. So, I think the point that was being raised last week was these aircraft are just going to deteriorate. If there's an operator that maybe has three or four of the same type, they might cannibalize one or two for parts for the other one. But you can't maintain them. You can't fly them. You can't get spares.

Lee Ann Shay:

I would agree with that. You know, and even just from parking aircraft. Parking aircraft falls under Part 145 maintenance certification. So, depending on the province of the aircraft, you can't even properly touch it. To properly ground an aircraft, there's certain things that have to be done depending on how long it's going to be parked. You know, whether you're draining fluids, covering the pitot tubes. But if you cannot do that by law because of these sanctions, you know, it's kind of like a house. You don't just abandon a house, and if you're going to close it up for several months, there's certain things that you do to it just to preserve it. But under, you know, the Part 145 maintenance bans, you can't touch it.

Angus Batey:

The other thing that I was at yesterday was a Gulfstream event, held at their new maintenance facility at Farnborough (Airport). [Gulfstream President] Mark Burns was there and he was speaking. We spoke briefly about this. And he said that at the moment, their understanding is that they can continue to talk to their customers who are in Russia, as long as they're not sanctioned individuals, but that's all they can do. So, if this goes on for very much longer, you've got significant problems, just managing your own relationships with people who may be entirely blameless.

Molly McMillin:

And it looked like there is a difference of opinion on whether this might lead to a fire sale then that you can buy these jets, right?

Angus Batey:

There are several different trains of thought here. There are those who believe that it's inevitable that the people who will have these useless assets will be seeking to get rid of them as soon as possible. The question then becomes how they could do that, legally, at the moment, there appears to be no mechanism by which that can be done. On the other hand, there are those who feel that because of the practicalities involved, this is the least likely thing to happen. But at the moment, just nobody knows.

Lee Ann Shay:

I would agree, at the Corporate Jet Investors (event), I think the predominant thought was that, you know, people are just not going to touch them. From insurance banking, maintenance, paperwork process. It's just not worth the risk. And if you think about, the beauty of corporate aviation, you know, these aircraft are tools to allow people to enhance their businesses to be productive. And, you know, if there are all of these kind of ambiguous potential to deteriorate the aircraft's value, it's just not worth it.

Angus Batey:

I guess the one possible way out of this that we could possibly see at the moment is clues to this are in what the British government is saying about Roman Abramovich. He's probably the most high profile tycoon from Russia in the UK, through his ownership of Chelsea Football Club. He wasn't sanctioned until …Thursday, the 10th of March. Prior to that, he had announced that he was going to try and sell Chelsea. And there are apparently a lot of people wanting to buy it. But as of Thursday the 10th, he been sanctioned. The sale cannot now take place. And restrictions have been placed on the basic operation of this very successful sports team in the UK that they've been told things like they're not allowed to sell any more tickets. Those fans who already have a season ticket will be able to go to games. But if they get to a cup final, which is possible, they're still in two competitions, their fans won't be able to buy tickets for those events.

They have a 20,000 lb. limit on travel to away games. They can continue to sell beverages during matches to people who've already got tickets, but they can't operate the club shop that sells shirts. Now, there are discussions taking place and senior government figures talking about exceptions to the sanctions that may be made in order to permit certain functioning of the football club to ensure that it continues to exist as a business. This may offer a glimmer of hope to people in sectors like business aviation. Perhaps there will be, as the situation develops, and as understanding of the impacts permeates through the decision- making levels of governments, people might start to make practical exemptions to enable Western companies to continue to do their business in a way that doesn't damage the economic interests of Western companies to the extent that perhaps it might otherwise.

Lee Ann Shay:

That's an excellent point. Robert Baltus, who is the Chief Operating Officer for the European Business Aviation Association, told me this week that he really likes what EASA has been doing. You know, they suspended certifications. They didn't revoke them. So, whether, from the crew, to the maintenance organizations, to the operators, these certifications have been suspended, which really leaves the door open for when hopefully the war's conflict is over to normalize. The ramp up should hopefully be good or easier than it would be if it was revoked.

But, you know, right now there's just a lot of clarity that needs to happen regarding the sanctions. But he also pointed out that the European commission has been hosting weekly meetings with the key stakeholders to talk about the sanctions, to field questions so they can, you know, provide guidance. And Robert thought in the next two to three weeks, there should be a lot of written guidance regarding, you know, the aircraft maintenance, flight crews, all these areas. So hopefully the gray areas will become less gray.

Molly McMillin:

Bill, do you have any final thoughts that you'd like to add?

Bill Carey:

Yeah. I mean, there's just many different aspects of this crisis, one of which is the potential impact on the manufacturing side of aviation. Russia is one of the leading world suppliers of titanium, and titanium is used in aircraft components, including landing gear. That's mainly a consideration for the bigger airframe manufacturers, the Boeings and the Airbuses. However, there could be some limited exposure by the large business jet airframe manufacturers like Bombardier. Bombardier has said it doesn't expect that to be an issue, but in terms of the deliveries it makes on an annual basis, it estimates that 5 to 6% of its annual deliveries are made to Russia and the Confederation of Independent States, which is the political structure of the former Soviet Union. So that's just an example of some of the many different dimensions of this problem.

Molly McMillin:

Lee Anne, any final thoughts?

Lee Ann Shay:

I would just say right now, there's just a lot of ambiguity. Aviation is a very safety driven industry. You know, people want to comply, people want to do the right thing, which is part of the reason that the industry is reacting as it is. It's about risk mitigation. And if anything could even, you know, be conceived as being partly Russian or related to Russia, they're not touching it. So, I would just say that right now it's risk management and I expect that this will continue. At least for the next couple weeks until there's a little bit more clarity on the impact of the sanctions.

Molly McMillin:

Well, that wraps up our podcast for today. I want to thank Lee Anne and Angus and Bill for your great insight and discussion here. Join us again in a few weeks for the next edition. To make sure you don't miss it, you can subscribe to Aviation Week’s BCA podcast and find us on Apple podcasts, Google podcasts, Amazon, Audible, and Spotify. Thank you for listening and have a great day.