In a Less-Globalized World, Be Careful Where You Park Your Plane

Ireland’s AerCap has the most jets in Russia, 145 in service, analytics company IBA said. In relative terms, though, U.S.-based Fortress Transportation and Infrastructure Investors tops the list with 23% of its portfolio affected by the war. The stocks are down 17% and 16%, respectively, this year. Investors also own 67 Russian planes through asset-backed securities managed by the likes of

Carlyle

and Castlelake. Senior notes in some Russian-heavy ABS have traded as low as 70 cents in the dollar, Ishka analysts said.

Aircraft owners are often insured against physical damage, wars and confiscations. Fitch Ratings said Monday that insurers—most of them belonging to Lloyd’s of London—could foot almost all of the bill, with 30% to 40% covered in turn by reinsurers. It expects the impact to be manageable.

So why aren’t investors buying the dip in lessor shares and ABS? Perhaps because the aircraft-finance ecosystem is unprepared for years of legal battles. Despite emerging in the 1970s, the aircraft-leasing model didn’t take off until the 1990s, eventually expanding to include half of the world’s fleet. Lessors have grown up in an era of globalized aviation and geopolitical calm, in which treaties like the 2001 Cape Town Convention regarding movable property gave them a false sense of security.

Common sense suggests that Moscow has broken the rules by refusing to return planes. However, Russian officials are offering to pay the leases or even buy the jets; it is the Western firms that aren’t allowed by their governments to accept payments from Russia. So the legal situation is unclear and may depend on factors like the timing of insurance cancellations or even who operates the jets: Claiming nationalization could be easier with a state-owned airline like

Aeroflot,

some lessors said.

Part of the solution, banks and insurers hope, is that a sizable part of the lost assets could one day be recovered. They will probably be disappointed.

A jet’s worth is tied to the integrity of the technical records allowing operators and financiers to determine its airworthiness. Tracking back gaps in records often costs about $3 million a plane, New York University professor

David Yu

estimates, and stepping outside the scrutiny of Western regulators will make the entire fleet suspect. Also, Russian aircraft will need to be cannibalized for parts, and bankruptcy procedures show that this takes years and tens of millions of dollars to reverse. Being operated even for a while in such circumstances could mark planes down close to scrap value.

This mess may ultimately lead to higher insurance premiums and lower aircraft values. The broader lesson is that international law may be no match for rising geopolitical risks. Adding to the complications, Western investors are exposed to Russia through their financing of Chinese lessors, which own 75 Russian jets, Cirium data shows. Not to mention that foreign leasing firms have 806 jets worth $20 billion in China itself, so would have an even bigger problem if that country gets entangled in the sanctions against Russia.

Even assets that can fly can’t always keep above the fray of a fragmenting world.

Write to Jon Sindreu at jon.sindreu@wsj.com