Update what does the conflict in Ukraine mean to business aviation?
The invasion of Ukraine will hit Europe’s buoyant business jet market. But it will also be felt around the world.
Although few aircraft are based in the country, Russia is a key business jet market for both aircraft and charter sales. It is also difficult to say just how big the Russian fleet is. Many aircraft are based and registered in other parts of the world.
- Airspace closed to all Russian aircraft – including private jets
- Fuel prices rise – Brent crude breaks $100 for first time since 2014
- WINGX says that 7% of all European business jet flights fly from or to Ukraine or Russia.
- Sanctions hitting
The EU and the UK have closed all airspace to Russian owner or operated aircraft.
“We are shutting down the EU airspace for Russians. We are proposing a prohibition on all Russian-owned, Russian registered or Russian-controlled aircraft. These aircraft will no more be able to land in, take off or overfly the territory of the EU. This will apply to any plane owned, chartered or otherwise controlled by a Russian legal or natural person,” said Ursula von der Leyen, president of the European Commission. “So let me be very clear. Our airspace will be closed to every Russian plane – and that includes the private jets of oligarchs.”
This is a massive headache for operators. How do you view a jet owned by a Russian individual who has duel citizenship? What about a shared ownership or fractional aircraft with a Russian individual? How do you define a non-Russian registered aircraft owned by a BVI company?
Fuel costs rise
Crude oil is now trading at levels last seen in 2014. Although this increases costs for operators, high energy prices typically encourage buyers. “The rising price of oil contributes positively to our business. This is because so many of the private jet travelers in the region work in the oil & gas industry who tend to travel and spend more when their industry thrives,” says Adel Mardini, founder and CEO of Jetex Flight Support, which has a strong Middle Eastern Focus.
The price of jet fuel Northwest Europe rose 7% on Thursday to $492.5 per tonne according to Argus Media, the commodity pricing company. This is the highest it has been since July 2013. However, Argus Media believes this could settle as Russia is not a major provider of jet fuel to Europe. Sanctions on energy companies will have greater impact on heating than aviation.
It may also take time for the effects to filter down. Aviation fuel prices change on a weekly; bi-weekly; or monthly basis depending on the location. The general trend over the past six months has been an upward move and this is expected to continue.
Blow to European charter
WINGX says that 7% of all European business jet flights fly from or to Ukraine or Russia. It says the main destinations from Moscow Vnukov Airport are: St Petersburg, London, Dubai, Geneva, Nice, Riga, Vienna, Belgrade, Zurich, Kazan, Munich, Sochi and Larnaca.
The Russian charter market is very much a large aircraft market. WINGX says flights on heavy jets (16%), airliners (16%) and ultra long jets (11%) account for most flights to and from Russia and Ukraine.
It is worth noting the sanctions against Aeroflot could offer some new opportunities to business jet operators, other than those connected to the UK.
Sanctions big threat to industry
Bob Menendez, chair of the US Senate’s foreign-relations committee, has threatened “The mother of all sanctions.” And other western allies – including the EU and UK – have said they will act in tandem.
The UK and US have talked about targeting oligarchs – Russian Ultra High Net Worth individuals – many of these own jets.
It is important to remember that many Russian UHWNIs do not base their aircraft in the country. A large part of the fleet is in countries like Austria and Malta. The US Office of Foreign Asset Control has already been investigating at least one international operator.
Supporting existing aircraft for OEMs may get harder.
Travel bans may also impact charter, although this may be less of an issue than Russians choosing to stay at home.
Further sanctions against Belarus – which already has aircraft sanctioned – are also likely.
In a statement the Russian Foreign Ministry said: “There should be no doubts – the sanctions will result in a strong response, not necessarily symmetric, but well-calculated and painful for the American side.”
Moscow also stressed that the US sanctions policy is counterproductive and that it has become a “reflex” for Washington.
“Russia has proved that, despite all the costs, we are able to minimize the damage. And even more so, sanctions pressure can’t affect our determination to defend our interests”, the statement read.
Adverse impact on transactions
New business jet purchase and financing deals for Russian clients will be put on hold — some already are. Those existing deals may face issues such as illegality, force majeure, payment defaults, etc. due to sanctions or export restrictions.
Any international transactions with business jets in which a sanctions-restricted bank or one of its subsidiaries is involved will now be adversely affected — as a buyer, seller or financier.
It is worth noting some sanctioned banks, such as VTB Bank and Sberbank, have leasing subsidiaries that also deal with aircraft and that will be affected.
Supply chains could impacted by long conflict
Russia is also an important market for raw materials used in aerospace. Russia produces 6% of the world’s aluminium, and 7% of nickel. Aluminium prices on the London Metals Exchange hit a record high after the invasion of Ukraine.
Rolls-Royce, for example, sources 20% of its titanium from Russia.
How will it hit global economy?
With consumers and investors already concerned about inflation, economists are watching closely.
Russia is the 11th largest economy in the world and sanctions will hit many companies dealing with it.
The London Stock Exchange is particularly vulnerable with 31 Russian companies listed. Several state-owned banks – Sberbank and VTB – and energy companies – Gazprom and Rosneft – also have secondary listings.