Aeroflot to undertake resheduling of aircraft lease payments

Published: 9/29/1999

Aeroflot has confirmed its intention - rumoured for some time - to restructure some of its outstanding financial obligations of $100m, primarily made up of aircraft lease payments. The news comes as no surprise, given the current condition of the air transport market, the low levels of load factor and airfares that still remain at post-crisis levels. Valery Okulov, General Director of Aeroflot, has already admitted that the airline missed lease payments in December last year and in January 1999, rumoured to be on its new Boeing 777s. There have been repeated suggestions concerning possible wet leases of these very expensive aircraft ($950,000 a month) to a number of parties including Libya, in an effort to reduce the cost to the airline. It seems unlikely that the lessor, Los Angeles-based ILFC, would treat such a contract favourably, given that it already cut a deal on the normal lease cost of $1.25m a month and would not like to see its aircraft in Libya. Aeroflot currently operates 27 leased aircraft, which represent the backbone of their international fleet and costing the airline, according to our estimates, $171.3m a year, paid according to custom on a monthly basis. It is also not unusual for airlines to have start-up costs and falls in income when bringing new aircraft into service. For Aeroflot this, combined with its heavy dependence on hard currency leased foreign aircraft, is an operational weakness, particularly with larger aircraft, where current load factors of 50% and soft pricing can make it difficult to generate sufficient revenue. It seems unlikely, however, that the leasing companies, primarily GE and ILFC, will be unwilling to discuss some form of restructuring, given that the market for aircraft of this type is soft and repossessed aircraft would have to be found a home elsewhere. Withdrawal from Aeroflot"s leases would also end its participation in the market in any meaningful way: something that neither side wishes to happen. Default at this point also seems improbable. For Aeroflot, it does call into question whether it has the right fleet for the current and future market. Efforts may be made to place at least one of the two 777s elsewhere over the next few months.

Article ID: 919