Introduction

The global aviation leasing and finance market continues to navigate an era of unprecedented geopolitical risk. The ongoing war in Ukraine, now entering its fifth year, and the escalating military conflict involving Iran have fundamentally altered the risk calculus for lessors, lenders, and investors engaged in commercial aircraft portfolio transactions. This advisory summarizes the principal legal considerations that aviation leasing companies and their financing counterparties should address when acquiring or financing portfolios of commercial aircraft assets in the current environment.

I. Sanctions Compliance and Export Control Exposure

Any portfolio acquisition or secured financing involving commercial aircraft must begin with a rigorous sanctions and export control analysis. The U.S. Office of Foreign Assets Control ("OFAC"), the European Union, and the United Kingdom have maintained and expanded comprehensive sanctions programs targeting Russia and Iran, including broad sectoral sanctions on aviation-related goods, services, and technology.¹ The U.S. Export Administration Regulations ("EAR") impose additional re-export restrictions on U.S.-origin aircraft, engines, and components, which capture virtually all Western-manufactured commercial aircraft given the ubiquity of U.S.-origin content.²

For portfolio acquirers, this means that every aircraft in a target portfolio must be screened not only against current sanctions designations but also against historical placement and operational records. An aircraft that was previously operated on routes serving sanctioned jurisdictions, or that was subject to a lease with a carrier subsequently designated under sanctions, may carry residual compliance risk, including potential violations of the EAR's "knowledge" standard or OFAC's strict liability framework. The 2022 imposition of sanctions following Russia's invasion of Ukraine demonstrated the speed at which an entire fleet segment can become legally stranded, and the Iran-related designations under Executive Order 13846 and subsequent executive actions continue to expand the universe of restricted parties and end uses.³

II. Lessons from the Russia Aircraft Crisis

The single most consequential event in modern aviation finance remains the stranding of over 400 Western-leased aircraft in Russia following the February 2022 invasion of Ukraine.⁴ Major lessors including AerCap, SMBC Aviation Capital, and BOC Aviation collectively wrote off or impaired billions of dollars in aircraft assets after Russian authorities effectively permitted domestic airlines to retain and operate foreign-owned aircraft in defiance of lease termination notices and sanctions-driven demands for redelivery.⁵ AerCap alone reported approximately $3.5 billion in insurance claims related to its trapped Russian fleet, ultimately reaching a $2.5 billion settlement with its insurers in 2025—a figure substantially below the aircraft book values at issue.⁶

These losses carry direct implications for portfolio transactions today. Acquirers must conduct enhanced due diligence on any portfolio that previously included Russian-placed aircraft, examining whether write-offs were fully resolved, whether insurance recoveries have been assigned or are subject to subrogation claims, and whether any residual contractual obligations to Russian obligors persist. Lenders providing acquisition financing should require representations and warranties specifically addressing Russian and other sanctioned-jurisdiction exposure, and should consider excluding any aircraft with unresolved sanctions-related title clouds from borrowing base calculations.

III. War Risk Insurance and Contractual Allocation of Loss

The Ukraine and Iran conflicts have transformed the war risk insurance market. Premiums for war risk and allied perils coverage have increased dramatically since 2022, and underwriters have introduced specific exclusions for aircraft operating in or over active conflict zones.⁷ The London insurance market's standard AVN48B war risk cancellation provisions, which permit insurers to cancel war risk coverage on as little as seven days' notice, have been invoked repeatedly, creating acute exposure windows for lessors and financiers.

The risks are not hypothetical. In January 2020, Ukraine International Airlines flight PS752 - a Boeing 737-800 aircraft widely reported to have been under lease - was shot down by Iranian military forces shortly after departure from Tehran Imam Khomeini International Airport, resulting in the deaths of all 176 persons on board and a total loss of the airframe.^7a The incident triggered complex insurance disputes involving war risk versus all-risk hull coverage and underscored the catastrophic exposure facing lessors whose aircraft operate in or transit active conflict zones. More recently, the escalation of hostilities involving Iran has forced major carriers including Lufthansa, Singapore Airlines, and Qantas to suspend or reroute flights away from Iranian, Iraqi, and broader Persian Gulf airspace, disrupting lease revenue streams for lessors whose airline customers depend on Middle Eastern traffic flows and stranding aircraft in operational terms even where physical repossession remains theoretically possible.

In portfolio acquisitions, buyers must diligence the insurance program of each aircraft in the target pool, paying particular attention to the scope of war risk coverage, any territorial exclusions (which now commonly exclude airspace over Ukraine, Russia, Iran, Iraq, and surrounding zones), and the allocation of war risk premium obligations between lessor and lessee under each lease. Financing documents should require borrowers to maintain war risk insurance meeting specified minimum standards and should include events of default tied to any lapse in such coverage. Given the Iran conflict's potential to disrupt air corridors over the Persian Gulf and broader Middle East, financiers should also model scenarios in which key revenue-generating routes become uninsurable or operationally infeasible.⁸

IV. Cape Town Convention and Repossession Risk

The Convention on International Interests in Mobile Equipment and its Protocol on Matters Specific to Aircraft Equipment (together, the "Cape Town Convention") remain the foundational framework for secured creditor protections in aviation finance.⁹ However, the Russia crisis exposed the practical limits of Cape Town Convention protections when a sovereign state refuses to honor international legal obligations. Russia, a Cape Town Convention contracting state, disregarded Irrevocable De-Registration and Export Request Authorizations ("IDERAs") and refused to cooperate with lessors seeking to deregister and repossess aircraft.

Portfolio acquirers and lenders must reassess country risk with fresh eyes. For aircraft placed with airlines in jurisdictions that are geopolitically aligned with Russia or Iran, or that have demonstrated a willingness to disregard Cape Town Convention obligations, the practical enforceability of IDERAs and remedial rights under the Cape Town Convention cannot be assumed. Transaction structures should incorporate enhanced country risk analysis, including legal opinions on local enforceability, and financing terms should reflect appropriate loan-to-value discounts for aircraft placed in higher-risk jurisdictions. Consideration should also be given to "Alternative A" insolvency regime elections under the Cape Town Convention, and whether the relevant state of registry has made qualifying declarations.¹⁰

V. Due Diligence Priorities for Portfolio Transactions in the Current Environment

In light of the foregoing, we recommend that aviation leasing companies and their financing counterparties incorporate the following priorities into any portfolio acquisition or financing conducted in the current geopolitical climate:

Sanctions and Export Control Screening. Full chain-of-custody analysis for each aircraft, including historical lessee and operator records, prior jurisdictions of registration and operation, and any nexus to sanctioned persons, entities, or jurisdictions. This analysis should extend to engines and parts, which may have been separated from airframes and swapped through pools that include sanctioned-jurisdiction exposure.

Insurance Program Review. Comprehensive review of war risk and all-risk hull and liability insurance programs, including identification of territorial exclusions, cancellation provisions, and any pending or historical claims related to conflict-zone losses.

Cape Town Convention and Title Diligence. Verification of International Registry registrations, IDERA filings, and lien searches, together with an assessment of the practical enforceability of remedies in each aircraft's state of registry. Title insurance or title indemnities should be considered for aircraft with complex provenance histories.

Contractual Protections. Lease and financing documentation should include robust sanctions representations, war risk insurance covenants, enhanced termination rights tied to geopolitical events, and carefully negotiated force majeure provisions that account for the specific risks posed by the Ukraine and Iran conflicts.

Conclusion

The aviation finance market has demonstrated remarkable resilience since 2022, with aircraft values remaining strong and investor appetite for the sector robust. However, the legal risks inherent in transacting portfolios during a period of active armed conflict demand a level of diligence and structuring sophistication that exceeds historical norms. Baker Botts' Aviation Finance Group has extensive experience advising lessors, lenders, and investors on these matters, and we welcome the opportunity to assist clients in navigating the complexities of this environment.

For further information, please contact the Baker Botts Aviation Finance Group.
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¹See U.S. Department of the Treasury, Office of Foreign Assets Control, Russia-Related Sanctions Program (updated 2025); Council Regulation (EU) No. 833/2014, as amended through the EU's fourteenth package of sanctions (2024); OFAC, Iran Sanctions Program.

²See 15 C.F.R. Parts 730–774 (Export Administration Regulations); Bureau of Industry and Security, Rule on Russia/Belarus Foreign Direct Product Restrictions, 87 Fed. Reg. 13,048 (Mar. 8, 2022).

³Exec. Order No. 13,846, 83 Fed. Reg. 38,939 (Aug. 6, 2018) (reimposing Iran sanctions); see also OFAC, Specially Designated Nationals and Blocked Persons List (updated continuously).

⁴International Air Transport Association, Report on Leased Aircraft Retained in Russia (2022); see also Reuters, "Western Lessors Face Loss of More Than 400 Jets Stuck in Russia" (Mar. 2022).

⁵AerCap Holdings N.V., Annual Report (Form 20-F) at 12–14 (2022); SMBC Aviation Capital, Annual Report 2022 at 8; BOC Aviation Ltd., Annual Report 2022, Note 12 (Asset Impairments).

⁶AerCap Holdings N.V., Press Release, "AerCap Announces Insurance Settlement" (June 11, 2025).

⁷Willis Towers Watson, Aviation Insurance Market Overview (2025); Marsh, Aviation War Risk Insurance Update (2024).

^7aSee Final Report of the Aircraft Accident Investigation Board of Iran, Ukrainian International Airlines Flight PS752 (2021); see also CBC News, "Iran Plane Crash: What We Know About Ukraine International Airlines Flight PS752" (Jan. 2020); Aviation Working Group, Statement on Conflict Zone Operating Risks (2020).

⁸See Lloyd's Market Association, Bulletin on Middle East Territorial Exclusions (2024); IATA, Guidance on Airspace Risk Assessment Over Conflict Zones (2025).

⁹Convention on International Interests in Mobile Equipment, opened for signature Nov. 16, 2001, S. Treaty Doc. No. 108-10; Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, opened for signature Nov. 16, 2001, S. Treaty Doc. No. 108-10.

¹⁰See Cape Town Convention Academic Project, "Declarations and Reservations by Contracting States," available at ctcap.org; see also Aviation Working Group, Practitioner's Guide to the Cape Town Convention and the Aircraft Protocol (3d ed. 2020).