Russian airlines: the first alliance and other developments January 2001

As expected, Russian traffic continued to decline in 1999, by about 4% to 21.4m. More alarmingly, the decline accelerated in 2000 — traffic was down by 8% in the first half of the year. This was despite an improvement in the country’s economy due to higher oil revenues.

However, some airlines, notably Aeroflot, Transaero and Sibir, are now waking up to the need for change. Words like ''alliance'' and ''partnership'' are coming into use, not necessarily in their accepted Western senses, but in ways relevant to the particular problems of Russia.

August 2000 saw yet another change in the country’s regulatory body, the sixth since the Soviet Union ended in December 1991. Now termed the ''State Service of Civil Aviation'' (GSGA, to use its Russian initials), it has been amalgamated back into the Ministry of Transport. It is not yet clear what effect this may have on its budgets for safety oversight.

Government plans to set a legal basis for aviation leasing, and long- promised budgetary support for a lease industry, have not yet been realised. The matter is still before the national parliament (the Duma). Funding has been promised, but not enacted, for a lessor called ''Ilyushin Finance'' to purchase seven long–range Il–96–300s (for lease to Aeroflot) and ten Tu- 204/214s (for lease to Transaero and its partners). This reform is now critical. In the very difficult financial climate of the country, only five new airliners were delivered in 1999, and six in 2000.

Fleets are now beginning to shrink, with few airlines having enough money to pay for major overhauls, and their aircraft consequently been withdrawn and scrapped. About 20% of the current fleet of passenger aircraft are grounded awaiting overhaul.

As of December 2000, there were 321 registered airlines in Russia, with 115 of these licensed to carry passengers (the others are mainly cargo and aerial work companies). The top 10 airlines carried some 52% of the 1999 passengers, and the top 45 carried just over 92%. A few are growing; most are just holding on.

The Russian government continues to ensure that taxes owed by airlines are extracted with maximum force, and state debts to airlines are delayed as long as possible, often for three or four years. There is no right of offset.

Two Ukrainian airlines are included for the first time in this report. In the nine years since the end of the Soviet Union, traffic in the country has collapsed from 15m passengers annually to just 1.25m in 1999. The country’s economy has been in steady decline throughout the 1990s, but a growth of some 5% is expected for 2000.

Aeroflot - Russian Airlines

Ukrainian government policy on air transport has been indecisive, and continually changing. The national airline, Air Ukraine, has been divided and divided again, and now most cities of the country have their own part of the carrier. Unfortunately, each break–up has resulted in the Kiev–based section retaining the debts of the latest breakaway units, with the result that Air Ukraine is in a very difficult situation today. The country’s national carrier changed its title by dropping ''International'' in June, to reflect its focus on domestic services. . In 1999, it carried a total of 4.6m passengers or some 22% of the country’s total, an increase of 4% on 1998. International volumes were down from 3.7m to 3.4m, while domestic traffic grew from 0.7m to nearly 1.2m.

Aeroflot recorded an operating loss by Western accounting standards, and engaged McKinsey & Co. to review its strategy. The result was a route–by–route analysis and a resultant reduction in the numbers of destinations it serves. An improvement of $100m–plus is targeted for 2001.

The airline’s management has expressed considerable concern about its facilities at Moscow’s major airport, Sheremetyevo, and is working with the local regional government to build a new terminal to cater for the airline and its partners.

Aeroflot hopes to join the Delta/Air France SkyTeam alliance by 2003, and has developed partnerships with several Russian domestic airlines to feed its international services from Moscow. It is expected to announce an order for up to 30 A320/319s to replace its Tu–154s on European, Middle East and domestic services. The Il–96T remains undelivered, and Aeroflot has expressed concern and disappointment at the continuing delays, and threatened to go for additional DC–10–30Fs if the matter is not speedily resolved.

Chief Executive: Valeri M. Okulov

Tel/Fax: (095)752 9001. (095) 155 6647

Address: 37, Leningradski Prospekt, Moscow 125167

Pulkovo Aviation Enterprise

The St. Petersburg–based airline carried 1.5m passengers in 1999, an 8% increase on 1998, and rose to second place on Russia’s airline list. Like Aeroflot, the growth was domestic, as international traffic fell by from 0.7m to 0.6m. It has continued its policy of improving Soviet equipment by, for example, refurbishing aircraft interiors and revamping St. Petersburg airport. It has also begun cooperating more closely with Aeroflot.

Early in 2000, it was asked by the regional government of Murmansk to take over Murmansk Avia. This carrier had achieved the highest losses of any Russian airline in 1998, mainly due to expenditure on in proving two airports in its region, and was technically bankrupt. Its fleet included four relatively new Tu–154Ms.

Chief Executive: Boris G.Demchenko

Tel/ Fax: (812) 122 9422, (812) 104 3302

Address: 196210 St. Petersburg, Pilot St., 18/4

Vnukovo Airlines

The airline’s prediction in late 1999 that it would carry 1.3m passengers in the year turned out to be wildly optimistic: the total came to just over 0.9m. When Alexander Krasnenker took on the CEO position in Setember 1999, the once major domestic airline in Russia was carrying just 600 passengers per day. He set about an intensive campaign to restore staff morale and passenger confidence, and by June 2000, traffic had grown ten fold, with an average of over 6,000 daily. He then resigned in September, with no public explanation, and the airline was soon back in crisis.

(Acting) CEO: Alexander V. Klimov

Tel/ Fax: (095) 436 7995. (095) 436 2626

Adderss: 103027 Moscow, Vnukovo Airport

Kras Air

New management, brought in at the end of 1998, succeeded in boosting business — traffic grew by 28% in 1999 to just under 0.8m — and building partnerships to control costs. CEO Boris Abramovich has also concentrated on restructuring the fleet. Early in 2000, he added the first medium–range Tu–134s, a 72–seat aircraft suitable for the off–peak seasons, and also available for executive charters. At last, Kras Air has taken delivery of a new Tu–204, and the airline has joined a partnership with Transaero to acquire, operate, maintain and train crews and technical staff on the type. It is also looking at some smaller western aircraft, although no decisions have yet been taken.

Kras is code sharing with Transaero on the Moscow–Krasnoyarsk route, and has recently become a founder member of the as yet unnamed "first Russian aviation alliance". This is a group of four airlines working to rationalise schedules and connections, and to market their flights jointly. They will also permit members to utilise each other’s aircraft in certain circumstances, and they will attempt to rationalise spares and maintenance facilities.

CEO: Boris M. Abramovich

Tel/ Fax: (3912) 236366, (3912) 244895

Address: 663020 Krasnoyarsk, Yermelianovo Airport.

Sibir

This airline continues to improve its reputation. 1999 saw passenger traffic grow by 20% to over 0.7m, and a $2m after–tax profit on revenues of $106m was reported. Healthy traffic has also been evident this year.

Two notable firsts were achieved in 2000. Sibir became the first Russian airline to enter a comprehensive interline agreement with a major international carrier, agreeing with Lufthansa to jointly market the other’s services and to interline passengers at Frankfurt and other German airports. Equally important, it became the first Russian airline to secure funding for a new gen–eration aircraft from a Russian bank.

Other airlines had obtained two or three million dollars for older aircraft, but the $16.8m advance from Sberbank for the purchase of a two year old Tu- 204 marked a new stage in financing Russian aircraft. Sibir bought the aircraft from a lease company, and the deal requires the lessor to use the funds to complete two other Tu–204s currently on the production line and to lease them to Sibir.

The airline has continued to improve its interiors and maintenance facilities, and is close to announcing further major developments.

CEO: Vladislav F. Filiov

Tel/ Fax: (3832) 227572, (3832) 599064

Address: 633115 Novosibirsk, Tolmachevo Airport

Transaero

Of all the Russian airlines, Transaero took the hardest hit following the Rouble collapse in 1998, as most of its costs were in hard currency. But it has responded well, completely restructuring its operations. In 1999, it carried under 0.6m passengers, a drop of 58% on 1998 levels. But it was able to its first–ever operating profit and a marginal net profit.

Transaero has focused on reducing costs by entering partnerships with other airlines. Apart from the Kras Air code–share mentioned above, it has agreed to take 10 Tu–204/214s on lease from the new Russian aviation lessor, Ilyushin Finance. These will be shared between Transaero and three partner airlines, including Kras Air, Air Kazakhstan and Air Moldova. Ural Airlines may also join the group.

In November 2000, it took delivery of a leased A310 in order to begin to serve its long–range routes again. This will be used on routes to western Europe and Israel, and a second will be added in time for the 2001 summer season.

Chief Executive: Nikolai V. Kozhevnikov

Tel/ Fax: (095) 578 5007, (095) 578 8688

Address: 103340 Moscow, Sheremetyevo Airport

Domodedovo Airlines

Domodedovo’s management has taken several steps to turning the airline’s decline. They have improved marketing, and opened the route to Macau. At the end of 2000, they instigated the "first Russian Aviation Alliance", linking Kras Air, ChelAl (Chelyabinsk Airlines) and Aviaexpresskruiz together to develop their marketing and schedules at Domodedovo Airport, and for fleet rationalisation. Together, the four airlines have 97 aircraft of 12 types, and carried 1.3m passengers in the first nine months of 2000. Alexander Akimov, the CEO, expects the alliance to add value and revenue to each of the members, and he anticipates that more airlines operating onto the newly rebuilt airport will join.

In 1999, the airline carried 0.55m passengers, a 14% increase on 1998.

Chief executive: Alexander I. Akimov

Tel/ Fax: (095) 323 8991, (095) 952 8651

Address: 142945 Moscow Region, Domodedovo Airport

Kolavia - Kogalym Airlines

In 1999, Kolavia saw its traffic fall for the first time in its history due to a severe reduction in its holiday flights following the Rouble collapse. It carried just under 0.5m passengers, 11% down on its 1998 loads.

With its major customer, the oil industry, switching its western Siberia base to Surgut, some 300km from Kogalym, the airline relocated its main base to the new oil capital.

Chief Executive: Nikolai N. Zolnikov

Tel/ Fax: (3462) 241113, (3462) 280085.

Address: 624600 Tyumen Region, Surgut Airport

Tyumenaviatrans (TAT)

Although TAT actually came tenth on the 1999 list, some recent developments make it newsworthy (the one ahead of it was Ural Airlines, with 0.48m passengers). TAT’s traffic fell by 1.5%, in 1999 to 0.47m, turning in a figure of 474,300/. But early in 2000, its management changed, and the results were soon evident. The first nine months saw traffic increase by 56% and revenues by 66% allowing the airline to claim the fourth position in Russia for the period.

TAT was originally the aerial work section of Aeroflot’s Tyumen region, and it retains a very large helicopter fleet. It added some Tu–154Ms bought new from the factory, and held onto some regional turboprops and Yak 40s. With these, it began to build its own passenger services, and quickly outpaced the other Tyumen–based passenger carrier.

Its helicopter fleet principally serves the oil industry in western Siberia, and it has also moved its headquarters to Surgut (as has Kolavia) at the time the oil and gas industries made the move.

Two major contracts with the United Nations (one in East Timor, the other in Sierra Leone) have added some $22m revenues to this years results, and TAT has now opened an office in New York to seek further UN work.

TAT has secured increased capital through the issue of ADRs (American Depository Receipts), traded on the Berlin and New York stock exchanges.

Chief Executive: Andrei Martirosov

Tel/ Fax: (3462) 280057, (3462) 280116

Volga Dnepr Airlines

Address: 624600 Tyumen Region, Surgut Airport Russia’s largest cargo operator, Volga Dnepr specialises in the outsize cargo market. It operates world–wide, in partnership with the British company, Heavylift Cargo Airlines. Founded in 1990, Volga Dnepr has been consistently profitable since then. Unusually for a Russian company, it has invested its profits in improving the engineering and operational characteristics of it fleet, mainly the Antonov An–124, the world’s largest production aircraft. Customers include Boeing and Lockheed Martin. It now holds over 50% of the world market for outsize cargo work, and has recently added its tenth 124 to its fleet. On revenues of $120m for 1999, it achieved a net profit of $6m.

Chief Executive: Alexei I. Isaikin

Tel/ Fax: (8422) 202671, (8422) 204997

Aerosvit

Address: 432062 Ulyanovsk, Karbyshev Street, 14 "Air World" in Ukrainian, Aerosvit was founded in 1994, flying mainly charter services at first. It began operations with 737s later, but was almost destroyed when a Yak 42, chartered from a section of Air Ukraine, crashed in Greece. Although not flown by Aerosvit, the airline has been involved in a running battle with the Greek authorities. A detailed inspection of the airline by the Greek aviation authority found it to be well run, and operating standards to be high, but the problem is not yet resolved.

After the accident, a new management team was brought in. Led by Gregori Gurtovoi, the founding commercial director of Russia’s Transaero, the team swung the company around, and today it is the leader in terms of passenger volumes in the Ukraine.

In 2000, the airline carried just under 250,000 passengers and earned revenues of $42m. A small net profit (under $100,000) was achieved.

Chief Executive: Gregory A. Gurtovoi

Tel/ Fax: (38 044) 235 8710, (38 044) 246 5184

Address: 58A, T. Shevchenka Bulvard, Kiev 01032, Ukraine

Ukraine International Airlines (UIA)

Founded in 1992 as a partnership between the Ukraine government and the (then) megalessor GPA, UIA was planned to bring western airline standards to the Ukrainian market. This it has succeeded in doing, and its success can be measured by the fact it now has four western investors — Debis Finance, Swissair, Austrian , and, from December 2000, the EBRD (European Bank of Reconstruction and Development). It also code shares with KLM, and is expected to do the same with TWA shortly.

In 1999, it carried 0.2m passengers and achieved revenues of $55m; 2000 results are predicted to be 0.24m passengers and $59m revenues, and a small net profit. It was the first airline in the former Soviet Union to earn JAR145 (European aircraft maintenance) approval.

Chief Executive: Vadim Potiomski

Tel/ Fax: (38 044) 216 4093, (38 044) 216 7994

Address: 14, Peremohy Avenue, Kiev 01135, Ukraine