Russian airlines: traffic recovers but bureaucratic barriers remain January 2002

Russian traffic is now moving strongly upwards again but major impediments remain in term of import taxes and access to Western finance.

The decline in Russian traffic was finally reversed two thirds of the way through 2000 when the new aviation administration brought in new policies on route licensing and holiday charters. The passenger total came to 21.76m, an increase of just 1% on 1999. However, this growth was generated in the final three months of the year, whereas the first nine months had shown a decline of about 8%.

The traffic upturn continued strongly throughout 2001, with monthly growth rates of 15–19% up to the end of October.

September 11 appears to have had a minimal impact on Russian domestic travel.

North America is down of course, although the only Russian carrier serving that region is Aeroflot, which is predicting an overall drop in 2001 transatlantic passenger numbers of 1% as a consequence.

Consolidation is accelerating: there are now 242 registered operators, well down from the 321 of a year ago, with about 110 authorised to carry passengers. Again, the concentration of traffic with the larger carriers continues, In 2000, the top 10 carried over 11.5m passengers, well over half; by the end of 2001, some 12m were carried on the five major airlines.The Ministry of Transport has announced plans intended further to reduce the number of air operators in the country.

For example, one new rule states that unless a back–up aircraft of the same or greater capacity is available, an operator cannot offer service with a particular type.

As an extreme example — an airline with two aircraft, a 350–seat Il–85 and a 32 seat Yak- 40, cannot market the Il–85 except as a back–up for the Yak 40. Russia does not presently allow back–ups from other companies.

Import taxes on aircraft have been reduced from 56% to 44%, but they still represent an almost impossible hurdle for airline growth. The days of Presidential exemptions for favoured carriers are gone, but it is possible to find specific exemptions when replacing aircraft.

Just now, at least seven carriers are looking hard at Western types, hoping to take advantage of depressed second–hand prices. But, evidently, something has to change in terms of funding availability before airlines will have any real prospect of replacing their aging aircraft.

Some progress has been made on the question of leasing, with two companies awarded the "contract'' to win some state support, although the conditions seem unduly onerous. These are Ilyushin Finance (but only for the Il–96–300) and the Financial Leasing Company from Tatarstan for the Tupolev Tu–214, a longer range version of the -204.

Aeroflot - Russian Airlines

The country’s national airline carried 5.1m passengers or some 24% of the country’s total, in 2000, 10.6% up on 1999 ( volumes were boosted by the purchase of 51% of a Rostov- based airline, now renamed it ''Aeroflot–Don''). Thus for the first time since the end of the USSR in 1990, it exceeded the 4.76m carried by the former Aeroflot international division. The seat load factor came to 64.2%.

Aeroflot has launched a three–year Strategic Development Programme aimed at improving its management, controls, passenger image and transparency. There have been noticeable improvements since then.

One major problem remains its base airport, Sheremetyevo. Aeroflot has begun to face up to this, and work on a new terminal at the airport has begun, with Bovis International hired to complete the work.

In September 2000, Aeroflot’s board approved a plan to authorise up to 20% of its issued capital to the American Depository Receipt market through Deutschebank. The new transparency has resulted in the publication of western- standard material in its annual report published with the 2000 results in mid–2001.

Total revenues came to $1,407m and pre–tax profit to $39.5m. After tax and minority interests, the net profit came to $8.6m. In 1999 considerable charges were taken to bring the accounts into line with western practice, and thus showed a net loss amounted to $59.6m. Up to September, Aeroflot had expected 2001 to be better, but it has revised its forecasts sharply downwards to an after tax figure of about $1m since then.

Plans to join the Delta/ Air France/ Aeromexico ''Sky Team'' alliance by 2003 are progressing. The expected order for A320s has not yet materialised, due mainly to pressure from the Russian manufacturing industry, although Boeing has also appealed to the government for the order. Aeroflot has continued to option new Russian aircraft, particularly in the regional market, although it is concerned about the manufacturing industry’s ability to deliver. The failed attempt to purchase Virgin Express Ireland was in part an attempt to get round the rules on importing Western equipment.

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 1.63m passengers in 2000, a 10% increase on 1999, and retained second place in the Russian industry list. It is expected to reach the 2m mark for 2001.

It has continued its development of services to Europe, and is currently looking at the possibility of adding some western types to ensure that it can meet Chapter 3 requirements.

Some of its Tu–154s have been modified for this, but the older aircraft, and its Tu- 134s and Il–86s, cannot meet the tightened noise and emission regulations.

Chief Executive: Boris G.Demchenko Tel/ Fax: (812) 122 9422, (812) 104 3302 Address: 196210 St. Petersburg, Pilot St., 18/4

Vnukovo Airlines

The expected collapse of Vnukovo occurred early in 2001, and it was subsequently bought out by Sibir. The price paid was, quite simply, Sibir’s agreement to accept all the debts of the Moscow carrier, probably amounting to about $40m, a very large amount for any Russian airline. Only 11 Vnukovo aircraft remained airworthy, and Sibir has been overhauling the others as cash permits, with some joining the Sibir fleet, and others going to establish a new leasing company at the request of the Minister of Transport.

Kras Air

Apart from Vnukovo, Kras Air was the only one of the top six airlines to see a fall in traffic in 2000, down almost 5% to 0.73m on the previous year. However, strong growth resumed in 2001, and Kras expects to report a passenger total of over 1m for the year.

The airline has developed a strategic plan for development over the next ten years. The first stage is to develop in the Russian market — it is aiming to become one of the three largest in the market. Next will come the CIS market, then the international one. It sees the location of Krasnoyarsk as being a suitable transpolar hub for cargo and some passenger services, and aims to develop the airport to meet the standards required by long–range international operators.

In the development of its Russian services, the airline has recently agreed to join with the southeast Siberian carrier Chita Avia to partner it in the creation of a second hub for Kras Air.

Kras Air has now received its second Tu- 204, and the two aircraft were widely used on holiday charters throughout the summer. the aviation regulatory authorities and from Tupolev (necessary under the regulations) to upgrade its capability.

CEO: Vladislav F. Filiov Tel/ Fax: (3832) 227572, (3832) 599064 Address: 633115 Novosibirsk, Tolmachevo Airport

Transaero

Transaero decided to suspend some of these European routes after September 11, and returned its only Airbus A310 to the lessor. It plans to return to these routes in the near future, and is currently seeking to augment its capital by about $4m. Early in 2002, it will begin to look for either A310s or 767s to resume some long–distance services.

It is currently completing negotiations to replace its 737–200s with Chapter 3–compliant 737 Classics, necessary if it is to operate into Western Europe from next April.

In 2000, it carried just 0.43m passengers (twelfth position for the year), but it earned operating profits in each quarter, and claims to have achieved a small net profit in the year. In May, it moved its operations from Moscow’s dismal Sheremetyevo Airport to the newly rebuilt Domodedovo, a move both popular with passengers and cost- effective.

Chief Executive: Olga Pleshakova Tel/ Fax: (095) 937 8463 (095) 937 8463 Address: 113054 Moscow, Paveletskaya Square 2/1 (second floor)

Domodedovo Airlines

Domodedovo’s management has been caught in a privatisation problem in the last few months. The price expected by the state for some of its shares in dispute, and as a result, management has not been able to concentrate on the airline’s development.

As a result, traffic fell by 23% to just 0.43m in 2000, although some recovery is expected for 2001.

Chief executive: Alexander I. Akimov Tel/ Fax: (095) 323 8991, (095) 952 8651 Address: 142945 Moscow Region, Domodedovo Airport

Kolavia - Kogalym Airlines

Kolavia saw a further drop in its passengers in 2000, when it carried 0.44m, but 2001 has shown reasonable growth, and it should carry over 0.5m. 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)

TAT continued its strong growth in 2000, and ended the year in sixth overall position, with 0.65m passengers. Uniquely in Russia in the past decade, it was even profitable on its short- range feeder services, where it uses the original RJ — the Yak 40 — and some elderly Antonov turboprops.

On revenues of $85m, it achieved a remarkable $17.5m net profit before taxes (under Russian accounting standards).

This is due mainly to its inheritance of a huge helicopter fleet from Soviet times. In 2001, its profits will be lower, as it is spending considerable amounts on restoring helicopters that have not flown for some years. With the world’s largest helicopter fleet, including the world largest production model, the Mi–26, the $2m revenues earned by the previous management seemed seriously inadequate. 2000 ended with the company opening a new office in New York to negotiate with the United Nations for some $25m in contracts.

The regional governments in western Siberia have followed closely the airline’s progress, including the introduction of Western management techniques, and bought substantial shareholdings early in 2001, while leaving the management unchanged. One result was their announcement that they would seek to merge several other airlines in the region into TAT.

Negotiations are now under way with Tyumen Airlines and Yamal, both substantially owned by these regions, but Kolavia, mostly owned by the Lukoil Company, is resisting.

TAT is one of the coming carriers.

Chief Executive: Andrei Martirosov Tel/ Fax: (3462) 280057, (3462) 280116 Address: 624600 Tyumen Region, Surgut Airport

Volga Dnepr Airlines

Early in 2001, Russia’s largest cargo operator terminated its partnership with HeavyLift for reasons not made clear. It suffered some loss of business in the next quarter, but by the end of October it had managed to catch up, and expects the year to end level with 2000 in terms of work and revenues — about $120m.

In December, it applied for European certification for two An–124s currently under construction and it reckons it has about a 50/50 likelihood of success. With this, it hopes to gain access to western finance by using the aircraft as collateral for expansion funds. It has set up subsidiaries in the UK and the US, and has reached agreement with the US Federal Emergency Management Administration to provide airlift capacity in major emergency situations. It has retained its 55% share of the outsize cargo market with customers including Boeing and Lockheed Martin.

Chief Executive: Alexei I. Isaikin Tel/ Fax: (8422) 202671, (8422) 204997 Address: 432062 Ulyanovsk, Karbyshev Street, 14

Ukraine

The Ukrainian government has at last decided its policy toward building an airline industry in the country. It has asked Aerosvit, Ukraine International and Air Ukraine to come up with proposals for a merger. While the first two of these have been working closely together and helping each other wherever possible, they have outside shareholders, and these will need to be satisfied with the outcome.

Air Ukraine is in a much more complex position. It left the USSR with a fleet of over 100 aircraft and about 15m passengers annually. Since then, each town and region in the country has been permitted to keep its aviation assets, and as these were separated from the national airline, they were permitted to leave it to hold their share of the liabilities. Thus, by early 2001, it had only five aircraft in operation, and these were often detained for unpaid debts. Much will need to be sorted out.

Aerosvit

In 2001, the airline expects to carry some 0.31m passengers and earn a net profit of about $2m. It has recently signed to lease two 737–500s to begin to replace its Chapter 2 737–200s

. 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) Guinness Peat Aviation Group, UIA was planned to bring western airline standards to the Ukrainian market. It added Finnair to its list of code–share partners, with a UIA service to Helsinki starting in September.

In 2000, it carried 0.25m passengers. For 2001, it expects some 0.31m and revenues of $67m. An operating profit of $3m is also expected. In the year, it added its first 737- 500, and carried the Pope during his visit to Ukraine.

Chief Executive: Vadim Potiomski Tel/ Fax: (38 044) 216 4093, (38 044) 216 7994 Address: 14, Peremohy Avenue, Kiev 01135, Ukraine