Vnukovo Airlines, Russia's third largest airline, has published its 1999 figures under Russian accounting standards

Published: 5/26/2000

The company's revenues in the period rose by 4% in rubles, but fell by 59% in dollar terms, reflecting the dramatic decline in the airline's revenues and the ruble over the period. Operating costs rose by 0.4% in rubles while declining by 61% in dollars, resulting in operating revenues declining by 21% in rubles and by 69% in dollars. Given that the average exchange rate in the two periods declined from 9.7 to 24.66 rubles to the dollar, on first glance these figures are probably better than expected particularly given reports of dramatic passenger declines in the last quarter. Vnukovo has had a multitude of management problems during the last 12-18 months, which culminated in the appointment of ex-Aeroflot director Alexander Krasnenker as General Director in September of 1999. Krasnenker was appointed with an ambitious mandate, although some questioned the power, to turn the ailing carrier around after falls in passenger numbers of 41.8% at the ten-month stage in 1999, according to the Air Transport Association. In operational terms however, the airline increased load factors by 2.7%. How this has been achieved is difficult to tell given the company's information, but the assumption can be made that the airline's poor reliability record due to lack of available aircraft during the year reduced flights substantially and achieved higher load factors. During the year, the company also endeavoured to control costs with regard to employees by simply not paying them. An action, which while positive for cash flow, did result in actual or threatened wildcat strikes particularly in the last quarter of 1999 and brought further delays and cancellations of flights and damage to Vnukovo's tarnished image. The company also flattered earnings for 1999 by reducing its amortisation and depreciation expenses in the period in dollar terms in line with the eccentric policy of using a depreciation policy established under the Soviet system in 1990. Ticket pricing was difficult as for other Russian carriers during the year, with inflation eating into the real value of revenue, as demonstrated by the decline in dollar terms. The use of price-cutting by competitors further exacerbated the poor situation. The carrier also suffered as have other carriers, most notably Domodedovo Airlines which suspended flights in protest, from non-payment of government debts relating to travel by civil servants. The company's operating loss of 194.33m rubles ($7.88) was significantly flattered by substantial gains in non-operating activity amounting to a profit of 292.83m rubles ($11.87m), described by the company as revenues from trading on debt notes, currency transactions and gains from aircraft disposals (not difficult given the valuation of aircraft in the balance sheet). The company was reluctant to talk about the details of these profits simply stating that the legally required information was sufficient, despite the fact the size of contribution of these earnings to pre-tax profits of 23.07m rubles ($0.94m) before adjustments. After adjustments for tax debts and penalties, however, the airline recorded a loss of 10.58m rubles. The company has also announced its first quarter figures for 2000, which showed a decline on the first quarter reflecting the dramatic downturn in passengers the airline experienced during 1999. Passenger numbers overall were down by 56% at 106,3000, well short of Krasnenker's stated target of 1.8m passengers for 2000, after his target of 1.4m in 1999, with load factors down a dramatic 21% to 39%. The airline said, not surprisingly, that the operating result would probably be even worse than the top line figures. The reason given for the dramatic declines by the airline include passengers switching to other modes of transport, fewer passengers passing through the Vnukovo hub, lack of aircraft and cancellations of flights with the related impact on passengers perception of the carrier, which is already regarded by many travellers as unreliable. While accepting the latter elements of the airline's explanation, these declines are nothing short of disastrous as the sector begins to pull itself out of the trough. Even with a recovery in volumes in the spring and the summer, Vnukovo will have to fight to remain within the top ten airlines in terms of passenger numbers, as Aeroflot seeks to expand in the domestic market and Transaero appears to be recovering. Regional carriers in the form of Sibir and Krasair are also dramatically expanding their operations and targeting Vnukovo. Apparently, from the full year and first quarter 2000 figures succeeding in targeting Vnukovo's historical 25% share of the Urals and Siberian markets. Vnukovo's historical response of simply cutting fares appears to have had little impact on defending their market share and has continued to weaken it. In response to the problems Krasnenker has announced further elements in an ambitious programme to bring the airline back on track. These include increased cooperation to develop code sharing with other carriers to offset the risks of having the airline's passengers taken at source and shared use of aircraft in pools with other carriers in an effort to bring down costs, linked with contracting out maintenance and other services bringing down staff numbers. The airline also plans a significantly more aggressive marketing strategy both in terms of researching travellers' needs and counteracting the perception of the airline. Krasnenker however, has accepted that competitors have better fleets, better cooperation and much greater flexibility in marketing and in route planning and will challenge aggressively on all his major routes The task is therefore, a significant one given that it requires the changing of the airline's physical situation as the major part of its fleet is unflyable, or too expensive to fly in the case of the Il-86s, and beating the consumer's perception of unreliability. This will require a significant change from today's position and have to be achieved in the main without sufficient funding while having its competitors smell blood.

Article ID: 1814