Published: 11/29/2000

At a recent airline conference in St Petersburg statements by Valery Okulov, the General Director of Aeroflot, were reported to have suggested that Aeroflot should lead the creation of a super Russian airline that would compete with foreign airlines, adding according to the reports ,that he had already initiated such talks with St Petersburg carrier Pulkovo. The reports however, were rapidly dismissed by the management of the airline as being a misinterpretation of Okulov's statements, which related to the patchwork quilt of “strategic” agreements between the flag carrier and a number of airline's in Russian and the CIS and not the creation a larger airline entity. The question remains however, why would Aeroflot not consider absorbing a major domestic carrier to compliment its international operations and growing domestic operations, with the objective of creating the scale to be a major airline entity? The reason for Aeroflot's speed of dismissal and explanation of Okulov's comments, appears to lie in the concern that the statements may have been misinterpreted by the Sky Team alliance, which the airline is currently negotiating with to resolve issues such as the building of a new terminal in Moscow; speculated as being the price of entry for the airline into the international carrier club, after its completion in 2003. Aeroflot is however, reported to be trying to speed up the process and sources within Delta, one of the major SkyTeam partners, have suggested that they feel Aeroflot is close to the standards set by the alliance. It appears however, that the setting of clear plans for the terminal will be the start of the process. The concerns of Aeroflot about SkyTeam's sensitivity may have been both premature and overdone, as we can see little real threat to Aeroflot membership of the alliance from the development of a much more aggressive consolidation of the Russian airline sector into fewer hands giving surviving players a better balance of routes and resources. Currently the industry is beset with struggling carriers at all levels of the industry, from Vnukovo to regional carriers desperately trying to stay in business and dreading the entry of more able and better financed competitors into their markets….. if they are not there already! Carriers who in many cases are spoiling the development of a stable air transport market by simply staying in business with regional political support, when they should be going under and giving up their volume to create scale for the super regionals or emerging national carriers. An example of this general environment, in our view, is illustrated by Pulkovo Airlines. The last of the great state owned unitary aviation enterprises combining primarily the airline and airport activities of St Petersburg, with a 60% share of traffic through Russia's second city. Pulkovo has been in the view of many, slow to respond to the changing demands of passengers both in the region and throughout Russia, given its position as the second largest carrier in the country carrying 1.4m passengers in 1999. It also charged with being burdened with a conservative management team who are happy with the current status quo and if Aeroflot were looking for such an intimate partner, could be expected to oppose such a relationship. Pulkovo airport however, remains severely capacity constrained particularly for international flights, although improvements are being made with reluctant EBRD financing; forcing Pulkovo to recently strike a deal to cooperate with Aeroflot to carry passengers from the city via Moscow to international destinations. The airline, protected by its virtual monopoly of traffic in and out of St Petersburg, even Aeroflot did not start flying to the city until 1995, is reported to be less than efficiently managed. Its fleet of aging Russian aircraft will also be vulnerable in the medium term to the expanding domestic services of Aeroflot increasingly focussed on pushing the perception of higher quality services using western aircraft. For Aeroflot with the stated goal of the “transportation of passengers to most large cities of the world, both by creating its own convenient and viable route network and through cooperating with partner airlines”. The creation of a developed domestic network remains a priority. Its experience with domestic networks however, is mixed. According to reports, the Aeroflot Nizhni Novgorod affiliate, a joint venture with the city's airport, is toiling, with suggestions that it has even considered closure. Few reports have emerged about the experience in Rostov-on-Don, but given the condition of the airline involved prior to the move, it would seem unlikely to be substantively better. The primary objective of the airline's entire domestic network plans remains however, the provision of passengers for long haul within Europe and the CIS, and more broadly into the alliance through hubs in Paris and Atlanta. This is an objective that the airline will have to continue to meet. The absorption or “closer” relationships with a carrier such as Pulkov would therefore offer the ability to gather passengers more efficiently, potentially eliminate some competition and establish a carrier/alliance which carried over 6m passengers in 1999. For Aeroflot, lacking the management strength in depth, to manage a series of virtual start up situations. The development of a domestic network will put considerable strains on the improvement of its medium long haul routes. Simply providing a couple of managers and a pile of surplus equipment will not make viable airlines out of struggling regional carriers. The current web of alliances does also not necessarily allow you the opportunity long term to control your passenger from departure to destination. Particularly when many of your current cooperative partners are interested in your business long term, as they are also fully cognoscente with the changing shape of traffic towards the long to medium haul and how the revenue cake will split as a result. For Aeroflot a merger or closer relationship would therefore make prefect sense in our view benefiting not only the two airlines, but also the air transport system and even Aeroflot's alliance partners. Any suggestion of a closer relationship between the two carriers is of course speculation on our part. The publicly available information suggests that Aeroflot is continuing to weave a network of relationships on varying levels designed to give it coverage. The Pulkovo agreement signed at the end of last year and being currently developed, is a very basic arrangement covering a very limited number of areas. Any suggestion that the state may like to merge its two largest air transport entities would lead to strong opposition, particularly from the Pulkovo management. It does however, leave the thought that conventional thinking on restructuring the industry focussed on the development of alliances and consolidation by the large buying the bankrupt, perhaps lacks the overall power to bring about the emergence of a truly global airline from Russia.

Article ID: 2218