New state unitary enterprise may provide partial solution, but is no panacea (506 words)

Published: 5/16/2001

On 4th May, Victor Ishaev, Governor of the Khabarovsk Region, signed a decree executing the long expected merger of the region's three airlines: Dalavia, OAO Vostok Airlines and Nikolayevsk-On-Amur Airlines. The move is in response to what has been described as the "critical" situation within air transport in the region. The new airline - named state unitary enterprise, Khabarovskavia - will be created by the Committee of Khabarovsk Regional Property Fund. However, the constituent elements of the new company do not augur well for the success of the new enterprise. Currently, Nikolayevsk-On-Amur Airlines is on the brink of bankruptcy, with debts that amount to three times the airline's annual sales and five times the current book value of its assets. OAO Vostok Airlines, in an effort to stay solvent, has been aggressively cutting back on its subsidized regional routes, given lack of funding from the regional budget. Dalavia sustains losses on regional routes and claims that it has insufficient cashflow to lease new aircraft. Certain parties are likely to be concerned by this, given that the airline is one of the launch customers for the Tu-214, with two aircraft scheduled for delivery this year and the fact that the regional government has financed the aircraft to the tune of $6m. The airline was profitable in 2000, but has been reported to be incurring heavy losses on its intra regional routes during the first quarter of this year, with the expectation that summer vacation traffic might pull them out of the doldrums. The prime motivation for the merger appears to be to remove competition from domestic routes, where the three carriers overlap and compete in an increasingly unprofitable regional market, with a commensurate impact on margins. The regional administration - rather optimistically - believes the merger will resolve all its problems in one feel swoop when the new airline begins operating on 1st August 2001. Local press reports indicate that the management of the airlines concerned is reluctant to discuss the merger. It seems that none of the parties is overtly welcoming the move, suggesting that it is unlikely to be a smooth process, especially given the perilous financial condition of Nikolayevsk-On-Amur Airlines. It is also legally quite complex, being, effectively, a denationalization of the joint stock company, Vostok (controlled jointly by the Federal and Regional property funds (57.3%)), in order to combine it with the two state entities. In the last few months, these have been transferred to the Regional Property Fund from the Federal authorities, in exchange for writing off federal debts to Khabarovsk's budget. For the Federal authorities, the move is in line with the policy of the GSGA. According to Vladimir Prilipko, First Deputy Director of the GSGA's Department of the Far East, the decision to merge allows the state to support viable entities rather than waste resources on those that will not survive and guaranteeing the support required to those airlines providing social transportation through state subsidies.

Article ID: 2537