Initiative welcomed, but mixed results to date make strategy questionable (1,240 words)

Published: 5/21/2001

In an effort by the central government to revive regional air transport, Victor Kazantsev, Presidential Representative for the southern region of Russia, has set the local authorities the goal of restoring a viable air transport in the region. In April, a conference on the issue was held in Rostov. Kazantsev, a former senior army officer and previously the commander of Russian forces in Chechnya, faces a major challenge in effecting a recovery of air transport in the region to anything like 1991 levels. The region's seven main airlines, in common with many of the regional airlines, have difficulties with most areas of operations, including IT, the maintenance of scheduled flights, rising operating costs and ageing aircraft. Ageing fleets is the most pressing problem, given that the market remains very depressed. Recovery in domestic traffic still not evident and is unlikely to materialise before 2003. International traffic is, however, is still growing, but is a small proportion of total traffic. In principle, the domestic and regional markets should already be recovering where certain destinations are concerned. The airport at Rostov - the regional capital - offers flights to 11 destinations, including Volgograd, Makhachkala, Stavropol and Elista. An alternative method of travel, such as the North-Caucasian Railway, takes almost 30 hours to carry passengers to holiday destinations on the Caspian Sea, as it is required to transit around Chechnya with Stavropol and Elista, which are not well served by railway services. For other destinations, however, such as the resorts of the Black Sea and the North Caucasus, such as Rostov- Novorosiysk, Rostov-Mineralny Vody, the train is both cheap and relatively fast, so appealing to pensioners who vacation at the North Caucus spa resorts. While the airlines publicly support the Presidential Representative's initiative, they remain very skeptical in private about its success in profitability terms. They argue that, notwithstanding low volumes of traffic, costs have made profitability virtually impossible. According to the carriers, fuel has now reached the level of 60-75% of costs and, when linked with the very high airport fees, amounting to 20-25%, plus 3-6% for air traffic control, the margins after operating expenses are non-existent. In true military fashion, however, Kazantsev is convinced that the routes can be made profitable and believes that the more competitive pricing of flights will bring passengers back to the airlines and increase load factors. It is by no means certain, however, that, by reducing the current $34 air fare from Rostov to Astrakan to a rate comparable with that of the train sleeper ($22), would actually bring the traffic back and so create load factors similar to those experienced by the airline on routes to Moscow and international destinations. Kazantsev still insists that the fare reductions are the only real option and is unclear about how any turnaround could additionally be achieved beyond vague comments about optimised expenses and additional resources. Some steps towards reducing the airlines' expenses have already been made, with reports that the refinery in Volgograd will sell aviation fuel for regional routes at Rb3, 500 ($120) per tonne, compared to the current airport price of Rb7,000-8,000, although it is estimated that the airlines would require 2000 tonnes at this rate, in order to substantially reduce costs on these routes. The airlines are also looking at increasing load factors by the better organization of the route structure, introducing additional stops on routes to improve loads. There are also reports that Rostov Airport is offering a 50% discount on take-off and landing fees. Inevitably, the key issue lies in the level and payment of subsidies by the regional government and the ability of the administrations to find such funding, given a tax base depleted by large concessions, granted in order to keep enterprises operating in the region. The principle of operating routes simply on the basis of subsidy is also viewed as unlikely to improve airlines' operating efficiency to the point of profitability. In fact, the increased availability of subsidies would probably act as a disincentive to profitability ever, on even relatively high volume routes. Despite the market's difficulties, routes are being restored and, on 15th May, after an eight-year break, the state unitary enterprise, Elbrus, launched a twice-weekly flight from Nalchik-Rostov-Astrakhan-Rostov-Nalchik using a its one Yak-40. Its other aircraft - a Yak-42 - is making daily flights to Moscow. In the near future, the airline expects to add one further flight to Makhachkala-Astrakhan-Volgograd. However, the economics of the reopened route came into question almost immediately, as only one passenger flew to Rostov by the Elbrus flight, according to Narimanovo airport, with no passengers from Rostov. Astrakhan Airlines (Astral) had planned to start to fly from Astrakhan-Rostov two days previously, but had to cancel the flight, owing to the lack of reservations. In part, the lack of demand may reflect the startup of the new services. There is concern, however, that, despite Astral's claim that it can operate an An-24 on the route profitably, given a 40% load factor profitably and an airfare of $76, this may not be achievable. Currently the carrier makes a profit with its four Tu-134s on routes to Moscow (one Tu-134 is leased to Makhachkala) and with one of its three An-24s to Istanbul (the other two are being overhauled and planned to be used in Thailand). By June, the airline will start making flights to Sochi and charter flights abroad. An international flight to Risht in Iran, started last year, has been stopped, owing to the lack of an Iranian consulate in Astrakhan. This is expected to be reopened shortly. Astral is also facing competition on the Iranian route from ZAO Flight, an airline based in Astrakhan, that has made a trial flight from Astrakhan to Risht carrying Iranian businessmen to a trade fair in Astrakhan. According to Yury Mazukha of Flight, the airline has reached agreement with the Iranian authoirites, but still has to finalise visa and customs matters and has established a maintenance agreement in Iran. Flight is only certified by the GSGA for international charter flights, as it possesses only one passenger aircraft. Despite this fact, the airline has plans to make the route into a scheduled service, with the acquisition of another Tu-134 within a month. Pilots from Moscow's Gromov LII test facilitiy currently operate the airline's Tu-134. Flight also has one An-12, two Mi-8MTVs and two Mi-8Ts, providing support services to LUKoil and Astrakhangazprom, on the Northern Caspian shelf. In mid 2000, with the help of Astrakhan affiliate of Sberbank and Astrakhangazprom, it obtained, from the Russian MoD, the lightly used (8% of its life expired) Tu-134, that operates in three classes. The timing of the air transport system initiative is somewhat unfortunate. Narimanovo airport will be closed during the day from 19th May until the end of July, for its first overhaul in 22 years. To date, government intervention in the plight of regional air transport has been both muddled and, in some cases, fairly ineffective. Over the last few months, however, the state and regional administrations have started to become increasingly involved in revitalizing the sector, either through forcing mergers into single entities or by restructuring. However, real success lies in meaningful change and in rationalising existing assets: something that the authorities have not been particularly eager to undertake in the past.

Article ID: 2544