Airline accused of anti-competitive practices (899 words)

Published: 6/14/2001

The Stavropol Department of the Ministry of Anti-Monopoly Policy (MAP) has begun an investigation into the restructuring of state air enterprise, Kavminvodyavia (KMV), which split the airline from its airport assets at Mineralny Vody and Stavropol, in a bid to remove what the ministry believes is KMV's monopoly of air transport in the region, operating to the detriment of consumers. Vladimir Rokhmistrov, head of the Stavropol's MAP Department, has claimed that the airline has been operating its airline assets in “its own interest and offers other airlines unfavourable conditions". He alleges that it has exploited its control of the airports to put pressure on travel agents to use the airline and disadvantage rival operators, through giving them unfavorable slots at the airport. Of the two airports involved, Stavropol is probably the less attractive asset, in marked contrast to the busy spa resort aiport of Mineralny Vody. It was privatized in 1992, but reclaimed by the state after going bankrupt in 1999, under a storm of controversy, relating to corruption and illegal asset sales. Its reversion to the state and, ultimately, to 100% state-owned KMV was orchestrated by the regional governor, Alexander Chernogorov, who had led a three-year campaign to evict the previous owners for not meeting the terms of the privatization, in terms of investment and for allowing the airport's physical condition to deteriorate markedly. The former owner, Stavropol Joint-Stock Aviation Company (SAAK) still continues to contest the transfer. SAAK's primary interest in the airport was for its potential use as a tax free zone, allowed under a Yeltsin decree of 1994. Mr Russkikh, General Director of SAAK, hatched a plan for the establishing of tax free zone that subsequently failed to materialise, although he was reported to have gained a 5% holding in SAAK, in return for his proposal. According to Svetlana Belova, KMV's representative in Moscow, over the last three years, the airline has invested a significant amount under the Rb100m program of renovating Stavropol Airport and its runways, given its poor condition in December 1999. KMV is, therefore, not prepared to roll over and simply having the airport removed from its control. According to Ivan Shakhbazov, Deputy General Director of KMV, the MAP initiative may be linked to an effort by other parties, aimed at re-taking control of the airport. KMV also claims, somewhat paradoxically, that the airport is unviable as an entity independent of the rest of the airline, given the depressed state of Stavropol's economy and the spending power of its 500,000 inhabitants: a fact it believes is supported by major airlines dropping the city as a destination, leaving only KMV, Aviaexpresscruise and Tsentravia flying scheduled flights. KMV says that it has endeavoured to expand its activities from the city, but its efforts “to request clearance" to re-launch flights to Muslim countries, which, it claims, would significantly “increase the passenger traffic" have not been successful. According to Belova, the "GSGA so far is against it". Publicly, the airline remains optimistic, despite these strongly negative factors, that it can generate more traffic in the future by opening flights to additional destinations. Privately, however, some members of the KMV management seem puzzled by senior executives' determination to keep the airport, given the its marginal viability, at best. As tends to be the nature of these debates in Russia, local sources suspect that the ministry investigation has a deeper motivation, involving either the former owners, or the regional government. It should be stressed, however, that the ministry is not significantly diverging from conventional wisdom, if not government policy, on the splitting of air monopolies, which are a hangover from the dismantling of the sub units of the former Soviet Aeroflot within Russia, although there are notable exceptions, such as Pulkovo Airlines in St Petersburg. The combined air companies, incorporating both airlines and airport, are fundamentally inefficient, as a result of the cosy relationship between carrier and ground facilities, leading to the operation of de facto monopolies and discouraging the entry of other players into regional markets, through poor slots and high charges. In principle, the idea of a liberalized air transport market, serviced by detached ground facilities, seems admirable. The low volumes of traffic offer little to attract new carriers, particularly when combined with considerable government involvement - both regional and federal - often resulting in merely nominal splits, with former managers of the united enterprise working closely to retain the status quo. For KMV, one of the country's stronger carriers, the concern must be that its lucrative vacation business in and out of Mineralny Vody could be opened up to more competition, although it is already serviced by a number of carriers. Much of the airline's business is now driven by charter operations that fly not just from its home base. It is also true that, while the anti-monopoly authorities may have taken the unusual step of making the investigation public, any proposal for a split requires the agreement of a number of other agencies, including the GSGA, which would have normally been the lead agency in any unbundling initiatives. The state-owned airline, the ninth largest in Russia by passengers carried and revenues ($35m), currently has a fleet of 21 aircraft (Tu-134, Tu-154, 2 Tu-204) flying to 48 destinations in Russia, Bulgaria, Germany, Greece, Syria, Cyprus, Turkey, and UAE and owns two airports at Stavropol and Mineralny Vody.

Article ID: 2588