Published: 11/27/2001

Since its inception, the Russian civil aviation authority -GSGA- has left the Russian civil aviation sector in no doubt that one of its primary objectives (in common with its predecessor, the FSVT) is the consolidation of the Russian air transport sector into significantly fewer carriers than at present, either through takeover or de facto merger by tightly organised alliances. An industry seminar held in November and involving a broad range of industry and government speakers outlined the benefits of this both for passengers and industry participants. However, the seminar was primarily motivated by the fact that, despite the cajoling by the GSGA and its parent, the Ministry of Transport, the industry is simply not consolidating fast enough. There are some signs of movement from the larger players. Sibir has emerged from the back of the field to become heir apparent to the country's number two carrier: potentially knocking Pulkovo off the spot through a combination of judicious cherry picking of distressed regional carriers' aircraft and routes to strengthen its network in Siberia and its “merger” with troubled Vnukovo Airlines. Elswewhere, the picture is less encouraging. Aeroflot's initial efforts to grow its domestic business through the creation of a network of regional carriers affiliated to the national carrier in a hub and spoke structure have been much less grandiose than when first mooted in private two or three years ago. The management of the two direct affiliates, Aeroflot-Don and Nizhni Novgorod, has reportedly been difficult and the reality has fallen short of a structure that could raise capital independent of Aeroflot's own balance sheet, while providing the capacity to feed Aeroflot's international and long haul operations. In July, Okulov delivered a rousing speech in Ekaterinburg on the future of Aeroflot's hubs in the city and elsewhere, but with little reference to the network of affiliated regional carriers, and only a passing and vague mention of involvement with Ural Airlines for the benefit of the region's governor. The airline now seems much focussed on the development of its own directly controlled network and the last few months have witnessed the transfer of aircraft from currently soft international routes to the domestic network. Among the other larger carriers - and the top 20 account for at least 90% of traffic - efforts to consolidate have been marred by both competition and distrust. Earlier this year, Domodedovo Airlines (DAL) withdrew from the Russian Open Sky Alliance made up of Krasnoyarsk Airlines (KrasAir), Encor, Aviaexpresscruise, Sibaviatrans and Kogalymavia, claiming that KrasAir was less concerned with cooperating than with getting licences to operate on routes currently served by DAL. The alliance's manager admitted that the alliance first announced in late 2000 has actually achieved very little and has yet to agree on the standardisation of fares and - more tellingly - the coordination of schedules. Further down the pecking order, many regional carriers are tenaciously clinging to existence despite lack of funds and the threat of licence suspension. But while the GSGA has certainly “talked the talk” about suspending airlines that failed to met viability guidelines, it has proved less willing to “walk the walk” when it comes to cancelling licences of smaller carriers. The reasons for not wielding its considerable powers in this respect are twofold. Firstly, in many cases, the development of regional mergers has been dogged by the poor financial health of the potential participants. The combination of two or more dying entities offers little relief since it does not resolve the issue of investment or solvent demand. Secondly, there is the issue of the role of regional government: in many cases, the principal owner of the airlines or acting as the federal government's agent through regional property funds. The administrations have proved to be reluctant agents of change and it is not difficult to see why. They naturally suspect any merger that would take primary control of the airline out of their hands as being a primary political risk, in a country where pork barrel remains the basis of much of the system. Airlines that are merged into greater regional entities for the sake of greater economies of scale will remove local control. In the loss of that control, regional flights, which have kept airlines going, despite declining subsidy, run the risk of closure, with both constituents being deprived of vital connections and the economic attractiveness of their respective regions diminishes as a result. This fear has been evident in much of the opposition to Sibir's acquisition of smaller regional carries in Siberia, where local authorities, despite the perilous conditions of airlines, have not greeted the carrier with open arms. The commercial realities of the air transport industry are either largely unimportant or simply incomprehensible to regional politicians and there is plenty of evidence of this in attempts by regional to merge airlines that have stumbled due to the unrealistic expectations of what could be achieved on the money or resources available. So, what next? For the larger carriers, the general pick up in traffic in 2001 appears to have carried them through the aftermath of 11th September. The future seems to be relatively rosy and promising increasingly better returns, as Russia pulls itself out of the financial crisis of summer 1998. The much-vaunted aircraft leasing schemes have at least been approved, with funding in principle outlined and even reports of some easing of the import regime for foreign aircraft. The top four to five carriers seem likely to take greater share at the expense of smaller participants. For the second division participants, the options are becoming increasingly limited. Moscow-based Encor has reinvented itself out of Chelyabinsk Airlines, changing both its name and operational base, in an effort to make itself competitive on a national basis. But this is the exception rather than the rule. Most carriers seem likely to continue their steady decline with regional and local government fighting a withering rearguard action against the encroachment of larger regional and national carriers. In some cases, the regional governments, particularly those with the funding, will take a direct role to preserve the regional carrier from outside threats, such as the taking of a majority stake by the Tyumen regional government in Tyumenaviatrans (TAT) to ensure no dilution in the coverage offered of the region - or possible dilution of control. In the end, the major carriers will succeed and squeeze the medium sized carriers, in particular, either out of business, into regional niches or into “mergers”. The concept of successful alliances among the medium sized group is shaky, given their differing agendas and seems likely to achieve little in the way of creating a competitive third force in the market. For the smaller carriers operating within the regions, Russia's increasing prosperity may offer a few the chance of a reasonably prosperous survival, but the availability of funding could end up attracting the truly commercial operators at least into the better-off regions, so sounding the death knell for the state-owned players. Leaving the only card left to play for the administrations, control of the regional airport infrastructure.

Article ID: 2928