It seems that the signs of sustained recovery in the Russian air transport sector are emerging with many of the largest of the airlines producing figures that have returned them to levels last seen in the summer of 1998. The question that now arises is whether they sustain the performance for the next twelve months against a background of rising fuel prices.

It seems likely they will if volumes continue to grow at their current 4-5% for the majors, but the path to sustained profitability may not be as smooth as the experience over the summer. Aeroflot is already reported to have indicated the potential length of the recovery by advising the government that the privatisation of the state holding in the airline would be better timed for two years hence as opposed to the potential sale of the 51.17% government holding in 2001; arguing that under a two year timetable, it can present a better investment case after fully implementing the McKinsey driven restructuring of the airline.

Despite a relatively conventional plan for the restructuring of the airline, implementation is likely to be challenging for the airline's management . The plan to acquire substantial shares in regional air carriers flying under the Aeroflot `brand', although a compelling argument in theory, still has the hurdle of execution. Which will be a severe test for the both upper and middle Aeroflot management, given the condition of the sector and both current and potential partners. There are already reports that the deal with Nizhni Novgorod Airport for the creation of a regional carrier is not going as well as expected. Although according to reports the contribution from Aeroflot to date has been primarily aircraft and engines, although undoubtedly a significant amount of management time has been included. The current negotiations at Perm are also proceeding, but against a background of discussion who is responsible for upgrading and repairing the carrier's airport. Aeroflot obviously believes it is the responsibility of the local authorities, whether they are able to pay is another matter. The suspicion is also that those advising the airline have sugared the process of the creation of a network of affiliated regional airlines for the upper management of the airline, stressing the potential riches to be gained from spinning off the carriers through the markets. Giving Aeroflot potentially a valuable asset, which will have little direct call on the carrier's capital in the medium term.

The task of creating feeder airlines to Aeroflot's long haul routes makes perfect sense and is a proven model for airline operation, particularly in a country the size of Russia with its linked markets in the CIS. The planners and management consultants have to keep in mind that the industry lacks two basic commodities essential to its success; investment and the management skill to run both entrepreneurial start-ups and turnaround airlines. The ability to fulfil the latter on very limited resources is possible, as Sibir has shown. Equivalent teams appear to be in short supply or struggling with the weight of turning around potentially unsolvable situations; such as Alexander Krasnenker at Vnukovo Airlines. Krasneneker has achieved a great deal since taking over in the latter part of last year, but Vnukovo still has crippling cash flow problems, which recent reports suggest make managing the top four airline a course in crisis management.

The next twelve months may, however, offer investors the opportunity of participating in the most recently successful of Russia's airlines, Sibir based in Novosibirsk, as its 25% government holding is slated for privatisation. The airline's performance in climbing the ranks of the country's airlines by judicious use of its skills to affiliate struggling regional airlines and knit them into a regional network supplying longer haul routes, is a lesson on how to build a business with no money and not over burden yourself with debt.

The next few years may prove to be the real test of the carrier as the deals they will have to strike now to continue the company's growth will involve the purchas of aircraft in the market, not cherry picking collapsing carriers in their home market in Siberia. Further expansion will also place them in head-to-head competition with the established long distance carriers of Aeroflot and Transaero, neither of whom will be keen to relinquish their positions. Whether or not they can do it time alone will tell, but if bets have to be taken any airline that can prosper in the air transport challenges of Siberia, must be worth a punt.