PERFORMANCE OF RUSSIAN AIRLINES IN 1998

DATE OF REPORT: 06/24/99

AUTHOR: Michael Nikoulichev

Summary

The Federal Aviation Service of Russia (FAS) has published performance results of the civil aviation industry for 1998. Although the industry finished 1998 with heavy losses, reforms in the industry and consolidation efforts offer hope for a swift recovery and resulting opportunities for U.S. companies in spare parts manufacturing and those providing airport services. End summary.

Background

By the end of 1998, Russian airlines incurred operating losses of nearly $100 million. Despite these losses, traffic on both domestic and international routes fell only five percent compared to 1997. The broad economic recovery that was expected to turn around the entire industry failed to materialize. Nonetheless, reforms in the industry and consolidation efforts provide opportunities to U.S. companies in spare parts manufacturing and those providing airport services. The number of U.S. aircraft now flying under Russian flag carriers is slowly growing in spite of prohibitive customs tariffs. (The portion of wide-body foreign aircraft in the Russian fleet barely exceeds one percent, while they carry 15-17 percent of domestic and international passengers.) More and more domestic aircraft are equipped with U.S. avionics. Concerns for flight safety are forcing authorities to modernize ground support services and procure foreign ATC equipment.

Civil Aviation at a Glance

Source: Federal Aviation Service of Russia

Major Operational Indices

The Federal Aviation Service of Russia (FAS) has published performance results of the civil aviation industry for 1998. Through the first half of 1998, traffic stabilized at 1997 levels (25 million passengers a year), but following the financial crisis in August 1998, passenger traffic fell approximately 15-20 percent. Charter traffic was reduced by 20-25 percent, and freight traffic suffered the most; it fell 40 percent. In October 1998, FAS and the Russian Anti-Trust Service on Transport acted together to prevent price hikes and avoid a further reduction in freight and passenger services. As a result, passenger fares rose only 10-12 percent over the 1997 levels (in spite of the sharp devaluation of the local currency) and traffic volumes stabilized. Domestic freight rates were increased by only 6.9 percent, compared to a 24.8 percent increase in 1997 and a 47.7 percent increase in 1996. The resulting losses in operating revenues for the major Russian carriers, even the relatively healthy ones, were traumatic. For example, there is much speculation in Russian mass media that Transaero airlines may be near bankruptcy as well as some other less known companies. FAS projected tariffs growth of 4.8 percent for 1999, but the continued slide of the ruble against the dollar and the current 4-5 percent a month inflation make this nearly impossible. No accurate statistics are available because in reality some airlines kept their fare structure unchanged, some raised prices only on the most profitable commercial flights, while others offered discounts to attract passengers and cancelled unprofitable flights.

Table. Economic results for the civil aviation in 1998

(Source: Air Transport Review Journal)

Fleet

At present, Russia has seven national carriers, 77 regional airlines, and 93 local business and corporate aviation companies. FAS also registered 128 enterprises that offer various air transportation services. Up to 80 percent of transportation services fall under the 30 largest airlines, which carry nearly 80 percent of all passengers and airfreight. In 1998, 11 companies merged into larger structures, and the trend is expected to continue, especially in the sphere of regional air transport. According to some estimates the optimal number of regional carriers should not exceed 25. International flights remain the most profitable business, and more and more airlines are trying to receive licenses to operate internationally.

In 1998, FAS retired 262 aircraft from active service, including 16 Tu-154, 12 Il-62 and 6 Tu-134. In 1999, 337 aircraft will be retired, including 71 middle- and long-range aircraft. It is estimated that to maintain flight safety it would be necessary to write off up to 300 aircraft every year until 2005. Thus, the industry will lose a large portion of its fleet, and airlines will be in desperate need of new aircraft. According to FAS, the Russian aviation industry needs at least 20-30 aircraft a year to maintain its current level of operation. The need in 1999 is estimated at 33 middle- and long-range aircraft.

As airlines are unable to finance aircraft construction (in spite of their lower cost compared to foreign aircraft), the only option is to attract to Russia leasing companies capable of bailing out the crippled Russian aviation industry. However, so far the Russian government has not proposed any viable legislation with mechanisms to stimulate the operating and financial lease of aircraft and other equipment.

Airports

In 1998, Russia closed 117 regional airports, especially in the north of the country. The annual federal program for supporting airports has been drastically reduced to a meager $250,000, leaving the airports to survive on their own. However some airports (that have received federal airport status) enjoy the support of regional authorities and receive financing for modernization from foreign financial and investment institutions. In an attempt to earn additional revenues from various commercial opportunities, airports are now actively involved in so called non-aviation activities. Opportunities for U.S. companies exist in various airport and ground support equipment, including special transport and baggage handling, communication and security equipment, and commercial retail stores and services.

Airport Trade Mission

The U.S. Department of Commerce is working on organizing a trade mission of U.S. companies interested in entering Russian market. Mission participants will be briefed on Russia’s plans for airport development and management and be given the chance to meet and establish working contacts with key Russian government and industry decision makers. One-on-one meetings, site visits, and in-country briefings by the U.S. Embassy in Moscow will complete the mission program.

Mission coordinator will be:

Heather Pederson, International Trade Specialist
Office of Aerospace, U.S. Department of Commerce
14th & Constitution Avenues, NW., Room 2128
Washington, D.C. 20230
Tel: (202) 482-6234
Fax: (202) 482-3383
E-mail: heather_pederson@ita.doc.gov

Useful contacts:

Federal Aviation Service (FAS)
Viktor Gorlov, Deputy Director
Leningradsky Pr., 37
125167 Moscow, Russia
Tel: (095)-155-5210
Fax: (095)-250-1080

Tatjana Anodina, Chairman
International Aviation Committee of Russia (MAK)
Krzhizhanovskogo str., 7-1
117875 Moscow, Russia
Tel: (095) 125-2178/ 190-5995
Fax: (095) 129-6144

American Chamber of Commerce
Scott Backlin, President
Bld.1, 8th Floor
Kosmodimyanovskaya nab. 52
113054 Moscow, Russia
Tel: (095) 961-2141
Fax: (095) 961-2142
Douglas Davidson, Chairman, Aerospace Committee
Tel: (095) 797-3400
Fax: (095) 797-3401


INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 1999. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES