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02.07.07
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Up, Up And Away
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By Ivor Crotty
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Russia's Charter Airline Market Takes Off
Rather than sweating it out in the city, more and more middle class Russians are opting for weekend breaks in a myriad of vacation destinations now on offer to Russian consumers through charter flight companies such as Transaero, VimAvia, Dai-Avia and S7, whose developing charter business is attracting Russia's middle-income bracket in huge numbers. Behind the emergence of mass tourism, however, lies more complicated political and economic factors that are not always appreciated by the stressed out tourists in last-minute queues for tax-back rebates in Antalya (Turkey), Hurghada (Egypt), Varna (Bulgaria), Montenegro or Crete, all of which can be reached with a $350 return ticket from Moscow. Charters to Bangkok, Goa and Andorra start at around $500. Airlines in Russia carried 38 million passengers in 2006, an 8.3 percent increase on 2005, and the market is growing.
Just as the emergence of low-cost airlines was precipitated by the establishment of freedom of movement throughout the European Union, the difficulty for Russians in acquiring visas to the EU diverts business from Europe to adjacent markets with friendlier visa regimes. Egypt, Turkey, Ukraine, Tunisia, Morocco, Montenegro and Croatia have traditionally been choice destinations for Russian charters, not to mention Crimea, where the local Simferopol airport receives up to eight flights a day from Russia.
Unsurprisingly, the visa issue looms large in shaping the direction the burgeoning charter flight market will take. Although EU-Russia relations deteriorated in early 2007, Germany annulled a whole series of visas and introduced a visa quota system for Russian citizens, an agreement was reached to reduce visa fees for certain categories of travelers between Russia and 24 European countries (diplomats, family members of diplomats, researchers and exchange students). With Britain noticeably absent from the list, the fee waiver system seems to be too little too late, and Russian tourists, particularly the last-minute variety will continue to avoid countries with visa requirements as long as alternative destinations continue to appeal.
New destinations are constantly emerging in the charter market. Phuket in Thailand and Goa in India are popular with economy travelers, offering sun, sea, sand and adventure, while visa requirements remain minimal compared with the EU. Departures are not exclusively from European Russia either. In January, Dai-Avia introduced a flight from Khabarovsk to the Japanese resort of Saipan, and S7 began flying to Bangkok from Irkutsk in October 2006. The announcement by S7 that it would reserve new Boeing 737s for charter purposes is evidence that the market in charter holidays is set to expand. Increasing demand for visa-free destinations from Russia's new middle class is being met by the proliferation of long-haul charter flights, formerly the preserve of scheduled operators, evidenced by the flurry of competition between Airbus & Boeing this year, and the much trumpeted roll-out of Sukhoi's Russian Regional Jet in 2008.
The Business Class
While the charter holiday business is growing rapidly, demand has also pushed into the upper echelons of European and Russian executive charters, and Russian airports are demonstrating impressive flexibility in catering to this market. Over 100 private charter companies are registered in Russia. At the time of writing, Vnukovo, Moscow's "third" airport, is hosting a reception for Velvet Club, announcing the opening of executive charter services from its Terminal 3 to London, featuring an enlarged apron, a new international business terminal with fast-track visa and customs clearance, a VIP lounge, a full office suite and hangar space for up to 70 aircraft.
Vnukovo, in developing a facility with industry benchmark Lufthansa Technik, has grasped the opportunity to provide a full suite of logistic and technical support for executive charters following expressions of dissatisfaction with service levels at Moscow's Sheremetyevo Airport, which is undergoing considerable renovation.
As the airport of choice for charter flights, and the Moscow base for Sky Express, Russia's first operating low-cost airline, Vnukovo retains the ambience of an as-yet undiscovered regional airport living in the shadow of giants Domodedovo and Sheremetyevo, yet profiting from the lack of attention, since its size facilitates a more flexible approach to Russia's notoriously complicated aviation legislation.
European charter operators have had to carefully navigate Russian legislation in order to compete in the emerging market, but two key factors are stimulating business. A sales tax of almost 40 percent is encouraging owners to base their aircraft outside the country, and ownership of private aircraft is diversifying as demand for private jets reflects business links in London, New York, Shanghai and Hong Kong rather than Siberian oil fields. Now at Vnukovo-3 it's possible to handle more than 100 flights per day," says Maksim Fedosov of JSC Vippert, which offers a one-stop shop of private charter services at Vnukovo. "Clients can use any of two business terminals, depending on what flight it is, international or domestic."
There remains little about Russia's international economic relations with other countries that is simple, and in most sectors Russia has had to play catch-up through radical restructuring of domestic industries, nurturing new domestic consolidated companies or national champions while maintaining a difficult balance between competing foreign interests, in this case Boeing and Airbus. In aviation, however, the Russian model seems to be reaping rewards, with the competitiveness of domestic business increasing, while working relations, however stuttering, are developing with international strategic partners.
On May 2, President Vladimir Putin signed a decree creating a consolidated air company AirUnion, from KrasAir, Domodedovo Airlines, Omskavia, Samara Air and Sibaviatrans. AirUnion will operate as a "strategic company" and, as such, the state will maintain a 55 percent shareholding. KrasAir, through its financial arm AirBridge, recently won a tender to buy Hungarian national carrier Malev and Putin's decree has effectively created Russia's No.2 domestic airline, leapfrogging over S7. The integration of Malev into this group brings potentially significant access to the Oneworld alliance headed by American Airlines, British Airways and Iberia. The five airlines of AirUnion control 70 planes and are expected to carry 5.5 million passengers in 2007.
The competition wasn't dragging its heels either, with Aeroflot the only bidder left in the race for its SkyTeam partner, Italian national carrier Alitalia. Also, in a startling series of announcements, S7 ordered 10 single-aisle Boeing 737-800s for approximately $705 million in April, and a month later announced it had placed an order with Boeing for 15 long-haul Boeing 787 Dreamliners, at a catalogue price of $2.4 billion, with 7 planes scheduled for delivery by 2014. Boeing has admitted, however, that it is treating S7 as a "launch company" for Russia and as such a discount was involved in the order price.
Despite industry skepticism that a company with S7's turnover cannot afford such a deal, S7 General Director Vladislav Filyev told a press conference: "Banks are queuing up to support airlines purchasing the Dreamliner." Marlin Dailey, Boeing vice president of sales for Europe, the Middle East and Russia, agreed, saying, banks are "seeking every opportunity to fund acquisitions of 787s. The Russian air travel market has been growing fast, developing in a favorable way [for financiers]. S7 is one of the recognized stars of this market. The financing will be available." Dailey later told Flight Magazine that the double order from S7 "means that Boeing is selected by S7 as preferred supplier, with its products taking a central place in the S7 fleet renewal strategy."
S7 General Director Natalya Filyova holds a 63 percent stake in the company; the Russian government, through the Federal Property Management Agency, maintains a 25 percent stake, for which it sought $110 million at an unsuccessful February auction. Given the PR disaster surrounding the death of 124 S7 passengers in Irkutsk in July 2006, and the still unresolved compensation claims, it was hardly surprising that no offers were tabled for the government stake.
S7 stated that its 737s and the first Dreamliners it receives will be used exclusively for S7 Charter, a subsidiary the company is developing to run routes between Russian cities of over 1 million, and popular tourist destinations bereft of Schengen-style formalities.
Enter the National Champions
The state is also starting to roll out its aviation national champion, UAC (United Aircraft Corporation), as a major producer of Russia's as-yet-unseen but much talked-about Sukhoi Super Jet (SSJ), a 100-seat mid-range aircraft designed to replace the ageing Tupulov-134, whose 76 economy-class seats could be easily converted to 39 executive class berths, securing the Tu-134's position as a favorite with the many executives jetting across Russia's 11 time-zones. The plane has had its day, however, and much fanfare has accompanied the development of the SSJ.
The hype around the new aircraft is not totally disconnected from supposed presidential contender Sergei Ivanov's desire to maintain a high profile at present. Even though aviation industry website Avia.ru announced last week that SSJ engine laboratory tests would only begin in July, Ivanov declared at a Komsomolsk-on-Amur production facility that no less than 5,000 SSJs would be built by 2025. The project may indeed deliver as much for Ivanov's career trajectory as for Russia's emergent aero-industry. The engines for the SSJ will be first attached to fuselage in September 2007, with a proposed March 2008 engine certification deadline.
The international balancing act also continues according to plan. While the SSJ slowly but surely becomes a reality, Arkady Dvorkovich, President Vladimir Putin's chief economic advisor, speaking at the May European Bank for Reconstruction and Development in Kazan, managed to walk the fine line by insisting that Russia was still open to talking with Boeing despite pursuing a deal with Airbus and confirming the purchase of 13 planes from the European producer just before the forum in Kazan. "Aeroflot's purchase of Airbuses is a signal for partnership," he said, adding "this does not mean we refuse to buy Boeings." Russian daily Kommersant also recently reported that Boeing may be brought in as a consultant on the SSJ.
Famously, Aeroflot walked out of an $3 billion agreement with Boeing to buy a series of Dreamliners in 2006, and instead entered into a contract with Airbus for a similar number of A310s. Duma deputy and Aeroflot shareholder Alexander Lebedev told Russia Today at the time that he had personally signed contracts with both Airbus and Boeing in order to keep both producers interested. More machinations emerged as the respective parties courted each other.
VTB, then in the run-up to its IPO, acquired a 5 percent stake in Airbus' parent company, European Aeronautics and Defense Systems (EADS), and later ratcheted that up to 7 percent, according to Alfa Bank. Because VTB is a state-owned bank and UAC is a "national champion," Russia has become one of Europe's major aero-defense players. Meanwhile EADS bought a 10 percent stake in Irkut, the Russian manufacturer and part of the recently created aircraft manufacturing national champion UAC. Markets at the time actually responded positively to the news of VTB's involvement in EADS, and the beleaguered producer's shares rose 10 percent in a week.
However, shortly afterwards, VTB was told in no uncertain terms that despite Aeroflot placing a $2.6 billion order for A310s in January, the bank would not be a welcome decision maker at Airbus, and perhaps this rejection sent Russian aircraft buyers' attention towards Boeing. In any case, it seems that the desire of foreign companies to do business in Russia, and Russian companies' desire to modernize and compete internationally, is sufficient for both sides to eventually cooperate, despite constant moaning that Russians don't understand international business practice.
In fact, both positions can be contradicted. At the EBRD forum in Kazan, Dvorkovich discussed ramifications of proposed "deeper cooperation" between UAC and EADS. Significantly, Dvorkovich also mooted a nebulous joint-venture to develop a "new generation of airliners by 2014," thus tossing Boeing a line, while reeling in Airbus. Business as usual, it seems. |
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