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Analysis & Opinion
30.03.11 Winged Ambitions
By Tai Adelaja

The Russian Government has pledged to spend “tens of billions of rubles” to revamp and transform two of Moscow’s three international airports, in an effort to make them more attractive for eventual privatization. “We have agreed that Sheremetyevo Airport – 100 percent owned by the government – and Vnukovo Airport – 75 percent owned by the Moscow city administration – will be integrated into one complex,” Prime Minister Vladimir Putin told a meeting on the development of Moscow’s aviation hub on Monday.

The need to consolidate the capital's main airports was part of a recommendation by two major investment bankers – Troika Dialog and Credit Suisse – which were hired by the government last fall to advise on how to revamp state-owned Sheremetyevo Airport and make it competitive, Vedomosti reported on Monday. The investment banks came to the conclusion that revamping Sheremetyevo Airport, whose pilots and air traffic controllers still rely on equipment made in the early 1980s, would be impractical. They recommended instead that the government should merge Moscow’s three international airports – Sheremetyevo, Vnukovo and Domodedovo – to create a Moscow aviation hub. Earlier, Vedomosti reported that First Deputy Prime Minister Igor Shuvalov and some unnamed officials at the Transport Ministry did not quite agree on the need to merge the airports, with the Transport Ministry officials stressing the need to encourage competition among the city's airports.

The Prime Minister made it clear on Monday that the government has no intention of clinging on to the newly-created transport hub once it has been adequately developed and modernized. "The state does not plan on keeping this asset forever," Putin said. "This step is meant to create a single complex, equip it with the latest technology, and then put it on the market for privatization at an appropriate price." He added that Moscow's airports plan to double their capacity to 100 million passengers by 2020. Oleg Panteleyev, an analyst at industry Web site, said the aggregate potential of Moscow’s three airports fall short of what is needed to compete with other European transport hubs. “The main aim of creating a consolidated transport hub is to be able to compete with Europe,” Panteleyev said. “It is also to discourage Moscow airports from competing against each other.”

Part of the present government’s plan is to merge all terminals inside Sheremetyevo, including newly-built Aeroflot Terminal D and later consolidate it with Vnukovo, Transport Minister Igor Levitin said. But some private investors at Vnukovo Airport appeared taken aback by the prime minister’s decision, which might have been taken without due consultation, analysts say. Vitaly Vantsev, one of the owners of Vnukovo Invest, which owns a blocking stake in the airport and attended Monday’s meeting “was in shock over the prime-minister’s decision,” Vedomosti reported Tuesday, citing a close friend of the businessman. When Moscow Mayor Sobyanin first mulled plans to privatize City Hall’s package in the airport last year, Vnukovo Invest was the main contender for the stake, the business daily reported.

After a separate meeting held earlier on Monday between the prime minster, the mayor of Moscow and a representative of the Finance Ministry, Putin said the federal government will pay as much as 50 billion rubles to acquire City Hall’s share in Vnukovo. City Hall has been trying to raise as much as $7 billion in the next two years from asset sales, which includes Vnukovo, Deputy Mayor Andrei Sharonov said last month. The city is desperate to revamp its infrastructure, which is key to the success of President Dmitry Medvedev’s modernization program and his dream to turn Moscow into an international financial center. Medvedev ordered newly-appointed Mayor Sobyanin in October to solve the city's transportation problems. Putin said on Monday that he hoped Sobyanin would use the cash from the sales of City Hall’s share in Vnukovo to invest in metro construction.

Domodedovo, the city’s largest airport, has been excluded from the proposed merger, “to prevent the transfer of control in the merged company into private hands,” analysts say. Domodedovo, which services more than 75 airlines, including foreign giants such as Lufthansa and British Airways, is controlled by East Line. Once an aging Soviet relic, the airport has now outstripped Sheremetyevo as the country's busiest airport after more than $1 billion in private investment. One reason for the government’s decision to exclude Domodedovo was that the government could end up with less than a controlling share, which is highly undesirable, reported on Tuesday. According to the newspaper, government consultants had valued assets of Domodedovo Airport at around $5.1 billion while state-owned Sheremetyevo was valued at $2.4 billion and Vnukovo was estimated at between $500 and $700 million.

The government has tried but failed in the past to wean Domodedovo Airport away from its private owners and to combine the administration of all Moscow airports. However, Putin’s spokesman Dmitry Peskov said on Wednesday that Domodedovo was never contemplated as part of government’s consolidation plan adding that government might consider buying out shares belonging to private investors in Vnukovo Airport. UBS Russia transport analyst Kirill Tachennikov said the main stumbling block for the government was the private ownership of Domodedovo. “Any attempt to embrace Domodedovo Airport as part of the merger plan would have entangled the government in a long period of negotiation to acquire privately-owned shares in the company," Tachennikov said. “The government’s decision was the right one because the government is investing in infrastructural development while private investors are more inclined to work for themselves.”

State-owned Sheremetyevo and Domodedovo airports have also been competing in other areas including for government largesse to build a new third runway in Moscow, which experts say could cost about 50 billion rubles. However, Putin on Monday confirmed an earlier government decision to build the runway at Sheremetyevo and instructed the Ministry of Economic Development, the Finance Ministry and the Transport Ministry to secure funding for renovating a new runway at Moscow’s Vnukovo Airport and for the construction of a new one at Sheremetyevo Airport. “The list of priorities includes the completion of runway renovation at Vnukovo and construction of a new runway at Sheremetyevo where our main national carrier, Aeroflot, is based,” Putin said.

Some industry experts said however that Sheremetyevo Airport lacks the real estate to accommodate the 3800-meter strip needed for the new runway. The airport already has plans on the drawing board to construct a 3200-meter runway. However, the plan has run into snags because of the need for considerable deforestation in its proposed location as well as the heavy cost of relocating residents in villages around the area. On the contrary, Domodedovo airport, located 35 kilometers south of Moscow, has enough land reserved for as many as 10 runways while the cost of construction there could be 40 percent lower, Vedomosti reported. However, some analysts said the construction of the third runway is the last chance of survival for Sheremetyevo. VTB Capital transport analyst Elena Sakhnova estimated that the third runway at Sheremetyevo airport could raise the market capitalization of Sheremetyevo and Vnukova airports by 30 to 40 percent. “Together, Vnukovo and Sheremetyevo airports can be a formidable competitor against Domodedovo if the merger plans are realized,” Sakhnova said.
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