Russian Business Aviation Reaches a Crossroads in Its Growth Path

 - December 3, 2013, 2:30 AM
This year’s eighth annual JetExpo show held in Moscow in September provided grounds for optimism that the business aviation market in Russia will achieve more growth, albeit once the industry overcomes some key challenges.

September’s JetExpo show at Moscow’s Vnukovo Airport once again provided a fascinating snapshot of how Russia’s business aviation market is continuing to develop. The overall impression from this eighth annual event is that, after a powerful growth surge, the market may be leveling off somewhat, but with every prospect of further expansion.

As with many other emerging business aviation markets, an unfriendly regulatory and fiscal environment continues to be a challenge for the industry. But on the positive side, more purpose-built infrastructure to support business aircraft operations in Russia is being put in place.

“We want the legislative base [regulating business aviation activities] to improve and our member companies to have a profitable growth,” said Alexander Kuleshov, chairman of the board at the Russian United Business Aviation Association (RUBAA). Speaking at the Business Aviation Forum in Moscow on the eve of this year’s JetExpo show, he said that growing numbers of Russian aircraft owners now want to import their assets into Russia legally, reversing a long-standing trend that has seen aircraft registered outside the country to avoid a complex web of administrative and fiscal hurdles. As of August this year there were still only 50 business aircraft registered in Russia, but this represented a significant increase on the 30 shown on the register 12 months earlier.

Many more aircraft are registered overseas, mainly in Western Europe, where numerous wealthy Russians have homes. RUBAA says that it has solid information that at least 170 aircraft are owned by Russian citizens but based overseas. Wider estimates suggest that anywhere between 300 and 500 aircraft are now Russian-owned, but registered outside the country. Of these, it is estimated that around 100 are permanently, or for the most part, based outside Russia. But a larger number are based at Russian airports more or less regularly.

One of the reasons this anomaly is significant relates to abuses of cabotage rules that prohibit foreign-registered aircraft from making commercial flights within another country. More aggressive action by Russian officials against illegal charter activity is one factor that is inducing some Russian owners to “legalize” their operations by bringing aircraft onto the Russian register. According to Kuleshov, a number of Russian owners have opted to incur the trouble and expense of importing their aircraft into Russia against the advice of their own financial consultants.

Kuleshov believes that investments now being made in airport infrastructure will drive industry growth in that they will generate new revenues for the sector and so attract further investment.

For the foreseeable future, Vnukovo (which hosted the JetExpo show) is expected to continue as the Russian capital’s main business aviation hub. The airport administration is laying plans to build a second runway at the airport, located just over 17 miles southwest of the center of Moscow, and this would increase the number of available slots by one third.

A new hangar, large enough to house widebody airliner-class business jets, is scheduled to open at the Vnukovo-3 FBO complex this month. Two more new hangars are to be added next year.

Today, the Moscow-area airports generate approximately 70 percent of all revenues from Russian business aviation. Recently, St. Petersburg Pulkovo Airport has seen operators invest in an impressive new FBO, and this wave of improvement is expected to spread to other Russian provincial airports in cities such as Nizhny Novgorod. Kuleshov predicted that these provincial business centers will eventually generate higher levels of growth for the industry than the country’s two main cities, reinforcing the impression that Russia’s business aviation sector has reached a turning point.

A Somewhat Divided Market

Many industry executives AIN interviewed at JetExpo had difficulty finding the right phrase to describe Russian bizav’s current condition. Most agreed that “new” or “emerging” are no long accurate descriptions but neither were they comfortable with the term “mature” for a market that is now more than 20 years old.

The head of one Western executive charter operator that has been serving the Russian market for some 15 years said that Bombardier’s Challenger 605 has become a key dividing line in the local customer base. Speaking on condition of anonymity, he explained that those clients who would not fly in anything smaller than the Challenger do not appear to have changed their flying habits in the wake of the most recent world financial crisis. In his view, these people were either never affected by the crisis or have recovered from any impact and now represent a mature group of customers who tend to buy replacement, rather than additional, aircraft.

By contrast, the operator claimed, customers using aircraft smaller than the Challenger 605 generally are still recovering from the shock of the crisis but, nonetheless, remain eager to take advantage of private aviation. This group now accounts for the largest number of new business aviation users but it is also the most nervous about the impact of a further economic downturn.

The sub-Challenger 605 group generated rapid additional demand between 2005 and 2007, but then fell away between 2008 and 2010, resulting in a collapse in the charter sector. Many others from this group became desperate to sell their aircraft to generate cash to support their core businesses, even if this meant discounting the price by as much as 50 percent. According to the operator, this has forestalled stability in the Russian market for pre-owned small- and medium-sized jets, and prices remain below 2007 levels.

Overall, flying activity among this more volatile group of clients has almost completely recovered to pre-crisis levels, as defined by the numbers of flights and distances flown. However, crucially for operators, they are now more insistent on paying less to fly and are more ready to downgrade to a smaller aircraft, something these clients would rarely do before the crisis.

The operator AIN interviewed said that charter rates for Russian customers are now around 25 to 35 percent lower than they were five years ago. At the same time, these clients are far more concerned about cost factors such as catering charges and airport fees.