Russian Air Transport, Lease Markets Endure Tectonic Shifts

 - May 17, 2016, 12:01 PM
Russian carriers have withdrawn some 250 airplanes from their fleets since 2014, including all Boeing 747 passenger jets. (Photo: Flickr: Creative Commons (BY-SA) by maarten-sr)

An economic downturn intensified by low prices for fossil fuels and Western sanctions has taken its toll on the Russian air transportation industry, which has now generated losses for three years in succession. According to figures released by Russia’s Ural Airlines during a recent finance conference in Moscow, losses in totaled 5 billion rubles ($75 million) in 2013, 25 billion rubles ($375 million) in 2014 and 30 billion rubles ($450 million) last year. The trend contrasts sharply with that witnessed by the rest of the world: the global airline industry generated some $33 billion of profit in 2015.

Ural Airlines—Russia’s fifth largest carrier—attributed the situation to several factors, including the shrinking income of Russia’s population, high volatility of the ruble, unfavorable geopolitics and the threat of terrorism, the stagnation in the number of profitable international flights, market consolidation in which Aeroflot’s share of domestic traffic rose to more than 50 percent and the high cost of capital.

The loss-making resulted from a disparity between airlines’ income and spending: earlier this century the airlines took too many large jets for which they have to pay in hard currency while selling tickets in rubles. 

The fleet size and composition remain inadequate for economically viable service of real passenger flows. Since 2014, local carriers withdrew more than 250 aircraft from their fleets (including all passenger Boeing 747s and most Boeing 767s) by way of returning them to lessors or putting them in storage. Importation of Boeing, Airbus, Bombardier, Embraer and ATR passenger aircraft steadily declined from 124 in 2011 to 116 in 2012 to 98 in 2013 to 90 in 2014 and, finally, to 48 last year. On paper, though, Russia remains among world’s top five countries in terms of passenger fleet size, operating 825 aircraft (down from a peak of 953 in 2014) compared with the UK’s 854. 

Even though the remaining fleet remains relatively young, averaging 11 years of age, it generates profits almost exclusively on international flights. In 2012, the international sector counted 32 million passengers (excluding the CIS), the same as in 2015. During those three years, domestic traffic grew from 35.4 million to 52.5 million. The growth has proved unprofitable, as the country’s real GDP shrunk by 3.8 percent in 2015.

The unfavorable environment and, by many estimates, ill-considered strategies led to the bankruptcies of Polyet, Vladivostok Avia and, most recently, Transaero, which ceased operations in October 2015. The bigger half of Transaero’s 97-unit-strong fleet remains grounded. Of Russian lessors that provided the bulk of the fleet on financial lease terms, only Sberbank Leasing and IFC managed to partly re-locate their assets, while VTB and VEB Leasing did not. 

Further worsening of the economic situation will undoubtedly result in more companies going bankrupt, said Sergei Koltovich, former Aeroflot fleet manager and now CEO of Dublin-based Horizon BizJet Leasing. “Five leasing companies in Russia will have to write off 1- to 1.5 billion U.S. dollars on the fleet of 150 aircraft,” he estimated. “Most of the aircraft in Russian lessors’ portfolio have an unrealistic book value… sometimes as much as four times above the average market figures.”