Russian Traffic Rises, but Airlines Endure Instability

 - November 1, 2017, 3:53 PM

While Russian traffic measured in passenger kilometers rose 20 percent over the first three quarters of the year, the country's airline industry remains in an “unstable financial situation,” according to speakers at the November 1 to 2 Wings of the Future conference in Moscow. The 15th annual event attracted more than 400 aviation professionals who flocked to Moscow three months after the U.S. Congress voted to impose additional sanctions on Russia.

While acknowledging that the sanctions might frighten off U.S. investors, Danny Thorniley, president and founder of DT Global Business Consulting, insists that the Russians and their partners have learned to manage them. He described the business climate in Russia as “not booming, but OK,” while calling the conditions for businessmen and investors “survivable and manageable.” Even though “super-profits” observed at the turn of the century have disappeared, said Thorniley, the Russian market has stabilized and appears poised to grow at a 2 percent average rate into the foreseeable future, creating a solid basis for investing.

Vladimir Tasun, chairman of Russia’s Association of Air Transport Operators, reported that Russian airlines generated a loss of 18 billion roubles ($309 million) in the first half of 2017 compared with a 13 billion rouble ($223 million) loss during the same period last year. He predicted that the year will again end with a negative result for the industry despite an expected 11 percent increase in the airlines’ income, partly due to a 16-percent rise in airport charges and a 30-percent jump in fuel costs, all accrued in the national currency.

In the absence of official statistics from government bodies, various sources give different estimates for the collective financial results of the Russian airline industry, ranging from 10- to 13 billion ruble losses to a profit of 2.9 billion in 2016. But no one disputes that 2014 and 2015 brought a negative result, and that 2017 will most likely do so as well. All agree that the airlines face financial pressures fraught with more bankruptcies following that of VIM-Avia last month.

Moscow-based Infomost Consulting notes that the recent traffic growth does not correlate with an almost flat gross domestic product. It further states that the national fleet remains oversized. Instead of downsizing, VIM-Avia embarked on an aggressive expansion strategy, increasing its seating capacity by 18 percent in 2016. It accumulated large debts and ceased flights on October 15.

A survey of 40 major Russian domestic air routes indicates that average fare per thousand kilometers flown varies between $46 and $90, compared with $120 to $150 in the U.S. The difference results in the inherent unprofitability of Russia's domestic routes, barely compensated by the profits coming from international services. Price wars and decreased income of the Russian population from 2014 to 2017 did not allow the local industry to improve. Even though fares measured in the national currency grew by 67 percent over the past four years, the rouble continued to lose value compared to the dollar.

Although a number of previous attempts to establish a low-cost carrier failed, Podeba—Russia’s only surviving low-cost carrier—has performed rather well recently with its 13 Boeing 737-800s. Partly for that reason, Norwegian Air Shuttle chief executive Bjorn Kjos said he thinks that Russia will one day open itself to the idea of budget airlines, like Norway did in 2002. Since then Norwegian has grown into the world’s sixth largest LCC with fleet of more than 140 Boeing jets. Kjos said he believes in a tremendous opportunity that an expected tourist boom might bring the country, calling St. Petersburg and Vladivostok “gold mines…that must be made into the gateways to Europe and the Far East.”