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Russian Airlines

Russia's new state airline will stifle competition  Nov 10, 2008

MOSCOW - Russia is creating a new state giant, Russian Airlines, to absorb carriers crippled by the financial crisis, but experts warn it will sideline Aeroflot and reverse years of progress toward a vibrant airline industry.

Aeroflot, Russia's flagship carrier, will now have a competitor with strong lobbying power and a direct line to state cash. And its expansion plans into eastern Russia may be frustrated by the state's takeover of nearly half the sector.

Lawmakers said that, given the crisis circumstances, it was necessary for President Dmitry Medvedev to hand the fleets and routes of up to eleven carriers to state-owned Russian Technologies, which will fold them into Russian Airlines.

Some warned, however, that the industry will no longer run along market lines.

"It will take not one year but several years before we can talk about competition on this market again," said Sergei Shishkaryov, chairman of the transport committee of Russia's lower house of parliament, the State Duma.

The collapse of the mid-sized firms came earlier this year after fuel prices reached record highs, forcing them to take loans that they could not refinance when the credit crunch hit Russia.

By late August, many could no longer afford to fly. The Russian public was then faced for the first time with the impact of the financial crisis on the real economy, as local media ran images for weeks of airports full of stranded passengers.


For over a year, Aeroflot has been eyeing acquisitions in the eastern parts of Russia, including Vladivostok Avia, which had a turnover of around 3 billion roubles ($111.5 million) in the first half of 2008.

Amid the financial crisis, it could have realized these plans at bargain prices as indebted carriers were forced to sell off stakes to raise cash.

"But the officials swept these ideas aside," said Oleg Panteleyev, chief analyst at aviation consultancy Aviaport.

Under Russian law, aviation is a strategic industry, and Kremlin hawks have consistently pushed for the state to keep it under tight control. Sergei Chemezov, the head of Russian Technologies and a close ally of Prime Minister Vladimir Putin, is a leading figure in this conservative camp.

"When Chemezov showed up with his ambitions to unite the sector, he was given the green light to create this enormous new carrier," Panteleyev said.

Valery Okulov, chief executive of Aeroflot, lashed out the decision to allow it. "It's a pyramid scheme ... To send a new player into a falling market is simply creating a bubble."

But Panteleyev said the new player would be at least as strong as Aeroflot, which has never had a domestic competitor that could threaten its dominant market share.

"If you just look at their objective indicators as aviation firms, without counting the lobbying power of Russian Airlines, I would say they are about equal," he said.

With Chemezov as board chairman at Russian Airlines, its lobbying power is likely to be strong. The powerful mayor of Moscow, Yury Luzhkov, and Deputy Transport Ministry Boris Korol are also expected to join the board when it meets on November 11.


Among the fallout from the failing airlines was the closure of most internal routes over Siberia and the Russian Far East, which were seen as vital for creating homegrown business in the regions and easing their economic dependence on Moscow.

"That is a much longer-term problem ... I think no one will be ready to provide loans or investments for these local flights after seeing how vulnerable they are," said Yevgeny Ostrovsky, aviation adviser to the transport ministry and head of a leading jet fuel provider.

Virgin Group VA.UL was in talks to open a Russian carrier by 2010, its owner Richard Branson said early this year. But Virgin's spokeswoman Jackie Mcquillan said on Friday: "Nothing like that is coming to fruition in the foreseeable future."

Ostrovsky and Shishkaryov said around 80 percent of internal flights are now going via Moscow or another hub in the European part of Russia.

This forces local businesses to take circuitous and far more expensive routes when shipping their goods, most often flying them to Moscow and then back across Russia to their destination.

"Right now we have reverted back to a situation where Siberia and the Far East do not have regular air services, neither for cargo nor passengers. This is how it was in 1990," said Olga Trapeznikova, head of communications for Krasair, a Siberian carrier set to be folded into Russian Airlines.

Russia's new state airline will stifle competition
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