INSIGHT: Russian airport traffic growth nosedived in 2015

New terminal at Samara Kurumoch airport (Photo by Andrey Makhonin / Transport-photo.com)

Russian airports suffered a dramatic slump in passenger growth last year as overall numbers barely increased by an average of less than one per cent, leaving investors concerned about dwindling airport revenues.

The crisis is a slap in the face for those calling for urgently-needed upgrades of many crumbling and poorly lit runways across the nation, as well as other key airport modernisation projects.

International passenger departures suffered the most last year, down 20.1% against 1.3% growth in 2014 – and a previously impressive 15-18% average increase in the preceding three years. Figures reveal that, last year, overall passenger numbers grew by a meager 0.9%, compared to 9.6% in 2014 and 13% in 2011-2013.

The collapse is a sorry reflection of the general condition of the country's air transport sector, with foreign carriers contributing mostly to the latest nosedive with a 22.8% fall in the volume of their passenger departures, compared to a moderate 3.2% decline in 2014. It was only the 11.7% growth in Russia’s domestic traffic, against 15.4% the year before, that helped recover the overall figure to around zero.

Passengers, mail and cargo carried through Russian airports

Type of transportation 2015 2015 vs. 2014, % 2014 2014 vs. 2013, % 2013 2013 vs. 2012, %
Passenger departures, thousand 79,658.7 +0.9 78,917.9 +9.6 71,351.2 +12.6
including:
- on international routes 27,045.9 -20.1 32,481.8 +1.3 32,071.8 +15.3
by foreign carriers 7,637.3 -22.8 9,374.9 –3.2 9,671.9 +10.0
- on domestic routes 52,612.7 +11.7 46,436.2 +15.4 39,279.3 +10.6
Mail shipments, ton 39,331.3 -11.8 43,980.5 +2.8 42,770.3 +1.7
including:
- on international routes 4,838.0 +22.6 3,743.5 –1.8 3,810.6 +17.0
by foreign carriers 1,362.2 -16.0 1,580.1 –0.3 1,585.6 +10.4
- on domestic routes 34,493.3 -16.7 40,237 +3.2 38,959.8 +0.4
Freight shipments, ton 297,497.7 -8.6 323,058.2 –5.8 341,942.8 –9.7
including:
- on international routes 68,651.8 +3.5 66,248.9 –6.1 70,315.1 –30.7
by foreign carriers 20,086.7 -4.0 20,886.1 +6.3 19,570.3 –2.8
- on domestic routes 228,845.9 -12.2 256,809.31 –5.8 271,627.6 –2.0

Note. Figures for domestic departures include GA operations.

 Source: Russian Transport Clearing House.

Observers believe these latest trends illustrate the underlying financial plight in which Russia’s airports sector has found itself. A significant contributory factor in the business mix is that airport fees and charges for foreign carriers are appreciably steeper, sometimes two or three times higher, than those for Russian airlines. For example, Moscow's Vnukovo airport charges Russian operators a runway movement charge calculated at 178.3 rubles per tonne of MTOW (US$2.78 at the current exchange rate), whereas foreign operators are charged 674.29 rubles, or nearly 3.8 times higher. As foreign airlines see their passenger numbers decrease, Russian airports' earnings decline too. The airports are then faced with charging Russian carriers more.

Project investments needed

Against this bleak scenario is a backdrop of critically-needed urgent repairs and renovations at a number of airports. According to Russia’s Federal Air Transport Agency (FATA), there were 254 registered civilian airfields and heliports in the country in early 2016, including 81 international airports (of which only 74 are equipped with operational border control facilities). The overall figure has shrunk (by 9% year-on-year) from 282 locations, but the number of international airports has increased slightly from 71 the year before. Of the total number of airports, 91 are designated as federal airports; whilst 117 make up the national core domestic airfield network.

Of Russia’s 178 paved runway airfields many have a desperate need for major repairs and renovations, with some 12% of runways in need of urgent work. In many cases, runway lighting is either absent or requires renovation. In a total of 184 airfields, 72% are adequately equipped with lighting systems, of these 76 have high-intensity runway lights and 108 have low-intensity installations. This means that, because of insufficient illumination, some airports are available for daytime operations only.

This situation is creating a vicious circle for Russia’s aviation business as resolving these and other infrastructure shortfalls will inevitably entail hefty expenses for the entire air transport sector; and regional airlines operating from these airports are constrained by the number of flights they can operate. Similarly, mainline carriers cannot designate these airfields as night-time alternates, so are forced to use longer routes. The effect of all this is to drive up operating costs.

Currently, only 44 Russian airfields are ICAO-categorized: 31 are Cat I, 10 are Cat II, and only three (Sheremetyevo, Domodedovo, and Vnukovo, all three serving Moscow) are Cat III. This limitation results in significant overheads for Russian carriers as most modern aircraft are certified for Cat III operations, as are a significant number of their captains. In essence, the lack of equipment and ICAO certification is preventing operators from flying in more adverse weather conditions. This contributes to schedule disruptions – and declining passenger numbers.

The government is aware of these situations and is doing its best to rectify them. According to FATA, the implementation of four federal-level programmes and a number of additional measures taken in 2002-2015 have already helped repair terminals and government-controlled infrastructure facilities at 99 airports. This included the re-paving of runways, taxiways and aprons, as well as renovating airfield lighting and navigation aids. A total of 421.5 billion rubles was invested in this work, including 296.7 billion from the federal budget and a further 151.8 billion from regional budgets and other sources.

It should be noted that many of these airport enhancements have been ad-hoc investments, with money systematically allocated to individual airports specifically for major local sporting and other international events. Although the expediency of this approach is debatable in that the peak passenger numbers processed during such events are usually much higher than current and projected numbers, at least this resource distribution principle is bringing some positive contribution to the long-term development of Russia's airports infrastructure.

Some of the most high-profile renovation projects of the recent past include Vladivostok airport in the run-up to the 2012 APEC summit, Kazan (the 2013 Summer Universiade), Sochi (the 2014 Winter Olympics and Paralympic Games), and Ufa (the SCO and BRICS summits in 2015), as well as runway repairs at Vnukovo and Penza airports.

Investment in massive refurbishment at St Petersburg Pulkovo airport requires payback (Photo by Fyodor Borisov / Transport-photo.com)

Investment in massive refurbishment at St Petersburg Pulkovo airport requires payback (Photo by Fyodor Borisov / Transport-photo.com)

Between 2016 and 2020, a total of 225.8 billion rubles will be allocated from the federal budget for renovating and expanding airfield infrastructure. The sum includes 187.1 billion rubles as part of the federal program to develop Russia's transport system, and 68.7 billion rubles to develop the economic and social sectors of the Far East and the Baikal region through 2018.

With the government's priorities unchanged, a key renovation driver will be the 2018 FIFA World Cup, which is being hosted across central Russia. Some of the more high-profile airport development projects in this scheme will include building an all-new Yuzhny airport at Rostov-on-Don, laying a third runway at Sheremetyevo, and overhauling one of the two runways at Domodedovo. New runways are to be installed at Samara, Krasnodar, Ufa, and Petropavlovsk-Kamchatsky in 2016. Also, by the end of the year, airport terminal repairs are to be completed at Krasnodar, Petrozavodsk, Petropavlovsk-Kamchatsky, Palany (Kamchatka Territory), and Nikolskoye (Bering Island). Norilsk airport will also be renovated.

In contrast to these positive steps, the current depressed economic climate is prompting the Russian government to cut costs and postpone some key projects. For example, it has been proposed that the program to develop the country's transport system through 2020 be amended to omit the current plans to embark on the reconstruction of terminals at Novosibirsk's Tolmachevo and at the airport serving the town of Zhigansk (Yakutia). The program to develop the Far East and Baikal region may also be similarly revised whereby the 2016 launch of the project to build Tigil airport in Kamchatka Territory may be postponed.

Breakeven problem

By allocating money for airport infrastructure projects the Russian government acts as an investor and as such its return-on-investment payback expectations are in the region of 30 or even 50 years, unaffordable terms for private investors, who do not accept even 10 years for their money back. Since most of the current airport development projects are bankrolled by private-public partnerships, in varying combinations, this discrepancy in break-even expectations leads to tensions, particularly in the current economic recession.

It all adds up to a changing financial landscape for Russian air transport. With shrinking passenger numbers affecting airport revenues, this also precipitates further delays to the break-even point for investors. Sluggish growth in landside revenues – directly related to the overall economic activity – means that airports cannot keep cutting costs and are forced to turn to the only reliable remedy they know: hiking fees and charges for airlines. Not surprisingly, carriers dispute this practice, arguing that the government requires them to keep airfares affordable to the population.

With this backdrop of rising costs, infrastructure in disrepair and falling revenues, it is useful to study a document created earlier this year by the Russian Union of Industrialists and Entrepreneurs (RSPP), which collected and presented statistics on the growth in airline charges at airports (per tonne of MTOW, not counting passenger handling fees, see Fig. 1). The graphs clearly indicate that airport handling costs – which amount to around 20% of an airline's overall costs – are growing much faster than their airfares.

Ap-gr-01

Some of the fees and charges levied by airports are regulated by the government, so their growth is usually consistent with the inflation rate. Even though carriers are unhappy with such increases, the government regulator normally approves them. Airports may achieve the remainder of their revenue targets by dramatically hiking their fees – not controlled by the state – by more than 50% a year. Even though these fees are relatively low in absolute terms, this practice does not sit well with airlines.

This revenue problem has become particularly urgent now that the government may decide to liberalize airport charges, primarily at Moscow’s airports, but also possibly across the entire country. The plan is to lease the Moscow airports to their current respective management companies without a formal contest. However, the potential lessees are not happy with the lease terms, so the signing is being delayed.

Liberalization of airport fees was originally proposed as a measure to boost the appeal of the lease agreements. That attempt failed, but the proposal has since spun off into a separate initiative, reflecting the government's intention to boost healthy competition among Moscow’s airports. It has become clear, though, that such a measure will hardly help competition: an airline planning to start operations to Moscow may benefit from comparing the charges at the three airports, but it is highly unlikely that a carrier already based at one of the three will relocate to either the other two simply because of the difference in fees. The cost of such a move – including infrastructure, offices, personnel and other commercial factors such as interline agreements – would never be recouped, and the few relocations of the past were driven by considerations that had nothing to do with rivalry among the airports.

Meanwhile, airline concerns caused by the possible liberalization of airport fees should not be overestimated. As a senior airport manager has put it, any airport can achieve operational profitability simply by tweaking some or any of its charges. If the government relaxes its grip on airport fees, this may result in revenue growth across the board.

The problem is that many Russian airports, even among those which make up the national core airfield network, cannot exist as independent business entities due to low passenger numbers. This problem has nothing to do with those who own these airports, whether it is the federal government, regions, private shareholders, or any combinations thereof. In Europe, airports serving fewer than 4 million passengers a year benefit from being regarded as national ‘infrastructure facilities’ rather than as business operations. In Russia, that line should perhaps be drawn at 1.5 million passengers per year.

With their current business models, such airports are trying to generate revenues whilst offering no modernization investment potential to speak of. The consequences of this include growing fees and charges for airlines, expensive and less frequent regional air services, carriers concentrating on major airports, fewer minor airlines and, in the end, fewer airports.

It is obvious that overhauling the business model and re-designating smaller airports as non-commercial infrastructure facilities is a formidable, resource-intensive challenge that sits alluringly on the horizon. But this will need to be done sooner or later, otherwise Russian air transport costs will continue to take off, making airfares prohibitively expensive.

By Alexei Sinistky

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