There’s a widely held perception that, in its existing form, Russia’s air transport industry has reached the limits of its development.
Needless to say, the current paradigm, which looks as if it may continue functioning in the same way for some time to come, needs to wake up, embrace and recognise the changes that are imminent. And the future of the industry will be shaped primarily by the airlines themselves.
Typically, Russian commercial aviation’s 2018 results look great, at first glance. Last year the country’s airlines collectively carried in excess of 116 million passengers, enjoying a higher than 10 per cent growth rate over 2017. The industry’s RPKs also increased by more than 10 per cent in the year. Notably, the industry’s relative quality performance indicators are improving as well – the seat load factor added 0.6 percentage points, reaching 83.8 per cent, and commercial loads increased by 0.8 percentage points to 70.9 per cent.
But industry experts point to another record – airline capacity growth nearly hit 14 per cent, some four percentage points above the traffic growth rate. And don’t bother to even try comparing these numbers to the nation’s 2.3 per cent GDP growth and the 0.2 per cent deterioration in real household earnings in the country.
Evidently, the airlines’ higher seat load factors – despite the capacity growth – is purely a reflection of lowered prices and low margins, a recipe leading to losses that cannot be offset by direct or indirect support from the state. The collective operational losses of Russian airlines in 2018 is estimated at 50 billion roubles (US$770 million), although the actual figure has not yet been calculated, given that many airlines do not disclose their financial statements.
However, even industry leader Aeroflot has reported a 10-fold slump in its net profits compared to 2017. Last year, the figure stood at just 2.8 billion roubles. The major factor behind this crisis is the fact that fuel costs increased by approximately 43 per cent throughout the year, and Aeroflot is not the only victim of this, as all airlines suffered proportionately.
But the government apparently remains quite cold-blooded about the airline industry’s woes. At a February 12 session on aviation fuel, vice-premier Dmitriy Kozak opposed the idea of the regulation of jet fuel prices and the principle of partly compensating those airline expenses attributable to increased fuel prices. Russia’s Ministry of Transport did support one of the industry’s requests to increase the fuel excise duty compensation coefficient from 2.0 to 3.5 but, in the end, it is the Russian aviation industry that has failed to consolidate and successfully lobby for support on its most burning issue.
Concerns about the likelihood of airline insolvencies en masse have been voiced for several years in Russia, but the persuasiveness of these views is disguised by the impressive traffic growth figures. Overall it seems as if the airlines have simply not succeeded in presenting a strong enough economic argument to justify their cause.
Notably, the industry is now radically different from the almost free market it was in Russia just a decade ago. The 15 first airlines in the league ranking are accountable for 92 per cent of all traffic and generate some 94 per cent of RPKs. The share of the Aeroflot Group of airlines stands at 48 per cent and the flag carrier, which positions itself as a premium airline, is complemented by its subsidiaries – low-cost Pobeda Airlines, Rossiya Airlines which, having absorbed the fleet of defunct Transaero Airlines is perfectly suited for all kinds of social responsibility projects, and Aurora Airlines which serves Russia’s far east region. As of December 2018, Aeroflot’s board of directors has consisted entirely of government officials chaired by transport minister Evgeny Ditrikh. This indicates that Aeroflot will accommodate any tasks the government chooses to assign it.
Meanwhile, if the majority of airlines carry on regardless with their present practices and policies, their gradual extinction is only a question of time and it will be mostly Aeroflot left to pick up the pieces for their abandoned passengers, even at extra expense. So the government indeed appears to have no grounds to worry about the industry’s fate. In this scenario we can expect the ultimate level of consolidation and we are tempted to hope that privately-owned rivals, such as S7 Airlines, Ural Airlines and Utair, will be able to maintain some degree of competition in what would then be a very skewed market.
Another scenario seems more optimistic for the industry, but to achieve it the airlines have to first decisively abandon their archaic business models and their existing erratic pricing policies and instead adopt a progressive marketing strategy based on a deep understanding of each airline’s market niche and clientele. Airlines now have access to all the data required for such an understanding as well as sophisticated analysis tools. What they have to do is put some intelligent thought into it and expand their planning horizons.
Or is this just another flight of fancy?
By Alexey Sinitsky, Infomost Counsulting
Russian Aviation Insider
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