As authorities in other countries continue to signal a range of life-saving proposals to support their respective airlines, the Russian Association of Air Transport Operators (RATOA) has pleaded with the country’s transport ministry to take urgent measures to protect Russia’s air transport industry from collapse.
The association’s proposed range of measures includes waiving value added tax (VAT) payments, boosting state subsidies for regional air travel and the freezing of airport handling fees. The association realises that, unless the state takes unprecedented and expeditious measures, the successful rescue from insolvency of all existing airlines is highly unlikely, and that the industry will inevitably emerge from this crisis substantially trimmed. It is also calling on the industry players not to rely entirely on state support and instead take measures to “save themselves.”
As of today, the restrictions on air connections imposed in response to the global Coronavirus threat have already amputated more than 40 per cent of the country’s airlines’ international operations, and the bans are likely to increase even further, RATOA’s president Vladimir Tasun writes in his address to the ministry. He further outlines several negative ways in which the on-going crisis is affecting the financial health of Russian airlines and is proposing a number of measures to mitigate the risks.
THE DEMISE OF A REVENUE-GENERATING MARKET
Denominated in Euros, the international air travel business sector generates the bulk of revenues for Russia’s airlines, and this market is currently visibly shrinking. “The positive financial contribution that the international segment has always made has allowed airlines to partially compensate for the losses made by their domestic operations, thus making domestic air travel affordable for a larger number of customers,” Tasun notes. In 2018, according to RATOA’s records, combined losses from domestic operations amounted to 60.4 billion roubles.
RATOA lists the central fixed costs of aircraft leasing, maintenance, labour and social insurance are among those that, to a certain extent, are not reflected in the actual operations and are therefore not reimbursable by the lean domestic segment. These expenses constitute between 45 and 50 per cent of an airline’s cost structure. According to RATOA, airlines are now negotiating with their lessors regarding payment delays and reductions of payment rates, but “in the current environment of economic downturn,” substantial discounts from leasing companies are hardly expected. “Thus airlines are not able to reduce [the financial burden] of their excess capacities in time and without [consequential] losses.”
According to Russian Aviation Insider’s data, as of February, excluding all aircraft with a seating capacity of less than 19 seats, Russia’s airlines had 1,194 units in their combined fleet, showing that, from the beginning of 2019, the total fleet size had expanded by 68 aircraft. The average seat load factor in January this year was 78.8 per cent, 0.2 p.p. less than for the same month of last year.
At the same time, most of these fixed costs, particularly lease payments and aircraft maintenance, are paid for in hard currency, a factor which further aggravates the situation in view of the rapid devaluation of the rouble by almost 20 per cent from January 1 to March 18.
DOMESTIC TRAVEL WON’T HELP
RATOA does not envision that domestic travel will increase in proportion to the decline of the international segment. “Not all customers will prefer domestic travel and, besides, we cannot exclude the scenario that restrictions on air travel inside the country may also be imposed due to the virus spread rates,” Tasun argues.
Last year, Russian airlines’ domestic traffic improved on that of 2018 by 6.1 per cent, reaching 73.1 million passengers, which was 57 per cent of the airlines’ combined total traffic. International traffic for the same period improved by 16.3 per cent to 55.1 million passengers.
An additional negative factor affecting the domestic travel market is the current excess of seating capacities, which are likely to be chaotically redistributed across the domestic market, thus affecting unit costs and further degrading the airlines’ financial returns.
State support may “mitigate the risks of bankruptcies and their negative consequences, and create preconditions for the fast recovery of air travel in the post-crisis periods,” Tasun writes, suggesting three vital measures. The first is to impose zero VAT payments on all domestic travel, including those through Moscow, where the current VAT rate is 10 per cent. “This will provide relief to airlines by an estimated amount of up to 36 billion roubles.”
Secondly, RATOA is calling for increases in the existing state subsidies for regional air travel programmes. In 2019, 17.1 billion roubles were allocated for this cause, which helped more 3.2 million travellers, 1.8 million more than in 2018.
Finally, RATOA believes that it is vital to introduce a moratorium for the proposed increases in airport and ATM service fees.
Russian Aviation Insider
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