Soaring fuel prices burn a big hole in Russian airlines profitability
Russia’s major airlines, including powerhouses Aeroflot and S7 Airlines, have declared that the country’s commercial aviation industry is once again on the brink of a large-scale financial crisis, as rocketing fuel prices continue to wreak havoc with the profitability of the business.
While the country’s transport ministry discusses with the government possible ways to compensate for the carriers’ unbudgeted losses, the airlines are continuing to pile up more debts.
The crisis is resulting in widespread mounting losses, the cutting back of investments and the axing of non-profitable routes, Russian Aviation Insider has learned.
The main problem is that Russia’s airlines have been operating under the continuous strain of rising jet fuel prices throughout 2017 and 2018, affirms Boris Shokurov, executive director of the Moscow-based Russian Air Transport Operator Association (RATOA). The trade association and airlines lobbying group reveals that fuel prices grew on average by 20 per cent in 2017 compared to 2016, and then shot up by a further 36 per cent in the first 10 months of this year.
In the first nine months of 2018 the collective fuel spend of Russian airlines reached 288 billion roubles (US$4.43 billion), a 43 per cent increase that translates to an extra cost of 87 billion roubles (US$1.34 billion). “At the same time, fuel consumption increased by nine per cent, or seven million tonnes, representing some 19 billion roubles,” Shokurov stresses. “The share of fuel in the structure of operator costs has increased by five percentage points, hitting 27.5 per cent of all operational expenses.”
The fuel price surge has had a particularly debilitating effect on the balance sheets of Russian airlines. In the first nine months of this year their estimated cumulative shortfall amounted to 19 billion roubles. Losses in the domestic segment increased sevenfold, reaching 34.5 billion roubles, even though the three-quarters period embraces the summer high season, which normally is able to provide a safety cushion to counterbalance the traditionally low final quarter, Shokurov points out.
Taking into account the usual low season, it is now safe to predict that, for the entire 2018 year, the airlines’ operational losses will reach between 37 and 39 billion roubles (US$0.6 billion). In the current decade, the previous all-time low was 24 billion roubles of losses in 2014.
This year Aeroflot has twice increased its fuel surcharge in its air fares, the first time in July, adding between 200 and 400 roubles to average fares and then, most recently, in November, adding another 200 roubles (US$3) to economy and 400 (US$6) to business class fares. The forced increases were due to “extreme fuel price growth,” Aeroflot explained to customers.
In the first nine months of 2018 the entire Aeroflot Group, which consists of the title carrier and subsidiaries Rossiya Airlines, low cost carrier Pobeda Airlines and Aurora, managed to keep its yield above the extra costs, even though the group’s fuel costs rose by 46.7 per cent to 132 billion roubles, partly due to fleet expansion and an increase in fleet utilisation rates. As a result, the group’s profits slid by 17.2 per cent year-on-year to 22.5 billion roubles.
Ural Airlines, Russia’s fourth largest carrier, also saw its profits decrease, but has not specified the exact figures. The airline’s press officer Vera Gasnikova says the situation was aggravated by the fact that “the highest spike began in May 2018, when the airlines had largely sold out their tickets for the summer season and had no way of compensating these expenses. In essence, they just gave all their summer profits to fuel companies.” The share of fuel expense in the airline’s cost structure has climbed back to 30 per cent from the 25 per cent of the first nine months of 2017.
Gasnikova adds that the airline had no opportunity to take any corrective measures to mitigate the negative effect of the rising fuel bill, because the situation simply spurred competition that resulted in a further decrease in airfares. The entire financial gap created by the unbudgeted fuel price surge was covered by the airline’s projected profits.
According to Ural Airlines’ data, by the final quarter of 2018, the average fuel price had climbed by 33 per cent and now stands at 57,500 roubles (US$884.6) per tonne, almost reaching the average European price of 58,200 roubles (US$895.4) per tonne, but still short of the average CIS price of 75,300 roubles (US$1,158.5).
Meanwhile, a high-ranking executive at one of the large Russian airlines has confided to Russian Aviation Insider that almost all the carriers operating in the Russian air travel market are deeply in debt, including those that have not previously experienced financial difficulties. The commercial airline industry’s financial standing has been further aggravated by marginally higher airport fees – which are not regulated by the state – and by the strengthening of the US dollar, a factor which directly affects leasing and maintenance costs of western-built aircraft, which are now the backbone of many local airlines’ fleets.
At the same time consumer buying power has not kept pace with the increasing costs and this has forced airlines to sell tickets at lower than breakeven level. “In principle, the airlines are not against all these increasing tariffs – but be so kind as to alert us at least half a year in advance, so that we have the time to factor it into our fares. We’ve saved everything we could save. The only segment in which we cannot make cuts is in flight safety,” he argues, with more than a hint of irony.
Another airline has told Russian Aviation Insider that it has had to revise both its route network and its schedule, cutting out loss-making routes.
Russian Aviation Insider
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