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Russia/CIS Round-Up

The second JetExpo, Moscow’s annual business aviation exhibition, proved to be a markedly bigger event than the inaugural 2006 show, housing over 130 exhibitor booths and 15 aircraft on static display at Vnukovo airport, and drawing in excess of 6,000 visitors. Although this sector of commercial aviation [not general aviation as it’s known elsewhere in the world] remains almost hermetically discreet, the show has become a reasonable reflection of some of the evident trends of the Russian bizav scene today.

The great attraction this market currently holds for the world’s leading aircraft manufacturers and foreign operators has been well documented, although most still refuse to disclose whether any of their clients are Russian. Nevertheless, regardless of the event being sandwiched between the Moscow Aerospace Show (MAKS) and the NBAA Convention, all of the major business jet (and most major rotorcraft) manufacturers chose to be present in one way or another. Curiously, however, the Russian manufacturers who also claim a slice of the business aircraft market within the region, and who during MAKS displayed several VIP configured aircraft, ignored JetExpo altogether.

One question prominent on many peoples’ lips is, “Will the Russian market reach its saturation level at any time soon?” The manufacturers seem more optimistic that it won’t than the operators, who have been watching business start to slow down from the boom they experienced starting in 2005. Manufacturers have found the Russian market unpredictable from the start, though.

According to Richard Gaona, Airbus’ vice president, Corporate Aviation, the ACJ fleet belonging to Russian customers has doubled since 2000. Airbus officials believe that customers within the region will potentially purchase around 10 ultra-large aircraft per year, and hope to cover half of this demand. As a reflection of the importance Airbus places in this market, an A318 Elite operated by Swiss company Comlux was displayed at Vnukovo, and drew plenty of interest from JetExpo attendees. However the driving force behind this demand is not clear to Airbus or to other manufacturers.

Russia-based charter brokers believe that economic growth is not the only factor behind the aircraft acquisition boom in Russia and the CIS. The wealth that companies are currently experiencing in the region may have been there as early as 2000, but it was generally discouraged for companies or individuals to equate that wealth with aircraft - and besides it was not until recently it became possible to fly a business jet to and from Russia without red tape causing difficulties.

Today, though, there are signs that the State is slowly starting to acknowledge that business aviation could make a worthwhile contribution to its economy. Indeed, the significant first step has been taken of the lifting of import taxes on midsize business jets. Although this is unlikely to cause immediate change in the way Russian-owned aircraft are registered and operated, it is still considered a positive move in the right direction.

And although local aviation regulations - most of which date back to Soviet times - remain a major burden to private aviation, it is evident that market mechanisms have found a way of overcoming this obstacle. Even smaller aircraft and rotorcraft that are far more sensitive to legal issues with regards to flying within Russia, and are thus based and operated in Russia, are now receiving Russian type certificates in anticipation of a sales boom.

Other clear signs of a more sophisticated market to come include development of relevant infrastructure: FBOs, business aviation terminals in large international airports and maintenance stations for Western-produced equipment are among this infrastructure development.

For example, September marked the opening of the first Russian FBO at Ostafyevo airport belonging to Gazprom. Formerly serving exclusively the needs of Gazpromavia (the aviation subsidiary of the gas giant, and a regular passenger carrier), the airport has finally received international status, and according to Gazpromavia officials, is on its way to becoming a dedicated bizav center with handling services, including certified Dassault and Eurocopter maintenance stations.

A lack of slots in Moscow’s other airports is already limiting corporate flight operations, so Ostafyevo is well positioned to pick up customers. Meantime, Gazprom is also in negotiations with the administration of St. Petersburg regarding Levashiovo airport near Russia’s “Northern capital”.

Taxes

As briefly touched on above, in August the Russian government reduced customs duties on the import of foreign aircraft - with up to 19 seats and a basic empty weight of 15 to 20 tons - from 20% to 10%. Taking the 18% VAT rate into account, overall fees will now amount to 29.8% instead of 41.6%, making the cost of importing an aircraft some 11.8% cheaper.

The measure in itself is not expected to start another boom in business jet sales, nor should it stimulate a major transfer of fleet from foreign registries to the Russian register (at present about 95% of aircraft owned by Russian companies and individuals are registered abroad and operated by foreign entities, according to market participant estimates). The lifting of taxes will, though, have a positive effect for those owners who wish to operate their midsize aircraft primarily within Russia, and mostly for charter flights, because these types of operations require Russian registration and a Russian AOC. It might also foster development of some new business aviation segments that today are only being talked about - for example, regular premium class airline operations are being discussed - but these plans are hindered by an insufficient number of business aircraft based in Russia that are officially permitted to conduct internal operations.

For flights outside of the country, however, Russian registration presently holds little advantage - so in many cases, owners prefer to bear the costs of ferry flights from base airports in Europe, in some cases simply acquiring permissions to base aircraft in Moscow for two to three days. Considering the Russian customers’ preferences in terms of aircraft size too, it becomes evident that the tax reduction does not target a very large segment of the market. But it at least it represents a step in the right direction.

That step is further enhanced when one considers that in eight months time the duties may be lifted altogether (according to Russian legislation, the duties can be reduced by no more than 50% of their original rate at a time), and that all aircraft with empty weight of up to 20 tons will become tax-free. There is hope that tax reduction will eventually change the current ratio of Russian/foreign operators active in the region’s market, which presently stands at an 85% majority for foreign operators. What is essentially needed is a major change in the minds of the Russian legislators to create a set of regulations for business aviation that would be different from airline operation requirements.

This concerns, above all, adopting international practice in terms of ‘Cabotage’ - something that the Russian business aviation community is fighting against, and concerns the fact that there are no separate rules for business aviation, and a private operator within the region is treated the same as a commercial carrier.

Because bizav operators are treated the same as regular carriers, the Chicago Convention is applied, and according to the Chicago Convention, commercial air operations are regulated by bilateral interstate agreements in which no airline can carry passengers between cities of a foreign country - thus protecting local carriers. But in the case of a business aircraft placed on a foreign register, but operated within Russia, this clearly doesn’t work.

So for now, Russian business aviation operators remain a pretty disadvantaged group, and their number is actually diminishing. The fleet of VIP-configured Tupolev Tu-134s and Yakovlev YaK-42s can hardly be modernized, and their operating costs exceed those of their Western counterparts. The fastest growing group are charter brokers, most of whom have recently acquired a new function: this “management a la Russe” implies that a Russian-owned aircraft on a foreign operator’s AOC is actually being flown and maintained by the operator, but managed from Russia, including charter sales, financial and accounting reports to the owner, cabin refurbishments, etc. The new format is becoming wide-spread causing more turn-over for bizav services to remain in Russia.


/ Новости

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