Russian commercial aviation faces serious challenges caused by the country’s deteriorating economic situation and political tensions over the crisis in Ukraine. As the double-digit growth demonstrated in the previous decade appears to be over, the top carriers are exploring ways to optimize costs and capacity.
Russian airlines have almost tripled the number of passengers carried annually since 2004, from 33.7 million to 84.6 million in 2013, but now the growth pace is slowing down. For the first three quarters of this year, the country’s airlines carried 72.9 million passengers, up 11.8% on the same period in 2013.
Aeroflot continued to lead with 17.8 million passengers carried, or up 13.4% year-on-year. Transaero ranked second with 10.4 million; UTair Aviation came third with 6.9 million people. These two carriers demonstrated the slowest growth of the top five Russian airlines, 6.4% and 9.3% respectively. S7 Airlines saw its passenger numbers grow by 14.6% in the first nine months of the year, reaching 6.1 million. The figures for Ural Airlines were 18.3% and 4 million. These five companies together accounted for 62.3% of all Russian passengers carried, the Federal Air Transport Agency reports.
Detailed statistics provided by the agency corroborates earlier reports to the effect that the growth in passenger traffic was mainly observed on domestic routes (up 19.1% to 37.4 million passengers), while international services flights demonstrated less pronounced dynamics (up 5.6% to 32.7 million). One year ago, the situation was quite the opposite, with an 18% year-on-year increase in international passenger numbers and only 10% for domestic flights.
The overall passenger load factor grew by 0.3 percentage points in the first nine month of 2014, reaching 81.1%, mainly due to the growing numbers of domestic passengers (up by 1.5 percentage points to 78%). The load factor on international routes remained at 83.1%, but the year-on-year comparison indicates that it decreased by 0.2 percentage points.
This shift in the industry’s trend is confirmed by the individual performance results of the largest carriers. For example, Aeroflot’s statistics for January-August 2014 show a 31.4% increase in passengers carried domestically, to 7.3 million, while its international traffic increased only by 1.9% to reach 8.3 million passengers.
Transaero demonstrated the greatest growth in domestic passenger traffic in the first eight months of this year, up 37.9% to 2.6 million people. Internationally, the airline carried 3.8 million passengers, indicating a slight decrease year-on-year.
Industry actors forecast a continuous period of weak demand for international air services. Transaero’s Chief Executive Director Alexander Pleshakov predicts that overall international traffic may shrink by 10-15% through April 2015. In his recent presentation for a Russian association of tourist operators, Pleshakov blamed the slow demand on the weakening ruble, which particularly affects services to European and US destinations. He confirmed that Transaero’s traffic between Russia and Ukraine dropped by 60% in the first eight months of the year, while other CIS destinations like Kazakhstan, Uzbekistan, and Armenia, demonstrated an upwards trends.
Although many local routes, especially those connecting central Russia to the country’s Far East, western enclave of Kaliningrad and Crimea are subsidized by the government, this does not seem to be enough to keep the demand up. Pleshakov expects the growth of domestic traffic to slow down to 3-5% during the winter season of 2014/15. “In general, there will be no double-digit growth on the [air transport] market,” he notes.
The shrinking demand, especially on international routes, is affecting the financial health of some carriers. According to the head of Russia’s Association of Air Transport Operators Vladimir Tasun, it is international operations that bring Russian airlines most of their revenues, while domestic services remain largely unprofitable. Tasun points out that in 2013, the domestic operations of all Russian carriers combined generated 19 billion rubles’ (about $450 million under the current exchange rate) worth of losses, only partially compensated by the 14 billion rubles’ worth of profits on international routes. The situation will get even worse this year, he warns.
Aeroflot reported a net loss of 1.9 billion rubles under the International Financial Reporting Standards for the first half of 2014, the company’s first such incident in the past five years. “Slower economic growth rates in Russia, combined with significant one-off factors, had a negative effect on the group’s financial results in the first half of 2014,” explained Shamil Kurmashov, Aeroflot’s deputy CEO for finance.
The airline’s pilot low-fares project, the subsidiary Dobrolet, fell victim to Russia’s deteriorating relations with the West. The new carrier was forced to cease operations several months after its launch because of the sanctions imposed by the EU to punish it for operating flights to Crimea.
Earlier, Aeroflot CEO Vitaly Savelyev complained about weakening forward booking statistics and assumed that this might affect the company’s fleet expansion plans. Russia’s flag carrier phased out Ilyushin Il-96 and Boeing 767-300ER widebody airliners this year, and postponed the delivery schedule of its new 787s and A350s. Nevertheless, Aeroflot has not abandoned its low-fares experiment altogether. Dobrolet is preparing to be re-launched under a new brand.
Russia’s other two largest carriers, UTair and Transaero, are facing a very similar problem of huge short-term debts. UTair’s major shareholder, the Surgutneftegas oil company, backed the carrier by inserting 13.8 billion rubles into its charter capital, to be used in repaying the loans. In July this year, UTair launched a cost-cutting program, dubbed Impulse, to optimize the route network, streamline the aircraft ground handling and maintenance systems, and increase operational efficiency. As a result, the carrier expects to save up to 5 billion rubles annually in 2014-15.
Financial difficulties and shrinking demand forced UTair to postpone its fleet expansion plans, which had originally called for 22 new deliveries this year. UTair head Andrei Martirosov has been recently quoted by Russian media as saying that deliveries of the carrier’s Airbus A321 narrowbodies would slip to 2016-2018. The airline placed an order for 20 of the type in 2012, with deliveries through 2015. Only eight have been delivered to date. Another deal, signed in 2011, involved the purchase of 40 Boeing 737NG aircraft, including seven 737-900ERs and 33 examples of the 737-800 variant. UTair took delivery of six Boeing 737-800s this year, but further deliveries have been postponed indefinitely, according to Martirosov.
Transaero managed to solve its financial difficulties by reaching an agreement with state-owned Sberbank in October for a long-term loan of 45 billion rubles. In a drive to improve its operational efficiency the airline also launched a new development strategy in 2013. It shifts the company’s development priorities “from quantitative to qualitative performance indicators”. CEO Olga Pleshakova was quoted by the business daily Vedomosti as saying that the program had allowed the company to save 5.9 billion rubles in 2013. According to her, the airline secured lower airport charges by reducing the take-off weight for its widebody Boeing fleet and optimizing the engine maintenance programs, agent commissions, and renting expenses.
Transaero, which is the only Russian airline operating passenger Boeing 747s, has additionally slowed down the seat capacity expansion pace. According to Pleshakova, while in previous years this parameter was growing by 10% annually, this year the carrier took delivery of only 7 aircraft, bringing the overall number of seats just by 2.8%. In September, Transaero canceled an order for four Boeing 787s and opted for five 767s instead, at five times lower the lease rate. In 2015-16, Transaero is planning to add four Airbus A380s and four Boeing 747-8s, while its narrowbody fleet should expand through Boeing 737-800 and A321 deliveries.