More Russian Carriers Have Their Backs to the Wall

Transaero is not alone
The sharp devaluation of the rouble during the past weeks has led to a deterioration of most Russian carrier’s economic standing. Some Russian aviation experts even indicate that collective Russian airline losses for 2014 could very well be up to six times higher than 2013 and reach a minus of more than US$ 720 million.

Polet and Samara Airlines have both had their AOC’s terminated last week and apparently Russian Sky has joined the list in the past days.

Polet, which was founded in 1988 and which has been in financial woes for a long time, operated a fleet of three AN124 cargo aircraft as well as two AN148 passenger planes on internal Russian routes. This is the oldest privately owned airline in Russia, and one of the most respected. Its owner, Anatoly Karpov, remains in a fighting mood and has stated that the carrier will reinstate flights again in the near future. Volga Dnepr refused to take over Polet’s AN-124 aircraft, so the best bet would be to try and get them airborne again soon.

Air Samara, a small outfit running three KingAir 350 aircraft suffered the same fate during the past weeks.

UTair, the third largest Russian airline and which operates a large fleet of mostly narrow bodied Boeing aircraft is said to be also in discussion with the government in order to gain credit agreements which can ensure that payments, especially for aircraft leases, can be upheld. The carrier has started cutting its fleet down by 40% and has grounded or returned 46 aircraft to its lessors due to not being able to pay lease bills. The aircraft are a mixture of Airbus A321s, Boeing 757-200, B737-800, B767-200/300 and also Bombardier planes.
Market experts are saying that UTair will end 2014 with a minus of 6.8 billion roubles which apparently does not include the losses of their daughter company UTair Ukraine.

There are many new carriers which have sprung up in Russia during the past few years and who have been able to take advantage of the boom in passenger traffic to vacation destinations within the region and other parts of the world.
This traffic is declining fast due to the rouble being in freefall.
One of those affected most by this situation is said to be I-FLY, whose CEO Eugeny Filatov, ex Volga-Dnepr UK, already in November reported a 49% decline in passengers due tour agencies having lost their customer base.
And - they are not alone - most charter operators flying for other travel agencies have similar decreases in business.

Aeroflot and AirBridge Cargo Airlines
Aeroflot (SU) has been cashing in on up to US$600 million in 2014 on the so called “overflight fees” (royalties) levied on other carriers passing through Russian airspace. This was supposed to end in 2014, assured by the Russian government when joining the WTO in 2012, but there is little hope of that now.
The agreement was that Aeroflot should share some of this massive amount of money with other Russian carriers as well as using part for the development, modernization and salary payments of the Russian Air Traffic Control (ATC) system.
The Russian national carrier indicated already in mid-2014 that it had by then run up a loss of around 3.4 billion roubles.
And - that was when the rouble was still strong.
Now - in order to try and remain somewhat financially stable, SU is holding onto all of the monies cashed for over flight rights and the other carriers and the ATC organization will not see a share. This will further impact Transaero, ABC and others who once received a share of the royalties.

AirBridge Cargo, the Volga Dnepr daughter which operates a fleet of Boeing 747-400 and 747-8 freighters may well be the carrier which can best handle this serious situation.
The airline operates almost only on international freight routes and it is estimated that well over 90% of their revenues are in foreign currencies.
On top of this, conservative estimates show that only 50% of ABC’s costs are in roubles and this makes their recent management move to Luxemburg a little less likely to produce the rewards expected with regards to cost savings.
However - the more the situation deteriorates, the more dangerous it can become for the very successful Russian freight carrier.
Imports into Russia continue to dry up and not only because of the rouble’s decline, but also due to embargoes levied by the Russian government on EU and North American goods and vice versa. 2014 imports were mostly ordered and paid for in advance; 2015 still has to show what the Russian importers and manufacturers will do to regarding transport and purchasing. If foreign goods are a necessity and even available under sanctions, the choice of airfreight will be an expensive luxury to get it to the market when paid in roubles.

These are not good days for Russian aviation
The country has come a long way in the past two decades in modernizing its aviation product and gearing itself towards the (once) massive demand for passenger and freight traffic into and out of the country.
Generally speaking – “airlines come and go.”
Here however, the danger is that the complete system will fall apart and that maybe repercussions will come from the Russian side where over flight rights for many western carriers will be restricted or even prohibited, as recently already indicated by Prime Minister Dmitry Medvedev (CargoForwarder Global reported). However, that scenario does not seem likely at the moment as that would absolutely ensure the demise of Aeroflot when there are no government cash infusions available.

The most likely outcome will be that the fittest airlines only will survive (with government help) and less choice for the consumers as a consequence. When this happens, and hopefully sanity prevails and normalcy returns, Russia may be an even more attractive as a port of call for foreign airlines.

John Mc Donagh