UTAir in Despair

Russia's third largest airline is close to bankruptcy. According to local media the airline has piled up liabilities exceeding 175 billion roubles (approx. 2.4 billion euros). Although a month ago the Russian government promised to inject large amounts of cash into the ailing carrier to prevent it from biting the dust, the Kremlin meanwhile seems to have scrapped such plans.

UTAir’s counters – seen here in Moscow Vnukovo Airport – might be closed soon  / source: hs
UTAir’s counters – seen here in Moscow Vnukovo Airport – might be closed soon / source: hs

Is there still a chink of light at the end of UTAir’s dark tunnel? Currently, it’s not really detectable. It needs a miracle or a white knight has to step in fast to save the carrier from becoming defunct. That’s today’s gloomy truth. Too high are the debts, too marginal the earnings from passenger and freight transports to enable the airline to continue operating for long. 

The number of defunct Russian airlines is growing fast
UTAir's unfolding bankruptcy would be in line with a number of carriers such as Moskovia, Bylina or Ak Bars Aero who either lost their AOC or became insolvent as happened to Dobrolet and Tatarstan Air in 2014, followed by VIM-Avia just some days ago.
However, unlike VIM or Tatarstan Air, to name just two that were grounded, UTAir is a real heavyweight in the Russian aviation landscape. It offers passengers and cargo clients a dense route of mainly domestic flights but serves some neighboring CIS and Eastern European countries as well. In addition, UTAir is by far the largest helicopter operator and thus of indispensible value as an air carrier in difficult terrain for the national energy, mineral or lumber industry.

Moscow shows an ambivalent attitude
Interesting is the fact that the Russian government granted financial help to ailing Transaero only three weeks ago but seems to withhold its support for UTAir. Could it be that Transaero that carries mostly Russian tourists to leisure resorts at the Red Sea or the Mediterranean coast is of higher political value than UTAir? After all, the Putin government could lose support from the many travelers if their preferred leisure carrier would go broke and be blamed for its fate.
In contrast, UTAir is serving mostly domestic routes, resembling national networks operated by Aeroflot, S7, Rossiya and some regional carriers. Hence, travelers and cargo consignments flying within Russia are offered plenty alternatives should UTAir disappear, with little protest expected.
Speculation, of course, but there are mounting indications pointing towards this direction.

Market consolidation
Should UTAir bit the dust, as expected by most aviation analysts, it would pave the way for the consolidation of the Russian airline industry. This unspoken strategy might also be behind the Kremlin’s obvious lack of interest for granting the carrier further state support to keep it in the air.
This crash scenario is in line with contents of a letter sent by the helmsmen Vitaly Saveliev of Aeroflot and S7’s Vladimir Obyedkov to the Russian government, suggesting refraining from supporting competitor UTAir financially. In their note they point out that UTAir has pursued a suicidal strategy for many years by selling tickets at cheap rates to generate sufficient cash flow for financing its risky expansion policy. This self-inflicted behavior led to the current financial turbulences the carrier is facing, state managers Saveliev and Obyedkov unanimously. However, particularly Aeroflot’s Saveliev omits adding that his state airline is subsidized by its European competitors by cashing in the lion’s share of the royalties, BA, AF-KL, LH and others have to pay for crossing Siberian air space on their roundtrips between Europe and Far East.

Prospect of reduced VAT
In the meantime, the Kremlin has refused airline demands to nullify value added taxes for domestic flights. Instead, Moscow proposed to reduce the levied VAT from currently 18 percent to 10 percent, in order to ease the national carrier’s strained financial situation.
This is caused by a combination of factors

  • The sharp devaluation of the rouble against the dollar and euro, resulting from the sanctions imposed by the West as reaction to Putin’s aggressive Ukraine polcy
  • The fall of the oil price which harms Russia’s budget severely
  • Falling demand for domestic and intercontinental air travel due to a decline of business travelers and the crisis of the tourism market since Russia’s annexation of the Crimea
  • A remarkable reduction of industrial and consumer goods produced in EU member states and transported by Russian carriers in the belly holds or main decks of their aircraft to the final consignees in Moscow, St. Petersburg, Novosibirsk or elsewhere. 

As things stand, UTAir seems to be the next victim of the Russian aviation crises. Presumably, it won’t be the last airline going out of business.

Heiner Siegmund

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