10-Apr-2013 11:00 PM

Armenia sees almost 25% capacity reduction from Armavia suspension

Analysis

Armavia suspended operations on 01-Apr-2013 after filing for bankruptcy amid mounting debts. The Armenian national carrier was, until then, the largest carrier operating from Armenia with services across Eastern and Central Europe and into the Middle East.

The loss of Armavia has resulted in capacity to/from the country reducing by about 23%, according to CAPA and Innovata data. But already three carriers from Western Europe have agreed to increase capacity to Yerevan in the wake of Armavia's suspension of operations. A number of Eastern carriers also plan to launch services to the country as part of their summer 2013 programmes.

Armavia's financial issues were apparent in late 2012 with Yerevan Zvartnots International Airport temporarily suspending the servicing of the airline's aircraft twice within one week in late Oct-2012 due to unpaid debts of USD3.3 million. This was above the agreed debt level of USD1 million.

Large debts to both Armenian and Russian organisations

In Nov-2012 the airport's deputy director Pavel Manukya said the airport was considering completely banning the airline from the airport and was planning to file a lawsuit against the airline. At around the same time, the airline was reportedly considering offers from various parties interested in purchasing the airline.

Armavia recently had a new shareholder enter into the company, however this shareholder was not disclosed despite Yerevan Zvartnots requesting the new shareholder's name to be revealed.

Armavia's liquidity issues saw the Armenian Government state its tender with Armavia may be terminated. The government planned to announce a decision on the future of its tender agreement with Armavia on 22-Apr-2013.

Russian Federal Air Transport Agency (Rosaviatsia) confirmed the suspension of operations by Armavia on 01-Apr-2013 and stated the airline's debt to Russian organisations to be RUB54.2 million (USD1.8 million), including USD290,000 for Russian air navigation services and almost RUB44.3 million (USD1.4 million) to Moscow Vnukovo International Airport.

The airline also reportedly had debts to fuel suppliers. Meanwhile, Sukhoi reportedly stated plans to sue the airline for over USD1.385 million in relation to a debt for the unfulfilled terms of an agreement for SSJ100 aircraft. Armavia's total debt (including debts to both Armenian and Russian organisations) is yet to be disclosed but may increase if Sukhoi's lawsuit is successful.

Armenia: a purely international aviation market

Armenia's aviation market is purely international, with no domestic air transportation networks. The majority of air traffic to the nation is to Yerevan Zvartnots International Airport, handling about 97% of total traffic, with the remaining 3% of traffic handled by Gyoumri Leninakan Airport.

Gyoumri Leninakan Airport currently features one airline, Russia's VIM Airlines, which operates three times weekly Moscow Domodedovo-Gyoumri Leninakan service using Boeing 757-200 equipment. About 1,300 seats per week are offered on the route.

Up until Armavia's bankruptcy, Armavia was the largest carrier operating from Armenia and was based at Yerevan Zvartnots International Airport. Armavia operated a network of 18 destinations, with its main market being Eastern and Central Europe. According to Innovata data, Eastern and Central Europe accounted for about 95% of Armavia's total capacity while the Middle East accounted for the remaining 5%. The airline operated around 10,200 seats on its European network and only about 500 weekly seats across its Middle Eastern network.

The airline's network was operated using a fleet of seven aircraft including one A320, three Boeing 737-500s and three Bombardier CRJ200LR aircraft. In late 2012 the airline also operated a SSJ100 aircraft however this was returned to Sukhoi due to a dispute between the airline and manufacturer over maintenance costs.

Armavia top 10 international routes based on capacity (seats): 01-Apr-2013 to 07-Apr-2013

Russia was Armavia's main market, with seven of its top 10 destinations being Russian. Its top two, Moscow Vnukovo and Moscow Domodedovo, made up 65% of the airline's total capacity offered per week (about 7,000 seats out of a total of almost 11,000 seats per week). Yerevan-Moscow Vnukovo service made up 48% of the airline's total capacity alone.

Yerevan Zvartnots International Airport main gateway into Armenia

Yerevan Zvartnots International Airport served 25 airlines (including Armavia) at the time of Armavia's bankruptcy with 34 passenger destinations (30 to Europe, three to the Middle East and one to Asia-Pacific). Eastern and Central Europe is Armenia's main market, with around 85% of total capacity (about 39,000 seats) attributed to the region. This is followed by Western Europe, the Middle East and Central Asia with around 8%, 7% and less than 1%, respectively. The majority of airline traffic to and from Armenia is full service, as LCCs account for about 3% of capacity in the market.

Armenia international capacity share (% of seats) by region: 01-Apr-2013 to 07-Apr-2013

Armavia was the leading carrier in its home market but not by a large margin. Based on schedules originally filed for the week commencing 1-Apr-2013, Armavia accounted for 23% of capacity in Armenia.

Post-Armavia, the four Russian carriers of S7 Airlines, Aeroflot, Donavia and UTair Aviation have become the leading four carriers in the Armenian market. A fifth Russian carrier, Transaero Airlines, also makes the top 10 list of airlines into Armenia based on weekly seats offered in the market.

Armenia international capacity (seats per week) by carrier: 01-Apr-2013 to 07-Apr-2013

Western and Eastern European airlines increasing frequencies to Yerevan

Yerevan Zvartnots Airport reportedly reached an agreement with Alitalia, Austrian Airlines and CSA Czech Airlines to increase frequencies to Yerevan on 04-Apr-2013. The increases will reportedly see Alitalia operate three times weekly service and Austrian Airlines and CSA Czech Airlines each operate daily service. According to Innovata, Alitalia currently operates twice weekly Rome Fiumicino-Yerevan service, Austrian Airlines five times weekly Vienna-Yerevan service and CSA Czech Airlines five times weekly Prague-Yerevan service. The increases will see Austrian Airlines and CSA Czech Airlines further strengthen their positions in the Armenian market, where they ranked as the sixth and eighth largest carriers when Armavia was still in the market.

Eastern carriers are planning new routes to Yerevan in the coming months including Aeroflot, NordStar and Ukraine International Airlines (UIA). Aeroflot plans to launch Sochi-Yerevan service while NordStar plans to launch weekly Krasnoyarsk-Yerevan service on 01-May-2013 using Boeing 737-800 equipment. UIA plans to launch services from Kiev Boryspil, Odessa and Donetsk to Yerevan in Apr-2013, Jun-2013 and Jul-2013 respectively. Kiev Boryspil-Yerevan service was previously operated by Aerosvit until it suspended operations in late Dec-2013/early Jan-2013.

European low-cost carriers may also identify opportunities in the market with Armavia's exit. UAE low-cost carrier flydubai was already the seventh largest carrier in the Armenian market prior to Armavia's suspension of operations. It is currently the only budget carrier operating in the country.

The same issues for low-cost carriers operating in Eastern countries remain though, including high airport charges and competition rules which often can make it difficult for low-cost carriers to establish themselves in different Eastern markets.

No other Armenian airline able to take Armavia's place

There are no other Armenian carriers able to take Armavia's place at this point in time. While Armenia's General Department of Civil Aviation has issued 11 Air Operator's Certificates (AOC) to airlines including Armavia, the majority of these airlines are small charter and cargo operators such as Air Armenia, Vertir Airlines and Veteran Avia. The only Armenian scheduled passenger service operator currently is Atlantis European Airways. Atlantis operates leisure services and currently operates scheduled four times weekly Yerevan-Prague service with its sole A320 aircraft in addition to charter services.

Thus, Armenia will be relying heavily upon foreign carriers to maintain links between the country and the rest of Europe. While Alitalia, Austrian Airlines and CSA Czech Airlines have already responded with some frequency increases, there is still a significant gap left by Armavia's suspension of operations. The increased frequencies and new routes by Eastern carriers as part of their summer 2013 programmes will also help fill the capacity gaps left by Armavia.