19-Dec-2012 8:05 PM

Kuban Airlines ceases operations, the last vestige of LCC SkyExpress? UTair gains most

Analysis

Kuban Airlines ceased operations on 11-Dec-2012, filing for bankruptcy with the Krasnodar Region Arbitration Court. It had been in financial difficulties for some time. Kuban Airlines accounted for just under 16,000 seats per week to Russia's aviation market, ranking it the 20th largest carrier in the country based on weekly seats offered, according to Innovata data.

The bankruptcy filing also apparently spells the end for the first of Russia's mostly unhappy LCCs. Established in 2006, the former self-standing LCC, SkyExpress, had been folded into Kuban in Oct-2011 and operated under its own brand as a low cost division under Kuban's AOC, while retaining the SkyExpress identity.

Some Russian carriers have already signalled their intention to step in to replace services on some routes and UTair stands to benefit most from the collapse, particularly on domestic services from Moscow Vnukovo Airport.

Summary

Kuban Airlines filed for bankruptcy on 11-Dec-2012 due to financial difficulties.
The bankruptcy also marked the end of Russia's first low-cost carrier, SkyExpress.
UTair is expected to benefit the most from Kuban Airlines' collapse, particularly on domestic services from Moscow Vnukovo Airport.
Kuban Airlines operated mainly domestic routes, with only three international routes.
Ak Bars Aero and UTair have already taken over some of Kuban Airlines' routes.
The collapse of Kuban Airlines has had a limited impact on Krasnodar and Moscow Vnukovo Airport, with only two small routes currently left unserved.

Kuban was a significant player at Krasnodar and Moscow Vnukovo

Kuban Airlines was based at Krasnodar Pashkovsky Airport with a secondary base at Moscow Vnukovo Airport, although it operated the majority of its services from Moscow. In the week its operations were suspended, the airline was the third largest airline based on overall seats at Krasnodar Pashkovsky Airport - the second largest internationally and the fifth largest domestically.

At Moscow Vnukovo Airport Kuban was the sixth largest airline (based on overall seats) and the fourth largest domestically. It only operated domestic services at Vnukovo.

Krasnodar Pashkovsky Airport system capacity (seats per week) by carrier: 10-Dec-2012 to 16-Dec-2012

Moscow Vnukovo Airport domestic capacity (seats per week) by carrier: 10-Dec-2012 to 16-Dec-2012

Kuban Airlines' bankruptcy followed the introduction of new regulations by Rosaviatsia, Russia's Federal Air Transport Agency. These regulations required scheduled airlines to operate a minimum of eight aircraft with a capacity of 55 seats each. Kuban Airlines was unable to comply with these regulations as it had an operating fleet of seven aircraft including three A319s, two Boeing 737-300s and two Boeing 737-500s. It had already been struggling financially with a substantial debt overhang.

Kuban mainly operated a domestic Russian network with around 83% of its capacity allocated to the domestic market. But it also operated three international routes, from Krasnodar to Istanbul Ataturk (Turkey), Yerevan (Armenia) and Tel Aviv (Israel).

Kuban Airlines' three international routes based on capacity (seats per week): 10-Dec-2012 to 16-Dec-2012

The airline's top domestic route connected its Moscow Vnukovo and Krasnodar hubs, providing 3,725 one-way seats per week, according to Innovata data.

This was followed by five routes from Moscow Vnukovo to other domestic Russian destinations. Three other domestic routes from Krasnodar were also in the top 10 as well as one from Saint Petersburg to Nizhnevartovsk Airport.

Kuban Airlines top 10 domestic routes based on capacity (seats per week): 10-Dec-2012 to 16-Dec-2012

Kuban Airlines' routes operated until 11-Dec-2012

Route	Other operators
KRR-IST*	Pegasus Airlines (to SAW)
KRR-EVN*	Armavia
KRR-TLV*	N/A
KRR-VKO	UTair / Yakutia
VKO-NAL	Grozny Avia
VKO-KUF	UTair
VKO-KGD	UTair
VKO-PEE	UTair
VKO-CEK	Red Wings
KRR-DME	S7 Airlines / Transaero Airlines / VIM Airlines
KRR-LED	Rossiya / Yakutia
LED-NJC	N/A
KRR-AER	Ak Bars Aero**

Kuban's suspension left three routes without any service: Krasnodar-Tel Aviv, Saint Petersburg-Sochi and Saint Petersburg-Nizhnevartovsk. This excludes Krasnodar-Istanbul Ataturk service, as Pegasus Airlines continues to operate to Krasnodar from Istanbul Sabiha Gokcen Airport. But carriers including Ak Bars Aero and UTair have said they will take over some routes now vacated (or which have seen significant drops in capacity) as a result of Kuban Airlines' collapse.

Ak Bars Aero quickly announced plans to launch Krasnodar-Sochi service from 11-Dec-2012. The airline is now operating 10 weekly flights on the route using Bombardier CRJ200 equipment. This has resulted in capacity on the route increasing significantly compared to Kuban Airlines' previous weekly service on the route. There are no other airlines currently operating on the route.

Krasnodar-Sochi is Ak Bars Aero's first route at Krasnodar. The carrier already had four domestic destinations from Sochi, according to Innovata data.

UTair said on 12-Dec-2012 it would launch daily service on Moscow Vnukovo-Nalchik, which was Kuban's second largest route, on 15-Jan-2013. Grozny Avia also currently operates on the route, according to Innovata.

UTair to benefit most from Kuban Airlines' collapse

UTair will benefit the most from Kuban Airlines' collapse as it was the sole competitor on three routes that Kuban operated. UTair is by far the largest carrier at Moscow Vnukovo.

UTair now no longer faces competition on services from Moscow Vnukovo Airport to Nalchik, Samara and Perm while it will have one less competitor on Moscow Vnukovo-Krasnodar service.

In Jun-2012 Kuban Airlines had fended off rumours it planned to cease scheduled services in order to become a charter carrier from winter 2012. While no announcements have yet been made, it is possible Kuban could resume services in 2013 as a charter operator.

Regardless, Kuban Airlines' collapse has, and will have, only a limited impact at both of its bases - Krasnodar and Moscow Vnukovo Airport, especially as Ak Bars Aero and UTair have already stepped in to take over two of Kuban Airlines' former routes, and as a result only two very small former Kuban routes are currently left unserved by any carrier.

Vale SkyExpress, as Russia's LCCs falter

The exit of Kuban would appear also appear to bring down the final curtain on Russia's first LCC, SkyExpress.

The airline was established in 2006 with investment from KrasAir CEO, Boris Abramovich, the European Bank for Reconstruction and Development, Altima Partners and others. SkyExpress operated scheduled services to destinations in western Russia from its Moscow base and, when it got into financial problems back in 2011, was folded into being a division of the Kuban parent operation, keeping its own brand. Russia's underdeveloped LCC market, often distorted by an interventionist government flavoured by favouritism, has not been hospitable to private investment. Earlier reports suggested that the Arbitration Court of Krasnodar had in fact already technically declared SkyExpress bankrupt on 17-Sep-2012.

The Oct-2011 bankruptcy of Avianova, Russia's fastest-growing LCC, had highlighted the difficulties of emerging markets that lure investors and their LCC start-ups into complex but evolving sectors with promises of explosive growth. Avianova's bankruptcy followed financial difficulties after a dispute between its two shareholders, Russia's A1 Investments and US-based LCC investor Indigo Partners, showcasing the risk of foreign-managed operations in emerging markets where old habits can die hard.

Kuban Airlines ceases operations, the last vestige of LCC SkyExpress? UTair gains most

Kuban was a significant player at Krasnodar and Moscow Vnukovo

UTair to benefit most from Kuban Airlines' collapse

Vale SkyExpress, as Russia's LCCs falter

Want More Analysis Like This?