Protectionism to make a return in Russia


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Russian aviation has been undergoing serious re-evaluation in recent weeks. Coupled with the steep downturn in the country's financial markets, all the signs are that this will result in a significant shift in aviation policy, turning back several years of laissez-faire operations. In order to introduce some stability amid the turbulence, Prime Minister Putin has already actively intervened, pushing the nation's regulatory authorities to become much more proactive.

The turning point came when, just as Russians were returning from their summer holidays at the end of the school break, AiRUnion's stretched finances finally cracked. Its fuel suppliers, facing a mounting debt - reportedly billions of roubles - refused to extend further credit, effectively grounding the various airlines of the idiosyncratic airline grouping. This threatened to strand tens of thousands of people.

Mr Putin stepped in, directing his Transport and Communications Minister to provide sufficient fuel to last until 14-Sep-08, at state expense, in order to get everyone home. Shortly afterwards, the AiRUnion group of carriers was directed to move its operations, almost overnight, from the aggressive and privately run Domodedovo Airport, to nearby Vnukovo, causing temporary chaos in its own right.

The new combination, gathered around a Muscovite favourite, Atlant-Soyuz, becomes a carrier of greater substance (albeit still relying heavily on a largely antiquated fleet).

Russian airlines domestic and international passenger numbers;
7 months to 31-Aug-08

Note: (i) AiRUnion will include Krasnoyarsk, Atlant-Soyuz, Domodedovo and Samara airlines; (ii) Atlant-Souyz is also shown as a separate entity to illustrate its independent size
Source: Centre for Asia Pacific Aviation & TCH

Simultaneously, and apparently in some ways connected with these developments, official concerns were raised about independent LCC, Sky Express', financial position. This led the LCC's management to issue a statement at the end of the week that it was "surprised to read the comments from Mr. Bachurin, Head of the Russian Aviation Agency," and asserting that it did "not have any extraordinary debts to our suppliers and we have not suffered, and do not expect to suffer, any operational disruptions as a result. We do not have any bank debt at all, and have a strong group of shareholders, including the European Bank of Reconstruction and Development."

It continued, "our major airport partner, Vnukovo, has issued its own statement today reiterating that there are no difficulties between us and negative comments are most unhelpful to stable companies which are trying to expand Russian aviation. Sky Express is taking delivery of our 10th aircraft shortly and look forward to continued growth over the next months and years, bringing the Low Cost model to the Russian market."

Assuming credibility of the Sky Express response, the official statement suggests signs of commercial intervention; rumours are circulating that the government will in future restrict the activities of LCCs, as it seeks to retrieve a semblance of profitability in the Russian airline market. In that scenario, the last thing it wants is an aggressive and independent airline with a young fleet upsetting a more stable future.

When an Aeroflot Nord aircraft crashed last week, a further level of concern was reached. Aeroflot quickly announced that it would cease codesharing and replace the affiliate carrier's B737-500 operations with its own newer aircraft. But the accident will only reinforce the official desire to assert more direct control over an industry that was apparently getting out of hand.

While a liberal entry policy has stimulated rapid changes, the antiquated fleets of some of the country's major carriers, along with a cavalier attitude to profitability, have provoked a clearly unsustainable operating environment. Russia apparently needs time to catch its breath. Mr Putin and his government will have no qualms about reversing the previously relatively liberal direction, in favour of more protective and predictable conditions.

This is hardly likely to benefit consumers and, if sufficiently heavy handed, will only serve to slow the process of Russia's aviation renewal.

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