Russia – could the strongest BRICs crumble?
While the rest of the world’s aviation prepares for economic storms, Russia’s aviation industry seems oblivious to the weather forecast. Aeroflot, still the largest Russian airline and the predominant flag carrier, continues to predict 30% growth this year while sitting on cash reserves of around USD3 billion.
And the largest domestic operator, Siberia Airlines (S7), will be keenly following the lists of airlines looking to delay aircraft deliveries. It is still flying a host of Soviet-era equipment as it rushes to convert to new aircraft, recently paying through the nose to lease four A320s from ILFC. Its passenger numbers were up 26% in the first half of 2008, “due first and foremost to the general positive growth trend in air travel on the Russian market”, which also grew by 23% overall.
Russia’s GDP grew at 8% in the first half, benefiting from high oil prices (although industrial production slumped in June – partly attributed to Russians watching the Euro football championship). Despite some signs of slowing, the outlook remains positive.
Things at the other members of the emerging market “BRIC” grouping are however not looking so rosy. In Brazil, Varig, now folded into LCC GOL’s empire and operating short haul under the VRG sobriquet, is largely withdrawing from long haul services, although GOL continues to be profitable.
India’s aviation system is for the time being in meltdown and going through what is euphemistically known as a consolidation phase; and China’s airlines, after years of predictable expansion, have recently experienced negative year-on-year contraction for the past two months – the first time this has happened since the SARS outbreak in 2003 and otherwise for around a decade.
But there are, as everywhere else, some potentially troubling signs for Russia. Despite a higher rouble, as the oil economy has pushed exchange rates up, inflation is well into double-digit territory and there are fears that the government’s 10.5% inflation target ceiling will not be maintained.
Air travel demand already may be faltering. Russia's Transport Clearing House reports Russian carriers handled 22.5 million passengers in the first half of 2008, up 19.9%, including 5 million passengers in Jun-08, up ‘just’ 8.7%. The figure is still positive (unlike India and China), but enough to drag the growth rate down from well above 20% in the first five months of the year. Aeroflot’s Jun-08 passenger numbers rose 13.7%, but the figure was well below the first five months, and has brought the year-to-date increase down to 16.2%.
Domestic passenger demanding growth in Brazil*, India, China and Russia**
*Brazil: RPK growth (exaggerated by VRG's withdrawal from long-haul flying); China, India and Russia: Passenger numbers growth
**Russia is total international and domestic for Jun-08 only – preliminary data
Source: Centre for Asia Pacific Aviation, CAAC, DGCA, The Transport Clearing House and Departamento de Aviacao Civil
It is still healthy growth, but shows even the high flying Russia is not immune to the pressures being experienced by the BRICs as the global economy slows.
In the January to May period (for which detailed data is currently available), toal international passenger numbers to/from Russia rose 24% to 7.9 million (or 45.2% of the total), including a 24.8% increase in traffic between Russia and foreign countries outside the CIS and a 20% increase in traffic between Russia and CIS states. Domestic passenger numbers rose 23.7% in the first five months of 2008 to 9.6 million (or 54.8% of the total).
According to the Clearing House, the “big five” Russian carriers (Aeroflot, S7, Transaero, UTair and Russia State Transport Company) accounted for 54.5% of the total international and domestic market in the first five months of the year. Aeroflot had 20.0% of the total, while S7 had a 12.7% share (along with its 16.1% domestic share). Transaero held an 8.5% share of the total market.
Russian aviation is extremely fragmented, with a further 25 airlines hold the remaining 45.5% of the market. A further slowing of demand as the economy cools could lead to further consolidation at this end of the Russian market.