Losing Ground

The negative consequences of the global financial crisis have affected the Russian market for business air travel, which shrank by an average of 35% in 2009 according to the Russian United Business Aviation Association (RUBAA). The current state of the secondary market does not encourage optimism either: of a total nationwide bizav fleet of 300 to 400 planes, some 150 Russian-owned aircraft were put up for sale last year. And yet a series of consistent measures taken – first to partially lift the import duty on business aircraft and then to permit ownership registration – leave some hope that the industry will further develop. One source of optimism was the seasonal peaking in the frequency of bizav flights around the New Year, which exceeded the previous year’s results by 1.5 times. Overall, the first signs of revival are beginning to be seen against the general background of uncertainty.
The global business aviation sector is notoriously sensitive to any fluctuations on the financial markets. Last year’s economic crisis was no exception — it led to a sharp decrease in international demand for bizav services. Russia suffered just like any other country, with the frequency of business aviation flights plummeting by 35% in 2009. The overall market slump was punctuated by modest increases in frequency — in April, July and August, and December. "Last summer saw a noticeable rise [in demand], and we performed as many flights as the same period in 2007, although the frequencies in early 2009 approached the 2006 levels," says Sergey Vekhov, Sales and Development Director at Moscow-based Air Charter Service. He is seconded by Igor Grigoryev, deputy chief for development at the Moscow Sky bizav operator, who says that "the frequency of chartered business aviation flights in July and August grew by 30% against the earlier period of crisis-induced recession". RUBAA Vice President Yevgeny Bakhtin also notes the summer and New Year peaks, but warns that seasonal increases in demand cannot be viewed as signs of an improvement. This viewpoint is backed up by last year’s spring slump, and by the anticipated drop in demand after this year’s New Year holidays.
Most operators agree that the highest peak of demand for bizav flights was in December 2009, when the frequency of charters exceeded the November results by nearly 100%. It was also 1.5 times higher than the December 2008 levels, suggesting that the market had reached the bottom of recession. Interestingly, the seasonal frequency increase did not affect the pricing: Air Charter Service notes that the average fare remained 10-15% below the baseline 2008 levels throughout the year. Bakhtin adds that the price tag for a charter flight in 2009 would repeatedly drop to just above the cost of operation level.
Although the cyclic recession, exacerbated by the financial crisis, had a negative impact on Russian business aviation, last year saw the emergence of a reassuring trend. It came obvious that the country’s bizav sector had started to transform into an independent transport industry. The considerable reduction in the frequency of business aviation flights did not bring about a comparable drop in the numbers of passengers flown. Air Charter Service’s Vekhov says that "the volume of business charters decreased by 20 to 30%, depending on the month, whereas the number of passengers on each individual flight grew significantly". Bakhtin concurs, saying that "Russia’s need for individual air transport services is so great and irreplaceable by other types of transportation that even the economic crisis is unlikely to stop the development of business aviation in this country".
Throughout last year, the recession of the country’s business aviation sector was evident from the worsening situation on the secondary bizav market. Significant numbers of aircraft were put up for sale from the second half of 2008 to the second half of 2009, dramatically overheating this market sector. According to RUBAA, out of some 300 business aircraft operated in the interests of Russian owners, up to 40% found themselves on the secondary market in 2009. The situation was further worsened by slack demand (not a single aircraft was sold from October 2008 to February 2009, and the total number of sales in 2009 did not exceed 15). The oversupply of second-hand business aircraft impacted on their market value. As a result, the average sale time for a lot on broker websites skyrocketed to six months. The stagnation led to multiple withdrawals, which somewhat cooled off the market — but the overall situation has not changed for the better.
Last year’s hopes for a redistribution of the charter air services market between Russian and foreign operators appear to have been dashed for the moment. It is a well-known fact that, when the sector was only forming in this country, Russian companies gave up a significant portion of the local market to foreign rivals. The crisis gave the national carriers a chance to expand their domestic presence. However, Moscow Sky believes, the recession has not influenced the distribution of market shares in any significant way. This is explained by the low financial potential of Russian operators and the strong pricing policy of their foreign competitors, who are expanding aggressively onto the Russian market.
Foreign carriers operate diversified businesses, so that a recession in one region is made up for by relative stability in another. This allows foreign operators to pursue more flexible pricing policies while offering high-quality services. One company particularly active in its expansion drive is VistaJet, with a fleet of 64 business jets, whose business interests span Europe, the United Arab Emirates, Hong Kong and Malaysia. VistaJet founder Thomas Flohr believes the Russian market harbors great opportunities for the fractional ownership model.
The short-term prospects for the Russian business aviation sector are hardly optimistic but not downright hopeless. The market players agree that the beginning of 2010 will be marked by a post-New Year decline in demand, a traditional trend regardless of the state of economy. There is little evidence, however, that this year’s drop will reach the critical low of January last year. The market appears to have hit the bottom of a recession cycle and is due to bounce back in the near future. On the other hand, the pace of recovery is unlikely to be fast. The key development factors — an economic growth and increasing revenues — are still not there. It is to be remembered that the business aviation market historically reacts to resumptions of economic growth with a lag of 18 to 24 months. Nevertheless, the positive changes that took place in 2009 — namely the passing of the bill on state registration of aircraft ownership rights — will undoubtedly stimulate further development of the sector. In addition, the long-awaited merger of Russia’s two business aviation associations has played a positive part in launching the work to develop a set of industry-wide rules. The newly formed RUBAA is expected to become a powerful lobby group for the sector. The Russian market players are becoming increasingly aware that it is only by uniting efforts that they can create the necessary conditions for a harmonious growth of the sector. This is a source of optimism in its own right.