Losing out

The recent decline in passenger traffic figures has intensified competition both on Russia’s domestic routes and internationally. In the latter case Russian carriers often have to face off against much stronger rivals. Although the level playing field on most international routes is enforced by intergovernmental agreements, this does not automatically guarantee equality of market standings. As if this weren’t enough of a setback, the Russian aviation authorities are unwittingly playing into the hands of foreign airlines.
The list of foreign carriers operating to Russia has been growing over the past eight years, prompted by a consistent increase in passenger numbers. A majority of the newcomers — Emirates, Thai Airways, Etihad, Niki, United, Singapore Airlines, Iberia, bmi and TAP Portugal — chose Moscow’s airports as their destinations. Others, such as Air Berlin and Germanwings, opted for both the capital and St. Petersburg. Those already well established on the Russian market carried on with their expansion plans. Valery Okulov, currently a deputy transport minister, repeatedly stressed during his previous career as the head of Aeroflot airlines that Russia’s fastest growing carrier was Lufthansa. Indeed, Lufthansa regional director for Russia and the CIS Ronald Schulz admitted in August 2009 that his airline’s passenger traffic to and from Russia had dropped by just 6%, compared to the average decrease of 15% across the Russian air transport scene.
The ever-growing popularity of foreign airlines in Russia owes much to their aggressive use of web-based services, and also to the progressive availability of the Internet in Russia. Even though the penetration of banking cards in Russian households remains relatively insignificant, online ticket sales have considerably expanded the airlines’ reach.
The economic crisis has forced some international carriers to revise their expansion plans for Russia. American Airlines, for example, stopped flying between Chicago and Moscow. Norwegian has cancelled its service from Oslo to Moscow, although the airline’s flights to St. Petersburg continue. Other players, however, have carried on regardless. El Al last winter introduced a Moscow-Elat route, while Singapore Airlines has launched an additional Singapore-Moscow-Houston service.
As for demonstrating the Russian flag abroad, the country’s largest carrier Aeroflot remains the only significant player on the international market. The current stern regulations allow other Russian companies, such as Transaero, S7 Airlines or UTair, to launch scheduled international services, but they certainly do not guarantee the most lucrative city pairs for new entrants. Aeroflot, for its part, constantly faces competition from the strongest foreign carriers on each of its foreign routes, which does not make the airline’s market position any more secure.
International flights from St Petersburg are operated by Rossiya Airlines. Although this market segment has seen lesser foreign presence, competition from abroad is nevertheless giving the Russian airline a hard time. Sources at Rossiya name the German market as an example, where there is no parity between the Russian and foreign carriers. "The German airlines, which possess much greater resources, control the routes to Russia," they say, quoting media reports which assert that Lufthansa carried 430,000 passengers from St Petersburg to German destinations in 2008 — compared to just 155,000 for Rossiya. The sources say the Russian aviation authorities are not doing enough to protect the interests of national airlines flying to Germany.
Kaliningrad-based KD Avia also attempted to strengthen Russia’s footing on international routes. The airline spent two years evolving its base at Khrabrovo airport into a massive hub with the idea that passenger from across Russia could fly to Europe via Kaliningrad. But months of soaring fuel prices, closely followed by the economic downturn, affected the volume of passenger traffic and ultimately brought KD Avia to bankruptcy. The government pledged financial help but the carrier never got any and eventually folded. Now, the demise of a powerful rival might have called for a celebratory party at any of the remaining Russian airlines, but the country’s air transport in general lost a share of the international market as the result. Aeroflot promptly announced its intention to set up an operation in Kaliningrad and maybe even move a portion of its fleet there, but the timeline for this plan has not yet been defined. In the meantime, in November LOT Polish Airlines is to resume the Warsaw-Kaliningrad service it discontinued in September 2008. LOT does not conceal that its return to the region has become possible thanks to the death of KD Avia. The Polish airline will fly ATR 42 and 72 turboprops to Kaliningrad, which appears to be a sensible decision given the decreased passenger traffic.
KD Avia’s bankruptcy may also give an extra boost to Latvia’s AirBaltic, which already operates scheduled services to Kaliningrad. AirBaltic vice president Janis Vanags reported a 15% increase in passenger traffic to and from the Russian exclave. The airline, which previously performed only point-to-point services between Kaliningrad and Riga, has recently started offering connection flights with a stopover in the Latvian capital.
Kaliningrad and St Petersburg are the two most prominent examples of how domestic airlines have been losing out to foreign competition in western Russia. It has long been an open secret that residents of these two particular regions prefer to catch a coach to the nearest airport in the neighbouring country (Finland for St Petersburg and Poland for Kaliningrad) and fly low-fare from there to anywhere they fancy in Europe.
The bilateral agreements governing commercial flights between Russia and foreign countries are rather restrictive on Russian airlines planning to break into international markets. Ironically, these same agreements have recently started impacting the international operations of Aeroflot, Russia’s designated carrier on most international routes. More and more often, Russian carriers that are normally restricted to their domestic networks sign interline and prorate agreements with foreign carriers. This enables them to offer connection flights for much less than the sum total of all the separate sectors of those flights. Being unable — for legal and/or economic reasons — to fly international routes on their own, these airlines collect passengers from all over Russia and pass them on to their foreign partners. Transaero, for one, has recently supplemented its existing interline agreement with Lufthansa with a prorate agreement, and has also struck a code-sharing deal with Austrian Airlines. S7 offers connection services jointly with several foreign carriers. In autumn 2009 the airline introduced a range of attractive air fares for one-stop flights from Russian regional airports to foreign destinations. The fares apply if one of the flight’s legs is operated by S7, and the other one by a partner airline. Possible routes include the following combinations: from a Russian regional airport to Moscow Domodedovo and on to foreign destinations; from Novosibirsk to South East Asian countries; and from Domodedovo to destinations abroad with a stopover at a foreign hub. The Russia & CIS Observer has learnt the details of one such connection agreement, between S7 and Etihad airlines. According to Etihad sources, a passenger travelling from a Russian regional destination will fly the Moscow leg almost for free; their only charge on that leg will be the applicable airport fee.
One can only praise the enterprising Russian airlines, which constantly devise yet new ways to develop further, but on the whole the current situation does not benefit Russian civil aviation at all. Russian airlines cannot hope for an equal dialog with foreign carriers, who are well aware of their inability to independently develop international route networks. Aeroflot, meanwhile, dissipates its resources by taking on every competitor in sight, rather than focusing on what is really important.