No money

The previous global air transport crisis of 2001-2002 did not affect Russian airlines in any significant way: at that point the country’s air transport market was still shaping up after the difficult 1990s, and the fear of flying that descended on many countries post 11 September 2001 was not really a factor for the Russian flying public. Nowadays, although there remains considerable developmental disparity between the air transport sectors in Russia and elsewhere (first of all the USA, Europe and South East Asia), the Russian market is suffering just like any other country’s. Some of the problems that have befallen domestic airlines are similar to those facing their international counterparts – such as increasingly expensive borrowings, but at the same time the crisis in Russia has its own unique features.
In April 2009 the International Monetary Fund reviewed its earlier outlook on Russia’s economy. The revised version states that the country’s GDP will plummet by 6%, against the 0.7% decline forecast in January this year. Given these gloom prospects, demand for domestic air travel in Russia will hardly resume growth in the near future. Despite a significant passenger traffic growth of 2006-2007, air transport in this country has failed to become an accessible means of transportation for all strata of the population – according to various estimates, only 3% to 7% Russians travelled by air on domestic routes over the past two years. Passenger numbers kept growing chiefly at the expense of charter flights and scheduled services to tourist destinations, and also thanks to domestic business travel.
Now that the country’s economy is slowing down, each of these air transport segments is suffering an inevitable decline. In addition, business passengers are increasingly downgrading to economy class, thus reducing the profitability of each flight. The diminishing demand leaves the airlines with the only passenger-attracting option of reducing air fares, which is extremely difficult to do in the current situation. Since early 2009 the Russian air transport market has been ridden with overcapacity; carriers are already merging or cancelling some of their flights, but this alone is not going to radically change the supply/demand imbalance. This is why airlines roll out special offers and promotions more often than before, despite constant complaints about their difficult financial situation.
The problem of searching for affordable loans is equally pressing in the international and Russian air transport markets. Back in autumn 2008, so-called system-forming Russian airlines (those carrying over 1 million passengers a year) were promised state support in the form of loan guarantees. However, the winter season brought no noticeable changes to the borrowings situation. As a result, several carriers found themselves in a tight spot. S7 Airlines in February defaulted on a loan worth 2.3 billion rubles (about $75 million); the debt is now being restructured by Raiffeisenbank.
Another high-profile Russian carrier, KD Avia, has found itself in a no less dramatic situation. The airline announced in March that it was suspending all flights due to funding shortages, but the problem was solved at the last minute. One month later KD Avia did suspend operations, albeit for just one day. Several days later Vneshtorgbank approved a 255 million-ruble credit line for the carrier. The first tranche of 70 million rubles was transferred almost immediately afterwards. According to the Rosaviatsia federal air transport authority, KD Avia’s debt to lessors stands at 500 million rubles, and its total debt is 10 billion rubles. Over the past several years, KD Avia’s business model has come to be viewed as one of the most promising projects on the Russian air transport market. Unlike other carriers, which focus on package charter flights or hub-and-spoke operations between Moscow and domestic destinations, it set up a hub in Kaliningrad linking flights from Russian regions and European cities. Such projects require sizeable investments, mostly in the fleet, aircrew and the initial operation of new routes – up to the breakeven point. KD Avia announced in spring that, despite the current problems, it was not planning to drop its fleet expansion plans (one year ago the carrier placed a $1.7 billion order for 25 Airbus A319 airliners, with deliveries from 2014).
S7, for its part, was forced to cancel the 2007 contract, worth $2.4 billion, for 15 Boeing 787 Dreamliner aircraft. The airline explained that it was still interested in the aircraft but would now probably lease them, rather than buying the lot.
Leasing has become another cause of Russian airlines’ worsening financial state. The weakening ruble has affected those carriers which used to renew their fleets through lease deals, since much of their revenues are in rubles, whereas lease payments are mostly made in foreign currencies. Access to state funding will now become key to the survivability of Russian civil aviation, because airlines will have to have operational credit lines at hand in order to honor their lease contracts.
Apart from the growing cost of funding, another key risk for Russian airlines is associated with growing airport charges.
Those Russian airlines operating international scheduled flights are better off in the current situation. International operations have been the least hit by the traffic drop of late 2008 and early 2009. There are, however, just a handful of such lucky carriers, including Aeroflot, GTK Rossiya, and Transaero. Another carrier which is part of Russia’s  top five largest airlines, UTair, will most likely survive thanks to its strong rotorcraft operation, whose performance has so far enabled it to make up for the decline in scheduled passenger traffic. Despite having lost quite a bit of traffic over the past months, UTair is not abandoning its plans to introduce new routes. During the winter season it launched flights between Moscow and Rostov-on-Don, Omsk, Perm, and Barnaul. Later on UTair came to Ulyanovsk, the city famed for its cutthroat competition and relatively small potential market. In order to capture its share, UTair introduced a very aggressive tariff policy on the Ulyanovsk route, with its fares maximally lowered to match those charged by the railway monopoly. The airline gets much of its profit from helicopter operations, which have been less affected by the crisis, and is therefore able to invest in opening new routes even during the recession. If only UTair keeps it up after the industry has rebounded, it will be able to snatch a sizeable market share.
The possibility cannot be ruled out that the crisis will prove a favorable period for aviation projects backed by federal agencies or regional administrations. These might include the Rosavia airline, currently being set up by the Russian Technologies corporation and the Moscow city administration, or East-West Airlines, whose creation was announced this spring by the administration of Irkutsk Region. It all depends on whether these plans will be implemented, though.