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Russian Airlines Trying to Survive in the Hard Geopolitical Conditions

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Turbulence throughout the whole of 2015 negatively affected the performances of both travel retailers and airlines in Russia. Airlines overall experienced a negative performance for the first time since the 2009 crisis. Based on preliminary data, airlines experienced a decline of 9%, or eight million passengers, in 2015. At the same time, outbound departures from Russia decreased by 25%, or 8.6 million trips. In such a difficult business environment, with a slowdown in the main leisure destinations and geopolitical tension in the region, local carriers have been trying to find new markets for growth and expansion.

Air transportation faces a number of issues in Russia

With more than seven million outbound trips in 2014, Turkey and Egypt were the two leading leisure destinations for Russia in this year, while Ukraine was traditionally the number one destination for total departures and arrivals in Russia. As a result, charter airlines suffered a lot. Based on preliminary data, charter airlines decreased by 15%, or three million passengers, in 2015. One more consequence of declining air passenger numbers and the challenging economic situation is the bankruptcy of the second largest local carrier Transaero, which held a 12% value market share in 2014. The company had huge debts and, even with governmental financial support, Transaero did not manage to survive.

Domestic trips in focus

In the current economic and political situation in Russia, domestic tourism development is the main market trend. Both government and local investors’ efforts are resulting inincreasing interest in destinations inside the country, with a growing number of domestic trips. Airlines are also actively following this trend. The Russian government is ready to support local air routes and tourism destinations with subsidies. New initiatives are now under discussion by the Russian government.

The largest local airline, Aeroflot, is developing its low-cost carrier under the Pobeda brand to allow Russians to travel more around the country. New domestic destinations are appearing every single month. Due to the reasonable prices, starting from RUB999 (EUR12, at the February 2016 exchange rate), this has had a huge impact on domestic tourism development. For example, Pobeda, helped by its new routes, increased the total number of passengers through Vnukovo airport by 17% in 2015. The low-cost carrier was only established in 2014 and carried 100,000 passengers in its first year (2014), which had already risen to 3.1 million passengers in 2015.

Development of local airports

Russia is putting a lot of effort into air transportation improvements in terms of new airports and reconstruction of old ones. In the first part of 2016, a new airport in Ramenskoe, Moscow region, will open its doors. Moreover, by the end of 2019, a new terminal will also be opened at this facility, as a result of which the airport’s capacity will develop to reach 12 million passengers per year. It is expected to become the fourth largest airport in Moscow. Another six airports will be opened in Perm, Rostov on Don, Saratov, Khabarovsk, Samara and Kaluga by 2018 as part of the country’s preparations for the 2018 FIFA World Cup. According to the long-term government strategy for Russian aviation, 500 airports will be built or reconstructed by the end of 2030, under plans for the expansion and improvement of domestic transportation.

Local low-cost carrier’s development as an attempt to find new market driver

Russia’s only notable low-cost carrier, Pobeda, is also expanding its international routes. For instance, the company already has flights to Italy, Germany, Austria and Switzerland, and plans to approach other European leisure destinations such as Cyprus in order to provide consumers with a greater variety of leisure destinations in 2016. Moreover, the company is trying to expand into neighbouring countries. The first proposed new destination is Minsk in Belarus. However, Belarusian aviation is under the strong protection of the local government and is not particularly keen to allow Pobeda to operate in Belarus, so that this possibility is still therefore at the negotiation stage. Despite Pobeda’s attempts to enter international markets, its focus is still on local routes, so that it will not therefore position itself as a competitor of such low-cost giants as Ryanair or Wizzair.

Stability – the main condition for development

Generally, despite a significant increase in interest in domestic flights as well as local carriers’ efforts in terms of new international destinations, this will not replace air transportation to Turkey, Egypt and Ukraine. The tense situation both in the region and globally is having a negative influence on the performance of airlines in Russia. However, the situation could change were Russia to renew flights to Egypt and other destinations. The Russian Ministry of Transport has already announced plans to reconsider the situation in 2016, as soon as Egypt meets all the safety requirements in terms of air transportation and provides proof of this. When the situation returns to stability again in both political and economic terms, the airlines’ performance will become more positive again.

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