Russian aviation market is improving again

Having overcome the impact of the crisis, Russian air carriers are gaining traction. The volume of passenger traffic has been growing sustainably, and the market players are optimistic about their future against the backdrop of current Government’s decisions.

The industry takes off. Official data of the Federal Air Transport Agency (Rosaviatsiya) for January – May 2017 demonstrates that Russian aviation market has been improving, and its growth rate makes jealous most of Russian economic sectors. During the first 5 months of the current year Russian airlines have carried almost 36 mln passengers, that is 22% more than during the same period in 2016. Since the start of the year, passenger turnover has increased by 25%, and totaled a shade under 89 billion passenger-kilometers; cargo turnover has increased by 23% and has reached the 3 billion ton-kilometers mark. Passenger load factor has grown by 2,7 pct (73,3% at the end of the reporting period).

Growth factors. Analysts explain the market growth by several factors. Firstly, the demand for highly remunerative international flights has boosted, and this means that airline companies have managed to adapt to the absence of Egyptian and Ukrainian destinations. As a result, for the first time during a long period the international load exceeded the domestic load. Secondly, along with the permanent leaders of the market – 5 companies that control 70% of air carriage (Aeroflot, Rossiya, S7, UTair and Ural Airlines) – a high growth rate has been demonstrated by small carriers that provide service to up to 3 mln passengers per year, and by charter carriers. The recovery of consumer demand for the industry’s services is supported by the initiated appreciation of the ruble, and by general trend of sustaining or cutting air ticket prices (which includes the background of rivalry with low-cost carriers, such as Pobeda) that made airline companies cut the average cost of tickets by 20%.

Under the Government’s wing. State support has played a significant part in market’s recovery. It took the form of application of a reduced VAT of 10% for airlines’ domestic passenger transportation services. At first, this abatement, that helped to lower the industry’s tax burden by almost 40 billion rubles, was planned to be in effect from July 1, 2015 till December 31, 2017, and the closer the end of the period the more frequent were the concerns of market participants that the industry which has just regained its feet was going to stall. However, on June 16, 2017 at the website of the Government of the Russian Federation there was published a decree by Dmitry Medvedev on extension of the benefit till December 31, 2020. The program of state aid to air industry till 2025 has also played a significant role in market’s recovery. The measures aimed at strengthening of competitive performance of Russian aircraft producers, have worked for passenger air carriers as well.

Out of turbulence. The news about the extension of preferential tax period has had its impact on the mood of the market’s participants. Despite certain problems, and instability of global political and economic environment, one could predict with great probability that Russian aviation market is going to grow. According to the estimation made by Vladimir Tasun, the president of the Russian Air Transport Operators Association (RATOA), as a result of the current year, passenger traffic of Russian airlines could go beyond a significant mark of 100 mln passengers.

Nevertheless, general favorable market situation does not guarantee an effective and stable operation of all its players. Specialists of the Information Agency Credinform recommend using Information and Analytical System Globas® when choosing an air carrier in order to prevent cooperation with an unreliable business partner and to minimize risks, which in this case may result in flight delays or cancellations, low-quality services and other unforeseen situations.

On May 14-15, 2017 Beijing (China) hosted “One belt – one road” international forum. 130 countries participated in the event, 30 of them were presented by the heads, including the President of the RF. Representatives of Asian countries, two representative from Latin America and Africa, and one from Micronesian state (Fiji) were also took part.

The Forum was dedicated to the development of Chinese initiative of “The New Silk Road” which was came up in 2013. The idea of the initiative is to create “Silk Road Economic Belt” (SREB) and “21-century Maritime Silk Road” (MSR). As a result, trade corridor of direct supplies on easy terms from the East to West has to be created. Currently the idea is renamed as “One belt – one road”.

Three roads are to be included in the Belt: north (China-Mongolia-Russia), central (China-Central Asia-West Asia) and south (Bangladesh-China-India-Myanmar, China-Pakistan). It is planned to create high-speed railroad lines and relevant infrastructure. Except for the MSR, it is possible that “North Maritime Road” will also be used in prospect. Over 100 states joined the project since autumn of 2013 and began take part in its execution.

According to Chinese head, it has already been possible to conduct coordination with some EAEU projects through contacts with Russia, Kazakhstan’s “Light Way”, Mongolia’s “Way of development”, “Central corridor” (Turkey, ASEAN members), Vietnam's "Two Corridors and One Circle", English strategy “NorthernPowerhouse”, Polish “Amber road” and other projects.

Currently there is still the deliquescence of “One belt – one road” ideas. Due to inclusion of all other foreign-policy initiatives of China, its nature lacks definition and is in course of formation. That is why the Forum also pursued other aims: coordination of development strategies of states and specific formats of cooperation, joining the transport routes of the participating countries, developing mutual trade, creating financial stability systems in Asia and developing inter-human contacts.

The opinions on the evaluation of the Forum results were diverse. The President of Russia gave positive summing up and said that the concept of multilateral cooperation of members of the European Economic Union, Shanghai Cooperation Organization and Association of Southeast Asian Nations is promising. Cooperation of the countries will allow creating a system, regulating bilateral and international agreements, simplifying customs, control standards, intellectual property, sectoral forms of investment and cooperation, creating a fundamentally new transport configuration of the Eurasian continent.

In general, the Russian experts negatively assess the results. Although the RF President was the most honorable guest at the Forum, Russia has not received significant benefits from the Chinese initiative yet, since China has responded to none of the 40 transport projects proposed by the RF Government and Eurasian Economic Commission. There are fears that China can edge Russia out with its project and steal thunder in the post-Soviet space, in the countries of the Persian region and South-East Asia, despite of announce about equal partnership and mutually beneficial cooperation.

For Russia, the Forum was more interesting not from the economic, but from the political point of view, since “One belt - one way” formally represents the formation of an alternative geostrategic reality. Therefore, the Chinese Forum is a return of “political debts” and way to strengthen the position of the Eurasian Economic Union in the face of growing Chinese power. The Russian interest in the Asian region is also stems from the fact that if earlier foreign investors were interested in a growing national market, now to enter the markets of the Asia-Pacific region the cooperation with investors from other countries is necessary.