The Russian and French prime ministers looked on as Russia’s national carrier, Aeroflot, signed off on an deal to buy 18 new Airbuses last month during a state visit to Airbus Industrie’s headquarters in Toulouse, France.
The deal for the A319 and A320 medium-range aircraft was first mooted this summer but Aeroflot has been struggling to find funding and to overcome lobbying by the Russian aviation lobby for the airline to buy Russian.
While the rest of the world’s aviation industry remains mired in depression, Aeroflot has had a good year. It failed to add significantly to passengers carried over the first nine months of this year but thanks to corporate restructuring it is on track to nearly quadruple its net profit to $75 million this year. It’s a far cry from 1999 when it lost $60 million. Its biggest financial advantage is that it continues to collect the fees other countries’ carriers pay to use Russian airspace – a hangover from the Soviet era.
Dumping the elephant
With improving financial health and an extensive corporate rebranding slated for this winter (the company has finally decided to dump its flying elephant mascot and will ditch its hammer-and-sickle logo next), the biggest obstacle Aeroflot faces to expanding its market share in Europe is the Russian government’s limit on the number of foreign-made aircraft it can buy.
In Soviet days Russian aviation producers churned out some 1,000 aircraft a year; last year they sold no more than three. Likewise, Russian air passengers carried fell from a Soviet-era peak of 137 million to a 1998 low of 21.4 million, which recovered to 25 million last year.
Aeroflot has 100 aircraft with an average age of 12.5 years, including 27 that are foreign-made. However, more than a quarter are grounded because they are inefficient, don’t meet western European regulations, or are too old.
The problem the company faces is that the Russian government refuses to lift a cap of 27 foreign-made aircraft imposed during Boris Yeltsin’s tenure as president. The new Airbuses, estimated to be worth $600 million, are to replace existing foreign-made aircraft coming to the end of their working lives. “We are very pleased that the links that we started 11 years ago with the Russian aviation sector… have developed into a close and mutually beneficial partnership,” Airbus president Noel Forgeard says.
However, a week later Aeroflot’s board of directors stepped back and put off approving the deal, citing financial problems. The company has been doing the rounds of foreign export credit agencies to find a backer for the deal but negotiations are going slowly. However, analysts believe the money will be forthcoming. “Aeroflot currently operates 14 aircraft under a capital lease arranged in the considerably more risky environment of 1996. It should not, therefore, have any problem closing a deal on a capital lease now,” says Vladimir Savov, a financial analyst with Brunswick Warburg in Moscow.
Raising money for aircraft is a perennial problem for all of Russia’s airlines. From a total of 200 the top five account for more than half the traffic and Aeroflot dominates with a 65% market share, according to the Antimonopoly Committee.
After president Vladimir Putin took over the reins of power in May 2000, the Russian government relaunched a long-debated plan to set up a state aviation leasing company to boost sales at home. Despite all the talk, though, the company has yet to start work.
Aeroflot is keen to strike a deal, as in the wake of September 11 the international aviation business is in a sorry state and it is a buyer’s market.
“Many of the old leasing deals are coming due and it is a good time to sign new agreements. The company hopes to make $45 million in savings on the new lease agreements,” says Savov. “The delay is technical. The deal will go ahead as it is a good time to buy – everything is very cheap.”
