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Saturday, 19 February 2011

Why low cost carriers have not taken off in Russia

Russia has had its fair share of revolutions in the last century, but a more recent sort of revolution has totally skipped it: the low-cost airline revolution that has swept through Europe in the past 15 years has barely touched the Russian airline industry, only Sky Express and Avianova seem to have fully embraced the low-cost concept, and these remain really small operators.

To be fair, some European LCC have made timid forays into the expanses of Russia, for example Vueling operates a Barcelona-Moscow flight and so does Air Berlin with some flights to Germany. However, these are little more than anecdotes and the positioning of these two airlines is not that of a pure low-cost, but more of a hybrid model straddling the business and leisure segments of the market.

There are some factors at play that have prevented the development of a low cost airline industry in Russia.

According to Vladislav Filev, chief executive of Russian airline S7, and recently interviewed by Flightglobal, the conditions for low cost aviation simply do not exist in Russia. He mentions long flying sectors between Russia's main cities and lack of secondary airports as deterrents.

These are certainly obstacles on the way, I remain unconvinced about the distance factor being so deterministic, though. Many destinations in European Russia can be reached in a 2-3 hour flight from Moscow and, after all, low cost carriers elsewhere are successfully operating even longer sectors (see Ryanair's new base in the Canary Islands).

Regarding airports, not sure whether it is the lack of adequate facilities (would be interesting to know what is the spare capacity at Russia's regional airports) or rather their pricing policies that are making it difficult for low cost carriers to take off. If we read what Ural Airlines director says about this matter, it seems that airport fees are the obstacle.


No prospects for a low cost airline industry in the short term in Russia, according to Ural Airlines management

Low cost carriers in Western Europe have managed to extract very favourable terms from regional airports wishing to boost their traffic as well as from regional and local authorities. A certain degree of management autonomy is required to achieve such an outcome and I ignore if this is the case in Russia, however, we have the example of two very different countries, Spain and India, where, in spite of their heavily centralized airport management, low cost carriers have flourished in the last few years. Could this happen in Russia too?

Red tape is another story, starting with taxes on imported aircraft, that denies any would-be Russian low cost carrier the flexibility to define its own optimal seat configuration, unless it wants to pay a 20% for the aircraft (just ask Avianova!)

In fact, Russia has moved to abolish import taxes for some types of aircraft, including those on the 110-169 and 220-299 seat ranges, but the restrictions that remain in place are still a considerable hurdle, as they affect configurations that have proven to be popular among low cost carriers elsewhere (as an illustration, Ryanair would have trouble operating its 189-seat Boeing 737-800).

Why then, we do not see Western low cost carriers opening more routes into Russia? I suspect a lot has to do with the regulatory and institutional framework.

In particular flying rights, as there are still frictions between the EU and Russia regarding bilateral agreements regulating who can fly the routes between Russia and each European country. These regulatory framework has been progressively dismantled in with the implementation of the Single European Sky and deregulation has been extended to North American routes (the EU-US Open Skies agreement) and to some of the EU's neighboring countries, such as Morocco, with whom the EU has signed treaties liberalizing air traffic. This has allowed European low cost carriers, particularly the largest, Easyjet and Ryanair, to expand their networks beyond the borders of the EU.

But getting Russia to negotiate such an agreement with the EU as a whole is going to get more complicated, as Russia keeps a stronger negotiating position by talking to each country individually, and in the background there is the still unresolved issue of Siberian overflights, with European carriers paying several hundred million dollars a year to a competitor (Aeroflot) for the right to fly to Asia through the shortest route (over Siberia)

An additional factor must be taken into account: low cost travel relies on independent travelers, and Russia is not an easy market for independent travel. This goes both ways: there is a limited flow of European budget travelers to Russia: visa requirements, the lack of a modern budget and mid-range hotels and the fact that Russia is far from being a mainstream tourist destination, all play a role.

Russians also need visas, this is possibly the main cause that most Russian holidaymakers buy packages supplied by tour-operators that usually include the charter flight. There is obviously an elite that is used to travel independently, but I am not sure that words such as "budget" and "low cost" would be really sell well in this market segment. In summary, not the best environment for the Easyjets and Ryanairs to thrive...

However,the EU-Russia air market is a 10.7 million passenger per year reality and the forecast is that this amount could double in this decade and some new entrants might be needed in order to exploit the full potential of this growing market. In the meantime, talks go on...


Most Russian holidaymakers travel in charter flights, such as those operated by this Transaero Boeing 747

1 comments:

faseeh ilyas said...

The low cost of your airline will facilitate the people in many different way this is nice step for the people.:cheers

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