ROUTES CIS: Strategy Forum Highlights Local Issues

The formal proceedings to this year’s Routes CIS forum commenced yesterday with an engaging and thought-provoking debate between airlines, airports, tourism officials and local industry experts from both within and outside the region on the key issues impacting the development of the aviation sector in the Russian Federation and wider CIS market. The consensus of opinion was that barriers need to be brought down to enhance inbound and outbound traffic, especially in relation to prohibitive bilateral restrictions and perhaps more importantly visa issues.

The Routes CIS Strategy Forum was opened with an address from Evgeniy Chudnovskiy, General Director of the event’s host Ekaterinburg Koltsovo Airport who set the tone for the afternoon’s discussions by highlighting that “there is still a lot to be done” in the Russian aviation business to enable it to develop to meet its full potential. He claimed that the Moscow ‘airport powerhouse’ that drives the business “is not enough to cater for demand” and that the regional market “is key to the development” of the overall industry”.

“We need to learn from what others have done across the world and learn from their mistakes before we travel down the road of liberalisation. We have to change legislation and there is a lot to change as this has become a barrier to development. The potential though is tremendous,” he explained.

So what are main opportunities in the region? Well, simply it is the enormous market potential. Around 280 million people live in the CIS region, around half in Russia; there is strong economic growth with Russian GDP at 4.2 per cent; there has been a 16% growth in seat capacity from the CIS in the past year; of the 100 largest airports in the world two of the top ten fastest growing were in Russia; Moscow is now in the top 20 airport systems with 56.5 million passengers and notably 4.6 million international trips to and from Russia go via another airport. But what, if any, are the biggest barriers to development in the region? Well, the opening panel all agreed that two major issues dominate: the current bilateral situation and visa issues for both inbound and outbound travellers.

Pegasus Airlines is one of only a small number of budget carriers that currently serve the Russian and CIS market and in the last few days launched its latest route into the region with a direct link between Istanbul Sabiha Gokcen and Omsk in Russia. “People ask why Omsk? Well, it was simply about gaining further traffic rights into the Russian market,” explained Emre Pekesen, Director of Sales, at the network low-cost carrier. He is particularly frustrated about access between Turkey and Russia, a huge market for leisure travellers. “There are around 41 destinations in Russia linked to Antalya each year by Russian operators but we can’t get scheduled rights,” he said.

This situation will change and Pegasus would be well placed to gain. “Every summer we have six to eight aircraft based in Antalya and these would be available for any new routes,” said Mr Pekesen. In the meantime, Pegasus officials are working with the authorities in an attempt to get around the current bilateral issues. “We are working to prove that Istanbul’s two airports – Ataturk and Sabiha Gokcen – have two very distinct catchments and should therefore be treated separately,” Mr Pekesen added.

The Turkish carrier is looking at ways to expand into this region more and for a number of years has been contemplating establishing a venture in Bishkek with Kygyzstan authorities to fly within the CIS and into Western Europe. “This remains a project,” said Mr Pekesen. “We have a business plan and if we can achieve everything we require and the necessary regulatory approval then we could move this forward in time.”

One country that has emerged as a major success from its Open Skies policy is the United Arab Emirates (UAE) and Jeyhun Efendi, Head of Commercial Operations at flydubai, a budget carrier in the country revealed during the first panel discussion that Russia and the CIS is clearly a market of opportunity for airlines like itself. Although the low-cost penetration in Russia and the CIS is currently very small it has the potential for development. Flydubai currently serves 12 cities in the region, according to Mr Efendi, but could “at least double” its activities over the coming years as additional aircraft are delivered.

Flydubai is a sister venture to the more glamorous Dubai-based Emirates Airline but it simply operates narrowbody Boeing 737-800 equipment enabling it o fly to many destinations that can’t be served by Emirates’ widebodied fleet. “Our primary goal has been to fly to under-served markets with a high-frequency, low-fare model. This region certainly fulfils these dynamics,” Mr Efendi explained.

Flydubai’s own development owes a lot to liberal aviation policy, although Mr Efendi understands that individual states have a right to protect their own interests against competition. “Every country has a right to protect its own, but there needs to be a balance between safeguarding airlines and developing airports. Airports can certainly generate greater income from selling goods such as duty free and fuel than the airline business can provide. If you allow growth it will bring in more airlines, who will deliver more passengers to airports and thus generate additional spending,” he said. With the example that Dubai Airports generated around $1.5 billion from Duty Free sales in the last year, the view was rather compelling to the audience.

However, there are other factors influencing the success of air services from this part of the world, an issue highlighted by Alexander Schroll, Director Traffic Development , Munich Airport. The Bavarian hub has seen a notable number of air services into Russia and the CIS through the years, a fact that Mrs Schroll puts down to the fact the airport has not tried to concentrate on a single geographical market like many other European major airports. “Munich is open to everyone,” he quipped. In 2011 around 700,000 passengers flew between Munich and the Russia and CIS region and this year growth numbers are in double-digits.

But, despite Munich’s liberal approach, securing new services doesn’t guarantee success and culture differences can impact development. “Some air services have been launched in the past and airlines expect them to be a guaranteed success with seats being filled automatically. However, with not everyone linked to the major GDS they have much less visibility. With short lead times to route launches it becomes even harder,” Mr Schroll explained.

He noted that Russian operators need to be in the major GDS and also put a huge value on them joining IATA’s Billing and Settlement Plan (BSP), a system designed to facilitate and simplify the selling, reporting and remitting procedures of IATA sales agents. “For the sum of entering, the merits outweigh the cost,” he said.

There is also the big question mark over visa issues and in particular the difficulty securing the necessary approval to fly. Munich last year was linked to Irkutsk on a twice weekly basis but the flight has subsequently been suspended. “The major issue was the difficulty for outbound passengers from Russia to get a visa to enter Germany,” explained Mr Schroll. “They all had to travel approximately 1,500km to Novosibirsk to get one. It is the same with Voronezh where passengers would have to travel to Moscow.” Germany is working to overcome this and according to Mr Schroll the Ministry is looking to remove visa restrictions for travel from Germany to Kaliningrad as the first stage to a potential opening of the market.

The above views on operational barriers are also shared by local interests. Marianna Galagura, Head of International Sales at local Ekaterinburg-headquartered Ural Airlines said traffic restrictions had impacted the airline’s own development. Using an example raised by Mr Schroll at Munich, the missed opportunity is clear. The strict bilateral between Munich and Moscow limits operations to just three carriers from each side. In Russia Aeroflot, S7 Airlines and Rossiya Airlines are the designated carriers but the latter does not use its rights and will not transfer them to others such Ural Airlines, Transaero Airlines or UTair. “This is a real pity,” said Mr Schroll.

Ural Airlines has, however, been able to grow and will next year celebrate its 20th anniversary. Although it has operations from Moscow Domodedovo it has taken advantage of more liberal traffic arrangements from Russia’s regions to develop a multi-hub offer with services from Ekaterinburg, Krasnoyarsk, Novosibirsk and Samara among others. “The CIS market is very important to us,” explained Mrs Galagura who noted that the company offers flights to the Tajikistan capital Dushanbe from nine Russian cities and Tashkent in Uzbekistan from five as an example. “This traffic is mainly business clientele,” she added.

Statistics revealed by Marina Bukalova, Vice President, TCH Russia shows just why operators are keen to get further access into the Russian market. Between 2005 and 2011 the number of passengers carried within Russia and on international flights to and from the country almost doubled to 80 million. This traffic is split between 33 million on domestic routes, 31 million by Russian carriers on international routes (five million in the CIS region) and 16 million international passengers carried by CIS and foreign airlines. In this period international traffic has accounted for a growing 59 per cent of all passengers, while the scheduled market has increased in size (vs charter) from 72 per cent to 75 per cent. “Our market is shaping into a civilised form,” acknowledged Ms Bukalova.

The Russian market is certainly rather top heavy with the five largest airports in the country accounting for 88 per cent of scheduled international traffic, 60 per cent of charter international traffic and 45 per cent of domestic traffic. These airports consist of Moscow’s Domodedovo, Sheremetyevo and Vnukvo, Pulkovo International in St Petersburg and our event host Ekaterinburg Koltsovo Airport. The next 20 airports by passenger numbers account for 11, 27 and 33 per cent shares, respectively, according to the TCH Russia data.

Aeroflot Russian Airlines and its partners are unsurprisingly the largest operators in Russia with a 29 per cent share of the market, although Transaero Airlines (11 per cent), S7 Airlines (eight per cent), UTair (eight per cent) and Ural Airlines (three per cent) have plans to grow. In a market where cash remains a popular way to fund air tickets, it is interesting to note that TCH Russia data shows that between 15 and 17 per cent of tickets are now purchased online.

In terms of destinations from Russia, the five largest markets from the country are all outside of the CIS region and are dominated by the traditional leisure markets of Turkey and Egypt, followed by Germany, Thailand and China. Ukraine is the largest CIS market in 6th place, followed by Armenia in tenth, Uzbekistan in eleventh and Azerbaijan in twelfth. However, as the second panel discussion noted, travelling habits are changing in the region. This talk focussed on tourism opportunities into the CIS and the need for new air services to enhance inbound and outbound traffic.

“The problem is there are not enough flights and fares are too high,” noted Svetlana Garipova, Head of the International Relations Committee of the Ekaterinburg City Administration. These restrictions mean that currently around 65 per cent of visitors to Ekaterinburg are classified as business tourists, according to Ms Garipova. “This will not change considerably in the short- or medium-term,” she added.

Interestingly, Natalya Aleshina, General Director of the Ural office of specialist travel package provider Russian Express, noted that habits of travellers in Russia are also changing. “We have seen a real change in tourist travel requests over the past five years. In 2008 it was all about the mass leisure destinations but now more and more people want to explore new areas. The desire has changed. They no longer want to visit the same location year after year but to visit more countries and see more of the world,” she explained. “They now want better hotels and a better level of service than previously.”

Hypothetically, if new network opportunities present themselves would airlines across Russia, CIS and the world be able to take advantage. Well, as Emre Pekesen of Pegasus Airlines noted, even if the carrier secured new traffic rights there are a number of other infrastructure issues that would impact any potential route development issue. “It’s a matter of infrastructure,” he explained. “We have a 25 minute turnaround in Turkey on domestic routes, 45 minutes across our international network but in Russia it’s two hours. But, it is not just the airports it is the city administration too. They need to work to develop a better product and then we can arrive and stimulate the market if we can set fares at an appropriate level.”

There has been a significant investment in infrastructure across Russia and CIS in the past years and our host Ekaterinburg Koltsovo Airport is testament to a proactive development programme. But is this keeping up with the demand. “In our case… Yes,” noted Alexey Bogatyrev, Head of Master Planning Department at Ekaterinburg Koltsovo Airport.

His involvement in the business is within the new airport holding company that sits above the facility. In February 2011, the Renova Group, a major conglomerate Russian business and majority owner of the airport, acquired a 73.6 per cent stake in state-run Nizhniy Novgorod International Airport and 71.2 per cent in Samara’s Kurumoch International Airport through Kurumoch-Invest, a company set up to run the facility. As part of the privatisation agreements, the airport authority has pledged to invest billions of roubles to develop new terminals at both airports in the next two years.

“We have seen our initial plans bear fruit with traffic growth at Ekaterinburg, Samara and especially at the smallest of our airports at Nizhniy Novgorod where passenger numbers are up from 300,000 to 460,000 in the one and half years since we acquired control,” explained Mr Bogatyrev.

According to Victor Gorbachev, General Director, Association Airport of CIS Civilian Aviation, around $1.4 billion is available in the federal budget this year for airport development projects, the main being at Moscow Sheremetyevo ($296.6 million), Moscow Domodedovo ($207 million), Petropavlask-Kamchatka ($186.2 million), Kazan ($96.6 million), Krasnador ($93.1 million) and Moscow Vnukov ($79.3 million).

But, what does the future hold? Will bearing any major changes in rules and regulation a forecast from AviaPort Chief Editor Oleg Panteleev that concluded the Strategy Forum suggested that with annual growth fluctuating between three and five per cent over the next 18 years the Russian industry could grow to more than 160 million passengers by 2030.