ROUTES SILK ROAD: A Market of New Opportunities for Aviation

It is symbolic that the established Routes CIS event has transformed this year into Routes Silk Road to include a wider community that is very interlinked historically, culturally and commercially and that it is hosted in Tbilisi, Georgia, the Pearl of Caucuses, which lies on the crossroad between Asia and Europe.

It is symbolic that the established Routes CIS event has transformed this year into Routes Silk Road to include a wider community that is very interlinked historically, culturally and commercially and that it is hosted in Tbilisi, Georgia, the Pearl of Caucuses, which lies on the crossroad between Asia and Europe, Yuliya Crane, senior consultant at ASM, the world route development consultants explained when she spoke to The HUB Daily just days ahead of travelling out to Tbilisi, Georgia for the forum.

According to Crane, the region’s geographical size and diverse terrain make airline travel an attractive transportation option.  While short run growth is reaching double digits, the longer term forecasts for air travel in the region is predicted to reach around 5.8% over the next 20 years by Airbus.  A rise in personal incomes and the liberalisation of air transport regulations makes aviation services more available and affordable,” she said.

Currently the region’s propensity to travel is still low, compared to the Western European level, suggesting there is potential for growth.  There is currently 25% of extra capacity planned for January 2015 (23.2 million two way seats) as compared to July 2014 (18.5 million two way seats) across the CIS, Georgia and Ukraine, according to Sabre AirDI data.

Delivery of 1,170 new airplanes is forecast over the next 20 years to support long term growth (and to further phase out old aircrafts), and with the three main Moscow airports nearing their full capacity; this is a great opportunity for the regional airports to break the Moscow centred aviation model and to stimulate direct international and domestic travel, particularly since currently domestic and regional travel continues to grow faster than international capacity.

According to Crane, latest data shows the economies of the CIS region plus Ukraine and Georgia grew in 2012 at an average rate of 3.8% (5% in 2011).  Kazakhstan and Georgia were the growth leaders at 5.2% and 5% respectively, with Ukraine growing a mere 0.2% in 2012. However, this good potential growth has been shadowed by the recent political turmoil in the region. Over the last 10 months, Ukraine has attracted the world’s attention for all the wrong reasons.

The CIS and Silk Road regions have seen a rapid growth in LCC services appearing to both first and second tier cities. While the story of domestic LCCs was not always plain sailing, with the failures of Avianova and SkyExpress in Russia, Crane said the number of international LCCs operating in the region has been growing, particularly in the newly liberalised markets of Moldova and Georgia.  Wizz Air in Georgia, for example, represents 86% of total traffic in Kutaisi airport and all LCC traffic, represented 17% of two way passengers in Georgia in 2013.

”In other parts of the CIS/Silk Road region, foreign LCCs face prevailing restrictions and their operations are characterised by relatively low frequencies and a low number of destinations within the region,” said Crane.  ”On average, in 2013 LCCs in Europe accounted for 32% of aviation capacity, while most countries in the CIS/Silk Road region have LCCs at below 10% of the market, indicating further potential for growth.”

The most talked about carrier in the region is the low cost carrier Dobrolet, Aeroflot’s subsidiary, which has started its operations with an inaugural flight to Simferopol, Crimea (to further support tourism in the annexed region), from Moscow Sheremetyevo on June 10, 2014 with a single  Boeing 737-800.  

”Aeroflot’s management has been successfully lobbying towards relaxing some of the restrictions in Russian aviation law, which made it difficult for domestic LCCs to succeed (such as the ability to charge for checked in luggage and providing less leg-room),” she explained.

Dobrolet recently announced the addition of flights to Volgograd and Perm from August 1, 2014 and August 29, 2014, respectively, and is planning to open flights to St Petersburg and Samara as well as other Russian destinations with an expected eight aircraft fleet by the end of the year. By 2016 the carrier’s planning to fly internationally and to the wider CIS region and by 2018 it’s planning to fly to 14 destinations with an expected 40 aircraft fleet.

With the backdrop on LCCs growth in the CIS/Silk Road region, the traditional airline industry continues to consolidate.  A number of small regional carriers have recently failed, such as Mordovia Airlines and Tatarstan Airlines in Russia and Air Onix in Ukraine. Vladavia and SAT airlines were merged under Aeroflot’s umbrella in November 2013 to form new Far Eastern carrier, Aurora, with their main base in Vladivostok.

”Once, this was a very highly regulated market, which now faces fast deregulation that remains to be uneven across the region. On the one hand, a number of countries in the region have recently liberalised their aviation environment - Moldova and Georgia have established ’Open Skies’ with the EU; and other countries are progressively moving towards Open Skies agreements with the EU such as Azerbaijan, Armenia and Ukraine,” said Crane.

On the other hand, Belarus, Uzbekistan, Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan all have tightly regulated aviation environments (frequencies, designated airline, equal number of operated flights etc). Russia is also significantly regulated, although the issue of abandoning Trans-Siberian routes royalties payments has been discussed over a number of years,” she added.

The official position is summarised by Valery Okulov, Deputy Minister of Transport of Russian Federation, October 2011 as: “Our objective as aviation authorities is to protect our airlines”.  According to Crane, overall, the outlook for the CIS/Silk Road region is good with strong economic growth, an expanding middle class, emerging LCCs and increasing liberalisation of the aviation environment.

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