In a major consolidation in the Russian aviation market, national carrier Aeroflot Russian Airlines is to acquire a majority stake in its largest rival, the independently-owned, Transaero Airlines. The surprise announcement this week, driven by the country’s ongoing financial crisis, has been approved by the Russian Government and will continue the recent airline consolidation in the country which has already seen Aeroflot take over a number of its regional rivals.
The news was revealed on September 1, 2015 following a meeting of the country’s Intergovernmental commission chaired by Igor Shuvalov, First Deputy Prime Minister, on the issues of air transport industry. “In the interests of the development of the commercial aviation and creating one of the largest in the world group of airlines, the commission has approved the acquisition of JSC Transaero Airlines by Aeroflot group. The shareholders of Transaero Airlines believe this measure will serve the interests of passengers, personnel and partners of the airline,” Transaero Airlines confirmed in a statement following the conclusion of the meeting.
It is understood that Aeroflot will likely acquire a 75 per cent plus one share stake in Transaero, subject to final board approval, with local Russian media suggesting a nominal purchase price of just a single ruble. The private carrier has been struggling financially, while Aeroflot has surprised the market with stronger-than-expected financial results for the first six months of 2015 in a challenging economic environment.
Despite a relatively upbeat industry outlook, short-term issues continue to impact aviation development in a number of global markets, none more so than in Russia where ongoing economic problems are hitting air travel hard. Russia faces a recession due in part to a global drop in oil prices and severe exchange-rate depreciation. Its economy contracted by 4.6 per cent in the second quarter of this year after shrinking by 2.2 per cent in the first.
In a presentation at this year’s Routes Silk Road Strategy Summit, Guy Brazeau, Director, IATA Consulting revealed that airlines flying within Europe and to and from Europe were witnessing a significant decline in average passenger yields during the first half of this year, but far short of the decline being seen in the Russian domestic market where yields are alarmingly more than a third less than last year.
The economic crisis in Russia has mainly affected international traffic, with CIS and foreign carriers experiencing a notable reduction in international demand. However, Russian carriers are seeing increased domestic demand, in the process impacting yields.
“Russia domestic yields are a massive 37 per cent lower than a year ago,” Brazeau said, noting that “in part, these yield declines reflect the ‘translation effect’ of the sizeable appreciation in the US$ over the past year.”
The data from the IATA Passenger Intelligence Services (PaxIS) air travel tool shows that after a 14.4 per cent fall in yields in 2014, the Russian domestic market has seen a massive, but stabilising drop, during the course during the first half of 2015 with yields down 47.0 per cent in February 2015, 42.8 per cent in March 2015 and 37.5 per cent in April 2015. This compares with a 17.2 per cent decline within Europe in the latter month.
The crisis has already forced UTair to significantly downsize its activities in Russia and Transaero’s financial difficulties have accelerated since the aggravation of the Ukrainian crisis, and the resulting European and American sanctions again Russia.
This resulted in a weaker rouble and a decline in the international traffic from Russia towards the markets typically core to Transaero’s business in regions such as the Caribbean, and south East Asia, with Russian travellers retreating towards domestic destinations such as the Black Sea area. According to analysts, Transaero’s reduced fares strategy did not generate the expected turnaround and further deteriorated the overall airline financial situation.
According to Michel Merluzeau, vice president – Aerospace Strategy & Business Development at Frost & Sullivan, the Aeroflot – Transaero agreement is a direct consequence of market and political forces that have significantly affected the private carrier’s operating revenues of the past few years.
He suggests the amalgamation of the two carriers, and in particular their outstanding aircraft orders, could lead to Aeroflot following in the path of Air Canada and Air Canada Rouge, using a combination of aircraft and service levels with differing operational, access and customer requirements.
“As the Russian economy continues to slow down, pressured from declining oil revenues and trade sanctions from the West, it will be interesting to follow how Aeroflot will right size the Transaero legacy routes, and therefore likely cut down on these routes’ capacity while maintaining access to destinations still viable overall,” he said.
The analyst also notes that with capacity growth in mind at Aeroflot, the integration of the Transaero orders is potentially problematic especially for its Boeing 747-8I and Airbus A380 commitments. However, he noted that the integration of the A330-900neo from Transaero “should not be in question at this point” as, he explained, “it fits nicely as a replacement for the A350-800 on order at Aeroflot and provide operational flexibility on routes ranging from high capacity domestic to long range international”.
Our analysis of OAG Schedules Analyser data shows the increasing dominance Aeroflot will have in both the Russian domestic and international markets after it takes control of Transaero. Interestingly, the combined airlines will have a 48.6 per cent share of domestic capacity in Russia and also a 48.6 share of international seats from the country in 2015, albeit some consolidation from network overlap may see route and frequency cuts in the future despite the two carriers having a network well spread around Moscow's main airports.
Based on this year’s flight schedules, Aeroflot will have a 38.5 per cent share of domestic seats in Russia, a figure that has risen considerably (up from just 14.2 per cent at the start of the decade) as the airline has taken control of other Russian operators. Transaero is the fourth largest carrier in the local skies with a 10.1 per cent market share in 2015 (a figure that has more than doubled since the start of the decade).
In the international market, Aeroflot and Transaero are the clear market leaders by capacity. The Russian flag carrier will have a 35.7 per cent share of international departure seats this year, based on published schedules, up from 23.7 per cent in 2010. Transaero will have a 12.9 per cent share, its highest figure this decade having grown its international capacity 79.9 per cent since the start of the decade.
The above chart, based on September 2015 data, shows that Aeroflot’s network is dominated by its operations from Moscow Sheremetyevo, its base and hub operation in the Russian capital. It accounts for a 38.1 per cent share of the carrier’s total network, more than four times the size of its second largest network point, Pulkovo International Airport in St Petersburg with a 9.0 per cent capacity share.
Meanwhile, the below chart highlights the biggest points in the September 2015 network of Transaero and a much wider split of operations thanks to its different strategy supporting business and leisure demand across multiple Moscow airports. Its main network point is Vnukovo International Airport with a 24.5 per cent share of departure seats this month, just ahead of Domodedovo International Airport with an 18.7 per cent share. The Transaero 'Top Ten' also includes a number of foreign destinations, highlighting the important role leisure routes to Egypt and the Mediterranean play in its summer activities.