FLUG REVUE January 2006: Aeroflot boss outlines plans

January 2006

AEROFLOT STRATEGY: “WESTERN AIRCRAFT ONLY”

By Andreas Spaeth

Aeroflot chief executive Valeri Okulov is planning to purchase Western types for his airline, as well as Russian regional jets. In so doing, he risks having to pay punitive taxes to the Russian government, which owns 51 percent of the company. Fleet modernisation, the threat of punitive taxes and a hub that is in need of renovation: the CEO of Aeroflot provided some information on these issues during an interview with FLUG REVUE in Moscow.

FLUG REVUE: You have now ordered seven additional Airbus A321's, thus exceeding for the first time the limit of 27 Western aircraft that you are allowed to import free of the exorbitant Russian import duties. Will Aeroflot now have to pay the full rate of over 30 percent of the purchase price?

Okulov: The plans on which this order is based assumed the most pessimistic scenario, i.e. that we would have to pay the full duty. But we have still not received any decision from the government regarding our application for exemption from the taxes, although a decision was actually expected back in August. But we can't wait, we have to continue developing our fleet as we can only compete on the market with nine aircraft. We have no choice. With today's fuel prices, the only way to break even is to fly only modern, fuel-efficient aircraft. With our present fleet we could not hold our own against the competition.

FLUG REVUE: Will the purchase of more Airbus jets mean that even more Russian aircraft are taken out of service?

Okulov: Yes, by 2010 we will have retired all 20 of our Tupolev Tu-154's and transferred the eight Ilyushin IL-86's to the fleet of a chartered subsidiary that we are planning to set up. The eleven Tupolev Tu-134's are the most expensive aircraft in our fleet today and we want to replace them with a new Russian regional jet, the Sukhoi RRJ. Actually we would prefer to retire the Tu-134 today, but unfortunately the Sukhoi RRJ's will not be available until 2008. We are being forced to wait a long time, but the new aircraft will be twice as efficient to operate and carry 86 passengers, compared with only 68 in the Tu-134. We are planning 30 firm orders for the Sukhoi-RRJ plus 20 options.

FLUG REVUE: Did you consider the Western regional jets when you were making your decision?

Okulov: We did consider leasing Western regional jets under a short lease to bridge the gap before we can take delivery of the Sukhoi-RRJ's. But unfortunately those aircraft are not currently certificated for operation in Russia. Before reaching a decision on a Tu-134 successor, we issued an invitation to tender and Embraer, Bombardier, Antonov and Sukhoi all submitted bids. The Sukhoi concept was the best.

FLUG REVUE: But surely the Sukhoi RRJ is still only a model?

Okulov: Yes, but that is also the case at present as regards our decision to purchase new long-haul aircraft, where we are choosing between the Boeing 787 and the Airbus A350. The delivery times are very long: if we were to place an order today, the earliest we would receive any 787's is 2010 and for the A350 the earliest date is 2012. We will place our order before the end of 2005, initially for 22 aircraft, but this number will rise. By 2010 or 2011 we want to have a purely Western fleet on all our routes – with the exception of the Sukhoi RRJ.

FLUG REVUE: It is well known that you are no friend of the Ilyushin IL-96 long-haul jet, but the government is forcing you to use this type. What are your plans for the six IL-96's?

Okulov: They will continue to fly, especially on charter routes and selected domestic routes, and after 2010 they will probably be transferred to another subsidiary.

FLUG REVUE: Does that mean that the Russian aircraft industry is currently competitive, at least in the area of regional jets?

Okulov: Yes, it seems so. The Russian aircraft industry can only restore its competitiveness by raising itself to a new technological level. But at present I do not see any prospects as regards medium-range and long-range aircraft. And even in the short-haul area, the Russian manufacturers would need to adopt technologies that are currently being applied on the Boeing 787 and the Airbus A350. Today the aerospace industry is a global business and, to survive, Russian industry needs to work closely with Airbus and Boeing.

FLUG REVUE: Recently more and more Western low fare airlines have been flying to Moscow. How can an airline like Aeroflot, which up to now has had high prices, compete against this?

Okulov: The low-cost business model is very efficient for flights of up to two hours' duration. But on longer flights, more passenger comfort is necessary, and Moscow lies on the periphery of Europe. Most flights to the centres of western Europe take three or more hours. Low-cost airlines may be effective from Berlin, but not for many other cities. Nevertheless, we are taking on the challenge and from the summer of 2006 we will be introducing a new passenger class in the aircraft, Economy Low Cost, on routes to Berlin, Vienna, Warsaw and Prague. It will have a relatively tight seat pitch of just under 79 centimetres, and meals and drinks will have to be paid for. The air fares will follow the market. In each case our fares will match the lowest price of a competitor.

FLUG REVUE: Many industry experts view Russia as the next big growth market for no-frills airlines, both on the international market and also on the domestic routes. Do you agree?

Okulov: The low fare model depends on two preconditions: there must be a large volume of traffic between the destinations and it must be possible to sell tickets over the internet. From Moscow there are only a few routes with a large volume of passengers: to St Petersburg, Samara and Yekaterinburg plus Sochi in the summer. But that is not enough to found our own low-cost subsidiary, and besides, internet access is not sufficiently widely available. On the other hand, this could all change in two or three years, in which case the preconditions for a separate low-cost airline would then be satisfied. But the low-cost model was not invented in the West – the giant Aeroflot of the Soviet era was actually a low fare airline.

FLUG REVUE: Aeroflot has announced its intention to join the SkyTeam Alliance, which includes Air France, KLM and Delta. When do you expect this to happen?

Okulov: Aeroflot has satisfied all the technical requirements for joining the alliance, and only recently we successfully passed the IATA Operational Safety Audit (IOSA). We expect the responsible SkyTeam committee to make a decision about whether Aeroflot can join in February 2006.

FLUG REVUE: Aeroflot makes quite a bit of money from the overflight fees that Western airlines have to pay for the use of Russian airspace. The amount in question is believed to be an extra $200 million a year which Aeroflot receives without having to provide anything in return. The EU has been trying to abolish these charges for some time. Does Aeroflot have any plan as to how to manage without this income?

Okulov: There is an agreement between the Russian Federation and the EU, under which these regulations will continue until 2013. However, by then there will be more capacity for European and Asian airlines in the Russian airspace. We are updating our connections through negotiations with the European airlines. But of course it is a very important sum for us. We are assuming that we will continue to receive at least a portion of the amount even after 2013.

FLUG REVUE: You want to become as good as Lufthansa or Emirates. Where does Aeroflot stand today?

Okulov: The new corporate identity and the new slogan, “Aeroflot – sincerely yours”, are very dynamic and differentiate Aeroflot as an airline. We have introduced new uniforms and new on-board service concepts. Three years ago it was not possible to take off from Europe for Moscow in the evening, but now we have evening flights from several capital cities in western Europe plus code sharing agreements with many airlines. We are very ambitious as regards our objectives – we want to become one of the most attractive airlines in Europe. But that is a continual process with ongoing changes in service and product. We have already passed the halfway mark on the path which lies before us.

FLUG REVUE: One of the biggest problems for Aeroflot is the partially unacceptable conditions at the hub airport of Moscow Sheremetyevo. When will things improve significantly with a new terminal?

Okulov: Today our most difficult problem in Sheremetyevo is ground handling. We will not achieve a detectable improvement until a new terminal is opened so that we can finally offer convenient transfer connections for international and national flights. The new Terminal 3 is scheduled to open in November 2007. And bearing in mind the progress that is being made on the construction work, we are optimistic that this date will be met. Without a new, attractive terminal, Aeroflot has no future. It is the precondition to the future success of Aeroflot. Only with the new terminal and new technology can we attract more transit passengers and develop a network strategy. We are particularly keen to attract passengers from Europe who are in transit to south-east Asia, but we hope to attract passengers bound for the CIS states or Russian domestic destinations as well.

FLUG REVUE: Up to now transit passengers have had to pay up to $100 for a five-minute taxi ride because there is no reliable transfer? What improvements can they expect?

Okulov: We have set ourselves the goal of reducing the minimum transit time in Sheremetyevo even before the new terminal opens, from the present 180 minutes to 50 minutes. By the end of 2005 we are planning to offer for the first time a bus service between the two terminals within the security area directly across the apron, which will mean transit passengers no longer have to leave the building. It has already been tried out. This will mean that we can halve the minimum transit time initially to 90 minutes.

From FLUG REVUE 1/2006

Last updated 9 December 2005

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