Upcoming airline consolidation in Russia

In Soviet times Aeroflot was the biggest airline on Earth, it had the monopoly of air travel in the largest country in the planet. But in 1991 the Soviet Union broke up, economic and political chaos ensued and air traffic plummeted.

Aeroflot's transformation mimicked that of its country and the company was broken up with the formation of over 800 independent smaller companies. Some of these became flag carriers of the newly independent republics, whereas in Russia itself, hundreds of regional airlines were carved out of the assets of the former Soviet Aeroflot. The so-called " babyflots" were born. However, Aeroflot did not disappear, it continued to operate international routes out of Moscow, while the "babyflots" served the domestic market.

The decade of the 90s was a time of turmoil in Russia, with weakened institutions and instability and the airline industry also suffered as a result. The "babyflots" were in great measure responsible for the bad reputation acquired by Russian airlines abroad. These undercapitalized companies, operating small fleets of old Soviet-era planes became famous for their dismal service and appalling safety record.

Aeroflot started to put its record straight in the year 2000 and underwent a modernization and much-needed re-branding. A few years later the improvements are evident. Aeroflot is now operating a fleet of modern aircraft, levels of service are now on a par with Western airlines and even its corporate website has a fresh and innovative look. It also helped that the Russian economy has been growing steadily in the last decade, with total passenger numbers in Russia more than doubling in 10 years, from 21 million in 2000, to over 45 million in 2009. Still a fraction of what it was in Soviet times (roughly half the number achieved during the peak year of 1990) but on upward track.

So we have a stronger and more modern Aeroflot in 2010, but...what happened to the “babyflots”?

Financial attrition and safety issues have taken its toll, as I write this post the numbers are down to 168. This is still too many according to the chief executive of Aeroflot, Vitaly Savelyev, that in a recent statement said that the country could do much better with 30 to 35 larger and more financially stable airlines.

The authorities have started to pilot this consolidation process, with Aeroflot becoming the vehicle for the consolidation of the air transport sector in Russia. The Russian flag-carrier is expected to take over a large number of the “babyflots”.

Back to the origins.

The first wave of consolidation is already under way, Aeroflot is taking over a group of six airlines: Rossiya, Orenair, KavminVodyAvia, Vladivostok Avia, Saratov Airlines and Sakhalin SAT Airlines. The first step will involve state-owned Rossiya airlines taking over the other five soon-to-merge airlines and then being absorbed itself by Aeroflot. But this might just be the beginning, as we can expect tens of other smaller Russian airlines to be absorbed by Aeroflot in the near future.

This raises some interesting questions about the future of civilian aviation in Russia: what would be the competitive landscape ten years from now?

What would be the role of the main private carriers (namely Transaero and S7) in a market where state-controlled Aeroflot will be acting as a “national-champion”?

What would be the implications for the aircraft manufacturers Boeing and Airbus and their chances to capitalize on the emerging Russian market, if a larger Aeroflot became the launchpad for the reemerging Russian civilian industry? Recent decisions regarding the upcoming launch of the Irkut Ms-21 and Sukhoi Superjet 100 point already in this direction.

And what will be the prospect of ever getting a sizable low-cost aviation market in Russia? Some recent upstarts like Sky Express

have tried to enter this segment, that remains practically non-existent in Russia. Will the authorities allow low-cost carriers to challenge incumbent airlines in the same way it has been done in the West?

Many questions that I will try to answer in upcoming posts...