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Aeroflot to create its own low-cost carrier

July 29, 2013, 17:08 UTC+3 Alexandrova Lyudmila

MOSCOW, July 29 (Itar-Tass) - Russia’s flagship air carrier Aeroflot announced its plans to create its own low-cost airline, which is expected to begin flights already in 2014. Before it starts operating amendments allowing to cut ticket prices should be submitted to Russia’s legislation. Experts agree that it is necessary to create a budget carrier, but express ambiguous opinions on the project’s prospects.

Last week Aeroflot Board of Directors approved the creation of a subsidiary - a low-cost carrier, where Aeroflot will own a 100% stake. The yet-to-be low-cost airline’s baseline product will maximally differ from Aeroflot’s existing offers. “A cost-effective business model, including abandonment of some conveniences that some passengers consider insignificant, make possible to use 20-40 percent discounts as compared to traditional air carriers and even to launch a price competition with rail transport,” the company said in a statement.

Aeroflot raised the question on the creation of a low-cost airline last autumn. Aeroflot CEO Vitaly Savelyev told President Vladimir Putin that it is necessary to submit amendments to Russia’s Airline Code. In particular, a special focus was placed on air carriers’ request to allow them to hire non-resident pilots, which would resolve the problem of a shortage of pilots. They also discussed whether it is possible to sell non-returnable tickets and empower air carriers to cancel snacks onboard and to impose luggage fees.

Moreover, for the project’s successful implementation it is necessary to sell more tickets for a particular flight than there are seats on the plane, Savelyev said. He explained that some passengers do not come to fly their flight. Compensations should be also developed for those passengers for whom no seats are available.

Aeroflot considers it especially important to cancel duties for planes accommodating over 170 passengers. Moreover, it is necessary to modernize an air traffic management system in such a way as to make it possible for planes to take off 30 minutes after the landing and to create a network of second-level airports with more advantageous tariffs.

Vladimir Putin agreed with all proposals put forward, except for the hiring of foreign pilots. He noted that this issue should be additionally discussed with trade unions.

Some ministries and agencies opposed these proposals. Thus, Russia’s Transport Ministry resisted cancellation of the effective norms on meals and luggage. The Economic Development Ministry and the Industry and Trade Ministry were against the lifting of duties on large planes - a MS-21 jetliner is being designed in this niche. The Russian consumer rights’ watchdog and the Federal Anti-Monopoly Service were not ready to agree with the sale of non-returnable tickets.

Nevertheless, in late May Transport Minister Maxim Sokolov said his ministry drafted all necessary amendments and legislators will have final say.

The State Duma or the lower house of Russian parliament has already expressed readiness to adopt these bills, an Aeroflot source was quoted by the Kommersant business daily as saying. Sources at the State Duma transport committee also confirmed this information.

In the first two years of its operation the low-cost carrier will develop most profitable routes in European Russia and will make flights to cities, which have a population of over one million. Later its flight map will expand and include Russian regions, CIS member-states and other countries. Earlier Savelyev said Aeroflot’s discount airline will use medium-range A320 or B737 jetliners.

In 2014 the low-cost carrier will begin flights to St. Petersburg, Samara, Yekaterinburg, Makhachkala, Krasnodar, Ufa, Kaliningrad and Novy Urengoi. In 2016 its map will include 26 routes, possibly such destinations as Kiev, Istanbul, Yerevan and Barcelona. Within five years the air carrier’s fleet will grow to 40-50 planes.

The low-cost carrier’s investment programme will total around $100 million for the upcoming two years. Aeroflot Board of Directors decided to inject 529 million roubles from its fund for financing targeted programmes. Another 2.8 billion roubles will be allocated from the budget for this purpose in 2014.

In global practice this is the upper bound of the cost of the project to create a budget airline, the Vedomosti business daily quoted Dmitry Chernyak, one of the founders of Avianova low-cost carrier, as saying. He said such a high cost of the project is explained by the fact that under effective rules air companies should own or lease no less than eight planes.

The air carrier should become profit-making already on the second year of its operation, Aeroflot’s consulting company Bain that developed the project on the low-cost carrier at the flagship airline’s request hopes. By 2015 it should earn $26 million and by 2018 - around $150 million. Aeroflot itself earns not so much more - $161 million in net income in 2012, the daily wrote.

At the first stage an average price of plane tickets, for instance, to Yekaterinburg will cost around 4,135 roubles (by 20 percent lower than the current average price), to Samara - 3,100 roubles (by 43 percent lower) and to Ufa - 3,485 roubles (by 31 percent), which correlates with prices of train tickets.

Aeroflot has everything necessary to give a good start to the project. However, if consumers do not show interest in the services provided, it will be impossible to gain success, a senior expert at Finam Asset Management, Dmitry Baranov, was quoted by Kommersant as saying.

“All efforts of the staff and shareholders, all money invested may turn, as they say, unclaimed, if prices for services of this low-cost carrier will not be attractive,” he said.

Most projects on the creation of budget air carriers in Russia proved unsuccessful up to this time. The country has already had two low-cost airlines - Sky Express and Avianova. Each air carrier had existed for around three years and then went bankrupt. Among bankruptcy reasons experts named expensive airport infrastructure, obsolete laws and high customs duties on foreign aircraft.