On a comma splice dilemma, the future of VIM-Avia airlines, the domino principle, turbulence and Egypt
— Has your comma splice dilemma in the famous sentence “Execute him we should not pardon him” been resolved by now? I’m asking you about the “incomplete aptitude” warning you received over the collapse of VIM-Avia Airlines.
In this particular case, I’m not in the position to decide where to put the punctuation marks. That’s not my level of competence.
I was handling the tasks that the President of Russia gave me. The VIM-Avia crisis was settled promptly. Within three days, four at the most, we achieved a situation where all flights the crisis management center had deemed as essential began to be carried out. By the end of October, when the flow of passengers who had purchased VIM-Avia tickets came to an end, we suspended the air carrier’s license. Now it is in a pre-bankruptcy state. The creditors are presenting their claims step by step. In the future, if a solution suitable to all parties (investors and shareholders) fails to be reached, then VIM-Avia will face bankruptcy.
— How come VIM-Avia, which had stayed in business for many years, suffered a sudden crash landing? Was it a surprise only for the passengers, or for the Ministry of Transport and the Russian federal air transport agency, too? It turns out that no lessons have been learned from the Transaero crisis, when attempts were made to put out the blaze with a flow of cash?
I’d disagree with you. In both cases the crisis developed gradually. In a sense we had been prepared to expect air carriers to develop problems with delivering passengers someday. VIM-Avia experienced its first problems toward the end of the spring of 2017, although in the previous year its performance looked quite decent. The company even declared a profit. At a certain point, the shareholders had an idea of increasing the fleet of aircraft and leased more planes, hoping for air traffic growth. In principle, it did happen this way. The market was up nearly 20% in contrast to 2016. I’ll say a couple of words separately about that, when I’m through with the VIM-Avia question.
VIM-Avia experienced the first problems toward the end of the spring of 2017, although in the previous year its performance looked quite decent
The company’s management took too great risks and failed to assess the real state of affairs realistically enough. The planes that had been expected in the spring were provided only in the middle of the summer. Moreover, five large liners that had undergone a thorough overhaul arrived later than expected – not by the beginning of the tourist season, but in June. VIM-Avia had to cede part of the tours with pre-paid flights to other carriers. When the long-expected liners became available at last, there were not enough travelers to achieve the required seat occupancy rate. We did extend a helping hand to keep the company afloat and let it honor its obligations to passengers. Alas, the crash occurred just “one week short of the runway.” A number of creditors, (airports in the first place) demanded VIM-Avia should pay the outstanding debts and – in case of refusal – grounded its planes. The Turks were the first to do that. The Belgians followed suit. Russia’s Domodedovo drove the last nail into the coffin. The domino principle worked. It all collapsed like a house of cards. VIM-Avia had no chance to borrow from the banks, the more so, since its main partner, Bank Zenit, at about the same time was placed under the control of an external administration and lost any chance to issue unsecured loans for bridging cash-flow gaps.
It so happened that VIM-Avia shareholders cracked under pressure, and, as you know, fled Russia, thus abandoning the company. Rosaviatsiya and the Ministry of Transport had to hurry in to take the company’s day-to-day affairs in their own hands. Let me say once again, the situation was normalized virtually within several days.
— How many passengers were involved and how much did it cost?
On September 26 – October 8 more than 36,000 passengers who had tickets on VIM-Avia’s international and domestic flights were delivered to their destinations. It cost 600 million rubles ($10.3 million). Let me remind you that only 100 million rubles is reserved in the special fund that can be used for such purposes, but the federal budget’s money was not put to use this time. Aeroflot provided financial leverage at the expense of royalties and compensatory payments. In any case, our costs turned out far lower than those of our foreign counterparts who found themselves in similar situations. Britain’s oldest air carrier – Monarch Airlines (the fourth largest in volume terms) - went bankrupt in early October. Germany’s second largest air carrier Berlin Air, too, had no chance to survive the 2017 season on its own. The German government had to infuse an equivalent of ten billion rubles into its salvation.
— And still, was there any chance of preventing the collapse from happening, of preventing an all-out alarm and urgent evacuation?
As I’ve already said, we keep an eye on the situation all the time, but even quarterly reports sometimes do not allow for promptly making managerial decisions. According to 2016 statistics, VIM-Avia was in the number one risk group with stable current paying capacity. To put it in a nutshell: we can impose certain restrictions if an air carrier features in the fourth, highest risk group for six months in a row. Not even once, did VIM-Avia fall into that category. It is important to remember that air traffic is not a very lucrative business around the world, with its profitability staying within five percent. Many are faced with the risk of getting into the marginal zone. This concerns not only Russian airlines.
After the VIM-Avia probe a number of regulatory documents were adopted to tighten the financial and economic control of air carriers, in particular, those that decide to change their business model, upgrade their fleet of aircraft or start operating new types of planes. We will be monitoring that on-line. But similar situations do occur in other spheres. As we can see, many banks have to undergo streamlining.
— But Valery Okulov, your deputy responsible for aviation, had to pay for the VIM-Avia crisis. Was he chosen to be thrown under the bus?
Personally, I am well-disposed towards Valery, he is a good comrade of mine many years my senior. Everybody else in the industry sees him as a great professional.
— Whatever the case, after the probe this professional was dismissed.
He resigned of his own accord. For age reasons. Okulov in 2017 turned 65. That’s the age limit for a civil servant.
— After this storm flared up, the Investigative Committee launched criminal proceedings against VIM-Avia owner Rashid Mursekayev over abuse of power. I’m well aware that this question is not exactly your cup of tea, but nevertheless do you have any idea why arrest warrants are issued only after the suspects have safely fled Russia with no chances of ever being reached? It was not the first such case.
Each government institution has its own duties to attend to. . The Ministry of Transport is not responsible for the observance of criminal legislation. We cannot assume the function of interrogators, investigators or informers. The borderline is very narrow…
Please remember, VIM-Avia is a private company. Had we tried to meddle in its operating activity, that might have been interpreted as a violation of commercial secrets. The Transport Ministry is empowered and even obliged to control subordinate public companies, while any intervention in the affairs of private businesses must be very delicate. It’s none of our business to decide if the bankruptcy was forced or deliberate. It is up to the authorities concerned to provide an answer.
— Over the past three years, six Russian airlines have been declared bankrupt. The future of Kogalymavia will be decided in February. Are there more surprises in store for us?
Hopefully not… Nevertheless, although we operate in an open economic model, we cannot afford to give any guarantees. For now the situation in the top ten air carriers that service 80% of passengers looks stable, although just two years ago UTair airlines was in a pre-bankruptcy condition. Measures of support, including subsidies, helped it overcome turbulence. But that by no means signifies that all companies, in particular, regional ones, are in a similar financial position. Local traffic is the costliest. The demand exists but the people’s buying power is not very high.
— How many air carriers are there at the moment?
About a hundred have effective air operator certificates. Just recently there were 300 of them.
Thirty-five companies account for 99% of all passenger traffic. The other operates remote hard-to-access routes. But they are very necessary. Giants such as Aeroflot won’t solve all problems. Moreover, it lacks its own fleet of short-haul aircraft.
— What airlines have you had a chance to fly?
Many. S7, UTair, Rossiya and Avrora… Just recently I flew Azimut to get to Rostov. A little bit earlier I tried Pobeda, when I had to get back to Moscow from Cheboksary. I fly Aeroflot most often.
This flagship of our air traffic industry controls about 50% of the market, it is very close to the limit where special tariff and price controls may be applied. To tell you the truth, I do not think it is a great problem the national carrier bears the main burden. This practice is widespread in Europe and some other parts of the world. Lufthansa, Air France and British Airways use the same models to take up a significant share of the market in their respective countries. True, an eye must be kept on pricing, but there is the Federal Antimonopoly Service for this. By the way, last year the average price of an air ticket was down four percent.
Another telling sign is that people have been flying much more domestically. Of the 89 million air passengers in 2016, 56 million travelled inside Russia. In 2017, international passenger traffic was up 30%, but Russia’s domestic market remained the leader, gaining another ten points. In reality, that’s the way it should be.
— And what do 2017 statistics look like?
There’s been growth by more than 15%. That’s a record for Russian aviation. For the first time ever, we’ve soared above 100 million passengers.
— Have you made any forecasts for next year?
Resumption of flights to Egyptian health resorts is quite real
Trees can never grow sky-high. Fast growth cannot last indefinitely, but if the links that were terminated earlier are restored, the market will get a strong impetus. For now, we aren’t putting any stakes on Ukraine, which once accounted for about 3.5 million passengers a year, but the resumption of flights to Egyptian health resorts is quite real. That’s another six million passengers a year at best.
— For the time being only flights to Cairo have been agreed on.
Yes, on December 15 my Egyptian counterpart Sherif Fathi and yours truly signed an intergovernmental protocol, due to take effect in 30 days’ time. Regular flights to the Egyptian capital may begin in February 2018. I’ve asked Aeroflot CEO Vitaly Saveliev to resume operation in Cairo and to conclude a contract with the new terminal from where Aeroflot planes will be landing and taking off.
— What about Hurghada and Sharm el-Sheikh?
The chances of resuming air links with Egypt’s seaside resorts during the winter season are slim. It’s a task to be addressed in the longer perspective. In this particular case, the dates do not depend on us.