Aeroflot plans budget airline revolution in Russian skies

MOSCOW - A Russian budget airline? The thought may fill some travellers with dread but Russia's flag carrier Aeroflot is now taking serious steps to launch the country's first sustainable low-cost airline.

Aeroflot has made huge strides in recent years to lay to rest its image as a disaster-plagued Soviet carrier, becoming a member of the Sky Team alliance and winning international awards for its service.

And now it wants to take another step by creating a Russian equivalent to EasyJet or Ryanair, whose success transformed travelling habits and the aviation industry in Europe.

Aeroflot announced the plan for a budget subsidiary after a board meeting in late July. But crucially, setting up the budget airline is still dependent on changes to Russia's aviation regulations which are stricter than in Europe.

The airline, which still controls 40 per cent of the Russian aviation market, is hoping from 2014 to launch its first budget routes from Moscow to Saint Petersburg and to cities in the south of Russia.

According to the daily newspaper Vedomosti, the new Aeroflot subsidiary, whose name has yet to be unveiled, plans to eventually serve international destinations including Kiev, Yerevan, Istanbul and Barcelona with a fleet that will comprise 40 planes starting with Boeing 737s.

Analysts point to the fact that many Russians are still making long journeys across the vast country by train - often lasting several days - and may be easily tempted to fly if the prices are lower.

Jumpstart the process

The budget Aeroflot would likely be based at Domodedovo in the south of Moscow as opposed the airline's main hub at Sheremetyevo airport.

Russia's third biggest airline UTair is also planning to set up its own low cost carrier, pointing to a clear market demand.

"People consider more and more that their time is precious and they are going to want less and less to spend two or three days to get anywhere," its chief executive Andrei Martirossov told Vedomosti.

Russian companies are also keenly aware that low-cost European airlines are already establishing themselves on the Russian aviation market which is enjoying annual growth rates of 20 per cent.

EasyJet in March launched its first flights between Moscow and London while Hungary-based Wizz Air will follow in September with flights between Budapest and Moscow.

"Aeroflot's move, in our view, is strategically sound given strong demand for cheap domestic flights, including from passengers who currently travel by train," Sberbank Investment Research said in a note to clients.

"It is better to jumpstart the process rather than wait for competitors to lead the way in this promising market segment," it added, warning however of the "high risks for Aeroflot".

Aeroflot is seeking to count on a tried-and-trusted method to set up its budget airline - reduce costs to a minimum, sell non-refundable tickets and only through the Internet, as well as charging for checked-in baggage and food.

The problem is that currently Russia's stringent aviation regulations outlaw many such aggressive cost-saving practices. Russian law also forbids the hiring of foreign pilots, a major problem in a country whose aviation boom had led to a pilot shortage and consequent high salaries.

The law must change

"As long as the law does not change, absolutely nothing is going to fly. We are not going to take the risk," Aeroflot's chief executive Vitaly Saveliev told state television.

"Aeroflot is not going to invest 100 million dollars in a project which is not going to make us money."

He called it a "paradox" that Russian authorities have allowed Wizz Air and EasyJet to fly into the country but hasn't levelled the regulatory playing field so Russian companies can use the same business model.

The Russian authorities appear however to have understood the necessity of acting after President Vladimir Putin gave his agreement in principle to the creation of a low cost airline last October. But changes have been slow to come.

According to consultancy Bain & Company all attempts to create a low-cost airline in Russia have failed until now and the price of tickets is three to five times more than those offered by European budget airlines.

One tentative attempt to create a budget airline, Sky Express, lost its license in 2011 due to financial difficulties. It was absorbed by another operator, Kuban, which itself went bankrupt at the end of 2012.

In 2009 the Alfa holding of billionaire Mikhail Fridman and American fund Indigo opened the Avianova airline but it grounded its aircraft in October 2011 after becoming heavily indebted and plagued by a shareholder conflict.

Analysts at VTB Capital said that given past experience, it seemed that Aeroflot still had an uphill struggle to get the airline of the ground.

"The low-cost airline model does not currently work in Russia, as the track record demonstrates, and we doubt this idea will be implemented any time soon."