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DEVELOPING MARKETS RUSSIA 1Q2011

February 2011

Category: Global Markets for Corporate Aircraft

Author: Anna Nazarova

Slowly, But Surely:
The Russian Business Aviation market starts its recovery.

The year 2010 proved the analysts right in their forecasts. As far back as 2008 predictions foretold that 2010 would be the lowest point of the industry downturn.

The consequences of the world financial crisis severely affected the production sector, and shipments of business jets have roughly been halved - yet the Russian market seemed to buck the trend. Of course, the main reason for this is the complete absence of any General Aviation production facilities here. The situation for Business Aviation charter in Russia formed a far more interesting picture, though.

Charter activity is traditionally a good marker of Business Aviation viability in the region. While any increase in utilization recorded during the downturn was generally insignificant, the appearance of Russian-Austrian air carrier Jetalliance East may prove very significant indeed.

A joint venture between Aeroflot – Russian Airlines and Jetalliance Holding AG, Jetalliance East operates four Soviet-Russian aircraft: two Tupolev Tu-134s, two Yakovlev Yak-42s, and two Cessna Citations - a CJ3 and Sovereign. (Jetalliance’s Sovereign (s/n OE-GJM) was placed in operation in December 2010).

Company representatives say that during 2011 the Tupolevs and Yakovlevs will remain operational, but in 2012 will gradually be phased-out and replaced by Cessnas. Sheremetyevo will become the HQ for Jetalliance East, although aircraft can be positioned to take off from any Moscow hub airport. A line maintenance station was also established at Sheremetyevo airport where Jetalliance carries out maintenance work.

COMPETITIVE ADVANTAGE
Russian registration of its business jets is an unquestionable advantage that Jetalliance East enjoys over its competitors. The western-built aircraft are listed on the operator’s certificate, allowing the company to operate flights between destinations within Russia legally, without bending the rules. In addition, all flight crews hold Russian citizenship in accordance with Russia’s Air Code - yet Jetalliance East remains something of an exception to the rule.

“Russia should be an ideal country for Business Aviation: lots of destination points and a lack of direct airlines,” said Igor Chunikhin, Jetalliance East CEO. “The economy is developing, the distances are vast, and there is a developed network of airports.”

Opinions are varied concerning the new company. According to Evgeni Bakhtin, Avkom D Company President, a new air carrier on the market can only be welcomed. “Such a powerful Business Aviation market participant from Europe will allow clients to choose an air carrier according to several criteria - not least by price/quality ratio and safety standards.”

Slightly more muted in his outlook, an unnamed Jetalliance East source thinks that there are enough foreign air carriers in Russia offering a similar service, and the new air carrier is unlikely to hold a considerable sector of the market within Russia. According to the source, the only - and most important - thing Jetalliance has to offer is legal flight procedures.

And that is the main weapon in the Austrian company’s armory, as Russian operators use Russian-built aircraft which are less effective compared to foreign analogues. Moreover the range of Cessna’s jets will allow the air carrier to establish a more diverse range of destinations a client can travel to more efficiently - and not only when flying from Moscow, but from other Russian cities too.

MORE SIGNS OF THAWING
Another marker of a thaw in the Russian market is the opening of the first Hawker maintenance center here. In December 2010, the aviation technical center of Avkom D passed the necessary EASA audit and gained the right to carry out periodical maintenance work on Hawker aircraft.

The EASA Part 145 Certificate allows Hawker jets to undergo maintenance in Russia, removing the need to send them abroad. Avkom D now has the right to carry out the full range of Hawker maintenance, including major repair work. The center is also authorized to carry out maintenance of other aircraft.

“The market is not big, but it is developing rapidly,” company president Bakhtin observed. “Last year we managed to fulfill four difficult orders on Hawker aircraft maintenance and repairs (both Russian- and foreign-registered). I think we will double, maybe triple this number this year.

“Last year’s clients came to understand all of the advantages of Russian-based maintenance. It is at least 40-45% cheaper (including the ferry flight expenses). Of course there will be a certain level of inertia, and only after some time can we predict all our potential clients will switch to our center from the European ones they have become accustomed to using.”

AIRPORT MONOPOLIES
Avkom D’s certificate award coincided with a conference entitled “Russia’s antimonopoly law implementation in the sphere of Business Aviation and General Aviation in Russian airports”.

Monopolies in Russia are not unusual, often appearing in the very spheres where competition should have bloomed. Ground services at Russian airports form one such sphere.

The conference participants focused on an ever-strengthening monopolization of Business and General Aviation maintenance. As a direct result of FBO service monopolies here, last year the cost of services for a business jet at some airports doubled while the level of service remained unchanged. It was clear from the conference that neither the clients nor the other operators were happy with the current situation, and they have now appealed to Russia’s Federal Antimonopoly Service, and to the government to change the legislation (accounting for the needs of Business and General Aviation), and introduce measures to eliminate the monopoly of FBOs.

MANUFACTURER INROADS
2010 saw weak signs of improvement in the sphere of licensed GA manufacturing. Licensed production of Diamond Aircraft’s DA40 and DA42 may soon occur at Gorbunov aviation production association in Kazan.

“Negotiations with the Russian side to organize light multi-purpose aircraft production are underway,” revealed Diamond Aircraft Sales & Marketing manager Anna Stolbovaya. Exactly when production would begin is still unclear.

International manufacturers continue to regard the Russian market as one holding plenty of potential demand for their products. Embraer and Piaggio Aero both confirmed their interest in the Russian market during 2010.

At Jet Expo 2010, Embraer named Moscow’s Vnukovo-3 the official Embraer business jet sales representative in Russia. The recently upgraded Embraer Legacy 600 is popular in Russia, and with the company adding several new and in-development aircraft to its family, it stands to reason that Embraer would want to strengthen its presence in the region. Nevertheless, the selection of Vnukovo-3 as a sales representative raised a few eyebrows in Russia since Embraer had already worked through an official dealer in Russia for several years previous to this appointment.

Unlike Embraer, Piaggio Aero was entering the Russian market for the first time, and in September an agreement with Aviacharter was signed for distribution of the P.180 Avanti II in Russia.

Mikhail Shamanov, Aviacharter CEO, outlines his strategy: “Our target markets are the more wealthy regions - Yekaterinburg, Novosibirsk, Krasnoyarsk, Irkutsk, Kazan, Samara and Sochi,” he explained. “These are the cities with larger populations, and developed industry and active business. Regional businessmen and officials hardly need large business jets, but they value time very high, and there is practically no regional aviation within Russia.”

It appears this sales strategy may yet work in a country that jet travel is generally preferred; Aviacharter has already achieved the sale of its first ‘flying Ferrari’.

In concluding our regional review, we must acknowledge the latest forecasts in which the Business Aviation market recovery slipped a year to 2012. The Russian market is highly unlikely to be an exception to the rule - a full recovery to 2008 levels is a longer-term proposition - but as with other regions of the world, the Business Aviation market will continue to grow and strengthen this coming year.

Anna Nazarova is the copy editor for Moscow-based Jet Magazine, Russia’s expert business Aviation publication, where she oversees the Business Aviation Section. She can be contacted at
anna.a.nazarova@gmail.com

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