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Crisis In Russia:
Is the economy a poison or cure for the industry?


Only eight months ago the situation of the Russian business aviation market looked far less dramatic than what was happening elsewhere in the world. The economic turbulence hadn’t yet hit the industry so badly. It was certainly evident that a drop in raw materials value would do no good to the fledgling local market- but nobody expected a throw-back to 2006 flight levels.

Instead of stabilizing- the market plunged into a state that may last for several years to come. It’s too early to talk of negative consequences- however - as with any crisis there is always the potential for renovation.

THE PULL OF THE CRISIS
Practically all the key market players in Russia noted a slowdown in growth (traditionally measured in flight intensity in the region). When the credit crunch hit- business flight growth-rates went down by 40%- reaching zero by the end of 2008. By early 2009 the volume of traffic had dropped to 2006 levels- and January saw almost no flights at all. According to the United Business Aviation Association (UBAA)- January and February 2009 flight levels were below those of 2006 by some 3%.

March 2009 proved a little better- rising back above 2006 levels- perhaps indicating a gradual comeback - a trend towards stabilization. The total number of flights in first quarter 2009 didn’t quite reach the levels of the same period in 2006; and compared to 1Q 2008- it was down by a significant 30-40%. Russian Public Holidays in early May saw a temporary seasonal increase- but at present it’s too early to jump to any optimistic conclusions.

Several months of growth will be needed for reliable conclusions to be drawn- and much will now depend on how the global economy behaves - but at this time- neither Russian- or international experts can predict exactly when we will reach the bottom of the recession and start climbing back out.

SURVIVAL OF THE FITTEST
It can also be quite difficult to envision what business aviation will be like in Russia after the recession is over. Only one thing is evident: There will be fundamental changes. Partly this is a good thing because the credit crunch may have the same effect as a medical examination on the Russian industry. It’ll identify and eliminate the hundreds of quick-buck companies that were filling the market when there was money to be readily had.

At its pre-recession pinnacle- charter brokers became all-the-rage within Russian business aviation- and new companies spread rather like a disease - the services they offered were not always transparent- and costs rose as the number of middle-men involved increased.

While the money was available- few industry-users actually seemed to care. Now- corporate and private customers have taken a keener interest in their expenses. In their quest for optimization many have abandoned business charters altogether- switching back to the airlines.

This has all naturally led to a slump in demand- and greater competition among the brokers. This ‘survival of the fittest’ environment ought to prove beneficial to the industry in the long-term. Russian operators and brokers may lose most of what they had- but those that survive will come out a whole lot tougher.

In fact- the ‘sharpening effect’ of tough times in business aviation can be seen to be happening already… as recently as last year- Russian operators- spoilt by stable demand- were simply complaining about high import tax and archaic legislation that – they said – impeded market growth. In the autumn of 2008- when demand suddenly disappeared- minds became focused- and that has had a revitalizing effect on Russian companies. Complaints became actions in the search for new optimization and quality assurance resources.

Such trends- alongside changes for the better in the legislation and the elimination of import taxes for almost all business aircraft will give Russian business aviation a good chance of becoming more mature and eventually reaching European levels.

Also pushed into action by the economic situation are the UBAA and RBAA (Russian Business Aviation Association). Before the downturn- their co-existence elicited incredulity - not only from among foreign colleagues- but also among Russian politicians! Then at last- when the crisis hit- the two associations decided it was time to unite- stating it would be more resourceful each to give up personal interests than try to solve all the same problems separately.

BROKER ACCREDITATION INITIATIVE
The first example of an attempt at co-operation between the two organizations concerned the broker accreditation initiative- launched to establish a list of reliable- bona fide companies. The major flaw of that initiative was its timing - the financial storm is putting both professional and amateur brokers out of business.

While their first joint step proved a little shaky- it gives hope of a future where the two associations will be moving in the same direction. Incidentally- the UBAA took another long-awaited step toward transparency recently. While it might sound like transparency should automatically be the case when measured against EBAA and NBAA standards in Europe and the United States respectively- it has not traditionally been so within the Russian market.

Late April saw the publication of the above figures showing business flight volumes in Russia. There were no exact numbers - the Association offered processed and apparently incomplete information on non-regular flights- shown in percentages - but the sheer courage to admit a 40% drop in flights must warrant some respect. It’s too early to say whether such information will set a precedent for regularly providing accurate data though.

INFRASTRUCTURAL VIBRATIONS
During the peak years before the economic slump hit- one of the biggest problems in this region was to do with infrastructure lagging behind the growth of - and demand for - business aircraft. This has started to change during the recession. It appears some of the key market players have decided to use this period of lagging demand to raise the quality offered to clients and increase the range of services ready for when demand picks up again.

During 2009- for example- Streamline OPS (with a network of local representative offices) will start building a business aviation centre at Tolmachevo- Siberia. And elsewhere- a new ground handling player is emerging on the market: EVO Jet Services is expected to loosen the monopolization of this segment- currently held by only two companies. Alexey Korolev- leading analyst of the Russian company Upcast Media- reckons the competition brought by a new player will have a positive effect on the market as a whole. Despite the recession and a lower number of flights- there should still be enough work for three major companies in the market.

The lack of airports servicing business aviation flights remains a serious issue in and around Russia’s capital though. Moscow’s Vnukovo- Domodedovo- and Sheremetyevo are focused on regular commercial flights- offering only terminals or lounges for business aviation. The lack of competition with Vnukovo- which services up to 90% of business flights (according to some estimates)- has led to a drastic increase in prices but without much improvement to the infrastructure in return. This surprises foreign operators and aircraft owners. Suburban Moscow airport Ostafievo – where Gazprom’s own operator- Gazpromavia- is based – has not yet been completed.

With this in mind- the April announcement by Russian businessman Suleiman Kerimov- head of the investment group Nafta-Moskva- on his intention to build a dedicated business aviation airport in place of the suburban military aerodrome in Kubinka may be regarded a precedent for civilized dialogue between Russian market players.

A separate entity- ZAO Kubinka Airport- has already been established- and although the prospects are rather shadowy at the moment- if the plan is approved by the Ministry of Defense and the airport owner recognizes the shortcomings of his competitors- the yet-to-be first dedicated business aviation airport will have all that it takes to attract most of the traffic now divided among the three Moscow hubs.

Whenever the prospects of Russian business aviation are discussed- the “long-term” is usually something that crops up. The same trends that will eventually have a positive effect on the industry worldwide will help the Russian market too.

Regional growth should resume when the Russian and global economy start to climb back on track - stabilization of the global financial system- positive dynamics of prices for energy resources- raw materials and goods- further globalization and better links for Russian business within the world- along with the increase in corporate and personal profits will all help the industry in this region.

And when the traditional Russian ‘diseases’ (poor infrastructure- heavy import taxes and customs duties- lack of qualified personnel and slow recovery of Russian OEMs) heal over- we may witness another great leap- like the one Russia enjoyed just before the crunch hit.

Anna Nazarova is the staff writer for Moscow-based Air Transport Observer- Russia’s expert airline business publication- where she oversees the Business Aviation Section. She can be contacted at anna.a.nazarova@gmail.com

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