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Second Approach:
Another year lying low for business aviation in Russia ?
By Anna Nazarova & Ivan Veretennikov

A “rough landing” would be a good way to describe what happened to Russian business aviation in 2009. The year was even worse than the most pessimistic forecasts could have predicted. Players on this market are less diverse than their American and European counterparts in terms of the services they offer- so the crisis hit only charter brokers and operators.

The slump that started in 2008 affected demand for their services- and by the end of 2009 business flights dropped 35%. The pre-owned market suddenly found up to 150 aircraft for sale (pretty incredible when the Russian Inventory stands at 300-400 aircraft). All this- coupled with the inactivity of local aviation authorities- has put many operators on the brink of extinction.

Eugene Bakhtin- Vice President of the Russian United Business Aviation Association- shared with World Aircraft Sales Magazine how the industry pulled through 2009- and what 2010 has in store.

WAS: What was the change in total business flights recorded in 2009- and has this affected average charter prices?

Bakhtin: A general stagnation of businesses due to the economic crisis has led to a slackening of demand in business aviation. Russia followed the rest of the world in that the situation grew worse throughout 2009. Over half of all the business jets that the Russians bought in the past three years are on sale- while a quarter of the active fleet has either been transferred to commercial operators- or placed on hold altogether. Some owners have gone back to the airlines.

The number of business flights has gone down 35% when compared to 2008- and taking into account the annual 35-40% growth that preceded this downturn- we can say that the industry has lost about 65%. 2009 has thrown business aviation back to 2007 levels. At some points there were increases in charter brokerage- but this was mainly due to owners switching to charters.

Charter prices went down drastically with the increase of the number of aircraft operated commercially. Sometimes people would fly at rates barely above the aircraft Direct Operating Cost.

WAS: What changes has 2010 brought to the situation?

Bakhtin: Moscow – representing about 90% of all business aviation in Russia – is showing signs of recovery. In January the number of flights were the same as in January 2009- and in February the number was even higher than that of last year. Don’t jump to conclusions- though: First of all- 2009 levels were already very low compared to 2008- and this makes the “recovery” somewhat modest. It can be said that the market has probably hit bottom- and can only move up. It’s very unlikely that it can go down any lower.

WAS: Has the crisis affected the balance of Russian and foreign operators significantly?

Bakhtin: There was no effect at all in the balance. The Russian market is dominated by foreign operators who hold as much as 90% of the market. High import duties and VAT have always put local operators at a disadvantage- because they couldn’t acquire modern foreign aircraft. Difficult operator certification rules and the need to confirm and approve every flight with the authorities make Russian companies even less competitive.

The official line in merging small companies into large state operators has led to many business aviation companies losing their AOCs in the period 2008-2009. At the same time- import duties for certain aircraft were cancelled by the state- and this has had a positive effect.

I can’t say that large European and American companies run full-scale operations on the Russian market: they have to be careful with the local legislation. We still don’t have a local company with at least 50% shares belonging to a foreign business- or an operator controlled by a foreign company.

Most of the market is taken up by small foreign operators (owners) directly or indirectly affiliated with Russian owners- flying 2-3 business aircraft. This is favorable for Russian operators and makes it easier for them to compete... unless the government policy of taking away AOCs leads to the disappearance of operators altogether by the end of 2010- that is…

WAS: What can you say about aircraft of Russian owners that are now on sale?

Bakhtin: According to the Russian United Business Aviation Association about 300 business aircraft totaling $5.5 billion were acquired by Russian owners in the period 2005-2009. Although this is hard to confirm due to secrecy and privacy of transactions- we can say that at least 40% of these are now on sale- and there are so many others on the market that an aircraft can stay on sale for up to 180 days.

Despite the low cost of pre-owned aircraft- there were no more than 15 completed transactions last year- leading to many owners opting to keep their aircraft- because it’s cheaper than selling at a bad price. As a result- at the end of 2009 about half of the jets that had been on sale were not listed anymore.

WAS: What do you think of the prospects for fractional ownership companies in the Russian market?

Bakhtin: Fractional ownership companies have always been more akin to charter operators as opposed to what they are supposed to be: Only a limited number of people in Russia actually own a share of an aircraft- but a lot of them hold cards that such operators issue. The way a fractional operator can offer low prices due to low operating costs and large fleets has become a great advantage on the Russian market. As the crisis hit- however- demand for charters went down and many owners discarded their ownership.

As the number of aircraft in fleets decreased- fractional ownership companies found themselves in a difficult situation and had to lay-off personnel- or decrease activity.

WAS: What has the RUBAA done in the past few months to change the Air Code and flight rules in the region?

Bakhtin: After the two Associations merged into one- the RUBAA has taken a number of practical steps to change the acting legislation and industry documents in a bid to harmonize Russian and international business aviation regulations.

We’ve helped cancel the useless import duties for business aircraft along with a number of obsolete documents that kept business aviation under the control of the airlines. It’s also become easier to obtain flight approvals for Russian operators- and a new classification of airspace is on the way.

The greatest achievement of the RUBAA is the consolidation of business aviation operators and flyers in lobbying their interests at state level. The Association has become a force that the authorities can’t wave away.

WAS: Has the ‘zero-tax’ changed the way owners regard the Russian registry at all?

Bakhtin: Partly. In the second half of 2009 the Russian business aviation fleet increased by 18 aircraft. Basically the fleet that was built up over the past 15 years suddenly doubled in three months! The effect is certainly positive- but not all airplanes meet the restrictions- and high VAT is still a turnoff for most owners.

Local airworthiness directives are different from international ones- meaning that aircraft operated in Russia are hard to sell abroad and suffer serious depreciation. Russia isn’t a part of the Cape Town Treaty that protects ownership rights of the creditor to an aircraft he is financing. Thus foreign banks don’t provide financing for aircraft that are destined for the Russian registry.

RA insignia also limit flights to the United States and some European countries that demand special approvals. All this leads to most aircraft operated for Russian owners being registered in Europe or offshore jurisdictions such as Aruba- Cayman Islands- the Isle of Man and Bermuda. All offshore jurisdictions provide only for private operation and to register an aircraft for commercial operations in accordance with ICAO recommendations- the States of the operator and registration must have an agreement (83 bis) that transfers some regulatory and oversight functions from one State to another. Russia has such an agreement only with Bermuda- but it doesn’t cover business aircraft.

WAS: What are your expectations for Business Aviation here in 2010?

Bakhtin: Business aviation is tied to the global economy. It’s clear that a global recession will have a negative effect on the industry. The demand for private air transportation in Russia is so high and lacking an alternative- however- that the economic turbulence won’t stop industry development altogether.

It’s critical that Russian operators overcome the slump in business flights and manage to live off small incomes for the time being. Further integration in the international economy and trade unions; a rational policy of the Russian Government; less taxes and tax inspections; and easier registration procedures will all give the market a chance to survive the economic crisis. State policy towards operators will also be a key factor. If more operator licenses are revoked- and certification of new operators is ditched- legal operators may disappear completely before year-end.

If the authorities consider what the Association has to offer and take rational steps in operator certification and control- however- the industry may still have a chance for existence and growth.

More information from
www.rubaa.ru

Anna Nazarova is the staff writer for Moscowbased 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

Ivan Veretennikov is director- Sales & Marketing at Upcast and can be contacted at
ivan@upcast-media.com


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