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Closed Sky:
The reasons why western-built business aircraft are still rare on Russian domestic routes.

If you are a stranger to the professional circles of Russian business aviation operators and associated brokers engaged in VIP-flights- it is unlikely that you will be able to find a company with which to discuss the topic of domestic business jet flights. The talk is about passenger transportation between Russian cities by means of aircraft manufactured in the West and managed by foreign operators. In many cases the nature of such flights makes it possible to treat them as illegal cabotage.

In recent years this practice has become widespread on the Russian market- but due to the lack of transparency of this business it is not accepted practice to discuss these issues in public.

The emergence of this illegal (though operators and brokers prefer to call it “grey”) cabotage is directly linked to the formation of the enormous fleet of civil aircraft (by the standards of Russian civil aviation) factually managed by foreign companies- but actually belonging to Russian owners.

According to Russian legislation- the operation of business aviation aircraft (be it a private aircraft intended for the transportation of its owners- or an airplane whose transportation capacities are sold on the market by an operating company (charter)) is regulated by rules developed for traditional Russian aviation companies. The reality of the rules mean that Russian aviation authorities will treat any business jet flight - even if it belongs to the Russian owner - that is not registered on a Russian company’s air operator certificate as a flight carried out by a foreign aviation company… irrespective of whether the plane is operated by its Russian owner or not.

Further- due to the fact the flight is officially being performed by a foreign carrier- all its operations will be regulated by the norms of international law within the framework of the Chicago convention 1944- (i.e. on the basis of bilateral agreements between Russia and the country where the aircraft operator is registered). The 8th level of freedom which provides the most complete commercial rights- is forbidden in Russia- making cabotage flights illegal there.

Of course- it is difficult for the owner of a western-built plane to stomach that although he paid multi-million dollars for the plane he cannot use it for flights in Russia. Obviously there is a way around this: – you can charter a native Tupolev Tu-134 and Yakovlev Yak-40 which are the only aircraft you can legally use for flights on Russian domestic routes. But if that were a suitable solution- why buy a western-built business jet?

An alternative option allows an owner/operator to register their western-built business aircraft in Russia- and enable operation on domestic routes - but- even going down this path- western aircraft encounter red-tape obstacles. Over a year ago the government of the Russian Federation enacted a resolution concerning the approval of import duties rates concerning some types of civil aircraft.

Aircraft of foreign manufacture with a capacity not exceeding 19 passenger seats were exempted from the excessive 20-percent duties which had been thought the major obstacle hindering development of the market. It seemed that a remedy had been found- and the thin stream of those queuing to add their business jets to the Russian registry would turn into a full-flowing river. But- as regularly happens- the theory proved to be at odds with reality…

According to the information from various sources- last year only about 10-20 western- built aircraft were recorded on the Russian registry- which- bluntly put- hardly whets the appetite- instead posing two simple questions: Why are there so few planes registering? Is it possible to change the situation?

In order to understand why the pace of western airplanes joining the Russian register has been so disastrously slow- we should turn to the nature of the state protective measures. Despite the fact that the Russian aviation industry has been producing only a handful of airplanes recently- the government became somewhat obsessed with the idea of protecting this sector from competition with the West. As a result- high import duties were set up on all western-produced aircraft- both for commercial and business aviation. Though the attitude of the state to the airplanes of the commercial carriers can be explained- no reasonable explanation exists for the situation when applied to business aviation aircraft.

The Russian industry has never produced an aircraft designed specifically to serve business aviation purposes - so even the faintest hint of suspicion at ‘the competition’ in this arena is absurd. Yet- the authorities ignored this fact- and extended the protective measures to this non-existent sector of the Russian aircraft engineering industry. Consequently- customs did not find themselves overrun with those feeling the burning desire to pay 20% of the full price of the aircraft (on average reaching tens-of-millions-of-dollars) in exchange for painting a Russian flag on it. It simply remained cheaper to register airplanes elsewhere - the Caribbean or in Europe- for example.

Meantime- the state blinked in astonishment as it beheld the ‘grey’ area of cabotage unfolding around it in Russia. Business aviation around the nation was further and further leaning towards foreign registration. By the time the decree on the abolishment of the import duties had come into effect- Russia-registered airplanes numbered barely more than a dozen business jets- and a few converted Tupolevs and Yakovlevs. Yet- the fleet of business aircraft belonging to Russian owners is said to number about 300 planes.

No drastic changes are expected in the near future as- customs duties aside- there are still a whole range of other limitations in existence. Alexander Yevdokimov- Director General of Jet Transfer believes- “it is necessary to take such factors as financial issues- technical maintenance- ground environment and pilots into account.”

Yet- it would be unfair to ignore altogether the creation of favorable conditions which will have a degree of impact on future decisions aircraft owners take concerning Russian registration. Major players in the Russian business aviation market agree that the cancellation of protective duties had a positive impact - but that it was not as effective as was hoped.

Leonid Koshelev- Chairman of the Russian United Business Aviation Association (RUBAA) clearly believes that even though the abolishment of duties did not lead to an avalanche of registration under the Russian jurisdiction- it would have an impact on many decisions taken by aircraft owners in the future. “It should result in the significant growth of the number of business aircraft which are operated in Russian civil aviation. Some of the planes are already registered while others are being discussed - and decisions on some of those have already been taken.”

“Currently we are holding negotiations with our clients regarding Russian certification as an operator of several western-manufactured aircraft- and their registration onto the Russian registry-” Michail Titov- Director of RusJet- revealed- adding that he sees some revival of interest in Russian registration at this time.

JETALLIANCE BLAZING A TRAIL?
A recent deal concluded by Austrian operator Jetalliance is proof of how tangible the inflow of business aircraft can be for the Russian jurisdiction. In November of 2009 the company won a tender for buying a block of shares of Aeroflot-Plus company which is a subsidiary of the biggest Russian air carrier Aeroflot. Aerflot-Plus is engaged in business charter operations- and the transaction is estimated to be in the region of $2 million- which bought Jetalliance 51% of the Aeroflot subsidiary shares.

The new owner will have to handle the company debt which exceeds 80 million roubles- to control the operating business of Aeroflot-Plus and develop a plan to lead the company out of crisis. The Austrian operator is not going to cancel converted Soviet Tu-134 and Yak-42 planes- but is going to use them on the Russian domestic market which still remains a priority for the company.

Jetalliance is also providing Aeroflot-Plus with two new business jets - a Cessna CJ3 and Cessna Citaition Sovereign – for the term of three years- and at no charge. These two jets will be registered on the operator’s certificate- setting a precedent for Russian business aviation in which Citation business jets will be legally operated on a commercial basis.

Sergey Koltovich- the former director of Aeroflot-Plus will be carrying out the Russian project of Jetalliance- and he explains the air-carrier will operate 30 aircraft registered in Russia on the Russian domestic routes. Up to now nobody has registered such a large number of business aviation airplanes in the country. The company’s plan envisages importing at least four jets into Russia.

Jetalliance representatives say that the Russian market is of the highest importance for them as about 30-35% of the company’s orders come from Russia and CIS countries. The growth rates of the business jet fleet will depend on the speed of the market recovery and subsequent growth. Whether the Jetalliance model will become something of a general trend- opening the way for western-built aircraft to fly into the Russian market is a question that draws mixed reaction.

Alexey Korolev- a co-owner of Upcast Media consulting company believes that the acquisition of the Russian company by a large foreign operator is further evidence of the interest which foreigners show in the Russian market as a whole.

“Even if a foreign operator establishes a subsidiary company with a Russian operator’s certificate- they would face the very same problems and difficulties which regular Russian companies encounter here-” he warned- however. “Cabotage is forbidden and the Russian registry is still not a popular avenue for registration of business jets for a whole variety of reasons. It is unlikely that the foresaid deal indicates noticeable changes on the market.”

Whether Jetalliance is forging a new route for Western operators into this notoriously difficult market- or whether Korolev will prove right in his assessment is something only time will reveal.

JET EXPO 2010
Don’t forget this month JET EXPO is scheduled to meet in Moscow- September 15-17- offering an ideal platform to learn more and discuss these and other key issues within the Russian Business Aviation community.

Find out more about this event at www.jetexpo.ru

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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