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Merger Mania Goes East And Hits Russia!

Fri Dec 08, 2000 4:05 am

Alliance could see the development of major carrier
Krasair lead formation of airline's alliance to answer Aeroflot (800 words)

Published 7 December 2000

The announcement of the agreement for the formation of an alliance between four of Russia's airlines, Krasair, Chelyabinsk, Domodedovo and Aviaexpresscruise, a fast growing Moscow based flying out of Vnukovo and Domodedovo to destinations in the Ukraine and southern Russia, mark the start of a consolidation of some of the country's largest airlines, led by Krasair, which held 5% of the domestic market in 1999, an increase of a full percentage point on 1998.

The motivation of the alliance is cited as being the necessity to compete with the leading domestic players such as Aeroflot (suspected to be the prime competition),Vnukovo and Pulkovo. The increasingly close relationship between Pulkovo and Aeroflot in particular, and the development of Aeroflot's affiliates in Rostov, Nizhni Novgorod and Perm, is seen by the alliance's key mover General Director of Krasair, Boris Abramovitch , as an extention of the major market challenge posed to existing operators since the decision of Aeroflot to become actively involved in the domestic market. Aeroflot's rising share of the market from 5% in 1998 to 8% in 1999, being a trumpet call warning of the damage that Aeroflot is capable of doing and there is little doubt that Aeroflot see the new alliance's markets as potential growth areas.

The initial announcement laid out little in the way of detail regarding the depth and operation of the new alliance, other than to say that the deal would involve the joint use of the airlines 97 aircraft. This in itself is a major step towards a single entity in the future with the information available suggesting that with funds reserved from all four members for aircraft overhaul, maintenance and insurance. A unified tariff policy and the development of combined ticket sales, is yet another nail in the coffin of the state air ticket selling structure, the Transport Clearing House. It has been reported that the new alliance will solely use Domomodedovo Airport in Moscow, recently overhauled at great expense by the East Line Group and an increasingly attractive competitor to Shermetyevo, as East Line try an persuade a number of domestic and international carriers such as Lufthansa of its charms. Vnukovo Airport may however, suffer given that some of the carriers including Aviaexpresscruise currently use the facility

According to Abramovitch the alliance may incorporate further partners at a later date, but he feels that three or four would be enough initially, although some sources have suggested that it is his ambition to create a single holding. Some media sources have said that the experience of the illfated Sibir and Vnukovo merger has tempered the participants eagerness to marry. We would suggest however, the causes of the failure of Vnukovo and Sibir to tie the knot, can largely be attributed to Filev gaining access to Vnukovo, and finding out just how bad things were. His flight at the alter has been thoroughly justified by developments at Vnukovo over the last few months as the airline has increasingly looked like a victim of consolidation without the lifeboat of a merger. The relative speed of this coming together, may owe more to the nature of Russian company law and the allocation of route licences rather than a lack of desire to form a single entity; which de facto the partners will be if they operate the fleet and ticketing as a single entity.

The new alliance's market share of 8.5% in 1999, would have left it as Russia's largest carrier and certainly is a wakeup call for Aeroflot that domestic expansion in small steps may not be an option in the future. The new alliance has a larger route structure domestically than Aeroflot, although according to Alexander Akimov, General Director of Domodedovo Airlines, the feeling remains that the tax privileges awarded to the flag carrier still give them an unfair advantage in the domestic market, particularly the duty and tax exemptions related to the import of foreign aircraft. The impact of this situation being that the domestic industry still lacks a viable domestic leasing structure as the major customer does its leasing offshore with aircraft largely not registered in Russia.

For the government in the form of Pavel Rozhkov, Deputy Minister of Transportation, hot from his recent efforts to merge the various airlines in the Volga region in conjunction with former Prime Minister and Presidential representative Sergey Kirienko. The moves from Krasair and party are the first steps towards a consolidation that the civil aviation department, the GSGA say could see the number of airlines in Russia reduced by 60%. This statistic however is meaningless given the size and general condition of Russia 300 or so registered airlines.The important consolidation is what happens among the top twenty airlines that control the vast majority of the traffic. Krasair's announcement suggests change for the sector may be on the way with major consequences for both travellers and manufacturers

"Clive Beddoe says he favours competition, but his actions do not support that idea." Robert Milton - CEO Air Canada

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