Comment: Why are low-cost airlines not thriving in Russia?

As easyJet launches the first low-cost flights from the UK to Russia, Nadejda Popova,Euromonitor’s senior analyst – travel and tourism explains why budget airlines have failed to thrive in the country.

The breakup of the Soviet Union created a fragmented aviation industry in Russia, with numerous players spread throughout the country. In addition, the country’s aviation industry is very strictly regulated, which has hindered development and kept low cost carriers involvement to a minimum. Further changes to regulations are needed to boost the development of the low-cost carriers’ category in Russia and increase competition.

Growth in low-cost airlines could bring changes in the structure of tourism arrivals to the country and open up its appeal to international travellers. It will also boost intra-regional travel.

According to the Russian Federal Air Transport Agency, Russian airlines carried over 70 million passengers during 2012, up more than 15% over the previous year. There are a number of factors influencing the current growth and success of Russian aviation. The economy is performing well, resulting in increasing consumer wealth and disposable incomes. Air transportation is also becoming more accessible, with infrastructure improvements and investment.

This growth in passengers carried is predicted to continue for the next five years, boosted by the Winter Olympics in 2014 and the FIFA World Cup in 2018. The sheer size of Russia also means that domestic air transportation is key, accounting for 60% of the total volume of flights.

Schedule airlines dominate Russia’s aviation industry, with only a handful of foreign low-cost carriers (LCCs) offering limited flights. Whilst the destinations served by LCCs are growing, the conditions operating in Russia make it difficult for budget operators to thrive.

The classic low-cost model characterised by Southwest or Ryanair is impossible to maintain. Indeed, LCCs have yet to expand in Russia as they have throughout the rest of Europe and North America due to a lack of secondary airports, while regional airports do not offer any special conditions for LCCs.

In addition, LCC travel often relies on independent travel and Russia remains a somewhat difficult destination for independent visitors to get around. However, foreign LCCs are slowly expanding throughout the Russian market, and capacity will increase as additional destinations are added if regulation changes take place and protectionist policies are abandoned.

The recent demise of two Russian carriers, Sky Express and Avianova, illustrate the pitfalls faced by budget airlines operating in Russia. Key to the fall of Avianova, which was launched in 2009 with backing from Indigo (a US investment firm which owns other LCCs), were aircraft import duties, which made the configuring of the planes for LCC business difficult.

Despite these failures easyJet has just started operations to Russia, with flights between London and Moscow. The LCC provides up to 14 flights a week from London Gatwick Airport to Moscow Domodedovo Airport. Ticket prices start from US$200, about half of the average price of a London to Moscow scheduled flight.

Source: Euromonitor International

This historic fragmentation of the Russian airline industry to date, combined with the country’s vast geography and thinly spread population, has made profitable operations very difficult for many players. However, it is hoped that the government’s consolidation efforts will help change the fragmented nature of the industry by allowing Aeroflot to acquire several regional carriers, such as Orenair, Rossiya, Saratov Airlines, SAT and Vladivostok Avia.

There are a growing number of international players opening routes to Russia due to a slight relaxing of the regulations governed by bilateral agreements. Russia’s complex regulatory policy continues to damage the industry’s potential, where a bias towards Aeroflot has become somewhat entrenched.

Additionally, the Russian Air Code still forbids foreign carriers from operating domestic flights in Russia, and there has been no low-cost domestic air traffic since local airlines Avianova and Sky Express collapsed in 2011. Despite this, the Federal Anti-Monopoly Service is examining the possibility of providing access to domestic routes by foreign low cost carriers, in an attempt to develop internal competition and cut air ticket prices. However, this could become a very protracted process.

Despite these problems, Russia’s economy is showing steady growth, and, together with greater integration into financial and commodity markets, the aviation industry is ripe for continued expansion if protectionism of domestic players is weakened and new regulations are enforced.

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