“Russian Airlines are Facing Bankruptcy”

According to Russian media, the rise in fuel prices puts pressure not only on motorists, but also on airlines. There are more and more signs that in the coming months some of them are facing bankruptcy and this threatens with a large-scale crisis for the entire airline industry.

Why do prices for jet fuel rise so sharply and why are the periodic devastation of air carriers connected with it?

The Russian air transport industry is on the verge of a massive crisis. This was announced beginning of October at the meeting of the RSPP Commission on Transport and Transport Infrastructure, by Deputy Director General of the S7 group of companies Dmitry Kudelkin. According to him, the ruble price per ton of jet fuel increased by about 35% per year. The previous time, such a jump in fuel prices occurred 10 years ago, in 2008, and then everything ended with the stopping of one of the largest air carriers, AirUnion, and the bankruptcy of several smaller companies.

According to the results of six months of the current year, the total losses in Russian civil aviation reached 40.75 billion rubles – more than twice as much as in the same period last year (18.21 billion rubles), Alexander Fridlyand, professor of MSTU of civil aviation, estimated. According to the report submitted to them, in the first half of the year, the increase in the cost of the industry was 12.8%, while on average, the inflationary rise in prices in the country’s economy was at the level of 2.3%. The main contribution to this almost sixfold advance was made by aviation kerosene rising in price after oil. If in May – September of last year its weighted average exchange price was 35 thousand rubles per ton, then in the same months of this year it reached 45.4 thousand rubles, and by October 1 it was close to 51 thousand rubles. That is, in a year and several months the price jumped by 45%.

Rising prices for aviation fuels and lubricants is the main driver of higher costs for Russian airlines If you look at the contribution of this article to the overall increase in the cost of air travel for the six months of 2018, it is more than 52%, ”states Fridland. However, other items of expenses are also growing: leasing and renting, airport maintenance, payroll, operational maintenance of aircraft, etc. This figure also indicates the high costs of aviators: last year the profit of Russian airports was 14 billion rubles, for six months this year – already 17 billion rubles.

The external picture of the situation in the industry is still very favorable – the volume of air traffic in Russia continues to grow. According to the Federal Air Transport Agency, in the first eight months of this year, Russian aviators transported 77.3 million passengers, or 10% more than during the same period last year; the average occupancy of passenger seats reached 84.3%. Compared with last year, when the market grew by 19%, the dynamics are clearly slowing down, but in any case, it significantly exceeds GDP growth. At the same time, the prices of air tickets of Russian airlines have long remained at a historically low level. According to the report of Alexander Friedman, since the beginning of the year, the average increase in tariffs in civil aviation was 7.4%, that is, it was significantly lower than the increase in cost. This led to a rapid increase in airline losses: due to the limited solvency of the population, they are unable to raise tariffs sharply.

In the end, financial problems affect the fleet, explains the chief editor of the portal Avia.Ru Roman Gusarov: if the carrier does not have money for repairs and routine maintenance of aircraft, they will be out of order. In such a situation, the conduct of the aviation business becomes impossible.

“For a while, airlines will still be able to stretch,” the expert notes. – Now they need to go to the banks and take loans to survive the low season – autumn and winter, and besides, charter flights to Egypt have not resumed. But if the pricing mechanism for jet fuel does not change, then by next fall bankruptcies can begin – as it was before, when critical problems arose for VIM-Avia, Transaero, Avianovy in the fall. The reason is simple: in August carriers have a high season, and with it an influx of funds. ”

Gusarov adds that it is of particular concern that, for the first time in many years, the international airline segment has become unprofitable. Therefore, the expert believes, almost all airlines are at risk. Although market leaders, such as Aeroflot or S7, feel definitely better – they have a greater financial security cushion, and the segments in which they operate are more profitable.

The main reason for the sharp rise in the cost of jet fuel industry analysts call the tax maneuver in the oil and gas industry. Previously, the tax burden was mainly accounted for by exporters of oil, from which the export duty was levied. But now this duty is reduced and by 2024 it will be equal to zero. Through the mineral extraction tax (MET) tax burden and the corresponding increase in costs are gradually redistributed to all consumers of petroleum products, including such large ones as airlines.

As such a solution, we propose the so-called return excise mechanism, which is already being implemented in the aviation industry. In mid-August, Transport Minister Yevgeny Dietrich proposed to compensate in the amount of 22.5 billion rubles out of 50 billion rubles for the additional fuel costs of airlines from the budget in the form of one-time one-off subsidies (according to the Ministry of Transport, the cumulative increase in the price of aviation kerosene could reach 30% this year) . This initiative was supported by the transport commission of the Russian Union of Industrialists and Entrepreneurs, believing that an effective measure would be to increase the reverse excise rate from 2.08 to 3.5, which would increase the amount of excise tax refund to airlines from 3,024 to 7,000 rubles per ton.

“It is unlikely that it will be possible to influence the pricing policy of kerosene producers,” believes Roman Gusarov. – Therefore, it is proposed to use the mechanism of return excise: airlines will buy kerosene at a high price, but the state will reimburse them in the amount of MET. This mechanism is valid now, but not in the required amount, and besides, the excise tax is returned only after six months – a huge period for airlines. ”

Therefore, insists Gusarov, the decision must be taken urgently, within a few months. Already in spring it may be too late – another wave of airline bankruptcy may occur.

“The situation in the industry is alarming: airlines have a lot of debts, some carriers run out of money, because the summer season did not bring the expected profit due to strong cost increases,” adds another industry analyst, director of the consulting group InfoMost, Boris Rybak.

The next series of exit from the airline market will only reinforce the idea that the Russian air transportation market lives from one bankruptcy to another. Moreover, these bankruptcies are invariably accompanied by scandals, legal proceedings, declarations from high tribunes about the need to prevent a recurrence, etc. But then everything inevitably repeats.

“Over the past few years, the industry has received a series of blows from which it simply does not have time to recover: the closure of Egypt, the conflict with Turkey, the cessation of flights to Ukraine, the devaluation of the ruble, the rising cost of transportation, and now the situation with kerosene,” Roman Gusarov lists.

Paradoxically, this model of permanent crisis has a number of advantages for the end user.

The withdrawal of such players as Transaero and VIM-Avia from the market led to a redistribution of their routes among other companies, but did not cause a sharp rise in ticket prices. On the contrary, the emergence of a number of low-cost carriers led by Victory makes other airlines adapt to the new realities.

According to Gusarov, Pobeda was able to achieve cost, which is significantly lower than that of other airlines, and this year it increased the traffic volume by more than 40%. “This is several times less than in other airlines, plus Victory is very intensively used by aircraft,” comments the expert. “Many large airlines are now trying to use some elements of a low-budget model — they can buy tickets from them that are comparable to Victory, without luggage, food, or the possibility of a return.”

But the overall picture in Russian civil aviation is reminiscent of the constant walking in a circle: after each new crisis and a sharp drop in performance, there is a rapid recovery, leading to another crisis.

“Now the slowdown in the growth of the air transportation market after the recovery of 2016 is already obvious: it is coming to its natural socio-economic parameters,” says Boris Rybak. – There can be no long-term growth in air travel without economic growth and incomes of the population as a whole. Russian airlines operate in an economic reality that presupposes the presence of certain cycles and specific features: price wars, excess carrying capacity. This leads to periodic cleaning up of the market due to the bankruptcies of airlines, and after a while, everything repeats. Economic conditions will change – there will be another activity model. ”

Source: Russian Media