Volga-Dnepr Group / Press-center / Media Coverage

Russia - Carriers wait to see where the wind blows

11/20/2008

"For now, though, we do not see further expansion as our immediate priority." explains Tatyana Arslanova, AirBridgeCargo's senior VP for strategy and commercial.

Longer-term ambitions by leading Russian airlines to become bigger players on the wider global air cargo stage have for now been superseded by a need to respond to more immediate industry and general economic pressures.

The recent increase in those pressures was highlighted by the collapse of Russian airline group AiRUnion in September* and subsequent widely reported news that the Russian government intends to pump Rb30bn (US$1.1bn) into the country's airline industry to subsidise fuel costs.

Most Russian air cargo industry players are still playing down any potential negative impact of those developments on their business.

"I think we are basically just seeing a bit of consolidation in the Russian aviation industry, which could in fact help to rationalise the sector and improve its efficiency, " suggests Mathias Lukas, manager regional sales steering and processes, Russia & CIS, for Lufthansa Cargo, which operates a weekly MD-11F service between Frankfurt and Moscow's Sheremetyevo airport and provides bellyhold capacity on scheduled passenger services between several German airports and Russia.

Even so, Russia's two leading scheduled international freighter service operators, Aeroflot Cargo and AirBridgeCargo Airlines, have both reigned back previously mooted plans to expand their geographical coverage and are instead focusing on improving service quality and schedules in existing markets – basically those between the Far East, Russia and Europe. Volga-Dnepr group scheduled carrier AirBridgeCargo, which operates a fleet of seven B747 freighters (three -400ERFs, three -200Fs and one -300F) did introduce one new service between Moscow Domodedovo and Tokyo Narita in September but, other than that, its Asian operations remain predominantly focused on existing China routes.

"Today, we operate daily flights to Shanghai, daily to Hong Kong and six flights a week to Beijing, " explains Tatyana Arslanova, AirBridgeCargo's senior VP for strategy and commercial.

"In recent years we have also looked at other markets in China and south-east Asia and we are continuing to monitor those regions. For now, though, we do not see further expansion as our immediate priority." Arslanova maintains, though, that the current world economic situation is not the main factor behind that approach. "The global crisis will of course change the face of today's air cargo market in China but our present strategy is more the result of a focus on achieving fleet efficiency and overall improvement in the quality of our product." A similar "stick to the markets we know" approach is being followed by Aeroflot Cargo, which currently operates three MD-11 freighters, with three more due to arrive next year, and one remaining DC-10F to maintain international and Russian domestic services.

"Internationally, our intention is to focus on increasing service frequencies to our existing destinations to provide a better service for customers, " confirms Alexsey Sumchenko, the carrier's deputy general manager – commercial director. "Next year, we intend to increase our frequencies to Asian destinations like Hong Kong, Shanghai and Beijing up to daily. We will also increase the frequencies between Russia and Frankfurt-Hahn [the carrier's main European hub].

Domestically within Russia, our plans include adding more frequencies between Moscow and centres in Siberia and the Russian far east." Originally, Aeroflot Cargo had intended to support its planned domestic service expansion, as well as previously outlined possible moves into other international markets such as Moscow-India and MoscowMiddle East, by adding three newbuild 92-tonne capacity Ilyushin IL96-400T freighters to its fleet by the end of this year.

However, the arrival of those aircraft has now been put on indefinite hold, says Sumchenko. "When we received the final technical data for the IL96-400T and made our own calculations, we found it would not be easy to get positive financial results from operating that aircraft. We are still in discussions about all issues of that contract but no-one knows when a final decision will be taken." In addition to apparently shelving plans to bring in the IL96-400T aircraft, Aeroflot Cargo has also withdrawn from service two B737Fs it operated for several months earlier this year between Moscow and various European points, including: Helsinki, Leipzig, Dusseldorf and Frankfurt-Hahn.

"We are a general cargo carrier and it became clear to us that the B737F was more suited to carrying mail and couriertype traffic, " says Sumchenko.

"The problem was that we could not use them as feeder aircraft because of differences in pallet sizes. If pallets arrived in Moscow from China on an MD11F or DC-10F, we had to break down that pallet and then rebuild the cargo on smaller pallets before putting in on a B737F for onward movement to Europe. That was costly and made the overall transit times too long." With the carrier's one remaining DC10F due to exit the fleet on 16 December, Aeroflot Cargo will be left with an allMD-11F fleet next year.

Sumchenko claims that should help boost both service reliability and financial performance.

"In the current situation, we prefer to have a simple operation, using a fleet we can rely on, generating normal profit levels in markets that are good for us, " he concludes. The big question for Aeroflot Cargo, AirBridgeCargo and other players in the Russian air cargo market is how well their business will stand up in the face of present global financial and economic pressures.

Right now, the consensus view is that Russian market air cargo volumes are still holding up fairly well but that there are also growing indications a downturn could be on the way. AirBridgeCargo's Arslanova comments: "We are confident that the markets of China and Russia, where we have firmly established ourselves, are sufficiently robust to withstand the present global economic trouble. Although we will undoubtedly feel the negative impact of the current slowdown, other less strong carriers will have to leave the market altogether." One international observer well placed to comment is Mike Staeck, group MD of Transnautic Aero, German general sales and service agent for Aeroflot Cargo. In addition to a presence at seven German airports, Transnautic also has two offices in Moscow. Operationally, Staeck is keen to stress that to date, neither the global economic situation nor the well-documented problems in the Russian air transport industry have had any impact on Aeroflot Cargo's freighter services out of Hahn. In fact, he claims, with the arrival of the MD-11Fs, service reliability has improved this year.

"We are still more or less full on the flights out of Hahn but it is fair to say there are now signs that the world's economic problems are appearing in Russia as well, although we do not yet know quite what will happen there, " he says.

Credit squeeze

One particular area of concern in that context, he suggests, is the fact that the Russian importers bringing in goods by air often rely heavily on credit from Russian banks to buy their supplies. Since Russian banks get their loans from western banks, continues Staeck, the global credit crunch is likely to feed through to that business.

"Right now, there is nothing you can point to in the Russian market and say that is fact. But if you think through the whole situation, then you might come to the conclusion that something is going to happen there, " he adds.

A similar view is expressed by Lufthansa Cargo's Lukas. "So far, we have not seen any slowing down in Russian air cargo volumes. However, we are now hearing from some of the agents that they do expect to see a certain decline so that is our feeling as well." Lukas also goes along with Staeck's observation about the likely impact on the market of the global credit crunch. "We have heard and read in Russian newspapers that major consumer and retail companies in the country are reducing staff so it is clear they are looking at the cost side of their operations.

The question is how that will influence the market. However, I don't expect to see a drastic loss of consumer goods traffic." In fact, recent estimates published by the Russian Federal Customs Service showed the country's imports from beyond the CIS and Baltic states in September were up almost 52% on September 2007 to $21.4bn (US$27.3bn). Imports for the first nine months of 2008 were up 49% year-on-year to $172.3bn. Russian news services suggested importers were expecting the financial crisis to affect them in the mid-term, rather than in the short-term.

Another key issue for the Russian air cargo market is capacity trends. The general consensus appears to be that a combination of normal seasonal influences – specifically the withdrawal of some passenger services and their respective bellyhold space for the winter period – plus cutbacks in air cargo charter and scheduled service operations has effectively counter-balanced the recent increase in freighter capacity by Aeroflot Cargo and an earlier fleet upgrade by AirBridgeCargo. As far as overall Russian air cargo market prospects are concerned, Aeroflot Cargo's Sumchenko believes much will depend on which of two current trends ultimately has the most influence.

"The fact that the global economy and the production of goods is slowing down means there will generally be less air cargo around. But at the same time, passenger airlines are decreasing their service frequencies and some have even gone out of business, so reducing the availability of bellyhold cargo capacity. Less capacity should mean higher rates, " he suggests.

"The question is, which of those trends will be the stronger? At the moment, no-one knows the answer to that."

Array

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