Merge to Fly Another Day

The consolidation of Russia's airline industry - which has been long advocated by government officials and aviation authorities - is gathering steam as top five carriers in the country take a more proactive approach to business, gobbling up smaller companies and forming alliances. Though small - the remnant carriers left over from the breakout of the Aeroflot monopoly of Soviet times - still abound, their number has more than halved since the 1990s to just under 200 this year. During the first nine months of 2004, five new major consolidation events occurred in a trend that industry watchers predict will continue in near future. Driven by economic reasons, carriers are join forces to optimize their route networks and upgrade fleets for more successful businesses.

From Siberia to the world
Siberia Airlines, second only to the current Russian flagship Aeroflot, kicked off this year's merges and acquisitions to continue its strong growth since emerging in the late 1990s from the former Novosibirsk division of Aeroflot.
In May, Siberia gained control of Chelaybinsk aviation enterprise in the Urals region and edged out of business the 14th-ranked airline, Chelyabinskbased Encore, which last year carried half a million passengers, nearly one seventh of Siberia's own volume. The takeover, which was viewed by some shareholders of Encore as hostile, signaled further strengthening of Siberia Airlines on the domestic market, where the latter overtook Aeroflot for the first time last year.
Ruled by a new management team with former career officer Vladislav Filyov at the helm, Siberia started off its expansion in late 1990s by gobbling up smaller regional carriers next door. In 2002, it took control of the debt-ridden federal carrier Vnukovo Airlines, which helped it with set up a home base in Moscow.
Yet Siberia did not stop at that. Furthering its expansion drive beyond the Russian borders, Siberia last year bought up a small Armenian carrier Armavia, which it used as a vehicle to import and test-fly Airbus jets. The airline is now effectively Armenia's national carrier.
Siberia Deputy General Director Mikhail Koshman says the company is moving along the natural consolidation process, which in 7-10 years will streamline the industry towards three to four federal-level carriers and a small number of regional and local operators acting as feeders.

More consolidations
Indeed after a few feeble attempts to form alliances with other regional carriers, No. 4 KrasAir in September snapped up a nearly 50 percent stake in Moscow-based Domodedovo airlines. The shares were acquired by private shareholders of KrasAir, which is otherwise controlled by the state. The government also holds over 50 percent in Domodedovo airlines, and has blessed the alliance of the two.
Domodedovo flies to the Far East and Asia, while KrasAir is the strongest in the Siberian Krasnoyarsk region with an extensive network across Russia and is complemented by some international destinations. Last year, the airlines flew 750,000 passengers and 1.4 million passengers, respectively. Although both companies say it is too early to talk of the full-fledged merger of the two (both of them continue to function under their own names), some of KrasAir's top executives have already migrated to Domodedovo. Early in October, KrasAir and Domodedovo set up a joint managing company, dubbed Air Bridge, which will oversee optimization of their route network and fleet usage.
Earlier in the year, another strong regional player - UTAir - that also has long mulled takeover of small carriers, gained control of more than 70% of Komiinteravia airline. No.5 UTAir has a fleet of over 100 aircraft and it flew 1.2 million passengers last year. Komiinteravia, listed in top 30 Russian airlines, has a fleet of 22 airplanes and carried 200,000 passengers last year. With economic reasons now being the major drive behind the airline industry consolidation, the administrative resource still remains a factor in the merger business.
In September, Russian President Vladimir Putin revived the long-dormant plans of bringing wholly-state owned carriers Pulkovo in St. Petersburg and GTK Rossiya in Moscow under one roof. Initially proposed a few years ago, the marriage between No.3 Pulkovo and Rossiya - which apart from providing VIP services for top government officials, including Putin himself also has a commercial arm - has repeatedly been postponed for lack of a clear merger scheme.
Under the current plan, the new company will not incorporate Rossiya's unit that serves government officials up to the president, nor will it include Pulkovo airport, formerly part of one business within the airline.
Until recently, Federal Air Transport Service head and former Rossiya CEO Nikolay Shipil said that the merger with Pulkovo was no longer an issue with both companies doing fine financially. Now, the detailed plan will be drummed up within seven months, giving the newborn airline a combined fleet of nearly 90 aircraft, second only to Aeroflot.

Back to the USSR?
Meanwhile, the flag carrier itself has not been immune to the merger spree. Aeroflot, a monopoly in the Soviet times and rivaled only by the country's massive railroad system, gradually shed its positions on the domestic market after the break-up of the USSR as it kept its focus on the international destination.
However, last year CEO Valery Okulov announced ambitious plans to reconquer the domestic market and gain some 30% on internal routes by not only offering better service but also by welcoming other carriers under its wing. First to fall under Aeroflot control in 2002 was the Rostov-on-Don carrier, which became Aeroflot-Don and has worked as a trial balloon for the flagship, according to Commercial Director Yevgeny Bachurin.
Aeroflot recently translated the pattern onto Arkhangelsk Airlines, which it bought after winning a government tender. This new subsidiary, registered in October as Aeroflot-Nord, is now forecasted to increase its passenger numbers by 50 percent next year under its new ownership - up from last year's 278,000 passengers. Aeroflot said it is negotiating with other Russian carriers, including Samara airlines, where it wants to get a controlling stake not yet approved by the government.
Aeroflot refused to name other carriers in its sights, but ruled out any tie up with No.2 Siberia. After Siberia incorporated Vnukovo airlines into its structure, it announced that talks were under way for an alliance with Aeroflot. However these plans were never realized.
Meanwhile the government has again announced it wants to sell its 25.5% stake in Siberia airline, which is otherwise controlled by its management. Aeroflot executives believe that Russian anti-monopoly authorities would never allow this deal nor would it be welcomed by Siberia's management.
Away from home, Aeroflot is negotiating the purchase of Georgian national carrier Air Zena, which however has been stalled somewhat due to political instability in the relations between the two countries.
Aeroflot's position also was unstable until recently, as the government was going back and forth on whether to sell its 51 percent stake in the flagship next year. Late September, the government however decided to keep Aeroflot's stake in the list of strategic enterprises whose privatization is not allowed, a move readily welcomed by airline CEO Okulov. Okulov has said the privatization of Aeroflot is not feasible and the government would stand to gain more from its sale once the company completes entry into global SkyTeam airline alliance and builds the new Sheremetyevo-3 dedicated terminal at Moscow's Sheremetyevo international airport.
Better still, Okulov suggested a plan to the government whereby the state would contribute the stakes it has in other airlines to Aeroflot charter capital. The flagship dismissed any suggestions that it could thus revive its status of nearly monopoly that it was in the Soviet times. The government has yet to reply to the Aeroflot initiative.

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