Low-cost airline market set to take off

In Russia the total portion of low-fare traffic is no more than 20 percent. Source: Vostok Photo

In Russia the total portion of low-fare traffic is no more than 20 percent. Source: Vostok Photo

There are no Russian budget carriers in the market now, making the domestic market an available niche for local airlines.

The Russian Ministry of Transport has decided to seriously work on the development of low-cost airlines, which is a new aviation market segment in the country. Such airlines will help reduce costs and travel tariffs, but one should not expect the price levels to equal those of Europe. The difference will be not two or three times less, but a maximum of 35 percent.

Conditions for take-off

The Ministry of Transport prepared an order to annul mandatory in-flight food in Russian planes. In addition, the agency proposed to introduce non-refundable tariffs and to exclude the cost of luggage transportation from the ticket price. According to the experts, under the current system, the airlines have to provide for potential losses from the ticket refunds, which increases their total costs. The new measures should help to develop a new segment of the Russian aviation market – the budget carriers, known as low-cost airlines. According A.T. Kearney, budget airlines account for about 40 percent of the domestic traffic in Europe. In Russia, the total portion of the low-fare traffic is not more than 20 percent. This includes both special tariffs of airlines and Western low-cost airlines – German Wings and Air Berlin. There are no Russian budget carriers in the market now, making the domestic market an available niche for local airlines.

The development of budget airlines in Russia should also be promoted by the recent decision of the Eurasian Economic Commission (EEC) that allows Russian airlines to buy duty-free aircraft models, with a capacity of 170 to 219 seats, such as the Boeing 737 and Airbus A320 of various modifications.

Low prices

“The reduction of costs for airlines will lower the cost of transportation per client,” says Oleg Panteleyev, head of the analytical department of the Aviaport Agency. “That, in turn, allows airlines to share these savings with passengers by offering lower tariffs.” According to the experts, non-refundable tariffs alone will reduce costs by 20 percent. Overall, prices may be reduced by 35 percent. According to analysts, this will stimulate demand and allow Russian low-cost airlines to attract new customers, and at the same time, to win in the competition against their main transportation competitors – the railway companies.

As the aviation market participants explain, the need for low-cost airlines has already matured on the Russian market. Incomes of Russians are gradually rising – in 2013 alone, they rose by 3.3 percent, according to Rosstat. As for the average monthly salary, it increased by 12.3 percent – up to 29,940 roubles.  The middle class will have a disposable income, which can be spent on taking trips.

“Individual tourists, mostly young people – the so-called backpackers, will travel with low-cost airlines,” says Vladimir Kantorovich, president of the Association of Russian Tour Operators (ARTO).

Upcoming budget carrier in Russia

The Russian aviation market already experienced the emergence of low-cost airlines. The first was SkyExpress, which existed for almost six years, the second one was Avianova (three years in the market). SkyExpress suffered from constant delays due to faulty aircraft. This badly affected the company’s reputation, which undermined demand when the tariffs rose to the market level,” says Oleg Panteleyev, head of the analytical department of the Aviaport Agency. “Avianova was run by a management team oriented to the Western business model. They managed to reduce costs, but failed to align the profitability.”

The new low-cost airline,  Dobrolet Airline, an affiliate of the state carrier Aeroflot,  looks to meet the demand for low-cost flights on the Russian market. Plans are on to launch the first flight from Moscow to St Petersburg in the summer of 2014, and then gradually add another ten destinations across Russia. As for access to international flights, according to Oleg Panteleyev, the demand for transportation to and from Russia is growing among both Russian citizens and foreigners. “However, it will be possible to predict the success of Russian budget carriers in conquering the international skies only based on the results of their operations on domestic routes,” he says. According to the existing rules, any Russian airline established from scratch, must fly in the domestic market for the first two years.

Danger for low-cost airlines

At the same time, the special conditions being established by the Ministry of Transport cannot solve all the problems. Kantorovich says Russian airport charges are significantly higher than those in Europe for low-cost airlines. However, there is already a plan to create a special airport for low-cost airlines in Yermolino near Moscow.

Another problem in the way of Russian low-cost airlines is the undeveloped regional aviation: Now almost 80 percent of air transportation is carried out not directly, but through Moscow and its major airports with their high rates. In order to create a niche for low-cost airlines in the domestic market, it will be necessary not only to make changes to the legislation, but also to develop the route network.

All rights reserved by Rossiyskaya Gazeta.

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