easyJet Wins Rights to Serve Moscow

The UK Civil Aviation Authority (CAA) has said air passengers travelling between Moscow and London will benefit from additional choice after it ruled that British Airways (BA) and easyJet should take the UK allocation of traffic rights on the route between the two capital cities. The ruling followed the recent purchase of bmi British Midland International by BA’s parent IAG and the suspension of its own flights between London Heathrow and Moscow Domodedovo.

The UK CAA opened a scarce capacity allocation hearing this summer as BA, easyJet and Virgin Atlantic all made applications to replace bmi on the route. In situations where airlines wish to operate more services than are permitted under an agreement between the governments concerned, the CAA is tasked with deciding which of them should be entitled to operate. The CAA says its rulings are based around allocating “the rights to operate to the airlines that best serve air transport users’ varied needs, at the lowest prices consistent with a high standard of safety, promoting competition, securing effective provision of civil air transport to the UK and ensuring the effective use of UK airports”.

After hearing the arguments put forward by each of the airlines earlier this month, a Panel of CAA Board Members decided to allow BA to continue to operate the services they currently operate from London Heathrow Airport to Moscow Domodedovo Airport and to grant easyJet permission to operate between London Gatwick and Moscow Domodedovo.

“On balance, allocating scarce capacity to BA and easyJet is likely to deliver the greatest benefit to consumers. easyJet’s proposal will introduce an innovative product into the market and has the potential to deliver the greatest dynamic fare benefits for consumers,” said Iain Osborne, Director of Regulatory Policy, UK CAA and chair of the scarce capacity decision panel. “We concluded that easyJet’s proposal would introduce a distinctly different product into the market and would stimulate innovation on the route as a whole, as well as satisfying and stimulating consumer demand that is currently underserved, in particular: people who prefer or are content to use Gatwick.”

There has understandably been a mixed response to the news with Virgin Atlantic, who many thought were in a strong position to secure the rights, suggesting that they could consider an appeal once they have digested the full report of the CAA’s decision. The airline claims the ruling “flies in the face of what the consumer wants and our economy demands”. A big argument in their application had been the suggestion that passengers want to fly from Heathrow rather than Gatwick. “We are perplexed by a decision that is clearly not good for consumers and leaves no one to challenge BA's dominance of this market,” the airline added in a statement.

easyJet, meanwhile, are in positive spirits. Chief Executive Officer, Carolyn McCall said the ruling “was the right decision for consumers” both in the UK and Russia. “We believe that our flights will be popular with both business and leisure travellers alike. easyJet has proved again and again that when we enter a new market we open it up – bringing in competition and lower fares and enabling more people to travel on the route," she added.

The low-cost carrier is now working to fulfill one of the conditions of the ruling, formalising a codeshare arrangement with a Russian operator on the route, its first ever such deal. In its application easyJet said it was “confident” it would be able to secure a commercial agreement with Transaero. Both airlines confirm that informal discussions have already taken place on this matter.

easyJet is planning to operate an Airbus A320 on the twice daily link. Although the low-cost carrier has not previously confirmed its proposed Moscow terminus, the CAA’s ruling claims it will fly to Domodedovo. Flights could start as early as January 2013 subject to final approval and regulatory agreement from Russia.

One major challenge for easyJet will be adapting its business model to meet the dynamics of the local Russian market. According to a CAA Passenger Survey shows that, in 2011, 45 per cent of passengers on the London – Moscow route originate in Russia (versus 42 per cent from the UK). Currently only a very small share of bookings that are made by Russian-originating passengers are via the internet, where easyJet currently generates the majority of its sales.

Within its evidence to the CAA easyJet claimed that its proposal would provide lower fares than those that are currently available on the route and those that Virgin would offer. It stated that its lowest fare on the route, set on the basis of marginal avoidable cost, would be £125 return, which could be offered due to its expected higher load factors and lower estimated per seat cost, a reported £106 per sector. However, it is already advertising one-way fares from £67 including taxes, charges and a single checked bag.

For easyJet this ruling could open the door for it to expand its offering into the Russian capital and perhaps wider Russian market. The airline would certainly consider flying to Moscow from other UK and Continental European bases as under this ruling it now has commitment to have infrastructure support on the ground in the Russian capital, and there is no reason why it couldn’t actually establish a base there to support the aviation strategy of the Russian Government.

The Russian Transport Ministry is currently looking at the option of permitting foreign low-cost operators to fly domestic flights within Russia. This was confirmed by the head of Federal Anti-Monopoly Service, Igor Artemyev, only last week, according to the local Interfax news agency. In a statement he is reported to have said: "We are very actively discussing the issue of inviting foreign low-cost airlines ... including for domestic transportation. We expect to hold a serious discussion on this."

The ambition of the Russian transport authorities is clear and according to Vedomosti has already received backing from the most senior of politicians in the country. The publication quotes a spokesman for First Deputy Prime Minister Igor Shuvalov as saying “we are talking about allowing low-cost airlines to fly to some destinations where their technology, investment and experience of managing this business could increase competition and, of course, lower costs”.

In the table below we highlight the changes in seat capacity on the London – Moscow route since the Millennium. Despite restrictions to the Air Services Agreement annual growth continues to increase the overall capacity available with departures and available capacity almost doubling during the past decade. Based on last year’s schedule data, BA held the largest capacity share between the cities with 33.7 per cent of seats, followed by Aeroflot Russian Airlines (29.4 per cent), bmi (19.5 per cent) and Transaero Airlines (17.4 per cent).