A packed programme of presentations, discussions and speeches at this year’s Routes CIS Strategy Summit revealed that the region can now, after many challenges, look forward with some confidence to rising traffic and connectivity.
Ahead of the discussions Nigel Mayes VP commercial Routes, UBM Live, had set the tone for the day’s events by pointing out at an event press conference how, for Ukraine, three trends are combining to set the air sector on a new path. For one, the country now looks poised to conclude an Open Skies deal with the European Union. At the same time, its airline industry is being transformed by consolidation and the arrival of low-cost carriers, he said.
For Oleksiy Dubrevskyy, Chief Commercial Officer of the host airport, Donetsk Sergey Prokofiev International, the networking forum will itself serve as a catalyst for realising new opportunities at a moment of rapid change. “There is a dynamic developing market and this potential needs to be released,” he told the summit.
Routes CIS has already helped Donetsk airport to pass another milestone on its route to becoming a hub, he hinted. “Wizz Air has become a home carrier, with one aircraft based at Donetsk,” he said. “It will not be the only home carrier here. I think at the final press conference, we’ll announce results there.”
Donetsk also exemplified the robust state of the regional industry by aiming for 15 per cent traffic growth in 2013, despite market turbulence from the bankruptcy of AeroSvit Airlines. As Mayes put it, “there has never been a better time to discuss the market in the CIS”.
State backing
Official support to help gateways like Donetsk to achieve their ambitious goals was underscored during the welcome address. Sergey Dergunov, first deputy chairman of the Donetsk Regional State Administration, spoke of a strategy of “sustainable development” that had already made Donetsk a host for large sporting events. Donetsk’s Mayor, Alexander Lukyanchenko, added that the city has once again been voted the best place in Ukraine to do business.
But the full extent of the overhaul underway within aviation in Ukraine was apparent in the keynote address from Konstantin Yefimenko, First Deputy Minister of Infrastructure in the Government of Ukraine. Citing initiatives such as Donetsk’s overhaul and Odessa’s new public-private ownership structure, he outlined how the country is combining infrastructure investment with regulatory projects to spur its aviation sector.
At a conservative estimate of growth, he gave a target of 28 million passengers and a decade of growth. “Turkey, which started developing its airports only ten years ago, now has 46 airports, up from 15,” he said. In its international negotiations, Ukraine is now aiming to finalise first category flight security status in the US by the year-end, he said.
In Europe, bilateral discussions are also underway with Italy, the UK and France, while an Open Skies deal with the EU is imminent, he said. “We are at the last points of discussion with Europe,” he said. “Ukrainian airlines need one and a half to two years to find their place in this highly competitive market.” Contributing to one of the day’s main themes, he also spotlighted how LCCs are on a steep growth curb. “We would like to fill our airport infrastructure,” he said.
Alexander Grechko, First Deputy Head of the State Aviation Administration of Ukraine, gave further insights into the progress of Ukraine’s Open Skies negotiations with Europe. After seven rounds of discussion, the final negotiations are due next year, with a goal of full liberalisation along with fifth freedom rights. But, in his view, the challenge for local carriers in competing would come from outside the sector. “The main obstacles for Ukrainian carriers are low incomes and visa barriers,” he said, adding “the transition should be stage by stage.”
Who will survive?
Even amid the CIS’s expanding market, there will be winners and losers. At least, this was the message from the panel discussing ‘Turbulence in the CIS Airline Industry’. Yolanta Strikitsa, managing director of Strikitsa Consulting, moderated a discussion that brought out some controversial points.
Denis Shkabara, VP commercial, UTair, gave a controversial view on why the low-cost carrier model has yet to make headway in the CIS region. “Moscow hubs can handle an aircraft in 20 minutes,” he said. “Regional airports cannot do that. Regional airports are lazy. They don’t want to work.”
But his fellow panelist provided alternative explanations for the dearth of budget airlines. Yevgen Treskunov, EVP strategy & development at Ukraine International Airlines, put the absence down to basic market factors. “The model of the low-cost carrier is well understood – a short list but a very precise one,” he said. “Unfortunately, the market of Ukraine is not yet ready.”
But the hub approach can also attract flak in the CIS, he revealed. “At Frankfurt and Munich, nobody says Lufthansa has privatised the airport,” he said. “Ukrainian and Russian airports are afraid of a monopoly – they don’t want a return to the Aeroflot times.”
Dr Sergey Ryzhov, deputy director aviation marketing & commerce at Sheremetyevo, described the monopoly issue as “acute” for the gateway. “By law, gateways are seen as natural monopolies,” he said. “In a highly competitive market, that is very difficult, with two strong competitors.”
Over-regulation was also blamed for the lack of LCCs in the CIS, through the imposition of automatic refunds along with mandatory catering and free luggage up to 20kg. Strikitsa cited an optimistic view of the region’s potential as “a sleeping giant”, well placed to provide transit flights from Asia, the region set to drive passenger growth over the coming decades. She also questioned how regulation could be holding back LCCs, given their emergence against the even Indian’s more hostile regulatory backdrop.
In his contribution to the discussion, Andrey Dobritsa of the plane manufacturer Irkut, described Aeroflot as the launch customer of its MC-21 passenger planes. He also looked forward with confidence to the demolition of the current manufacturing “duopoly” of Airbus and Boeing within three years following the arrival of Irkut’s new short-haul jet.
Low-cost opportunities
The crucial issue of when the low-cost model might take off in the CIS came under further intense scrutiny from Yuliya Crane, a consultant for ASM. Her presentation outlined starkly the reasons why airports in the region could currently “fear” budget carriers. “Airports will say I’d rather work with no airlines than low-cost airlines,” she said.
Their trepidation stems from an expectation of outrageous demands along with a bullying attitude, she said. Airports expect LCCs to steal markets, to bring a questionable quality of passengers and to care insufficiently for their passengers, she added.
Yet her presentation suggested LCCs deserve a warmer welcome from airports, despite Ryanair’s Michael O’Leary claim that all he needs from a gateway is a tin shed. Full-service carriers, on the other hand, provide no guarantee of consistent services, she added. Over 2012, traditional airlines pulled out of 13 per cent of the routes they started, according to her data.
Despite their detractors, LLCs grow overall traffic rather than eat into the share of pricier airlines, she added. A graph of London-Barcelona traffic illustrated this point, with first easyJet and then Ryanair building on existing traffic on the route. What’s more, when Russia recently lost its sole LCC, while prices went up, so did traffic. “Passengers had changed their preference from trains, perhaps,” said Crane.
The CIS can look to Poland to see how LCCs could boost the market, she added. “Until recently, the Polish market was opposed to low-cost carriers,” she said. But, behind LOT, Ryanair and Wizz Air are now the market’s largest carriers. Two factors suggesting the CIS is ripe for low-cost air travel are the high use of trains and the rapid growth of its middle class, added the consultant.
Build it and they’ll come?
Crane also moderated the next session in the summit, which tackled the issue of developing the CIS region’s airport infrastructure, and whether traffic would continue to be funneled through the Moscow hubs. Gregory Pomerantsev, commercial director JSC Airport Tolmachevo, Novosibirsk, pointed out that CIS markets differ greatly. While Russia’s flights are mainly domestic, other countries lack any internal services. At Novosibirsk, international flights have strongly outpaced domestic travel, he said.
Timur Biryukov, deputy director general of Rostov-on-Don International Airport, spoke of the gateway’s goal to become a southern hub. “In the last ten years we have invested 1 billion roubles into the terminal and increased capacity three times,” he said.
As vice president of the Ukraine Association of Airports, Petr Lipovenko said Ukraine currently has 20 with almost no traffic, which reflects problems of municipal control, in his view. “When they were transferred, no conditions were set,” he said. “Owners are not obliged to invest or develop. We need a law on airports and airport activity, including tariff policy and other important issues.”
Vladimir Kamynin, marketing director for Moscow’s Domodedovo International Airport, said development should balance state and private investment. But he suggested public funding should not be directed at picking winners. “If we want to stimulate the market, we need to stimulate the customer, and they will decide,” he said.
The concept of consolidation seemed a welcome trend for members of the panel, such as Pomerantsev. “It’s not consolidation but specialisation,” he said. “We like dealing with larger companies. Everybody wins… Consolidation allows for the emergence of regional carriers.” Biryukov added that experience of airline failures makes regional airlines keen to deal with larger, less vulnerable carriers.
Outbound growth
The summit’s final discussion focused on the outbound market. In a session moderated by Nigel Mayes, a panel looked at how highly promising forecasts could be realised. The current rate of expansion is unquestionably impressive, said Mayes. From 2.6 million in 1995, traffic is now at 7.7 million. The first quarter of 2013 has continued the trend with a total of 2 million, a 19 per cent year-on-year rise.
Mayes presented a quote from Peter Long, head of the TUI Group, that further bolstered the case for continuing growth: “The CIS markets could be as big for TUI as the business of our German and UK operations combined,” it read.
Valerie Luyk, director of Discover the World Marketing, saw a streamlining of visa processing as a likely spur to traffic. “CIS citizens are becoming more free mentality wise – they really want to discover the world,” she added. Rising incomes in the CIS will convince other nations to ease entry restrictions, while faltering economies in Europe will also tend to improve the welcome for tourist cash, according to the executive.
Greg Kaldahl, SVP resource management, Finnair, told the summit that traffic from Ekaterinburg revealed the diversity of routes taken by CIS travellers. “Eighty-two percent of traffic is connecting traffic – most going somewhere else than Europe,” he said. “A significant amount of traffic out of Moscow and St Petersburg goes to the Far East… We really have a broad spectrum of destinations – they use the full network of our destinations in Europe.”
William Ast, senior market analyst for Embraer – CIS & Europe, described outbound travel from the CIS as “a market we want to be part of”. He pointed out how Kazakhstan traffic is set to rocket 20 per cent, heading a tally of impressive growth figures for the entire region.
But for Luyk, the outbound market is also ripe for a shakeup. In her view, airlines can proactively develop new markets by introducing routes. “People need to operate routes to create demand,” she said. For Ukraine, airlines developed demand for holidays in Sri Lanka simply by introducing flights, she said. “A few years ago, nobody knew what Sri Lanka was… Routes create the demand,” she said.
Kaldahl added an uncomplicated analysis of outbound demand that encapsulated the strong case for optimism across the market. “Airline growth is related to GDP growth,” he said. “The future should be bright.”
Related Content
