Transaero on verge of collapse, but how will it impact Russian connectivity?

The decision earlier this month from Aeroflot Russian Airlines not to extend its offer to acquire a 75 per cent plus one share in rival carrier Transaero after shareholders had not submitted a proposal for the purchase within the deadline stipulated in the tender offer, has effectively lead to the collapse of the independent operator, and Russia’s second largest carrier.

Although Transaero is continuing to fly, operational control of the airline has already been passed across to Aeroflot and bookings are no longer being taken beyond December 15, 2015. Although nothing has been formally confirmed on the likely bankruptcy of Transaero, these actions and an ongoing unscheduled safety audit by Russia’s Federal Air Transport Agency, Rosaviatsia, will likely lead to the closure of the carrier, with creditors such as Sberbank and Alfa Bank set to bring bankruptcy proceedings against the carrier.

While Aeroflot has said it has “put in place measures to ensure Transaero fulfilled its obligations to passengers, and also to minimize possible negative social consequences among the company’s staff,” it is already reducing the Transaero network with a significant number of flight cancellations during the first week of this month.

The Russian government is understood to now consider bankruptcy as the only possible option, with Economy Minister, Alexei Ulyukaev, blaming "ineffective management" at Transaero for the company's troubles. Aeroflot has made suggestions it could accommodate around half of the Transaero workforce in its own expanded operation and could also take control of some of its aircraft assets, although much of its older equipment will likely be stored.

The economic crisis in Russia has mainly affected international traffic, with CIS and foreign carriers experiencing a notable reduction in international demand. However, Russian carriers are seeing increased domestic demand, in the process impacting yields due to the large amount of capacity in the market.

Data from the IATA Passenger Intelligence Services (PaxIS) air travel tool shows that after a 14.4 per cent fall in yields in 2014, the Russian domestic market has seen a massive, but stabilising drop, during the course during the first half of 2015 with yields down 47.0 per cent in February 2015, 42.8 per cent in March 2015 and 37.5 per cent in April 2015. This compares with a 17.2 per cent decline within Europe in the latter month.

The crisis has already forced UTair to significantly downsize its activities in Russia and Transaero’s financial difficulties accelerated since the aggravation of the Ukrainian crisis, and the resulting European and American sanctions again Russia.

This resulted in a weaker rouble and a decline in the international traffic from Russia towards the markets typically core to Transaero’s business in regions such as the Caribbean, and south East Asia, with Russian travellers retreating towards domestic destinations such as the Black Sea area. According to analysts, Transaero’s reduced fares strategy did not generate the expected turnaround and further deteriorated the overall airline financial situation.

But, what will the expected closure of Transaero mean for the Russian aviation sector, as it continues to fight against one of its most difficult trading periods for decades? Our analysis of OAG Schedules Analyser data shows how Transaero has rapidly built capacity in both the domestic and international markets over the past ten years. Since 2005 its domestic offering has increased 781.8 per cent and its international capacity by 895.5 per cent and average annual growth between 2005 and 2014 of 86.9 per cent within and 99.5 per cent outside of Russia.

Despite its rapid growth, Transaero is currently the fourth largest carrier in the Russian domestic market with a 10.1 per cent market share in 2015 (a figure that has more than doubled since the start of the decade). In international skies Transaero is the biggest competitor to Aeroflot with a 12.9 per cent share, its highest figure this decade having grown its international capacity 79.9 per cent since the start of the decade.

With a strategy supporting business and leisure demand across multiple Moscow airports, a closer look at Transaero’s network clearly illustrates which markets could suffer the most by the collapse of the carrier. Its main network point is Vnukovo International Airport with a 30.3 per cent share of departure seats this month, just ahead of Domodedovo International Airport with a 14.4 per cent share.

The October 2015 schedules show that Transaero currently serves eight exclusive domestic markets from Moscow Domodedovo (Anadyr, Blagoveschensk, Khabarovsk, Khanty-Mansiysk, Komsomolsk-Na-amure, Magadan, Petropavlovsk and Vladivostok ) and 12 from Moscow Vnukovo (Anadyr, Blagoveschensk, Bratsk, Gorno-altaysk, Irkutsk, Khabarovsk, Magadan, Norilsk, Petropavlovsk, Ulan-Ude, Vladivostok and Yuzhno-Sakhalinsk), but only three of these destinations are not served from the Moscow market - Anadyr, Blagoveschensk and Magadan.

Outside of its Moscow bases it also has significant operations from Adler/Sochi (a 12.9 per cent share of its domestic capacity this month) which it links to 15 destinations alongside its two Moscow hubs with a total of 224 monthly frequencies and at Pulkovo International Airport in St Petersburg (a 7.4 per cent domestic capacity share) where it serves from Moscow and Adler/Sochi.

However, away from its home market, Transaero’s largest network points by capacity include a number of foreign destinations, highlighting the important role leisure routes play in its flight programme. Topping this list are the markets of Hurghada and Sharm-el-Sheikh in Egypt and Larnaca on the Mediterranean island of Cyprus, but these are also served by other operators.

The data shows that Transaero is the only airline this month to offer direct flights from Moscow to Atyrau, Kazakhstan; Cancun, Mexico; Colombo, Sri Lanka; Goa, India; Kokshetau, Kazakhstan; Kyzylorda, Kazakhstan; Paris Orly, France (albeit Paris CDG is served by Aeroflot and Air France), Punta Cana, Dominican Republic; Varadero, Cuba; and Toronto, Canada.

Although the future of Transaero is in real doubt, the airline’s employees, passengers and partners have written a petition to the President of the Russian Federation and the Government to save Transaero and prevent it from bankruptcy. As this article was placed online almost 100,000 people had already signed in support.

They argue that an airline that has innovated in the Russian market should not be allowed to collapse simply because it is the best option for Aeroflot, which has taken over operational decisions at the business. Acknowledging the tough market conditions they say that after the meeting of the Government Commission on economic development and integration and the decision to consolidate Transaero with Aeroflot “nothing was done” and the airline is being “intentionally brought to bankruptcy”.