The degree of competition on the Russian airlines market is significant. The market has a number of large carriers, including Aeroflot and S7 Airlines, and a host of other competitors.

The revenue of passenger air transportation carriers in Russia stood at USD 10.1 billion in 2009. Compound annual growth was 11.4 percent from 2005 to 2009. The volume of passenger transportation increased at a compound annual growth rate of 6.2 percent from 2005 to 2009. The number of passengers transported was 39.5 million in 2009.

The industry’s growth is projected to continue at the rate of 12.3 percent from 2009 to 2014. Thus, by 2015, the industry will have the size of USD 18.1 billion.

Overview

The volume of passengers using the services of airlines in Russia went down significantly in 2009 amidst the recession. Still, solid growth rates that prevailed throughout all past years provide confidence that the sector will rebound once the economic downturn ends. As such, two-digit growth is forecast for the airline industry for the next four years.

As was already stated, in 2009, airlines in Russia netted total revenue of USD 10.1 billion. The average growth rate was 11.4 percent for the 4 preceding years. The rate of growth for the airline industries in France and Germany was 1 percent and 6.8 percent. The market volumes in the two European countries in 2009 were USD 10.4 billion and USD 20.7 billion. 

The industry expanded with a compound annual growth rate of 6.2 percent for 4 years before 2009, and the number of passengers last year totaled 39.5 million people. By 2014, the number of passengers transported is expected to increase to 60.3 million. The growth rate for the period of years from 2009 to 2014 is estimated at 8.8 percent.

Domestic air transportation represented the highest share of the total civil aviation traffic in Russia. Around 23.8 million passengers flew on Russia’s domestic routes. This is 60.2 percent of the total volume. International travelers accounted for the remaining 39.8 percent and numbered 15.7 million.

The market for Russia’s airline transportation industry is likely going to reach USD 18.1 billion by 2015. The French airline industry, by comparison, will have the volume of USD 13.1 million, while the German air transportation market will be USD 30.9 billion. 

In 2009, the Russian airline industry experienced a contraction of 21.4 percent. 

Share of the European market

The airline industries of Germany account for 18.7 percent of the total European market size. Airlines in the United Kingdom account for 14.8 percent. French airlines comprise 9.4 percent, and Russia’s airlines make up 9.2 percent. Other European countries are responsible for 47.9 percent.

Analysis

The passenger air transportation sector in Russia can be characterized by significant competition. The power of suppliers is also formidable. Differentiation of services is not significant, and costs of switching from one service provider to another are small. Consumers are very sensitive to price. Economy-class carriers mount strong competition in relation to traditional airline companies. The supplier companies of Airbus and Boeing hold firm positions on the passenger jet market. Alternative brands, including Antonov, Tupolev, and Ilyushin, limit the power of the multi-national giants. Prices on fuel for jet planes in Russia have almost always been high. Of course, since 2008, prices have decreased substantially. Discounting the decline that has taken place in 2009, the market has developed steadily since 2005. Companies that have recently entered the market generally find the opportunities available to be significant. At the same time, intense competition that is prompted by low substitution costs makes airline companies particularly susceptible to negative market phenomena. The industry is very sensitive to the general state of the economy. 

According to Datamonitor, the chief driving forces in the Russian airline industry have the following ratings (on a 5-point scale): buyer power: 3; degree of competition: 3; difficulty of new entry: 3, substitutes: 3; supplier power: 3.

Power of buyers

Companies in the air transportation sector have a significant number of buyers, most of whom are private consumers. Business-to-business sales to tour agencies and charter companies are also a frequent occurrence.  The sensitivity of consumers to price is high, especially in view of the increased popularity of Internet portals offering fare comparison options. Such traditional airline companies as Aeroflot are now confronting growing competition from such budget carriers as Air Baltic. 

The overall trend on the market is that the power of buyers is continuing to increase. Air carriers protect their interests chiefly by differentiating their products. The usual way in which airlines in Russia try to distinguish their services is to market their extra features, including additional seating space and on-board entertainment equipment.

Costs of substituting the services of airline companies are insignificant, and thus the power of buyers is great. Loyalty programs are commonly used in Russia. Aeroflot, for instance, runs a program called Bonus that allows the airline company’s customers to accumulate air miles. The miles earned can be exchanged for free flights, seating upgrades, and other perks. Thus, substitution costs are the number of bonus miles lost when a traveller choses to use the services of another carrier. 

There is no threat of backward or forward integration. At the same time, instances of vertical integration, whereby air carriers unite together with travel bureaus, do happen from time to time. Buyer power is considered as moderate. The following factors, rated on a 5-point scale, have been identified by Datamonitor as affecting buyer power: backward integration: 2, buyer independence: 4; buyer size: 2; financial muscle: 2; price sensitivity: 4; product dispensability: 3; tendency to switch: 4; undifferentiated product: 3.

Suppliers

Passenger carriers often enter into contracts when they lease or purchase airplanes from their manufacturers. It would be commercially devastating for an airline company to commit a breach of these supplier contracts. The two largest world-wide producers of aircrafts Airbus and Boeing have very strong positions on the market, especially in long-distance jetliner category. Popular models include Boeing 747 and A380. ATR, Bombardier, and Embraer also have a strong presence on the market. At the same time, the Russian supplier market is different from those of many other countries because there are numerous domestic manufacturers of airplanes. The biggest domestic producers are Antonov, Tupolev, and Ilyushin. As such, Aeroflot has 71 Airbus aircrafts, 37 Boeings, 38 Tupolev planes, and nine Ilushins. The company has 7 additional planes from other aircraft manufacturing companies. 

The power of supplier is increased also as a consequence of the industry’s need for reliable and safe equipment. Aircraft maintenance and safety control are important.

Expenditures associated with hiring qualified personnel are significant. A successful airline business would require a large flight personnel, as well as a sizeable staff of ground support workers, mechanics, reservation line personnel, ticket agents, and transportation staff.

Fuel is another considerable source of expenditures. According to the Air Transport Association, the price of fuel accounted for almost one third of an average airline’s expenses when curde oil prices were at their peak in 2008. Older data show that fuel costs accounted for less than 15 percent of total expenses before 2003. In 2009, Aeroflot’s purchases of fuel accounted for 25 percent of the airline’s total expenses. In 2008, fuel expenses were 38 percent.

As there are few suppliers that are capable of delivering aviation kerosene in large volumes, the power of suppliers is substantially augmented. To counterbalance the strength of suppliers, airline companies frequently resort to the strategy of hedging.

The power of suppliers is restrained by the impossibility of the suppliers’ forward-integration. Even for large companies, which frequently have supplemental streams of revenue from defense contract work, the civil aviation sector constitutes the main portion of gross receipts. For example, in 2009, Boeing generated 50 percent of its revenue from world-wide sales of airplanes. As for Airbus, the company is wholly focused on passenger jets. While the parent company of the European aircraft manufacturer boasts broad diversification and actively works in the helicopter sector, space, and defense, the weaker the diversity of an airline supplier, the stronger is the reliance of that supplier on air carriers. Thus, the size and the orientation of suppliers diminish the power of suppliers.

Airlines often unite into associations and alliances not for the obvious reason of extending their reach and facilitating greater economy by means of code sharing arrangements, but also to have greater bargaining power in purchasing fuel and aircrafts. Thus, the airlines’ practice of joining efforts and equities in facilitating large purchase transactions mitigates the power of buyers. 

At the same time, there are no replacements for the ingredients necessary for operating an airline. Every airline needs to have aircrafts, fuel, and a base of qualified employees. Furthermore, it is extremely unlikely that airlines would be able to benefit from the technological advances in alternative energy within the foreseeable future. Considering the overall picture, supplier power on the Russian market is generally viewed as strong.

According to Datamonitor, the following considerations, rated on a 5-point sliding scale, are important in assessing the strength of suppliers on the Russian market: differentiated input: 3; forward-integration: 1; importance of quality-cost relationship: 4; no substitutes input: 5; oligopoly threat: 4; player dispensability: 2; player independence: 5; supplier size: 5; switching costs: 4.

Market entry

Significant entry costs set the bar for those wishing to enter the Russian airline market quite high. For a new company, initial capital expenditures include the cost for purchasing airplanes. Established companies that simply would like to begin flights into Russia or any particular region of the country are not likely to be confronted with this problem. 

Marketing and ticket distribution for new airline sector entrants would not be easy, since the companies would have to create a reservation system, implement advertising campaigns, and create friendly relationships with travel agents.

Some problems could also be encountered in securing take-off and landing slots at airports. Since the volume of air traffic in Russia is on the rise from year to year, congestion at airports generally and at central hubs, such as Moscow, should be expected. Airlines long established in most cases have monopolies on take-off and landing slots at a number of airports, and it might not be easy for a new carrier to reach an agreement for a favorable arrival and departure timetable. These difficulties might mean that new market entrants might be left with no choice but to provide service at off-peak times or fly to airports further away from the most in-demand points of destination. Such circumstances might create a significant barrier to market entry. On the other hand, the prospects for growth and the capability of offering a number of additional routes to cities insufficiently covered by other carriers presents clear advantages.

Large carriers can benefit from the passenger demand for service to destinations that are off the major routes by entering into code-sharing arrangements with regional carriers. It is, however, not the case that the application of every new market entrant for alliance membership will be approved.

The Russian Federal Agency for Air Transport is the agency responsible for aircraft registration and airworthiness inspection. Expenses related to complying with the regulatory norms increase the barriers to market entry.

The Russian domestic flight market is closed to foreign companies. Thus, new entrants from other countries can only count on working in the international market segment of the Russian airlines industry. Viewed as a whole, market obstacles to entries from other countries are considered moderate.

Competition

The degree of competition on the Russian airlines market is significant. The market has a number of large carriers, including Aeroflot and S7 Airlines, and a host of other competitors. Competition is made more intense as a consequence of the emergence of budget carriers. Thus, the battleground for companies in competition is the price. Substitution costs are negligible, and it is easy for customers to give up loyalty and use the services of another market participant. 

The storage expenses for the airline industry are the costs incurred as result of not being able to sell enough seats on a particular flight. In view of considerable expenses, including fuel costs, personnel, ground operations, and airport take-off and landing fees, airlines often sell more tickets than the number of available seats. The reduction of storage expenses, in turn, allays the intensity of competition.

The ability of air carriers to diversify is very limited. Some companies generate extra income from freight services operation. At the same time, these services bring in a small portion of overall revenue. As such, in 2009, 78 percent of Aeroflot’s revenue came from the transportation of passengers and only 6 percent from air cargo deliveries. The absence of market diversification makes the competition even stronger.

Expenses associated with exiting from the market are considered moderate. Aircrafts have a large value as assets. The purchase price is generally high, and asset depreciation is low. Air carriers must conduct frequent maintenance to keep up their equipment in safe and working condition. Aircrafts are mobile assets, and carriers that wish to terminate business operations in Russia can easily relocate their planes to other markets.  

Datamonitor has analyzed and rated on a 5-point scale the following factors that companies interested in entering the Russian airlines market need to review: accessibility of distribution methods: 2; incumbent acquiescence: 1; little IP involved: 3; little regulation: 2; low fixed costs: 2; low-cost switching: 4; market growth: 5; importance of scale: 2; suppliers accessibility: 4; undifferentiated product: 3; weak brands: 3.

Market participants

Aeroflot is one of the leaders in providing passenger and cargo air transportation services in Russia, both domestically and internationally. The company and its subsidiaries are also involved in providing hotel services, captive insurance services, cargo transportation services, catering services, and financial services. Aeroflot operates flights to 101 destinations in 48 countries around the world. It has six branches in Russia located at St. Petersburg, Sochi, Magadan, Krasnoyarsk, Kaliningrad, and Vladivostok. The company operates in Russia, where it is headquartered in Moscow and employs around 19 060 people. The company recorded revenues of USD 3 345.9 million in 2009. Its net profit for the year was USD 89.2 million.

Rossiya is the second national airline in Russia with its head office in St. Petersburg. The airline operates scheduled and charter passenger flights from St. Petersburg and Moscow, and VIP flights on behalf of the Russian government, including the operation of the aircraft for the President of Russia. The company offers service to 35 cities within Russia and around 60 destinations worldwide. The airline operates a fleet of 27 airplanes and has two planes on orders. Rossiya also has a separate fleet of aircrafts for the government that consists of 33 aircrafts plus a further thirteen on order. In February 2010, the Russian government announced that all regional airlines owned by the state through the holding company Rostechnologii would be consolidated with the national carrier Aeroflot in order to increase the airlines’ financial viability. The merger between Rossiya and Aeroflot is expected to be completed by the end of 2010 or early 2011 at the latest.

S7 Airlines is the second Russian air carrier by the number of passengers. S7 operates scheduled passenger flights to Russian destinations, as well as international services to Armenia, Austria, Azerbaijan, Bulgaria, China, Egypt, Germany, Ireland, Israel, Kazakhstan, Kyrgyzstan, Moldova, Montenegro, South Korea, Spain, Tajikistan, Thailand, Turkey, Turkmenistan, Uzbekistan, Ukraine, and the United Arab Emirates. Its main bases and hubs are Domodedovo International Airport, Moscow, as well as Tolmachevo Airport, Novosibirsk, with a further hub at Irkutsk Airport, Irkutsk. The airline has the largest domestic route network in Russia. S7 became a member of the Oneworld Alliance on November 15, 2010 as the first Russian airline to join Oneworld and second to join an alliance – after Aeroflot entered SkyTeam in 2006.