Russian aviation in meltdown, experts warn

The Russia aviation industry is in dire straits and a number of airlines face bankruptcy due to jet fuel prices, the Russian news agency ITAR-TASS reports. The cost of aviation fuel in Russia has risen over 70%. Despite having its own vast oil deposits, kerosene prices in Moscow are some 5-6% higher than in Europe.

Director of Russia’s Federal Service for Air Navigation, Yevgeny Bachurin, admitted last week that a number of Russian airlines face bankruptcy. Experts support his statement, arguing some 50% of Russian airlines could go under.

The steadily climbing fuel prices make the operations of about 60% of airline jet fleets unprofitable, Alexander Batkov, the president of the Association of Russian Aircraft Manufacturers told Itar-Tass last week.

Yelena Sakhnova, an analyst at the Moscow-based Vneshtorgbank, argues that for every increase in fares of US$50 passenger numbers drop 20% to 25%.

Tougher times lay ahead, he adds, saying that while the demand for air tickets is traditionally high during the summer peak, demand falls considerably in the low season October-February, and the air carriers may be short of revenues to pay to fuel suppliers.

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Most Russian airlines are on the verge of falling into the bankrupt category already now, says Yevgeny Ostrovsky, the director of a trade house supplying jet fuel to Russian airports. The most vulnerable are smaller airlines servicing under a million passengers a year, he argues.

Some the top twenty Russian carriers are loss-making and debt-laden, Ostrovsky says, adding that only five airlines - Aeroflot, S7, Rossiya, Transaero, and YUTair - are likely to survive owing to their strong partnership with the government and large corporations.

Russia’s largest carrier Aeroflot will cut its profit margin from 9% in 2006 and 2007 to 3% this year to 2% in 2009.

In mid-July, the Federal Antitrust Service started investigations into the activity of several large oil companies , accusing them of high monopolistic prices. Companies include LUKOIL, Gazprom Neft, TNK-BP, Rosneft, and Surgutneftegaz.

However, experts voice doubts over the ability of the FAS investigation to eliminate monopoly that dominates the Russian jet fuel business. Most Russian airports typically purchase fuel from just one company, and this heavily complicates the situation for the airlines, as they have to pay for fuel at a monopolistic price.
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