Aeroflot merger plan given green light

Aeroflot is set to acquire Russia’s fragmented regional carriers that will be formed into one company around the St. Petersburg airline Rossiya, thus scrapping the government’s plans to set up a second big state airline.

Formed in 2008 to compete with Aeroflot, the now failed project, called Rosavia, will shortly come under the wing of the company it was intended to challenge.

Russian Premier Vladimir Putin has agreed with the proposal made by Russian Transport Minister Igor Levitin to reincorporate Rossiya, the state transport company based in St. Petersburg, as a joint-stock entity in 2010 and then give it to Aeroflot.

“Kavminvodyavia”, “Orenburg Airlines”, “Vladivostok Avia”, “Saratov Airlines” and “Sakhalin Airways” are among other aviation assets of governmental corporation “Rostechnology”, which will also be integrated with Russia's flagship airline.

“We will turn these companies into one corporate entity during 2010. Rossiya, the biggest carrier and the nucleus for those assets, will be registered as a stock company in St. Petersburg. The local government will provide assistance. It is a lot of work and we should conduct it together. Then the entire asset will be gathered under joint management and merged with Aeroflot,” Igor Levitin, Russia’s Transport Minister explained.

Specifically, the state transport company Rossiya, which comes fifth in terms of transport volume, is said to have the most serious problems among Russian aviation companies, with a debt of 6 billion Roubles in December last year – according to the former head of Rosaviation Gennady Kurzenkov.

However, Kirill Tachennikov, a senior analyst at Otkrytie FC, says the deal is still questionable, as Aeroflot is a commercial entity and a governmental decision alone is not enough for a merger to take place.

“In fact, the practicality of the deal isn’t obvious, as Aeroflot has to settle its own financial problems and become at least loss-free before taking up the financial burden of Rossiya.”

Andrey Rozhkov, analyst at IFC Metropol, agrees that Rossiya’s debt could indeed become too troublesome for Aeroflot, but adds that its amount is still not clear.

“It is too early to talk about how heavy Rossiya’s debt could be for Aeroflot, as its price hasn’t been calculated yet. First, Rossiya will just be converted into a stock company, and only after that the amount of debt will be estimated. I think, in case a possible loss turns out to be too high, Aeroflot will ask the government either to restructure it, or subsidize it. As for the airline, being a commercial entity, there is absolutely no point in taking up additional debt. Or, alternatively, Aeroflot could set up one or two subsidiaries and pass Rossiya’s debt burden to it,” he said.

Talking about possible advantages for Aeroflot, Kirill Tachennikov remained skeptical. He thinks even an increase in passenger turnover won’t decide the company’s basic financial problems:

“The only advantage I can see that Aeroflot can take out of the deal is to increase its passenger traffic. But again, this will result in higher revenues, while shareholders are interested in net income.”

However, Andrey Rozhkov was more positive, saying the merge could help Aeroflot to better Aeroflot’s performance.

“First, Aeroflot could strengthen its position in Russia’s Far East, especially in Vladivostok, and expand into South East Asia. And second, the deal will increase the company’s passenger traffic, which really has room for improvement compared to both the Russian and European average. In 2009, capacity utilization at Aeroflot was at 60–68%, while Russia’s average is 72-73%, and in Europe it’s at 82-85%.”

Currently, Aeroflot controls over 42% of the Russian market of regular international air traffic, with its joint route network including 856 airports in 169 countries. According to Levitin’s estimates, after the merger, Aeroflot's share of the domestic market will rise from the current 15% to around 35%.

Even though this might limit competition in Russia’s market, Levitin claims it will still go in line with legislation.

“It is within the anti-monopoly regulation, and we can work together with the Federal Antimonopoly Service on how to permanently monitor those regulatory measures.” 

Furthermore, “there is a trend towards larger scales and consolidation of the industry. This is the case worldwide, it is also the case in other countries,” Levitin added, while Rozhkov said that this probably reflects Aeroflot’s long–term plans to become internationally competitive in some five-to-six years.

Evgeny Shago, director at the investment asset management department in Ingosstrakh, also thinks competition will remain in the market.

“The companies in question are small and will add only 2% to 5% to Aeroflot's domestic share of the market. The two attractive airlines transferred to Aeroflot is Rossiya airline based in St. Petersburg, and Vladivostok airlines that own the city's airport. The others will most probably be restructured or shut down. As for the idea of another national carrier – it is already there – we have S7 and Transaero, which are able to compete with Aeroflot.”