Dormant market set to flourish again

Despite poor infrastructure and continuing problems of illegal charters, Eugene Gerden sees a promising future for Russian business aviation

The Russian business aviation outlook is steadily improving as domestic demand for business jets recovers and a better infrastructure develops. Russia first woke up to business aviation in the early 1990s, and saw annual growth of about 10% per year during the years to 2000.

The largest local corporations, such as Gazprom, Lukoil and Rosneft, which had extensive operations in Russia as well as interests abroad, became the first buyers of business jets during this period, but business aviation made up only a small part of the overall air transport market, totalling no more than a dozen companies.

Rapid growth in the Russian economy in the early 2000s brought a boom in the domestic business aviation market. The number of business jets owned by Russian companies and private citizens increased almost tenfold, reaching about 300 units, and the number of flights was growing at some 30% per year.

Industry experts estimate that before 2008 the Russian business aviation market was worth $2.5 to $3 billion, with local operators typically turning over in the range of $30 to $100 million a year.
The global economic crisis led to a sharp decline of the market, in Russia as everywhere else, with aircraft sales and flying activity decreasing. Indeed the industry has not yet fully recovered from the downturn and is currently valued at just $1 billion.

Because of the long-distance requirement, the Russian business fleet is largely made up of models such as Gulfstream, Embraer Legacy and Bombardier Challenger and Global jets

A growth rate estimated at about 10% in 2011 looks set to be repeated in 2012). Evgeniy Bakhtin, VP of the Russian United Business Aviation Association, says the country’s fleet of business jets is currently almost at a standstill, with the majority of large companies and business people buying new jets simply to replace older ones.

Bakhtin estimates there are now around 350-370 business jets in operation, but says that in recent years, many users prefer to charter aircraft rather than operating their own. One factor is the high cost of management and maintenance at Russian airports. Renting a hangar at Moscow’s Vnukovo airport can cost as much as €1 million per year.

The Russian business aviation market is traditionally secretive. Owners and operators are reluctant to disclose details of what they do and where they fly. Local business jet operators are not publicly registered with the Transport Clearing Company, the executive arm of Russia’s Air Transport Settlement System.

The Infomost consultancy says the business aviation market mainly comprises the senior management of large companies – especially those with subsidiaries located in remote areas of the country, often more than 1,500km from headquarters.

Almost the whole sector is concentrated in Moscow and St Petersburg airports, and Infomost says that because of this long-distance requirement, the Russian business fleet is largely made up of models such as Gulfstream, Embraer Legacy and Bombardier Challenger and Global jets.

According to Igor Chunikhin, CEO of Jetallians, a joint venture between Jet Alliance and Aeroflot, the market is mainly served by foreign operators and smaller domestic companies that fly re-equipped Russian and former Soviet-built aircraft such as the Tu-134, An-24, Yak-40 and Yak-42.

Analysts say the economic crisis resulted in only limited market consolidation. Some smaller operators withdrew, however, opening the way for foreign operators to gain a foothold.

Among the leading foreign operators in the Russian market are Swiss-owned VistaJet, whose large fleet makes carries out up to 100 flights to and from Russia per month, NetJets and Finland’s Airfix Aviation. Global Jet Concept, another Swiss company, is said to be the largest operator of jets owned by Russians.

In September, Gama Aviation announced the addition of two new aircraft, a Bombardier Challenger 850 and a Boeing BBJ2, to those it is already managing on behalf of Russia-based customers. Gama Aviation’s worldwide portfolio now exceeds 80 aircraft and includes a number of Boeing, Bombardier, Falcon and Gulfstream aircraft based in Moscow. The company was one of the first business aviation service providers to support Russian customers in the 1990s.

The leading locally owned business aircraft owner and management company is RusJet. Its commercial director, Maya Szyszko, says the monthly number of business flights is now up to about 100, of which 60% are international. Not far behind among Russian operators is Jet-2000, whose 60 monthly flights are 80% are international.

Among the main destinations within the country are Novosibirsk, Surgut and Noyabrsky, centres of Russia’s oil and gas production. The UK is the main destination for Russian business flights abroad by a significant margin, with an estimated 20% share, perhaps reflecting the number of oligarchs that have homes there. In second place is Italy, followed by France and Switzerland.

Grey market dominates
The majority of the foreign operators that are active in the Russian business aviation market work illegally through so-called “grey” cabotage, conducting flights on aircraft that are not registered in Russia and thus able to escape liability for their operations.
One explanation is that business jets can lose a lot of money for their owners. Registering your aircraft there attracts 18% VAT, and the large luxury types that are traditionally in demand incur additional customs duties which apply to all imported aircraft with a dry weight of more than 20 tonnes. Furthermore, Russian-registered aircraft automatically have a lower resale value, on account of the unfortunate image Russian business aviation has in the eyes of the rest of the world.

VistaJet claims to be one of the few foreign operators that conducts its flights in Russia fully legally. Last June, the company set up a joint venture with the Russian air taxi operator Dexter, under the terms of which several of its aircraft became locally registered.

Most of VistaJet’s competitors are in no hurry to follow its lead by opening JVs with local carriers, or setting up their own subsidiaries, to move part of their fleets on to the local aviation registry. They prefer instead to exploit the weakness of Russian regulation to continue with cabotage flights.

Probably the main obstacle to the development of the Russian business aviation market is the lack of modern infrastructure.
The business terminal at Vnukovo may be the largest in Russia, and one of the largest in Europe, but has become critically overloaded despite the slower pace of growth in recent years. The same problem is evident at Moscow’s other major airports, Sheremetyevo and Domodedovo. They have business terminals but must also accommodate scheduled commercial flights, which are usually given priority.

It is possible this may change thanks to the efforts of businessman Suleiman Kerimov, who recently announced plans to build the first Russian airport dedicated exclusively to business aviation.
Despite strong opposition from the Russian Ministry of Defence, Kerimov has taken ownership of a large chunk of Kubinka, a military airfield west of Moscow.

At an estimated cost of only $7 million, he has acquired 46ha of the facility, including 24 buildings covering an area of 7,000sq metres, though that is only a fraction of the ultimate project cost of $1 billion. In the first stage, Kerimov will build the business terminal itself, later developing a parking area and either constructing new service hangars or modernising some of the structures that already exist. According to preliminary plans, the new airport could go into operation by 2018.

Future prospects
Despite its numerous problems, analysts predict a bright future for the Russian business aviation market. The country’s vast territory and the lack of a well-developed network of ground transportation makes Russia an attractive prospect, especially as the number of wealthy people is steadily growing – and hence the demand for business jets. It is forecast there could be more than 2,000 of these by 2020.

Local airport infrastructure should have markedly improved in that time. For example, a new business terminal is expected to be built soon in the historical building at terminal two of St Petersburg’s Pulkovo airport.

Leonid Shcherbakov, chief inspector of civil aviation service provider Aerotrans, reports there were more than 14,000 business aviation flights in Russia in 2011.

Mikhail Titov, CEO of RusJet, says this exceeded the total in the previous record year of 2008. He believes Russia stands to benefit strongly as the world regains its economic stability, and says the market can continue to grow by 10% per year.