CIS Emerges

At a Glance

  • Russiaʼs transition to a more inward-looking economic policy is taking time to yield profits, though, once fully implemented, should strengthen the economy.
  • The network remains highly concentrated, with huge portions of seats offered going through only a few central hubs.
  • 2014’s oil-price slump hit the region hard although with the price per barrel climbing, economies are being boosted.

An Emerging CIS?

After more than 3 years of geopolitical and economic turbulence, Russia and its neighbors in the CIS are not out of the woods just yet, but they are finally beginning to emerge. IHS Global Insight predicts that Russia will achieve GDP growth of 1.5% in 2017 – well below the government’s target of 4% but after 2 years of economic contractions, at least back in positive territory.

Positive Change for the Region

There are other encouraging indicators to consider also:

  • the US$/RUB exchange rate has stabilized.
  • inflation has been halved from an average of 16% in 2015 to less than 8% in 2016.
  • real wages are recovering.

The indicators point to a recovery in air travel demand, albeit primarily domestic. This is due, in part, to the much reduced purchasing power of the RUB overseas, although demand for leisure travel is also turning inwards given instability in North Africa and Turkey – traditional Russian holiday destinations – as well as Russia’s de facto control of the Crimean Peninsula.

Changing Priorities

In spite of positive developments, the region is experiencing structural problems. Russia’s population has been shrinking, falling at around 1% p.a. for the past 15 years, now down to 140 million inhabitants. Also, it is transitioning from an economy that traded heavily with the EU to a more inward-looking, self-sufficient one, taking time to yield benefits. As part of this, Russia is successfully attracting more foreign investment (evidenced in FDI inflows), however the level is still a fraction of what it was pre-2014. Much of this investment is needed on industrial production lines; when this materializes, Russia’s economy will likely gain more traction.

The Issue of Oil Price

Due to high extraction costs, Russia and most of the oil-producing CIS member states were hit hard by the slump in oil prices, which concurred with the region’s 2014 downturn. This has meant that while oil prices are far from their pre-2014 levels, the upward trend above US$ 50 per barrel translates into economic tailwinds for all countries concerned. Other major mined commodities – precious metals in particular – are also showing signs of recovery.

Regional Industry

It is no secret that the Russian Government has for years been fostering the local aircraft industry with both off-the-shelf and new, partly or fully indigenous designs. It could however be “too little, too late”, since the obvious replacement targets – operators of Russian aircraft from the Soviet era – have almost all migrated to operating Western designs from the major OEMs. Nevertheless, politics can dictate that foreign aircraft lose their competitive advantage, but even so, lack of funding for native programs, underdeveloped technical support networks and outdated engine technology (compared to the West) means that a return to the production levels seen under Communism is still a long way off.

Consolidation

Acquisition by the Aeroflot Group was the alternative to bankruptcy for smaller, regional competitors in the Russian market though this trend led to a reduction in competition and network centralization around Moscow and other major centers. With 35% of all Russian airports with scheduled air services linked to only one destination, global air access is limited with only the 30 largest airports (15%) having high global network connectivity of at least 10 links. Aeroflot’s three largest competitors (S7 Airlines, UTair & Ural Airlines) have all built up sizeable Moscow networks as well, but are now going in the opposite direction – strengthening their regional bases and meeting some of the demand for still lacking regional connectivity.

Air Transport Connectivity: Non-stop Destinations Available

Consistent Trends

Whatever Russia’s relations with the outside world there are three clear constants:

  1. High demand for local air travel, by simple virtue of the geographic, topographic and demographic make-up of the country.
  2. Alternative means of transport are years away from rivalling air travel in terms of time savings and efficiency gains.
  3. More than 25 years on from the break-up of the Soviet Union, Russia and the CIS remain highly politically and economically intertwined, and this shows no sign of changing.

Additionally, it is in the other CIS member states where, in contrast to Russia, populations are growing, and thus demand may emanate increasingly from these countries.

A Highly Concentrated Network

Over half of all seat capacity deployed by Russian carriers is offered in flights to, from or between Moscow and St. Petersburg. Almaty traffic accounts for 55% of all seats flown by Kazakh airlines – when combined with Astana the proportion reaches 90%. Kiev accounts for 75% of the seat capacity offered by Ukrainian carriers. For the foreseeable future however, with the exception of certain trunk routes within Russia, between Moscow and other CIS capitals, demand calls for more thin markets to be served, where 70 to 130-seat jets are optimally placed to operate them in a profitable manner.

Air Service Concentration % of Seats Offered

Source: Innovata, Embraer

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