Along with a new portion of sanctions came new troubles. First, the UK banned Aeroflot flights from and to Russia.
Then other countries joined these sanctions. The answer turned out to be expectedly mirror-like: Russia closed its airspace to aircraft from states that showed unfriendliness. Only now our counter-sanctions turned out to be something akin to shooting oneself in the foot. And that’s why.
Earnings and quotes
It must be understood that it is still faster and more profitable to fly to Japan from France over Russian Siberia. With the Russian Federation closing the skies for European airlines, they will now have to process more paperwork on the ground and make a huge detour in the air. What is the meaning of the ban on flights over the territory of Russia? At first glance, these are new serious troubles for our economy. The exchange price of Aeroflot shares fell by 31% in a few days at the end of February. Since March 1 last year, it has decreased from 68.31 rubles / piece to 34.16 rubles.
Who exactly got worse? Aeroflot is one of the oldest airlines in the world. Its ancestor is the Russian Air Fleet Society Dobrolet, which appeared in 1923. The carrier is based at Sheremetyevo Airport, from where it operates its main flights, and has five branches in Russia. The controlling stake in Aeroflot – 51.17% – belongs to the state. Institutional investors – 35.7%. Another 3.5% is on the balance sheet of the state corporation Rostec, 5.1% belongs to individuals.
The aviation industry in Russia is characterized by high market concentration, dominated by a small number of companies. Formally, Aeroflot is not a monopolist in the air transportation market, but in fact it occupies an artificially created leader position on it. This airline is regularly reminded by the Federal Antimonopoly Service (FAS), but its painless injections are usually perceived indifferently.
In February 2017, the British consulting agency Brand Finance recognized Aeroflot as the strongest aviation brand in the world. The carrier from the Russian Federation took first place, overtaking American Airlines and Emirates. But this is not so much his own merit as the unique working conditions provided to him. Perhaps the current sanctions were successfully lobbied by competitors.
The shortest air route from Europe to Japan and Southeast Asia runs over Siberia. For the opportunity to use this route, foreign companies pay royalties. This “money out of thin air” has so far been received by the only beneficiary, Aeroflot. The tradition has been going on since the 1970s, when Aeroflot was the only airline in the USSR, there was no one to share these incomes with, there was no talk of unfair distribution of money.
Now royalties have a strong impact on the competitive position of the national carrier: their amount is around $600 million a year, which is about a third of the total turnover of the closest pursuer, S7 airline, which earns on its own. Today, royalties are no longer directed, as before, to the technical equipment of the industry, but almost completely simply settle with Aeroflot.
Until the thunder rolls
Aeroflot seemed to be a prosperous company, although the profit curve on the prosperity graph is slowly but surely going down. So, dividends in 2018 amounted to 12.81 rubles per share, in 2019 they fell by 79% – 2.69 rubles.
Thunder struck from a clear sky, and at first it was called Covid-19. The volume of passenger traffic has collapsed around the world. In fact, only Aeroflot has the ability to carry out international flights that are not exclusively related to the export of Russian tourists from foreign holiday destinations. However, the position of the state-owned company then raised questions from the FAS. The Antimonopoly Service demanded that ticket prices be kept affordable and additional costs paid off by increasing the Trans-Siberian royalty. But even in quarantine, Aeroflot found an opportunity to make money by sharply raising prices. On March 19, tickets from Prague to Moscow with a departure on the day of purchase were issued for 11,744 rubles, and on March 20 – already for 16,066 rubles. The FAS demanded to eliminate violations in the pricing policy, the airline responded by calling the information about inflated prices “stuffing and rumors.” However, the decrease in royalties amounted to more than 70%: in 2020, the national carrier lost about $350 million, because the flights of foreign carriers over our country became significantly less due to the pandemic.
As a result of all these events, the Aeroflot group of companies (Pobeda, Rossiya and Aeroflot itself) received a net loss of 123 billion rubles in 2020. Dividends for 2020 were not paid.
Sanctions
Now most of Europe, Canada and some other countries have closed their airspace to Russia. Aeroflot flights on the network of European routes have been suspended. Moreover, at least six major Russian airlines have received notices from European lessors about the termination of contracts. There are few options for them to get out of the situation – to return the planes to their real owners, try to buy them out, or simply break off relations with lessors in order to keep the fleet for themselves, to work in the Russian Federation. There was information that the state plans to help only Aeroflot.
This company alone has at least five wide-body “unsanctioned” aircraft with valid insurance. It is not clear what lessors will do with those not new and largely “used” aircraft.
The desire to “rattle” sanctions is understandable. The “mirror” response of the Russian Federation is also understandable. She limited the operation of flights to airlines of 36 states. The Federal Air Transport Agency explains that this will be a response to European states that have banned Russian aircraft from flying. That is, Aeroflot (and the state along with it) is not only deprived of the European market, but also the future amounts of royalties are almost in full. It is very similar to the saying “to spite my grandmother I will get frostbite of my ears”, isn’t it?