LONDON — Transaero, Russia’s first privately-owned airline, has grown to become the country’s second-largest carrier. It has expanded without pause since its creation in 1991, so how has it handled recent difficulties caused by sanctions imposed by the West following the turmoil in Ukraine? First Deputy CEO Dmitry Stolyarov assesses the present situation and the airline’s prospects in a two-part interview.
Airways: How serious was the effect of the international situation over Crimea and Ukraine on your business last year and for 2015 so far?
Dmitry Stolyarov: All airlines around the world are among the first to feel effects of any crisis. We’ve seen this during turmoil and protests in Egypt and Thailand, when people traveled less to these countries.
At the end of last year, amid the ruble’s heightened volatility, demand for international travel in Russia dropped. Russian airlines were not the only ones affected; a number of foreign carriers decreased their frequency of flights to Russia, and some of them suspended their services or announced plans to do this. The negative impact of sanctions on the financial performance of European carriers was recently highlighted by Tony Tyler, IATA’s Director-General and CEO, at IATA’s Annual General Meeting in Miami.
The introduction of restrictions on flights over Ukraine caused not only an increase in operational expenditures for Transaero but also economic losses through missed opportunities for the Ukrainian side.
However, it’s the task of an efficient management to minimize the effect of negative factors and find new points of growth. Our operating results for May demonstrated that we have succeeded in doing just that.
Transaero carried 13.2 million passengers in 2014, 3.6% up from 2013’s figure. Do you think passenger numbers will rise this year?
After some decrease in the first four months of 2015, in May we achieved a 7% growth of passenger traffic over May 2014, having carried more than 1.2 million passengers.
In spite of the decrease of flights to Russia by foreign airlines, there has been an increase in foreign travelers, which we see as a positive trend. Russian destinations remain attractive for foreign tourists, partly due to the current exchange rate. Transit flows continue to rise as tickets via Moscow are rather affordable for foreign passengers.
There has been a record number of transit passengers in May 2015 – this number grew by 137% over the same month in 2014. This was achieved by a combination of convenient connections on a large number of routes and attractive fares.
Transaero adjusts to market changes: we’ve increased passenger capacity and flight frequency on high-demand routes, expanded the domestic route network and launched new services. We expect further moderate growth.
Transaero’s CEO Olga Pleshakova recently said, that for outbound tourism “the market shows all the signs of recovery”. What are the factors behind this, as many international destinations are still expensive for Russians due to the fall in the ruble’s value?
It is true that, starting from April, we have seen some signs of the tourist market recovering after significant shrinkage in late 2014 and early 2015. Travelers have adjusted to the new economic conditions. For instance, the drop in demand for long-haul leisure destinations such as the Caribbean, which have become very expensive for a lot of potential passengers, has been compensated by growth in demand for Egypt and stable demand for Turkey – the popular destinations for budget holidays.
We’re offering new routes between St Petersburg and Beijing and Shanghai. In April we started scheduled flights to Prague – a very popular tourist destination – and for the first time launched scheduled flights to Malta.
On some international routes, such as Moscow to Paris, passenger traffic has not decreased at all but continues to grow sustainably. We also recorded significant growth on routes to Germany and Austria.
In general, looking at the first four months of 2015, Transaero’s passenger traffic grew on routes to Europe and the CIS – even to Ukraine, where the forced suspension of flights to Donetsk and Dnepropetrovsk was offset by increased services to Kiev and Odessa. Passenger flow to Israel, Egypt, China and India also significantly grew.
Domestic tourism is booming too. Russia, with its great diversity of climate and nature, provides tourist destinations to suit any taste and budget. This represents great opportunities for the airline. We are adjusting the airline’s domestic network by increasing services to leisure destination such as Sochi and other resorts in the south of Russia. In the first four months of 2015 these increased by 37%. We also added some new domestic destinations, such as Komsomolsk-on-Amur from Moscow and Magadan from St Petersburg.
In November 2014 you said that Transaero would begin “a comprehensive set of measures aimed at enhancing its operational efficiency”. Can you give some details?
Transaero contracted the McKinsey consultancy in November 2014. As a result, a comprehensive program was worked out to enhance operational efficiency. In December 2014, due to negative market forecasts for the entire industry, Transaero made a decision to cut its flights in the low demand season after the New Year holidays. The number of flights in January 2015 was down 9.1% compared to January 2014. However, the number of passengers decreased only by 3.8%, with passenger traffic on scheduled flights (which accounted for 92% of operations in January) dropping by only 2.3%.
In 2014 operational costs were reduced by 5.5% compared to 2013. This allowed us to improve the gross profit margin. We can now see tangible results of the McKinsey program: the airline has significantly increased sales via its own channels. For instance, for the first quarter of 2015 the airline’s direct sales grew by 70%. We’re continuing to work with McKinsey on dedicated commercial projects such as tariff setting.
The decrease in passenger traffic in the first quarter of 2015 was 6%, which is a much better result than we had during the global crisis of 2008. In 2009 we had a drop of 16% in comparison with the previous year. Thanks to the increase in our direct sales we have been able to make up for the decrease in demand from our tour operator partners. Transaero retains the highest load factor among Russia’s top five airlines, which proves the efficiency of the measures we have undertaken.
The Russian government has reduced the rate of value-added tax from 18% to 10% for domestic flights. Will this have a significant effect on encouraging passengers?
I believe that the reduction of VAT for domestic flights is a significant measure aimed at supporting the entire industry. It will prevent ticket prices from rising. We estimate that thanks to the implementation of this measure Transaero will be able to save about 2 billion rubles ($37 million).
You received a 9 billion ruble loan from VTB Bank in January. Do you believe this will be sufficient to ensure that Transaero survives, or is it possible that you might need more money?
The government’s support for Transaero was timely and efficient. Due to the macroeconomic situation, sanctions against a number of banks and drop in customer demand, the airline faced a cash deficit. This was the first time in the 24-year history of the airline that it had to apply for state support.
The commercial credit that the airline received from VTB Bank under state guarantees, allowed the airline to make urgent operational and production payments and to refinance some borrowings. The government provided state guarantees after a study of the real potential of Transaero and its program of business efficiency enhancement. At present, the airline is holding talks with VTB Bank on arranging a syndicated loan. We shall be able to talk about the results of these talks upon their completion.
You recently restated your 2013 financial results. Instead of a previously announced net profit of RUB 788 million you reported a net loss of RUB 13.3 billion. What happened? I believe the auditors were concerned that Transaero’s accounting policies differed on several points from the international ‘IFRS’ standards. Can you make any comment on this?
The auditors were concerned with the methodology of evaluation of intangible assets. The valuation of Transaero’s trademarks had been made for the first time in six years, and this was one of the reasons for their concern. We took on board the remarks of our auditors and financial partners and made several changes in our accounting policies. We’ve done a big job. We carried out comparative checks with our counterparts, assessed significant reserves and allocated transactions for reporting periods. As a result, when preparing the financial statement for 2014 we had to change the reference results of the previous period. This allowed us to make the financial statement fully transparent and fully complying with the requirements. We have now entirely settled all these issues.