The deteriorating economic situation in Russia and the political tensions from its annexation of the Crimea and support for separatist rebels in Eastern Ukraine is causing huge problems for the Russian aviation industry, and Russia is no busy bailing out its airlines, 2nd largest Russian airline Transaero Airlines and smaller UTAir are getting state aid to stay alive, and many more will be lining up over the next few months, as the situation deteriorates further.
Transaero Airlines is Russia’s 2nd largest airline with 102 aircraft (inc. 20 x B747-400’s ABOVE photo) after national carrier Aeroflot. The deepening economic crisis has had it close to cancelling many flights last month, and after appealing for state aid, the airline has received Ruble (RUB) 9 billion ($US 165 million) in guarantees mostly from VTB Bank one of several Russian banks on the EU/US sanctions list.
The airline leases 90 of its 102 aircraft, and these leases are mostly in $US and with the RUB now half of what it was earlier in the year, lease payments have become very expensive in local terms, with an estimated $US 28.1 million in lease payments per month now roughly RUB 1.85 billion !, look for more state aid for the airline as Russians are now travelling less, especially internationally. The airline has 6 x SSJ-100’s on order for now, the last thing Sukhoi needs now with the new tough delivery commitments it has made with its banks is aircraft cancellations.
This is a perfect storm for Russia, falling oil prices, economic sanctions, falling Ruble (RUB), Russia’s debt being downgraded to ‘junk’ status and all financial options dealing with Russia are “out of money”, and sky rocketing local cost increases for Russian companies who have foreign debt and accounts payable in the West. With Russian banks and energy companies prohibited to sell new bonds and equities on the global financial markets, the ability of Russian companies to raise capital is now limited, which will have a knock down effect on Russia’s ability to finance its aerospace ambitions.
The fall of the Ruble (RUB) against the $US and the falling oil prices have combined for a worst case scenario for Russia’s airlines and OEM’s, as airlines mostly lease and finance in $US and OEM’s buy aircraft components from the West, which in local Rubles makes all imports very expensive, in fact the RUB this morning continued its devaluation and is at RUB 66 to 1 $US, it was RUB 30 a year ago.
Now everything imported is now double the price in RUB in Russia, which drives inflation, the Russian economy and aviation sector is now facing collapse on various fronts as Brent Crude Oil Futures hit $47 and Goldman Sachs thinks $47 will be the average for 2015, while Credit Suisse thinks $70 will be the average for this year, still all bad news for Russia, so dependent on the oil industry as President Putin has failed to diversify the economy during his many years in power.
The country ranked 2nd worst in crony capitalism index for 2014 (billionaire wealth as % of GDP) as 19% of the Russian economy is in the hands of oligarch billionaires, most ‘friends’ of President Putin, many of which have been targeted by the EU/US sanctions but with little affect, the biggest impact as always is the little guy trying to get by on a small Russian salary.
On Dec 29th, Transaero Airlines announced its plea for state and creditor aid aid on Dec 22nd has been heard and will receive RUB 9 billion ($US 165 million) in guaranteed support. The airline was threatening to cancel many flights, which would have been very embarrassing to Mr. Putin and his government. The problem I see is that the airline had to commit to a price freeze on domestic services in 2015 and to reduce air fares 5-7% on domestic routes where Transaero Airlines has a monopoly.
This is at a time when it is hit with huge cashflow problems brought about by the economic crisis that has lowered passenger demand for air travel, especially international travel as few can afford the doubling of exchange rates with the Russian Ruble (RUB), and these foreign earnings are a must for the airline to pay for its 90 aircraft on lease as well as all its international costs outside of Russia (ie. fuel, handling, catering, maintenance, spare parts, etc.).
The state guarantee will now cover 100% of Transaero’s operating liabilities on a 3 year loan from VTB Bank (on EU/US sanctions list). With the help of McKinsey & Company, Transaero Airlines is restructuring its network, with more focus on Southern Russian destination due to costs as few can now afford overseas vacations.
As for Russia’s airlines, “Some of the airlines are struggling greatly,” said John Wojick, Boeing’s senior vice president for global sales. “It’s really dropped off for them”, and they cannot now defer deliveries for 2015 as manufacturing begin working on single-aisle planes almost 12 months before delivery, and on wide-body planes 18 months before delivery, so any changes made in scheduling need to be arranged well before the actual delivery.
That means any airlines with jet deliveries for 2015 will have to take delivery of those planes because it’s too late for the manufacturers to change schedules. Only deliveries from 2016 could be a subject for discussion, no Russian airline at this point has asked to defer deliveries, yet Russia is less than 10% of Boeing sales (only 12 deliveries in 2014), so stagnation there is not a big impact for Boeing or Airbus.
The sad thing is that it will surely need more money, and soon as 90 of its aircraft are leased in foreign currencies, I calculate the lease payments have to be around $US 28.1 million per month that is now RUB 1.85 billion per month ! no wonder the Russians are now looking to buy Russian aircraft, but even the SSJ-100 is +60% Western by value anyway and the planned MC-21 will be about the same with the PW1500G engine. The cargo market has been hit hard, as imports to Russia are significantly down due to the slide of the RUB against most currencies and Russia really has very little to export, “Made in Russia” is a rare sight on anything in the West, so any Russian airline flying lots of cargo aircraft like Transaero Airlines, is going to experience lots of problems.
Transaero Airlines is run by CEO Olga Pleshakova and the airline started operation in 1993 with a single IL-86, today it has around 103 aircraft (47 x B737’s all models, 20 x B747-400’s, 18 x B767-200/300’s, 15 x B777-200/300’s and 3 x TU-214’s), about 90 aircraft are leased in. The airline also owns Shannon, Ireland based Transaero Engineering Ireland (TEI) the old Air Atlanta operation, and is also in trouble with bankruptcy proceeding beginning as the maintenance company is owed around $US4.5 million from Transaero and does 3rd party work for El Al, Arkia, Air Berlin, TUI Group and others.
UTAir is another large Russian airline that is seeking Russian state aid, as it is has accumulated debts of RUB 13 billion ($US 214 million). The airline operates 93 aircraft, including the SSJ-100 (ABOVE photo) with 24 on order, yet now plans to reduce its fleet by 40% in 2015 as all airlines are seeing decreasing passenger numbers as the economy nose dives into recession and economic contraction in 2015. Between Transaero and UTAir, there are 30 x SSJ-100 orders outstanding, will they take delivery with the cut backs in service and fleets ?
UTAir has bank debts of 13 billion RUB ($US 214 million), it is streamlining and will reduce its fleet by 40% in 2015 as travel is down in Russia and will continue to decrease for some time now, The current UTAir fleet is 93 aircraft (5 x A321’s, 18 x ATR-42/72, 51 x B737 all models, 5 x B757-200’s, 6 x B767-200’s and 8 x CRJ-200’s).
Aeroflot is Russia’s national airline and a Sky Team member, it has 147 aircrft (including 13 SSJ-100’s) in service and has 147 aircraft on order (including 10 x SSJ-100’s and 50 Irkut MC-21) it employs 30,300+ employees with revenues of $US 9.3 billion in 2013. If Aeroflot gets into trouble, then you know the entire Russian air transport system and aircraft OEM’s are in BIG trouble. I expect at some point in 2015 Aeroflot will get state aid, the economic situation especially the fall of the Ruble (RUB) to 66 to 1 $US as of today will bring chaos to its finances at some point. Aeroflot had to ground one of its subsidiaries this summer, as its new LCC (low cost carrier) Dobrolet, flew Boeing 737-800’s to the Crimea, the US/EU re-acted with sanctions on maintenance, insurance and other services. The worry is Russia now is that Russia has too many Western airliners, but sadly its aircraft are non-competitive ‘junk, except the 87 passenger Sukhoi SSJ-100 SuperJet regional airliner.
NOTE: most of Aeroflot’s fleet is registered in Bermuda (VP-B registration), due to financing and repossession reasons as well as high VAT (value added tax) place don Western aircraft to try and protect the Russian industry, well at an average of 20 Russian commercial aircraft built between 2004-2013 that failed, says novels about the situation in Russia when you cannot place commercial aircraft on its RA registration and has to go to far away, tiny island of Bermuda, we are talking about the national flag carrier of Russia having to use a VP-B registration !
When will Russia’s national airline, Aeroflot ask for state aid ? surely sometime in 2015 you will see Aeroflot lining up for money along with other Russian airlines. Sadly 2013 was a big year for Russia’s airlines with 85 million passengers a 152% increase in the past 10 years.
As for the Russian aerospace industry, and as per my previous article on the Sukhoi SSJ-100, things will not be as planned, as the attractive financing for low leases will be difficult when Russian banks are shut out from borrowing in most international markets as they are under EU?US sanctions. Even this crisis with Transaero Airlines and UTAir will hurt, as combined they have 30 SSJ-100’s on order !
I think Russia can forget about the Irkut MC-21 airliner for now, it will be an expensive national pride exercise with limited possibilities for international success, and in no way will it be ready for 2018 delivery as planned, it will be the Chinese ARJ-21 all over again, 8 years behind schedule and still no FAA Type Certificate.
With oil nowhere near the fiscal break even Brent price of $US 105 needed by Russia to balance its budget, Russia is looking at a massive budget deficit in 2015, and few options for international borrowing with a ‘junk’ bond status, Russia may have to let the Irkut MC-21 program fade into history and without the promised low lease rates the SSJ-100 will NOT be competitive with the new Embraer E2’s or Mitsubishi’s Regional Jet.
Lastly, even for Russian VIP users of business jets life is getting tough, A close billionaire friend of President Vladimir Putin, Mr. Gennady Timchenko who is on the US sanction list has had his Gulfstream technical support withdrawn by the manufacturer, and can’t use his business jet for now. This is why I think Sukhoi predicts a sizable market for its VIP version of SSJ-100 SuperJet, we shall see how it all plays out, for now Russian airlines and aerospace companies are facing tough times ahead, maybe even worst than in the 1990’s when they thought it could not get any worst.
Till next time, thank you for reading my blog.