developing not because of, but despite

September 12, 2019

The enhanced monitoring of compliance with customs regulations, increased interest in charter flights and their cost growth, opening of the first business jet construction plant in Russia, attention to air taxi business model are so far the main trends and events of 2019. Russian Business Aviation market continues to develop not because of, but despite. At the same time restrictions and prohibitions extend to the point of absurdity. Anna Nazarova writes

2018 has shown quite inconsistent results in the Business Aviation market. On one hand, European market players are mentioning a decrease of “Russian” charters: German Consulting Agency WINGX Advance states that 13 out of 20 main European markets have shown a growth in 2018. However, amongst leading European countries, only Germany and Spain have been showing a stable increase of charter flights during the year. In the second half of 2018 UK, France and Italy experienced significantly lower activity, while Russia and Turkey showed the biggest activity decline. Russian brokers, on the contrary, have been pointing out a notable recovery on the charter market. It’s related to hosting of the Football World Cup, reflecting in more than 100% traffic spike and more than 1000 times increase of charter flights requests for some destinations. The exact statistics is still not being kept in Russia. However, market players converge in opinion that “flying less” is definitely not the case.

“In general, 2018 was quite successful for the Business Aviation industry, and such a grandiose event of the last summer as Football World Cup, which took place in different Russian cities, played a role of a great asset in this success,” says Dmitriy Petrochenko, project manager of Bizavianews.ru, the biggest Business Aviation news website in Russia and CIS. Almost all Russian and the majority of foreign operators and aircrafts were involved, also to coincide with this event, Russian government allowed foreign operators to perform domestic flights within Russia (Сabotage), which increased the supply of charter jets.

The representative of the Russian broker company LLJets has the same opinion. “Indeed, there was a growth in 2018. It was different for different broker companies, but definitely unconditional and significant. On one hand, it was related to the World Cup, on the other hand to natural development of the market. The increase here in LLJets reached 22%,” says the co-owner of Lljets, Alisher Elmuradov. “Definitely the situation hasn’t become worse in 2019. The intensity of flights during spring months was even higher than usually.”

Russia still stays under the pressure of sanctions, nevertheless now they are perceived by the market as a chance to evolve further.

“Certainly, when it comes to the influence, the sanctions theme comes to the fore. However, paradoxically, we see here a significant perspective for our industry – the return of assets under the jurisdiction of Russian Federation. This also relates to the airplanes,” says Anna Serezhkina, the COO of Russian United Business Aviation Association (RUBAA). “We expect that aircraft management will move from foreign operators to Russian ones. An airplane is a generator of all kinds of business in the industry. It needs parking, handling, maintenance and fuel. Therefore, it provides a cloud of goods and services, which are essential for its successful and safe operation.”

The COO of RUBAA considers that the more airplanes will be in Russia, the more opportunities will be provided to the industry in general, including maintenance facilities, ground infrastructure, ground handling and service companies – from aircraft cleaning to catering and training of personnel.

But perhaps the most significant event was not even the imposition of sanctions, but rather the implementation of tighter control of customs regulations compliance. In March 2019, the Investigative Committee of Russian Federation accused the “Sfera Jet” company of customs fees evasion. Four business jets were seized and criminal proceedings were initiated against the CEO of the company. Investigation information states that from August till September 2018 managers and employees of the company, Domodedovo airport customs personnel, along with a group of unidentified persons, acting as an organized criminal group, have created conditions for implementation of illegal private flights within Russia. The management of the company leased four business jets to operate private domestic flights from Domodedovo Airport. “No customs duties were paid when importing the airplanes to Russian Federation,” says the Investigative Committee. This illegal activity has resulted in the loss of 600 million rubles (9,4 million US dollars).

Obviously, behind these formal expressions lies just an ordinary practice. The majority of business jets, operated on behalf of conditionally Russian owners, don’t have a Russian registration. In case the airplane with a foreign registration lands in Russian Federation, the document for temporary concessional import, called “Import 53”, has to be issued. The precedent with “Sfera Jet” shows that some companies complied with this regulation, others just turned a blind eye to it. After the case with confiscation of the jets no more flights to Russia without issuing the above pointed document were conducted, which immediately affected the market.

This notorious “Import 53” form allows only non-commercial operations within Russia, which means that only the owners of the jets can fly domestically. Strengthening measures are still progressively taking place. In the recent past any domestic flight on a non-Russian registered airplane needs to have an agreement from a certain list of Russian operators. This directly influences the amount of charter supply market leading to the cost increase of the charter flights. “Simple economics rule: The less is the supply, the more is the cost,” says Dmitriy Petrochenko.

In private discussions, Russian market players tell about upsurge charter flights demand, which occurred in the spring of 2019. Strengthening of customs control has led to the situation when from April till June 2019 the owners couldn’t use their jets for domestic flights in Russia. “Import 53” didn’t cover airplanes with a big take-off weight, so the form physically couldn’t be filled in, as it simply didn’t exist for such airplanes. But the necessity to fly was still there. Therefore, the owners of those jets had to rent charter airplanes. That period is characterized by a sharp spike in charter flights demand, which got back on track just by the beginning of June as the regulator issued a declaration for temporary import with a small import duty. Thus, now here in Russia we’ve got a legal way for temporary import of business jets for private operation.

Nevertheless, the situation with charter flights supply on the Russian market stays under pressure and tight control. Charter jets with non-Russian registration appeared to be literally cut off the market. It resulted in providing ideal conditions for Russian operators: The demand stayed the same, while the supply dropped down dramatically. At the same time, the cost naturally went up, and reached a 30% increase from the beginning of 2019. Even despite of the costs, the demand for charter flights within Russia stays very high. By the way, charter market supply crunch has triggered quite an absurd situation: Customs duties cover all countries of the Customs Union, which includes Russia, Belarus and Kazakhstan. Before the regulator has issued a declaration for temporary import, to fly with a business jet from Moscow to Minsk, a stop in Riga on the way had to be planned.

For the record, the fight of the regulator with non-Russian registered airplanes has one more branch. It became known in June that the non-Russian registered airplanes, being a part of Russian companies’ fleet, can stop operating. Russian CAA has started to ignore the agreement with Bermuda Island, where these airplanes are registered. Russian CAA received a letter from Russian Ministry of Foreign Affairs, stating that the agreement with Bermuda Islands is not considered to be international, which means it doesn’t have a priority over national legislation. We can only guess where these attempts to stimulate the companies to register their airplanes in Russia are leading to. At the moment, a possible ban on Bermuda’s registration can negatively affect not only Business Aviation, but a regular one as well, where the role of the biggest operator of “Bermudian” airplanes plays a national carrier “Aeroflot”.

To sum up, we can say that lately the Business Aviation market is a market of a client. Operators and broker companies do their very best to meet their clients’ both cost and quality expectations.

“About 80% of clients carry out kind of tenders among the brokers, and brokers, in turn, among the operators, are searching for optimal value for money for the flight. This trend will be only developing in 2019-2020,” says the representative of Bizavianews.ru. “It only benefits the clients. Operators and brokers rather lose. Operators are forced to cut costs where possible, primarily for catering and maintaining the cabin, which at the end affects the clients themselves.”

VLJ. Made in Russia

In the first half of 2019, for the first time in the history of contemporary Russia and USSR, the agreement on building business jets was signed. And all this is about a production of a very light jet Victory. It’s known as an experimental single-engine turbojet which was created by American manufacturer Epic Aircraft in 2007. S7 group, part of which is the second biggest Russian airline company S7 Airlines, will invest 14 billion rubles (more than 220 million US dollars) of its own funds in construction of the plant in Stupino, located in the south of Moscow region. It is noteworthy that the co-owner of S7 group, Natalia Fileva died in an Epic Aircraft plane crashed in March 2019. Nevertheless, it hasn’t stop the company, which apparently has a strong belief in a light jet development in Russia & CIS.

At the moment it’s hard to judge how successful this project will be in the future. A state project Sukhoi Super Jet 100 has production of 40-50 airplanes, while the private project is aiming for 20-25 followed by successful sales. Tremendous certification and marketing costs, world market competition, sanction risks related to delivery of engines, avionics, spare parts leave the question of success open.

As expected, the start of the works construction will take place in the 4th half of 2019 and the completion of construction is planned for the 3rd quarter of 2025.

An agreement between S7 Group and Moscow Region Government was signed during St. Petersburg International Economic Forum 2019 (SPIEF).

A word about SPIEF: This year a record number of business jet passengers arrived to the largest Russian economic platform. During three days of the Forum “Pulkovo-3” handled 1772 passengers which arrived with 552 business jets. For example, last year the figures were 1674 passengers and 647 flights, in 2017 – 1586 passengers and 544 flights, and in 2016 – 1475 passengers and 545 flights.

“The peak days this year were the 5th and the 7th of June. We are very pleased with the fact that we haven’t received any claims and complaints during all Forum period of time,” comments the “Pulkovo-3” team.

Taxi Aims into the Sky

Popular in US and Europe, the air taxi trend has finally reached Russia. Almost simultaneously, several companies have started to research and develop the concept of air taxi. Apparently, Russian Business Aviation market has reached the development stage, when it’s ready to become more mass. Time will show exactly which concept of air taxi will be more appropriate and stable for Russian market, but at the moment we can observe the development of two concepts: Using helicopters and VLJs.

Following the popular aggregator Uber, which for some years has been including helicopter operators into their system in Europe and Dubai under the brand name UberCOPTER or UberCHOPPER, Russian market may introduce such a service as well. The biggest helicopter manufacturer in Russia, “Helicopters of Russia”, along with the government of Moscow, service aggregator “Yandex.Taxi” (Russian analogue of Google) and the provider of technical solutions for air traffic management are in talks regarding integration of helicopter operations into mobile online taxi service.

It’s also worth noting that the airspace within Moscow ring road is still closed for commercial flights, which impedes the project to gain the most attractive part of the market. Chairmen of the Board of Helicopter Industry Association, Mikhail Kazachkov, notes that opening Moscow airspace for private flights is one of the most important streams of the business. He’s absolutely convinced that the airspace will be opened sooner or later, but it’s too early to speculate on specific dates yet.

In the Moscow region, the helicopter taxi service is provided by several operators. Heliport Moscow, the helicopter transportation supplier, mentions that ridership to the destinations in the Moscow region area is sufficient enough for developing such a business as air taxi. Contrary to the popular opinion that the integration with the aggregator is harmful for the business, “Heliport” says that about three years ago it took the initiative of integration with “Yandex.Taxi”. Back then, a number of meetings with representatives of Yandex was implemented, but at that moment, the idea was evaluated to be too complicated and the project was suspended.

“I’m convinced that part of ‘Yandex.Taxi’ clients could easily use the services of helicopter taxi. Just nobody has ever had a proper thought about it. In terms of practical use for customers it is a direct development of transport system, simplification of personal logistics, significant time and efforts saving,” says the representative of Heliport.

Republic of Dagestan can already boast of fully operating helicopter taxi. The Makhachkala Airport in cooperation with LIS Trading Group, a member of Aim of Emperor Group has carried out the first project of Helicopter Taxi in the interests of Republic of Dagestan. The fleet consists of Airbus Helicopters with a base at the intensively developing Makhachkala International Airport.

Within the establishment of air taxi operator structure engaged experts have analyzed and determined the optimal type of the helicopter, provided flight crew recruitment, coordination of the fleet registration in the operator’s AOC. The airport of Makhachkala has completed a construction of a modern hangar and helipads and received two H130 helicopters. The airport management team says that it’s a pilot project of helicopter services, which hasn’t been presented in the region before.

“There is an existing demand for helicopter services, which includes both business and leisure trips. The tourist segment is rather small, yet in demand. For example, Dagestan had visitors from UAE, and they actively used helicopters. Therefore, we can say that helicopter services will be interesting for foreigners and local citizens,” the Director of Makhachkala International Airport Arsen Pirmagomedov said.

“Thanks to realization of the helicopter project, the region has received a unique service of safe and mobile air transfer,” commented Roman Malyushkin, a managing partner in LIS Trading Group. “Aviation start-ups is one of our business specializations, and we are always looking forward to assist regional enterprisers in aviation projects implementation.”

But perhaps the title of the most ambitious project could go to the concept of air taxi, which is being developed by Aim of Emperor Group, using light jets HondaJet. For the first time in Russia, we will see a classic model of air taxi with turbojets. Its route network will be the main feature of the project, and will be aiming not only at the capitals, but at regional centers of the country. “Aim of Emperor” says that in the initial phase of the project 3 HondaJet will be based in Moscow, St. Petersburg and Krasnodar, one in each city. Each of them will cover the most economically strong located within 1900 km from the base of the jets.

Irakli Litanishvili, the owner of “Aim of Emperor” Group, claims that Russian market is ready to accept a new business model. On one hand, charter flights market is facing a trend of cost optimization. Some passengers of charter flights, have changed to flying with business class on airlines, the others have started to pay more thorough attention to flights cost structure. More and more clients are looking “empty leg” options, comparing offers from different operators and looking for more affordable flights. At the same time, the new trend of “business class blurring”, which is noticeable during the past 3-4 years in Russian airlines industry, has reached the segment of Business Aviation. Passengers are more psychologically ready to replace excessive luxury with reasonable practicability. Some of the passengers prefer travelling with unfamiliar companions using the affordable coach share model to hiring the jet. Another important point is the fleet structure and the age of jets, having Russian registration and operating domestically. Statistics shows that light jets and midsize jets have the average age of 35-40. Obsolete jets are not anymore able to meet comfort and safety requirements of today’s private aviation. Nowadays passengers have their subjective criterion of safety – having the choice of several jets of the same class for Russian domestic flights, they will choose newer and slightly more expensive one.

It’s interesting to note that besides the increased level of mobility of wealthy people, there will be a new social target to be achieved. For the first time in Russia, an environment for executive aviation pilot training will be created, and it will have a base at Ulyanovsk Flight School.