Aeroflot set to spread its wings into Georgia

by Tracey Boles Transport Editor

The Business
June 20, 2004

Empire building is alive and well in Russia – at least in its aviation
sector. Aeroflot Russian Airlines has opened tentative talks with
Georgian flag carrier Air Zena with a view to purchasing it outright
or taking at least majority control of the airline.

As well as developing its presence outside Russia, Aeroflot is looking
to enhance its domestic services and is courting various Russian
airlines as potential purchases. The national carrier is understood to
be interested in Samara Airlines and Kuban Airlines, with the aim of
establishing new regional bases at Samara and Kransnador. In addition
it has not ruled out an investment in Siberia’s Arkhangelsk Airlines.

Air Zena was formed as a charter airline in 1994 and has established
a strong network into Europe from its base at Tbilisi. Acquiring flag
carrier status in 1999 following the demise of Georgian Airlines,
it has played an important role in developing the country’s economy
and its links with the west. A private airline, it operates three
Boeing 737-500 and two Antonov 2 aircraft on routes connecting Tbilisi
with Moscow, Prague, Paris, Athens, Tel Aviv, Frankfurt, Amsterdam,
Vienna and Kiev.

Aeroflot believes an equity investment in the Georgian carrier will
help expand its activities in the Commonwealth of Independent states
(CIS) and prove a boon to the SkyTeam alliance, which the Russian
airline will join within the next two years.

“We confirm that we are in talks for Air Zena , but this is a
preliminary stage and it is too early to talk about results,” Lev
Koshlyakov, deputy general director of Aeroflot, said. “We have
an interest in the CIS market and we are building up contacts and
relations as this could be our trump card in the SkyTeam alliance.”
If Aeroflot buys up Air Zena, it will be following the example of
Russia’s number two carrier Sibir, which acquired Armenia’s Armavia
airline in 2002. Sibir has used Armavia not only to expand its network,
but also to import Airbus 320 planes duty-free and to gain experience
operating them on the CIS market.

Sibir has already imported four such aircraft and is only required to
pay a small registration fee in Armenia. But the aircraft cannot be
used on the routes of Sibir proper due to government restrictions on
using imported planes; Aeroflot is allowed to operate only 27 foreign
jets in its fleet of 78.

Last month Aeroflot signed a preliminary agreement to join the Air
France-led SkyTeam airline alliance, a deal that could take a year
to be finalised.

Aeroflot intends to increase market share on Russian-US routes
with what it bills as an improved service – supposedly gone is the
unfriendly and unreliable image of Soviet times, to be replaced with
new uniforms and an la carte menu. The first North American office
for frequent fliers opened recently.

But Aeroflot’s ability to revamp its much-maligned fleet is limited
by the measures designed to protect Russia’s aircraft industry;
value-added-tax and import duties that increase the price of
foreign-made jets by up to 40%. As a result, Boeing, which has 500
engineers in Russia and has invested $ 1.3bn (715m, E1bn) into joint
ventures with the country since the early 1990s, sells more planes
to Uzbekistan, Azerbaijan and Ukraine.

The good news for both manufacturers is that the Russian airline
plans to double its fleet to 150 jets by the end of the decade;
the lack of sufficient Russian aircraft may play straight into their
hands. Of 110 foreign-made jets flown by CIS airlines, 88 are Boeings.