Aeroflot to Revive Low-Cost Plans Blocked by Ukraine Sanctions

Russian flag carrier OAO Aeroflot said it will revive plans to build a low-cost arm after discount unit Dobrolet was grounded by European Union sanctions tied to the Ukraine crisis just two months after flights began.

Dobrolet, which halted services Aug. 4 as companies were compelled to end provision of services including insurance and leasing, carried 43,400 people in July, the only full month of flying, with 93.3 percent seat occupancy, Aeroflot said today.

“The group remains committed to the low-cost-carrier business model, believes it holds great promise for development inside Russia, and is committed to developing this segment further,” the Moscow-based company said in a statement.

Aeroflot, where first-half earnings fell 17 percent on a decline in the ruble spurred by heightening tensions with the West, had made Dobrolet central to short-haul growth plans as more liberal regulations allowed it to operate along similar lines to European low-cost leader Ryanair Holdings Plc. (RYA) The carrier had two Boeing Co. (BA) 737s at the time of its grounding, with at least six more due in 2014 and plans for a fleet of 40.

With a base alongside Aeroflot at Moscow’s Sheremetyevo airport, Dobrolet’s first route was to Simferopol in Crimea, where initial flights were almost booked out following the region’s defection from Ukraine to rule from Russia. Services from Sheremetyevo to Volgograd, Samara, Ufa, Ekaterinburg and Perm were due to have been rolled out this month, with Kazan, Nizhny Novgorod, Sochi and Kaliningrad earmarked to follow.

Turboprop Study

Aeroflot’s own passenger traffic rose 12 percent in the first half, though international traffic fell 3 percent, hurt by a lower frequency of flights to Kiev and Odessa in Ukraine and the suspension of flights to Donetsk and Kharkov, as well as the reclassification of Simferopol as a domestic destination.

While Moscow-based S7 and Orenair, another Aeroflot unit, still serve Crimea with flights pre-dating its annexation in March, President Vladimir Putin’s government is considering how best to respond to the idling of Dobrolet, with Deputy Prime Minister Dmitry Rogozin saying Aug. 14 that plans for an airline using Russian aircraft are being evaluated.

Putin has also ordered a study into resuming Ilyushin Il-114 turboprop production at the Aviakor plant in Samara, southeast of Moscow, with results of the assessment due next month. That plane seats only 65 people and can fly no further than 1,500 kilometers (930 miles), so couldn’t directly substitute for 189-seat 737-800s with a range of 5,765 km.

Wizz, EasyJet

Another option might be to deploy Superjet 100s made by Russia’s Sukhoi and Finmeccanica SpA (FNC) of Italy, though the 87-seater is used by Aeroflot where larger aircraft struggle to break even and hence isn’t ideally suited to discount trips.

Even with Western-built jets, Dobrolet is only able to offer tickets 20 percent cheaper than its parent company, a figure that would jump to 40-60 percent with further liberalization and a dedicated discount terminal, Aeroflot Chief Executive Officer Vitaly Savelyev said on July 13.

A low-cost unit is vital if Aeroflot is to defend its market share against future incursions from Ryanair as well as Wizz Air Holdings Plc and EasyJet Plc (EZJ), which already serve Russia, and Air Berlin Plc, Savelyev said in an interview.

Aeroflot’s operating costs rose 15 percent in the first half as the ruble weakened and it expanded operations, paring earnings before interest, tax, depreciation, amortization and operating-lease expenses to 16.7 million rubles ($456,000), even as sales rose 9.4 percent to 140 billion rubles.

To contact the reporter on this story: Christopher Jasper in London at cjasper@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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