July 13 (Bloomberg) -- OAO Aeroflot said Russia must further liberalize its air-carriage rules for the airline to succeed with a plan to build a 40-plane low-cost arm that can repel European discount carriers led by Ryanair Holdings Plc.
The Dobrolet division, which began flying a month ago and has two Boeing Co. 737-800s in service with 10 more on order, won’t purchase more jets until restrictions are eased, Aeroflot Chief Executive Officer Vitaly Savelyev said today in London.
The government has already scrapped rules to allow the sale of non-refundable tickets and recruitment of foreign pilots, while easing the tax burden on the purchase of larger single-aisle models, Savelyev said in London. The elimination of a free-food provision is pending, and Aeroflot is pushing for a rule allowing Dobrolet to charge for bags, he said.
“Ryanair is the model, but we can’t compete on price without legislation,” Savelyev said, adding that the single biggest drag on the low-cost arm is its operational hub alongside Aeroflot at Moscow’s Sheremetyevo airport, where fees are high. The CEO is seeking to establish a new base at Ramenskoye airfield outside the city which would become the equivalent of Ryanair’s Stansted hub north of London.
Given the current restrictions Dobrolet is only able to offer tickets 20 percent cheaper than Aeroflot itself, a figure that would jump to 40-60 percent with further liberalization and a dedicated discount terminal, Savelyev said.
Dobrolet now operates to Simferopol on the Crimea, where initial flights have been almost booked out, he said, even after the region’s defection from Ukraine to rule from Moscow sent political tensions soaring.
Six more Boeing 737s are due for delivery this year, with destinations to be added including the holiday resort of Sochi on the Black Sea and the Russian enclave of Kaliningrad on the Baltic Sea, the CEO said. The final four 737s on order will arrive next year, out of a targeted total of eight per year.
The unit will operate a simple point-to-point model inspired by Ryanair, Savelyev said, helping to defend against incursions from the Irish carrier as well as Wizz Air Holdings Plc and EasyJet Plc, which already serve Russia, as well as Air Berlin Plc. The focus will remain on domestic routes, with likely future destinations including Nizhny Novgorod and Kazan in the federal republic of Tartarstan, Savelyev said.
The CEO said he’s prepared to see Dobrolet partly cannibalize Aeroflot traffic, with the unit forecast to win 1.2 million passengers from its parent over five years while securing 8 million from other carriers and rail transport. Aeroflot itself has lifted its passenger total from 8.2 million in 2009 to 21 million last year, he said.
Savelyev said he’s happy with the performance of the 11 Superjet 100 planes in the Aeroflot fleet out of 30 on order. The 87-seat regional aircraft -- manufactured by Russia’s Sukhoi with Finmeccanica SpA -- is assigned to routes where larger planes would struggle to reach break-even load factors. The CEO said an outline order for 50 Yak-242 planes, formerly the Irkut MC-21, will also go ahead if the aircraft is realized.
Aeroflot is happy with the SkyTeam alliance that includes Air France-KLM Group and Delta Air Lines Inc., but is also pushing from the freedom to forge ties beyond simple code-share deals with carriers from outside the group, Savelyev said. A cost and revenue sharing agreement with a Chinese airline or possibly Deutsche Lufthansa AG would be attractive, he said.
Russian plans to sell as much as 10 percent of Aeroflot stock should still go ahead this year, giving a “vital” boost to in a push to boost the carrier’s free-float, said the CEO, who was speaking before attending the Farnborough Air Show southwest of London, which starts tomorrow.
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