Aeroflot Gets In The Game

Better service, lower costs--it's looking like a competitor

Yevgeny Shaposhnikov glowers at the color photographs mounted on a wall of his Moscow office. Gesturing at a display of Russian-built Tupelov, Ilyushin, and Antonov jets, the 54-year-old CEO of Aeroflot Russian International Airlines fumes: "What a nightmare!" Shaposhnikov doesn't think these planes are good enough for his airline, the biggest offspring of former Soviet state carrier Aeroflot. This fall, he infuriated Russian aircraft makers by ordering 10 new Boeing 737s. If he has his way, within the next few years more than half of Aeroflot's fleet of 100 planes will be Western-built or fitted with U.S. engines and electronics.

Sure enough, in the 14 months since Shaposhnikov took over the controls, Aeroflot has begun to look a lot more like a competitive global airline than it did in the days when it was known mostly for its sullen stewardesses, lax safety, and overcrowded planes. A onetime fighter pilot who rose to become Soviet Defense Minister under Mikhail Gorbachev, Shaposhnikov was named because the Russian government wanted a strong leader able to buck the ingrown aviation manufacturing lobby. Kremlin insiders also installed a new management team that is now sprucing up service, dumping unprofitable routes, and expanding into new markets. If Shaposhnikov can continue such improvements while reining in costs, Aeroflot is well-positioned to cash in on a growing market for foreign travel. But it faces plenty of challenges, from foreign rivals to rising fuel costs.

In some ways, Aeroflot's monopoly legacy gives it an edge. While most of the 300-plus "Baby Flots" that were spun off from the Soviet parent in 1993 got stuck with money-losing domestic routes, Aeroflot won almost all international routes. And despite new competition from Western carriers and the Russian-owned startup Transaero, Aeroflot still carries nearly two-thirds of Russia's international traffic. As the flag carrier, it enjoys big advantages, including its pick of gate slots at Russian airports.

TOURIST TRIPS. To capitalize on its position, managers are reworking the route map, scaling back money-losing flights to African capitals while targeting nouveau-riche Russians with new service to tourist spots such as CancPound n and Mauritius. And while traffic to the U.S. is already up--Aeroflot now flies direct to five U.S. cities--bigger gains could come with a code-sharing agreement it expects to sign with Continental Airlines Inc. The deal will allow Aeroflot's passengers to connect to most major U.S. cities through Continental's hub at Newark International Airport, as early as the summer of 1997. Says Toubia Hachem, Continental's Moscow-based rep: "They've come a long way."

Indeed, care and feeding of passengers has improved dramatically. Where surly flight attendants once slapped down trays of leathery chicken legs, better meals--with choices such as kosher or vegetarian--have been added. And the famously rude cabin crews are now trained to smile and tend to passengers.

But that's just a good beginning. Service is still not polished enough for business travelers, most of whom--Russian and foreign alike--book with Western competitors or Transaero. Aeroflot won't deliver delayed baggage to passengers' hotels or homes, for example. A weak computer reservations system makes buying tickets outside of Russia extremely difficult. And inside Russia, things aren't much better: Customers at its dowdy Moscow office must stand in line for reservations, then queue up a second time to pay a cashier.

That has left a big opening for foreign carriers to exploit. The most aggressive competitor, Lufthansa, now has more than 250 flights a week to and from 10 former Soviet republics, with direct flights to Germany from six Russian cities. "Lufthansa's looking more and more like the national carrier of Russia," says Peter Smith, a Moscow-based consultant who has advised Aeroflot. And spiffy service at the five-year-old Transaero lured some 1.8 million passengers in 1995, more than half Aeroflot's total.

Meanwhile, soaring fuel prices have pushed Aeroflot's fares up, undermining what had been its only competitive advantage. A round-trip economy ticket from Moscow to New York now costs $900 on Aeroflot--up more than $200 from just a few years ago and only $75 less than on Delta Air Lines Inc., the only U.S. carrier with flights to Russia. The narrowing gap could make it much harder for Aeroflot to maintain its dominance, warns Robert Hannah, Delta's Moscow-based representative. "We're competing much more now than in the past," he says. Last year, Aeroflot reported breaking even on sales of $960 million, although industry experts suspect that hidden subsidies help keep the carrier airborne.

"STIMULUS." Even Shaposhnikov concedes that the higher fuel costs and tougher competition will push Aeroflot back into the red this year. That's why cutting costs is his main priority. Shaposhnikov inherited a bloated workforce of 14,000 and an aged fleet of fuel guzzlers. Now, he's increasingly turning to more efficient Western equipment. Besides spending some $300 million on the new 737s, to be used on European routes, Aeroflot has begun leasing Boeing 767s and Airbus A310s for flights to the U.S. and Asia. And Shaposhnikov announced this month that he will buy Pratt & Whitney engines and Rockwell International Corp. avionics equipment for 20 new long-haul Ilyushin-96 planes that Aeroflot will acquire starting next year. The moves have begun to slash operating costs, Shaposhnikov says. The Boeing 767s on Aeroflot's transatlantic flights use 40% less fuel than Ilyushin-62s, for example, while carrying one-third more people.

Elsewhere, though, downsizing will be difficult because the Russian government owns 51% of Aeroflot stock and is sure to oppose large-scale layoffs. But Aeroflot has an important ally in the Kremlin: Boris Berezovsky, a business mogul recently named deputy secretary of Boris Yeltsin's Security Council. One company he helped set up, Avtovazbank, handles many of Aeroflot's financial operations. Another supplied two executives, one of whom, Aeroflot Marketing Director Alexander Krasnenker, "has been the driving force behind the changes" at the airline, according to Paul Duffy, a Moscow-based aviation consultant.

Shaposhnikov, who logged more than 3,000 hours in his days as a fighter pilot, predicts that Aeroflot will emerge from the battle smarter and stronger. "We should not be depressed. It should be a stimulus for us to work harder," he says. The question now is whether red ink and rival airlines will force him into a tailspin before he closes in on his target.

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