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Tue, 07/29/2008 - 11:40
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Growing prices of fuel may slash number of airlines in Russia By Lyudmila

MOSCOW, July 29 - Continuing growth of prices for jet fuel may bring about a closure of 50 or so percent Russian airlines, experts say.

Since the beginning of the year, the price of jet fuel has climbedmore than 70% in this country and currently stands at a level higher than the averaged international one.

Kerosene is 5% to 6% percent more expensive in Moscow than in other European capitals, although the vast majority of European countries do not have their own deposits of crude oil.

Russia's prices of jet fuel are tied to the prices of crude thatcontinue growing in their turn, and each increase of the fares by 50 U.S. dollars slims the airlines' clientele by another 20% to 25%.

The situation on the market of commercial air transportation hasdeteriorated to the extent that the director of Russia's Federal Service for Air Navigation /Rosaviatsiya/, Yevgeny Bachurin had to admit last week that a number of Russian airlines might face the prospect of bankruptcy, the Vedomosti newspaper writes.

The steadily climbing fuel prices make the operations of about 60% of airline jet fleets unprofitable, Alexander Batkov, the president of the Association of Russian Aircraft Manufacturers told Itar-Tass last week.

If fuel prices go up another 20%, then bankruptcies will really become imminent, Vedomosti quotes Yelena Sakhnova, an analyst at the Moscow-based Vneshtorgbank /VTB/ as sying.

Already now fuel accounts for about 40% of all costs at the majornational airline Aeroflot, 37.7% at Transaero, and 35% at the Sky Express discount airline.

Yet the worst of times are still ahead for the carriers, Sakhnovabelieves, saying that while the demand for air tickets is traditionally high enough at the peak of summer vacationing in this country, the numbers of passengers fall considerably in the low season - October/November and January/February - and the air carriers may be short of revenues then to pay to fuel suppliers.

The most vulnerable airlines are those that service less than amillion passengers a year on the average, and this group does not embrace only eleven airlines of the country's total 150. Corporate and charter carriers are not included in this number.

Most Russian airlines are on the verge of falling into the bankrupt category already now, says Yevgeny Ostrovsky, the director general of a trade house supplying jet fuel to Russian airports. Vedomosti quotes him as saying it is just enough to have a look at the basic financial performance parameters like the adverse profitability /loss-making/ and overdue liabilities.

Even some the top twenty Russian carriers are not profit-making and have overdue payables at the moment, Ostrovsky says, adding that only five airlines - Aeroflot, S7, Rossiya, Transaero, and YUTair - are likely to survive owing to their strong partnership with the government or with large corporations.

Still, even Aeroflot, the leader of the industry and the largestcarrier, has hard times now, as the runaway prices of jet fuel will cut down its profit margin from the 9% it posted in 2006 and 2007 to 3% this year to 2% in 2009.

It is worthwhile saying that airline bankruptcies have become rife throughout the world. According to the International Air TransportAssociation /IATA/, a total of 25 carriers went bankrupt or had to suspend their operations from January through to June 2008 alone.

As for Russia, experts surmise that the number of operating airlines here may eventually reduce by 50%.

Prices of jet fuel continue mastering ever more new summits forseveral straight months, and Transport Minister Igor Levitin had to admit at the end of last month they had risen 70% since the beginning of the year. This trend remains unabated in the Russian market even though international prices of the fuel started going down in mid-May.

The authorities have taken original steps to normalize the situation. In mid-July, the Federal Antitrust Service /FAS/ instituted investigations over the activity of several large oil companies and several dozen gasoline retail traders at a time.

FAS's list of fuel producers included upstream majors like LUKOIL,Gazprom Neft, TNK-BP, Rosneft, and Surgutneftegaz. These corporations were accused of establishing high monopolistic prices on wholesale markets of aviation kerosene and diesel fuel.

The cases were opened right after the executives of the International Association of Aviation Enterprises had complained to President Vladimir Putin over the price rampage. Putin in his turn urged the FAS to take adequate steps and warned that he would pass appropriate decisions on a reshuffle in this federal service otherwise.

The FAS not only reacted promptly. It also devised a formula forcomputing a fair price for fuel and, in this way, for proving the guilt of the companies that overvalued it.

Shortly, the offenders will be issued an instruction to keep the price at a certain level over a period of five years and to notify the FAS of increases if they exceed 5% in a quarter of the year.

However, experts voice doubts over the ability of the FASinvestigation to eliminate monopoly that dominates the Russian jet fuel business.

Most Russian airports typically purchase fuel from just one company, and this heavily complicates the situation for the airlines, as they have to pay for fuel at a monopolistic price then.

Record high prices of jet fuel compel airlines all around the world to revise passenger fares upwards. Even Ryanair, Europe's largest discounter, is increasing the fairs by 5%. In the wintertime, it will keep on the ground about 20 jets from its fleet of 163.

Russian discounter Sky Express has raised the fare by 500 rubles /USD 1=RUB 23.4/ as of January 1. This is the amount of a fuel fee, which the airline had to introduce because of the fuel price hike.

The fee for a return ticket stands at 1,000 rubles. Added to the basic rate of 500 rubles per passenger one way, this means that Sky Express's total fare has doubled.

The swelling prices could not help affecting the travel business,where the fares for air trips have been going up 10% every month since the beginning of the year. On the whole, a trip to European destinations has become 70% to 80% more expensive since the beginning of the summer season, while trips to exotic countries will get 300 euros more expensive by the start of next winter.

Experts say the price hikes will also compel the airlines todecommission some of the jets of Russian manufacture that have low fuel efficiency and to replace them with jets of Western manufacture.

Already now, the jets built by Russian aircraft plants make up less than 10% of total aircraft purchases at Russian airlines.

Many airlines have declared a changeover to Boeing-737s. Some of them buy the jets and others, like Aeroflot, use them under leasing agreements.