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BEAR MARKETINTRODUCTION: More and more Russians are getting the taste for business aviation. But can barriers blocking the sector's growth be removed so it can expand even further?
[May 23, 2008]

BEAR MARKETINTRODUCTION: More and more Russians are getting the taste for business aviation. But can barriers blocking the sector's growth be removed so it can expand even further?


(Flight International Via Acquire Media NewsEdge)
Russia is fertile ground for development of business aviation. The growth of the sector in the country in the past few years has been spectacular as an increasingly wealthy population discovers the joys of private flying. The business is now well past the $2 billion a year mark, annual fleet growth is estimated at 35%, and the market is now thought to be second only to the USA in size.



Around 350 business jets are owned by Russians, an increase of 70-100 aircraft in just over a year. This growth is all the more remarkable, considering the continuing failure of the Russian government to provide a more favourable environment for development of business aviation.

Russia's economy is dominated by large companies, mostly in natural resources, which are cash-rich due to the demand for commodities. The number of high net-worth individuals per thousand jumped from 80 in 2002 to 119 in 2006.


Russia is the largest country in the world, yet fully 95 pairs of cities have no scheduled air links between them. Hotels in major cities have Europe's highest occupancy rates, despite also being the continent's most expensive. Little wonder that Russia's increasingly wealthy business people prefer to fly.

Booming business

NetJets has been doing business in Russia for five years, and says business is booming. "We started with just a few dozen clients - now we have over 100, in just five years," says Vasily Pasetchnik, NetJets vice-president for Europe. He says Russian and CIS clients generate several hundred million dollars a year.

"Our clients are flying more, current annual growth is in double digits and we foresee this growth continuing. Russia is one of the top three markets in Europe. Russian customers have to fly longer distances than in Europe, and generally want bigger aircraft."

The growth in the business is exemplified by the figures for departures at the three Moscow airports. The main hub for business aviation is Moscow's Vnukovo, with its dedicated business terminal 3.

Not only is the market growing rapidly in absolute terms, it is also diversifying, with new business models and services appearing. The recent emergence of the budget end of business travel is indicative of the growth of the market in Russia. Dexter Air Taxis began operating its first eight-seat Pilatus PC-12 turboprop in October 2007 and now has a second aircraft. The firm plans to take delivery of its 13th aircraft by the end of 2008, and has a total of 25 on order.

Dexter says demand has fulfilled expectations, with its aircraft operating 65h a month from day one. The service is marketed to the budget end of the market, with advertising emphasis on the charge of just Rb130 ($5.50) per km per aircraft.

non-users targeted

Yevgeny Andrachnikov, managing director of Industrial Investors, which owns Dexter, says the air taxi market is aimed at users who would not ordinarily use aviation, and would have traditionally stuck to land-based transport. "We're not trying to attract the people who would usually charter Hawkers or Tupolevs, we're looking at mass customers who would use their own cars, or trains. Such people wouldn't usually have the opportunity to fly, because there simply weren't the air services before."

Industrial Investors also operates Velvet Club, a "business jet airline" aimed at the gap between traditional business jet services and commercial aviation. The firm uses the Embraer Legacy 600, operating only from fixed-base operations, and to business class standards, but flies on schedule, and on a per-seat paying basis.

Manufacturers are similarly optimistic about Russia. Bombardier is the overall market leader in Russia and the CIS with a 40% market share. The company has enjoyed particularly strong demand for its larger business jets. The firm is the market leader in the large and ultra-long-range aircraft sector in Russia and the CIS.

Dassault, another long-established name in the market, has sold over 60 new jets in Russia since 2000, of which 80% were bought in the past three years. "It seems the Russian market will plateau out to steady sales of around 25 aircraft a year," says Alain Aubry, Dassault's vice-president for sales and marketing.

Dassault intends to use the new Jet Aviation facility at Vnukovo 3 and has a team of engineers based in the Moscow region for the Dassault Falcon family, who are able to travel to local airports as needed.

Cessna sold 20 aircraft across the CIS in 2007, mainly to Kazakhstan, Russia and Ukraine. The US manufacturer expects to sell 10-15 Citationjets in Russia in 2008.

The Russian market is also energising Hawker Beechcraft. "The market has become one of our top three outside the USA," says Sean McGeough, Hawker Beechcraft vice-president, international sales. "Our Hawker series business jets have been extremely successful and well received. We have also sold the Beechcraft Premier IA to Russian clients. We also have strong interest in special-mission King Air sales, along with our commercial King Air business. There is expected to be a change in tax legislation that should lower the cost of aircraft ownership and spur additional demand. We are very excited about the growth in this market," he says.

Gulfstream does not release sales figures by country, but it notes that sales outside the USA exceeded domestic sales for the first time in 2007, a testament to demand from emerging markets such as Russia.

Bold step

Embraer says 20 of its Legacy jets now fly in and out of Moscow. In January, its ERJ-145 family was certificated by the Russian federal aviation authority.

Perhaps the boldest step taken by any manufacturer was Eclipse Aviation's decision to set up production of the Eclipse 500 very light jet in Russia, at the Aerostar factory in Ulyanovsk. European Technology and Investment Research Centre (Etirc), Eclipse's majority shareholder, says it sees "a market of well over 1,000 aircraft in the coming years", mostly from air taxi operators, rather than individuals.

There is little sign of Russian competition for Western manufacturers, although Ilyushin Finance has announced plans to produce a business-aircraft variant of Antonov's An-148 regional airliner as the Antonov Business Jet in 19- and 38-seat variants. Sukhoi plans a business variant of its Superjet 100 regional airliner, likely to be a few years away from production.

Predictably, this growth has happened despite, rather than thanks to, the Russian government. The legislative system in Russia continues to hold back the development of business aviation in three main areas - duties on import of new aircraft, registration, and the air traffic system.

The Russian government has promised to gradually abolish import duties, and temporarily cut them last year from 20% to 10% for a nine-month period (later extended), for aircraft under 19 seats with a 15-20t maximum take-off weight, criteria that caused some to question its motives.

"I think this was purely down to lobbying by someone close to the government, who wanted to save a few million dollars," says one operator in the business. Operators complain that with addition of VAT, it still leaves them paying 29.8% on top of the list price.

Registration of aircraft in Russia is another hoop business jet owners are made to go through, as legislation does not make the distinction between an airline and a private owner - indeed, Russian law does not recognise business aviation as a distinct concept.

An airline has to have a minimum of 30 core staff, regardless of size. Little wonder that most owners simply register abroad, although that also entails further complications when operating within Russia.

The figures for ownership of aircraft and their place of registration speaks volumes about the costs of registering locally. There are 107 privately owned business jets operating in Russia, of which just three are Russian-registered. A further 246 are owned by commercial entities, of which just 70 are Russian flagged (including 10 foreign-built aircraft).

jumping THROUGH HOOPS

The national air traffic system is still based on a permission to fly basis, rather than notification, as in North America and Europe. Despite this, there is hope of improvement.

NetJets' Pasetchnik shares the prevalent optimism that the legislative hurdles to the business will be overcome in the near future. "A few years from now, I don't think there will be any permits required, it will be a matter of giving a call, notifying and flying. I'm confident that there will be change."

His view is backed by Maxim Fedosov,director of the United Business Aviation Association in Russia. "The government is beginning to listen. We are having meetings, and giving them proposals for what thebusiness needs," he says.

Infrastructure is another issue that needs development for business aviation to grow. "It's definitely holding things back," Pasetchnik says. "There's a lack of decent hangar space, and what space exists is very costly. I meet more and more disgruntled people who have bought an aircraft on an impulse buy and only then become aware of the higher operating costs in Russia."

Vnukovo has its dedicated business terminal, but scheduled airlines get priority for runway use, to the detriment of business users. And the situation is exacerbated by the fact that the government air service also uses Vnukovo, and has priority access. Vnukovo plans to open its second runway in 2010 for business departures only.

Operators are already looking at other options to get round the constraints of the existing airports, including possibly expanding operations from Moscow's Bykovo airport and using GazpromAvia's dedicated facility at Ostafyevo, near Moscow, which the company airline intends to offer to other users in the near future.

The lack of maintenance facilities for foreign aircraft is another area that demands attention, and where there are signs of progress. "The lack of maintenance facilities is a big issue," NetJets' Pasetchnik says. Jet Aviation is now establishing the first maintenance centre in Russia for foreign-made business aircraft at Vnukovo, including a dedicated maintenance hangar to open by the end of this year.

Approval

"We will have our European Aviation Safety Agency approval by mid-May and were appointed as Bombardier line maintenance facility and Gulfstream authorised warranty line service facility in February 2008," says Jet Aviation's Moscow project manager Carsten Fimm. "In June we will have qualified personnel to begin serving the Global Express and Challenger 604 and 605, followed by the Gulfstream GIV/G450/GV and G550 jets in August."

Jet Aviation is in the process of receiving further international aviation authority approvals to provide services for Dassault Falcon, Cessna, Embraer and Hawker jets, and later to offer avionics and engine support.

The pace of change in Russia and the expectation of further demand once the legislative situation improves means investors and developers are waiting in the wings with new projects. This includes infrastructure in Moscow region and elsewhere, and new air services. In just a few years, the fertility of Russian business aviation might be even more impressive than it is today.

Copyright ? 2008 Reed Business Information - UK. All Rights Reserved.

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