With the new round of sanctions, Aeroflot flights to and from Russia have been banned by the UK.
Other countries have also joined these sanctions. In response, Russia has closed its airspace to unfriendly states' aircraft. However, these counter-sanctions are causing problems for Russia as well.
Earnings and quotes
It's important to note that flying from France to Japan over Russian Siberia is still quicker and more profitable. With European airlines no longer able to fly over Russia, they will need to deal with more paperwork on the ground and take a longer route in the air. This ban presents significant challenges for our economy. For instance, the share price of Aeroflot dropped by 31% in a few days at the end of February. Since March 1 last year, it has fallen from 68.31 rubles per share to 34.16 rubles.
Who's suffering the most? Aeroflot, one of the world's oldest airlines, is facing the brunt. It originated from the Russian Air Fleet Society Dobrolet, established in 1923. Based at Sheremetyevo Airport, it operates its main flights and has five branches in Russia. The state holds 51.17% of the company, while institutional investors hold 35.7%. Another 3.5% is owned by the state corporation Rostec, and 5.1% is held by individuals.
The aviation industry in Russia is characterized by a high degree of market concentration, dominated by a small number of companies. While Aeroflot isn't formally a monopoly in the air transportation market, it holds a leading position. The Federal Antimonopoly Service (FAS) often warns the airline, but its interventions are usually met with indifference.
In February 2017, the British consulting agency Brand Finance named Aeroflot the strongest aviation brand globally. The Russian carrier claimed the top spot, surpassing American Airlines and Emirates. However, this success is largely due to the unique working conditions provided. It's possible that the current sanctions were effectively influenced by competitors.
The shortest air route from Europe to Japan and Southeast Asia passes over Siberia. Foreign companies pay royalties for using this route. Aeroflot has been the sole recipient of these royalties, seen as 'easy money,' since the 1970s when it was the only airline in the USSR. There was no one else to share these earnings with, and discussions about fair distribution of the funds didn't exist.
These royalties now strongly impact the national carrier's competitive position, amounting to around $600 million annually, roughly a third of the total turnover of the nearest rival, S7 airline. Previously, these funds were used for the industry's technical equipment, but now they mostly go directly to Aeroflot.
Until the lightning strikes
Aeroflot appeared to be a successful company, but the profit trend on the prosperity graph is gradually declining. In 2018, dividends were 12.81 rubles per share, and in 2019 they dropped by 79% to 2.69 rubles.
Unexpectedly, Covid-19 caused major damage, leading to a drastic decrease in global passenger traffic. Aeroflot was the only airline able to operate international flights not solely for Russian tourists. However, the state-owned company faced scrutiny from the FAS. The Antimonopoly Service demanded reasonable ticket prices and instructed the airline to cover extra costs by increasing the Trans-Siberian royalty. Despite the quarantine, Aeroflot managed to profit by significantly raising prices. The FAS called for corrective action regarding the pricing policy, but the airline dismissed claims of inflated prices as mere rumors. Nevertheless, royalty earnings dropped by over 70% in 2020, resulting in a loss of about $350 million due to reduced foreign carrier flights over Russia as a result of the pandemic.
As a result of these events, the Aeroflot group, including Pobeda, Rossiya, and Aeroflot, suffered a net loss of 123 billion rubles in 2020. Dividends were not paid for the year.
Sanctions
Most of Europe, Canada, and some other countries have closed their airspace to Russia. Aeroflot's European route flights have been halted, and six major Russian airlines received termination notices from European lessors. Their options include returning the planes, attempting to repurchase them, or severing ties with lessors to retain the fleet for operation in Russia. Reports suggested that state assistance would be provided solely to Aeroflot.
Aeroflot possesses at least five unauthorized wide-body aircraft with valid insurance. It remains uncertain how lessors will handle these relatively old and heavily used aircraft.
The desire to demonstrate resistance to sanctions is understandable. The Russian Federation's reciprocal response curtailed flights from 36 states. The Federal Air Transport Agency stated that this was in retaliation against European countries that had restricted Russian aircraft. As a result, Aeroflot (and the state) not only lost access to the European market, but also the future royalty earnings. This situation is reminiscent of the saying 'to spite my grandmother, I will get frostbite of my ears', isn’t it?
