Potential restructuring of the government's holding in air transport could signify substantial change

Published: 2/8/2000

There are reports beginning to emerge of interesting potential developments within the Russian Ministry of Federal Property, regarding the government"s control of its extensive airline and airport holdings. The plans, which are reported to be at a very early stage, propose that the airline and airport holdings of the government are transferred to a new joint stock company covering Russian air transport. The company would initially be wholly owned by the state and structured in a similar way to that of the state telecom holding structure, Szyazinvest. The Szyazinvest structure currently holds all the state"s holdings in the regional telecom companies and exercises varying degrees of control through those shareholdings. It is also proposed that the new holding company should have two sub holding companies, which will control airlines and airports respectively. The new company, it is reported, will have complete autonomy over own affairs, within broad guidelines set by the government. If the plan goes ahead, it represents the first move in nine years to organise the government"s extensive holdings, which include 100% of Moscow"s Shermetyevo airport and also 100% of Domodedovo Airlines, in addition to 51% of Aeroflot. The purpose of the exercise appears to be centred primarily on the desire to try and bring some adequate finance to both sides of the industry, currently starved for resources and unable to raise finance individually. The potential moves would seek to address a number of issues: · The requirement for a collective leasing structure for airlines currently unable to fund individually; · The creation of a viable market of Russian-produced aircraft; · The pressing need for capital to restructure the deteriorating air transport infrastructure; · The need to streamline and improve the process of decision-making and control of the government"s air transport interests to facilitate change; and · The government"s requirement to get a return from its holdings, while improving Russia"s infrastructure. According to the initial reports, from sources close to the Federal Property Ministry, the restructuring would also allow the government to put some type of strategic shape into what has been an unstructured free-for-all, as a result of a combination of conflicting regional interests and internecine disputes within government. While in principle the plan looks a good one, the path to success will not be easy, for the following reasons: · The Federal authorities retain large holdings in the industry, but some have moved to a regional level and, in some cases, there are significant disputes over who owns what. · The Federal holdings have often been ‘contracted" out to third parties who operate facilities under arrangements that, for some, are highly lucrative. The recipients of these arrangements may be unhappy to see them move from a system of very light supervision to one that is more rigorous. · The largest debtors of the airlines and airports are the Federal authorities themselves and any move towards greater viability requires outstanding and ongoing debts to be met. · If the Szyazinvest experience is anything to go by, the operating companies do not always appreciate a firmer hand. · If the success of the deal pivots on the ability to use the collective might of the industry to create financing opportunities, the task of raising money, while considerably easier than for individual components, will still present problems externally, given the risks and the track record of both government and industry. Reports further suggest that stakes – potentially majority holdings - in the new vehicle may be offered to external shareholders, although this has not been clarified. For the external investor, however, buying some high quality investments in what is a very mixed bag could seem an unattractive option, even if the initial placement of Szyazinvest did generate considerable excitement.

Article ID: 1403