Aeroflot on brink of change

Published: 3/22/2000

In a number of circles, Boris Berezovsky is known as the 'Comeback Kid' and it appears that, at Aeroflot, he is justifying his nickname by increasing the pressure on General Director, Valery Okulov, who has just appointed a Berezovsky associate, Dmitry Amunts, to the position of Deputy General Director for strategic and corporate planning. The appointment followed the departure of his own appointee to the post: the lawyer, Alexander Klachin. Klachin, a dynamic executive in his mid-thirties had reportedly ruffled feathers through his desire for a more professional approach to planning and by suggesting publicly that the state should sell off its remaining stake in the airline. Sources close to Klachin also report that he found the internecine struggle within the airline running completely counter to the objective of making it more competitive. Amunts, a 38-year-old former civil servant, has worked his way through a number of appointments before joining Aeroflot, having worked at Menatep Bank and the Alfa Group and, latterly, as a VP of the Mabetex group of companies: infamous for its involvement in the Kremlin refurbishment scandal. It seem unlikely that this would be an Okulov hire out of choice and the suspicion is that it has been forced upon him, reinforcing the view that Okulov's days at Aeroflot may be numbered without the support of his father-in-law, former president, Boris Yeltsin. The AGM of the airline will take place on 24th June, after the presidential election and it looks like being a straight fight between the Okulov team and Berezovsky, with the government maintaining a fairly neutral stance. The Amunts appointment, however, suggests that the government is going along with Berezovsky at least for the moment, reflecting the widely held belief that Putin owes Berezovsky favours in repayment for his support, through his media interests, of the acting president in the election and over Chechnya. While Okulov is not up for re-election at the AGM, Berezovsky still has the opportunity to increase his direct holding of 7-8%, as the share register remains open and it is unclear when it will close. This has led to considerable speculation that Okulov will come under pressure to resign. It seems likely that, while the state, as a majority shareholder, will determine the control of the board, that there could be at least two members from the Berezovsky camp. One of these is Alexander Krasnenker, now General Director of Vnukovo Airlines, although it remains unexplained how he will reconcile the obvious conflict of interest. The trade unions, always opposed to Okulov and his attempts to change the airline, have stepped up their campaign against him in the last few months, although whether a Berezovsky controlled airline is a more interesting option appears not to concern them. In a recent leak from within Aeroflot to the Russian daily, Kommersant (controlled by Berezovsky), it has been suggested that the current strategic plan considerably reduces the airline's international network and looks for considerable growth in the CIS routes, which, according to Kommersant, will yield significant cost savings, yet continue to generate hard currency revenues, due to the linking of ticket prices to the $/Rb exchange rate. Aeroflot is almost certainly considerably more competitive on these routes against primarily domestic players. Among the international network, routes to the US are to be cut from eight to two and European routes, from 50 to 30. The company is also reported to be considering a 15% reduction in its 14,000 staff, on the recommendation of the McKinsey management consultancy, which has been working inside the company over the last six months, at a reported cost of $2m. According to one Aeroflot source, the personnel reductions has been its only significant recommendation, although other indications are that a substantial restructuring of Aeroflot's commercial operations has also been advised. While Kommersant may treat these comments as blinding revelations, the reality is that, for some time, Aeroflot has reluctantly accepted the unprofitable nature of many of its key international routes, which were largely created for political rather than commercial reasons. In the last two years, it has already shed a number of its peripheral routes to Latin America and Africa, or entered into code sharing with airlines, such as Air France, to gain coverage in West Africa, for example. The discussions with British Airways, since early last yeart, have also been focussed on the ability of the airline to lift passengers into BA's larger Heathrow hub for onward delivery and a recent statement from BA's director in Russia has confirmed this in the last two weeks. The announcement, on 21st March, of talks between Air France and Aeroflot, over an alliance involving Delta and carriers from Mexico and South Korea, due to be completed by 2003, suggests that the airline is riding a number of horses. The only question now is how quickly will change come and, if there is a change at the helm, what impact this will have. A change of management may be a good thing at this point. In an effort to curry favour with the internal factions, Okulov has lost a lot of his ability to achieve change, leaving younger, more dynamic managers, such as Klachin, struggling against a tide of recalcitrance from their older colleagues. A new manager, even if a 'financially unorthodox' one in the case of Berezovsky, may just galvanise that change and implement the painful restructuring that few in the present management seem willing to tackle. It seems clear from comments in Kommersant, which no doubt has access to Berezovsky, that he is not a supporter of the restructuring plans outlined so far and, if Okulov is pushed out in June, there may be a further review. Within Aeroflot management circles, there is little love for the Berezovsky crew, but a grudging admiration of their management skills nonetheless.

Article ID: 1723