Joint venture ends as VD goes it alone (710 words)

Published: 2/5/2001

After much speculation and denial, the long-term relationship between Volga Dnepr and UK-based HeavyLift Cargo Airlines has ended, as of 1st February 2001. The many recent reports of stormy negotiations between the two companies, combined with other reports of VD's efforts to set up its own marketing relationships, were correct. The joint venture, known as HeavyLift-VolgaDnepr Ltd, has now ceased to operate. Created on 17th September 1991 to market the An-124-100 on the international market, the venture proved highly successful in both developing and taking a substantial share of the growing global heavy-lift market. Revenues in excess of $90m per annum were achieved using a fleet of 10 An-124s. Initially, VD benefited from the experience, reputation and skills of the UK-based operator. It had become increasingly evident during recent months that VD had decided it would be capable of undertaking its own marketing without the intermediation of HeavyLift or the 50:50 split of revenues (and costs). Now that the split has been made, the Ulyanovsk airline's ability to carry out its own marketing will be put to the test. It remains the subject of some debate, with certain industry sources believing that it still has some way to go before matching HeavyLift's efforts. Undoubtedly, the carrier has learned a great deal over the past ten years and, given its predominant position in a fast-growing market, will not be unduly hindered by its lack of specific experience, when marketing its An-124-100 capability in the future through its own subsidiaries in the major markets. Volga-Dnepr has founded Volga-Dnepr UK Ltd (based at London's Stansted Airport) and VolgaDnepr - Unique Air Cargo, Inc. (Houston). Graham Pearce (Commercial Director of HeavyLift), commenting on the success of the JV said “At the start of the venture, Volga Dnepr was a new carrier, whereas HeavyLift had already earned a reputation as the world's leading outsized cargo specialist. Our expertise and contacts are clearly what attracted the Russians and the success we have achieved in the last decade demonstrates they made the correct decision”. He also makes it clear that HeavyLift was keen to extend the JV and had looked at various options, to enable the relationship to continue, including VD buying HeavyLift. It was unable to find an acceptable proposal for both sides. Comments made by Pearce and VD seem to be at odds with one another, especially over the issue of future development plans. VD has said that one of the reasons for terminating the agreement was the belief that the JV offered little option for further investment to fund the acquisition of additional An-124-100s. Heavy Lift, for its part, in a release announcing the split, says that numerous efforts were made to find a solution to this issue and that the carrier had worked with VD on the option of an IPO; this route was subsequently blocked by VD. Growth in the heavy-lift market is generally estimated to be between 10-13% for much of what remains of the decade. It is not really surprising that VD has made the decision to go it alone; a decision which will undoubtedly have been helped by the role of industrial conglomerate, Kaskol (currently a 16% holder in the airline), which has made it clear that it has ambitions for the airline, but none that necessarily involved a JV. Kaskol is actively involved in the development of its strategy through its President, Sergei Nedoroslev, who sits on VD's board. The potential IPO examined by both sides over the last 18 months appears not to have been abandoned by VD. Such an IPO would solely benefit those entities, which were current shareholders of VD alone, rather than of a 50% share of the JV. VD has commented that relations between the two companies continue, with the two parties discussing other routes for cooperation. Other reports indicate that relations between the two companies are not particularly cordial and even go as far as to say that VD is unlikely to lease aircraft in the future to HeavyLift. This view is supported by evidence of the lack of any specific agreements of An-124-100s being supplied to HeavyLift, although the carrier has stated, “there will be no interruption to our ability to provide 124 flights”.

Article ID: 2340