Bankrupt airline finds that former General Director illegally sold three of its aircraft and the current holders are reluctant to return them

Published: 8/10/1999

The problems of Baikal Airlines, since it went into external administration in November 18th 1998, are well illustrated by a recent report in Vostochno-Sibirskaya Pravda, in Irkutsk. According to the report, the arbitration court-appointed external administration, led by Vladimir Sizov, discovered at the beginning of 1999 that the previous General Director, V. Kovalenko, had illegally sold three of their Il-76's to Moscow-based East Line. The illegal sale was not discovered until the Moscow carrier attempted to re-register the aircraft as its own. However, according to the documentation inherited by Sizov, the aircraft remained the property of Baikal, leased under an agreement to East Line, which involved the cargo carrier overhauling the aircraft and operating them through 2000. According to the press speculation, Kovalenko thought the three aircraft would simply be forgotten in the general confusion surrounding the airline, after it was declared bankrupt in September 1998 and subsequently put under external administration. To his surprise, however, the airline continued to operate rather than have its fleet liquidated at auction, where the missing three aircraft may have been 'overlooked'. East Line has been far from prepared to lose the aircraft. While the prosecutor pursued the former General Director, it sent representatives to Irkutsk to contest possession with Baikal. This resulted in a controversial decision by the Irkutsk Arbitration Court, which found partially in favour of the Moscow operator. The circumstances of the decision have been regarded with some suspicion. At the end of July 1999, at the request of a Baikal lawyer, the arbitration court postponed the case of ownership until September 1999, when a decision on the validity of the original sale is due. Despite this decision, a court bailiff served Baikal with a notice from the arbitration court requiring that the aircraft be held in storage, pending a decision by none other than East Line, with one of the aircraft removed to Moscow. Baikal has lodged an appeal in response. Baikal's situation illustrates some of the problems of the Russian regional carriers. The airline, which was founded in 1992 out of the major Aeroflot division serving South Central Siberia, has been one of the many casualties of the breakup of the former Soviet Aeroflot. Several years after the reorganisation, Baikal Airlines remained the primary provider of passenger services out of Irkutsk. In theory, the airline should have prospered in a market with little or no competition, even from the Far Eastern transit flights passing through Irkutsk. The airline offered services to much of the former Soviet Union and was beginning to develop its capability to fly internationally. In fact, the status of the airline was so high internationally that ILFC leased a Boeing 757-200 to the company for a year in 1997. (The aircraft was subsequently returned, owing to the airline's inability to meet the lease payment). The airline therefore had steady cash flow from its activities: adequate enough to keep unprofitable regional routes going and to acquire debt to finance its ongoing activities, even if the management had little idea at the time of how the loans would be repaid. By the mid 1990s, Baikal, like many other regional operators, began to suffer from a combination of Russia' ongoing financial crisis and the entry of new competitors into the market, as the FAS granted licences to other operators. The FAS's licencing was perceived not so much as expanding choice and creating competition locally, but as an attempt to destroy regional airlines in favour of those based in Moscow. For Baikal, the changes put the airline under intense financial pressure. New airlines from Krasnoyarsk, Chelyabinsk, Samara, as well as Moscow started flying to Irkutsk. According to Baikal, the liberalisation was one-sided, since its efforts to get similar licences from the FAS to fly through other cities were refused. Baikal was, however, a late convert to competition given that its initial arguments against the granting of additional licences centred on the belief that the city only required one airline to serve its needs. This perhaps reflects the airline's lack of understanding of the fundamental changes in the Russian aviation scene, given the stated policy of the FAS. Internationally, the FAS also withdrew Baikal's licence to fly to Nigata in Japan. Since the route had previously been serviced by Aeroflot, the FAS argued that Aeroflot, Russian International Airlines, the international carrier spin off from Soviet Aeroflot, should remain the route licencee. (www.concise.org 4th August 1999) By late 1998, Baikal was in crisis. The regional administration proposed a reorganisation which would have created a long haul international and inter-regional carrier, as well as a sister local carrier to service intra-regional routes, in a deal with Chita Avia in the Chita Region. A decree for the reorganisation was issued on May 5th 1998. In June 1998, one of the airline's debtors, Samara Airlines, sued for bankruptcy over a small debt. As a result, in September 1998, the airline's inter-regional flights were reduced, while the number of local flights was slashed. Some cities in the Irkutsk region lost their airline service altogether. On November 18th 1998, Baikal was placed under external administration and the arbitration court appointed Vladimir Sizov as temporary General Director. According to Sizov, the situation at the airline was extremely unfavourable. Salaries had not been paid for long periods, the company was unable to pay for maintenance and had accumulated a level of debt it was unable to service. The airline had, however, managed to retain its skilled personnel and its fleet. Under the direction of the temporary management, the company developed a recovery plan and, by December 1998, some of the flights were restarted, with Moscow flights increasing from one flight to three flights a week. In addition, there are now two weekly flights to Sochi, and a flight to Shenyang. The company has also restarted flights on the northern routes, despite the fact that it only received 0.5 m rubles of the 1.6 m owed by the regional authorities in subsidy. Although the air connections have been restored, the airline continues to struggle with the very high cost of operating out of the northern airports. Owing to the low volume of traffic, landing fees are almost five times the level of those of Irkutsk: 10,000-20,000 rubles compared with Irkutsk's 2500 rubles. It would seem that, although Baikal is showing signs of recovery, its problems are by no means over. Despite clear rules regarding the treatment of funds during external administration, stating that payments of salary and health insurance should be maintained over repayment of debts, local media recently reported that masked tax police had confiscated 2m rubles in cash intended for employee's salaries. They also informed the airline that, since 1995, it had amassed fines totalling 12 m rubles. The recovery of the seized money - to which Baikal believes it is entitled - will require a resolution from the arbitration court. The process of recovery could take several months, so adding to the company's precarious working capital position. For Vladimir Sizov, the challenge now appears to be to prove to those that have calls on the company's assets, that bankruptcy and external administration are not the same thing. To achieve this, he will have to nurse the business back to health to pay its debtors, rather than have them seize assets and so hasten its demise. For Baikal, the next few months will be all about survival. Without a recovery in the regional market, or dramatic action on the part of the government, its future is by no means certain.

Article ID: 743