Consultant's report doubts the future of Kaliningradavia given current conditions reflecting the general situation of many regional carriers

Published: 8/15/1999

A recent report by Suseka, a Russian-German consultancy, employed by the Ministry of State Property of Russia to review companies within Kalingrad, concludes that, without radical restructuring, Kaliningradavia, the air company in the Russian Baltic enclave of Kaliningrad, may well go bankrupt. Such a gloomy picture does not bode well for the future survival of regional air companies. Founded in 1946, Kaliningradavia is a regional air company operating under Russian law. It controls the airports and air traffic control in the region, as well as operating an airline. The smallest part of its income derives from overflight fees. Revenues are low, owing to the size of the region, with the three overflight routes of only 137, 67 and 77 km generating revenue at a rate of $39 per 100 kms for foreign aircraft. Before the disintegration of the USSR, the eastern part of the Baltic air traffic control was provided by the Riga-based ATC with Riga collecting the transit fees. After the breakup of the USSR, both Lithuania and Estonia applied to ICAO, requesting the division of air space among the newly independent nations and Russia. The negotiations, in which Russia took part, lasted from 1993 until 1999. Kaliningrad was granted an area of control over the Baltic equal to its own region, with one international air route passing through 107 km of its territory. Lack of sufficient radar capability has meant that Kaliningrad has been unable cover its own area and radar cover has been provided temporarily by Lithuania. The FSVT, the federal agency responsible for the Kaliningrad air company, has recently acquired more powerful radar, and installation is currently underway. The air company is also faced with finding funds to enable the reconstruction of the airport terminal at Khabrovo Town Airport, extend its runway and overhaul its fleet. Prospects for investment are not particularly appealing to external investors, as this would only serve the enclave, and there are better opportunities to be had elsewhere in the region. It seems unlikely that revenue will come from other areas of the business. Kaliningradavia has a fleet of 10 Tu-134s and 2 Tu-154Ms of which it claims only five to seven are currently flying. Yelena Baltkais, Marketing Director, told Concise that the company plans to overhaul its fleet and improve the level of availability. The regional newspaper, Kaliningradskaya Pravda, reported, however, that the air company is considering writing off at least two of the aircraft. Despite the low level of serviceable aircraft, Ms Baltkis said that Kaliningradavia's passenger traffic had only declined by 21% since 1996: a figure the company did not consider disastrous in view of market conditions and the experience of other operators. Kaliningradavia is evidently keen to portray a rather different picture than that presented by the press. Recent reports in the Russian media referred to the company's failure to pay air traffic controllers, so driving them to disruptive working practices and even hunger strikes. This led to the air control system reducing its hours of operation from 24 hours to a day shift (www.concise.org 2nd February 1999). Kaliningradavia states that it has tried to find compromises with the trade unions, in order to work out a mutually acceptable solution. It claims that controllers' demands for salary increase have been met and an agreement signed. According to Ms Baltkis, Kaliningradavia has no payroll backlog. Staff levels have been reduced over the last year, in line with the decline in traffic, to less than 1000 employees, compared to 1031 in mid-1998. Unprofitable routes to Kiev, Chelyabinsk and Vladivostok have been eliminated and new routes to Volgograd, Omsk and Aktau (Kazakhstan) through Moscow airport, Domodedovo, have been opened. The airline has faced some serious competition from Air Kazahkstan, the national air carrier, on its profitable Kazahkstan routes. A bilateral agreement exists between Russia and Kazakhstan, defining carriers and quotas on the routes between the two countries, but Kaliningradavia claims that Kazakhstan has attempted to put forward new terms favouring Air Kazakhstan. Kaliningradavia also flies to Moscow, Saint Petersburg, Murmansk, Voronezh, Almaty, Yekaterinburg, Mineralny Vody, Novossibirsk, Omsk, Rostov, Samara, Simferopol, Sochi and Tashkent. According to the company, the routes to CIS destinations, Moscow and St. Petersburg are the most profitable, despite strong competition from St Petersburg based carrier, Pulkovo Airlines, and Aeroflot. In an aggressive bid to win business, Aeroflot has introduced passenger incentives, including rebates for those flying from Kaliningrad and then connecting to flights from Moscow. Aeroflot has also substantially cut prices on the route, so leading to accusations of dumping. Other airlines flying to Khabrovo Airport include Kuban Airlines, from Krasnodar Region, and SAS, which has 6 flights a week from Copenhagen to Kaliningrad, using Fokker F-50s. Kaliningradavia considers that it retains a good load factor on its major routes through the use of its own passenger incentives, but concedes that competition with the larger carriers on the major routes is making operations increasingly difficult for the smaller airlines. The company operates one international flight to Hanover and a three- year-old summer programme of charter flights to Greece and Turkey. In the first half of 1999, Kaliningradavia managed to generate a small profit and reduce its indebtedness by 25%. Vladislav Tseslyukevich, Commercial Director, considers that Suseka's findings are premature. The consultancy firm believes the air company's steady falls in load factors, number of flights and general efficiency will lead to the further decline of the airline in the current market. It argues that the company will have to reorganise itself into two independent entities: an airport company and an airline. But, according to Kaliningradskaya Pravda, the local government appears uninterested in the fate of the air company. No one from the local administration attended the presentation of Suseka's findings. Its recommendations therefore seem unlikely to be implemented in the short term, given the difference in priorities between local and national government and the associated lack of commitment in providing funds to support the new entities. The future for Kaliningradavia does, indeed, appear bleak. Kaliningrad as a whole is highly dependent on military spending and being isolated from the rest of Russia, is unlikely to see its economy improve substantially in the near future. The experience made all the more painful by the relative prosperity of the adjacent Baltic States.

Article ID: 753