THROUGH MOST of the 1990s, the civil aviation sector in Russia experienced turbulent times, with work volumes sliding and and losses from operations mounting. In 1999, small profits began to surface among companies for the first time. Overall profits increased in 2000 to 8.01 billion rubles and to 8.34 billion last year. Year 2001 revenues increased 8.6 percent to 101.64 billion rubles.

The industry's contribution to the state budget through tax revenues increased 8.7 percent last year to 10.79 billion rubles. The number of passengers carried both in domestic and international routes rose 14.8 percent over 2000.

Also, the efficiency of airline operations increased in 2001, which can be seen by the percentage of passenger seats occupied during a flight – an average of 66.4 percent, 2.6 percentage points more than in 2000.

A major share of revenues is obtained from passenger transportation. An average fare on domestic routes increased in 2001 from 3,280 rubles ($105) at the beginning of the year to 3,640 rubles ($117) by the end. At the same time, the average monthly salary in Russia increased more significantly, from 1,934 rubles ($62) to 3,300 rubles ($106).

At the end of 2000, the average air ticket price was much higher than average salary in the country: The gap was 1,346 rubles; by the beginning of January 2001 the difference dropped to 340 rubles, which may partially explain why while the number of passengers carried by air transport increased 14.8 percent, the income increased only 8.6 percent.

Low profitability means that Russian airlines' potential is restricted in terms of development, especially in acquisition of new equipment to modernize fleets. By the beginning of 2002, the Russian fleet comprised 6,014 civil aircraft, including 46 of Western origin, and 27 new Russian aircraft such as Il-96, Tu-204 and An-38. Although about a half of aircraft listed in airline's fleets are non-operational, waiting for repair or spare parts, such a huge fleet is more than sufficient for the current Russian passenger-traffic needs.

According to the State Scientific and Research Institute of Civil Aviation, the existing fleet will be sufficient for at least another decade. But growing ambitions of the major Russian airlines to serve profitable international routes create demand for modern competitive passenger aircraft, which also would meet strict international environmental requirements.

There are only three major Russian airlines that operate regular international flights in significant volumes: Aeroflot, Pulkovo and Transaero. Aeroflot and Transaero are both concerned with the competitiveness of their fleets, and, therefore, are operating big fleets of foreign-made aircraft.

Aeroflot has some 100 aircraft, of which 28 are Western-made and are servicing major international destinations. Transaero operates a fleet of foreign airplanes, with four Boeings 737-200 and two Boeings 737-700. State-owned Pulkovo, based in St. Petersburg, operates a fleet of Russian-made aircraft, mainly Tu-154, Tu-134 and Il-86.

Some other major Russian airlines last year declared their intention to upgrade their fleets of obsolete Soviet-made aircraft and to acquire modern Russian aircraft, including Tu-204, Tu-214 and Il-96-300. The plans, however, have not been fulfilled yet, mostly because of the lack of financially powerful leasing companies in Russia, high bank interest rates and lack of legal base in the country.

The government declared that it would solve the problem by participating in leasing companies' capital, offering state-guaranteed loans and other assistance. It arranged a tender to choose companies to be supported. The winners, Ilyushin Finance and Financial Leasing Co., are to receive federal funds through an input into their authorized capital. But the process, initiated last year, is still not completed, and although both companies have started financing the new Russian aircraft manufacturing, their limited financial capabilities could not really change the situation on the aircraft.

However, Russian airline companies have practically no time left to modernize their fleet according to international standards. Starting on April 1, 2002, airports at the EU member countries will be closed for aircraft that don't comply with latest noise standards (the so-called Chapter 3 regulation). That standard was accepted by the International Civil Aviation Organization (ICAO), which has estimated that currently only 7.5 percent of Russian aircraft meet the new standards. Passenger flights of Il-86, Tu-134 and early models of Tu-154 will be banned from European-destination flights.

Hard times come for Il-76 freighter aircraft operators. The only way to meet the European requirement is to re-equip the aircraft with new Perm-made PS-90-76 engines, which will cost at least $10 million apiece, and no Russian airline is prepared to spend that much.

To resolve the problem, Aeroflot is planning to add three more specialized cargo Boeings DC-10-30F to its only DC-10-30F operated currently.

Heads of the Russian Civil Aviation try to consider EU to reconsider the decision or to relieve Russian aircraft of having to fulfill that requirement, but with no success yet. Probably, the issue will be resolved by agreeing to special terms directly with Spain, Italy, France, and other countries with destinations that are most popular among Russian tourists.

In many respects, the Russian airline market development in the nearest future will be affected not only with the restrictions entered by Europe, but also with the way the market will be regulated by the Russian aviation authorities.

According to the licensing law that has been approved recently, in February licensing individual routes for each airline – a regulation that has been used as a major market-regulating tool – was supposed to be cancelled. However, the move was postponed due to some legislative issues, but if it will be implemented in the future, any Russian airline that has been certified and licensed for air transportation may launch regular flights any destination inside the country. The airline should only receive an approval of the destination airport that provides slots, a certain time for landing and takeoff for the airline.

And here is a peculiar thing, which is a concern of many airline companies: The air transportation market will be regulated to a large extent by airports, which are influenced by both local authorities and their major airline companies. The process of splitting air-transport enterprises into airline companies and the airports independent from each other, which began in early and mid ‘90s, has been completely stopped by now. Thus, if market players will operate under the new licensing regulation, they will find themselves in unequal competitive conditions: Some companies will be in the position to protect their market from competitors by not allowing them to use their airports for any reason or allocating them inconvenient time for flights.

(The author is Editor-in-Chief of Air Transport Observer)