CIS GAINS

MOMENTUM

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AT A GLANCE

  • Economic recovery in the region and optimism coming from the staging of the 2018 World Cup brings new vigor to the airline industry. Factors such as low inflation and a stable exchange rate favor an increase of both domestic and international air traffic.
  • New business models are appearing in the region, following the European trend and putting pressure on the already challenging yield environment.
  • Network remains highly concentrated, as most of the capacity available is focused on a few central airports.
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An Emerging CIS

The economy of the Commonwealth of Independent States is back on track, seemingly leaving the 2015–2016 recession behind. According to IHS Markit, GDP for the region has grown by 2% in 2017 – which is the best result in five years – and is expected to keep the pace as currency stabilization, inflation control and higher commodity prices favor economic activity.

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Although this is a notable turnaround from the recession that saw a contraction of 2.2% at its height in 2015, geopolitical ambiguity still lingers. The current diplomatic tension between Russia and the United States, as well as the possibility of additional sanctions affecting other CIS countries means that the whole region remains somewhat vulnerable. On the other hand, good relations with the European Union, as well as strong historical bonds with Western Asia and China mitigates risks.

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Changing Winds For Aviation

The return of economic progress, as expected, brings new optimism to the aviation industry. According to IATA, RPK growth in the Russian domestic market accelerated to 10.1% in 2017, the fastest rate since 2014, a result similar to those displayed by other CIS countries. This trend shall reverberate over the next years, as the 2018 World Cup boosts investment in tourism and infrastructure, attracting millions of visitors to the region.

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Internationally, several factors favor the increase in passenger traffic: overall currency stabilization and inflation control, meaning that the population has gained more spending power; the recovery of diplomatic relations between Russia, Egypt and Turkey, lifting previous traffic restrictions to these popular Russian tourist destinations; and recently established visa-free regimens in Ukraine, Georgia and Moldova, fostering connection with the European Union.

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Business Model Diversification

All taken into account, it appears that aviation in the CIS is on the upward curve, and airlines are working to adapt and benefit from the momentum. Indeed, diverging from traditional full-service/legacy carrier model and following Europe, a few companies are creating their own low-cost branches to compete in the market.

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The obvious upside is passenger stimulus and a push for the airspace to become more democratic, as country barriers continue to drop. On the other hand, traditional airlines are under pressure to lower their fares, adding even more stress to the already challenging yield environment.

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Network Decentralization

While competitiveness is increasing in high-density markets, where low-cost carriers usually thrive, there is still plenty of room for profitable operations on regional and under developed routes. In fact, while the main air carriers have built the core of their operations around each country’s main airports, some competitors are already working to strengthen their regional base with the use of 70–150 seat jets – and are growing consistently while doing so.

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There is a long way to go, as network centralization around country capitals is still keeping connectivity and traffic from realizing their full potential. The majority of passenger traffic in the CIS is concentrated on the 5 main airports – with 3 of those in the Moscow region. Conversely, over 30% of the airports still have emerging air access, with scheduled air services to only one other airport. This scenario indicates that, for the near future, demand will call for these secondary markets to be better served, where 70–150 seat jets can be optimally placed.

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NUMBER OF AVAILABLE
DESTINATIONS

Source: Sabre, Embraer – March 2018