Financial stability of Russian airlines under pressure of soaring fuel prices

Financial stability of Russian airlines under pressure of soaring fuel prices
Photo: Konstantin ‘KVentz’ Ventslavovich, 2020

Despite a gradual recovery in passenger flows, Russian air carriers are far from financial well-being. Intense competition along with the population’s weak purchasing power prevent airlines from increasing ticket prices, and growing fuel prices exacerbate the situation.

Rising fuel prices are compounding Russian airlines’ pandemic woes, says Reuters. While demand for domestic air travel is growing in Russia, competition between carriers doesn’t allow them to increase fares, so a surge in fuel prices is squeezing airlines’ finances. Russian carriers grounded their fleets in April 2020 due to the lockdown that lasted until June. Since autumn, passenger flows have gradually recovered (primarily on domestic flights), but demand remains far from pre-crisis levels, and ticket prices are unchanged because of the high level of competition and low customer spending power.

Meanwhile, airport fuel prices have almost returned to pre-crisis levels. According to Aeroflot, fuel costs tripled from the second quarter to the fourth quarter of 2020. “The rise in prices for jet fuel is bad for airlines given the equal prices and reduced demand,” said the airline’s spokesperson adding that the prices had risen more than 40% since June.

Russian carriers grounded their fleets in April 2020 due to the lockdown that lasted until June. Photo: Konstantin ‘KVentz’ Ventslavovich, 2020

The average fuel price at Moscow airports is almost 70% higher compared to May 2020, according to Refinitiv data provider. It is not far from a peak in 2018-2019 when fuel accounted for 26% to 31% of Red Wings airline’s total expenditure. In 2020, the share fell to 19%, says the company’s spokesperson adding that now it is again rapidly rising. The spokesperson considers that “this will definitely worsen the financial condition of airlines because it is impossible to transfer this increase onto the ticket price” due to strong competition and low effective demand.

Airlines expect a further seasonal increase in fuel prices in May and June. “Sooner or later, it will lead to the need for state support for the whole industry,” said Mikhail Ganelin, a senior analyst of ATON brokerage. In 2020, the lockdown and shutdown of many international flight routes halved passenger flows. The Association of Air Transport Operators, which includes most large Russian carriers except Aeroflot, estimates last year’s airline losses at 200 billion rubles. While the government has already allocated almost 21 billion rubles to support the industry and helped Aeroflot by buying its shares in a new share offering, the association has asked the state for additional concessions, such as subsidies and tax breaks, says Reuters citing an industry source.

By Anna Litvina