At Aeroflot, it’s patriotism over profits as Russia pressures industry

At Aeroflot, it’s patriotism over profits as Russia pressures industryAll smiles and cheery banter, the flight attendants greeted travelers on board Russia’s newest passenger jet.

“Welcome aboard and watch your head,” one attendant chirped courteously, holding her gloved hand atop the airplane’s diminutive door frame, lest passengers knock their heads.

As Aeroflot folds Russian-made jets back into its fleet, cramped doorways are just one of its challenges.

To help support homegrown companies in the midst of a downturn and Western sanctions, the government is pushing Aeroflot to buy the new Russian Superjets by Sukhoi. The manufacturer is best known for building the fighters and bombers now streaking over Syria.

Aeroflot must make the shift without alarming its customers at a time when the country’s airline industry is facing pressures not only from a sharp recession, but also from safety jitters over the crash in Egypt of a Russian passenger jet made by Airbus. Aeroflot dropped Russian-made jets years ago over safety lapses.

Across Russia, companies are being forced to prioritize patriotism over profits.

As oil prices slump, energy giants like Gazprom are facing the possibility of higher taxes. The added cost would cut into the dividends available to investors, many of which are big Western mutual fund managers.

Worried about unemployment and political unrest, the government pushed back when Avtovaz, the maker of Lada cars, moved quickly to cut workers as the economy slowed. To save money, the company instead announced a lengthy Christmas holiday, from Dec. 18 until Jan. 17.

For years, Sberbank tried to transform itself into a global, customer-friendly institution. But those efforts were blunted by Western sanctions over Russia’s interventions in Ukraine, which limit Sberbank’s overseas business dealings.

In recent years, Aeroflot, the Russian national airline, which is 51 percent state-owned, has overcome its reputation for abrasive service, poor safety and weak financial returns. Since the turnaround, the airline has come to be considered one of the country’s corporate champions.

But that lofty position now means the Russian government is turning to Aeroflot for help. Aeroflot, which flies 118 Airbuses and 25 Boeings, has 21 Sukhoi Superjets in its fleet. An additional 29 Superjets are on order.

Judging by passenger chatter, the squat, chubby Superjet is not many travelers’ first choice for getting around. “An idiotic plane,” one customer wrote on Aeroflot’s website after taking a flight on the Superjet. “For me, all routes this tub flies are off limits. Once was enough.”

As the Kremlin has taken a more hands-on role in the downturn, investors have reassessed their thinking on Russian businesses once considered emerging-market darlings.

Shares in the MSCI Russia Index are now trading at a minuscule 5.4 price-to-earnings ratio, a common gauge of investor confidence in future profits. By comparison, the price-earnings ratio on the broad MSCI emerging market index is 11.1.

“Clearly, this is one reason the Russian market is very cheap,” Daniel Salter, head of equity strategy at Renaissance Capital, an investment bank, said of government pressure on businesses. “Investors are well aware of that kind of risk.”

Aeroflot is dealing with a long list of government demands.

Along with buying Russian-made planes, Aeroflot stepped in this fall to fly passengers stranded by the bankruptcy of its largest rival, Transaero. Aeroflot also paid for the fuel for Transaero’s remaining flights. Altogether, Aeroflot estimates this has cost it at least 5 billion rubles, or around $75 million.

Aeroflot suffered in the geopolitical fallout over Ukraine. On Oct. 25, it cut flights to Odessa and Kiev after Ukraine imposed sanctions on the company for flying to Crimea, the disputed peninsula.

Aeroflot is also being pressured by the government to fly unprofitable routes to far-flung Siberian cities, so people in these places have at least some means of transportation. The company receives state subsidies for ticket sales to certain destinations.

“Right now the industry is living through bad times,” said Roman V. Gusarov, an authority on Russia’s aviation business who manages the website.

Even in Russia, the Superjet remains a rarity for now. Sukhoi says about 66 planes are in operation altogether.

On the recent Aeroflot flight, passengers gazed about the snug interior, akin to that of an Embraer or Bombardier regional jet. “I cannot tell you what I think of this airplane now, because I am working,” a flight attendant said cheerily, when asked how it stacks up to planes made by Boeing and Airbus.

Even with the added obligations, Aeroflot is still reporting operating profits, albeit a net loss over all. Executives also indicate that the national flag carrier should be flying domestically made airplanes.

“Every big company carries out activities to show it is acting responsibly toward the people it serves, and we do this, too, and we are proud of it,” said Aleksandr F. Lukashin, Aeroflot’s spokesman.

Aeroflot is an outlier in the Russian economy, which is expected to shrink by about 4 percent this year.

The number of passengers flying Aeroflot is growing even as passenger volumes broadly are declining. In the first nine months of this year, Aeroflot’s passenger volume was up 10.3 percent while overall air travel was down 3.4 percent in Russia, according to company and transport ministry figures.

It’s a riddle explained partly by the luck of geography.

As part of its strategy, Aeroflot has been promoting its hub in Moscow as a steppingstone between Europe, North America and Asia. Moscow is farther north than the hubs of other airlines trying this strategy, like Turkish Airlines in Istanbul or Emirates in Dubai.

In that sense, Aeroflot has a time advantage as it tries to capture a swelling number of Chinese passengers. Aeroflot says a flight from New York to Shanghai via Moscow, for example, is two hours shorter than via Dubai, the hub of Emirates. Aeroflot’s Moscow-to-Rome flight is now 80 percent filled with Chinese, all of them connecting through Russia for European trips.

To seize this business opportunity, Aeroflot realized it needed to buff its image. A decade ago, Aeroflot hired McKinsey, the consulting company, to create a training program for flight attendants. Since then, the carrier has won awards for service, smashing stereotypes about Russian rudeness.

It also needed to overcome its poor safety image, something that had shadowed the company for decades. In 1994, a pilot let his 16-year-old son fly an Airbus that promptly crashed, killing all 75 aboard.

Aeroflot responded by ramping up safety.

The airline now has among the youngest fleet of airplanes of all the major carriers. As of December 2014, Aeroflot’s fleet was 4.3 years old on average, surpassed by the Brazilian airline Azul, with an average aircraft age of 4.1. By comparison, the average age of Delta’s fleet is 17; at British Airways, it is 12.6.

For years, Aeroflot, a carrier with close political ties to the family of former President Boris N. Yeltsin, had shunned pleas from Russia’s beleaguered aircraft manufacturers to buy domestically, citing safety concerns. Looking to solidify its own reputation, the carrier assembled a fleet of Boeings and Airbuses.

Now, Aeroflot is relenting.

It increased Superjet orders just this year; when delivered, those jets will bring its total to 50. Aeroflot has also ordered 50 planes of a new midrange model, still under development, called the MS-21 and made by United Aircraft Corporation, a Russian company.

The Superjet itself has had safety problems. During a demonstration flight in 2012, the plane crashed into a mountain in Indonesia with 37 aviation executives and journalists and eight crew members aboard, killing everybody. Aeroflot says the plane these days is safe.

Still, Aeroflot is not taking chances. The company has put special emphasis on pilot training.

At its training center near the Sheremetyevo International Airport, Vladimir N. Ponomarev, a gruff, chiseled flight instructor at Aeroflot, has made a career of killing Russian pilots in midair disasters — all simulated, of course.

On a recent day, he stood, arms folded, watching a gigantic cockpit simulator that imitates a Superjet in flight gyrate and vibrate on its hydraulic legs.

Clearly, the pilots had encountered a problem in the simulated flight. Pilots get 48 hours of simulator training to fly the Superjet after flying Boeing, Airbus or other airplanes. The boxy, plastic cabin veered violently, and then came to rest. A door opened and two pilots emerged, wide-eyed.

Mr. Ponomarev said he teaches the basic skills. “If you can fly,” he said. “You can fly any airplane.”

Source: New York Times
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