Two years after economic collapse brought foreign airlines' profits in Russia to a screeching halt, firms report passenger levels have begun to take off again, although revenues remain low and expansion plans are still on hold.

Airlines say serious issues need to be addressed as they look to pick up speed, including Russia's complex visa regulations, limited runway capacity and a poor choice of timeslots for Moscow flights.

Stiff competition from domestic carriers has also kept revenues down, despite the fact that some operators say passenger levels have reached pre-crisis levels.

Leading the way, Lufthansa reported carrying 190,235 passengers between Germany and Russia in the first five months of this year, an increase of 13 percent over the same period in 1999. The company said that its passenger service is now operating at about 6 percent below pre-August 1998 levels in passenger numbers.

British Airways has said it hopes to fly 200,000 passengers between London and Russia this year; this would mark a return to its 1998 total.

However, the return of passengers has not meant a return to the profit levels of the glory days.

"I assume that most airlines since September [1999] have been realizing some modest profits, but we will never return to the boom days of the mid-'90s," said Grant Reeder, a representative with Delta AirLines CIS.

David Burkard, British Airways' commercial manager in Russia, Ukraine, Bulgaria and Romania, wouldn't reveal whether the airline was making a profit but said BA is "happy with the current development of the Russian market." However, he added that they were "still far away from the ‘pre-ruble-crisis' performance" on the London-Moscow and London-St. Petersburg routes.

The stagnation in profits, some officials say, is due to a population made thriftier after the August 1998 crisis.

• ‘Things changed'

"Russia was a nice market for high-yield tickets," said Ronald Jaggi, sales manager for Swiss Air. "The new Russian middle class was flying quite often in business class, but after the [financial] crisis, things changed immediately. The business class was sharply reduced. The travel policy of corporations also changed. They started saving money on travel by going from business class to economy."

Delta's Reeder added that Russian tourists, though not the bulk of foreign airlines' business, started looking for less expensive destinations like Turkey and Cyprus.

"The U.S., France and South America have lost in that area," he said.

To attract passengers in these tough times, companies have been forced to reduce fares and offer more special packages, such as frequent-flier miles.

"The marketing office has become very active over the last few years," said Vladimir Vyrozhemsky, Austrian Airlines' representative in Russia. "We have direct mailings to foreign companies announcing promotions during dead travel periods, and we have decreased price destinations in Western Europe."

Gala Emmanouilova, marketing director and advertisement manager at Air France, said her company has also stepped up its advertising program, offering businessmen more frequent-flier miles and more attractive prices.

However, a better-organized, modernized Aeroflot, the Russian national carrier, has also been chipping away at foreign airlines' profits.

"Aeroflot has come a long way. Their service has improved and they are moving in the right direction," said Delta's Reeder.

Andrei Ivanov, transportation analyst at Troika Dialog agreed. "Aeroflot has become more competitive after the crisis. Their service quality has increased, but their price has remained the same."

• Business travelers

The advantage of the more expensive foreign airlines lies in good service and excellent connection flights, "which is particularly important for business travelers," he added.

Backing that view, a representative at British American Tobacco said the company mostly uses Western airlines, because it prefers their services, while their "frequent flyer cards and good corporate agreements" make the prices competitive with Aeroflot.

However, for some businesses, the decision still comes down to cost. "I don't care much about service or quality; the price is the most important thing," said a representative from U.S. based Ingersoll-Rand Co., explaining why he flies with Aeroflot and KLM to the United States.

With revenues only slowly increasing, many airlines are not ready to revive expansion plans that were scrapped immediately after the crisis.

"I don't think we will see companies opening new destinations soon," said Jaggi, who also represents Belgium's Sabena airline in Russia. "We all know certain factors can change fast again." He added that Swiss Air has no plans to resume flying to Samara, where it canceled its flights in October 1998 after five months of operation.

Delta's Reeder agreed that it is just a bit too early for expansion. "I don't think that European carriers are looking to expand until they see more in the recovery."

He said Delta would not fly to Russia's provinces, because passenger volume does not support the long flight across the Atlantic. "The [Russian] provinces are more properly served by a feeder flight out of a European hub or Moscow."

BA has nonetheless said it plans to open two new destinations in Russia – Rostov-on-Don and Yekaterinburg – in the near future. Though no date has been set, Andrei Loboda, a BA representative, said that direct flights to the cities would probably be opened next year.

• May go daily

Estonian Air, which has four flights a week to the Russian capital, is also considering increasing its service to Moscow. Representative Oliver Ollin said the airline might start a daily Moscow service sometime next year, but added flights to other Russian cities would not be lucrative until the airline has built up its presence in Western Europe. Without carrying Western European travelers to the provinces via Estonia's capital, Tallin, "there would not be enough passengers."

Some airlines have ventured to expand their service – albeit on a small scale – in these cautious times. Austrian Airlines increased its flights last year to the southern Russian city of Anapa from two to three times a week. The 50-seat, business-class-only line has been able to make a profit, said Austrian Airlines' Vyrozhemski.

To increase the number of passengers carried in and out of Russia without flying to every corner of the country, foreign airlines have been increasing cooperation with Russian local carriers.

"Lufthansa considers cooperation with leading Russian air carriers one of the principal business developments," said Rueger, who added that the German company has already signed agreements with five Russian airlines.

Analysts expect Aeroflot to sign an alliance with the international consortium Sky Team, headed by Air France and Delta, once the company meets their standards.

"Aeroflot is focusing on increasing flights within Russia," said Troika Dialog's Ivanov. "It is better for Aeroflot to create a strong local network and let foreign airlines bring people to Moscow, and Aeroflot to other parts of Russia."

Eugene Satskov, an analyst at Renaissance Capital, agreed adding that it is often more cost effective for airlines to contract passengers with another airline than to open a direct route.

Despite a cash-strapped Russian population and strong competition, foreign airlines, especially Western European carriers, say they could see a larger profit on their Moscow route if Sheremetyevo-II's terminal capacity were enlarged.

"There is not enough takeoff space at Sheremetyevo, and there is no overnight parking space for the aircraft," said Austrian Airlines' Vyrozhemski, who added that Western European airlines would like to arrive in Moscow at night and leave in the morning to make early connections in Western Europe.

"Leaving Moscow is a protected thing," said Jaggi of Swiss Air and Sabena. "The problem is that the departure should not leave Moscow later than 7:30 a.m. in order to get to Western Europe by 9 a.m. Every airline would love to do that, but Aeroflot has no interest in letting that happen. They get all the passengers who want to leave early."

United Financial Group transportation analyst Julia Zhdanova said Aeroflot has an advantage when it comes to time slots, since it is treated as the national carrier.

"The airport is state-owned, and the state has a 50 percent stake in Aeroflot – so there is a mutual interest in seeing it do well," said Zhdanova, adding that foreign airlines just have to make due with the time slots offered.

But some foreign airlines do have early morning flights, and the list may soon grow. Vyrozhemski said he has been given an early morning flight time by Sheremetyevo management but is waiting to coordinate with Aeroflot.

However, a complete solution to the problem is still a few years off, according to industry experts. Aeroflot is looking to finance a third Sheremetyevo terminal and, if constructed, it could more than double the airport's passenger capacity – from 8 million to 18 million – by 2003.

"The new terminal will enable more convenient connections for customers of foreign airlines," said Zhdanova.

Insiders say airlines have their fingers crossed. "All airlines are hoping that they will build additional terminals," Delta's Reeder said.

Meanwhile, airline officials also claim that an expensive and drawn-out visa system discourages many potential tourists from flying to Moscow.

"It is difficult to obtain a visa, and a trip has to be organized in advance," said Ulrich Rueger, a Lufthansa representative. "The majority of people today prefer to travel without preparations."

Japan Airlines Sales Manager Yoshiro Chiba agreed that the visa procedure turns off tourists. "A traveler has to wait 10 days and go to the embassy twice and pay $80. If he goes within five days, he has to pay $300. This is very expensive."

According to Troika Dialog transportation analyst Andrei Ivanov, Lufthansa, the foreign airline with the largest presence in Russia, has expressed its intent to switch to Moscow's Domodedovo airport if capacity constraints are not addressed.

But, overall, breaking even in this "very competitive" market that includes more than 60 foreign airlines has not been easy for many.

"Our expenses are still more than our income," said Egypt Air General Manager Ismail Labid, whose company canceled plans to expand its service to St. Petersburg after the crisis and is constantly monitoring its business to the capital. "If the losses increase, then there is no sense in continuing to fly here [to Moscow] twice a week."

"Russia was a nice market for high-yield tickets. The new Russian middle class was flying quite often in business class."

(This is the second part of The Russia Journal's special report on the airline sector. For last week's report, which focused on domestic carriers, see The Russia Journal Website: www@russiajournal.com or e-mail editor@russiajournal.com.)