The Russian travel industry may be facing formidable challenges but help is at hand – providing you play by the rules, writes Sally White

Gloomy about Russian travel? There is no need if you are an Aeroflot shareholder as the share price is back up at levels last seen two years ago. Not hurting it at all was a recent report in the Financial Times that one of Putin’s friends, transport plutocrat Arkady Rotenberg, is eyeing a 25% stake. Plus international credit rating agency Fitch has just taken Aeroflot off its negative list and is forecasting a recovery from the end of next year.  

Another positive is that Poland’s tech entrepreneur Tomasz Czechowicz has just put $2 million from his $1.5bn MCI early-stage investment fund into Russian OTA Oktogo.

While there is no denying that the Russian travel industry faces formidable challenges, it is reshaping itself, with a little bit of help from the Kremlin. Aeroflot is obviously gaining from its dominance of the aviation market, with over 50% of total air traffic, but it has been set a task of expanding domestically. Given that Russian outbound tourist flow decreased by 31.3% last year to 12 million trips, the largest drop in 18 years according to the Russian Tourism Industry Union, that is just as well.

Among the strongest factors that support Fitch’s positive outlook for Aeroflot, its analysts write, are the 56 international routes that Aeroflot was allowed to inherit from its smaller bankrupted rival Transaero. While outward bound tourism has slumped, inbound is rising. Oktogo is a domestic travel OTA, hence Czechowicz’s interest.

Russian outbound tourist flow decreased by 31.3% last year to 12 million trips, the largest drop in 18 years

Russian Tourism Industry Union

 Aeroflot was let off the hook of having to acquire Transaero and all its problems. Fitch analysts point to its now even wider diversified route network, favourable hub position and strong position on domestic markets. Aeroflot is expected “to deliver healthy RPK growth over 2016-2019” and increasing cash flow, according to Fitch.

Last year’s headwinds reflected in Aeroflot Groups 2015 figures. Looking after two million Transaero passengers, a shrinking economy, falling currency, the impact of terrorism and the Turkish and Egyptian travel bans more than offset lower oil prices and the rise in domestic business.

Aeroflot Group carried over 39 million passengers and increased its income by 30%. At operating level the group enjoyed a margin of 10.6%, and claimed the second highest operating margin among legacy European carriers. But at pre-tax level there was a loss.

Hard task

Countries hit hardest by the downturn in Russian outbound travel according to the Russian Tourist Industry Union, were widespread. It lists Indonesia as worst hit, down 96.6%, but Tunisia saw an 83% reduction and Dominican Republic one of 82.5%. In Europe the sharpest decline – 48% - was registered in Greece. Then came Bulgaria, Spain and Croatia with falls of over 40%.

Devising a marketing strategy is no easy task for the Russian travel industry, since overseas travel numbers continue to fall - down 26% in January. As Russian Aviation Insider points out, European leisure destinations are no alternative for Egypt and Turkey, being in a completely different price segment. They also require visas for Russian citizens.

“Transaero’s market exit also had an effect on the market as a whole. One consequence is that Southeast Asia has become practically inaccessible, due to a great shortage of long-haul fleet after Transaero left the market,” it commented. Russia does have its own resorts on the Black Sea, but these vacation destinations operate only during a short, four-month-long summer season.

….the international fight to try to capture Russian tourism business is on

So, the international fight to try to capture Russian tourism business is on, with relaxing of visa restrictions and lower prices being offered as the lure.  Russian carriers are also looking for new markets outside the ruble zone - transit flights between Europe and Asia are one example given by Russian Aviation Insider. 

Tourism within Russia, however, is where the action is developing, for Russians and their foreign visitors as the ruble weakens.

Skycanner’s online flight booking system has noted a rise in foreign tourists visiting Russia. And numbers on Momondo the online reservation system were up 30% year according to the Kommersant newspaper. From Germany, it says, the numbers were up 35%. For Israel they rose 55%, Norway and the UK numbers were up 128% and 144% respectively.

Foreign tourists ventured further afield than just Moscow and St. Petersburg, - even Siberia’s Irkutsk apparently showed a 99.5% rise in foreign tourists, according to the Moscow Times.

A lot of money is going into Russia’s air transport and much more is promised - hence speculation that Rotenberg’s interest in Aeroflot may have come after a nudge.  New airports and terminals in Moscow were first, then (for the FIFA World Cup, of course) new airports in Perm, Rostov on Don, Saratov, Kharabarovsh, Samara and Kaluga by 2018.

Aeroflot is developing its brands. Probeda, its low cost airline which started in December 2014, had only operated domestically, but it is adding international routes. The three regional brands - Rossiya in St. Petersburg, Donavia in Moscow and Orenair in the south - are being merged into one under the Rossiya brand. The plan is that Rossiya will also take what was Transaero business. That consolidation still leaves Aurora operating as a separate brand in the Far East cities.

Aeroflot will not be able to take full advantage of market strength, however, when it comes to pricing.  A rare insight on this comes from President Putin’s website, no less, in an interview with Aeroflot General Director Vitaly Savelyev. While advocating that “there should not be a place or a region in the Russian Federation that citizens cannot fly to or from” the top boss sets one limit. Aeroflot must not “undermine anyone else on the market!”