Airline sanction war’s real cost for Russia

Recently the sanctions against Russia really hit home when the low-cost airline Dobrolyot suspended all flights, leaving thousands of tourists stranded abroad. In response, Moscow threatened to suspend European airlines’ flyover rights over Siberia. This might seem like opening a new front on the sanction war – Russia’s previous responses have been limited to banning food imports from Ukraine and the EU countries. But does Russia really have what it takes to achieve air superiority? Russian opposition leader Alexey Navalny, an outspoken critic of Putin’s regime and former member of Dobrolyot parent company Aeroflot’s Board of Directors, has doubts. We present a full translation of the post regarding this issue on his blog. 

As a former board member of the airline Aeroflot, the parent company of Dobrolyot, I’ve been asked what I think of the current situation. Let me share my thoughts.

First I’ll describe what happened:
1. Dobrolyot, Aeroflot’s subsidiary, performed flights to Crimea, which is why it got hit by sanctions. This effectively destroyed the low-cost project, making its business model [dependent on Europe for aircraft lease, maintenance, insurance, and even ticket booking] unfeasible.

2. Russia threatens to close the so-called “Trans-Siberian flyovers” to foreign airlines, currently flying through Russian airspace to save time and jet fuel. We get “flyover fees” for that, but the foreign airlines make a lot more than they pay.

3. Aeroflot’s shares fell when this intent was announced, because Aeroflot was where most of the flyover royalties went.

I believe this decision is really dangerous and poorly thought-out, and it will do Russia a lot of harm. The government should strive to shield the airlines, especially Aeroflot and its royalties, from the political conflict.

What we need to remember:
a) The royalties are actually a relic of highly successful talks held in a fortunate historical context. Both foreign states and airlines constantly raise the issue of abolishing the royalties. We’ll close the Trans-Siberian flyovers due to politics, but in a year or two we will reopen them – this time without the royalties.

b) Aeroflot is not the only one who gets the money (although it does get a lion’s share). The amount for different years varies. Aeroflot (and the government) consider it a secret, so I won’t name it, although everyone knows it as it is. This article seems to give a correct estimate [$500 million per year, of which $300 million go to Aeroflot].

c) Aeroflot is constantly quarreling with the Ministry of Transportation over the money, and it’s important to understand that the airline gets it in return for cowtowing to idiotic and completely unprofitable political projects. They are forced to by the Russian-made [mostly from foreign parts] Sukhoi Superjet planes, regardless of the fact that the project is so shoddy that the Superjets cannot actually fly. Prime Minister Medvedev tells them to cut down the price of flights to Sochi [the 2014 Winter Olympics host city] or to other cities like St. Petersburg or Vladivostok. They are pushed to buy out unprofitable airlines from the Russian Far East and pay their debts. The list goes on. Some of these projects do make a little sense and Aeroflot just does the government’s job of subsidizing airlines and routes; others are just officials’ willfulness, plain and simple. Aeroflot could refuse the flyover royalties, but then the government will have to kiss these projects goodbye.

d) While the Soviet civil aircraft industry was really competitive, it has been destroyed completely – and this is an “achievement” of Putin’s government with its corruption and neglect. This didn’t happen in the nineties, before Putin’s time. Experts have said a lot to prove it. Today Russia’s civil aviation is COMPLETELY dependent on the West. This dependence has to be overcome, but this will take decades (that is, if something actually is done, but it isn’t). The industry is very complicated and the competition is huge. It’s harder to make competitive civil aircraft than warplanes. People often invoke the Sukhoi Superjet project. But it won’t take flight. The Superjet isn’t profitable yet (it keeps breaking down), and the situation doesn’t seem to improve. More importantly, even if they do make it work, this plane will fill only one air transportation niche, out of many.  Concerning other prototype projects, there is a great leap between making one plane and producing flyable aircraft on an industrial scale.

e) Aeroflot is one of the few Russian companies working in a competitive international market and subject to many international regulations. The petty revenge against foreign airlines will lead to a complete crackdown. The EU can always declare Aeroflot non-compliant with their regulations.

f) The flights to Crimea, which were actually a loss for Dobrolyot and which it didn’t need, are purely a political order Aeroflot couldn’t refuse. What really happened is that the government framed the company, since these particular sanctions were on the table from the beginning.

g) The rules of diplomacy dictate Russia needs a response to the sanctions. But the response shouldn’t come in a field where we could be beaten to a pulp. For one, [the state-owned] Channel One could refuse to buy foreign series and show licenses.

To recap: Civil aviation isn’t a field for political squabbles and muscle-flexing. Our muscles here seem to be completely unprepared for that. The ban on Trans-Siberian flyovers will deal Aeroflot yet another blow: first the government forces it into sanctions and then “avenges” those sanctions by depriving Aeroflot of royalties.

All the hawks calling for trade, sanction, and other wars with Europe and the US should look at this picture more often.

The size of world economies. This data is from 2012, but the big picture has stayed the same.

If we want to go for sanction wars and win them, we should consider the size of our economy. We have to develop, ensure economic growth, and attract investment. Stop stealing people’s pensions, make the courts give real justice.

Unfortunately, TV propaganda won’t help us build locally produced aircraft so we can tell the Europeans to go to hell.