Aeroflot - Russian Airlines JSC

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Aeroflot - Russian Airlines JSC

Leningradsky Prospekt, 37, Bldg. 9
Moscow, 125167
Russia
Telephone: (+7 495) 155-6643
Toll Free: (888) 340-6400
Fax: (+7 495) 258-0684
Web site: http://www.aeroflot.ru/eng

Public Company
Incorporated: 1923 as Dobrolet
Employees: 19,000
Sales: $2.98 billion (2006)
Stock Exchanges: RTS
Ticker Symbol: AFLT
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation; 488190 Other Support Activities for Air Transportation; 721110 Hotels (Except Casino Hotels) and Motels; 722320 Caterers

SOVIET ORIGINS

COLD WAR COMPETITION

AEROFLOT UNDER GORBACHEV

THE NEW AEROFLOT

VIOLENT CRASH IN 1994

NAVIGATING CRISES

RESTORING THE FLEET

SEEKING GLOBAL REACH

PRINCIPAL SUBSIDIARIES

PRINCIPAL DIVISIONS

PRINCIPAL COMPETITORS

SOVIET ORIGINS

Before 1920 Russian air enthusiasts had experimented with aircraft development, and in 1920 and 1921, as the Russian Civil War drew to a close, small-scale experiments with air transport were made under both private and state initiative. Flights to the Nizhni Novgorod fair, a traditional trade fair, engendered a more systematic approach toward aviation. The Chief Administration of the Civil Air Fleet was soon established, and one of its first acts was to develop in 1921 a joint venture with German interests to create the Deutsch-Russische Luftverkehrs A.G. (Deruluft). Specializing in flights to the West, Deruluft’s regular services began from Königsberg in eastern Germany to Moscow on May Day, 1927. In its tenth year of operation it had two main routes, from Berlin to Moscow and from Königsberg to Leningrad, and it carried 3,600 passengers and 145 tons of post and goods.

Systemic domestic aviation developed at approximately the same time, with the state playing a more significant role. In March 1923 the first Soviet airline, Dobrolet, was created as a joint state and commercially based organization and the first regular service was introduced in July 1923 from Moscow to Nizhni Novgorod. The Russian people shared the West’s interest in aviation, and an attempt was made to formalize this in March 1923 with the creation of a large public organization, the ODVF, or Friends of the Air Fleet, under the slogan “working people build the air fleet.” Aviation could be portrayed as an exciting diversion from the real difficulties of the New Economic Policy as well as a potential source of future international conflict. At the 13th Party Congress in May 1924 it was noted that “the rapid growth of military and civil aviation in capitalist countries makes it necessary to strengthen and develop our own.”

The actual scale of activities, however, was still very small. In 1923 Georgian and Ukrainian based airlines were also created, backed by banks and commercial enterprises. During the 1920s, Dobrolet began to expand its activities across Russia, forming subdivisions as it did so, and in September 1926, it was made into an all-union organization. International flights to Mongolia and Afghanistan were initiated, but the main air-link to the West was still by Deruluft.

In 1928 a general consolidation began. The Ukrainian airline was merged with Dobrolet, and between 1930–32 a succession of organizational changes culminated in all Soviet civil aviation being subsumed under the title Aeroflot in March 1932. Henceforth all internal civil flying activity was under the control of Aeroflot. The new airline did not become fully responsible for international flights to the West until the agreement with Deruluft expired in 1937, when the latter’s routes were either suspended because of the growing hostility between Nazi Germany and Stalin’s Russia or taken over by Aeroflot.

In this way, Aeroflot emerged as the monopoly carrier in the U.S.S.R., with a structure essentially unchanged until the breakup of the Soviet Union in 1991–92. During this long period Aeroflot experienced sustained expansion, interrupted only by World War II, when it played an important military role. By the end of the 1930s Aeroflot had become the world’s largest airline. After 1945 the Soviet state made a deliberate attempt to direct medium- and long-distance travelers within the U.S.S.R. onto Aeroflot. By 1990 Aeroflot connected 3,600 cities and towns in the U.S.S.R. and flew to 102 countries, carrying 138 million passengers and three million tons of cargo and mail (five million passengers and 100,000 tons of freight on its international routes). No American airline could compete at this level. However, as the deputy director of Aeroflot said in 1963, “a true comparison between ourselves and the United States would not be with their largest airline but with all their airlines put together. ... We do not expect to be larger in total carrying than all those airlines for a few years yet.” In fact, despite this optimism, Soviet aviation has always taken second place to American aviation on a world scale.

Aeroflot’s fleet had to evolve rapidly to sustain this expansion, though lead times for the introduction of new planes were usually longer than in the West, especially as technology became more sophisticated. Early planes were imported or built under license in the U.S.S.R., but their long-term development was closely tied to the creation of an independent Soviet aircraft industry. In 1929, 61 percent of new planes used by Dobrolet were foreign, but after 1934, apart from the war years, Aeroflot’s fleet remained essentially Soviet-built until the purchase of Airbuses at the end of the 1980s. This fleet was a product of the famous design teams led by Antonov, Tupolev, and Ilyushin.

Aeroflot’s activities went far beyond those associated with Western airlines. A primary function was the transportation of domestic passengers and freight. In addition, Aeroflot acted as the international Soviet flag carrier. International flights always had a high prestige, but they never made up more than a small part of the passenger or ton miles flown by Aeroflot (usually well under 5 percent). Moreover, Aeroflot was also responsible for agricultural aviation, including fertilizer and pesticide dusting, some air sowing, attempts at climate modification to assist agriculture, forest patrols, and fish spotting for Soviet fishing fleets. The important work of air surveying and prospecting in the remoter areas of the U.S.S.R. and the airborne movement of construction materials to new sites was also organized through Aeroflot, as was the Soviet air ambulance service.

COMPANY PERSPECTIVES

Aeroflot’s mission is to provide most completely and safely one of the fundamental human freedoms— freedom of moving.

Aeroflot was also responsible for its own ground services and airport development. Systematic airport development was begun in the 1930s under Aeroflot’s control, and this became especially important after 1945 when the decision was made to link all the significant towns and cities by air. This led Aeroflot into building both airports and hotels to ensure the availability of adequate accommodation for its crews and passengers.

COLD WAR COMPETITION

Aeroflot’s organizational structure has been based on proliferating territorial divisions. In 1964 the organization of its international flights was turned into an independent division within Aeroflot under the trade name Aeroflot-International Airlines. Each territorial division (of which there were over 30 in 1990) was responsible for the full range of Aeroflot’s work within its defined area. Aeroflot was overseen by the Chief Directorate of the Civil Air Fleet which became the Ministry of Civil Aviation in 1964. As Aeroflot grew in size, this structure became unwieldy and problems of overlap developed. It was nevertheless maintained, possibly because it suited local political purposes. The manner in which this system actually functioned was still obscure into the 1990s, given the U.S.S.R.’s past secrecy. In the 1930s Aeroflot, and aviation generally, had been affected by the Stalinist purges. It was typical of the time that the designer Tupolev should be arrested for “betraying secrets,” and then be made to lead a research team of aircraft designers in the prison camps. Real public light in the West was first thrown on Aeroflot’s internal organization in 1957, when a highly qualified British airlines trade union team led by Clive Jenkins was given a detailed insight into Aeroflot’s working and when Jenkins updated his report in 1963. These early reports, which were later confirmed as secrecy diminished, suggested a reasonably efficient organization, but one which was struggling to keep up with its rapid, underplanned expansion. Senior staff also appeared to lack a good overview of Aeroflot’s functioning or have a realistic idea of its economic status.

To understand Aeroflot, it is important to appreciate that the needs of the state were paramount, and aviation was vital to the state’s survival. In this, of course, Aeroflot was not alone, since in the West too, governments played a key role in the development of civil aviation. Aeroflot, however, represented an extreme case of this trend.

Soviet policy was geared to rapid industrial development in conjunction with shortages of capital. Because transport generally involved high infrastructure costs, policy involved squeezing the maximum output from minimum inputs. This was also true of Aeroflot. Especially after World War II, domestic travel by air was encouraged in preference to rail and road. Yet this did not mean that Aeroflot had unlimited resources. It too was squeezed with high load factors of some 80 percent for freight and 75 percent for passengers, in addition to a “mottled pattern” of technology in the sense that while modern planes were used on the main services, smaller feeder services had to put up with older planes than similar services in the West. Domestic services in planes were also on a no-frills basis, with the late development of seat belts, and refreshments often limited to salted water in well-used plastic beakers. Ground services were also underdeveloped with low levels of mechanization. This excited much negative comment from foreigners, and after 1985 it became apparent that many Soviet citizens were also dissatisfied. However, this pattern made considerable sense given the state’s objectives. Because the overall level of the Soviet economy was low, it was inevitable that the attempt to develop a national airline on the scale of Aeroflot would mean that considerable quality sacrifices would have to be made. In particular, this meant that on Aeroflot’s international services, where it was competing with Western airlines, it had to offer comparable levels of service.

KEY DATES

1923:: Dobrolet is launched as Soviet Union’s original airline.
1932:: Aeroflot assumes control of all civil aviation within the U.S.S.R.
1937:: Aeroflot takes over international flights after German-Soviet joint venture Derulfut expires.
1964:: Separate division is established for international flights.
1990:: Aeroflot carries 140 million passengers on a fleet of more than 2,500 aircraft.
1992:: Company is reorganized as Aeroflot—Russian International Airlines following breakup of Soviet Union.
1998:: Russian currency crisis forces a temporary scaling back of routes.
2000:: Company name is shortened to Aeroflot -Russian Airlines JSC, reflecting growing domestic business.
2006:: Revenues approach $3 billion.

The strategic role given to Aeroflot in transport was informed by more than solely economic considerations. One was geography. It was inevitable that in the U.S.S. R., the largest country in the world, air travel would play a decisive role in linking population centers separated by distance, inhospitable terrain, and climate. Beyond this, Aeroflot was also heavily influenced by the state’s defense priorities. In the early 1930s civil and military planes were broadly interchangeable, but even when specialist air forces developed, civilian airlines were included in military planning for troop movements, and Aeroflot was no exception. Civilian pilots and many air crews were always considered part of the military reserve. The importance to the state of these aspects of Aeroflot’s role was reflected in the presence of military figures in its top management.

Another feature of Aeroflot’s development was its service to four political objectives of the Soviet state. One was the conscious use of Aeroflot’s successes to boost the prestige of the Soviet state with its own people. A second, more specific political function was the role given to Aeroflot in transporting the “matrices” of central newspapers, such as Pravda, from Moscow on a daily basis so that they could be published on the same day throughout the U.S.S.R. A third political role involved direct agitation in the 1930s. For a period Aeroflot had a fleet of airplanes which carried propagandists and experts across the country. At the center was the biggest plane in the world at the time, the Maxim Gorky, in the words of Mikhail Kolstov, “a steel-engined stormbird, a winged agitator, which will bring culture, knowledge, light and political learning to the most distant parts of the country.” Finally, Aeroflot played an important role in enabling the KGB and its predecessors to keep close control of their own empire and the country at large.

Political imperatives played a comparable role in Aeroflot’s development as an international carrier. Soviet leaders such as Nikita Khrushchev attached great importance to carrying the national flag abroad. They felt personally humiliated when the planes they landed in appeared inferior to their Western counterparts. By the same token, triumphs such as Khrushchev’s nonstop flight to Washington in an Aeroflot Tu-114, and the subsequent embarrassment of the Americans in not having a large enough moving stairway to fit it, were widely appreciated.

These competitive international political pressures also affected Aeroflot’s technical choices. In the 1930s the general world trend to build larger planes coincided with what was called “gigantomania” in the U.S.S.R.: the idea that “biggest is best.” The huge Maxim Gorky propaganda plane was seen as an early triumph. After the war the drive was to develop jet planes, and the widespread early use of the Tu-104 jet on passenger services was seen as a similar triumph. Such a politico-technological drive, however, did not necessarily serve Aeroflot well. In the 1960s the pressure was on to build a supersonic airliner to match the Concorde. Unfortunately this made little economic sense, for this project meant that resources had to be taken away from other areas. Aeroflot suffered increasingly in the late 1970s and 1980s from its lack of large capacity transport planes of the Jumbo, airbus types. Indeed, its problems here may well have been one of the many signals received by the Soviet leadership at this time which made them realize that they were beginning to fall behind the West.

Political considerations also influenced Aeroflot’s international route development. The latter was expected to help give the Soviet bloc an appearance of unity by its route planning and its long distance flights to Beijing (before the Sino-Soviet split) and to Havana from the 1960s. Moreover, Aeroflot was “a Soviet ambassador” to the Third World as Moscow attempted to compete with Western interests there.

AEROFLOT UNDER GORBACHEV

It was inevitable that Aeroflot would be heavily affected by the political and economic turmoil in the U.S.S.R. after 1985. At first glasnost and perestroika seemed beneficial. As Aeroflot became subject to searching criticism, information about its safety record emerged and passengers became more vocal about poor service and lack of reliability, even to the extent of staging sit-ins on heavily delayed planes. The management of Aeroflot initially appeared to assume that the reorganization of the Soviet economy would be to their advantage, ridding them of excessive state control and allowing them to develop joint ventures with Western airlines such as Aer Lingus and Lufthansa. They did not appreciate the extent to which Aeroflot’s own accounting had obscured the levels of state subsidy, nor did they anticipate the increasing dislocation that would occur in the economy after 1989, plunging internal flights into greater chaos.

Internal organizational change at this time emphasized the increasing autonomy of Aeroflot’s territorial divisions, especially in the republics. The fallout from the failed August 1991 political coup in Moscow, however, took this process even further. In the first instance the breakup of the U.S.S.R. pushed the new states to begin to try to divide up Aeroflot. The speeding up of economic reform also created serious disturbances in the Aeroflot organization. Effective management buyouts or privatization of parts of the organization took place. These moves tentatively began a process pushing post-Soviet aviation in the successor states toward a pattern more typical of the West, with separate companies providing different parts of the total provision of air services. This transition, however, was made more difficult by the removal of some subsidies which forced Aeroflot away from its lower fares policy, thus creating further economic difficulties.

Far from being a flagship, Aeroflot began to look like a white elephant for the new states, with an aging fleet and no obvious source for the massive new investment needed to renovate the civilian air structure as a whole. However, throughout the world, governments continued to give direct and indirect support to airlines, and the successor states in the former U.S.S.R. appeared no less anxious to ensure that their “bit” of Aeroflot did not go under.

THE NEW AEROFLOT

In 1989, Aeroflot reported RUB 1.19 billion in revenues.Air Transport World reported that before the Soviet breakup, Aeroflot had 2,500 jetliners, even more turboprops, an armada of 9,000 helicopters and smaller planes, and employed half a million people. By 1992, following the breakup of the U.S.S.R., about 70 airlines were flying in the Commonwealth of Independent States, nearly half of them former divisions of Aeroflot.

After flying under the name “PKO Aeroflot, Soviet Airlines” briefly during the summer of 1992, Aeroflot became known as “Aeroflot—Russian International Airlines” (ARIA). It was still the 25th largest carrier in the world, with 20,500 employees and 104 passenger aircraft. Tellingly, Russian International Airlines made its first flight on leased Airbus A310s. The carrier hoped to meet Western standards of service; some personnel were trained by Lufthansa.

In order to improve decision-making flexibility, Aeroflot established three separate subsidiaries, divided by the type of aircraft operated: Golden Star (Tu-154), Moscow Airways (Il-62), and Russky Vityaz (Il-76 and Tu-154); the Airbuses were operated by a separate division.

In 1993, ARIA reported income of RUB 900 billion, much of it in hard currency. Traffic for the year was up 18 percent at ARIA and the 30 other airlines carrying Aeroflot markings, according to Aviation Week & Space Technology. ARIA worked with British Airways to create a new airline to exploit new routes from Europe to the Orient. Air Russia planned to fly Boeing 767s from London, Paris, and Rome to Tokyo via Moscow. Aeroflot also entered into a U.S.-based cargo joint venture, North American Aeroflot.

VIOLENT CRASH IN 1994

Whatever confidence Aeroflot’s new partners were placing in it must have been severely tested by the bizarre and tragic events of March 22, 1994. An Aeroflot pilot on the “elite” Airbus A310 service between Moscow and Hong Kong reportedly allowed his teenage son to attempt to fly the airplane. Instead of taking over the controls immediately when the plane began to descend, the pilot coached the boy in how to recover the aircraft. The resulting crash over Siberia killed 75 people.

While pilots were mishandling the planes, it appeared managers were mishandling the money. In October 1995, Marshal Evgeni Shaposhnikov was appointed general director of 51 percent state-owned ARIA (it had became a joint stock company on June 21, 1994) in response to criticism of the carrier’s business practices. Although Shaposhnikov was a military man, his forward-thinking Western-styled business ideas ruffled many feathers in the Russian aviation community. ARIA’s revenues were at RUB 4.67 billion in 1995, and employment had been pared to about 15,000. Shaposhnikov was replaced in March 1997 by Valery Okulov, Boris Yeltsin’s son-in-law.

Under Okulov, the airline sought to enhance its fleet. With the help of a loan from a New York finance group, ARIA bought two new Boeing 777s for its Los Angeles–Moscow service in 1998. Also during this time, the Export-Import Bank of the United States (Exim-bank) backed another purchase of ten Boeing 737s and committed to finance $1 billion worth of Pratt & Whitney engines and equipment for use in Ilyushin jets to be flown by Aeroflot.

Aeroflot reportedly lost $93 million in 1997 and had an airliner briefly impounded by Canadian authorities over a $6 million debt to a hotel company. With financial challenges and doubts about its efficiency and safety at the forefront as it headed into a new century, Aeroflot occupied a unique and perhaps tenuous place among world airlines, a place, however, to which it seemed accustomed throughout its history.

Challenges ensued in the late 1990s, as Russia’s prosecutor general began investigating Aeroflot for currency law violations. Aeroflot was connected to the byzantine financial network of Russian tycoon Boris Berezovsky. A vocal critic to Vladimir Putin, he fled to the United Kingdom; he was tried in absentia for corruption in 2007.

NAVIGATING CRISES

Aeroflot also had to contend with a severe currency crisis in Russia in mid-1998. The airline’s international routes brought in hard currency, helping to mitigate its exposure to the drop in the ruble. Increasing lease payments for new Western aircraft were also tied to the dollar, however.

At the same time, passenger count and cargo volume plummeted due to the effect of the crisis on the Russian economy, leading Aeroflot to scale back its route network by a quarter. The airline ended up losing more than $150 million in 1998, according to international accounting standards. The loss was narrowed to $34 million the next year.

Though Aeroflot was the largest of the hundreds of airlines spawned by the breakup of the original Aeroflot, its market share on flights within Russia was relatively small: just 8 percent in 1999. A new emphasis on domestic services was a reason the name was shortened to Aeroflot - Russian Airlines JSC, omitting the word “International.” A couple of years later, the airline underwent a rebranding program, although it retained the traditional hammer-and-sickle logo.

Aeroflot was carrying some five million people a year by 2000. Total revenues exceeded $1.5 billion in 2001 and Aeroflot more than doubled its net income to $20 million. Net profit reached a record $89 million in 2002; revenues rose slightly while costs fell. Passenger count slipped 10 percent in what was a difficult year for the aviation industry at large, but soon rebounded.

RESTORING THE FLEET

By this time, Aeroflot’s fleet of roughly 100 aircraft included 27 western-built planes. These were favored due to their higher efficiency and lower operating costs over the long run. They were also perceived to be safer by international travelers. Aeroflot had added a pair of state-of-the-art, extended range Boeing 777s to the fleet a few years earlier, but replaced them with smaller planes to allow more frequent service. Airbus and Boeing experienced a falloff in orders following the September 11, 2001, terrorist attacks on the United States, and subsequently dropped their prices to levels closer to that of comparable Russian equipment. However, Moscow pressured Aeroflot to buy Russian aircraft by placing hefty tariffs on further imported aircraft. In some cases, Aeroflot made use of a hybrid solution: Russian airframes fitted with American engines and avionics.

Aeroflot remained one of the most important customers for Russia’s civil aerospace industry. It acquired a half-dozen Ilyushin Il-90 airliners in 2005, and also ordered 30 regional jets then in development by Sukhoi Civil Aircraft Co.

SEEKING GLOBAL REACH

Though the gigantomania of the Soviet days was long gone, Aeroflot remained a quite large airline. By 2005 revenues were more than $2.5 billion as net income continued a steady increase to $190 million. There were about 18,500 employees. Earnings reached $258 million in 2006 as revenues approached $3 billion.

After a few years of searching for a global airline alliance, Aeroflot committed to SkyTeam in 2004. It became a member after another two years of preparations focused on raising service levels to international standards; in addition, it had greatly improved its safety record over the previous decade. SkyTeam offered Aeroflot seamless connections with nine other global airlines including Air France/KLM and Delta Air Lines. Among Russian airlines, Aeroflot was by far the most coveted as a partner due to its domination of international traffic and leading brand name, observed Aviation Week & Space Technology.

Aeroflot attempted to extend its influence in Europe by making a bid for a stake in Alitalia SpA, Italy’s troubled national airline, in 2007. However, it ultimately abandoned the bid for Alitalia, whose sale was saddled with a number of conditions by the Italian government.

Mike Haynes
Updated, Frederick C. Ingram