CIS

LOOKS

AHEAD

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AT A GLANCE

  • Higher commodity prices and gradual improvements in the labor market drive the region’s economic recovery;
  • Sustainable long-term growth will be met with disciplined capacity addition, as a way of not overwhelming the market with excess supply;
  • After an era of great Soviet platforms, oil price volatility and rising maintenance costs put pressure on results. Meaning, airlines will be more open for fleet renewal.

CIS ECONOMIC UPTURN

Economic recovery stays on track with projected GDP growth of around 2% over the coming years. Tailwinds come from higher commodity prices, an improving labor market, and stable inflation – reflected directly in the disposable income of local residents and their willingness to travel.

Aligned with this is the trend towars opening up to the rest of the world, as tourism becomes an important source of capital in the region. The 2018 World Cup boosted travel in Russia in the short term, but the entire CIS will benefit from the positive awareness created by the event.

The lifting of visa restrictions comes as an additional measure to boost tourism, followed by tax benefits. Countries in the central-Asian region will particularly benefit from the large wave of visitors from China and India, generating widespread ripples across the macro-economy.

TRAFFIC PERFORMANCE GETTING MATURE

Since economic downturn in 2015-2016, aviation in the CIS region seems to have worked a formidable turnaround. Last year the region’s airlines collectively enjoyed an almost 10% growth rate in RPK, carrying in excess of 130 million passengers.

CIS VS. WORLD
RPK GROWTH/GDP GROWTH

Source: IHS Markit, Embraer Analysis

This outcome is to be celebrated, but with caution, as it does not mean that carriers will be able to keep moving at this pace unconditionally. Analysis points to yet another meaningful record – seat capacity in the region hit nearly 13% growth in the same period, 3% above the traffi c growth rate. This, in contrast with the GDP growth level of around 2%, is a sign that the supply-demand scale may be tipping in unfavorably for airlines.

In the described scenario, sustainable long-term growth will be met through disciplined capacity addition, as a way of not overwhelming the market with excess supply. Robust pricing policies, the use of right-sized aircraft, and strategies based on a deep understanding of each airline’s market niche, will enable prominent airlines to advance in an increasingly competitive marketplace.

THE TIME FOR FLEET RENEWAL

The Russian manufacturing industry played an important role in historical aircraft development, and Soviet-era models had a long-lasting run in the region. However, many of these types are coming to the end of their useful life: TU-154, AN-148, TU-204 – all had their last commercial flights in 2018, and other models such as the YAK-42 should follow suit soon.

CIS FLEET AGE PROFILE

Source: Flight Global, Dec18

With oil prices on the rise and increasing maintenance costs for legacy aircraft, the moment is ripe to consider substituting such models for new technologies, that are more economical to operate. Although the Russian government has offered political incentives and subsidies to bolster the position of locally manufactured aircraft, finding operators for these native aircraft outside of state-owned companies has been a challenge.

Nearly 400 aircraft in the up to 150-seat segment – between jets and turboprops – will require upgrading in the short to mid-term. While the CIS airline industry as a whole strives to meet international competitiveness standards, western technology will become more and more appealing to operators, as well as an important tool to achieve this goal.

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