Flot in My Backyard: Rival airlines beware: Russia’s Aeroflot is hurting now, but its expansion potential shines

The days when Aeroflot was the world’s largest airline—as the flag carrier of the Soviet Union—are a decades-old memory. But plenty of travelers, including a fair number from outside Russia, might be surprised to learn that’s no longer the case.

When Russia’s largest airline reports its Q2 earnings in the coming days, it’s hard to say which force will glow brighter: how poorly it will have done relative to its recent history (because of all the woes that have befallen its home market) or how well it will have done relative to its local rivals, despite all the challenges.

Start with the negatives, which are indisputable and numerous: Sure, Aeroflot gets a massive windfall from its government, in the form of overflight fees which pass straight from the rest of the world’s airlines into its coffers (revenue any serious analysis of its true performance as an airline must exclude). And sure, Aeroflot is its government’s favorite airline—and as such, it can occasionally help rewrite the rules to its benefit when it wants to acquire a rival or start a low-cost carrier. But for every rule Aeroflot manages to bend in its favor, countless others stymie its development. A respectably managed airline, which Aeroflot is, would almost certainly do better overall with less onerous regulation, even if that also meant less protection. Worse yet, there’s talk of stripping Aeroflot of the overflight fees. The worst-case scenario of all could be if that happens without any accompanying liberalization.

In the meantime, Aeroflot, like its rivals, must contend with something else tied to government policy: economic sanctions that have isolated the country just as (this part isn’t Russia’s fault) oil prices have collapsed. So, in turn, has the value of the ruble, making international travel unaffordable for many Russians. No wonder Aeroflot carried 5% fewer international passengers during the first six months of this year, a trend that—far from reversing itself—has only accelerated, with June alone down 13%. These figures include Aeroflot’s subsidiary airlines.

And oh, those subsidiary airlines…. Yes, Aeroflot got the consolidation it wanted. And at least it no longer has to compete against the airlines it now owns. But the price has been steep. Even in 2014, when things were better than they are today, none of Aeroflot’s five subsidiary airlines reported a net profit. Their results ranged from hopeful at Donavia, which focuses on domestic routes in Russia’s south and nearly broke even, to downright dreadful at the Moscow Domodedovo-based charter operator Orenair. St. Petersburg-based Rossiya and Aurora, in Russia’s Far East…

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