State-run Aeroflot will absorb the regional aviation assets controlled by Russian Technologies to help make the country's flag carrier more competitive on the global market, Prime Minister Vladimir Putin said Tuesday.
The decision essentially buries a two-year effort by Russian Technologies chief Sergei Chemezov to merge the state corporation's regional carriers with Atlant-Soyuz, an airline controlled by the Moscow city government. Aeroflot opposed the creation of a new competitor, to be called Rosavia, and many analysts questioned the logic of having competing state-run airlines.
Russian Technologies took over the carriers that formed the AiRUnion alliance in September 2008 after soaring fuel prices left the alliance members heavily in debt. Dozens of flights were interrupted after the companies were grounded for unpaid fuel.
"We need to take all the necessary steps for reliable, from the point of view of serving passengers' interests, self-sufficient, in the economic sense, and internationally competitive carriers to appear," Putin said at a meeting with Transportation Minister Igor Levitin, who proposed the merger.
Under the plan, the state will transform three airlines — Rossia, Kavminvodyavia and Orenburgskiye Avialinii — from federal state unitary enterprises into joint stock companies so that they can be merged with Aeroflot.
Levitin said the process would be completed this year.
Rossia, the largest airline involved in the merger, will be registered in St. Petersburg with the help of Governor Valentina Matviyenko, Levitin said. The airline operates planes that carry senior government and Kremlin officials.
Once all of the airlines have become joint stock companies, Aeroflot and Russian Technologies will jointly manage the group and eventually they will be merged with Aeroflot, Levitin said, without elaborating on a time frame.
Russian Technologies' three other aviation assets — Vladivostokavia, Saratovskiye Avialinii and Sakhalinskiye Aviatrassy — are already joint stock companies.
Putin said he was "ready to agree," but wanted to know whether the deal would require anti-monopoly approval. Levitin said Aeroflot's domestic air traffic would increase from the current 15 percent to between 30 percent and 35 percent after the full merger.
"It's compatible with the anti-monopoly regulations, and we can think along with the Federal Anti-Monopoly Service about a permanent way to oversee these regulations in the future," Levitin said, according to a transcript on the government web site.
Aeroflot's shares closed up 0.9 percent on the MICEX, slightly lagging the broader index's gain of 1.4 percent.
The announcement puts an end to Chemezov's ambitions to create Rosavia, which had already become an uphill battle in the past half year.
The Transportation Ministry said in early January that it was reconsidering the plan to create Rosavia altogether, and both Russian Technologies and Moscow had suggested that they had cold feet about the merger because of the airlines' heavy debt.
But on Jan. 13 the Moscow government said it would take full control of Atlant-Soyuz after clearing the airline's debt and that it was planning to sign a $1.2 billion contract to purchase planes in the first three months of 2010. The move was seen as a renewed sign of interest from Mayor Yury Luzhkov after Chemezov said Moscow must improve Atlant-Soyuz's financial health to receive a 49 percent stake in Rosavia.
A source close to Rosavia told Interfax on Tuesday that the airline would likely cancel a tender to buy up to 65 planes. In August, Chemezov invited Airbus, Boeing and Irkut to participate in a $2.5 billion tender for 50 narrow-aisle jets with an option of purchasing 15 more.
Analysts saw at least two obvious benefits from the merger for Aeroflot.
"The first benefit is the increase of Aeroflot's presence in Siberia and the Far East, since the company will be able to use the air base of Vladivostokavia," said Andrei Rozhkov, a transportation analyst at Metropol. "The second is the increase of Aeroflot's passenger load factor, since the increase of connection flights on the company's international routes will result in a larger passenger turnover," he said.
Aeroflot's current passenger load — a measure of capacity utilization — was 68 percent to 69 percent, while that of European airlines amounted to 82 percent to 85 percent, Rozhkov said.
The merger will not, however, mean a step back toward a Soviet monopoly carrier.
"The number of airlines in the world is decreasing thanks to acquisitions of companies by others. Aeroflot is moving in this direction and as a result we'll see a global carrier in Russia, which will compete on the global market in five to seven years," Rozhkov said.
Aeroflot carried 45 million passengers last year, a decrease by 9.8 percent from 2008, Levitin said.
Aeroflot plans to analyze the financial performance of the Russian Technologies assets as soon as possible and to create a plan for their integration, spokesman Oleg Mikhailov told reporters.
Russian Technologies and the Transportation Ministry declined comment.
The merger is the latest shakeup in the volatile Russian air industry, which saw Aeroflot's largest private shareholder, billionaire Alexander Lebedev, agree last month to sell back to the state a 25.8 percent stake at a considerable discount. He has been a frequent critic of the airline's management for not controlling costs.
Citing sources close to the airline, Vedomosti reported last week that Aeroflot might offer 10 percent of its shares in exchange for the assets controlled by Russian Technologies and 11 percent to 12 percent to the Sheremetyevo Airport in exchange for its shares.
But the state corporation opposed the exchange, and a final decision was left to Putin, the sources said.