Aeroflot and Alfa Group will develop the Sheremetyevo Airport in Moscow together. This is the only way to turn the airport into a world-class hub.

Alexei Khazbiev

In early June, Prime Minister Mikhail Fradkov gave an address at a closed meeting, in which he discussed the situation at Sheremetyevo International Airport. Back in January, Alfa-Sheremetyevo won the contract to manage the airport, while Aeroflot, represented by its subsidiary Inter-Terminal, ended up on the losing side. At the government meeting, however, officials decided to include Aeroflot in the development planning process. In effect this means that the results of the tender have been slightly revised. Why?
Alfa-Sheremetyevo could not get to work managing the airport. Right after the tender’s results were announced, Aeroflot General Director, Valery Okulov, stated that the company intended to transfer all of its flights to the Domodedovo and Vnukovo Airports immediately. Had this happened, the airport would have lost at least three fourths of its income in one fell swoop. Understandably, neither the government nor Alfa were happy with this turn of events. For this reason, the state did not confirm the tender results. Mikhail Kasyanov put off signing the directive in various ways and his replacement Mikhail Fradkov announced that he would only sign the document after Alfa-Sheremetyevo and Aeroflot created a plan to set up a unified management company. Commenting on the prime minister’s decision, Igor Levitin, Minister of Transportation, stated directly that “no one doubts the legitimacy of the tender and of Alfa’s victory, but if Aeroflot leaves Sheremetyevo, the project to develop the airport will be pointless.” This means the victors have to accept the losers as partners. The decision essentially contradicts the logic of tenders, but it is economically justified and sensible, if only because now the standoff between Aeroflot and Alfa will move to the technical analysis of the companies’ earnings from developing Sheremetyevo.

Two approaches

Aeroflot has been pushing for the last three years to build its own terminal at Sheremetyevo and move all its flights there. To accomplish this, the company has rented 49 hectares from the local administration in Khimki and goes to court almost yearly to defend its right to rent. According to Mikhail Poluboyarinov, Deputy General Director of Finance and Planning, Terminal 3 at Sheremetyevo would cost around $400 million. The blueprints were drawn up back in 2001 and that same year, the company laid the cornerstone for the new terminal. However, as Sheremetyevo airport management changed constantly (almost annually over the last five years), that was as far as the project went. Now Aeroflot hopes in the next month to confirm construction financing and start gathering funds. According to Okulov, Terminal 3 will not require any strategic decisions on the part of the government. The only thing that needs to be worked out is how to join the new terminal with the existing airport and connect it to roads and runways.
Alfa’s plans do not include any third terminal. Alfa-Sheremetyevo General Director Igor Baranovsky believes that first it is more important to improve existing terminals. By putting an end to illegal leases, the airport’s income will increase by tens of millions of dollars a year. According to Baranovsky’s estimates, Sheremetyevo requires $1.5-2 billion in investment to become a world-class airport. The management contract, however, stipulates that the company will administer the airport for only three years. Of course, in that short period of time, it will be impossible to renovate the airport and no one, not even Alfa, is willing to risk billions in investments without a guarantee of return.

A hub for Moscow

Okulov’s strategic goal is to turn Aeroflot into an airline as powerful as Lufthansa or Emirates. This goal is based on the principle of rapid development of transit flights through a hub airport. Emirates pursued this strategy to become the biggest airline in the Middle East. Thanks to its hub in Dubai, Emirates’ business doubles every three years. By 2012, the number of passengers flying on the airline will grow from 8.5 to 30 million, and the number of passengers passing through Dubai Airport will grow from 22 to 70 million. Lufthansa is developing in similar way. After setting up two hubs in Munich and Frankfurt, the company now serves more than 40 million passengers a year. The traffic through Frankfurt has increased in the last ten years to 50 million people, while the city only has a population of 660,000,
This kind of passenger traffic brings in billions of dollars a year. How much could Moscow hope to make if it opened its own European-style hub? The maximum additional passenger traffic in the near future could mean 10 million people a year. This would bring a minimum of a billion dollars, something worth fighting for.
For an existing airport to become a hub, it needs a wide network of routes serviced by a main airline and efficient airport organization allowing layovers to be cut down to 30 minutes. In that time, a passenger transfers from one flight to another without leaving the airport while the airport’s baggage service transfers luggage. At present, none of Moscow’s airports are ready to become hubs. Domodedovo does not have a main airline with a large network of flights, and the equipment at all the other airports leaves much to be desired.

Here’s to competition

Sheremetyevo’s only competitive advantage is that Aeroflot is based there. But Sheremetyevo does not allow the company to meet its goals. As the existing terminals are separated by a runway, transferring from one flight to another currently takes an average of two hours. This is inconvenient and passengers prefer to fly to the US or Europe via Frankfurt or London, where transfers are much faster. Okulov plainly states that without a new Terminal 3 at Sheremetyevo, Aeroflot does not have a future. The airline has practically reached the limit of its growth. Passengers are increasing by an average of 9-10% a year, while if the company had its own terminal this figure would equal at least 20% a year. Even this limited growth, Aeroflot is sure, will disappear in two or three years. A decline in growth is disastrous for an airline. According to Okulov, “we are bound hand and foot to Sheremetyevo, and Aeroflot’s share of the Russian domestic market is barely over 12%.” This is the lowest share of all the world’s national airlines. For example, Lufthansa’s share of the German market is 63% and British Air’s share of the UK market is 72%.
In contrast to Sheremetyevo, Domodedovo is managed by a centralized private company aiming to provide European-style service. At present, Domodedovo meets world standards and is even considered one of the best airports in Europe. In addition, it is possible a major airline could appear at Domodedovo. Siberia Airlines is hoping to play this role and it beat Aeroflot last year in terms of the number of passengers on domestic flights. However, at the moment its fleet of planes is not the best and it has few international routes in the works. Moreover, even though Domodedovo could handle substantial passenger growth, its runway is overcrowded. In order to increase the airport’s capacity, new runways need to be built, which cost more than airport terminals and take longer to build. Sheremetyevo, however, already has two runways and its development depends only on construction of a new terminal.
Thus, Domodedovo, with its current growth rates, can only hope to compete for the prize of hub status several years hence (as the airport itself expands and major airlines develop). To speed up the advent of a Moscow hub, it would be enough to stabilize the situation in Sheremetyevo and allow the airport to develop.

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