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Cablegate: Airlines in Russian Far East Skidding to a Stop

VZCZCXRO2211
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHVKA #0106 2700659
ZNR UUUUU ZZH ZUI RUEWMCE1207 2700655
R 260659Z SEP 08 ZDK
FM AMCONSUL VLADIVOSTOK
TO RUEHC/SECSTATE WASHDC
INFO EUROPEAN POLITICAL COLLECTIVE
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION COLLECTIVE
RUEHVK/AMCONSUL VLADIVOSTOK

UNCLAS SECTION 01 OF 02 VLADIVOSTOK 000106

SIPDIS

E.O. 12958: N/A
TAGS: EAIR PGOV ECON RS
SUBJECT: AIRLINES IN RUSSIAN FAR EAST SKIDDING TO A STOP

VLADIVOSTO 00000106 001.3 OF 002


1. Summary. The airline industry in the Far East continues its
downward trajectory. Dalavia has become the latest in a series
of bankruptcies in the industry. Vladivostok Avia remains
relatively strong, but may become a tempting takeover target.
Ticket prices will remain prohibitively expensive as competition

PAGE 02 RUEHVKA0106 UNCLAS
dwindles and fuel prices remain high.

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Dalavia in Trouble
------------------

2. Khabarovsk-based air carrier Dalavia is the latest airline
serving the Russian Far East to file for bankruptcy, following
Magadan Air, Krasnoyarsk Air, and Domodedovo. Things came to a
head for long-troubled Dalavia when airports in several cities,
including in its home base Khabarovsk, began refusing to service
its fleet after the company defaulted on its
multi-million-dollar fuel debt to the airports. As a result, in
September the company was forced to cancel all of its domestic
and international flights, and has ceased selling tickets. In
September, Khabarovsk airport refused to grant landing rights to
in-flight Dalavia planes which then had to be diverted to other
airports.

3. Dalavia General Director Valeriy Chichilimov addressed the

PAGE 03 RUEHVKA0106 UNCLAS
media on Sep 22, blaming the company's troubles on its aging
fleet, malfunctioning engines on its new Tupolev-214s,
"unprecedented fuel prices," and competitors who "operate
fuel-efficient US- and Western-made aircraft." Chichilimov also
confirmed that authorities have placed liens on the company's
accounts to pay fuel debts to Khabarovsk airport. Not
surprisingly, the company is also facing legal problems. The
regional Prosecutors Office launched a criminal investigation
against Dalavia management on suspicion of "illegal
entrepreneurship," misuse of funds, and illegal withholding of
wages. Dalavia is fully government-owned and operated flights
domestically and to Japan, South Korea, and China. Its fleet of
27 Tupolevs and Antonovs carried 694,000 passengers in 2007.

-----------------
In Steps Vladavia
-----------------

4. In early September, the government announced plans to merge
Dalavia into Vladivostok-based Vladavia, which has begun

PAGE 04 RUEHVKA0106 UNCLAS
carrying ticketed Dalavia passengers and will pick up all of
DalAvia's international and domestic routes. As part of the
plan, Vladavia will have access to Dalavia funds remaining from
past ticket sales. Vladavia Deputy Director Igor Bagelfer will
reportedly take over as Dalavia's General Director. Management
at Vladavia has so far refrained from commenting on the merger,
saying that they "have not received any official documentation
regarding the matter." Consulate FSN staff was unable to
illicit comment from our contact at Dalavia.

5. Vladavia operates 70 flights a week to domestic and Pacific
Rim countries and is considered the healthiest of the Russian
Far East's regional carriers. It is 51 percent
government-owned. The company carried 776,000 passengers in
2007, and began seasonal service from Kamchatka to Anchorage,
Alaska, in July this year. It has 30 airplanes in its fleet,
including the new fuel-efficient long-range TU-204-300.

--------------------------------------------- ---
Past Maneuvering Did Little to Improve Situation

PAGE 05 RUEHVKA0106 UNCLAS
--------------------------------------------- ---

6. In 2006 Aeroflot had its own plans for the Russian Far East,
proposing a consolidation of all Far East carriers into one
regional airline to be called AEROFLOT-VOSTOK, with Aeroflot
holding 70 percent of the new airline's shares. The move had
been approved by federal regulators, and Dalavia agreed to the
plan. Vladavia held out against the proposal, and Vladavia's
main shareholder, the federal government, let the plan lapse.
Then-President Putin chose not to issue a presidential decree
that could have forced the merger.

7. Despite heavy government involvement and even ownership,
Vladavia and Dalavia had been subject to government
intervention. In an effort to lower prices and cut monopoly
powers of airlines owning their own hub airports, the federal
government forced Dalavia in 2007 and Vladavia in early 2008 to
spin off their airport operations from their passenger service
companies. The plan did not result in more competition and
lower prices as hoped -- competition did not increase in

PAGE 06 RUEHVKA0106 UNCLAS
Khabarovsk, and Vladavia still charges more for its two-hour
hops to Seoul and Niigata than U.S. carriers charge for most
trans-Pacific flights.

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Comment
-------

VLADIVOSTO 00000106 002.2 OF 002

8. If the Kremlin were to again get involved in the
deteriorating situation in the Russian Far East's aviation
industry, it would likely not be to prop up ailing companies,
but to take over the most healthy. If Vladavia were to remain
solvent, it could end up as a target for Rostehnologii, the
conglomerate of over 200 firms led by close Putin associate
Sergey Chemezov. The holding company has reportedly been
looking for entry into the airline industry. Whatever the fate
of Vladavia, one of the main problems hindering development in
the East is the high cost of transportation, and with the string
of recent airline bankruptcies, the situation will not improve
soon.
ARMBRUSTER

© Scoop Media

 
 
 
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