St. Petersburg University
Graduate School of Management
Master in International Business Program
Сountry-specific factors influencing low-cost carrier market in Russia
Master’s Thesis by the 2nd year student
Concentration — International business
Diakov Vasilii
Research advisor:
Associate professor,
Maria M. Smirnova
St. Petersburg
2016
STATEMENT ABOUT THE INDEPENDENT CHARACTER OF
THE MASTER THESIS
I, Diakov Vasilii, second year master student, Master in Corporate Finance program
«Management», state that my master thesis on the topic «Country-specific factors influencing lowcost carrier market in Russia», which is presented to the Master Office to be submitted to the
Official Defense Committee for the public defense, does not contain any elements of plagiarism.
All direct borrowings from printed and electronic sources, as well as from master theses,
PhD and doctorate theses which were defended earlier, have appropriate references.
I am aware that according to paragraph 9.7.1. of Guidelines for instruction in major
curriculum programs of higher and secondary professional education at St.Petersburg University
«A master thesis must be completed by each of the degree candidates individually under the
supervision of his or her advisor», and according to paragraph 51 of Charter of the Federal State
Institution of Higher Professional Education Saint-Petersburg State University «a student can be
expelled from St.Petersburg University for submitting of the course or graduation qualification
work developed by other person (persons)».
________________________________________________ (Student’s signature)
__________________________26/05/16_______________ (Date)
1
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПОЛНЕНИЯ
ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ РАБОТЫ
Я,
Дьяков
Василий,
студент
второго
курса
магистратуры
направления
«Менеджмент», заявляю, что в моей магистерской диссертации на тему «Специфические
для страны факторы, влияющие на рынок бюджетных авиалиний в России»,
представленной в службу обеспечения программ магистратуры для последующей передачи
в государственную аттестационную комиссию для публичной защиты, не содержится
элементов плагиата.
Все прямые заимствования из печатных и электронных источников, а также из
защищенных ранее выпускных квалификационных работ, кандидатских и докторских
диссертаций имеют соответствующие ссылки.
Мне известно содержание п. 9.7.1 Правил обучения по основным образовательным
программам высшего и среднего профессионального образования в СПбГУ о том, что «ВКР
выполняется индивидуально каждым студентом под руководством назначенного ему научного
руководителя», и п. 51 Устава федерального государственного бюджетного образовательного
учреждения высшего профессионального образования «Санкт-Петербургский государственный
университет» о том, что «студент подлежит отчислению из Санкт-Петербургского университета за
представление курсовой или выпускной квалификационной работы, выполненной другим лицом
(лицами)».
_______________________________________________ (Подпись студента)
_________________________26/05/16_______________ (Дата)
2
Abstract
Master Student’s Name
Master Thesis Title
Vasilii Diakov
Сountry-specific factors influencing low-cost
carrier market in Russia
Graduate School of Management, SaintPetersburg University
International Business
2016
Maria M. Smirnova
The main goal of this thesis is to identify the
country-specific factors influencing low-cost
carrier market in Russia in order to develop
managerial implication for new entrants of the
market. In order to do so, this thesis
investigated previous works concerning
classical low-cost carrier model and checked
revealed possible factors through analysis of
activity of participants of the Russian market.
Data was collected through several interviews
with experts of the industry and secondary
research. Single case study analysis suited well
for the given research and helped to answer
stated research questions. The results of the
research can be useful in managerial
implication for new entrants.
Low-cost airlines, Country-specific factors,
Russia, Industry development, Business
improvement, Low-fare, Airports
Faculty
Main field of study
Year
Academic Advisor’s Name
Description of the goal
Key words
3
Аннотация
Автор
Название магистерской диссертации
Дьяков Василий
Специфические для страны факторы,
влиящие на рфнок бюджетных авиалиний
в России
Высшая школа менеджмента, СанктПетербургский государственный
университет
Международный Бизнес
2016
Смирнова Мария Михайловна
Основная цель настоящей дипломной
работы – определение специфических для
страны факторов, влияющих на рынок
бюджетных
авиалиний
в
России,
необходимых
для
подготовки
практических рекомендаций для компаний,
желающий выйти на данный рынок. Для
этого данная работа обращается к
существующим работам, посвященным
классической бизнес-модели бюджетных
авиалиний и проверяет выявленные
потенциальные факторы через анализ
деятельности участников данного рынка.
Данные для работы были собраны в ходе
нескольких интервью с экспертами
индустрии и вторичных исследований.
Анализ единого кейса хорошо подходит
для данного исследования и помогает
ответить на все поставленные в работе
вопросы
исследования.
Результаты
исследования могут быть полезными для
практического применения компаниям,
желающим выйти на данный рынок.
Бюджетные авиалинии, Специфические
для страны факторы, Россия, Развитие
индустрии, Развитие бизнеса, Низкие
тарифы, Аэропорты
Факультет
Направление подготовки
Год
Научный руководитель
Описание цели, задач и основных
результатов
Ключевые слова
4
Contents
Introduction .....................................................................................................................................6
Chapter 1. Literature review ............................................................................................................9
1.1 Low-cost concept ...................................................................................................................9
1.2 Low-cost carrier concept .....................................................................................................11
1.3 Principles of LCC. Internal factors. .....................................................................................13
1.4 External factors ....................................................................................................................18
1.5 Implications from the literature review ...............................................................................26
Chapter 2. Methods .......................................................................................................................28
2.1 The strategy, methods and instruments................................................................................28
2.2 Case study research ..............................................................................................................29
2.3 Research design ...................................................................................................................33
Chapter 3. Empirical research .......................................................................................................36
3.1 World Market overview .......................................................................................................36
3.2 Russian market overview .....................................................................................................40
3.3 Internal factors .....................................................................................................................50
3.4 Expert interviews .................................................................................................................61
3.5 Discussion ............................................................................................................................65
3.6 Managerial implication ........................................................................................................69
3.7 Suggestions for further research ..........................................................................................69
Conclusion .....................................................................................................................................71
Appendix 1 ....................................................................................................................................72
Appendix 2 ....................................................................................................................................73
Literature .......................................................................................................................................74
5
Introduction
Russian airline industry is going through hard times and it is not temporary phenomenon. In
comparison with developed countries, it looks quite weak and immature. It can be reflected in high
prices, weak infrastructure, small amount of flights and destinations, and many other issues. For
comparison, in US there were 10 times more passengers carried last year. Only one low-cost carrier
Ryanair carried almost the same amount of passengers as the whole industry in Russia. There are
many reasons for that, starting with weak competition and monopolistic essence of the industry
and ending with immature infrastructure.
Until the last year, there was an absence of low-carriers in Russian market, while in mature stable
markets low-cost carriers occupy large share of the market of air transportation. Despite low-cost
carriers are airlines that generally reduce fares with less comfort, some of them are really financial
successful. For example, Ryanair, showed more than $5 billion in revenues and $800 million in
profit last year and that is comparable or even higher that giants of the industry. In the world
ranking of the largest airlines by the number of passengers carried, there are three low-cost carriers:
Southwest Airlines, Ryanair, EasyJet. Another interesting point that even gigantic stable low-cost
carriers are continuing to grow significantly with the rate up to 15%, while traditional airlines’
average growth rates comprise around 3-4% annually. However, in Russia, this aviation business
model had not taken root until the last year. In Russia there were several efforts to launch low-cost
carriers. For instance, Sky Express in 2006, Avianova in 2009 or Dobrolyot in 2013. All these
companies had to stop their activity due to different reasons, such as financial problems, absence
of loyalty to such type of airlines among Russian customers or imposition of sanction against the
background of tough political situation over the past years, as it was in the case of Dobrolyot.
However, there is an intriguing example: the only company that position itself as low-cost carrier
in Russian market today, Pobeda. This company started its activity only a year ago in December
2014 but already demonstrated enormous growth and incredible success, reaching the fifth position
on Russian market by the number of passengers conveyed. Pobeda became profitable just in a year
of activity, exceeding all expectations. This example stands out against the background of the
Russian market and deserves to be examined in details.
Today Russian economy encounters hard times that were triggered by financial crisis in Russia in
2014-2015 and tough political situation. All these led to the fact that foreign companies started
abandon Russian market. Of course, these times are hard for Russian airline industry also due to
decreasing buying purchase power of the population. In the current situation, huge demand for
6
services of low-cost carriers may be emerged. In addition, the exit of foreign players provides
Russian companies with huge opportunities to occupy this niche. Moreover, recent months had
enormous effect on the world airline industry. Costs of aviation fuel constitute significant part of
total cost structure of a company in this business. The huge decrease of oil prices in 2014 and 2015
led to the fact that the last year the industry became profitable for the time over the long period. In
other words, there is a very actual topic in the current situation, which has been changing
dramatically over the last couple of years.
This paper is devoted to the examination of low-cost carrier market in Russia, reasons of its
inadequacy and understanding, why such attractive business does not flourish in Russia. Research
encompasses determination of the main country-specific factors affecting the market of LCC in
Russia, understanding of how they influence it, and suggestion of actions for new entrants in this
market.
Research gap is a research question or problem which has not been answered appropriately or at
all in a given field of study. Because of insufficient level of development of Russian low cost
carrier market, the amount of theoretical research on the topic is quite scarce. Low-cost carrier
market is described quite well in the world. However, it is noticeable that there is a lack of research
dedicated the market of low-cost carrier in Russia and factors influencing this market. Hence, there
is a research gap. In this paper it focuses on the description main country-specific factors
influencing low-cost carrier market in Russia.
At this point, it is possible to set three major research questions that will be investigated through
this paper:
What are the country-specific factors influencing low-cost carrier market in Russia?
How do defined country-specific factors influence the market?
How can new entrants benefit from defined country-specific factors in formulation of entry
strategy?
By answering these three questions, we can understand the reasons of the present situation and
what new entrants can undertake in order to enter and prosper in this market.
Primarily, during that research I will focus on case study research. In general, case studies are the
preferred strategy when "how" or "why" questions are being posed, when the investigator has little
control over events, and when the focus is on a contemporary phenomenon within some real-life
context (Yin 2013). This type of research is very useful in the current situation, where the market
7
is quite immature and there is only one company operating in Russian market. Addressing the
literature review, it is possible to emphasize common and crucial factors affecting this industry
worldwide. These factors encompass methods in operational activity of low-cost carriers, nature
of their assets, customer attitude, level and specifics of competition, macro environment and
intermediates. Some of them (primarily concerning internal environment) are going to be checked
through investigation and comparison activities of existing Russian LCCs and foreign LCC, while
the rest (mainly the external environment) are going to be checked using interviews and opinions
of experts found in public sources.
8
Chapter 1. Literature review
This chapter includes literature review related to the topic of the thesis. This part I started with the
highlighting of low cost concept, then moved to the concept of low-cost carriers, and finally I
observed the literature unveiled factors influencing the low-cost carrier market worldwide, both
internal and external.
This part helps us to familiarize with the concept of low-cost model and how it looks in low-cost
carrier industry. In order to answer stated research questions and identify country-specific factors
in Russia, the list of potential factors could be constructed for further research. The list is based on
the existing literature describing dependencies in the airline industry in other countries.
1.1 Low-cost concept
Low-cost business models share a strong coherence between the value proposition and the asset
bases, organizations, and brands that support them – and this coherence delivers high operational
efficiency. According to Porter, firms seeking cost leadership emphasize achieving low costs and
offering products at low prices to many buyers who are price sensitive (Porter 1980).
However, there are some popular misconceptions about low-cost business model. Changing
misconceptions about low-cost business models are:
Low cost is not low margin. It can be highly profitable.
Low cost is not low quality. It usually entails a narrower range.
Low cost is not cheap imitation. It is true innovation.
Low cost is not unbranded. It is frequently supported by potent brands. (Kachaner,
Lindgardt, and Michael 2011)
In classical sense, low-cost business model attributes strategy focused on margin improvement
with the effective usage of a company’s assets. Increased revenue and reduced costs are inherent
to this strategy. Effective utilization of assets means minimizing of working capital and
maximization on return on assets. As a rule, low-cost competitor can pursue several strategies
along various points of the value chain, and rarely focuses on just one area (Morehouse et al. 2008).
Although, low-cost companies are usually perceived as innocuous, they could be a serious threat
for traditional sustainable company.
9
FIGURE 1. LOW-COST CONCEPT
Source: A. T. Kearney, 2008
Low-cost business models share a strong coherence between the value proposition and the asset
bases, organizations, and brands that support them – and this coherence delivers high operational
efficiency.
Not surprisingly low-cost innovators typically focus on price-sensitive customer segments.
However, "Achieving a low overall cost position often requires a high relative market share”
(Porter 1980). Low-cost innovators focus on radical rather than incremental offerings – and they
design them precisely to delight the chosen customers. Product or service should be simple,
focused on key basics, without any other attributes that either add complexity or cost. Pricing
should be clear and reflect the basic core value of the product or service. While frills should be
avoided, a well-designed menu of incremental options can be a real source of enhanced profit.
Their value chain is highly effective. Low-cost models depend on a lean value chain aligned to
deliver the value proposition and no more. Innovators commonly perform only core activities inhouse and outsource the rest. And in many cases, they leverage up-to-date, standardized assets to
facilitate scale-up and keep maintenance costs low. The cost model begins with a cost target
consistent with profitably delivering on the value proposition. While it is of course important to
limit overhead in low-cost models, it’s also crucial to have talented people, who understand the
10
value proposition and organizational mission (Kachaner, Lindgardt, and Michael 2011).
FIGURE 2. LOW-COST BUSINESS MODEL
SOURCE: BCG, 2011
Shortly speaking, low-cost model is aimed to increase efficiency of operations in order to reduce
costs that allows to set the lowest prices and attract more customers. Now, let’s take a look how
this model takes place in the industry of air transportation.
1.2 Low-cost carrier concept
Low-cost carrier (also known as low-cost airlines, no-frills carrier, discount carrier, budget carrier
or LCC) is an airline that generally offers very low fares in exchange for eliminating most of
traditional passenger services. The classic model of low-cost airline focuses on the segment of
price sensitive customers, who are ready to sacrifice convenience of the flight for the sake of a
better price (Yee Liau and Pei Tan 2014). However, budget airlines drive the industry and attract
new customers not only from airline industry. The main idea behind it was to make flights so cheap
that the airline could compete not only with other airlines, but even with alternative forms of
surface transportation (Buyck 2008). This was made possible by reducing service standards to a
minimum, cutting costs and increasing the efficiency wherever possible (Sommer 2005).
11
Setting the price at the reduced level is possible due to severe economy and optimization of
companies’ cost structure. To make up for profit and revenue lost in lower prices for tickets, the
low-cost carrier may charge for extra fee such as food and beverages on-board, priority boarding,
choice of seats, and addition luggage etc. Primarily budget airlines focus on price sensitive
customer segment – customers, who are ready to abandon the convenience and high quality of
services for the benefit of cheaper prices.
The term was introduced within the airline industry to name airlines, whose operating cost
structure is much lower than their competitors’ one. Since the term is usually referred to any airline
company that has low prices for tickets with limited services, without reference to their operating
models, low-cost airlines should be distinguished from traditional airlines that could simply
execute short flights without service, or full-service flights but with the offer at the reduced fares.
Some carriers seek actively to new market and start advertising themselves as budget, low-cost or
discount airlines but at the same time are maintaining and offering products, which usually are
associated with traditional airlines and quite often led to increased operational complexity. These
products, which can lead to increase the complexity or decrease efficiency, usually are: preferred
or assigned seating, providing with food and beverages other than the basic, different classes’
cabins, satellite Wi-Fi internet connection in-flight, and audio or TV and video entertainment.
Low-cost carrier is more about efficient operating model than simple inefficient reducing the prices
or the range of services.
The first successful low-cost airline carrier was Pacific Southwest Airlines United States, which
pioneered the concept of low-cost - its first flight took place on May 6, 1949. PSA's first experience
in low-cost flight model with efficient operations was a runaway success, which later inspired
many low-cost start-ups all across the United States of America, appearing in the 60s. The first
airline, which executed cheap transatlantic flight with low fares was Icelandic airline Loftleiðir in
1964, often named as "the Hippie Airline". The trend was that many young Americans wished to
travel to Europe after their graduation in order to get acquainted with the "old-world culture", and
the main determining factor for them often was the cheapest price, rather than comfortability or
even accuracy of landing or takeoff in time. Deregulation of airline industry played a great role in
the development of budget airlines that allowed airlines to spend less. In 70-es it led to increased
competition in the US, lower prices and better services (Meyer and Oster 1981). After the
deregulation of air transportation industry in Europe, the most notable success was achieved by
Ryanair, which began flights at low prices in 1990 and EasyJet airline, founded in 1995. Later in
2000 low-cost airlines appeared in Asia and Oceania - the leading companies are Malaysian
AirAsia, India's Air Deccan and the Australian Virgin Blue. Low-cost model has proved popularity
12
around the world but for its further advancement it needed deregulation existing air transport
market. In addition, low-cost carriers have created a precedent for financial threats traditional
airlines with their full-service maintenance, and high levels of the cost of traditional carriers
limited their ability to compete with low-cost carriers since the price is a one of the most important
factor for the consumer who chooses the carrier. Not surprisingly, since 2001-2003, when the
airline industry was hit by terrorism and the crisis, the majority of traditional airlines suffered
losses, while many low-cost carriers declared profits. Therefore, the traditional carriers began to
create their own low-cost company, for example: KLM - Buzz, British Airways - Go, Air India Air India-Express and United - Ted. However, they soon discovered that this innovation harms its
core business. By the end of 2007 there were more than 45 low-cost airlines serve more than 3,500
destinations in Europe. That indicates their economic prospects of their chosen schemes. Presently
the largest low-cost airline company is Southwest Airlines, a company operating in the United
States and surrounding areas.
1.3 Principles of LCC. Internal factors.
There are likely to be specific characteristics which are widespread among organizations within
the same industry – and these might be significantly different from characteristics found in other
industry sectors (Gordon 1991). The underlying principle behind low-cost concept, as it was stated
previously, is to provide the cheapest possible ticket prices in exchange for reduced quality of
services and other limitations. That way, the airline company must focus on strong cutting of costs,
therefore allowing for, previously mentioned, price reduction.
The review of the principles of a budget airline is going to be investigated through following
elements of low-cost concept revealed above: increased revenue (operations strategy), reduced
costs (operational excellence), and asset effectiveness. Various sources unveiled several factors
that conform with mentioned low-cost principles, and some additional factors.
Asset Effectiveness
One of the starting point for airline industry is the possession of aircrafts. Economy of scale is the
key element, through which cost reduction and asset effectiveness could be achieved (Chan and
Wright 1990). Most low-cost carriers operate their aircrafts with a single passenger class and most
operate only one type of aircraft. The uniform type of aircrafts allows the company to use the same
maintenance and operational equipment, and the same employees for the whole fleet of the
company (Kumar, Johnson, and Lai 2009). It leads to decreased future costs. In addition, budget
airlines usually operate on short-distance flights that require the narrow-body (single aisle) planes.
13
The usage of longer-range wide-body planes is redundant (wide-body planes require too large
capital investments for low-cost airlines). The fleet usually consists of new aircrafts. Despite of
more expensive purchase of new aircraft than the second side, as a rule, the new one is much
cheaper to operate in the long term, because they are highly efficient in respect of fuel,
maintenance, insurance or staff costs per passenger (IATA 2006).
The usage of aircraft by low-costs carrier in term of hours per day is much higher than by
traditional airlines, i.e. the time spent in the air. The utilization of an aircraft should be as effective
as possible (Huettinger 2013). By doing this the company reduces their average fixed costs. For
example, Ryanair reduced the time of maintenance of the plane at the ground from 55 to 30 minutes
and now it is a common practice for budget airlines (Thomas 2015a). It is possible since low-cost
airlines are based in small remote airports, where the passenger traffic is much less than in huge
international hubs passing great amount of passengers. In addition, increased time spent in air per
day could be triggered with increased number of flights per day. The schedule of flights should be
constructed so, that it allows to use an aircraft for maximum flights per day (Kumar, Johnson, and
Lai 2009). Some budget airlines increase the utilization of its fleet from 8 to 16 hours per day
(Ryanair 2015).
Primarily, budget airlines base in one airport and construct their schedule and network of smaller
airports in order to ensure full utilization of an aircraft. Like the major carriers, many low-cost
carriers develop more base airports in order to maximize destination coverage and defend their
market. Many do not operate traditional hubs, but rather focus cities (Bamber et al. 2009).
Reduced costs
The order of huge amount of vessels simultaneously can lead to the discount from the producer of
aircrafts. Later, the low-cost carrier can sell these vessels for the higher price. It brings the great
savings in fixed costs (IATA 2006).
As one of the main source of costs is airport fees, some budget airlines tend to use the smaller
airports or secondary airport that are quite remote from main cities. These airports are not
international hubs and pass fewer passengers through their gates (Chan and Wright 1990). That,
in turns, leads to the less payment for airports, airport taxes. Intriguing example here is that Ryanair
use a huge approach of economy of scale. It owns the whole or a part of these airports, leading for
the huge airport taxes reduction and also allowing the company to collect the revenue from other
carriers operating at this airport (Ryanair 2015). These small airports usually do not have any
excessive services, shops and conveniences, which give the view of a big shopping mall instead,
14
as we used to see in the huge international airports, but focus only on their primary function to
serve flights using the minimum facilities and staff (Kumar, Johnson, and Lai 2009).
The number of employees should be as few as possible but at the same they have to be
professionals and carry out multiple jobs both in-flight and on ground. Professionalism of
employees keeps good customers attitude and prevents from time- and cost-consuming failures in
operations (Huettinger 2013). For example, the same person at the airport can check-in the
passenger, register its luggage and work as a gate agent.
It is not convenient to use secondary airports for flight connection for passenger but budget airlines
do not want to operate with the connections, as it requires additional costs relate to the organization
of carrying the luggage from one flight to another that incur new personnel costs. Primarily, lowcosts airlines serves only point-to-point flights (Kumar, Johnson, and Lai 2009).
Distribution channels should be the cheapest, while still highly effective (IATA 2006). Today, online distribution is inherent in low-cost carrier business model, while the companies almost
completely abandon offices and point of sales. It leads to savings of large amount of fixed costs
related to rent and personnel costs. Registration for the flight is also an on-line process, while
registration at the airport could be carried out only with the additional fee. Such actions suggests
the company to abandon usage of offices, point of sales or even registration desk at the airport.
Aircraft often operates with minimum additional equipment, that in turn help to reduce the cost of
purchase and maintenance of the plane, and at the same time to keep the aircraft’s weight lower
and thus to save on fuel. Low-cost carriers’ seats cannot be recline or do not have back pockets in
order to cut the costs of cleaning and maintenance (Huettinger 2013). Others carriers’ do not have
curtains or no window shades. Pilot convenience can be also reduced. Usually, no in-flight
entertainments are available. The implementation of LCD monitors at the back of the seats is also
excluded in order to reduce the cost of purchase. The absence of additional services and devices
on the place could also be justified by the fact, that many routes served by low-cost carriers are
short-haul and thereby these services are not particularly in demand (IATA 2006).
Finally, good low-cost company do not have any assets (Kumar, Johnson, and Lai 2009). All
services except the fundamental one should be outsourced in order to save on it. However, some
giants prefer to exploit economy of scale and keep many services in-house. For instance, Ryanair
bought the whole airports in order to save on airport fees.
15
Increased revenue
Placement of seats in the aircraft cabin is a crucial point for designing a place for budget carriers.
Low-costs carriers embed up to 189 seats in Boeing 757 compared to 128 seats incorporated by
traditional airline carrier. This leads to the increased inconvenience of passenger due to limited leg
room but lets the carrier to generate more revenue (Kumar, Johnson, and Lai 2009).
Severe economy on every aspect of the airline carrier’s activity is not the only point of the policy
of low-cost carrier. The other side of the issue is the managing the revenue flows. Low-cost carriers
try to generate revenues from everything (Huettinger 2013). These typical services for airline
industries such as reservation of seat or transportation of luggage, catering on board and seat
selection are charged with the fee. Sometimes, the transportation of luggage can be more expensive
than the ticket itself. If the passenger decides to choose the seat, the charged fee also depends on
the location of the seat. For example, seats in the emergency exit rows, which have longer leg
room, are more expensive than others. Offering catering service on board is one of the most
popular service to generate additional revenue. Low-cost airlines receive additional revenue from
a variety of different activities, providing with additional services or establishing commissionbased products. Carriers may charge a fee not only for carry-on luggage but even for a pillow or
blanket. In Europe, it is quite common that for every convenience and service customers have to
pay an additional charge. Some companies, such as AirAsia, for example, receive their revenue by
providing with accommodation as well as flights. Budget carriers charge fees even for the usage
of different types of credit cards during the process of purchase of a ticket (Ryanair 2016; WizzAir
2016; EasyJet 2016; AirAsia 2016).
Budget carrier also provides flexibility and possibility to change of the ticket details only for
additional price. The carrier do not offer any refund or transfer even if the flight was late or
cancelled by the company’s fault. If the passenger is late for the connecting flight due to the lowcost carrier, the passenger have to buy the new ticket for the next flight from his own pocket and
the company will not refund these costs for the passenger (Thomas 2015a).
Yield management
Besides all these additional sources of revenue, low-cost carriers use yield management system in
order to maximize revenue generated from ticket sales. High load factor is an inherent part of lowcost carrier activity (Chan and Wright 1990). Yield management is a variable pricing strategy,
based on understanding, anticipating and influencing consumer behavior in order to maximize
revenue or profits from a fixed, perishable resources, such as airline seats or hotel room
reservations (Biermann 2007). As the resources, or items for sale, are limited, the company
16
implements strategy that implies the sale to the right customer at the right place for the right price.
The process leads to price discrimination, where the company offers identical goods or services to
different customers for the different price. It helps low-cost carrier to achieve its goal to fill the
plane as much as possible and to get higher market share. However, this strategy is not inherent
only in low-cost airline industry but its implementation is common for the whole airline industry.
The turning point was the deregulation of the industry in US, allowing the company to set various
prices.
This strategy can be applied to the airline industry, because the capacity of the aircraft is limited
and the product is sold at the particular moment of time. If the plane departs, unsold seats could
not generate any revenue. In other words, unsold items are unrealized or become perished. Airline
companies segments their customers and use various software to monitor and predict how seat
become reserved. Seats for unpopular flights can be sold for cheaper price comparing with other
popular destinations in terms of RPK (Revenue passenger kilometers). Reduced price leads to the
increased number of passengers and that can help to exploit maximum revenue from the flight.
Statistics show that very seldom every passenger comes to the flight: some of them are late, some
decide to change the date of their trip at the last moment (IATA 2006). That case is also taken into
account by airline industry and to exploit maximum companies sells more tickets that there are
seats in the plane. Market segmentation is also highly important issue in determining the price for
the product. Some customers are ready to pay extra fee for properties of the ticket such as changing
details and cancellation policy. In addition, this segmentation can be carried out by time periods.
Some people, who want to save money, plan their trip in advance but some decide to buy a ticket
just in a several days in advance, for instance for business trip or funeral. This case allows
companies to set higher price for tickets (if the company is sure that they will sell all the seats
anyway) as these category of customers is obliged to buy the ticket and they do not have no choice.
If the company fails to sell all tickets for flight, it can set the very low price just before the flight
in the hope to generate any revenue for unsold tickets. Otherwise, it will not earn anything.
Implementation of loyalty programs is also a part of yield management (Yee Liau and Pei Tan
2014). Providing cheaper tickets for the members of loyalty program, ensuring the increased
number of tickets sold. In this case, both sides win: the customer gets a discount, while the
company retains the customer, persuading him to use services of this particular carrier. Yield
management is based on the statistics and mathematical expectations.
Almost all LCCs have a policy of non-refundable tickets, as distinct from traditional airlines with
their different refund conditions, which make them more attractive and in a degree resolve the
problem of overbooking. For LCCs booking can be changed but for additional fee, but no money
17
is ever refunded. This gives the airline a better and more certain cash flow, which gets great savings
in interest costs (IATA 2006).
Implication
Although business model practices of low-cost carriers can vary widely, all these points address
to the increase of level of profitability and cost-efficiency that, in turn, is inherent in the
competitive advantage of low-cost companies. Airline industry is a very tough industry with
relatively low profitability level. For instance, carriers are the least profitable business in the whole
value chain of providing air transportation (IATA 2015b). (There are producers of vessels,
suppliers of fuel, airports, food-catering companies and etc.) Some features of each of these
principles are common and universal for majority of low-cost markets, while others could be
inherent in only some particular regions.
It is noticeable that some of the factors and principles from different sources overlap each other.
For further research it is possible to name the list of factors that are encountered and repeated in
various sources. These factors are aggregated in the list and discussed further in this paper.
1.4 External factors
In order to take a decision to enter the market, how to enter the market, and with what marketing
campaign, it is necessary to assess market’s potential. Market potential is determined by both
external environment and internal factors. Svend Hollensen in his book “Global Marketing”
provided the following framework for investigation both internal and external factors needed to
be investigated for determining of market potential (Hollensen 2007).
18
FIGURE 3. POTENTIAL FACTORS NEEDED FOR INVESTIGATION
Source: Hollensen, 2007
Customers
Besides effective operations, it is important to understand the customer and value proposition that
a company deliver. The first step helps us to understand the market, to assess the attractiveness of
the market, the potential customers, whether there are any opportunities or threats related to the
possible performance of company in this particular market. In other words, at this step there is an
exploration of customers. This market research includes understanding the customers’ segments,
their needs and behavior. How big these segments are and how they have changed. How price
sensitive are they or what distribution channels do they prefer. All this can give a clear picture of
what the market is currently is.
Important point needed to be taken into consideration is segmentation. Every market is not
homogeneous: customers could classified by their needs and preferences, age, gender, geographic
location or any other characteristics, and therefore it can require different strategies for different
segments. To acquire more detailed information it is necessary to do more detailed analysis and
divide a market by both products and customers. For segmentation, key segmentation variables
should be identified that determine how market should be divided. New narrower markets
19
composes the whole market and could be incorporated in segmentation matrix, which describes
the whole market but emphasizes its heterogeneity and distinguishes it. After that process, it is
possible to start evaluate the attractiveness of every segments.
If we are talking about budget airlines, value proposition is not so much when passengers are on
the plane; rather it is when get to their destination. Most companies would want public admiration,
as it would be assumed to have a positive impact on sales. However, the goal of a low-cost
company then is not to be loved but to understand the true value of what they are offering and
ensure that customers are willing to pay a price that ensures the long-term future of the firm
(Thomas 2015a). At this point, the only true value proposition is cheap price.
Despite the widespread opinion, that low-cost carriers are perceived as airlines with no comfort
and poor quality, there are more positive than negative attitude to LCCs. There are a lot of place
to improve in customer service for low-cost carriers, however, in average, customers’ expectations
are fully satisfied (Yee Liau and Pei Tan 2014). The average flight does not exceed couple of
hours. Customers deliberately choose this type of service and they are satisfied with them.
Interesting point here that ticket promotion can even increase a positive attitude to a company
among customers significantly (Chan and Wright 1990). An apparently negative point relates to
customer service is flight cancellation. Flight cancellation leads to negative responses in a half of
cases entailing that customers abandon the airline’s service. Because flight delays or cancellations
create loss for both parties, customer support play a crucial role. With enhancement of the database
management system, the customer support staff can offer alternative flight to fulfil the customer’s
needs. This can be done by cooperating with other airlines on sharing their databases (Yee Liau
and Pei Tan 2014). Another research (Saha and Theingi 2009) showed that passengers indicated
overall satisfaction with the four dimensions of service quality examined in the study (tangibles,
schedule, ground staff, and flight staff). The correlation between schedule and satisfaction was
very strong, which implies that improvement in flight schedules is an important issue that requires
attention more than any other issues of providing quality.
However, there are some successful examples, where airlines applied both principles of low-cost
and traditional model. Their focus is biased from price sensitive segment and could include not
only low and middle class bur also premium segment. WestJet or Singapore airlines are the most
spectacular examples. Singapore Airlines (SIA) has been able to attract premium customers whilst
stringently controlling its costs (Thomas 2015b). It has defined its offer by consistently innovating
and offering new services to its customers. The company has added to its value proposition in
areas such as on-flight entertainment. For certain flights, this includes possibility to rent a tablet
that been pre-loaded with early release films and television shows. It also offers live satellite TV
20
having established a partnership with Bell. This is also a way of setting itself apart from other
airlines.
Attractive LCC’s image could be an effective weapon, which influences the customer decisionmaking process (Fernando, Saad, and Haron 2012). The LCC service could be unique if
management employ and manage the young generation as workforce, especially as frontline staff
who provide services to customers. Nurturing youngsters in a LCC organization with training and
development will bring an innovative spirit, creativity and new service development, toward the
overall success of the organization.
Having analyzed academic sources, it can be stated that value proposition should be focused on
main customer’s needs, such as punctuality and fares for air transportation. However, more benefit
could be exploited through better investigation of customers’ preferences. In this respect it is useful
to address to marketing mix. The term "marketing-mix," was first coined by Neil Borden, the
president of the American Marketing Association (Borden 1964). It is still used today to make
important decisions that lead to the execution of a marketing plan. It helps to identify how exactly
a product should be delivered to customers. Under marketing mix means often popular framework
of 4P’s or 7P’s. Product, Price, Promotion, Place and three additional points – Physical evidence,
People and Process.
Macro-external environment
Here it is useful to understand not only the market, but also a macro-external environment. What
are political or macroeconomic situations at the moment and how can it affect the market? The
literature on marketing and management gives a very useful model for the firm’s marketing
environment, which defines categories of dividing marketing factors: Political, Economic, Social,
Technological, Environmental and Legal, so-called PESTEL Analysis. What are the risks related
to this areas? Sometimes, as it is in our case of airline industry in Russia, these factors are ones of
the most significant ones. For instance, monopolistic essence of the market, government
protection, changes in population’s wealth or embargos against the whole industry heavily affected
the situation recent years in many industries. Without evaluating these risks, it was impossible to
predict the direction of the development of industries. Thereby, it is highly important to reveal key
drivers of change and assess their impact on the market. However, it can be very time consuming
to analyze all possible influential aspects. It is very important to distinguish those that create more
value for customers and evaluate them.
Shaw (Shaw 2011) explores each component of the PESTEL model in airline context, which is
presented in the Figure 4 below:
21
TABLE 1. FACTORS OF MACRO-EXTERNAL ENVIRONMENT
Source: Shaw, 2011
Political
Economic
Social
Technological Environmental Legal
Political
instability
Economic
The
aging Internet
growth and population
trade cycle
Transport
Deregulation
Changing in investments
and “open
customer
skies”
preferences
Global
warming
Regulations
Tourism
Weather
conditions
Privatization
State aid
Many authors (Meyer and Oster 1981; Graham, Kaplan, and Sibley 1983; Graham and Kaplan
1982; Huettinger 2013) mentioned the important role of favorable legal and political environment
in a country in the development of the industry. For example, deregulation of the industry in US
and Europe led to the rapid prosperity of the industry. Restraining regulations could be an obstacle
for many aspects of airline activity, such as fleet utilization, entry barriers or choice of destinations
(Graham, Kaplan, and Sibley 1983).
So-called “open-skies” policy determines the level of openness of the market, liberalizing aviation
services between two contracting states. A bilateral air transport agreement is needed to implement
international flights. These agreement allows the airlines of both states to launch commercial
flights between these countries. “Freedom of the air” could bring the greatest potential to an airline
company (Huettinger 2013).
Huettinger mentioned that political situation and government participation in an airline’s activity
have substantial effect on airlines (Huettinger 2013). Among state influence factors he primarily
focuses on level of privatization and level of state influence on decision-making process. In this
research, it is revealed that the level of privatization affect the optimization of processes, level of
bureaucracy, number of employees and other labor-related factors, and the process of development
of strategy. The participation of state in activity of a company could adjust the strategy of a
company, following the state interests instead of company’s ones. A huge support from the state
can be gained through its participation in a company. In addition, in many countries, the business
activities of airlines are determined by their history of being national icons operating in a heavily
regulated and restricted market (Prideaux and Kim 2006).
22
Intermediaries
Airlines inseparably interact with airports. Airport fees for landing, passenger embarkation and
other related services could reach significant amount of costs and if the airline succeeded in
reduction of them, it has a good background of the cost leadership (Thomas 2015a). Most of the
LCC support the policy of the underutilized airports. In the expansion policy of Ryanair, the
existence of the underutilized airport is the most fundamental requirement, even if it is a long way
from the city. The same policy holds Southwest Airlines, looking for the unused airport, even if
these are old, dilapidated and unfashionable.
A strong and value-driven management strategies, as well as long-term relationships with their
stakeholders is an important issue for secondary airports (Aulman 2015). As a rule, these airports
are ready to negotiate the price with airlines. Low fares services gave many secondary airports the
international recognition which most of them previously lacked. Secondary, regional, airports
increasingly provide a competitive alternative to the congested, expensive hub airports. In
addition, LCC can increase passenger traffic significantly that lead to increase of other sources of
revenue for airports.
Finally, effectiveness of operations in airport is highly important for successful activity of budget
airline (Paramonovs and Ijevleva 2015). Budget airlines has to carry out its stop in an airport in
short time, therefore this factors is a very important one.
Competition
The next step shows the level of competition or how the market belongs to the existing players.
Evaluating the competitive environment includes understanding main players on the market, how
they differ and what their behavior is and how it has been changing, evaluating entry barriers to
this particular market and some qualitative factors such as networking or suppliers’ power. This
step can help to reevaluate the segments explored in the first step with consideration of competition
and the attractiveness of the segments could be shifted. The useful instrument to conduct this
analysis is Porter’s Five Forces of Competition framework. The five forces are: Industry
competition, Suppliers, Buyers, Potential entrants and Substitutes. This framework refers to not
only rivalry among existing firms in the market but takes into account other important issues.
Investigation of threat of entries includes capital requirements, access to distribution channels,
government and legal barriers, relationship with suppliers and economies of scale. Knowing this,
a company can understand, how difficult is to enter this market. It is crucial issue that we have to
study in this paper.
23
The major point here is evaluation of existing substitutes, such as trains or busses. It is necessary
to assess how likely customers will switch to substitute services if they are not satisfied with the
current state of the market. In addition, substitutes could be a partner and provide additional spokes
for LCCs (Givoni and Banister 2006).
One more feature of air transportation industry is Air Alliance, a partnership association of airlines,
which allows to achieve a higher level of international cooperation in commercial air transport.
Airlines within the alliance retain their legal independence, but at the same time unify elements
such as booking system, bonus program for passengers, introduce codeshare flights and coordinate
schedules flights. The reason for the emergence of airline alliances is the regulation of air transport
at the national level and intensification of competition. Since commercial air service between
Europe and the United States are regulated and could be carried out only by the airlines of member
countries of the contract. For example, air travel between the United States and France may only
American and French airlines. German airline may not be present in this market, but through
membership in the alliance, the German flag carrier Lufthansa, for example, can offer such flight
through code-sharing with American airline. In addition, participation in an alliance increases
number of passenger and therefore revenue flows.
Other factors
Despite of the fact that Porter’s five forces of competition is very prominent and useful framework
to get brief and quiet full understanding of rivalry, it has been the subject of constant criticism.
This is a universe model that describes the industry structure and its main elements, but it does not
take into consideration some secondary issues, that could be highly important for a particular
industry.
Another important issue that could affect an industry and competition within it is an existence of
complementary goods. Complementors – These are other players who provide a product or service
that can be linked to your own to make both offerings more attractive to your customers
(Brandenburger and Nalebuff 2011). In this way, complementary goods can generate new demand
and therefore new opportunities can be exploit. Two American economists, Adam Brandenburger
and Barry Nalebuff, even developed new model called Value Net, where they replace substitutes
with complementors in Porter’s five Forces. In our research consideration of complementary goods
will help to better understand the demand for passenger transportation but also find out new
sources of revenue that low-cost carriers should use.
The second important flaws of Porter’s Five Forces analysis is that it is a static framework, which
do not take into consideration the behavior of competitors and their interactions. It is not true that
24
independent action of one player do not affect activity of others. Especially, it can be noticed
explicitly in industry with the low level of competition, where an action of one firm could launch
a trend for the whole industry. To take into account such risks, the huge contribution was made
with Game Theory. Game theory helps to structure strategic decisions, identifying the main actors,
understanding their behavior and their payoffs in every possible outcome. Knowing this
information, a company can action in the best way and choose the best strategic option, reducing
uncertainty comes from competitors’ behavior. As a result of game theory, a company can reach
one of many decisions, such as cooperation, deterrence, commitment, signaling (communication
to competitors in order to influence their decisions) or even changing the structure of the game
(for instance, technological change or creation of a huge alliance within the industry).
However, prediction of competitors’ behavior is not that easy. There are three main purpose and
sometimes it is impossible to predict some of them. They are:
Forecast of competitors’ future strategies and decisions
Prediction of competitors’ likely actions to a firm’s strategic initiatives
Determination of how competitors’ behavior can be influenced to make it more favorable
(Grant 2015).
In order to answer these three points, it is necessary to take into account competitors’ current
situation, competitors’ objectives’, competitors’ assumptions about the industry and competitors’
resources and capabilities. Understanding how competitors are competing at present, why they are
behave in a particular way, what are their goals and what resources and capabilities of a company
are will lead to apprehension of their behavior. Assumption about the industry means competitors’
perception of itself and the outside the industry. All this can answer the question: “What
competitive initiatives is the firm likely to take?”(Porter 1980).
Market entry issues
If a company decide to enter low-cost market, some important issues appear:
Should a new low-cost business model be operated within the core business?
Should it share the same brand as the parent?
Should it try to maximize synergies with the parent or favor autonomy?
Should the low-cost business grow organically or through acquisition?
There are no one-size-fits-all answers to these questions, but experience suggests some general
rules (Kachaner, Lindgardt, and Michael 2011):
25
Low-cost offerings cannot flourish within a traditional ‘‘high cost’’ environment.
Brands can stretch only so far. Thus, a secondary brand is often advisable.
The first priority for a low-cost model is that it must win on its own merits. Synergies
should be a secondary concern.
Most traditional airlines that launched low-cost offerings chose to maximize synergies, leading to
disappointing results because of the mismatch between their low-cost value proposition and a
hybrid operating model that combined some low-cost elements with largely major-carrier
economics (Kachaner, Lindgardt, and Michael 2011)
1.5 Implications from the literature review
The main aim of the paper is to define key country-specific factors influencing the market of lowcost carrier market in Russia and to assess their influence on the market. In addition, these results
will help to elaborate recommendation for companies, who potentially can be interested in entering
low-cost airline market in Russia. In other words, the major task here is to understand what factors
affect the market of low-cost carriers in Russia the most that should be taken into consideration if
an airline desires to participate in this market, what their influences are, and how the market can
evolve and new companies can emerge.
In this way, having conducted literature review, it is possible to determine key factors that can
have possible influence on low-cost carrier market in Russia. According to their nature, these
factors should be divided into two categories: external and internal factors. Internal factors are
inherent part of operational model of LCC’s business. External factors includes customer attitude,
competition and macro environment. Some factors from different source overlap each other.
Having aggregated the information found during the literature review, it is possible to define
following potential factors that are going to be used in the research.
Internal factors:
Fleet characteristics
o Fleet size
o Homogeneity of fleet
o Type
o Age
o Number of seats
o Country of registration
Aircraft utilization
26
o Turnaround time
o Utilization time
o Punctuality
Operations
o Crew’s operations
o In-land operations
o Distribution
Yield management
Materials, Fuel and Maintenance
Airport related factors
o Airport fees
o Quality of airport services
Additional services
Quality of services
Relationships
External factors:
Political environment
Legal environment
Macroeconomics
Industry growth
Competition
Airport infrastructure
Customer attitude
Further investigation and analysis of Russian market will be conducted with consideration these
factors in order to assess which of them are unusual for the world budget airline market and
inherent in Russian reality, and have the most impact on the market in Russia.
27
Chapter 2. Methods
2.1 The strategy, methods and instruments
One of appropriate strategies for exploring low-cost airline phenomenon in Russia is case study
research. Due to the lack of appropriate cases in Russian history and relatively big difference
between Russian market and the majority of developed and emerging markets in the world, case
study research helps us to construct theory basing on the few sources. Even emerging and
developing markets differs from Russian market heavily due to distinctive features of the market,
such as high corruption, monopolistic essence of the market or customers preferences and habits.
As the goal of the research is to identify the country-specific factors influencing low-cost carrier
market in Russia and to develop managerial implication for new entrants of the market, the unit of
analysis is the whole market of budget airlines in Russia. Single case study is going to be
conducted. There are several participants in the market including incumbents, new entrants,
airports, end customers and in some extend even substitutes (railroad, buses, cars). In this research
the impact of country-specific factors on all participants of the market will be investigated.
However, the main focus is on potential new entrants of the markets. The results of the research
will help them to understand better which factors are going to be taken into account in formulation
entry strategy.
This research of low-cost carriers market in Russia are based on primary data and secondary data.
Secondary data is collected from open sources such as academic articles, interview in public
sources, reports of institutions and companies, researches of analytical and statistical agencies.
Primary data involves preliminary and semi-structured interviews. Preliminary interview gives us
the first understanding of the market, Russian reality in respect to the market and adjusts the
direction of the research. Semi-structured interviews are interviews with the representatives of the
industries or experts, who work in it. It will help us to understand special features of the industry,
companies’ strategies and gives the deeper understanding of country-specific factors influencing
the market, and how to behave according to these factors. However, the main focus is on the
secondary data. The majority of information relate to the cases that is explored in the research, is
collected from the open sources such as companies’ financial reports, official statistics, reports of
institutions operates with the industry (RosAviation, IATA), interviews of the experts published
in the open sources. Finally, literature review is an essential part of any academic research.
Although, there is a lack of appropriate academic literature, it will help us to get acquainted with
papers that were written before, that, in turn, helps to identify the existing knowledge base and
factors needed to check in this research.
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2.2 Case study research
One of appropriate methods for exploring low-cost airline phenomenon in both developed
countries and other emerging markets, especially Russia is case study research. The case study is
one of the several ways of doing science research. Other ways of conducting research are: surveys,
experiments, histories and the analysis of existing archival studies (economic studies, student
records). Each of these strategies has its own advantages and disadvantages; some of them are
appropriate in one situation, but could be not so useful in others. The strategy is depending upon
three conditions:
the type of research question,
the control an investigator has over actual behavioral events, and
the focus on contemporary as opposed to historical phenomena.
In general, case studies are the preferred strategy when "how" or "why" questions are being posed,
when the investigator has little control over events, and when the focus is on a contemporary
phenomenon within some real-life context (Yin 2013). However, cases could be of the two types:
“exploratory” and “descriptive” case studies. Since “descriptive” type simply describes the
problem or practices, investigator in research should focus more on “exploratory” type and does a
great care in designing and doing case study research in order to resist the criticism of this method.
“As a research endeavor, the case study contributes uniquely to our knowledge of individual,
organizational, social, and political phenomena. Not surprisingly, the case study has been a
common research strategy in psychology, sociology, political science, business, social work, and
planning” (Yin 2013).
Hence, the important question is why and when we should use case study research and when is
better to use other strategies. There is a popular misconception that the different research strategies
should be implemented directly to the particular phase. This misconception includes that case
studies are appropriate for the exploratory phase of an investigation, that surveys and histories are
appropriate for the descriptive phase, and that experiments are the best way of doing explanatory
or causal inquiries (Platt 1992). However, some literature refers to the fact that case studies can be
used for all these three processes – exploratory, description and explanatory.
In respect to three conditions mentioned earlier: (a) the type of research question, (b) the degree
of control an investigator has over actual behavioral events and (c) the focus on contemporary as
29
opposed to historical events, it is possible to understand where it is appropriate to use a particular
strategy (Figure 1.1).
TABLE 2. RELEVANT SITUATIONS FOR DIFFERENT RESEARCH STUDIES.
SOURCE: COSMOS CORPORATION.
Strategy
Form of research
Requires control over
questions
behavioral events?
Experiment
How, Why
Survey
Who, What, Where, No
How
many,
Yes
Focuses on
contemporary events?
Yes
Yes
How
much
Archival analysis
Who, What, Where, No
How
many,
Yes/No
How
much
History
How, Why
No
No
Case study
How, Why
No
Yes
The case study is appropriate in the situations with examining contemporary events, but when
behavioral events cannot be controlled. The case study includes many the same techniques and
methods as a history, for example, but it also includes other sources of evidence that are not usually
use in the history (Systematic interviewing and direct observation). Again, despite of the similarity
of case studies and history, the case study includes unique advantage: It deals with a wide range
of evidence (documents, interviews and observations) beyond what might be found in the historical
study and could be more useful. In addition, sometimes, informal manipulation can occur.
It is possible to identify situations in which all these research strategies might be appropriate, and
other situations in which two different strategies could be equally attractive. It is also possible to
use two or more strategies in any studies (for instance, a survey can be used within a case study or
vice versa. In respect to this, different strategies are not mutually exclusive. However, according
to the figure 1.1, it is possible to identify situations when specific strategy will be the most
appropriate with distinct advantages. For example, the case study is useful when “how” and “why”
questions are asked in respect to contemporary events over which the investigator does not have
control or has little control.
Probably one of the greatest concern is the lack of rigor in case study research. There were many
examples when an investigator was sloppy or allowed ambiguous evidence or biased views to
affect the findings, the conclusions and the direction of the research. Sometimes, people are
30
confused with the type of purpose of the case study. For instance, in teaching, case can emphasize
or deliberately change and exaggerate a particular point in the more needed way.
Another important concern says that case studies provides too little base for scientific
generalization. In other words: “Is it really possible to generalize and induce from a single case?".
However, other strategy, experiment, also does not represent a sample. Nonetheless, the goal is to
do a "generalizing" and not a "particularizing" analysis (Lipset, Trow, and Coleman 1956).
The last popular complaint about case studies is that the result is presented in massive document,
which is hard to read and it takes a lot of time. In addition, a good case study is very difficult to
do.
To summarize and determine what case study research is, let us address to one popular definition.
“The essence of a case study, the central tendency among all types of case study, is that it tries to
illuminate a decision or set of decisions: why they were taken. how they were implemented, and
with what result” (Schramm 1971).
Yin in his book about case studies mentioned that the crucial features of case study are that case
study:
investigates a contemporary phenomenon within its real-life context, especially when
the boundaries between phenomenon and context are not clearly evident;
copes with the technically distinctive situation in which there will be many more variables
of interest than data points, and as one result;
relies on multiple sources of evidence, with data needing to converge in a triangulating
fashion, and as another result;
benefits from the prior development of theoretical propositions to guide data collection and
analysis (Yin 2013).
Another point that it is necessary to understand is how the process of inducting the theory using
case studies is organized. The process from determining the research questions to closure of the
research. Several steps of the process, such as problem definition and building validation, in
general are the same as in hypothesis-testing research. Others steps, for example within-case
analysis and replication logic, are very specific and unique to the inductive case-focused process.
This type of approach for research especially good suits for new topic areas. “The resultant theory
is often novel, testable, and empirically valid. Finally, framebreaking insights, the tests of good
theory (e.g., parsimony, logical coherence), and convincing grounding in the evidence are the key
criteria for evaluating this type of research (Eisenhardt 1989)”.
31
According to Eisenhardt there are several steps of the process of building theory from case study:
Definition of research question
Selecting cases
Multiple data collection methods
Entering the field - Flexible and opportunistic data collection, allows investigators to make
helpful adjustments
Analyzing the data
Shaping hypothesis
Enfolding literature
Reaching closure
However, the confusion about the distinction of qualitative data, inductive logic and overall case
study research appears. Involvement of inductive logic in the development theory is especially the
issue with the lack of clarity. Development of theory is a central activity in organizational research.
Traditionally, authors have developed theory by combining observations from previous literature,
common sense, and experience. However, the tie to actual data has often been tenuous (Perrow
1986).
The process is alive with tension between divergence into new ways of understanding the data and
convergence onto a single theoretical framework. For example, the process involves the use of
multiple investigators and multiple data collection methods as well as a variety of cross-case
searching tactics. Each of these tactics involves viewing evidence from diverse perspectives. One
strength of theory building from cases is its likelihood of generating novel theory. Although a myth
surrounding theory building from case studies is that the process is limited by investigators'
preconceptions, in fact, just the opposite is true. This constant juxtaposition of conflicting realities
tends to "unfreeze" thinking, and so the process has the potential to generate theory with less
researcher bias than theory built from incremental studies or armchair, axiomatic deduction
(Huberman and Miles 2002).
A second strength is that the emergent theory is likely to be testable with constructs that can be
readily measured and hypotheses that can be proven false. A third strength is that the resultant
theory is likely to be empirically valid. The likelihood of valid theory is high because the theorybuilding process is so intimately tied with evidence that it is very likely that the resultant theory
will be consistent with empirical observation (Huberman and Miles 2002).
32
However, some characteristics that lead to strengths in theory building from case studies also lead
to weaknesses. For example, the intensive use of empirical evidence can yield theory which is
overly complex. Another weakness is that building theory from cases may result in narrow and
idiosyncratic theory. The risks are that the theory describes a very idiosyncratic phenomenon or
that the theorist is unable to raise the level of generality of the theory (Eisenhardt 1989)”.
Besides the relevance of these issues, the important aspect of case study research around which
there have been many debates is representation. The way of how case studies are written, reported
and presented to the audience. “Representation is a key component of any scientific output, as it
shapes what readers will accept as reality” (Stern 1998).
2.3 Research design
Research design guides the investigator in the process of collecting, analyzing, and interpreting
observation. It is a logical model of proof that allows the researcher to draw inferences concerning
causal relations among the variables under investigation (Nachmias and Nachmias 1976). Another
way of thinking about a research design is as a “blueprint” of research, dealing with at least four
problems: what questions to study, what data are relevant, what data to collect, and how to analyze
the results (Philliber, Schwab, and Samsloss 1980).
Research strategy: Single-case study
In the research the only case is going to be to be investigated. In order to answer the stated
questions the whole market with all its participants should be investigated simultaneously from
the different points of view. This gives us the wider and clearer picture of the current situation in
the market encompassing all the participants. On the other hand, Russian market is quite
outstanding and cannot be compared with other market in the world due to its specific features. In
addition, the market is quite new for Russia and does not have enough cases of low-cost airlines
in history. All 4 companies presented in Russia had so many differences in their activity that they
should be observed together with other participants and features of the market in order to get
understanding of factors influencing the market.
Overall, the single-case study design is eminently justifiable under certain conditions – when the
case represents (a) a critical test of existing theory, (b) a rare or unique circumstances, or (c) a
representative or typical case or when the case serves a (d) revelatory or (e) longitudinal purpose
(Yin 2013).
33
Research questions:
What are country-specific factors influencing low-cost carrier market in Russia?
How do defined country-specific factors influence the market?
How can new entrants benefit from defined country-specific factors in formulation of entry
strategy?
Study proposition: Defined country-specific factors are directly influencing the market of budget
airlines in Russia.
Unit of analysis: Low-cost carrier market in Russia. Participants of the market.
Criteria: Costs triggered by a factor, Effect on revenue triggered by a factor, Number of
passengers
The research consists of two parts. The first part is devoted to the identifying of the countryspecific factors affecting the industry using secondary data. The second part includes interview
results that reveal how exactly these defined factors affect the industry and what recommendations
could be suggested. The results from the first part and the second part is going to be compared and
used in answering the stated questions.
The first part is exploration the effect of internal and external factors affecting the market
using secondary data. Investigation of external factors includes exploration of macroexternal environment and all participants of the market. Internal environment is going to
be investigated on the base of studying the activity of Russian LCC and through
comparison of it with Ryanair’s activity. This entails understanding of which factors from
list mentioned above affect low-cost carrier market in Russia and are country-specific.
Secondary data using in this part of the research consists of company’s reports, industry
reports by institution and statistical or consulting agencies, interviews of experts of the
industry published in public sources. This analysis helps us to determine which factors play
the greatest role in activity of budget airlines in Russia and which of them are countryspecific, i.e. are inherent in Russian market.
The second part of the research includes primary interviews with experts of the industry.
The semi-structured interviews are based on the questionnaire dedicated to the potential
factors identified through literature review and with the consideration of information
collected in the first part of the research. The interview reveals to what extend these factors
influence the industry and helps to understand how potential new entrants should behave.
In other words, information collected through interview helps to answer stated questions
more concretely and precisely.
34
However, we have to take into consideration the credibility of research findings. In order to reduce
the possibility of getting the wrong answer, it is important to pay attention to attributes of research
design: validity and generalizability. Validity is concerned with whether the findings are really
about what they appear to be about. Is the relationship between two variables a causal relationship?
In addition, there is a concern about the extent to which the research results are generalizable: that
is, whether the findings may be equally applicable to other research settings or not.
35
Chapter 3. Empirical research
3.1 World Market overview
The world market for air travel continues progressive development, in spite of the complications
of the macroeconomic situation in some regions. For the global aviation industry in general, 2015
became quite successful. However, the growth is accounted for by passenger transportation, while
the volume of air freight did not grow. According to IATA, passenger traffic grew by 6.5% in the
world. The largest contribution to global market growth came from Asia-Pacific and Middle East
regions, where passenger traffic rose with a rate of up to 15% (IATA 2015a). One-third of total
growth in passenger transportation accounted for Asia Pacific region. However, the pace of growth
has been slightly slowed down.
FIGURE 4. TOTAL AIR TRAVEL AND AIR FREIGHT VOLUME
Source: IATA, 2015
Primarily, this growth was triggered by passenger budget transportation. The growth of RPK of
traditional airlines worldwide is quite modest except some emerging markets, while the growth in
low-cost market segment reaches up to 15% even in such developed and mature market as US. For
the last 10 years the share of budget airlines in European market doubled (Israel 2015). It stemmed
from easing of major drivers of premium travel demand, such as slowing growth or recession in a
number of large markets such as China and Brazil or tough conditions in some key industry sectors
(IATA 2015c).
36
FIGURE 5 EUROPE AIRLINE MARKETSHARE
Source: Airline Profiler, 2015
Net posttax profit of the industry for 2014 was $16.4 billion, a 2.2% margin on revenues. This was
the fifth successive year of profitability, and it builds on the $10.6 billion profit and 1.5% profit
margin in 2013. The air transport industry’s profitability in 2014 is owed primarily to improving
global economic conditions, which underpinned robust growth in passenger demand. Lower fuel
costs also helped, but because of hedging some airlines have yet to experience the benefits of the
decline in fuel prices (IATA 2015b).
FIGURE 6. ANNUAL TRAFFIC GROWTH AND PROFIT MARGIN
Source: IATA, 2015
37
Jet fuel prices have decreased significantly over the past year. Jet fuel prices are highly correlated
with crude oil prices. The second half of 2014 and 2015 was challenging time for oil industry. Yet
even in 2013 crude oil price for Brent fluctuated around 110$ for a barrel but the following 1,5
years completely changed industry situation. By the end of 2015 crude oil prices declined
significantly and reached its lowest level of 27,72$ for a barrel of Brent in January 2016. Followed
by crude oil prices, jet fuel prices declined dramatically. Average price of jet fuel in 2013 was
124,5 a barrel but the latest prices in March did not exceed the level of 45$ for a barrel.
FIGURE 7. JET FUEL AND CRUDE OIL PRICE ($/BARREL)
Source: Oanda, 2016
Crude oil is commodity and its prices is formed under the pressure of market forces of supply and
demand. The peculiarity of the demand for oil is that in the short term demand for crude oil is not
elastic: the rise in prices has little effect on demand, because oil is a major energy and can not be
replaced by some other resources in those areas where it is used most wide (the fuel for most forms
of transport, petrochemicals). Therefore, even a slight drop in oil supply leads to a sharp rise in
prices (Cooper 2003). The overall supply of oil has increased. There are some reasons for it.
Kingdom of Saudi Arabia for the second year is in a real "oil war" against the United States - or
rather, against the American oil companies involved in the development of shale deposits (Conca
2014). It shale revolution, by which production in the US has increased since 2008 by 90 percent,
led to the fact that markets are reduced to Arab oil. In shale oil, there is one significant difference
from the Arab - it is expensive. Many fields can be at breakeven price of $ 60-80 per barrel, while
Saudi Arabia is enough and 20, or even 10 dollars per barrel. The idea of the kingdom to pump oil
market, lower prices and bankrupt shale producers.
European and American sanctions was taken off against Iran, the country has sharply increased
supply on the world market. There is no doubt that it will not wait or restrict exports to raise prices
38
- Iran needed inflow of foreign currency immediately, the country had for too long lived under
sanctions (Walayat 2016).
Despite of the disadvantage position of Russia in the background of lower crude oil prices, Russian
companies did not reduced their level of extraction of oil (Rosstat 2016). The official position of
Russian oil companies is to produce as much as possible - and at least compensate for this fall in
prices (Leiva 2016). No one wants to voluntarily withdraw from the market because he feared that
he was immediately replaced by competitors.
At the same time the problem comes from the supply side. The growth of China's economy is
slowing down, which means that oil consumption in the country is not as big as expected a few
years ago (ITA 2016). The point, however, not only in China: the world consumption of oil is not
too grows - the GDP of many major economies did not increase from year to year, and now Europe
and the United States are actively developing alternative energy and stimulate citizens commute
to work by bike rather than by car – shortly saying, do everything that consumes less oil. Under
such conditions, the global demand for oil is growing at one percent a year - offer the same
increases much faster.
Despite the fact that the traditional air transportation market has been growing with very modest
pace, budget airlines showed a significant growth both in revenues and number of passengers,
making budget airline industry more and more popular. CAGR of supply of seats in European
market for budget airlines comprised 21,8% for the period from 2000 to 2011, while traditional
carriers did not show any growth for the corresponding period. Notable fact here is that the share
of seats offered by budget airline in the total amount of seats offered in the European market has
been growing from 6% to 38% for the same period of time (IATA 2015b). These numbers are
really impressing, especially if we are looking at the results of traditional carriers and their humble
results against the background of the absence of profitability.
Huge players at the market of low-cost air transportation demonstrated also quite steady growth.
For the last 8 years EasyJet, one of the largest budget carrier based in England, showed stable
growth both in the number of passengers and revenue. Its CAGR of revenue from 2007 to 2014
constituted 11% and CAGR of the number of passengers was 8% (Easyjet 2014). These numbers
are especially impressive if we look at the size of the company. EasyJet possesses around 230
vessels and it ordered and is waiting for additional 170 planes.
But the leader of budget carriers in Europe is Ryanair. Its financial results are even more. Ryanair
experienced revenue growth with CAGR of 14% for the period from 2010 to 2014, while its
passenger traffic rose with CAGR of 5% (Ryanair 2015). The most incredible point here that the
39
company encompasses 300 planes and is waiting for 400 in the future. Ryanair conveyed 82
million of passengers in 2014 that is more than the whole airline industry in Russia in the same
year. Its revenue reached the level of 5 billion EUR in 2014.
The largest discount airline in the world is Southwest Airlines. It is a mature and very sustainable
company operating in the US market and its surrounding areas since 1971. The company has more
than 600 vessels in its fleet and ordered additional 300 planes. The revenue of the company has
been increasing with CAGR of 10% from 2005 and comprised more than 18 billion dollars in 2014
(Southwest airlines 2014). However, the number of passengers has been growing with CAGR of
3% for the same period of time and constituted 110 million people, much more than the whole
industry in Russia.
The previous example demonstrates activity of stable and sustainable companies. There are also
small companies established on the market relatively recently. For example, Vueling, Spanish
budget carrier founded in 2004, started its business with relatively small fleet of about 20 vessels
but the wise management leads to fact that the company has been gaining their facilities and
turnover very rapidly. For the whole history of the company, Vieling gained its revenue with
CAGR of 20% and its passenger traffic with CAGR of 18%. Today Vueling has more than 100
plane in their facilities and conveyed more than 20 million of passengers (Vueling 2014).
The world market overview showed that the current situation in air transportation is favorable for
the development of low-cost segment. Impressing numbers of growth of companies represented in
this segment advocate it. The business model of low-cost carriers could be profitable and
prospective. In this way, it is needed to investigate closer Russian market in order to understand
the reasons of its inadequacy and factors affecting it.
3.2 Russian market overview
Macroeconomics
Economic situation in Russia was not favorable last years. Economic crisis emerged in 2014
significantly slows the development almost all fields of economy of Russia. In addition, low oil
prices exacerbated the situation (Moody’s 2016).
In 2013, economic growth in Russia fell under the influence of structural problems and a decrease
in investment activity. GDP growth was 1.3%, inflation - 6.5%, industry growth - 0.8%. Capital
outflow from Russia amounted to $ 61 billion for the year 2013. In 2014, economic stagnation
continued. In 2014, economic sanctions were imposed toward Russia that led to the huge economic
changes. Economic growth in Russia amounted to 0.6%, the inflation rate was 11.4%, and
40
industrial production grew 1.7%. The outflow of capital from Russia in 2014 amounted to a record
$ 151.5 billion. In December 2014, there was an enormous fall of the ruble against the US dollar
and euro. In Russia a currency crisis caused by the imposition of economic sanctions and falling
oil prices began. It contributed to a further decline in the economy. In 2015, Russia's economy
encountered the same problems: falling oil prices and the preservation of economic sanctions.
During 2015 decline in GDP was 3.7% (Rosstat 2016). The devaluation of Russia's currency and
stock market slump led to the fact that the market capitalization of Russian companies has returned
to the level of 2005. According to the Bank for International Settlements (BIS 2016), the real
effective ruble exchange rate in September 2015 decreased compared to December 2013, 30.4%.
The weakening of the ruble has become a major factor in the increase of inflation and, as a result,
contributed to the decline in real disposable income and long-term cooling of consumer demand.
At the end of 2015, inflation in Russia rose to 12.91%. According to Rosstat data (Rosstat 2015),
as of October 2015, the average monthly real wages of workers' organizations in Russia decreased
year on year by 10.9%. This was most significant falling of real incomes of the population in the
period since 1999. 2016 began with weakening and extreme instability of the ruble against the
backdrop of falling oil prices.
The current situation does not look favorable for the development of low-cost carrier market due
to ruble exchange rate, stagnation of economy and decline in disposable income of potential
customers. The costs are increasing, while revenue per passenger is decreasing.
Industry trends
For the Russian civil aviation in 2014 and 2015 became difficult. The industry observed significant
decline in passenger turnover against the background of slowing macroeconomic fundamentals.
Despite the negative trends, the Russian market was still growing in 2014 at a faster pace compared
with other regions. However, 2015 with its severe macroeconomic situating change the direction
of the trend and the industry suffered the drop in industry turnover (Aeroflot 2015).
This drop was triggered by both domestic companies and foreign players. Foreign companies exit
Russian market in prevailing amount primarily due to decreasing purchasing power of Russian
Rubble, reduced income of customers at this market and tough political situation. Even huge giants
such such as DeltiAirLines or Lufthansa and its subsidiary GermanWings (Papernaya 2015)
reduced their activity in Russia to a minimum level or just abandoned this market. In the current
situation, the tickets are expensive enough to ensure the previous level of profitability on
international routes for foreign companies. In respect to domestic companies, it can be seen at the
figure 1 that the overall turnover strongly reduced by the decline in international flights. Only just
41
among Russian companies, there was a drop in international transportation by around 20%
(RosAviation 2016a).
Passenger turnover (Russian companies)
300 000 000
Thsd pass km
250 000 000
200 000 000
150 000 000
100 000 000
50 000 000
0
2011
Total Passenger turnover
2012
2013
2014
International transportation
2015
Domestic transportation
FIGURE 8. PASSENGER TURNOVER OF RUSSIAN COMPANIES 2011-2015.
SOURCE: ROSAVIATION, 2016
People
Passenger transportation (Russian companies)
100 000 000
90 000 000
80 000 000
70 000 000
60 000 000
50 000 000
40 000 000
30 000 000
20 000 000
10 000 000
0
2011
Total passenger transportation
2012
2013
International transportation
2014
2015
Domestic transportation
FIGURE 9. PASSENGER TRANSPORTATION 2011-2015.
SOURCE: ROSAVIATION, 2016
Weakening competition triggered by the exit of international companies and bankruptcy of some
domestic players allowed the existing companies to increase their prices (Aeroflot 2015). It also
adversely affected the number of passenger conveyed. Increase in price could also be explained
by the monopolistic characteristic of the Russian market.
Competition
42
Russian airline industry is not fragmented and has more monopolistic essence. The main player at
Russian market is Aeroflot, state-owned company, the national airline of Russia. Together with its
subsidiaries Rossiya, DonAvia, Avrora, Orenair, Pobeda and other small airlines, form the largest
aviation holdings in Russia - "Aeroflot" group. The Aeroflot group holds around 55% of the whole
Russian market (RosAviation 2016b).
A year ago, it was possible to observe other large player at the market – TransAero. Transaero, the
second largest airline in the country and the company, whose appearance in 90s actually marked
the beginning of real competition in the Russian passenger aircraft industry. In 2014 TransAero
holds 33% of Russian market in terms of PSK (RosAviation 2016b). However, on October 26
2015 Transaero was declared bankrupt with the debt amounting to 250 bln. Russian rubbles.
Aeroflot and its subsidiary Russia gained access to 56 routes Transaero on a number of major
areas. In 2014 Aeroflot had market share of around 25%. In 2015 the company gained its share
and it comprised around 28%. In January 2016 Aeroflot reached 36% of the whole market. Since
Aeroflot got all the key areas, the level of monopolization of the Russian market of international
traffic increases dramatically. In particular, the full monopoly on the Russian side are routes from
Moscow to London, Paris, Berlin, Vienna, Rome, Milan, Venice, Prague, Heraklion, Tel Aviv,
Istanbul, Antalya, New York, Los Angeles, Miami, Bangkok , Phuket, Beijing, Hong Kong,
Karaganda (Transaero 2015). As for the remaining 64% of the liberated areas of "Transaero", they
have no claim, and it is unlikely to be eligible in the next few years, because they are direct flights
from Russian regional centers, where demand for international transportation greatly reduced.
Thus, it is possible to name Russia as the market resembled to monopoly.
TABLE 3. TOP RUSSIAN COMPANIES. 2014-2015
SOURCE: ROSAVIATION, 2016
Passenger transportation, people
Passenger turnover, thsd pass km
2014
2015
2014
2015
Aeroflot
23 610 036
26 111 728
67 121 707
74 115 874
Transaero
13 198 591
11 218 909
47 066 421
35 584 398
Siberia
7 938 199
8 208 508
15 582 789
15 701 045
UtAir
8 564 340
5 540 382
20 198 948
9 994 954
Ural Airlines
5 160 588
5 445 134
13 327 154
13 124 658
Russia
5 191 783
4 751 568
10 147 404
8 694 979
39 565
3 089 676
50 325
4 668 439
3 034 659
2 840 284
8 471 008
6 348 659
Top 8 companies
66 737 761
67 206 189
181 965 757
168 233 007
% of 8 in the total
72%
73%
75%
74%
93 180 376
92 071 065
241 429 335
226 843 354
Pobeda
OrenAir
Total Russian airlines
43
TABLE 4. TOP RUSSIAN COMPANIES JANUARY 2015, JANUARY 2016
SOURCE: ROSAVIATION, 2016
Passenger transportation, people
Passenger turnover, thsd pass km
Jan 2015
Jan 2016
Jan 2015
Jan 2016
1 810 922
2 005 421
5 330 132,60
5 831 875,00
Siberia
538 216
690 195
1 082 195,00
1 311 703,00
UtAir
395 818
376 876
903 766,44
599 628,21
Ural Airlines
325 858
350 403
797 590,79
793 737,58
Pobeda
79 000
330 956
117 438,08
490 701,07
Russia
379 310
275 411
741 875,72
484 063,79
OrenAir
199 596
192 617
370 488,49
590 781,88
Globus
178 998
189 687
449 403,00
478 038,00
Top 8 companies
3 907 718
4 411 566
9 792 890
10 580 529
% of 8 in the total
66%
80%
62%
77%
5 900 119
5 540 107
15 784 228,76
13 692 793,73
Aeroflot
Total Russian airlines
However, experts within industry mentions that typically 50-80% of the first passengers on the
route of a low-cost airline company - new travelers. Thus main competitors for LCCs are buses,
train and cars. People, who used these types of transport before, now can use planes and reach the
destination faster but for cheaper price (Aeroflot 2015). However, current economic situation are
more favorable for substitutes.
Destinations
According to information from Transport Clearing Company, main destinations in Russia are
between Moscow and other main cities of Russia (Transport Clearing Company 2015). Two the
most popular routes are from Moscow to Saint Petersburg and back. In this way, there is only one
huge hub in Russia – Moscow. The prevailing majority of flights between regions are routed
through Moscow. Other small hubs are Saint Petersburg and Ekaterinburg but they are much less
than three Moscow airports. Here is the table with the largest airports in terms of passenger traffic.
In the table airports with more than 1 mln passengers annually are presented.
44
TABLE 5. PASSENGER TRAFFIC SOURCE
SOURCE: ROSAVIATION, 2015
Passangers
Name
2014
Moscow (Sheremetyevo)
Moscow (Domodedovo)
Moscow (Vnukovo)
Saint Petersburg (Pulkovo)
Simferopol (International)
Ekaterinburg (Koltsovo)
Sochi
Novosibirsk (Tolmachovo)
Krasnodar (Pashkovskiy)
Ufa
Samara (Kurumoch)
Rostov-na-donu
Mineralnie vody
Kazan
Krasnoyars (Emelianovo)
Habarovsk (New)
Vladivostok (Knevichi)
Irkutsk
Kaliningrad (Hrabovo)
Surgut
Tumen (Roschino)
Perm (Bolshoe Savino)
Chelyabinsk (Balandino)
Anapa (Vityazevo)
Nizhniy Novgorod (Strigino)
Volgograd (Gumrak)
Omsk (Centralniy)
31 259 662
33 039 531
12 733 118
14 264 732
2 685 269
4 473 239
3 065 644
3 829 667
3 420 385
2 356 467
2 359 133
2 340 295
1 921 453
1 942 408
2 045 249
1 924 253
1 772 370
1 661 261
1 460 060
1 353 287
1 369 094
1 315 144
1 394 142
1 005 383
1 126 755
757 748
1 037 808
2015
31 279 508
30 504 515
15 815 129
13 501 454
5 017 758
4 170 737
4 076 509
3 600 291
3 121 630
2 291 502
2 193 744
2 061 016
1 957 121
1 794 735
1 788 754
1 716 333
1 678 628
1 635 478
1 533 057
1 416 846
1 399 264
1 284 970
1 229 435
1 178 984
946 334
901 522
881 186
%
100,1
92,3
124,2
94,7
186,9
93,2
133,0
94,0
91,3
97,2
93,0
88,1
101,9
92,4
87,5
89,2
94,7
98,5
105,0
104,7
102,2
97,7
88,2
117,3
84,0
119,0
84,9
Airports
The second largest cost item in a structure of costs of airline is airport services (Aeroflot 2015).
The cost of airport services, the transparency of its formation and inadequate quality of the ground
infrastructure are still sharp subjects in relationships airlines and airports (Belousov 2014). Parties
are in any case tied to each other. One of the most important reason for high taxes is the absence
of competition among airport.
Classic model of budget airlines implies that an airline chooses less comfortable airport but
cheaper. However, Russian market does not have secondary airports and airlines do not have
choices. Number of experts in interviews published in media named weak infrastructure as one of
the main problem for successful activity of LCC. Lack of competition, lack of investments and
small passenger turnover leads to slow pace of development of regional airports (Belousov 2014;
45
Mokrousova 2012). As a result, airport cannot serve aircraft in time comparable with the best
airports and therefore it has negative effect on activity of LCC. In addition, CEO of Avainova,
Teterin Konstantin, stated that airports historically prefer to serve classic airlines. As a result, LCC
could get uncomfortable, day or night slots, which means that their flights will have fewer
passengers, because the main traffic is in the morning or evening (Mokrousova 2012).
Costs of services in different scale and geography should not be the same. They have fixed costs the runway should always be in a good quality, the terminal should be maintained, regardless of
the number of passengers. Tariffs should at least provide a refund that are different for all airports.
The smaller airport by number of operations or passenger traffic, the more the size of rates and
tariffs is critical for it in terms of preserving financial stability. The difference in the cost varies
depending on the particular equipment of the airport and the amount of consumption of services.
For example, in the upgraded or new airports (Sochi) air terminal use can be more expensive than
in the old (Krasnodar) (Belousov 2014). In addition, some airports provide with additional services
such as leading of aircraft, while others do not use it.
The Federal Tariff Service sets limits fees for takeoffs and landings, aviation security, terminal
use, passenger service and excessive parking – five main costs at airports. Management of several
Russian airlines, such as S7 and Ural airlines stated that the lack of state control of price
determination lead to the lack of transparency of the price (TASS 2016). Tariffs are unregulated
and could be set arbitrarily, without reference to the cost, always significantly exceeding costs of
airports, often in several times. Price are calculated using the desired total revenue for the company
(Belousov 2014). Due to the fact that supply is usually monopolistic, airports could set higher
price. However, some experts of the industry (Oleg Panteleev, Industry agency AviaPort; Irina
Frolova, Transaero) mentioned that regulation of these taxes could lead to the reduction of
investments in the development of infrastructure (Mamonova 2014; Belousov 2014). At this point,
the ability to negotiate could be an advantage of the company.
In determining the best routes for potential low-cost airline it is important to take into consideration
tariffs of airports. Calculations for the price of airport services provided in this paper take into
account 4 major costs: fees for takeoffs and landings, aviation security, terminal use and passenger
service. Two first cost items are fixed costs and depend on the maximum takeoff weight, while the
last two cost items are variable and depend on passenger traffic. The information about tariffs
(table 4) for these services are gathered by AviaPort, a Russian information-analytical agency
specializing in the collection, processing and dissemination of business details about the aviation
industry. Information was updated in the beginning of 2016 (Aviaport 2016). The list contains
cities with a passenger traffic more than 1 mln people in last year, as fixed costs (fees for takeoffs
46
and landings, aviation security) for low-cost airlines are acceptable. In addition, this calculations
do not take into consideration additional secondary services provided by airports. In this way, the
price could be understated. This calculation are done only for the purpose of ranging airport
according their prices.
The price will be calculated for typical aircraft of low-cost carrier, Boeing 737-800 with the
average maximum takeoff weight of 75 tons and 189 seats onboard. The passenger load factors is
75%. To get the price, fees for takeoffs/landings and aviation security are multiplied by the weight
of average vessel and summed up with the product of the average number of passengers conveyed
and fees for terminal use and passenger services for 1 passenger.
TABLE 6. TOTAL COSTS FOR AVERAGE VESSEL
Source: by author on the base of Aviaport data, 2016
Having calculated costs for airport services for average vessel using by low-cost carriers,
conventional unit cost, it is possible to range airports according to their price. The huge difference
in prices can be noticed. Moscow airports are the cheapest ones, while Saint Petersburg, the second
largest city, has a very expensive airport. That is one of the major explanation, why there is almost
no low-cost carriers in Saint Petersburg despite of the huge potential market.
47
Customers
In order to attract passengers who are sensitive to the cost of transportation, creation a new airline,
budget carrier, could be a good option. Low cost carriers in most cases generate new passenger
traffic and stimulate the growth of total traffic. Typically 50-80% of the first passengers on the
route low-cost airline company - new travelers (Aeroflot 2015). According to interview with CEO
of Pobeda, Andrei Kalmykov, main competitors of LCCs in Russia are substitutes, ground
transport modes, such as buses, trains, cars. “A huge number of passengers, who used buses before,
now prefers flights lasting up to two hours. Passengers who previously traveled to the capital by
bus, now travel on the plane, because it costs about the same money, but the speed is much faster.
Because the plane encompassed 189 seats can offer the lowest fare and the lowest fare generates
additional passengers, which would never have flew. Student can visit relatives, go somewhere on
weekends and so on. Therefore, our main competitors are not Russian airlines but ground
transportation.” (Medvedev 2016c)
The main customers of LCCs are not only price sensitive customers. All categories of population
use this type of travel. Even share of business customers are significantly growing. People who fly
on business trip prefer to save money and to spend it with a worthy purpose (Medvedev 2016c).
The other reason that true LCC operates with very high punctuality. For business passengers is
important to get there on time and with the guarantee to get where they need. They fly mainly on
one or two days - they have a minimal amount of luggage. They can get on board conditions that
they are used to receive in the classic airlines: they can book priority boarding at the airport,
booking places that are at the emergency exits, in which the increased distance for legs and to fly
with comfort. Today, LCC is not something shameful, or an indication that a person has no money.
CEO of Pobeda mentioned that up to 30% of their passengers are from business segment.
Ticket promotion
Low-cost carriers use tickets promotions that lead to attraction of new customers. Pobeda offer
tickets for 999 rubbles, Avianova offered tickets for only 250 rubbles, Ryanair seldom sold tickets
just for 1 Pound. This is a very effective technic. These ticket promotions are so effective that
helped Pobeda, Avianova and Sky Express get into top 10 companies out of 150 by RPK in only
one year (Rosaviation 2008, 2009, 2015). Moreover, it was achieved with relatively small fleets.
However, it does not mean that passenger can buy tickets for such a low price. With the filling of
a plane, the ticket price is increasing. Low-cost carriers use yield management system in order to
maximize revenue generated from ticket sales. Yield management is a variable pricing strategy,
based on understanding, anticipating and influencing consumer behavior in order to maximize
revenue or profits from a fixed, perishable resource. Therefore it is possible to get really cheap
48
tickets only in advance. When the number of tickets left are small, their price is comparable to
traditional airline. However, this technic is so powerful that allows to fill planes with maximum
load factor.
Political environment
Political environment highly affect airline industry, where passengers are favored over the
airlines. According to words of CEO of Pobeda, “safety is paramount” (Medvedev 2016b). In
addition, Russian government has a strong influence on the market because it owns Aeroflot group.
In other words, more than 50% of market belongs to state-owned company. It leads to the fact that
state-owned company can behave in its own interests. In addition, tough political situation in
Russia and its relationship with some countries could also affect activity of Russian airline
companies. For example, sanctions against Dobrolyot forced the company to be closed (Reguly
2014).
Legal environment
Legal environment determine the boundaries of the industry, therefore, in any ways, companies
have to take into account. There are still some restrictions, which are unusual for worldwide
industry; Russia is a “unique” country to some extent. However, due to the efforts of Aeroflot
group, the situation has been improved and some important laws were enacted. Connection with
authorities and the status of state-owned company helped in it.
Only two years ago, it became possible to sell non-refundable tickets (Federal law №79,
20.04.2014). The law allowing it was enacted due to the efforts of Aeroflot but it spreads to all
players in the industry. This is crucial point for LCC’s activity as it helps in cost saving
significantly. CEO of Avianova mentioned that to refund ticket with the price of 1000 Rub, it was
necessary to involve staff in the amount of 3-4 thsd. Rub. It is unacceptable for flourishing lowcost business.
Concerning catering, today all plane have to unload and carefully inspect all food and drinks on
board in any airport (Federal law №60, 19.03.1997). It requires additional costs and time needed
for these procedures, thereby it could significantly burden LCC’s activity. It is quite unusual for
European markets.
Russian legislation allows passengers to convey luggage with the weight of 10 kg for free. In
addition, there is a list of items that is possible to bring on board for free, such as portfolio, ladies'
bag, suit in holdall, cot, baby food, umbrella, camera, computer, and so on (Federal law №60,
19.03.1997). In this respect minimum requirements for luggage transportation are more favorable
49
for customers in Russia, you do not find such conditions abroad, for every item on board LCCs
are in right to charge fee.
Another restraining factor is necessity of usage of paper tickets (Federal law №60, 19.03.1997).
Advanced airlines abolished physical tickets and use only bar code on passenger phones. It save
time and money needed for registration of passengers, printing tickets or buying machines for it.
All this leads to increased time of passenger service in airport that, again, is very important for
LCC’s activity.
According to air code of Russia, the minimum amount of vessels that company has to have in its
fleet today is 8 (Federal law №60, 19.03.1997). It requires significant amount of investments, if a
new player wants to enter the market. In addition, all planes operate in domestic market should be
registered in Russia. If an aircraft was assembled outside Russia, it requires owner of the plane to
pay VAT and custom taxes. In this way, legal environment becomes a serious barrier both for
entrants and for existing companies.
3.3 Internal factors
The comparison of Russian budget airline and Ryanair in the context of internal factors is presented
in Appendix 1. The detailed analysis is described further.
Pobeda
Another very remarkable point related to Russian market is the launch of Pobeda – the forth
Russian low-cost airline and the only one existing nowadays. The airline was established after
sanctions of the European Union against the airline Dobrolet for the flights to Simferopol have
been introduced on July 30, 2014 and whereby the airline was forced to terminate all its flights.
Airline Pobeda was founded in September 2014 as part of "Aeroflot" Group. 100% of Pobeda
belongs to Aeroflot group. The company develops on the basis of the classical business model of
budget airline with global best practices accumulated in the industry. Pobeda is based at Moscow's
Vnukovo airport. December 1, 2014 Pobeda has carried out its first flight on the route Moscow –
Volgograd. The situation is outstanding because the company showed extremely great success in
its first year of activity (Aeroflot 2015).
The decision to establish the budget airline was adopted by the Board of Directors of Aeroflot
group in 2013 in order to consolidate its leading position in the emerging segment of low-cost
transportation. Activities of the airline aims to increase the mobility of the population and mutual
access to Russian regions (Aeroflot 2015).
50
On November 11, 2014 Pobeda launched on sale tickets for the first flights and for the first 12
hours sold more than 7 thousand tickets, and 20 thousand for a week of work. In January 2016,
after only 1 year of activity, Pobeda became the 5th largest Russian company in terms of conveyed
passengers. In 2015 Pobeda made a profit of 37 million rubles, according to Russian GAAP after
just 1 year of activity. All these results were achieved with a fleet of only 12 aircrafts (Aeroflot
2015).
Dobrolyot
Dobrolyot was Russia's budget airline, a 100% subsidiary of Aeroflot, based in Moscow
Sheremetyevo airport. The company was founded on October 4, 2013 and began commercial
operations in June 2014. On July 30, 2014 the sanctions of the European Union for the flights to
Simferopol was introduced against the company. After that the airline was forced to terminate all
its flights (Dobrolyot 2016). In July 2015 it became known about the liquidation of the company.
Majority of assets became the part of Pobeda (Aeroflot 2015).
In short, Dobrolyot was a predecessor of Pobeda. It had the same CEO, the same team and strategy,
all vessels of Dobrolyot would be used by Pobeda later. The only official reason why Dobrolyot
had to be closed lies in sanctions against the company. The company carried out flights to
Simpheropol’ against the background of tough political situation. On August 3, 2014 Dobrolyot
officially announced that due to EU sanctions "under unprecedented pressure from European
suppliers” the company "forced to terminate flights and ticket sales." The press release explained
that a number of European counterparties had canceled the lease agreement on the aircraft,
maintenance and insurance of aircraft, as well as the provision of aeronautical information. The
new LCC Pobeda do not have flights to Simpheropol’.
Sky Express
Sky Express is previously existed Russian airline, the first low-budget airline in the country,
founded in 2006 and based in Moscow airport Vnukovo. According to the number of passengers
carried in 2009, it took 13th place in the country (1.02 million passengers). The business model of
Sky Express has not been copied from European low-cost airlines but developed independently.
Due to the lack of readiness of the Russian market to the traditional models of aggressive low-cost
airline, Sky Express combines the features of both low-cost airlines and traditional airlines. The
company ceased operations in the autumn of 2011, the air carrier certificate has been revoked by
Rosaviation on October 31, 2011. By the end of 2012, the Arbitration Court of Krasnodar region
recognized airline insolvent (bankrupt).
Avianova
51
Avianova was Russian budget airline, which operates in 2009-2011. The company became the
second LCC in Russia, rapidly increased its route network. Nevertheless, two years later the airline
ceased operations due to a chronic loss-making, and in part because of the conflict of shareholders
(Gazeta.ru 2012). January 12, 2012 operator certificate of Avianova was canceled.
Business model of Avianova includes both features of LCC and elements of traditional airline.
However, the company did not show any profit for the whole period of activity. The company did
not do its best to reduce its costs, while fares were really low. Finally, after first huge losses and
debts, investors of the company could not come to the single conclusion that led to the termination
of financing from some parties and to the larger losses.
Fleet characteristics
Successful business model of low-cost carrier involves appropriate fleet as it directly affect cost
structure of a company.
TABLE 7. FLEET CHARACTERISTICS
Source: Source: Database Planespotters.net
Fleet size
Homogeneity of
fleet
Type
Pobeda
Dobrolyet
SkyExpress
Avianova
Ryanair
12
2
10
6
345
one type
one type
one type
one type
Boeing 737-800
Boeing 737-800
3 types
Boeing 737300/ Boeing
737-500 /
Airbus A-319
Airbus A320-232
Boeing 737-800
Age
1,5
1
19
10
6,5
Number of seats
Country of
registration
189
189
132-148
170
189
Bermudas
Bermudas
Russia
Ireland
Ireland
Pobeda’s fleet includes aircrafts of one type – Boeing 737 with 189 seats. As of April 2016 the
average age of aircraft airline was 1.8 years. All of them are used through operational leasing. The
company perfectly exploit economy of scale. New fleet allows to save from technical maintenance,
fuel consumption and insurance payments (Medvedev 2016b). The average age of Sky Express
was 18-19 years that led to increased costs relate to technical maintenance, oil consumption,
number of breakdowns and time spent in airports. Some experts (Chernyak, Avrora; Tetetin,
Avianova; Koltovich, Aeroflot) of the industry mentioned that this was a crucial point that led
company to the bankruptcy (Mokrousova 2012)(Mokrousova 2012). Avianova also had increased
costs and time for maintenance, fuel consumption and insurance payments due to old fleet. This
was also one of the reason for constant delays of both companies that also had a huge impact on
companies’ performance.
52
Recommendations in Russian context could be similar to classic low-cost carrier model. As the
majority of directions relevant for low-cost activity in Russia does not exceed 2 thsd. km.,
utilization of new middle-haul narrow-body planes with maximum amount of seats is the perfect
option. Longer-range or wide-body planes are redundant for the market as it requires too capitalintensive investments and too large passenger turnover to recoup the costs. Single type of aircrafts
allows to save on salaries for pilots and maintenance. In addition, the more seats are in aircraft, the
more revenue it can generate from one flight. The fleet should be as new as possible.
All planes of Pobeda are not registered in Russia but in Bermuda as well as all planes of Aeroflot.
It helps Pobeda not to pay taxes, as it is necessary to pay them for import of planes in Russia.
There are only two countries – Bermuda and Ireland – that have signed an agreement allowing free
movement to Russia. However, these agreements implies only international flights but the Russian
government may provide with exceptions to this rule, as it often does; an aircraft with foreign
registration can also be used for domestic flights. As it was mentioned, all vessel by Aeroflot group
are registered in Bermuda but are used within Russia, while some other Russian companies did
not get permission for it (Roche & Duffay 2016). This shows how huge impact of government on
airline industry is and its possibility to change the rules. One implication can be made that
relationships and connections play significant role in Russian market. Avianova registered its fleet
in Russia and paid significant amount of import taxes that comprised up to 41of total price of
aircraft (Dagaeva 2011b).
Fleet utilization
As airline has relatively huge amount of fixed costs (for instance, lease payments), it is necessary
to utilize fleet to the full extend. It should bring money at any moment.
TABLE 8. FLEET UTILIZATION
Source: Interviews with experts and representatives of companies; websites of companies.
Utilization time
Turnaround
time
Punktuality
Pobeda
Dobrolyet
SkyExpress
Avianova
Ryanair
12-16 hours
12-14 hours
8 hours
12 hours
12-16 hours
25-35 minutes
30-40 minutes
1 hour
1 hour
25-30 minutes
0,81%
1,65%
17%
12%
2%
All Russian budget airlines tried to utilize their fleet at full capacity. However, only Pobeda and
Dobrolyot achieved results that are close to the best practices worldwide. Pobeda could reach
turnaround time in some airports of 30 minutes and time of utilization of aircraft up to 16 hours
per day. These result are one of the best in the world (Medvedev 2016b). This results has been
achieved through close collaboration with airports and thorough training of employees. To
improve airport service and reduce the spent in airport by aircraft, Pobeda started to interact with
53
airport very intensively. The main goal was to introduce and implement new standard of airport
services. CEO of Pobeda mentioned that Pobeda had been involved in elaboration of optimization
strategy for some main region airports. A huge number of operations should be performed
simultaneously and it should became technologically coordinated work. Pobeda even arranged
business trip for representatives of airports to the best European low-cost airports with the aim to
show them, how it is possible to improve quality of airport services. In addition, all operation are
strictly described and personnel know what exactly and in which order they have to do. Some of
serving such as cleaning services were eliminated and now are carried out by crew of a plane.
Strict adherence of the rules is also highly important. If passenger is late for 1 minute, it means
that flight is not going to wait him (Medvedev 2016a).
Avianova and Sky Express also tried to minimize time spent in airport. However, weak
development of infrastructure and lack of thorough study of all processes in airport and lack of
involvement and collaboration with airports did not allow to reduce the time. In some cases, good
relationships between airline and airport could lead to better results. For instance, the priority of a
company can be increased (Dagaeva 2011a).
Punctuality rates of Pobeda and Dobrolyot are also highly positive. This rate shows the share of
flights that were delayed for more than 2 hours. There are two main reasons for weak punctuality
rate. Beside ineffective operations in airport, poor weather conditions can also affect punctuality.
Russian climate is relatively unpredictable, so it is not unusual that weather can lead to delays.
Weak infrastructure of airports does not allow to land the plane in bad weather conditions.
Punctuality leads not only to missed revenue but also to catastrophic losses for providing
accommodation for passengers. Such high level of delays in Sky Express (up to 29% in some
months) was also triggered by lack of vessels: 2 new aircraft were delivered one month later than
they should be (Dagaeva 2011a).
This information confirmed the fact of weak development of airports. Some of them are not ready
to serve aircraft for 30 minutes. The implications derived from this information tell that close
collaboration with airports could significantly help in utilization of aircraft as in Pobeda case.
54
Operations
TABLE 9. OPERATIONS
Source: Interviews with experts and representatives of companies; websites of companies.
Fuel
consumption
Pobeda
Effective +
Discounts due to
large amounts
bought together
with Aeroflot
Dobrolyot
Effective +
Discounts due to
large amounts
bought together
with Aeroflot
Sky Express
Avianova
Ryanair
Less effective/No
discount
More spending on
maintenance/
frequent
breakdowns
Effective +
Economy of scale
New fleet allows
to spend less
Less effective/No
discount
More spending on
maintenance/
frequent
breakdowns
Maintenance
& Insurance
New fleet allows
to spend less
Personnel
Distribution
channels
Cheapest
ticket
Yield
Menagement
Multifunctionality
Multifunctionality
Multifunctionality
Multifunctionality
Multifunctionality
Primarily On-line
Primarily On-line
Primarily On-line
On-line. Offices
Primarily On-line
999 Rub
999 Rub
500 Rub
250 Rub
1£
Yes
Yes
Yes
Yes
Yes
New fleet allows
to spend less
As it was told above, new fleet allows to save from technical maintenance, fuel consumption and
insurance payments. New fleets lead to the reduced number of breakdowns that, in turn, reduce
the time spent on ground and less costs. In addition, new aircrafts produced by Boeing and Airbus
consume less fuel (Medvedev 2016b). The average age of Sky Express was 18-19 years that led
to increased costs relate to technical maintenance, oil consumption, number of breakdowns and
time spent in airports. The same story with Avianova (Mokrousova 2012).
Pobeda has only 100 employees, who do not fly. All the rest are members of crew. That is why it
has no employee in airports. The number of members in crew in the least possible according to
Russian legislation. This helps significantly to reduce costs. The crucial principle here is
multifunctionality. The same person serve passengers both in air and on ground. She is responsible
with customer registration, their loading, customer service in flight and even vessel cleaning.
Moreover, all function of the staff are described in details. All the rest should be outsourced. A
huge number of operations performed simultaneously in order to reduce time spent in airports
(Medvedev 2016a). Sky Express and Avianova tried to follow the same strategy.
The essential aspect of low-cost carrier is to abandon traditional distribution channels. All Russian
budget airlines understood it and focused primarily on on-line distribution. If a passenger wants to
buy ticket at the airport, he has to pay more for it. This mark-up covers all additional costs tied to
this sale. The transaction costs more, therefore passenger should pay more (Medvedev 2016b).
In addition, all companies implemented yield management system that helped to increase revenue
flow through price discrimination. First tickets are extremely cheap in advance but the more plane
55
is filled, the more expensive they are. The last tickets for a flight is usually comparable with prices
of traditional airlines (Medvedev 2016b)
Another point that helped Pobeda to be more successful than its predecessors is economy of scale
in fuel procurements. Pobeda is a part of Aeroflot group and therefore have an access to the cheaper
fuel (Labykin 2013). This is a positive point emphasizing advantage of synergy effect of
collaboration traditional airline and low-cost carrier.
To sum up, all these points are inherent in classic low-cost carrier model activity and should be
taken into account in any market. To increase probability of success, a company should elaborate
strict plan concerning these points. Avianova and Sky Express did not emphasize it and therefore
incurred significant losses. In addition, possibility of achieving economy of scales could be an
advantage.
Destinations and Airport related issues
TABLE 10. DESTINATIONS AND AIRPORT FEES
Source: websites of companies, Wikipedia
Destinations
Pobeda
Majority flights
are from
Moscow.
Developed
network of
regional flights
Airport fees
Use all airports /
Lower fees due
to connections
Dobrolyot
SkyExpress
All flights are
from Moscow
Use the
cheapest
airports / Lower
fees due to
connections
All flights are
from Moscow
Use all airports
Avianova
Majority flights
are from
Moscow.
Developed
network of
regional flights
Ryanair
Developed
network
Use all airports
Use the cheapest
airports /
Ryanair owns
some airports
There are two factors that affect the choice of destinations of an airline. The first is a passenger
traffic. Airline has to provide each flight with the maximum number of passenger in order to
achieve satisfactory load factor and possibility to use aircraft as much hours per day as possible.
The second is payment for airport services. As we discussed it earlier, there is a problem with the
development of infrastructure in Russia that includes lack of competition, inadequate service in
some airports and lack of transparency of airport fees. In addition, airports historically prefer to
serve classic airlines. As a result, LCC could get uncomfortable, day or night slots, which means
that their flights will have fewer passengers, because the main traffic is in the morning or evening
(Mokrousova 2012).
Pobeda focuses on most popular destinations and tries to use the cheapest airports, where it is
possible. Pobeda started its activity with only 11 directions from Moscow to regions of Russia:
Industrial - centers of Russia - Ekaterinburg, Perm, Chelyabinsk, Tumen, Surgut; South of Russia:
56
Vladikavkaz, Sochi, Mineralnie Vody; Cities of central Russia: Volgograd, Belgorod, Samara.
These are the most popular destinations in Russia. Today Pobeda’s flight network has been
expanded to 34 directions from Moscow with both domestic (Anapa, Astrakhan, Gelendzhik,
Kirov, Krasnodar, Makhachkala, Nazran, Nizhnevartovsk, Novosibirsk, Saint Petersburg and
Cheboksary) and international flights (Vienna, Bratislava, Cologne, Milano, Minningem, Larnaka
and Pafos). Also there are some connections between south resort cities (Anapa, Sochi) and largest
cities of Russia, allowing to exploit tourists flow. Recently, Pobeda launched some flights between
main cities of Russia except Moscow (Saint Petersburg, Ekaterinburg, and Krasnodar). In respect
to foreign destinations, Pobeda choose the cheapest airports. Choosing the cheapest airports,
Pobeda also provide customers with Fly&Bus offer, allowing them to get more European cities.
For example, using a flight from Moscow to Minnengem, customers can reach Munich and Zurich
as well. Pobeda sell a bundle for a flight ticket and bus provided by the company from cheap
airport in Minnengem to the center of Munich or Zurich. This trick helps the company to widen
its destination network. As Pobeda is a part of Aeroflot Group, the company has some synergies
from it. First of all, Aeroflot has a good connections with some airports and therefore it can an
access for cheaper tariffs for airport services and access to the better time slots (Medvedev 2016b).
Airport fees are the second largest cost driver, thus this advantage is a key point.
As well as other LCCs in Russia, Sky Express used all main airport that sometimes were quite
expensive but primarily due to the absence of competition between airports in regions. However,
all its flights were only from Moscow with the focus on the most profitable destination. All flights
were effectively optimized. The most important factor in the growth of production indicators in
2009 was access to the international charter market, primarily in Turkey (Istanbul), Greece
(Heraklion), Cyprus, Spain (Ibiza), Egypt (about 30 lines). According to the Transport Clearing
House, in 2009 the number of airline passengers on international flights increased by 7.5 times from 18.9 to 205.3 thousand people (Transport Clearing Company 2016).
Avianova also had developed network of its flights, while majority of them were form Moscow.
However, Avianova’s network included also not very attractive flights. For example, it used
expensive Pulkovo airport in Saint Petersburg as a hub with empty flights to unattractive
destinations (Labykin 2013).
Political aspect is also important issue. Due to flights to Simpheropol’ and against the background
of current political situation in the Crimea, the sanctions were imposed on Dobrolyot. The press
release explained that a number of European counterparties had canceled the lease agreement on
the aircraft, maintenance and insurance of aircraft, as well as the provision of aeronautical
information. After that the airline was forced to terminate all its flights. Pobeda now does not flight
57
to Simpheropol’(Skifsky 2014). Political tension also leads to the difficulties with receiving
permission for flights in some European countries for Pobeda (BFM 2015).
To sum up, destinations should be chosen with consideration of passenger traffic, airport services
and airport fees. As Russian airport infrastructure is not developed properly, there is an absence of
competition and therefor lack of service quality and transparency of fees. Good connections and
relationship could be a great advantage at this point. In addition, the direct participation of LCC in
the development of an airport could be extremely useful. Political situation also affect the scope
of activity of Russian companies. It has influence on restrictions of foreign flight, sources of
foreign capital and cooperation with foreign counterparties and intermediaries.
Additional services
TABLE 11. ADDTIONAL SERVICES
Source: websites of companies, Wikipedia, Interview with representatives of companies.
Pobeda
10 kg free / no
hand luggage
allowed
Dobrolyot
10 kg free / no
hand luggage
allowed
SkyExpress
Avianova
Ryanair
15 kg / hand
luggage allowed
15 kg / hand
luggage allowed
Hand luggage
allowed
Seat selection
Paid
Paid
Paid
Paid
Paid
Priority boarding
Non-refundable
tickets
Different types
of payments
Paid
Paid
-
-
Paid
Yes
Yes
No
No
Yes
Paid
Paid
Free
Paid
Paid
No catering
No catering
No catering
Catering
Catering
No
No
No
No
Paid
40%
-
10%
12%
25%
Luggage
Catering
Entertainments
Share of revenue
Pobeda provides all range of services common for LCCs and charge fee for them. 40% of its
revenue comes from providing customers with additional service, such as luggage transportation,
seat selection, priority boarding. The only distinct difference that Pobeda do not provide catering
on board. It is triggered by Russian legal environment that obliges all planes to unload and
carefully inspect all food and drinks on board, when it is in airport. These procedures are time
consuming and do not allow vessel to depart in 30 minutes after arrival that is paramount for LCC’s
activity (Medvedev 2016b). Nevertheless, Pobeda has quite unusual policy for luggage
transportation. Due to Russian legislation, it is possible to convey 10 kg for free and bring on board
some items from the list approved by Federal aviation rules. It is not common for LCCs worldwide,
where you have to pay almost for everything and therefore make LCCs in Russia much more
convenient for customers. However, sometimes it leads to absurd situation, when you can to bring
laptop onboard but cannot take a bag for laptop for free. Representatives of Pobeda say that any
hand luggage brought on board make people wait in the aisle, while other passengers load their
luggage on shelves. It extend the time spent for boarding and therefore the whole time spent in
58
airport that is crucial for effective scheduled activity of LCCs. Charging a fee, persuade people
not to take belongings with them or to convey them as luggage (Medvedev 2016a).
The majority of principles of LCCs were implemented in the business of model of Sky Express.
However, it encompasses some elements that are not inherent for budget airlines. In addition, Sky
Express allowed their passengers to travel with 15 kg of luggage and carry hand luggage onboard
for free that completely washed away revenue for luggage transportation. This was due to existed
regulations that obliged all airlines to transport 15 kg of luggage for free. The company also did
not charge any fee for different types of payment and therefore did not cover costs relate to
processing it. Only 10% of revenue came from additional services (SkyExpress 2010). In addition,
it was not allowed to sell non-refundable tickets until 2014, when this law was passed. This led to
significant costs.
Avianova also provide additional services that can bring revenue. The share of revenue from
additional services comprised only 12% according to CEO of Avianova, Andrew Payne (Attikova
2014). Avianova allows passengers to carry hang luggage on board and 15 kg as luggage. These
rules completely diminished potential revenue from luggage transportation. As well as Sky
Express, Avianova was not able to sell non-refundable tickets that also led to some costs. In
addition, Avianova provided their passengers with food and drinks on-board that slow the time
spent in airport. As it was mentioned before, regulation in Russia obliges every aircraft to unload
all food and beverages in airport for inspection. These procedures are very time consuming.
Charging fee for any additional service could help to succeed in Russian market and generate
significant amount of revenue. However, Russian legal system has strong influence on activity of
LCC that should be taken into account, when a company elaborate its strategy.
Relationships
Relationship and corruption have an influence on Russian business to some extent. In respect to
airline industry, good relationship with government could help to implement new favorable laws
or mitigation of come requirements. As it was described above, Aeroflot facilitated to promotion
of deregulation of some aspects of the industry. In addition, it receives some privileges towards
utilization of fleets registered abroad. Good relationship with airports lead to discount for airport
services. Finally, it could help to receive attractive international destinations. International
destinations are limited and a company can receive through a contest. To sum up, relationships
and connection plays significant role in Russian airline industry.
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Implication of secondary research
Having conducted market research and analyzed the activity of Russian budget airlines, it is
possible to summarize results and highlight some features of the market that have the most
influence.
Macroeconomic situation is not favorable for low-cost airline.
Monopolistic essence of the market make it difficult to compete; However, the majority
of new clients come from substitutes;
Airports and infrastructure are immature; It does not allow to utilize aircraft at
maximum capacity. Close collaboration with airports could help in increase of
effectiveness of airport services;
Legal environment is “unique” and very restrictive;
Government support is a great advantage that can help to overcome legal, financial and
airport related issues;
Political situation could affect international routes.
In addition to mentioned issues, SkyExpress and Avianova had ineffective management and poorly
elaborated strategy. Strategy elaboration is crucial and should cover all internal factors with the
aim of cost optimization and improvement of asset optimization but it should be adjusted according
to country-specific factors.
Based on observation of activity of companies in Russian market, the possible actions could be:
1. New one-type fleet with maximum amount of seats;
2. Multifunctionality of staff and optimized operations;
3. Abandonment of physical assets; Focus on online distribution;
4. High level of outsource
5. Payable additional services
6. Focus on the most profitable destinations and cheaper airports
60
3.4 Expert interviews
The primary data is the data, collected by the researcher himself. When it is not enough of
secondary information to solve the problem or answer the research question, the researcher needs
to gather data by using special techniques (Easterby-Smith, Thorpe, and Jackson 2012). The
advantage of primary data is that it is tailored for particular research and therefore more reliable.
The disadvantage is that primary data collection can be very costly and time-consuming.
In this research, I elaborated non-standardized set of questions with some level of flexibility (see
Appendix 2). It follows that there is no one “objective” view to be discovered which the process
of interviewing may bias (Easterby-Smith, Thorpe, and Jackson 2012).
The set of question used during the interview was based on the factors revealed during the literature
review and with consideration of findings from the first part of this research. Through interviews
I intended to find more detailed description of the factors’ impact on low-cost carrier market in
Russia. During interviews external factors were primarily considered.
Interviews were conducted with 4 experts of the industry. The experts are:
Director of the Department of Public Policy in the field of Civil Aviation. Ministry of
transportation of Russian Federation;
Manager of Russian low-cost carrier;
Representative of low-cost airlines. Domodedovo airport;
Consultant worked on cost optimization in large airline company. McKinsey & Company.
All interview lasted from 15 to 20 minutes and includes answers on all questions from Appendix
2 and some specifying questions that helped to acquire more detailed understanding of the issue.
Economic situation
Economic situation was named by all interviewees as a restraining factor. Although economic
downturn is not considered as unfavorable condition for low-cost carriers (sometimes it even helps
to improve LCC’s position through gaining its market share), in Russia it became significant
obstacle.
“All lease payments are in foreign currency. Tickets for 1000 rubles cannot cover this payments”
“Being as a part of existing company, low-cost carrier can get significant synergy effect and
achieve economy of scale”
Financial crisis in Russia in 2014-2015 led to the devaluation of Russian Rubble. This led to
additional difficulties with covering lease and other payments made in foreign currency. In
61
addition, purchasing power of population has dropped. This reduced passenger traffic to the
directions to Europe.
“People travel abroad less, especially in Europe”
“New low-cost company will emerge only if the economy recover”
Competition
Competition also affects the market. Especially, international routes. In order to fly abroad, airline
should get commercial rights for implementation this flight. These rights are limited resource.
There is a contest for getting these rights and Aeroflot group has an advantage here due to
government aid. In the current situation of economic crisis in Russia, this international flights are
the most profitable. In that way, the access to the most profitable routes is quite restricted.
“Commercial flights are limited resources. It could be hard to get them.”
“Pobeda focuses on international routes and western part of Russia. Maybe new entrants should
focus on eastern part, Urals.”
In domestic market, the main competitors are traditional airlines and substitutes (trains, buses,
cars). In current situation of economic downturn, a low-cost carrier can attract new customers from
both these segments. If a company choose new destination, it should be sure that load factor will
be high. It obliges airlines to fly only to very popular directions.
“If the price for the train ticket is lower, people prefer ground transport mode.”
Airports and infrastructure
All experts mentioned that many regional airports are not ready to serve aircrafts in 30 minutes.
The reality that the lack of efficiency and optimization in airports leads to prolonged time spent in
airports, up to 1 hour. Even Pobeda spend in some airports more time than it is stated officially.
However, as it was mentioned above, Pobeda closely interacts with airports at improvement of
efficiency. It entirely involved in process of optimization and even arranged business trips for
representatives of airports in order to get acquainted with best practices. These action could be
very useful managerial implication in this situation that both helps airline and improve
infrastructure.
“Lack of efficiency does not allow to serve an aircraft fast”
“Yes. Collaboration with airports could be very useful action”
62
In addition, the lack of competition between airports leads to increased tariffs and difficulties to
get the best slots in airports. Experts mentioned that huge investments in infrastructure
development are not expected due to economic downturn.
“Secondary airports cannot even land Boeing”
“No investments in development of infrastructure are expected in the nearest future”
“High tariffs significantly subside the attractiveness of some destinations. For example, Saint
Petersburg’s Pulkovo”
End Customers
The majority of new passengers comes from substitutes such as trains, buses or cars. Budget
airlines allow this segment to travel faster but for the same price. However, population in regions
does not know all the advantages of budget airlines, considering it as a mean of transport with very
poor service. Some people also consider budget airlines with delays and destinations but it is not
truth.
“Many people in regions do not know what budget airline is. They think it is an airline with poor
service and constant delays or cancellations. Otherwise is true”
“The mentality of Russian people that they do not trust Russian low-cost airlines”
People in Moscow and in Saint Petersburg buy tickets online but the rest of the country prefer to
buy tickets in ticket offices. Therefore they do not know what actually low cost carriers provide.
Budget airlines simply do not possess ticket offices.
“Online purchases are common in Moscow and Saint Petersburg but people in other cities buy
tickets in ticket office.”
“Many people in Russia are very conservative”
“Some of them even do not know that Pobeda exists”
Legal environment
Legal environment was named as one of the main obstacle by all experts. Regulations determine
boundaries or rules of the industry. Under the pretext of security, Russian legal system has so many
conditions that restrict the development of low-cost carrier market. These restrictions imply
additional costs that are crucial point in this issue.
“Luggage for free is impossible for budget airline.
63
“So many rules that do not allow industry to flourish”
“At least 8 vessels for a start. No investor is ready to provide such a big amount of money. A
budget airline should appear only as part of existing company or instead of it”
“Security is paramount – that’s why there are so many restrictions”
These restrictions both operational costs and investments needed to be made in order to run this
business. If we are talking about operational costs, legal environment obliges companies to
transport 10 kg of baggage for free or inspect all food and drinks on board in every airport. It slows
airport services or does not allow to generate additional revenue. In addition, the minimum amount
of planes that company has to have is 8. It is very big obstacle for new entrants, as it requires
enormous amount of investments. Moreover, airline could not get any destinations without having
of fleet, so these investments should be made in the condition of uncertainty. Too risky for
investors. These investments is also increased with the necessity of registration foreign planes in
Russia that requires payments of VAT and custom taxes. Without this registration, no aircraft can
operate in domestic market.
Government support
Nevertheless, all these obstacles could be omitted by companies with enough level of government
support. According to opinions of all expert, the success of Pobeda was partly triggered by Aeroflot
and government support. Many of these restrictions were avoided with the help of government.
For example, Pobeda started sell tickets in advance, when the company did not have permission
for it. In addition, all vessel by Pobeda is registered in Bermuda. However, they operate in
domestic market in Russia. Experts mentioned that it is more “political project”, initiative of
president of Russia and therefore it received huge advantages.
“Pobeda is a presidential project”
“There are no obstacles for Pobeda”
“Pobeda started selling their tickets before the company appeared. It did not have the right for
it.”
Of course, success of Pobeda is determined partly by many other factors, starting from wise
management and access to economy of scale. However, all experts mentioned that government
support played very significant role in Pobeda’s success. Being as a part of Aeroflot, Pobeda has
access to many advantages. As we can see it through many examples in this paper, government
support helped Pobeda to avoid many legal restrictions, to get attractive international flights or
64
achieve better communication with airports. Again, experts mentioned that it is more “political
project”, initiative of president of Russia and therefore it received huge advantages.
Implications of primary research
Primary interview explained the effect of mentioned factors clearer. Findings show new results
as well as support results from the first part of research:
Today the economic situation for budget airlines is quite unattractive. The emergence
of new low-cost carrier can be expected only when the economy recover;
Highly limitative legal environment;
Due to high entry barriers, new budget airlines preferably should be established as a
part of existing company under the new brand or on a base of existing company;
Poor awareness of advantages of budget airlines among population. The company
should emphasize on it;
Close collaboration with airports and their participation in process optimization
could significantly improve airport services;
Government support provide with enormous advantage.
3.5 Discussion
This paper is devoted to the examination of low-cost carrier market in Russia and reasons of its
inadequacy. Research encompasses determination of the main factors affecting the market of LCC
in Russia, understanding of how they influence it and suggestion of actions for new entrants in this
market.
The research started with literature review, which gives is the understanding of the classic lowcost carrier model and major factors that potentially can affect the market in Russia. Then, these
factors checked with two researches.
The first part of the research is exploration the effect of internal and external factors affecting the
market using secondary data. Investigation of external factors includes exploration of macroexternal environment and all participants of the market. Internal environment is going to be
investigated on the base of studying the activity of Russian LCC and through comparison of it with
Ryanair’s activity.
The second part of the research includes primary interviews with experts of the industry. The
semi-structured interviews are based on the. The interview reveals to what extend these factors
influence the industry and helps to understand how potential new entrants should behave.
65
If the first part gives us full picture of the current situation in the market and how activities on
Russian market differ from classic low-cost carrier model, the second part helped us to ascertain
and adjust, which factors has the major impact, and support results from the first part. There was
no huge differences or contradictions in results between secondary and primary research.
However, interviews highlighted the most important aspects of the market from experts’ point of
view and pinpointed the weakest points where recommendations could be applied.
Aggregated the information from both parts, it is possible to answer the stated questions.
What are country-specific factors influencing low-cost carrier market in Russia?
During the study, following country-specific factors affecting the market of budget airlines were
revealed:
Highly limitative legal environment
Adverse economic situation
Government support or close relationships with government and airports
Immaturity of infrastructure and weak airport services
Poorly informed population about advantages of LCC
Managerial issues
How do defined country-specific factors influence the market?
Highly limitative legal environment
During both secondary and primary research, experts mentioned that this factor is the most
influencing. Legal environment determine the boundaries of the industry, therefore, in any ways,
companies have to take into account. There are still some restrictions, which are unusual for
worldwide industry; Russia is a “unique” country to some extent. These legal restrictions
significantly hinder the development of the market of budget airlines including additional
investments, higher operational costs and lost revenue.
Adverse economic situation
Both secondary data and information collected from interviews unveiled adverse effect of current
economic situation. For the Russian civil aviation in 2014 and 2015 became difficult. The industry
observed significant decline in passenger turnover against the background of slowing
macroeconomic fundamentals. Although economic downturn is not considered as unfavorable
condition for low-cost carriers (sometimes it even helps to improve LCC’s position), in Russia it
became significant obstacle. All lease payments are in foreign currency. Financial crisis in Russia
66
in 2014-2015 led to the devaluation of Russian Rubble. This led to additional difficulties with
covering lease and other payments made in foreign currency. In addition, purchasing power of
population has dropped. This reduced passenger traffic to some profitable directions to Europe or
other countries. Foreign companies exit Russian market in prevailing amount primarily due to
decreasing purchasing power of Russian Rubble, reduced income of customers at this market and
tough political situation.
Government support or close relationships with government and airports
This factor was also supported by experts of the industry during primary interviews. Relationship
with government or airports are crucial factor in Russia as it can help the company to save costs
in some cases or get different advantages. Government support helps to avoid some legal, financial
and airport related restrictions. Aeroflot group could even accelerate the adoption of several laws
that made the life of LCC easier. Good connections with airport could provide low-cost carrier
with significant advantage both in services and airports fees. Government support also helps in
issues of competition for commercial rights for international flights.
Immaturity of infrastructure and weak airport services
All experts in interview supported the results found during the secondary research concerning
immaturity of infrastructure. Today’s infrastructure of airport significantly affect budget airline
industry. It is still significant restriction for the development of the industry. Some airports
provides slow and inefficient services for aircrafts that is unacceptable for budget airlines. High
airport fares and absence of secondary airports also slow the development of industry.
Poorly informed population about advantages of LCC
It was not obvious during secondary research, but experts in interviews mentioned this problem public awareness of advantages of budget airlines. Population do not know that in some cases
budget airline can provide more than traditional airline – punctuality of flights and cheap tickets.
People that are not from Moscow or Saint Petersburg suppose that budget airlines do not follow
the schedule and the probability of delays or cancellations are high. However, the opposite is
true.
Quality of providing services is important but not as much as other factors that affect profitability
directly. Customer service can influence customer satisfaction. Nevertheless, customers are ready
to spend one or two hours with less comfort but save decent amount of money and spend them for
other purposes. They are not well informed about advantages of it. However, delays and
cancellations play great role in customer’s attitude. The failure of Avianova and SkyExpress led
67
to the fact that population consider budget airlines as companies that are not punctual. In average,
customers are not ready to use services of LCC after experienced cancellation of flights. Thereby
this factor is very important.
Managerial issues
Managerial issues primarily address to internal factors. Internal factors are not country-specific
factors but needed to be considered anyways. Avianova and Sky Express failed partly due to lack
of effective management and well-detailed strategy. These factors directly influence the activity
of low-cost carrier. Strategy elaboration is crucial and should cover all internal factors with the
aim of cost optimization and improvement of asset optimization but it should be adjusted according
to country-specific factors.
How can new entrants benefit from defined country-specific factors in formulation of entry
strategy?
There are three changeable and three non-changeable factors from the defined list of countryspecific factors. The assumption for the third questions is that highly limitative legal environment,
adverse economic situation and government support cannot be changed by new entrants without
huge support. As new entrants imply any company that potentially wants to enter the market, it is
necessary to take into account this assumption. In this way, we have to focus on changeable factors
and adaptation to non-changeable factors. The defined country-specific factors mentioned above
determine new rules of how LCCs have to behave in market. In order to succeed in market, lowcost carrier should try to adapt their business model to these factors but also minimize negative
effect from them and exploit maximum benefit from them.
As immaturity of infrastructure and weak airport services were named as one of the restraining
factor during both secondary and primary research, actions for improvement of the situation should
be implemented. Close collaboration with airport was mentioned as an effective way of decreasing
the time spent in airports. It will help to improve airport service that, in turn, will lead to increased
effectiveness of fleet utilization. Optimization of processes is a crucial point. Achieving high
optimization of processes entails assets effectiveness that can help to succeed in the market.
Today, economic situation is not so favorable for low-cost carrier activity. However, it is a great
opportunity to gain market share in short terms. Experts stated in conducted interviews that new
company should be established as a part of existing company but under a new brand in order to
differentiate itself or on the base of existing company instead of it. Economy of scale and synergy
effect could be achieved and help in margin improvements and asset effectiveness.
68
Experts of industry declared that population is not informed well about the advantages of low-cost
carriers. Biased perception of its services leads to inadequate load factor. Emphasis on
improvement of public awareness of advantages of LCC is a must.
Finally, strategy elaboration is crucial and should cover all internal factors with the aim of cost
optimization and improvement of asset optimization but it should be adjusted according to
country-specific factors.
3.6 Managerial implication
This research demonstrates factors that restrict low-cost carrier market in Russia. These factors
determine the boundaries of the industry and behavior of key and potential players in the industry.
Information revealed in this research could significantly help in understanding the current situation
of the market and in strategy elaboration.
The main goal of LCC is to set lower fares through low costs. Internal factors definitely should be
taken into account as they directly affect profitability of airline. Mainly the strategy should follow
classic low-cost strategy but with country-specific adjustments. To succeed in market, low-cost
carrier should try to adapt their business model to these factors but also minimize negative effect
from them and exploit maximum benefit from them.
In addition to mentioned results, entry strategy should focus on maximum asset effectiveness and
cost optimization. It includes mainly pieces of classic low-cost carriers. Based on information
gained through secondary data and primary research, it is possible to determine the list of
recommendations or principles that should be followed in Russian market:
New one-type fleet with maximum amount of seats;
Multifunctionality of staff and optimized operations;
Abandonment of physical assets; Focus on online distribution;
High level of outsource
Payable additional services
Focus on the most profitable destinations and cheaper airports
3.7 Suggestions for further research
As it was revealed during the research low-cost market in Russia is very dynamic and has high
potential for growth. However, the restraining factors has an enormous influence on the market.
More detailed investigation of them could be very useful and relevant for investigation and
understanding key obstacles of development of the market. Under these circumstances, I consider
future researches in the following directions:
69
Development of airports in Russia.
Optimization of airport services;
Influence of LCC’s activity on the market players, monopolistic essence in Russia;
Customers’ attitude to LCC.
70
Conclusion
This paper focuses on the investigation of country-specific factors influencing low-cost carrier
market in Russia. The research includes literature review concerning the given topic, market
research using secondary research and investigation of opinions of industry experts. Main
peculiarities and factors of the market were described. Recommendations for new entrants were
elaborated.
The current situation is not very favorable for the development of low-cost carrier market in
Russia. Current economic situation coupled with restrictive legal environment and immaturity of
infrastructure significantly prevents the growth in the industry. Revealed factors make it quite
difficult to be profitable low-cost company and still set low prices for attracting customers. Legal
environment needs some transformation and deregulation for future prosperity of the industry.
Infrastructure requires huge investments. In addition, population is not ready for emergence of
budget airlines to some extent. Conservatism, adherence of traditions or simple inadequate
spreading of information lead to the fact that population chooses another type of transportation.
However, the industry is developing and the emergence of Pobeda made first steps for improving
the situation. In particular, Pobeda facilitated in adoption of some laws mitigating the boundaries
for low-cost carrier activities. In addition, other airline companies can also improve the situation
with the focus of their actions on improvement airport services through close collaboration or
changing the image of budget airlines.
Besides, new entrants should be very careful in strategy elaboration. Maximization of profitability
and asset effectiveness are two major principles of classic low-cost model that should be taken
into consideration in every aspect of activity. However, former Russian airlines (Avianova and
SkyExpress) did not adhere them.
71
Appendix 1
Pobeda
Dobrolyet
SkyExpress
Avianova
Ryanair
12
2
10
6
345
one type
one type
3 types
one type
one type
Boeing 737-800
Boeing 737-800
Boeing 737-300/
Boeing 737-500 /
Airbus A-319
Airbus A320-232
Boeing 737-800
Age
1,5
1
19
10
6,5
Number of seats
Country of
registration
189
189
132-148
170
189
Bermudas
Bermudas
Russia
Ireland
Ireland
Utilization time
12-16 hours
12-14 hours
8 hours
12 hours
12-16 hours
25-35 minutes
30-40 minutes
1 hour
1 hour
25-30 minutes
1,65%
Effective +
Discounts due to
large amounts
bought together
with Aeroflot
17%
12%
2%
Fuel consumption
0,81%
Effective +
Discounts due to
large amounts
bought together
with Aeroflot
New fleet allows
to spend less
New fleet allows
to spend less
Less effective/No
discount
More spending on
maintenance/
frequent
breakdowns
Effective +
Economy of scale
Maintenance &
Insurance
Less effective/No
discount
More spending on
maintenance/
frequent
breakdowns
Multifunctionality
Multifunctionality
Multifunctionality
Multifunctionality
Multifunctionality
Primarily On-line
Primarily On-line
Primarily On-line
On-line. Offices
Primarily On-line
999 Rub
999 Rub
500 Rub
250 Rub
1£
Yes
Majority flights
are from Moscow.
Developed
network of
regional flights
Yes
Yes
Yes
All flights are
from Moscow
Use all airports /
Lower fees due to
connections
10 kg free / no
hand luggage
allowed
All flights are
from Moscow
Use the cheapest
airports / Lower
fees due to
connections
10 kg free / no
hand luggage
allowed
Yes
Majority flights
are from Moscow.
Developed
network of
regional flights
Use all airports
Use all airports
Developed
network
Use the cheapest
airports / Ryanair
owns some
airports
15 kg / hand
luggage allowed
15 kg / hand
luggage allowed
Hand luggage
allowed
Seat selection
Paid
Paid
Paid
Paid
Paid
Priority boarding
Non-refundable
tickets
Different types of
payments
Paid
Paid
-
-
Paid
Yes
Yes
No
No
Yes
Paid
Paid
Free
Paid
Paid
No catering
No catering
No catering
Catering
Catering
No
No
No
No
Paid
40%
-
10%
12%
25%
Fleet size
Homogeneity of
fleet
Type
Turnaround time
Punktuality
Personnel
Distribution
channels
Cheapest ticket
Yield
Menagement
Destinations
Airport fees
Luggage
Catering
Entertainments
Share of revenue
72
New fleet allows
to spend less
Appendix 2
Question for interview
1. A key element of successful performance of LCC is the presence of a consistently high passenger traffic.
In accordance with this statement whether you think that there is a demand for low cost air travel in Russia?
Your answer:
Is there a negative attitude towards budget airlines from the population in Russia? Is the population
informed enough about the advantages of low cost airlines?
Your answer:
2. Implementation of low fares policy is possible due to a substantial reduction in costs. Airport fees are a
significant item of expenses in the activity of airlines, while appropriate infrastructure and effective services
at airports allow the use of an aircraft as efficiently as possible. Do regional airports provide fast and
efficient service of aircraft that is so necessary for the success of the low-cost airlines?
Your answer:
The lack of competition among airports and a modest passenger traffic lead to inflated rates in some
airports. Is it a significant obstacle for the development of low-cost airlines?
Your answer:
Does the good relationship with the management of airports have a significant impact on these factors?
Your answer:
3. Do you agree that prices for aviation fuel in Russia is quite high and it substantially prevents the emergence
of new low-cost airlines?
Your answer:
4. The legal environment defines the rules that must be followed by airlines that leads to additional costs. Do
you agree that the current legal environment greatly restrict the development of low-cost carrier market in
Russia?
Your answer:
Can airlines influence the changes of the Air Code?
Your answer:
5. Does the current political situation have an impact on the international flights (for example, the difficulty
of obtaining permits to carry out international flights)?
Your answer:
6. How would you assess the probability of the emergence of another budget airline in the Russian market?
Why?
Your answer:
7. What is the key factor hindering the development of low-cost airlines market in Russia?
Your answer:
73
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