Founded five years ago with a mere $5,000 in start-up capital, upstart airline Transaero is now criss-crossing the Russian skies and getting ready to invade the United States. Every year it has doubled its passenger load, and expects to continue the trend into the future. It has yet to make a profit, but the company says it had revenues of $168 million last year, and Transaero may soon become the first Russian start-up company to "go public" to raise cash for further expansion. One of the company's board, Alexei Andreyev, recently said that the management hoped that the share offering would place a value on the airline of not less than $100 million.
All this has been accomplished against the backdrop of the historic collapse of Aeroflot and Russian aviation in general. What gives?
A few things. No doubt, something had to emerge from the collapse of the aviation industry. Partly through the vision of Alexander Pleshakov, 31, the company's founder, Transaero was there to pick up the slack by using one of the oldest formulas in the history of business: providing people with a service they need at a reasonable price. Today, Pleshakov is sanguine about what he and his colleagues have done. "Two things coincided," the self-confessed workaholic says. "Very real economic changes were taking place in the demonopolization of civil aviation in 1990 and 1991. The second thing was the simple idea ... to make an airline that met international standards."
In comparison with the plastic beaker of fizzy water and cookie that constitutes the in-flight fare of most so-called "babyflots" that have succeeded the old Soviet Aeroflot behemoth, Transaero onboard service appears to be abject luxury, even in economy class. The airline's introduction of business class, at a price premium of course, was a novelty on Russian internal routes. The key to Transaero's approach to service has been a refusal to hire any cabin staff who have ever worked for Aeroflot.
Transaero is an anomaly among Russian airlines. More than that, it is an anomaly in Russia. To this day, most Russian businesses are essentially renamed state enterprises in which a handful of forward-looking men and women were able to take over existing state structures and privatize them. There are few totally new start-up companies with the scope of Transaero, and of them, none has come close to the airline's success.
Transaero appeared in 1990. Its earliest plans were to create an airline based at Vnukovo Airport to the south of Moscow. But Vnukovo management, then in the throes of privatizing the airport, did not go for the deal. So, the airline, still without an airplane, moved to Sheremetyevo 1, the older, smaller brother of Sheremetyevo 2, Russia's main international airport, and began hiring staff. In 1991, Transaero began charter flights, shuttling immigrants to Israel on a rented Aeroflot Tu-154 with a repainted fuselage.
In 1992, Transaero got its first aircraft, an Il-86 bought on credit. Later that year, it rented another Il-86, and in a year's time, it returned the first plane. It was not until the end of 1992 that Transaero won its first license to fly regularly scheduled routes, to Norilsk and Sochi. February of 1993 brought licenses for Riga, Minsk, Kiev, Almaty, Tbilisi and Baku.
In April of 1993, Transaero leased its first Western jet, a Boeing 737. Pleshakov said the decision did not come easily; the company looked hard at continuing to use Russian-made aircraft. The fuel inefficiency and maintenance requirements of Russian aircraft rendered them unsuitable, in spite of the fact that they can be a fifth of the cost.
The moment turned out to be a definitive one for Transaero, in more ways than one. From that point on, the airline made a selling point out of the fact that it owned a cushy Western-built fleet of planes. Air France has provided training for cabin crews -- the airline's livery is also similar to that of the French flag carrier -- and so was born Transaero's image as the airline that provides Western quality service.
Transaero now leases 10 foreign aircraft including 737s and 757s and flies 20 routes across Russia and Europe. They have the rights to fly to Taiwan, and to Chicago and Orlando in the United States as well, and are weighing strategy for those routes. Orlando service is scheduled to begin for the summer tourist season.
The numbers tell the history in graphic fashion. In 1993, Transaero carried 236,000 passengers and had revenues of $20.7 million. In 1994, it carried 436,000 passengers to generate revenue of $67 million and in 1995, those figures leapt to 1.8 million and $160 million, respectively. For 1995 the average load factor -- the percentage of seats sold -- was a high 75 percent.
The airline has succeeded despite the structure of the Russian aviation business, which remains heavily stacked in favor of the incumbent operator, that is to say one section or other of the former Aeroflot domestic operation.
The regional sections of Aeroflot were often privatized in tandem with the airport from which they operated, meaning that the airports are loath to allow in any competitors to their "own" airline. And when they do, landing fees can be extremely steep by international standards as airports have jacked them up to maintain income as airport traffic has diminished.
Transaero's greater success may lie in the precedent it has set, and in the fact that it has proved that opportunity does exist amid Russia's economic rubble. "It is [now] absolutely clear that competition does work," said Peter Smith, an airline analyst and president of the Kasparov Consultancy. "The existence of Transaero has woken people in this country up to the fact that other airlines have to respond in a proper manner. And that is very important for this country."
The question is, why aren't there more Transaeros, both in the airline sector and in the Russian economy writ large?
First, few industries in Russia fell apart like aviation. Taken together, Aeroflot and the aircraft construction plants in Russia employed in the neighborhood of 3 million people at their peak. Since the breakup of the Soviet Union, one in three of those people no longer work in aviation. At its pre-breakup peak, Aeroflot carried 137 million passengers. Last year, only 35 million Russians took to the air.
Second, few industries in Russia would prove as easy to fix as aviation. It is much easier to bring in a new airplane from the West than it is to import an oil refinery, as Smith notes. It was also easier, it turns out, to start an airline from scratch than to try to break bad habits. That's why airlines like Vnukovo, Domodedovo and Pulkovo may be bigger than Transaero, but are not as well known in the aviation community for their innovative service and route network. Says Smith: "It is about 1,000 times harder to change an existing operation than it is to start a new one."
Pleshakov is fairly modest in explaining his success, and attributes it to a few simple factors. Say all you want about Russia's economic problems, he says: "More than anything else, the situation of economic reforms gave us the ability to work."
There is one element to his success that Pleshakov leaves out. No one, in fact, wants to talk on the record about the little thing that everyone whispers behind his back -- the fact that Pleshakov's mother, Tatyana Anodina, is president of the Interstate Aviation Committee and one of the most powerful people in Russian aviation. And her husband, Yevgeny Primakov, was recently named Foreign Minister. The Interstate Aviation Committee, among other things, awards international air routes for Russia.
One analyst, who asked not to be named, cautioned against making too much out of the role of Pleshakov's mother and her connections in high places. "She didn't give him the airplanes, after all," the analyst said.
In fact, a wide network of influence has been created through an adroit parceling of the shareholder base: Transaero is less of an upstart than it might appear. Aeroflot, Transaero's arch rival, owns 10 percent. The Ilyushin and Yakovlev aircraft design bureaus have a holding. Even the Moscow city government is reputed to own a stake. "They set themselves up pretty well politically," said another Moscow-based airline industry analyst who spoke only on the condition of anonymity. "These people will now be hesitant to criticize the airline."
Competition with Aeroflot, the surviving international division of the former Soviet monolith, can only increase as it re-enters the market for domestic routes. Transaero, analysts say, must tread very lightly around Big Brother.
Pleshakov says he wants Transaero to continue to grow until it is, perhaps, No. 2 among Russian airlines. Right now, Transaero is No. 4 or 5 among Russian airlines both in terms of revenue and passengers carried. Already, the airline business is consolidating around the top few carriers. The 18 leading airlines, Pleshakov estimates, carry 75 percent of all passengers, and the top eight or nine carry about half.
Situated at Sheremetyevo 1, across the runways from Russia's main international gateway at Sheremetyevo 2, Transaero is in theory ideally situated to take transit passengers going onward in Russia. It saves a long trek -- and very expensive taxi ride -- round the Moscow outer ring road to Domodedovo or Vnukovo airports.
But the surest source of revenue is in international routes. There Transaero does not have the problem of airlines combining with airports to keep it out. Moreover, fares on international routes for Russians have always been higher than on domestic ones, making it easier to make money.
The allocation of international routes is decided by governments on a bilateral basis, and normally involves a quid pro quo for carriers of each country. The head start that state-owned national flag carriers have in such allocations has long posed a major barrier to entry for upstart private airlines. Here Transaero's inside links to those who make such decisions in Russia has, to date, served it well.
Whether Transaero should compete head-on with Aeroflot is another matter. Big airlines, once forced to accept competition from new smaller competitors, can try to squeeze them out of business through their greater financial resources, by "dumping" tactics with fares and route capacity. Smaller airlines, with shallower pockets, can be very vulnerable to such tactics. As such, despite its good connections, Transaero has to play a careful game with Big Brother.
"When you have international trunk routes that Aeroflot has flown -- no matter how unsuccessfully -- for many years, they will not give them up. They cannot give them up," Smith said. "My advice [to Transaero]," he continued, "would be not to go head-to-head with its big brother."
That would mean avoiding too much direct competition in the United States, where Transaero is getting ready to serve Orlando, home of tourist mecca Disney World, and the Midwest business hub of Chicago.
Pleshakov said Transaero is intensely examining the U.S. market and its complexities before flying there. All the major European carriers that serve Moscow offer easy connections to the United States through, for example, Frankfurt, London and Paris. Competing with them, and trying to grab a fraction of Aeroflot's U.S. passengers, is no easy matter.
To date there has not been a fare war with Aeroflot. "Transaero will need very astute marketing to stay ahead," said the Moscow-based airline analyst. "Aeroflot takes the $300 fares and Delta takes the $1,000 fares. Transaero will need the higher priced Russian travelers and leave the backpackers to Aeroflot."
Paul Duffy, a Moscow-based airline-industry consultant, said, "now they will have to start facing serious competition from quality airlines that are looking for the same customers that they have.
"Delta and Aeroflot could well combine to kill Transaero," he said. "You lower your fares until the young guy runs out of money and has to close."
For the moment, Transaero is maintaining ticket prices, and says it intends to increase them by an average 10 percent to 12 percent this year.
Charging more has much to do with Transaero's Western-standard, onboard service-with-a-smile, but also with its Western jets. Replenishing the fleet with new, modern, and probably Western aircraft takes money.
With the company yet to make a profit, good relations with its bankers are key. For Transaero, this takes the form of a close working arrangement with Bank Menatep, which is the company's main banker. But Transaero has a reputation of always having been run on a shoestring, a dangerous way to run an airline, as a falloff in load factor can rapidly translate into big losses -- and Bank Menatep is widely thought to be overstretched financially.
This year will, in addition to the U.S. links, bring a direct scheduled route to London and one via Riga to Paris, plus several new aircraft, including three wide-body DC-10s for transatlantic flights.
This expansion requires money, and Transaero sees an international public offering as a means to find it. To this end Alliance-Menatep has been appointed the airline's investment bank, and Ernst & Young will act as auditors.
The offering could be problematic. One Western investment banker in Moscow, who asked not to be identified, said that the combination of Russia risk and airline risk -- the industry worldwide is rarely very profitable -- means that the valuation placed on Transaero by international portfolio investors at present would be low, despite Transaero's continuing growth potential. The fact that the airline has not made consistent profits adds another negative factor.
Another banker close to the situation, who asked not to be identified, said that no such offering was probable before June's presidential elections, and was not likely before the end of the year, because of the negative investment situation in Russia in general.
To reinforce its position, one line of argument is that Transaero badly needs a tie-up with a foreign airline. Worldwide, and particularly in Europe, smaller airlines are linking up with or being taken over by larger ones in an industry-wide drive to cut costs and rationalize operations. Holland's KLM has bought into the U.S. airline Northwest, Swissair has taken a large stake in Belgium's Sabena, while Lauda Air, the small Austrian airline, has formed an alliance with the much bigger Lufthansa in neighboring Germany.
To date, however, Transaero's cooperation with foreign airlines has been limited. But Pleshakov last week announced that he is in negotiations with a major Western carrier -- he did not say which one -- to create a "code-sharing" agreement, whereby Transaero flights are listed under the designation codes of both airlines.
Entrepreneurs who set up airlines often continue to take business risks. Transaero must manage to keep traffic volumes up and to sustain the razor-sharp margins that are all that separate many airlines from bankruptcy. In the airline business, turbulence can always be ahead.
-- Simon Baker contributed to this article.
All this has been accomplished against the backdrop of the historic collapse of Aeroflot and Russian aviation in general. What gives?
A few things. No doubt, something had to emerge from the collapse of the aviation industry. Partly through the vision of Alexander Pleshakov, 31, the company's founder, Transaero was there to pick up the slack by using one of the oldest formulas in the history of business: providing people with a service they need at a reasonable price. Today, Pleshakov is sanguine about what he and his colleagues have done. "Two things coincided," the self-confessed workaholic says. "Very real economic changes were taking place in the demonopolization of civil aviation in 1990 and 1991. The second thing was the simple idea ... to make an airline that met international standards."
In comparison with the plastic beaker of fizzy water and cookie that constitutes the in-flight fare of most so-called "babyflots" that have succeeded the old Soviet Aeroflot behemoth, Transaero onboard service appears to be abject luxury, even in economy class. The airline's introduction of business class, at a price premium of course, was a novelty on Russian internal routes. The key to Transaero's approach to service has been a refusal to hire any cabin staff who have ever worked for Aeroflot.
Transaero is an anomaly among Russian airlines. More than that, it is an anomaly in Russia. To this day, most Russian businesses are essentially renamed state enterprises in which a handful of forward-looking men and women were able to take over existing state structures and privatize them. There are few totally new start-up companies with the scope of Transaero, and of them, none has come close to the airline's success.
Transaero appeared in 1990. Its earliest plans were to create an airline based at Vnukovo Airport to the south of Moscow. But Vnukovo management, then in the throes of privatizing the airport, did not go for the deal. So, the airline, still without an airplane, moved to Sheremetyevo 1, the older, smaller brother of Sheremetyevo 2, Russia's main international airport, and began hiring staff. In 1991, Transaero began charter flights, shuttling immigrants to Israel on a rented Aeroflot Tu-154 with a repainted fuselage.
In 1992, Transaero got its first aircraft, an Il-86 bought on credit. Later that year, it rented another Il-86, and in a year's time, it returned the first plane. It was not until the end of 1992 that Transaero won its first license to fly regularly scheduled routes, to Norilsk and Sochi. February of 1993 brought licenses for Riga, Minsk, Kiev, Almaty, Tbilisi and Baku.
In April of 1993, Transaero leased its first Western jet, a Boeing 737. Pleshakov said the decision did not come easily; the company looked hard at continuing to use Russian-made aircraft. The fuel inefficiency and maintenance requirements of Russian aircraft rendered them unsuitable, in spite of the fact that they can be a fifth of the cost.
The moment turned out to be a definitive one for Transaero, in more ways than one. From that point on, the airline made a selling point out of the fact that it owned a cushy Western-built fleet of planes. Air France has provided training for cabin crews -- the airline's livery is also similar to that of the French flag carrier -- and so was born Transaero's image as the airline that provides Western quality service.
Transaero now leases 10 foreign aircraft including 737s and 757s and flies 20 routes across Russia and Europe. They have the rights to fly to Taiwan, and to Chicago and Orlando in the United States as well, and are weighing strategy for those routes. Orlando service is scheduled to begin for the summer tourist season.
The numbers tell the history in graphic fashion. In 1993, Transaero carried 236,000 passengers and had revenues of $20.7 million. In 1994, it carried 436,000 passengers to generate revenue of $67 million and in 1995, those figures leapt to 1.8 million and $160 million, respectively. For 1995 the average load factor -- the percentage of seats sold -- was a high 75 percent.
The airline has succeeded despite the structure of the Russian aviation business, which remains heavily stacked in favor of the incumbent operator, that is to say one section or other of the former Aeroflot domestic operation.
The regional sections of Aeroflot were often privatized in tandem with the airport from which they operated, meaning that the airports are loath to allow in any competitors to their "own" airline. And when they do, landing fees can be extremely steep by international standards as airports have jacked them up to maintain income as airport traffic has diminished.
Transaero's greater success may lie in the precedent it has set, and in the fact that it has proved that opportunity does exist amid Russia's economic rubble. "It is [now] absolutely clear that competition does work," said Peter Smith, an airline analyst and president of the Kasparov Consultancy. "The existence of Transaero has woken people in this country up to the fact that other airlines have to respond in a proper manner. And that is very important for this country."
The question is, why aren't there more Transaeros, both in the airline sector and in the Russian economy writ large?
First, few industries in Russia fell apart like aviation. Taken together, Aeroflot and the aircraft construction plants in Russia employed in the neighborhood of 3 million people at their peak. Since the breakup of the Soviet Union, one in three of those people no longer work in aviation. At its pre-breakup peak, Aeroflot carried 137 million passengers. Last year, only 35 million Russians took to the air.
Second, few industries in Russia would prove as easy to fix as aviation. It is much easier to bring in a new airplane from the West than it is to import an oil refinery, as Smith notes. It was also easier, it turns out, to start an airline from scratch than to try to break bad habits. That's why airlines like Vnukovo, Domodedovo and Pulkovo may be bigger than Transaero, but are not as well known in the aviation community for their innovative service and route network. Says Smith: "It is about 1,000 times harder to change an existing operation than it is to start a new one."
Pleshakov is fairly modest in explaining his success, and attributes it to a few simple factors. Say all you want about Russia's economic problems, he says: "More than anything else, the situation of economic reforms gave us the ability to work."
There is one element to his success that Pleshakov leaves out. No one, in fact, wants to talk on the record about the little thing that everyone whispers behind his back -- the fact that Pleshakov's mother, Tatyana Anodina, is president of the Interstate Aviation Committee and one of the most powerful people in Russian aviation. And her husband, Yevgeny Primakov, was recently named Foreign Minister. The Interstate Aviation Committee, among other things, awards international air routes for Russia.
One analyst, who asked not to be named, cautioned against making too much out of the role of Pleshakov's mother and her connections in high places. "She didn't give him the airplanes, after all," the analyst said.
In fact, a wide network of influence has been created through an adroit parceling of the shareholder base: Transaero is less of an upstart than it might appear. Aeroflot, Transaero's arch rival, owns 10 percent. The Ilyushin and Yakovlev aircraft design bureaus have a holding. Even the Moscow city government is reputed to own a stake. "They set themselves up pretty well politically," said another Moscow-based airline industry analyst who spoke only on the condition of anonymity. "These people will now be hesitant to criticize the airline."
Competition with Aeroflot, the surviving international division of the former Soviet monolith, can only increase as it re-enters the market for domestic routes. Transaero, analysts say, must tread very lightly around Big Brother.
Pleshakov says he wants Transaero to continue to grow until it is, perhaps, No. 2 among Russian airlines. Right now, Transaero is No. 4 or 5 among Russian airlines both in terms of revenue and passengers carried. Already, the airline business is consolidating around the top few carriers. The 18 leading airlines, Pleshakov estimates, carry 75 percent of all passengers, and the top eight or nine carry about half.
Situated at Sheremetyevo 1, across the runways from Russia's main international gateway at Sheremetyevo 2, Transaero is in theory ideally situated to take transit passengers going onward in Russia. It saves a long trek -- and very expensive taxi ride -- round the Moscow outer ring road to Domodedovo or Vnukovo airports.
But the surest source of revenue is in international routes. There Transaero does not have the problem of airlines combining with airports to keep it out. Moreover, fares on international routes for Russians have always been higher than on domestic ones, making it easier to make money.
The allocation of international routes is decided by governments on a bilateral basis, and normally involves a quid pro quo for carriers of each country. The head start that state-owned national flag carriers have in such allocations has long posed a major barrier to entry for upstart private airlines. Here Transaero's inside links to those who make such decisions in Russia has, to date, served it well.
Whether Transaero should compete head-on with Aeroflot is another matter. Big airlines, once forced to accept competition from new smaller competitors, can try to squeeze them out of business through their greater financial resources, by "dumping" tactics with fares and route capacity. Smaller airlines, with shallower pockets, can be very vulnerable to such tactics. As such, despite its good connections, Transaero has to play a careful game with Big Brother.
"When you have international trunk routes that Aeroflot has flown -- no matter how unsuccessfully -- for many years, they will not give them up. They cannot give them up," Smith said. "My advice [to Transaero]," he continued, "would be not to go head-to-head with its big brother."
That would mean avoiding too much direct competition in the United States, where Transaero is getting ready to serve Orlando, home of tourist mecca Disney World, and the Midwest business hub of Chicago.
Pleshakov said Transaero is intensely examining the U.S. market and its complexities before flying there. All the major European carriers that serve Moscow offer easy connections to the United States through, for example, Frankfurt, London and Paris. Competing with them, and trying to grab a fraction of Aeroflot's U.S. passengers, is no easy matter.
To date there has not been a fare war with Aeroflot. "Transaero will need very astute marketing to stay ahead," said the Moscow-based airline analyst. "Aeroflot takes the $300 fares and Delta takes the $1,000 fares. Transaero will need the higher priced Russian travelers and leave the backpackers to Aeroflot."
Paul Duffy, a Moscow-based airline-industry consultant, said, "now they will have to start facing serious competition from quality airlines that are looking for the same customers that they have.
"Delta and Aeroflot could well combine to kill Transaero," he said. "You lower your fares until the young guy runs out of money and has to close."
For the moment, Transaero is maintaining ticket prices, and says it intends to increase them by an average 10 percent to 12 percent this year.
Charging more has much to do with Transaero's Western-standard, onboard service-with-a-smile, but also with its Western jets. Replenishing the fleet with new, modern, and probably Western aircraft takes money.
With the company yet to make a profit, good relations with its bankers are key. For Transaero, this takes the form of a close working arrangement with Bank Menatep, which is the company's main banker. But Transaero has a reputation of always having been run on a shoestring, a dangerous way to run an airline, as a falloff in load factor can rapidly translate into big losses -- and Bank Menatep is widely thought to be overstretched financially.
This year will, in addition to the U.S. links, bring a direct scheduled route to London and one via Riga to Paris, plus several new aircraft, including three wide-body DC-10s for transatlantic flights.
This expansion requires money, and Transaero sees an international public offering as a means to find it. To this end Alliance-Menatep has been appointed the airline's investment bank, and Ernst & Young will act as auditors.
The offering could be problematic. One Western investment banker in Moscow, who asked not to be identified, said that the combination of Russia risk and airline risk -- the industry worldwide is rarely very profitable -- means that the valuation placed on Transaero by international portfolio investors at present would be low, despite Transaero's continuing growth potential. The fact that the airline has not made consistent profits adds another negative factor.
Another banker close to the situation, who asked not to be identified, said that no such offering was probable before June's presidential elections, and was not likely before the end of the year, because of the negative investment situation in Russia in general.
To reinforce its position, one line of argument is that Transaero badly needs a tie-up with a foreign airline. Worldwide, and particularly in Europe, smaller airlines are linking up with or being taken over by larger ones in an industry-wide drive to cut costs and rationalize operations. Holland's KLM has bought into the U.S. airline Northwest, Swissair has taken a large stake in Belgium's Sabena, while Lauda Air, the small Austrian airline, has formed an alliance with the much bigger Lufthansa in neighboring Germany.
To date, however, Transaero's cooperation with foreign airlines has been limited. But Pleshakov last week announced that he is in negotiations with a major Western carrier -- he did not say which one -- to create a "code-sharing" agreement, whereby Transaero flights are listed under the designation codes of both airlines.
Entrepreneurs who set up airlines often continue to take business risks. Transaero must manage to keep traffic volumes up and to sustain the razor-sharp margins that are all that separate many airlines from bankruptcy. In the airline business, turbulence can always be ahead.
-- Simon Baker contributed to this article.
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