Avialeasing” Company Annual Report of Closed Joint-Stock Company (zao)



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Avialeasing” Company

Annual Report
of Closed Joint-Stock Company (ZAO)

Avialeasing” Perm Investment & Finance Company”


for 2006



Perm 2007

Table of Contents


Address of the General Director

4

1. Economic Situation in the Air Traffic Market in 2006

5

2. Economict and Legal Situation in the Aircraft Lease Industry in 2006

16

3. Technical Conditions of the Air Traffic Market in 2006

19

4. Forecasted Capacity of the Aircraft Market

22

5. Appraisal of the Domestic Airlines Demands

25

6. Mission and Declaration of the Company

30

7. Position of ZAO “Avialeasing” Perm Investment and Finance Company” in the Industry

30

8. Business Activities and Operations of the Company in 2006

51

9. Credit History of ZAO “Avialeasing” Perm Investment and Finance Company”

61

10. Development Prospects of the Company

62

11. Market Tools. Capital Raising Practices Board of Directors’ Report

70

12. Board of Directors’ Report

83

13. Finance Figures over the Reporting Period

84

14. Supplementary Information for the Shareholders. Voting Results of the Company’s Annual Shareholders’ Meeting for 2006

85

15. Information on Securities Issued by the Company

88

16. Audit Report on Finance Accounts of ZAO “Avialeasing” Perm Investment and Finance Company” from 01.01.2006 till 31.12.2006

89

17. Report on Revision for 2006 of ZAO “Avialeasing” Perm Investment and Finance Company”

91







Annex

93

I. Finance Accounts for 2006

94

Balance Sheet for 2006. Form No. 1

94

Profit and Loss Statement for 2006. Form No. 2

97

II. Appraisal of Financial and Business Operations. ZAO “Avialeasing” Perm Investment and Finance Company”

98

Balance Sheet (Form No. 1) Structure in per cents to Summary Total

102

Calculation of Business Ratios

104

Finance Stability Appraisal upon Relative Indices

104

Balance-Sheet Liquidity Appraisal upon Relative Indices

105

Finance Stability Appraisal upon Absolute Indices

105

Business Activity Figures

106

Profitability Indices

106

Market Activity Figures

107

Break-Even Point

108

Fixed Assets Turnover and Status Indices

109

Accounts Receivable

109

Accounts Payable

110

III. Net Assets. Net Assets Cost Calculation

111

Management Structure of ZAO “Avialeasing” Perm Investment and Finance Company”

112

Address of the General Director


In 2006 “Avialeasing” Company realized the development strategy consistently and purposefully. It made us possible to achieve intended results in industrial and financial activity. The fleet of the company has replenished with three modernized Tu-154M aircrafts that have a number of operational advantages on such parameters, as economy of fuel and revenue load.

High operating efficiency and focus on the most profitable segments of the market have allowed «Avialeasing» company to achieve worthy financial results. According to rating agency «Expert RА» for 2006, our Company takes up the 66 position among the largest Russian leasing companies. It has risen on 43 items in comparison with the year 2005.

In 2007 “Avialeasing” company will continuous realizing its strategy on the base of principles of sustainable development. The company plans to implement 4 projects with the Tu-154M aircrafts and 2 projects with the foreign-made aircrafts. The company intends to strengthen its positions among the largest Russian leasing companies and offer the clients a product, quality of which will be constantly improved.

Let me thank all our partners on behalf of all Company workers and voice our hope in fruitful and mutually beneficial cooperation in the future.




General Director of

ZAO “Avialeasing” Company O.L. Kislukhin

1. Economic Situation in the Air Traffic Market in 2006
In 2006 it was the growth trend in the passenger air traffic industry. Over the last six years, stable growth of demand led to increase in transportation volume, which, in turn, made it possible for the airlines to define their positions more clearly and improve both production and finance figures. According to Transport Clearing Organization (TKP), the number of passengers transported by the Russian civil planes increased, as compared to 2005, by 8.3% to 38.01 mln people. Particularly, 17.26 millions (+8.7%) accounted for the international air routes and 20.75 millions (+8.1%) accounted for the domestic air routes.

Main Points of Civil Aviation

Service and Finance Activities in 2003-2006

Items

2003

2004

2005

2006

+/- of 2006 to 2005

%

Passenger turnover, bln passenger-km

71,14

82,99

85,77

93,91

+ 9,5



















Cargo turnover, bln ton-km

2,74

3,00

2,83

2,93

+ 3,5



















Income of civil aviation, bln rubles

160

168

180

n/a

n/a

The aggregate passenger turnover of domestic airlines grew by 9.5% and totalled to 93.91 bln. passenger-kilometres. In 2006 a positive factor of aircrafts activity was a stop of decrease of traffic volume in a cargo segment of air traffic market. The cargo turnover reached 2.93 bln ton-km, that is 3.5% more as compared to the previous year. Total amount of cargo transported in 2006 was 640.27 thousand tons. Passenger seats occupancy rate in 2006 was 72.40%, the growth in comparison with the last year equalled 0.5%. In particular, for the international air routes the growth in relation to the last year is 1.2% and for the domestic air routes it is 0.3%.

Upon the results of 2006, the airlines achieved an aggregate income growth. This is a good economic basis for further development of the airlines.



According to Ministry of Transport of the Russian Federation, in 2006 there were totally 182 air companies in the transportation market (in 2005 there were 185 companies) that operated about 2.5 thousand aircrafts (there are 5.5 thousand aircrafts registered in the Russian Federation).

The top ten of the leading airlines in terms of passenger traffic in 2006 deeply changed as compared to 2005. The best four airlines are the same as in the previous year. “Transaero” has risen on two positions and got the 5th place. In turn, “KrasAir” and “Vim-Avia” lost their positions and got the 6th and the 7th places correspondingly. “Atlant-Soyuz” has never been in the top ten of the leading airlines, but now this airline is on the 8th position in the rating of airlines in terms of passenger traffic. Because of entering of one airline in this rating, “Ural Airlines” and “Aeroflot-Nord” have lost one position and “Domodedovo Airlines” surrendered the 10th place.

Rating of airlines in terms of passenger traffic in 2006 (International and domestic air routes)

Passengers transported in 2005, mln people

Passengers transported in 2006, mln people

International air routes

Domestic air routes

Total

International air routes

Domestic air routes

Total

1.«Aeroflot-RA»

4,650

2,017

6,667

4,939

2,351

7,290

2. «S7»

1,530

2,674

4,204

1,943

2,951

4,894

3. «Russia»

1,500

1,702

3,202

1,460

1,574

3,034

4.«UTair»

0,192

1,695

1,887

0,240

2,177

2,417

5. «Transaero»

1,247

0,325

1,572

1,795

0,342

2,137

6. «KrasAir»

0,906

0,915

1,821

0,771

1,081

1,852

7. «Vim-Avia»

1,462

0,127

1,589

1,010

0,308

1,318

8. «Atlant-Soyuz»

0,413

0,056

0,469

1,139

0,070

1,209

9. «Ural Airlines»

0,364

0,545

0,909

0,412

0,600

1,012

10. «Aeroflot-Nord»

n/a

n/a

0, 805

n/a

n/a

0,875

Passenger turnover rating of the Russian airlines over 2006 looks somewhat differently. See the following table.

Rating of airlines in terms of passenger traffic in 2006 (International and domestic air routes)

Passenger turnover n 2005,

mln passenger-km

Passenger turnover in 2006,

mln passenger-km




International air routes

Domestic air routes

Total

International air routes

Domestic air routes

Total

1.«Aeroflot-RA»

15897,7

4797,1

20694,8

16753,7

5652,8

22406,5

2. S7 Airlines

4269,0

6680,0

10949,0

5476,9

7020,6

12497,5

3.«Transaero»

3854,3

1430,5

5284,8

6276,6

1515,9

7792,5

4. «Russia»

3980,5

2598,1

6578,6

3805,4

2315,8

6121,2

5. «KrasAir»

2551,7

2909,7

5461,4

2117,5

3327,2

5444,7

6.«Domodedovo

Airlines»

592,7

2576,6

3169,3

965,2

2826,0

3791,2

7. «UTair»

421,1

2555,6

2976,7

515,1

3150,7

3665,8

8. «Vim-Avia»

4254,8

323,4

4578,2

3039,2

611,2

3650,4

9. «Atlant-Soyuz»

999,9

92,6

1092,5

3014,8

94,5

3109,3

10. «Ural Airlines»

1229,2

1118,9

2348,1

1370,4

1238,2

2608,6

If we analyze the situation in the air traffic market, it is necessary to mention, that the biggest share of air traffic is still covered by the largest airlines. The total share of “Aeroflot-RA”, “Siberia” and “Transaero” grew to 45%; practically all amounts of passengers were carried by 35 airlines and 70% of this share was covered by the above listed biggest companies of the country.

The leader of Russian airlines “Aeroflot – Russian Airlines” in 2006 improved its figures in terms of passenger traffic by 9.3% (623 mln people); passenger turnover grew by 8.3% (1711.7 mln passenger-km). There are not enough aircrafts in the fleet of the company to develop more dynamically in comparison with other airlines which got first three positions. OAO “Aeroflot-RA” increases its domestic air traffic at the cost of subsidiary companies such as “Aeroflot-Don” in Rostov-on-Don and “Aeroflot-Nord” in Arkhangelsk. However, the network of subsidiaries is favourable for “Aeroflot-RA” both in brand expansion within the country and in giving opportunities of effective fleet employment.

S7” (“Siberia”) is the leader in terms of domestic air traffic. In 2006 passenger traffic of the company reached 16.4% (690 thousand people), passenger turnover – 14.1% (1548.5 mln passenger-km). The second place in terms of both passengers traffic and passenger turnover among the mentioned market participants is hold by “S7”. The growth of production figures is caused by fleet modernization and expansion of route network. The most important events of 2006 are a successful evaluation of air safety (IOSA) by international audit and approval of the new brand name “S7 Airlines”.



S7” (“Siberia”) is followed by FGUP GTK”Russia”, an air company which was founded in the result of merger of FGUAP “Pulkovo” and GTK “Russia”. Experts consider, that the merger of two state air companies was the right decision because it makes possible to reduce budget expenses of “Russia”, the company which mainly dealt with a transport of high ranking officials of the state. The process of consolidation influence also on production activity of the company: in 2006 FGUP “GTK”Russia” showed negative dynamics of passenger traffic -5.5% (168 thousand people) and -7.5% (457.4 mln passenger-km) accordingly.

On the 4th place of the rating in terms of passenger traffic is “UTair”, the company which in the financial year reached one of the highest figures of the passenger traffic growth 28.1% (530 thousand people). Besides, over the financial year we can note essential growth of other items, in particular, in terms of passenger turnover which was increased by 23.1% (689.1 mln passenger-km). The main reasons of growth of “UTair” figures are correct business organization, large investments in the maintenance of fleet airworthiness and expansion of route network.

In 2006 the most impressive growth belongs to “Transaero”, which keeps the 5th place. The amount of passenger grew by 35.9% (565 thousand people) as compared to the previous year. Passenger turnover totalled 47.5% (2507.7 mln passenger-km) more than in 2005. This dynamics is caused by an expansion of route network of the company, an increase of flight frequency and a fleet expansion.

On the 6th position in the rating in terms of passenger traffic is “KrasAir” which increased its figures by 1.7% (31 thousand people). Passenger turnover of the company decreased by 0.3% (16.7 mln passenger-km). The participants of the market consider that this insignificant decrease is related to redistribution of routes and fleet within the alliance, a founder and a centre of which is “KrasAir”. The alliance unifies the air companies of “KrasAir”, “Domodedovo Airlines”, “Samara Airlines”, “Omskavia Airlines” and “Sibaviatrans”. These companies are so far legally independent entities and only the route network is coordinated within the alliance. In future it is planned to establish a unified air company. Equity stakes of the state are 51% for “KrasAir”, 50% for “Domodedovo Airlines”, 46.5% for “Samara Airlines”. The General Director of “KrasAir” B.M. Abramovich and the related entities control about 40% of “KrasAir” equity, 48.6% of “Domodedovo Airlines”, about 40% of “Samara Airlines”, about 70% of “Omskavia Airlines” and 100% of “Sibaviatrans” equity. Decrease of passenger turnover of “KrasAir” can be explained by an inexhausted conflict of “AirUnion” with “Rosimushchestvo” and the company activity in the foreign market in 2006. Over 2006 the Russian alliance “Air Bridge” that acted on behalf of the “KrasAir” shareholders continued struggling for the purchase of 99.95% the national aviation enterprise “Malev Hungarian Airlines” equities. A cooperation of Russian and Hungarian air companies is mutually profitable because of some reasons. Firstly, the air companies, which are included in “AirUnion”, can significantly increase the passenger traffic of Hungarian carrier. In turn, they get a right to use an extensive European route network “Malev”. Secondly, a merger of two route networks “Malev” and “AirUnion” will make possible to create a high quality hub which will control transport traffic. Thirdly, the fact that “AirUnion” will control “Malev” is a good perspective in the development of the Russian aircraft industry because the new routes require extra fleet to comprise thousands of planes at a conservative estimate. New Russian aircrafts, certificated for the European market by means of “Malev” for example, Sukhoj Superjet 100, will be able to improve prestige of the Russian aircraft industry and hire thousands of aviation workers.

2006 was the least successful for “Vim-Avia”, the leader of charter traffic of the previous year. The carrier showed a negative dynamics in comparison with 2005. The amount of passenger was increased by 20.6% (271 thousand people), the passenger turnover – by 25.4% (927.8 mln passenger-km). They say that a significant decline of production figures caused by temporary problems connected with the fleet. Some of the aircraft were under planned maintenance and four additional liners which had been planned to use within that period, were put into operation later than it was expected. However, the passenger seats occupancy rate of the company was decreased. In 2006 it reached 73.8% as compared to 92.6% in the previous year.

The air company of the Moscow Government “Atlant-Soyuz” was included in the top ten of the leading airlines for the first time in 2006. For a long time it was called cargo and charter carrier. In the beginning of 2005 the air company management decided to develop passenger traffic. The increase of passenger traffic needed some internal and external changes within the company. As a result of the financial year the passenger traffic of “Atlant-Soyuz” has risen by 157.8% (740 thousand people), the passenger turnover – by 32.4% (2016.8 mln passenger-km).

Ural Airlines” hold the 9th place in the rating in terms of passenger traffic has improved its figures by 11.3% (103 thousand people). The passenger turnover was increased by 11.1% (260.5 mln passenger-km). It is necessary to mention that 11% growth is specific for both international and domestic air routes. This trend is caused by an expansion of flight geography, an increase of flights frequency and the fleet renovation.



An integral part of the production activity, except the passenger traffic, is the cargo traffic. In the following table you can see the best ten Russian airlines in terms of freight-traffic volume at domestic and international air routes:

Rating of airlines in terms of cargo traffic in 2006 (International and domestic air routes)

Cargo transported

in 2005, thousand tons

Cargo transported

in 2006, thousand tons

International air routes

Domestic air routes

Total

International air routes

Domestic air routes

Total

1.«Volga-Dnepr»

102,0

0,8

102,8

152,7

2,4

155,1

2.«Aeroflot-RA»

121.9

23,6

145,5

118,8

26,5

145,3

3. “S7 Airlines”

3,0

22,8

25,8

3,6

25,3

28,9

4.«Polet»

27,3

1,0

28,3

26,6

0,5

27,1

5. «Alrosa»

0

25,5

25,5

0,1

20,9

21,0

6. «Transaero»

4,3

11,7

16,0

5,1

10,2

15,3

7. «KrasAir»

1,0

15,9

16,9

0,7

14,5

15,2

8. «Domodedovo Airlines»

0,9

12,1

13,0

2,1

12,3

14,4

9. «Aviastar-Tu»

n/a

n/a

n/a

n/a

n/a

n/a

10. «Airlines 400»

n/a

n/a

n/a

n/a

n/a

n/a



Rating of airlines in terms of cargo turnover in 2006 (International and domestic air routes)

Cargo turnover in 2005 , mln ton-km

Cargo turnover in 2006 , mln ton-km

International air routes

Domestic air routes

Total

International air routes

Domestic air routes

Total

1.«Volga-Dnepr»

745,2

3,2

748,4

983,0

9,4

992,4

2.«Aeroflot-RA»

761,3

107,2

868,5

745,2

122,9

868,1

3. «Polet»

156,2

4,0

160,2

157,3

2,1

159,4

4. «Domodedovo Airlines»

2,5

75,1

77,6

7,8

78,9

86,7

5. “S7 Airlines”

7,3

66,7

74,0

8,8

72,8

81,6

6. «Transaero»

12,0

66,2

78,2

16,0

61,5

77,5

7. «Alrosa»

0,3

68,9

69,2

0,1

54,6

54,7

8. «KrasAir»

3,7

53,6

57,3

1,7

47,3

49,0

9. «Aviakon-Citotrans»

n/a

n/a

n/a

n/a

n/a

n/a

10. «Aviastar-TU»

n/a

n/a

n/a

n/a

n/a

n/a

Upon the results of 2006, “Volga-Dnepr” is the leader among the cargo air companies. Its cargo traffic figures grew by 50.9% (52.3 thousand tons), cargo turnover increased by 32.6% (244.0 mln ton-km). An activity of the subsidiary air company “AirBridgeCargo”, the first Russian regular cargo air carrier, has influenced the effectivity of “Volga-Dnepr”. Besides, according to the “Volga-Dnepr” Press Service, the company began to transport a non-typical kind of cargo. Before this kind of cargo has been transported just by ground and see mode of transport.

In the financial year “Aeroflot-RA” has surrendered the leader position in terms of cargo traffic. Now it is on the second place and shows a negative dynamics. Cargo traffic of the company decreased by 0.1% (0.2 thousand tons), cargo turnover – by 0.05% (0.4 mln ton-km). As compared to “Volga-Dnepr”, “Aeroflot-RA” continuous using cargo transportation capacity of the fleet of passenger foreign-made aircrafts.

The next in the rating of the airlines in terms of cargo traffic is “S7 Airlines” whose growth totalled 12.0% (3.1 thousand tons). Cargo turnover grew by 10.3% (7.6 mln ton-km). It is necessary to mention that the company has never dealt with cargo transportation. Cargo traffic volume consists of just cargo capacity at regular passenger flights.

In 2006 the air traffic industry showed a clearly expanding tendency to operator consolidation. The business entities approached this strategic objective by several ways.

  1. Aeroflot-RA” established a classical vertically integrated holding (“Aeroflot-RA” + “Aeroflot-Don” + “Aeroflot-Nord”). Presently all mentioned operators preserve full self-dependence.

After “Aeroflot-RA” gets control over all air traffic market participants that it is presently interested in, it is be natural to expect transition of the entire group to a single stock.

In 2007 the air company plans to create the third subsidiary enterprises in the Far East on the basis of OAO”Dalavia”, OAO”Sakhalin Aviatrassy” and OAO”Vladivostok Avia”.

  1. Some of the air carriers (“KrasAir”, “Domodedovo Airlines”, “Samara Airlines”, “Omskavia Airlines”, “Sibaviatrans”) chose establishment of the “AiRUnion” alliance that is de-facto led by “KrasAir”. A problem faced by the alliance is that none of the owner groups has a controlling holding in all mentioned operators, and, lacking this, no strict management within the alliance is possible. The very form of unification, an alliance, was chosen because the owners of the alliance leader had no controlling stockholdings. In 2005 the alliance leader’s attempts to get the control stock of the alliance operators by all means had already resulted in a serious conflict with Rosimushchestvo. In turn, it wanted to keep a control stock of a new company in the state property. In 2006 the problem was resolved in favour of private owners. The proportion of state share and private shareholders share in a new company will amount 45% to 55%. Generally, a creation of the second national air carrier is quite logical and positively.

  2. GTK “Russia” and FGUAP “Pulkovo” follow the way of consolidation by acquisition in form of merger. In 2004 the edict of the Russian President about air companies’ merger was sighed but till the middle 2005 the process was embarrassed because of objective causes. However, on the 9th of October 2006 the process of merger was completed officially. From the 29th of October the flights of united airlines started.

  3. S7” and “UTair Aviation” implemented consolidation procedures by purchasing smaller carriers. Particularly, by 2005 “S7”, having assumed liabilities of the bankrupted “Vnukovo Airlines”, received their aircraft fleet and route network. Moreover “S7” purchased a controlling stock of Chelyabinsk air company and obtained its fleet, route network, and airport facilities of the subsidiary entities. In December 2006 “S7” leased the fleet of “Perm Airlines” and undertook all its flights. They will use the codes of both air companies. Later “Perm Airlines” will be completely acquised by “S7”. “UTair Aviation” purchased the control stock of OOO “Komiinteravia” and got its route network and fleet. In December 2006 in the process of reorganising of OAO“Komiinteravia” “UTair” completed the registration of subsidiary OOO”UTair-Express” which has got the operator certificate for commercial freights on the board “An-24”. Perhaps, “UTair-Express” will be the feed company which will drive passengers to the “UTair” hub airports. In general, the consolidation of “S7” and “UTair Aviation” shows the tendency to independent development. Consolidation mechanisms of this kind rather demonstrate struggle between the airlines for transportation facilities of the outsiders.

Thus, considering the consolidation trends among the air carriers in 2006 and the previous years, the ratings of the air carrier groups, air carrier holdings and air carrier alliances being established, are as follows:

Rating of the air carrier groups in terms of passenger traffic in 2006

Number of passengers carried in 2005, mln people

Number of passengers carried in 2006, mln people

1. “Aeroflot” Group
«Aeroflot-RA»

«Aeroflot-Don»

«Aeroflot-Nord»

8,071
6,667

0,599

0,805

8,753
7,290

0,588

0,875

2. «S7 Airlines»

4,204

4,894

3. «AiRUnion»
«KrasAir»

«Domodedovo Airlines»

«Samara Airlines»

«Omskavia»

«Sibaviatrans»

3,208
1,821

0,644

0,441

0,120

0,182

3,365
1,852

0,773

0,445

0,084

0,211

4. GTK«Russia»

3,202

3,034

5. «UTair»

1,887

2,417

6. «Transaero»

1,572

2,137

7. «Vim-Avia»

1,589

1,318

8. «Atlant-Soyuz»

0,469

1,209

9. «Ural Airlines»

0,909

1,012



Rating of the air carrier groups in terms of passenger turnover in 2006

Passenger turnover in 2005, mln passenger-km

Passenger turnover in 2006, mln passenger-km

1. «Aeroflot» Group
«Aeroflot-RA»

«Aeroflot-Don»

«Aeroflot-Nord»

22514,2
20694,8

912,2

907,2

24324,8
22406,5

874,5

1043,8

2. «S7 Airlines»

10949,0

12497,5

3. «AiRUnion»
«KrasAir»

«Domodedovo Airlines»

«Samara Airlines»

«Omskavia»

«Sibaviatrans»

9906,7
5461,4

3169,3

705,4

338,2

232,4

10477,5
5444,7

3791,2

712,8

268,5

260,3

4. «Transaero»

5254,0

7792,5

5. GTK«Russia»

6578,6

6121,2

6. «UTair»

2976,7

3665,8

7. «Vim-Avia»

4578,2

3650,4

8. «Atlant-Soyuz»

1092,5

3109,3

9. «Ural Airlines»

2348,1

2608,6


The analysis of the above data with the Pareto distribution gives an evident conclusion that the outlined group of leaders in terms of passenger traffic and passenger turnover holds dominating positions in the air service market of the Russian Federation (74.03% of the passenger traffic and 79.07% of the passenger turnover) and in the mid-term prospect will hold these positions. Due to a high penetration barrier of this market, it is only foreign air carriers that can be new in the market and aiming at a seize of a considerable share of this market. This trend is already seen: the foreign airlines that serve international flights to and from the Russian Federation aggregately hold 30-35% of the market. At the same time, no foreign airline is present at domestic Russian air routes.

In the reporting year we could see the following cost of air transportation:



The analysis of the transportation cost change shows that the pace of expense growth is mainly related to the pace of price growth for the aviation fuel. Over the year, the price of aviation kerosene grew by at least 10.5%. In the reporting year the average price reached 18 thousand roubles per ton and its ratio in the cost was about 40%. Considerable growth of fuel prices created an extremely difficult situation for all air traffic market participants. It is difficult for the air carriers to optimize their budget since over a half of the expenses are born in monopolistic markets. Thus, it is a complex issue and joint efforts are required to solve it both at the governmental level and within the industry.

Raising fuel prices could not but influenced the growth of flight tariffs. In 2006 the annual flight tariff growth of the economy class at the domestic air routes (32.8%) outpaced the general inflation factor in the country as in the previous year.

Monitoring of finance & economic status of the air carriers, being performed by Rosaviatsiya, demonstrates that almost 50% of them are in a non-satisfactory condition. Only the airlines of large traffic volumes are currently able to maintain profitable or break-even activities. And, taking into account that large airlines increasing their market share force smaller companies out, further growth of the number of unprofitable enterprises is inevitable. A special concern is caused by regional airlines and airlines mainly involved in unprofitable services at local air routes.

It is impossible to improve competitiveness of the airlines without solving the seemingly most urgent problem of the civil aviation that is the quickest possible renovation of the aircraft fleet. Currently, the Russian airlines operate 1051 passenger planes. 600 of them are long-distance aircrafts (IL-96-300: 13, IL-86: 45, IL-62: 38, Tu-154: 254, Tu-204: 14, Tu-214: 9, Yak-42: 72, А-310: 6, А-319: 15, А-320: 11, А-321: 7, В-737: 64, В-747: 11, В-757: 19, В-767: 22) and 451 are regional ones (Tu-314: 172, IL-114: 2, An-24: 118, An-38: 6, Yak-40: 142, Dash-8-100: 3, ATR-42-320: 2, SAAB 2000: 6). Thus, there are only 44 domestic new generation aircrafts operated (such as IL-96-300, Tu-214, Tu-204-100, Tu-204-300, IL-114, An-38). They are operated by 14 Russian air carriers.

The strained situation in the international flight market that relates to the introduction of various limitations on the use of outdated aircrafts, forced to import 67 foreign planes in 2006, even under high customs duties. The total amount of foreign aircrafts was 166 planes (in 2005 there were 99 aircrafts). Foreign long-distance and regional aircrafts are operated by 23 Russian air companies (it is 14 air companies more than in 2005). In 2006 foreign-made planes made more than 32% of the total traffic.

In this situation foreign-made aircrafts have to be imported and operated by Russian airlines to enable them to withstand strict competition with foreign companies both in the international and Russian markets, where they acquire more importance. In 2006 some new foreign carriers appeared. They are “Germanwings” (Germany), “Norwegian Air Shuttle” (Norway), “Windjet” (Italy), “Transaviabaltica” (Lithuania), “Air Berlin” (Germany), “SCAT” (Kazakhstan).

Small Russian airlines simply do not have enough working capital to withstand expansion. They have no possibility for target financing of new aircrafts even in case of their purchase under operational lease. These companies cannot ensure a high level of flight safety, regularity of scheduled flights, or meet all kinds of regulations.

The only tool of the Russian airlines to set off the growing foreign presence is rapid consolidation of air carriers, urgent establishment of sound operators among industry leaders, namely the “Aeroflot” Group, the “AiR Union” alliance, “S7”, “Russia”, “UTair Aviation”, “Transaero Airlines”, “Vim Airlines”, “Uralskye Airlines”. Establishment of global aviation alliances remains a global tendency of the last decade development of civil aviation. The main purpose of such alliances is to cut costs, attract more passengers by offering a wide route network, joint competition against other alliances.

2. Market and Legal Situation in the Aircraft Lease Industry in 2006
Nowadays the main issue of the aircraft industry development is still discrepancy of the scale and structure of its research and production potential to the effective demand for the commercial products of the industry.

Thereby, the industry experiences the decline of design and production technology, aging of capital production facilities, and a flow-out of high-skilled staff. In order to change the situation, the government works out a strategy and programme for aircraft industry development aimed to restore the competitive position of aircraft industry in the domestic market and to expand export of products and services of the aircraft industry.

Thanks to the state programmes in 2006, there was the exchange of a negative trend for a positive one. In 2006 the aircraft industry of the Russian Federation produced 33 planes and 99 helicopters. Such data you can see in the “Preview report on production and delivery of civil aircrafts in 2006” which was prepared by Federal Industry Agency. So, in 2006 to 2005 the production volume of civil aircrafts totalled 120.5%. It is possible to consider this fact as the correctness of accepted recently essentially important decisions on long-term strategy of an aircraft industry development.

A provision is made for great state support of air industry and a lot of the measures directed on steady development of the branch.

However, we can say about the second crisis situation which is related to the personnel. Skilled staff, taken part in the creation of aircrafts of the previous generation, is almost of a retirement age. Because of some reasons the prestige of engineering work in Russia has unreasonably decreased. It seems that special measures are needed for attraction of talented young people to the work in the aircraft and other high- technology industries.

If we speak about the most important events in the civil aircraft industry of 2006, it is possible to list the following:

  • The Strategy of Development of Russian Aircraft Industry for the Periods to 2015” was adopted. The aim of the program was to recover the positions of our country in the market of civil aircrafts. Now the share of new Russian aircraft in the world market is less than one percent. An ambitious task was set – to achieve 5% share of civil long-distance and regional planes in the world market.

  • A new redaction of the federal and state program titled “Development of Russian Civil Aircrafts for the Periods from 2002 to 2010 and up to 2015” was adopted. The program was adopted by the government in 2001. The first version of the program assumed rather modest state maintenance of the industrial enterprises. At the average 9 bln rubles are laid out for this federal program annually from 2002 to 2005, including 3 bln rubles from the federal budget. A new version of the program “Development of Russian Civil Aircrafts for the Periods from 2002 to 2010 and up to 2015” means not just multiple increase of the total budget of this federal program but also a change of the role of the federal budget. Before its share did not exceed one third in the total expenses of the federal program but now it has increased up to 55%. At the same time on average for the nearest ten years the annual budget of the federal program will amount more than 33.8 bln rubles and the annual direct expenses from the federal budget will exceed 18.8 bln rubles.

All the above mentioned programs are directed to the crucial decision of the problem of developing of aircraft building and air activity in the Russian Federation.

Some attempts are made to solve problems concerning re-equipment of Russian civil aircrafts with new machinery of domestic manufacture. For that he Russian Government assumed the following measures:
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