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OTHER ARTICLES Last modified on August 25, 2016

Helping hand

Lufthansa Consulting’s Anna Shachikova explains how subsidised transportation could help regional airports in Russia’s Far East survive and flourish.

Public Service Obligations (PSOs) – invariably the subsidising of air services – remains a highly relevant topic for the development of small, regional airports in remote regions across the world, and Russia is no exception. 

For although small, regional gateways are essentially built to provide cities and regions with connections to the rest of the country and beyond, they often lack the appeal to independently build up their route networks and operate successfully.

Indeed, as ACI World points out in its annual Airport Economics Survey, it is almost impossible for small airports handling less than one million passengers per annum to be profitable. 

The challenges of the Russian Federation’s smaller regional airports are arguably magnified by the country’s size, which ensures that many of the most remote gateways are long distances and many hours’ flying time from Moscow and each other. As a result, Russia faces huge challenges in terms of arranging frequent local air transportation services.

In many countries, of course, governments financially support the operations of these airports in order to provide a minimum level of transport accessibility and connectivity and, again, Russia is no different.

However, in most cases the level of support doesn’t meet the airport’s actual needs. And there are other problems, too, such as the fact that subsidised services are often served by outdated fleets. The unprofitability of the route and the lack of opportunities for modernisation also means that the cost of operating it constantly increases. 

This leads to another issue as low service levels and low frequencies inevitably have a negative impact on demand and increase customer uncertainty. In other words, people are not satisfied with the quality or with the volume of the transportation provided.

Lufthansa Consulting conducted research into the effectiveness and commercial efficiency of the current subsidy programmes in Russia’s Far East region, which is one-and-a-half times larger than the size of the European Union, yet has a population density 100 times lower than it. 

Today the Russian state is developing three separate schemes in the region to subsidise:

  • Direct connections between regional airports and the rest of Russia’s biggest cities (funded by the state);
  • Inter-regional links between gateways in different districts in the Far East region (funded by the state and local authorities);
  • Intra-regional connections between airports in each district in the region (funded by the local authority).

These programmes are intended to run entirely independently from one another, but there are financial and social potential benefits to be gained from the synergy effect if all three schemes can be co-ordinated with each other or even combined effectively. 

Lufthansa Consulting’s analysis identified opportunities to optimise current subsidy schemes and make them more efficient, as well as to increase passenger traffic and population mobility. 

What we do know is that an increase in supply often stimulates demand when alternative modes of transport are not available or when air transport generates significant time-savings that deliver economic value to passengers. 

In order to increase air traffic, improve connectivity and broaden the scope of the network significantly, a number of changes will be necessary. 

In the main, these involve building up an optimal route network in the Russian Far East and redirecting passenger flows from point-to-point to feeder routes via regional hubs.

The feeder subsidy scheme will enable regional hubs to grow and provide the possibility for small regional airports to survive and generate sustainable passenger traffic volumes. 

We calculated that rather than developing direct links between each regional city in the Far East region with major Russian large cities, it would make more sense from an economic point of view to develop a regional network around two or three regional hubs. 

Our research also estimates that rearranging subsidy programmes would boost total passenger traffic in this region by 8% and increase the volume of subsidised passengers by 17% over the next 10 years. 

At the same time, traffic at one of the potential regional hubs could be almost doubled during this period! 

The feeder connections would add some time to the journey, but it would also enable costs to be cut, which in turn would make air transportation available to more people of this region and help to increase mobility. 

In most cases, business travellers, which constitute the most time-sensitive market segment, will still have the option of direct flights at a fair market price or a wider choice of flights as a result of increased frequencies. 

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