The European Commission has charged Panalpina, Kuehne + Nagel, DSV, DB Schenker and DHL Global Forwarding with continued illegal price-fixing.
     The anti-trust allegations are based on a raid in fall 2007 when offices of the above mentioned logistics giants and facilities of CEVA (formerly EGL), Expeditors, and UTI Worldwide were searched by prosecutors.
     According to an EU statement the law-breakings occurred on air freight transports from the UK to outside the thirty-country European Economic Area (EEA), from China to the EEA, from southern China respectively Hong Kong to the EEA, and from the EEA to the United States.
     “The EU is investigating alleged anticompetitive practices by a number of firms because of their collusion activities on the imposition, level, timing and application of various surcharges, in breach of Article 101 of the EU Treaty," the Commission explained.
     The U.S. Department of Justice and the Swiss Competition Commission are closely collaborating with Brussels on the investigation.
     Meanwhile the European Authorities have sent a Statement of Objection relating to the alleged cartel building to some of the firms suspected of continuous price-fixing. This is a formal step in antitrust investigations in which the parties concerned are informed what charges are being raised against them.
     Danish DSV, Panalpina and K+N, both of Switzerland, confirmed receipt of charges from Brussels.
     If cartel building is proven, the enterprises can be fined up to 10 percent of their yearly turnover. However, in the past the EU has not imposed such drastic penalties in similar cases.
     Deutsche Post subsidiary DHL confirmed its global forwarding division DHL Air & Ocean had received the Statement of Objections. The German company claimed it had been granted immunity from prosecution and fines by the Commission, conditional upon its continued collaboration with the regulator.
     In the meantime Robert Frei has stepped down as global head of product and procurement, air at Panalpina. His move came right after the Swiss enterprise received a Statement of Objections by the EU containing its alleged involvement in price-fixing practices.
Heiner Siegmund

     Operating figures for Russian airlines show 5% y-o-y decline of revenue passenger kilometers in 11M 2009. Russian operators, like their foreign peers, have experienced some recovery in passenger carrying since the 1H 2009, but the recovery has been hampered by rising prices for fuel in 2009. IATA expects the global industry to show net losses of USD$10b this year, declining to USD$5b in 2010.
     The Russian airline market has potential to grow faster than the international average due to current low human mobility, which should rise together with GDP. Expect the concentration of what remains a fragmented market (there are more than 170 domestic airlines, mostly with five or fewer jets). The five biggest airlines, which carry over 60% of passengers, should expand their market share as small companies with inefficient Soviet craft go out of business: expect a second wave of airline bankruptcies in 2010-2011, as fuel price pressure intensifies.
     The International Air Transportation Association (IATA) reports that average passenger load factor in the global airline industry increased from a low of 71% in January-February 2009 to 77% in October-November. The Russian industry has fared better than the U.S. and Europe, but has lagged recovery rates of Middle East and SEA airlines. Operating performance in Russia and worldwide is still far below levels in the pre-crisis period. Recovery of airline financials has been hindered by rise of fuel prices in 2009. For 2010 IATA predicts positive operating margin and halving of net losses. SEA and the Middle East should lead the recovery in 2010 due to fastest GDP growth in those regions.
     Revenues passenger kilometers (RPK) in the Russian airline industry fell by just over 5% y-o-y in 11M 2009. Two of the five main Russian carriers, UTair and Transaero, avoided decline, improving their RPK performance by 5% and 11% y-o-y, respectively. Aeroflot showed average performance. But the other main carriers (Sibir, UTair and GTK Rossiya) all fared worse than the average.
     Russia still has relatively low human mobility: annual passenger numbers per capita are about 0.5x, which is equal to Slovakia and significantly lower than most developed markets, such as France (2x), Germany (2x) and UK (3.7x). So there is strong potential for industry growth in Russia once the economy recovers.
     Most of the Russian civil air fleet still consists of domestic-built craft, which are much less fuel-efficient than foreign planes. This makes it hard to achieve profitable operations, even with a high load factor. The situation is made worse by refueling monopolies at many regional airports: only airlines, which refuel in Moscow and St. Petersburg or abroad, can be sure of obtaining fair prices for fuel.
     Russia’s airline industry as mentioned is still quite fragmented: there are 170 airlines, most of them with no more than five jets each. The five biggest airlines (Aeroflot, Sibir Airlines, Transaero, UTair and GTK Rosiya) carried more than 60% of passengers in 9M 2009. Other players are small regional companies with Soviet-made planes, few routes and very low margins.

      The combination of an old inefficient fleet and rising fuel prices could led to a new wave of bankruptcies among small regional players in 2010. This will create expansion opportunities for the biggest airlines.
      Overall, expect the number of Russian airlines to decline significantly in the mid-term. The big players (and other survivors) will use the opportunity to increase their market share, and their operating results will improve substantially as the Russian economy recovers and per capita passenger numbers increase.
      Aeroflot remains the #1 Russian airline company, carrying over 22% of Russian passengers in 9M 2009 (including subsidiaries Donavia and Nordavia). The key event at the company in 2009 was a change of management team. The airline industry veteran, Valeriy Okulov, was replaced as CEO by Vitaliy Saveliev, a professional manager, who previously headed the telecom division of AFK Sistema. The new team has emphasized focus on profitability and seems resolved to close unprofitable routes, regardless of their political or social significance (flights to Cairo have been axed; flights to Norilsk ceased in mid-January). A final version of company strategy is due at the end of 1Q 2010.
      The Group showed healthy 9M 09 operating results. RPK in 11M fell by only 5% y-o-y, while passenger load factor was only 1.3% lower y-o-y at 70.2%. Company results have improved much faster than the overall market since 2H 2009.
      Management has very ambitious targets for 2010: passenger load factor should reach 75%, and the company has set a target in excess of 25% for y-o-y growth of passenger numbers, increasing market share. Forecasts are more conservative, but many do take the company targets seriously and believe that they may be achieved.

     A cost-cutting program this year is targeting $860m savings compared with the initial budget for 2009. The program includes reduction of non-operating personnel numbers by about 2,300 (following the pattern of personnel reductions by other international airlines), and about $240m savings thanks to a new system of fuel purchases, which includes a hedge strategy and auctions for fuel supplies every 10 days to replace long-term contracts.
      Aeroflot has reviewed routes and ticket pricing, and is closing unprofitable routes, except those, which are justified by connections with other highly profitable routes (mainly regional routes inside Russia connecting with international routes via Moscow). The cost-cutting does not extend to Aeroflot’s fleet renewal program, which continues unabated and aims to replace all Soviet-built planes with Airbus, Boeing and Russian-made SSJ-100s in a few years time.
     Aeroflot opened its new terminal at Sheremetyevo Airport (Sheremetyevo-3) in mid-November and is gradually transferring all its flights there. The company says that slow pace of the changeover is intentional, to avoid repeating the disastrous opening of Heathrow-5, and that 80% of international flights and all domestic flights will use Sheremetyevo-3 by the end of 1Q 2010. In addition to efficiency improvements thanks to exclusive operation of a single terminal, Aeroflot expects to receive nearly $200m revenues from leasing of retail space, etc. (Aeroflot has a controlling stake in Sheremetyevo-3).
     The Group published healthy 9M 2009 financials, though margins were pulled down by subsidiaries (Donavia, Nordavia and Aeroflot-Cargo). Losses at subsidiaries have been reduced y-o-y. The Group’s profitability will likely increase and cost-cutting measures will likely bring positive effects in 2010-2011. However higher-than-expected fuel prices could have serious impact on margins.

Source: Company Data

      Among second-tiers, the most promising Russian companies are Transaero, Sibir Airlines and Ural Airlines, which are ranked #2, 3 and 7 by passenger numbers. All three are expanding routes and starting new flights in Russia and abroad. They all have efficient fleets, consisting mainly of foreign jets (Airbus and Boeing).
     Transaero is the biggest Russian charter operator, and is particularly interesting in light of its upcoming IPO on MICEX. Charter business accounted for about 60% of revenues in 2009 and the foreign-built long- and medium-haul fleet helps to reduce fuel expenses. Transaero recently obtained government guarantees for debt refinancing, which is clearly positive.
     Transaero shares have an indicative listing on the RTS-board, but trading has been suspended for the duration of a share split (intended to raise attractiveness for investors ahead of the IPO).

      Sibir Airlines benefits from a diverse route network and new fleet. The company also has significant charter business, which brought about 20% of revenues in 2008. Sibir, like Transaero, has obtained government guarantees for its debt, which calms concerns about high debt levels incurred in 2008 due to acquisition of new jets. The Russian government owns a minority stake in Sibir, which provides a good hedge in the downturn. Official operating results of Sibir shrank substantially in 2009 due to transfer of part of routes and fleet to the 100% subsidiary, Globus.

     UTair is ranked as the #5 airline company in Russia and it includes a helicopter transport business, which has supported company financials through the downturn. UTair has been among best performers in 2009, expanding its regional routes after bankruptcy of Air Union and some of the operators, which were part of Air Union. UTair operates freight transportation for Russian oil & gas and mining companies, and also has projects in Congo, Turkey and some other EMEA countries.
     The company has an ADR program and publishes financial results under IFRS, but there have been delays in publication of audited figures. The company has opaque shareholder structure. But the main beneficiary shareholder is believed to be Surgutneftegaz, with a stake of more than 75%. Surgut has very large cash reserves, adding to confidence about financial stability of UTair.

      Ural Airlines is #7 operator in Russia by passenger numbers. Recent business development and fleet enlargement made it one of the best performers in 2009: RPK of the company increased by 1% y-o-y in 10M 2009. Ural Airlines is 74% owned by its 100% subsidiary Krylya Urala. However, the nature of company shareholder structure is opaque.

Gordon Feller

Our Martin Changed Air Cargo

     If you want to learn about August Martin, the great air cargo pilot who flew for Seaboard World Airlines during the 1950’s, and was also the first black man to captain a U.S. flag air cargo airplane, you better plan on either using your old Funk & Wagnall’s Encyclopedia, or visiting the wonderful high school located near JFK International Airport in Queens New York City named in honor of the air pioneer.
     The name August Martin as an internet search, most often comes up as “August” 28, 1963, when “Martin” Luther King delivered his never to be forgotten “I Have A Dream,” speech at the Lincoln Memorial in Washington, D.C.
     This August Martin, a gentle man would go down in history as the first African American to serve as Captain on a U.S. scheduled airline.
     Put another way, before “Augie” as his friends called him, there had never been a black airline captain on the bridge of any U.S. flag airline.
     Although he flew for other carriers, including El Al Israel Airlines and a company called Buffalo Skylines between 1946 and 1955, it was Seaboard World Airlines, an air cargo company, which hired Augie and broke through a glass ceiling in American culture.
     Air cargo put a great aviation pioneer, who happened to be black, in the left seat.
     August Martin, who was born in 1916 had aviation blood in his veins.
     He worked all his life to be a pilot, training as a youngster to fly small prop jobs and later during World War II as a front line Mitchell B26 bomber pilot.
     He also took training at the Tuskegee, Alabama base, which spawned the legendary black pilots who gained fame as The Tuskegee Air Men.
     While awaiting his big break with a scheduled U.S. flag carrier, Augie worked as a stevedore on the New York docks to make ends meet.
     But when SWA came a knocking, August Martin was ready.
     For the next thirteen years Martin piloted the legendary all-cargo aircraft of SWA, including the Lockheed Constellation, Canadair CL44 swing-tail freighter, Douglas DC-4 and DC-6 among others.
     August Martin was not just about breaking through for himself. Augie also gave back big time.
     Often, he would donate his off time and vacations, flying supplies to the impoverished in Africa, and other points of emergency and need around the world.
     On July 1, 1968 August Martin was killed aboard just such a flight when his cargo-laden aircraft crashed in a blinding rainstorm as he attempted to land in Biafra, Africa.
     Today, in modern air cargo circles not much is known or said about August Martin.
     Air cargo groups and organizations, and increasingly publications yearly name people to this and that “Hall of Fame,” blithely unaware that one of the truly, great firsts in the history of air cargo was a black man with the rank and responsibility of Captain of a great international airline.
     August Martin deserves charter membership in any air cargo “Hall of Fame.”
     Here was a guy who not only makes us proud, he makes us look good.
     History demands the truth.
Geoffrey

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