Analysis of Low-Cost Carriers in the Post-Soviet States

The research paper provides an overview of low-cost carrier (LCC) development in the postSoviet states with the analysis of the largest aviation market in Russia. The LCC model seeks to achieve a competitive advantage through the reduction of operating costs below the traditional airline model. Since the post-Soviet states are emerging economies, airlines face a high level of uncertainty and experience a number of unique problems. While the global community enjoys the benefits offered by LCCs, the question remains why this model has not been successful in the 15 newly formed countries, with the exception of the Hungarian low-cost subsidiary Wizz Air Ukraine. Convenient geographic location, large population with comparable GDP per capita, high levels of tourism, and good transportation infrastructure make this market very attractive for domestic and foreign-based LCCs. The research addresses strategies employed by airlines, as well as the challenges and opportunities. The airline classifications and data is collected using the Flightglobal database. Future strategies, including government legislation, are discussed in order to promote the LCC business model as a successful option to compete in these markets.


Introduction
After the breakup of the Soviet Union in 1991, the former 15 Soviet republics obtained their independence. In December 1991, most of these countries, with the exception of the Baltic States and Georgia, formed the Commonwealth of Independent States (CIS) to promote trade, economic cooperation and security. Georgia joined the organization in 1993 and then withdrew in 2008. The 15 former Soviet Republics differ in a number of ways: size, population, natural resources and the state of economic development. The newly formed countries went through a lot of changes to transition to the open market economy. This included the re-structuring of the previously centralized aviation industry and emergence of new airlines, including the low-cost carriers (LCC).
Two groups of low-cost airlines could be observed in the post-Soviet states. The first group is airlines with the rights to carry passengers in the domestic routes. These include domestic operators, or airlines formed either as a joint-venture or a partnership between domestic firms and foreign entities. Examples of this type include, the first Russian LCCs Avianova and SkyExpress. This group also includes foreign airline subsidiaries with the rights to operate within the domestic market, such as Wizz Air Ukraine, a subsidiary of Hungarian low cost carrier Wizz Air.
The second group is foreign-based airlines without any domestics rights to carry passengers. Irish Ryanair with one non-stop destination to Estonia, one to Latvia, and two non-stop destinations to Lithuania. -Norwegian with one non-stop destination to Russia, one to Ukraine, one to Estonia, one to Latvia, and two non-stop destinations to Lithuania. -Turkish Pegasus Airlines with one non-stop destination to Russia, one to Kazakhstan and one to Georgia. -UAE Air Arabia with five non-stop destinations to Russia, four to Ukraine, and two to Kazakhstan. -UAE FlyDubai with five non-stop destinations to Russia, three to Ukraine, one to Armenia, one to Azerbaijan, and one to Georgia (Flightglobal, 2013).
This study provides an overview of the LCCs in the post-Soviet states. The airline classification and data was collected using the Flightglobal database. The study concludes with the discussion on why the LCC model is not widely established in this part of the world, and what strategies should be implemented in order to successfully compete in these markets.

Low Cost Carrier Model
The Low Cost Carrier (LCC) concept is considered to have originated in the U.S. (Cento, 2009). It started with Southwest Airlines in the early 1970s and was later adapted to the European market by Irish carrier Ryanair in 1991, followed by the UK-based easyJet in 1995. It seems that the establishment of LCCs follows a natural industry progression and a countries' economic development. Vasigh and Harraf (1994) noted that during an economic downturn and the accompanying reduction of disposable consumer income, large carriers faced reductions in passenger traffic and, therefore, downsized. As a result, a large pool of skilled labor and discounted aircraft facilitate the emergence of new low cost carriers.
The LCC model seeks to achieve a competitive advantage through the reduction of operating costs below the traditional airline model. According to Cento (2009), the now classic LCC model includes the following characteristics: 1. Core business: passenger air-service. 2. Route structure: point-to-point network. The carriers fly to main destinations on short or medium haul domestic routes without providing connecting flights for their passengers. 3. Airports choice: secondary airports, which are less expensive in terms of landing and handling fees and are also less congested. 4. Aircraft fleet: single type with a higher utilization rate. 5. Service: no frills; no product differentiation; no lounge services at the airports; no frequent flight program; fares are not refundable and cannot be used on other airlines. 6. Distribution system: sales/reservation costs are minimized. All tickets are in the electronic format, and the distribution channels only include the internet and telephone sales. 7. Ancillary services: additional revenue generation from other sources including hotels, car rentals, in-flight food and beverages, etc.
A number of research studies have been conducted to compare the development of LCCs and their operations across different geographic areas (see Table 1). For example, Reynolds-Feighan (2010) conducted a North American and European comparison, while Barbot, Costa and Sochirca (2008) analyzed 49 airlines across the world including LCCs.

The Post-Soviet States
The post-Soviet states are the former Soviet Union 15 republics, which were formed after the breakup of the USSR in 1991. The newly formed countries are located in four different geographic regions, Eastern Europe, Baltic, Central Asia and Southern Caucasus (see Table 2). Those characteristics provide a support that a large market exists, which needs to be served by airlines, including low cost carriers.

Low Cost Airlines in the Post-Soviet States
Given the size, population, economic development, and high level of tourism, it seems that the LCC model would be a viable model in the post-Soviet states for domestic and international travel. However, the history of the domestic low-cost airlines, has not been successful. Four domestically established low cost airlines stopped their operations within a few years of starting up (see Tables 3 & 4 In addition to the major national carriers, 10 out of the 15 countries operate either regional or leisure (charter) airlines with the structure in some way similar to the LCC model. Latvian airBaltic is the national Latvian airline and is classified as regional by Flightglobal database. However, in some publication airBaltic is referred as a hybrid low cost airline (CAPA, 2013).  Since 1991, the Russian transportation industry undergone a dramatic transition from state ownership to privatization, which led to decrease in aircraft production "from over 200 per year in the late 1980s to less than 10 in the 2000s" (Chustuzian & Belianin, 2009). The change included the split of the previously government-controlled Russian national airline Aeroflot into numerous companies who tried to survive in the new open-market economy. By allowing foreign companies to sell aircraft to Russia, domestic manufacturers lost their market share of aircraft production to Boeing and Airbus (Curtis & Swenson, 2010). Currently, the development of the Russian transportation industry is considered to be one of the main areas of government concern. Initiatives include new changes in the legislation, the modernization of airports and aircraft fleet, and an increase in the quality and affordability of aviation services.  (Flightglobal, 2013). The airline was sold in April 2013 to Mr. Kuznetsov and the Russian finance house GHP Group.
In addition to domestically-based LCCs, as of May 2013 there are 11 foreign-based low cost carriers currently operating in the Russian market (see Table 5). "In Oct-2012 these 11 LCCs operated approximately 22 routes to Russia with around 33,000 weekly seats. LCCs in the week commencing 29-Apr-2013 operate 24 routes and almost 42,000 weekly seats to and from Russia, according to CAPA and Innovata data. But that only accounts for about 4% of Russia's total international seat capacity" (CAPA, 2013). Most of the airlines had double digit increases in weekly seating capacity, while both Italian-based LCCs had triple digit increases. Sensing opportunities in the lucrative and open Russian market, easyJet, a UK-based low cost airline, started its operations in March 2013 on routes between London Gatwick Airport and Moscow Domodedovo Airport with 14 flights a week. It will be followed shortly by the Manchester-Moscow routes. easyJet will be operating a 180-seat A320. Additionally, the airline is looking into expanding its services to different Russian cities, including flights between domestic destinations if allowed by the Russian government (CAPA, 2013).
With such a rapid growth, other foreign carriers are also looking into the possibility of expanding their operations. Hungarian low-cost Wizz Air is planning to launch a Russian subsidiary, Wizz Air Russia, in 2014. The airline will base a fleet of three A320s in Moscow, and has plans to carry 750,000 passengers in its first year of operations with a total of 2,500 to 2,700 flights (CAPA, 2013). Wizz Air Russia will be serving approximately 15-20 destinations if it can obtain the rights to the domestic market (Zaitsev, 2013a). Additionally, the Irish-based Ryanair is looking at the possibility of launching Ireland-Russian flights and also operating within the domestic market. Moreover, Czech SmartWings is looking into the possibility of launching a Prague-Moscow route.

The Ukrainian LCC Market
Wizz Air Ukraine, the Kiev-based subsidiary of Hungarian-based low-cost carrier Wizz Air, was established in July 2008. Wizz Air Hungary, which is the largest low cost airline in Central and Eastern Europe, owns a 100% of Wizz Air Ukraine. Wizz Air Hungary was found in Poland in September 2003 by the former Malev CEO Mr. Varadi as a privately-owned low cost carrier (Flightblobal, 2013). It was reorganized in 2004 as a subsidiary of London-registered Wizz Air Ltd. In December 2004, the largest shareholder of Wizz Air became an investor group led by Indigo Partners LLC, also the founders of Singapore-based low cost carrier, Tiger Airways.
Wizz Air Ukraine operates domestic services between Kiev and Simferopol and international services to cities in Germany, Poland, Spain, Sweden ,Turkey and the UK with a total of 88 flights per week. (Flightglobal, 2013). In March 2011, Wizz Air Ukraine relocated its Kiev operating base from Borispol Airport to Zhulyany Airport. The recent expansion of the network includes obtaining the former routes of the Ukrainian national flag carrier AeroSvit, which terminated its operations in February 2013. The Ukrainian authorities distributed flying rights for 35 cross-border routes to second tier airlines (Zaitsev, 2013b). As a result, Wizz Air Ukraine will operate eight AeroSvit routes from Kiev, Donetsk and Kharkov using four Airbus A320s.
Other foreign-based low cost carriers operating in Ukraine include the following: -UAE based FlyDubai with non-stop destinations to three Ukrainian cities Kiev, Donetsk and Kharkov -UAE based Air Arabia with non-stop destinations to four Ukrainian cities Kiev, Donetsk, Kharkov and Odessa -Norwegian low cost carrier with one non-stop flight to Kiev.
Ryanair, an Irish-based low cost carrier, is currently looking into the possibility of expanding its operation into the Ukrainian market as well.

The Lithuanian LCC Market
Star1 Airlines was established as Lithuania's new, privately-owned, low-cost airline after the termination of the national Lithuanian airline FlyLAL in January 2009. The airline was owned by the Star Team Group, which was also an owner of the Star1 Holidays tour operator. Star1 launched charter flights in June 2009, followed by regular flights to London, Dublin, Gerona for Barcelona, and other major European cities. Services were suspended in September 2010 after the Star1 Airlines single Boeing 737 was seized by the lessor at Dublin (Kaminski, 2010). Star1 Airlines filed for bankruptcy two weeks later after the Star Team Group announced that it was unable to continue providing funding to the carrier (Flfightglobal, 2013).

The Kyrgyzstan LCC Market
A new start-up airline, Pegasus Asia, is a joint venture between the low-cost Pegasus Airlines of Turkey and the Kyrgyzstan-based Air Manas. Air Manas was established in 2006 as the private airline of Kyrgyzstan president, Mr. Bakiyev (Flightglobal, 2013

Discussion
While much of the global community enjoys the benefits offered by low-cost carriers, this model continues to struggle in the post-Soviet states, with the exception of the Ukrainian-based subsidiary Wizz Air. Post-Soviet countries have large populations, comparable GDP per capita and HDI, high levels of tourism, and good transportation infrastructure. Despite this fact, domestic LCCs have not succeeded to date. "Russia has the ninth largest domestic market in the world and it is the only domestic market among the world's top 20 that does not have any LCCs" (CAPA, 2013). This aviation passenger growth is projected to continue to increase, especially with the Winter Olympics in 2014 and the FIFA World Cup in 2018. Russia and the post-Soviet states offer a promising aviation market. With its large territory, air transportation is the fastest and the most convenient way of travel (Chustuzian & Belianin, 2009). While main carrier airfares remain unaffordable for a large portion of the regional population, LCCs marketing strategy should be able to target potential passengers who currently rely on rail transportation by providing them with faster and cheaper service.
Despite the market attractiveness, a large number of barriers exist. They could be classified in the following areas: a) Government regulations Currently, the Russian Air Code forbids foreign carriers from operating domestic flights inside Russia; aircraft import duties make the configuring of foreign planes for LCC business difficult; regulations regarding refundable tickets, onboard meals and free luggage; overall governmental support for national carriers b) Insufficient infrastructure: Lack of secondary airports and inability of regional airports to meet LCC requests, such as to turn aircraft around in approximately 20 minutes. c) Distribution system: Lack of computerized access and online payments outside of major cities.
Other barriers include: 1) the existence of only a few routes with high-density passenger flows, 2) older Russian-built aircraft do not meet international regulatory standards, 3) costly lease of Western-made aircraft due to import taxes, 4) a lack of adequate domestic maintenance facilities results that aircraft maintenance has to be performed abroad, and 5) Internet, commonly used as a distribution channel by LCC in other countries, is not yet widely used in Russia (Komarov, 2007). Moreover, under previous legislation each fare sold by LCCs should included 10 kg of checked luggage, in-flight food and beverages, and offer refundable tickets. This defeated the main goal of LCC to reduce its operating cost. "The inability to offer unbundled fares and create ancillary revenue sources essentially made Russia's previous LCCs full service despite marketing themselves as low cost" (CAPA, 2013).
The Russian Government sees the opportunity for LCCs and is in the process of amending the legislation. "In November 2012, the government reduced the minimum fleet size scheduled airlines are required to operate from eight to three aircraft with a capacity of at least 55 seats" (CAPA, 2013). Other initiatives include changes to requirements regarding refundable tickets, checked luggage and in-flight food and beverages. " In Nov-2012 the Russian Ministry of Transport proposed the cancellation of a regulation which requires airlines to carry 10kg of baggage per passenger for free" (CAPA, 2013). The Russian Government is also looking into the possibility to allow foreign LCCs to operate domestically. This will also create an opportunity for establishment of local subsidiaries or partnerships.
In order to stay competitive, domestic airlines have to develop and implement new strategic approaches. Russia's leading airlines, such as Aeroflot, Transaero and UTair, are interested in launching their own LCCs. UTair is planning to utilize Ermilino Airport, which is located about 80 km from Moscow and was previously under the Russian Defense Ministry. Older generation aircraft need to be replaced by more modern versions, allowing certification standards to be adjusted in accordance with international regulations. Newer technology needs to be introduced to improve ticket distribution and sales, including Internet booking and e-tickets.

Conclusions
The post-Soviet states can be characterized as emerging and developing economies, therefore, airlines face a high level of uncertainty. However, the new aviation regulations will make market conditions more favorable for pure LCCs to operate. Forecasts indicate that Russia LCCs will gain up to 35% market share within 10 years (CAPA, 2013). This should increase competition and, in turn, present a threat to already established airlines. Therefore, major Russian carriers, such as Aeroflot, Transaero and UTair, have expressed interest in launching their own LCC subsidiaries. At the same time, foreign LCCs also have plans to expand their operations to and within the domestic markets. For example, Irish-based Ryanair is planning to start operations in Ukraine and possibly in Russia, and Hungarian Wizz Air has plans to set up a Moscow-based division Wizz Air Russia to serve international and perhaps domestic routes in Russia.
The future is promising for LCCs to be successful in the post-Soviet states, and to provide cheaper and faster services to already established and new destinations, which were not previously served by airlines.