Russia's main airline, Aeroflot, announced this year that its major strategy is not to increase passenger traffic, but to become a more financially and commercially effective company and improve the quality of service it provides.

These lofty goals have been dictated by increasing competition – both at home and on the international market – that has prompted a slip in the company's market share. Aeroflot's General Director Valery Okulov spoke to The Russia Journal's Ivan Vorontsov about what changes the company has in store and what it plans for the coming year.

The Russia Journal: What are the most important changes Aeroflot plans for next year?

Valery Okulov: We intend to restructure our fleet over the next two years. This is a major undertaking that will involve replacing more than 20 aircraft. It's a difficult task because a key part of the work involves reaching new agreements with leasing companies.

This project will enable Aeroflot to save up to $100 million. We are carrying out a very large-scale program to modernize our entire fleet and bring it into line with EU navigation and noise standards.

RJ: What's the situation with flight safety at the moment, especially given recent incidents?

VO: We are completely unsatisfied with the Russian legislation on aviation security. Improving this legislation must become a priority. As for actual flight safety, we carried out a market-research study and were supported by our passengers. As a result, Aeroflot has banned smoking on all its flights.

We don't have a problem with security of flights to southern destinations. We have a good security service, and we are satisfied with the security at airports. We haven't faced any emergencies so far, and we are doing all we can to improve security both on the ground and in the air. We support Russian dog breeders who raise unique breeds of dogs for us, [which are] capable of finding explosives that technology can't discover, either because it simply doesn't exist or is too expensive.

RJ: Which companies have you signed code-sharing agreements with?

VO: Code-sharing is a tool for cooperation between airlines that involves exchanges of seats on our respective planes. We have signed more than 15 agreements. Our biggest partner companies are Lufthansa, Malev, LOT and Air France. We also have agreements with private airlines. We pay a lot of attention to our cooperation with these companies. The agreement with LOT is an excellent illustration. The route [that was] losing money and passengers was changed to different flights. When we began two flights, one from each company, the number of passengers increased immediately. We picked up passengers who wanted to fly through Moscow to other countries — it's cheaper and it cuts the flying time. We have six flights there and back a day with Air France.

RJ: Why does Aeroflot have no special rate for groups of 30-50 people?

VO: We don't have a fixed rate. A fixed group rate implies the cost comes down. Tour operators are all looking to get tickets for group tours at the lowest possible cost, but their wishes often exceed what Aeroflot can realistically offer. From a business point of view, groups mean fewer paying passengers, and it's not profitable for us to offer maximum discounts. If we see that the group demand is turning to our competitors, then of course we take measures so as not to lose group clients. But we don't usually offer the biggest discounts possible. We don't want our rates to be high, but nor do we want to lose profits. We don't need the image of a cheap carrier. We are improving service and security, and we want to be seen as a normal carrier running its business on a market basis.

RJ: Why is it sometimes cheaper to fly on foreign airlines than on Aeroflot? The food on Aeroflot isn't so good, and the discounts for children are small. What are you doing about this?

VO: Concerning prices, cheaper doesn't always mean better. Our company isn't a charity organization; we operate on the basis of mathematical models. As for service, we are doing all we can to improve it. Starting Dec. 14, flights to New York will have a completely new level of service. We will also introduce improvements to service on our flights to Europe and Asia, but for the moment, that is our knowledge only.

RJ: Charter flights accounted for 3 percent of all flights in the former Soviet Union. The figure is similar in the United States. In Europe, it is 5 percent on average. What is Aeroflot's policy regarding charters?

VO: Aeroflot's first priority was always its regular flights rather than charters. With more freedom and economic attractiveness, we could have good results. Aeroflot is an unwieldy player on the charter market – the rates are high and not competitive. As a regular carrier, we had a profitable and "hot" summer season.

FACTBOX

AEROFLOT

• According to preliminary findings, Aeroflot transported 5,716,000 passengers in 2002.

• The seat occupancy rate was 85 percent.

• Over the first 11 months of 2002, the company revenues amounted to 45,230 million rubles (9 percent increase over last year).

• Gross profit came to 2,667 million rubles (557 million rubles over last year). Net profit was 1,370 million rubles (540 million rubles over last year).

• Market forecasts for next year differ. Airlines are expecting growth of 20-30 percent, while industry analysts predict growth will slow down to no more than 1-2 percent.

• If the world air-transport market does pick up, Russian airlines will try to expand their business above all on international routes. Otherwise, domestic companies will concentrate on internal Russian routes, which are growing faster than international routes at the moment.

We were wise not to get caught up in the charter war. It was clear that the companies involved in charters would not make the additional revenue needed to complete their programs. Some of the problems were smoothed over.

The season wasn't very comforting for charter flights linked to the tourism business. The general situation in the world and the warm, but not so hot summer in Moscow played their part. Charters make up around 28 percent of long-haul passenger transport today. This does not harm our business, and we are always willing to encourage charter flights for Russian and foreign citizens, especially to the most popular summer and winter destinations. Of the more than 130 planes we own, 27 foreign-made planes account for more than 60 percent of our passenger turnover, and they are especially important on the international routes.

RJ: What are Aeroflot's relations with its competitors like?

VO: We feel very much up to the challenge our competition presents. There's no other way to approach it because our market and the air transport market in general are very competitive. But we can feel our competitors breathing down our necks. It's not just one factor, but a whole range of factors that make a company competitive. Our company doesn't have a high reputation in the world for its service, so we have to try to do even better than our competitors.

We are now following an aggressive policy in the market aimed at putting us among the top 10 airlines in the world by the middle of next year. We are investing a lot in modernizing our fleet. The overall cost of this modernization is $12.5 million. But we are not trying to capture the market; rather, we have our niche and know full well that we come behind other airlines in some areas. According to the British press, the top three companies in the world are Singapore Airlines, Emirates Airlines and Qantas.

RJ: What new offers does Aeroflot have for the tourism sector?

VO: We have already come to the end of our most difficult period of cutting back the number of destinations we fly to. We did have a very far-flung network of routes, but it is now more compact, effective and better geared to demand. We have increased the number of flights on the routes where demand is the highest. We now have two IL-86 VIP planes specifically for business and first-class flights.

For the winter, we are increasing the number of flights to Berlin, Munich, Vienna, Geneva and other skiing destinations. We have made cutbacks on some destinations in the south of Russia, but will maintain frequency. We will be flying to Bangkok twice a day from Friday to Sunday. We will fly to Hong Kong four times a week and from next summer will fly there five times a week.

We are always looking for a balance between market demand and our possibilities. We have no intention of reducing our presence in Europe, and the EU agrees with us here. This is in the clients' interests. It doesn't make economic sense for us to fly to places like South Africa, Latin America or Australia. There's no demand on the Russian market for flights to these places. After we stopped flying to Sao Paulo, Buenos Aires and Rio de Janeiro, the local companies didn't start flying to Moscow, and that suggests that tourist demand for these destinations is still low. The only increase in passengers comes during the MITT Moscow International Exhibition, which takes place only once a year, but this is not enough.