Sheremetyevo: facing the rivals and the future

Marina Tkacheva, Chief Editor of Airports International Russia, interviewed Markus Klaushofer, Chief Commercial Officer of JSC Sheremetyevo International.

The Russian capital Moscow with its three international airports − Domodedovo, Vnukovo and Sheremetyevo − is considered by some to be the most competitive environment of its kind in the world.  The three facilities are a significant distance from each other and have different owners.  Domodedovo is owned by the private company East Line, Vnukovo by private investors and the Moscow city government, while Sheremetyevo belongs to the state – except for its new Terminal D, which is owned by a consortium with JSC Aeroflot Russian Airlines (Aeroflot) at the head.
MT“Mr Klaushofer, what in your opinion are the main difficulties of creating aviation hubs in Russia?  Why, for example, did the management team at Riga manage to create a hub serving millions of passengers in a short period of time, while projects to establish efficient hubs in Russia face significant difficulties, even though their catchment areas are larger than those at Riga?”
MK:  “Concerning the comparison of Russia and Riga’s tremendous growth, they actually are open to every low-cost carrier and I think the major driver for this region was the low-cost development.  But if you boost your traffic on low-cost you get a peak, and then it slows down.  It’s a rule.  Look at some European low-cost oriented airports and you’ll see many examples of that.  So this kind of traffic is not sustainable; just a stimulation of course, but it could also possibly ruin your legacy carrier.
“I think what Russia has to do is to develop low-cost traffic for the domestic destinations as an alternative to the legacy aviation market.  This country is so huge that you only can serve it by flying.  Maybe there will be some super speed trains going from Moscow to Vladivostok [the distance between the cities is about 5,780 miles (9,300km), the train goes across two continents – Europe and Asia – 12 regions and 87 Russian cities for more than six days], but it takes years and years to create something like that, so I think there is a great chance for the domestic low-cost traffic to grow massively in Russia.

Markus Klaushofer, CCO, JSC Sheremetyveo.

“When you compare Russia with European countries in order to create a wave system, it’s much easier in Europe.  You normally have flights of two to three hours in Europe and you can organize four or five waves a day coming in and out.  Now imagine Russia, where an airline flies Moscow – St Petersburg [about 90 minutes], and the next flight is Moscow – Vladivostok [about 8 hrs 30 min].  When you fly short sectors you can have three or four flights a day, but if you have a flight of nine hours your aircraft is away for almost a whole day, so you only can fly one rotation a day.  It’s really much harder to create a hub system in Russia then in a smaller country.  The carriers would need more aircraft and so on, so it’s a tough task.
“One point is the domestic low-cost flights.  The second point is to create an efficient hub system.  My opinion is that you will have one hub in the West of Russia, and second one in the East.  Maybe there can also be another two, but there will be two major hubs; one in the West and one in the East, of that I’m sure.  I’m also 100% sure that this main hub in the West will be driven by Aeroflot.  There was Aeroflot, there is Aeroflot and there will be Aeroflot.  This is clear for me.
“I think the problem in the past, especially in Moscow, was that the logical hub for Russia, Sheremetyevo with Aeroflot, didn’t have sufficient infrastructure.  This was the major problem.  “Because the domestic and international terminals were located on different sides of the airfield the minimum connecting time (MCT) was over four hours, so it was much easier for all the foreign passengers to transfer in Frankfurt or Vienna.  For example, if you were to fly from Hamburg to Sochi you went to Vienna and from there flew Austrian.  The MCT in Vienna is 25 minutes and in Frankfurt 40 minutes.  To be competitive, you need a fast MCT, and if it is four hours the passengers won’t use it.
“Switching domestic and international traffic to be under one roof was a major step forward and that means we may win a lot of passengers travelling direct to destinations in Russia.  Aeroflot – and ourselves – lost a lot of passengers, mostly to Frankfurt and Vienna.  Now that we have a properly working system with a fast MCT, we will get a lot of point-to-point and transfer passengers back.”
MT“How, do you think relations could be developed between the three Moscow airports [Sheremetyevo, Vnukovo, Domodedovo] so that they can become the ‘airports of choice’ before the European hubs?”
MK:  “This is the very unique thing about the three Moscow airports.  Normally, you have only one airport authority – in Paris it’s ADP, in the UK it’s BAA, etc.  I think that Moscow is the most competitive airport environment in the world.  There is no other big city in the world where three airports are really competing against each other, not just on the paper.  So it’s more or less a little bit of paradise for the airlines because they can choose and challenge the prices.  My opinion is that Russia loses a little something [bargaining power] because of that, as you can get a lot of pressure from bigger carriers when they can choose between offers from three different airports.  On the other hand, it can get very competitive which is a positive thing.
“There are two ways to deal with this: either they are managed by one structure – let’s say the government – and everything will be changed; or the alternative is that only the strongest will survive.  I don’t believe in the first way.  This is not going to happen.  At the moment we have three different airport owners and we have to work with this environment in Moscow.”
MT “You don’t share the opinion that they should co-operate, developing each according to its own different business model?”
MK: “It is never going to work.  Every airport will take every business opportunity it can.  You don’t say – ‘Oh no, I’m not flying to Asia!’ – if you get the business, you take it.  So in the logical way, you will see that there will be one hub which will serve Moscow: Sheremetyevo with Aeroflot.  This will work, if we don’t make terrible mistakes.  This is because we and Aeroflot have everything, the financial backing, infrastructure etc.  Also, from our side we will use T1 as a low-cost terminal in order to drive low-cost traffic here together with the budget carrier Avianova.  Because we believe that low-cost traffic will be far more important for Russian aviation in the future, and we want to be strategically prepared.  From one side, we develop our hub traffic through a large number of international flights, connecting passengers and so on, and the other area that will grow dramatically will be the low-cost market.”
MT:  “What are the main challenges Sheremetyevo faces in the current economic downturn and how do you intend to cope with them?”
MK: “We lost some passengers in 2009, though the decrease was much smaller than expected – only 3% based year on year.  In December, the traffic rose as well as in the first three months of 2010 [at the time of publication the April figures were not yet available].  But we wanted to be prepared for the downturn and to cope with it we had to cut our expenditure.  The costs of mobile phones, travelling, advertising, some construction works – all our outgoings were looked at to optimize our cost structure.
“On the other hand, we have worked hard to create more demand and increase our traffic as this is also a very important thing.  I already said, as an airport located in Moscow we cannot be choosy.  We are not in the position of Heathrow or Frankfurt with 60 million passengers that allow us to choose carriers and destinations.  We are not there at the moment and we are really trying to create more traffic, be it domestic or international, low-cost, legacy – whatever.
“I’m not a fan of hysterical anti-crisis programmes.  All you have to do is to look at your costs and to make a lot of effort to get new business, new traffic.  You have to decide how we can get the most profit from the airport in aviation and non-aviation.  In a crisis, you just spend less money and try to prepare for the future.  You have the opportunity to make the difficult changes that you wouldn’t consider in the ‘good years’ because everything is running okay.  But there is no magic stick for crisis management.”
MT:  “How did you introduce your cost-cutting measures and what factors had been taken into account – and how did you co-operate with your clients?”
MK: “The best way to cut costs is where your client doesn’t even see it.  We cannot save money on the service level or on the relations with our customers.  This is why we discussed with our employees where we could save money and with our clients we asked how we could work together to get more passengers.  What kind of high-impact things could we do at very low cost?  For example, getting the national tourist boards of some countries [Austria, Italy Turkey, France, etc] to discuss with the national carriers the possibility of creating some events.  We also discussed with tour operators how they – together with the airlines – can promote more foreign destinations available from Moscow in order to increase the load factors, or at least keep them at the same level.  It was mainly co-operation on the marketing or sales side.  All of the airlines I spoke to were co-operative.  All of them are great partners.”
MT:  “Are there any visible results of the talks?”
MK: “Yes.  For example, Alitalia introduced a new route to Turin, and China Eastern started to fly from Sheremetyevo to Shanghai Pudong International Airport.  I cannot say the new flights are a result of the talks – it’s more complex than that.  The carriers and the tourist boards understand it themselves; it’s a package of all the different things.  As for the visible results, there was a rise in the load factors and SVO’s overall figures starting from July to August.”
MT:  “Many airlines have moved their flights to the new Terminal D built and owned by Aeroflot.  It reduces the airport’s cash flow – both in terms of aviation as well as the non-aviation revenue.  How is this factor balanced in the airport’s plans?”
MK: “It was obvious to us that Aeroflot will put most of the flights over there [Terminal D] and that some of the airlines would move there.  That means that for the next year the main focus is to get more business [into SVO] to fill our terminals.  If one airline is leaving to D, we have to get some new customers.
“And of course we don’t want to have an internal competitor, but that’s what we are facing now.
“We just have to do the best with our services, with our handling, to keep existing customers and bring in new ones.  I don’t think there should be a big fight for getting the largest slice of the cake, we just need to have a bigger cake.
“The most likely way out is that Terminal D will be integrated into JSC Sheremetyevo which then will manage all the airport’s terminals either itself or through an independent operator.  The decision is to be made by the owner together with the Ministry of Transportation.”
MT:  “What can you say about the different airport charges levied by Aeroflot’s Terminal D against those owned by JSC Sheremetyevo International Airport?”
MK: “The regulations regarding airport charges are in the jurisdiction of the State.”
MT:  “What is to become of [Terminals] SVO-1 and SVO-2 in view of an obvious traffic fall due to the transfer of flights to Aeroflot’s Terminal D and a general traffic fall caused by the recession?  Could it ever revert to how it was in Soviet times, when there were many passengers and a low service level, instead of how it is now with few passengers and a high service level?”
MK: “We have a new carrier, Avianova, Russia’s fastest growing low-cost airline, which was based at Vnukovo.  It began flying from Sheremetyevo’s Terminal 1, which is ideally suited for low cost carrier operations, on March 28.
“This move is very important to us because, as mentioned before, we believe that the Russian low-cost market will grow hugely, especially on domestic routes.  We made a thorough examination of the Avianova’s concept and are sure that it will dominate the Russian budget market.  This product also fits into our concept very well.  On one side, we have a very strong partner – Aeroflot – together with the SkyTeam alliance.  This is balanced by Avianova, which will serve and develop the low-cost segment.  Another thing is that all the Chinese carriers serving Moscow are now based at Sheremetyevo.  China is a strong strategic partner for us.  This country will become one of the biggest aviation markets and one of the most popular destinations.
“Terminal F will be connected to E and D and used for the international traffic.  According to the forecasts, Sheremetyevo’s total capacity will rise to 64 million passengers by 2030 – it’s the population of a whole country, and we will need this capacity in the next years.
“We rely upon greeting new clients here at Sheremetyevo this year and we do hope that the existing airlines will develop their networks.  Last year, Malev came back from Domodedovo and Avianova opted for us from Vnukovo.  We also managed to attract a new customer in Hainan Airlines and, as I said, Alitalia and China Eastern introduced its services.  It means a lot to us that we brought in new flights and airlines during such a difficult year.  It is now very important to complete work on Terminal E so that everything runs according to the schedule.  We are also highly excited to have Aeroexpress.  There are many passengers who now fly business class because they know they will reach the city very fast without traffic jams.”
MT:  “Recently, for the first time, Aeroflot has led the SkyTeam carriers’ European ratings for passenger service on economy class short- and medium-haul flights, and business class long-haul flights.  What do you think of that?”
MK: “I can honestly say, I know all the European routes and have flown business class with nearly all the airlines.  And I must say, Aeroflot offers the absolute best product.  No Lufthansa, no Austrian can compete with it.  This is why I think it is an important task to promote our brands together so that more European passengers know that they have the best business class and that Sheremetyevo airport has improved dramatically.  There is still much work to do to attract the European passengers into the business class.  We are taking steps towards it and I am sure we will succeed.
“It is also important to attend all the international conferences to present the results we have achieved: a state-of-the-art airport and the best service.  And I am sure that after completion of Terminal E, we will be the best aviation hub in Moscow, Russia and in the entire CIS.”
MT:  “How do you plan to raise your non-aviation revenue to 60%?”
MK: “It is very important.  We take a detailed look at which retail outlets are performing the best and, together with the operators, we choose the products that fit our customers best.  Make them happy and they will spend more money.  It is also important to optimize the immigration and customs process so that the customer has more time in the terminal and can go shopping.
“But the customer must not be worried to arrive late for his flight.  This is why it so important to have Aeroexpress.  In the future, we also plan to check-in international flights at the Aeroexpress destination, the city railway station Belorusskaya.  All that, and the short queues at immigration and customs check, take the stress off our customers and give them more time for shopping.”
MT:  “It must require a great deal of research?”
MK: “Exactly.  Precise planning is needed.  You must work on it constantly to find out which enterprises are the most successful, where they are located, and so on.”
MT:  “Who does this research?”
MK: “We don’t have a marketing contractor working on it.  We do it ourselves and have already completed talks with all the shops.  We use international experience gathered by IATA and other international organizations.”
MT:  “Do you think it would make sense to lobby at government level for the introduction of duty free on arrivals in Russia, as it is done in other countries?”
MK: “This is a very significant question.  I am sure it would definitely work in Russia.  Russians like shopping abroad because it’s generally cheaper there.  If the government would allow opening duty free on arrivals it would raise the revenue of the Russian Federation.  We will lose money if we don’t do that.”