In Civil Aviation, Costs are High and Effective Demand is low

In Civil Aviation, Costs are High and Effective Demand is low


According to Prime Minister Mikhail Mishustin, civil aviation has a special place in Russia’s transport complex as the development of regions and regular life of millions of people depend on its transparent and efficient operations.

"You unite our large country, solve the most important tasks of supplying residents of remote areas of Russia with medicines, food and essentials, deliver passengers and cargo to anywhere in the world, ensure interregional and international relations, and perform your duties at the highest professional level," Mishustin said.

Oleg Panteleyev, the executive director of the AviaPORT agency, shared his opinion with about whether it was possible to improve the efficiency of air travel while developing state monopolies.

Regulation is not Best

“Everything depends on the tasks to be solved by the state, represented by the government and the Ministry of Transport. For example, regarding the Far Eastern Federal District and flights from Moscow to Ulan-Ude (a city to the east of Lake Baikal) and back, a commercial operator offering rather low fares is being replaced with an airline that will offer subsidized fares primarily for the Far East residents, with a limited amount of subsidy. This approach does look a bit unreasonable indeed. To my thinking, this particular example shows bad regulation.

“The current pattern of subsidy assistance is based on the mechanism where funds are essentially allocated on a competitive basis. In theory, a subsidy should go to the carrier that best meets the requirements on which the subsidies are allocated. In other words, the best performer gets the right to carry passengers at subsidized tariffs. However, in general, subsidized transportation is about supporting passengers, i.e. the aim is to make air travel more affordable.

“So, the following conclusion can be made here. The algorithm of subsidy assistance makes air travel more affordable. In some cases, for instance, on local routes, it is impossible to fly without subsidies because the cost level is very high and the solvent demand is extremely low.

“Nevertheless, sometimes, the subsidy program might be not reasonable. Accordingly, in this situation, the question arises: should this particular sphere be subsidized?

Somewhere Result is Positive, Somewhere it is not

“I do not want to make any overblown generalizing. There is just a specific situation, i.e. the adoption of a government decree which creates a mechanism for subsidizing air travel. Practice shows that if we use the same approach and apply it to different areas, then somewhere it will give a positive result and in some cases, a negative one.

“However, if we make generalizations, I would add something else. When a carrier transports over long distances, for instance, from Moscow to Ulan-Ude or from Moscow to a destination in the Far East, the cost per one passenger-kilometre is quite moderate. So, you need to subsidize this transportation on a very limited scale. However, if we are talking about subsidy programs for local flights, i.e. within a region, where flights are operated by small aircraft or even helicopters and where the cost per passenger-kilometre is already the highest, then the scale of subsidies and state support should certainly be increased in this segment.”

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