2023 Will Challenge Wartime Survival Skills of Russian Airlines

Russia’s battered civil aviation sector is emerging from a tumultuous year after the Ukraine war upended normal operations. Moscow is aiming for a 6% uptick in passenger numbers. But that goal may be wishful thinking, given the bleak outlook for Russia’s economy and the fact that fuel usage by commercial airlines is on the wane. Jet fuel production since the start of December is also down 20% on an annual basis.

Speaking to President Vladimir Putin this week, Transport Minister Vitaly Saveliev said that Russian airlines handled 95 million passengers in 2022. The loss of 16 million passengers versus 2021 rates is largely due to the closure of airports in the south of the country, including Crimea, which shut down at the start of the Ukraine war last February. Russian observers doubt that this year’s goal of 101 million passengers is achievable amid expectations of further economic weakness for the second year in a row. The continued closure of southern airports and an expected reduction in state subsidies put a further damper on the aviation sector.

Collateral Damage

Dynamics in the jet fuel market show the extent of collateral damage from the war. Production in December and the first three weeks of January averaged about 200,000 barrels per day, down nearly 20% from 240,000 b/d in 2022. So far in January, deliveries by rail to civil aviation totaled 60,000 b/d, versus 90,000 b/d in January 2022 and an average 80,000 b/d last year. Monopoly pipeline operator Transneft also delivers jet to the sector. These volumes totaling around 35,000 b/d in the December-January period mainly supply Moscow’s three airports.

Purchases by “federal structures” — a proxy for Russia’s defense ministry and state reserves agency Rosreserv — have not picked up this winter, unlike in previous years when aviation fuel demand receded. Government buying activity amounted to just 30,000 b/d since December, about half the level in 2022. These deliveries peaked at 85,000 b/d in October, when Moscow intensified its military campaign to destroy Ukraine’s energy infrastructure.

However Russia’s jet fuel market is relatively insulated from the imminent EU embargo on Russian petroleum products that will impact its diesel, fuel oil, and naphtha shipments. Russia exported just 40,000 b/d of jet fuel last year, according to Energy Intelligence estimates. Novatek’s condensate splitter on the Gulf of Finland accounted for more than half of those shipments.

Shipping data from Kpler show that Russia exported 16,000 b/d by sea in 2022. Several cargoes went to countries including the Netherlands, Finland, and Latvia that can no longer import after Feb. 5. Russia found a new customer last year for its jet exports — Turkey. That country was the largest offtaker with imports of 7,000 b/d — all from Novatek. Kpler data show that Turkey imported no jet from Russia by sea in 2021. The remainder of Russian fuel exports most likely went to nearby countries like Armenia, Kazakhstan, and Mongolia that can take deliveries by rail.

Registration Woes

Russian air carriers have adapted to wartime realities after nearly one year. The most controversial issue has been the government’s move to illegally domicile hundreds of leased jets. The leasing companies dealing with Russia have typically preferred registration in third countries such as Bermuda and Ireland for fear that foreign destinations would question the safety credentials of Boeing and Airbus jets maintained in Russia. But when war broke out last February, Bermuda and Ireland abrogated the registration of these planes, forcing carriers like Aeroflot and S7 to seek domestic certification. Without an official registration, Russian airlines could not fly to foreign destinations that had not banned Russian planes and citizens — like the US and EU. In a recent report, Russian daily Kommersant reported that carriers had managed to re-register 200 airplanes in Russia by December, including 150 manufactured by Boeing and Airbus.

Russia’s 114 commercial airlines are fretting about reports of government cutbacks to subsidies. Last year the state disbursed some 172 billion rubles ($2.5 billion), according to industry regulator Rosaviatsia. But this largesse is expected to dry up in 2023 as Moscow prioritizes procurements for the war effort. For now the government has earmarked only 25 billion rubles for civil aviation subsidies until the end of March. The funds will be paid based on a carrier’s total passenger-kilometers in the November 2022-March 2023 period, provided the carrier handled at least 90% of last year’s average traffic.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact