State Looks for New Ways to Aid Airlines

The government is stepping up its efforts to help domestic airlines struggling with high jet fuel prices, calling for long-term contracts between oil companies and carriers.

In a meeting with President Dmitry Medvedev, Deputy Prime Minister Igor Sechin called on the industry to "switch to long-term contracts between airlines and oil companies that would exclude the middleman."

Intermediaries typically run refueling complexes at Russian airports, and the government has in the past accused them of selling fuel at unreasonable prices.

The Transportation Ministry said in a statement that it would outline a possible mechanism for formulating prices for the long-term contracts this week. It also proposed letting domestic carriers delay value-added tax and customs payments on imported planes for up to 18 months.

Customs fees will remain at their current levels, however, until at least May, the statement said.

Deputy Prime Minister Sergei Ivanov, meanwhile, told a business forum Friday that the situation on the domestic jet fuel market was "ridiculous" because prices for oil products remained high -- even as the cost of crude has fallen 50 percent since the summer.

"If we live in a market system, then let's live by market rules," Ivanov said, Interfax reported.

High fuel prices have pushed small Russian carriers into debt, resulting in delayed and canceled flights and a government bailout of struggling airline alliance AiRUnion. On Thursday, the Federal Anti-Monopoly Service warned the country's biggest oil companies that it would pursue legal action if they did not voluntarily cut prices for jet fuel.

"It's great that the government is finally looking into giving serious help to the airlines," said Yelena Sakhnova, a transportation analyst at VTB.

Fuel prices at the current level make them unprofitable, and even the larger companies could be in danger because they don't measure up to global leaders, she said.

The Russian aviation market should have consolidated five years ago, which would have alleviated some of its current problems, she said.

"There are 110 domestic airlines that are only responsible for transporting 40 million passengers per year," she said, adding that it was less than the volume of Lufthansa's traffic.

The Federal Navigation Service warned nine regional carriers on Oct. 8 that they would be grounded from Friday for not paying debts, although it said last week that they could continue to fly passengers who have already bought tickets.

Interfax, citing a source in the navigation agency, reported that airlines' debts were being restructured and that the companies would have to guarantee that they will repay the money.

But not everyone was convinced that eliminating middlemen would help airlines cut costs.

"There are middlemen in airports all over the world that operate fueling facilities," said Oleg Panteleyev, an independent analyst who runs industry web site

"Getting rid of middlemen in a single-handed government measure will only create additional problems," he said. "Instead, there needs to be competition on the market of fuel supply," he said.

Currently, many airports' fueling facilities do not have any way of switching suppliers, so airlines are locked in contracts with one company and whatever price they set.

In a sign that the government's warnings were being heard, Gazprom Neft said Friday that it would cut jet fuel prices by 12 percent on all new contracts, "which will lead to a decrease in fuel prices at Russian airports."

In late September, Gazprom Neft signed an agreement with Sheremetyevo Airport under which it would build new storage and fueling facilities by 2011 and become the airport's supplier.

Gazprom Neft was one of the five addressed by the Federal Anti-Monopoly Service last week. Its shares registered a slight tick upward Friday, gaining 0.2 on the MICEX.