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. Last Updated: 07/27/2016

Aeroflot, Sibir Move Toward a Merger

Aeroflot and Sibir announced Thursday they will combine their routes and fleets in a step that sets the stage for a merger between the country's No. 1 and No. 3 airlines.

The agreement came as the government pledged to support the crumbling aviation industry by providing loan guarantees to airlines buying Russian-built jets.

The deal, signed Wednesday, envisions a combined fleet of jets and flights, as well as the formation of an aircraft-leasing company, top airline officials said.

No financial details were released.

Sibir head Vladislav Filyov said the government initiated the alliance and that Transport Minister Sergei Frank signed off on it during a trip to Novosibirsk two weeks ago.

"Minister Frank issued the command and we fulfilled it," Filyov said. "This is his idea, first to combine the routes and later create the leasing company."

Frank is also the chairman of Aeroflot's board.

The government has a 51.17 percent stake in Aeroflot and is the largest shareholder in Sibir with a 25.5 percent stake.

Aeroflot deputy director Alexander Zurabov said the alliance could well lead to a full-fledged merger.

"This may well be a possibility. … We used to be competitors but now we are looking for a constructive cooperation," Zurabov said in an interview.

Filyov said airline management was considering a merger but the ultimate decision rested in the hands of the shareholders. A 75 percent vote by shareholders is required for a merger to go through.

In the meantime, Aeroflot and Sibir will iron out the details of the agreement to mesh their aircraft and routes over the next two months.

The airlines plan to make their hubs at Sheremetyevo Airport in Moscow and Tolmachyovo Airport in Novosibirsk.

Aeroflot, the nation's largest airline, has a fleet of 112 aircraft including 16 leased Boeings and 11 Airbuses. Last year, the airline flew more than 5 million passengers to 125 destinations in 74 countries. It flies to 28 cities in Russia.

Sibir, the No. 3 airline with 830,000 passengers carried last year, has a fleet of 28 aircraft and flies to 40 destinations. But it is poised to drastically expand under a planned merger with the financially troubled Vnukovo Airlines. Sibir plans to fly 2.5 million passengers in 2001 thanks to the ongoing acquisition of Vnukovo's 50 aircraft.

"We are moving at full speed [to fulfill the agreement,]" Filyov said, adding: "It's required by economic reality."

The economic reality is that consolidation is a must for airlines that want to stay aloft, said Paul Duffy, an independent aviation analyst.

Passengers had a lot of options to choose from in flying with 294 domestic airlines cruising Russia's skies last year, according to figures from the State Civil Aviation Service. All together, they carried 21.7 million passengers, a staggering drop from the 100 million Aeroflot carried in 1991 when it was the airline monopoly.

Half of all the passengers were flown by four airlines — Aeroflot, Pulkovo, Sibir and KrasAir.

Most of the airlines have fleets of aging Soviet-era aircraft that they cannot afford to upgrade or replace.

Aircraft makers themselves have sold only a handful of planes. From selling 300 planes a year before 1992, they delivered a mere four in 2000.

Even Aeroflot, which flew in the red for the past few years, looks to only now be turning a profit.

As such, Aeroflot and Sibir said Thursday that they intend to set up a jet-leasing company. The company will lease Tu-204 and Tu-214 aircraft. Charter capital will come in the form of cash from Aeroflot plus existing aircraft, engines and other assets from both sides, airline officials said.

Filyov said that Transport Minister Frank presented the alliance agreement to a meeting Thursday at which the government agreed to back the leasing and purchase of Russian aircraft.

The government — which had put off announcing its support four times this month alone — said it would provide guarantees covering 85 percent of loans and cover the difference between the interest rate demanded by banks and the amount the airlines could afford.

"It's a great day for Russian aviation," Russian Aviation and Space Agency head Yury Koptev said after the meeting. "If we hadn't made this decision today, we would be doomed to let foreign airlines fly in our airspace or domestic carriers switch to foreign aircraft."