Bloomberg News

Billionaire Branson Plans to Enter Russian Air Market (Update2)

January 31, 2008

Richard Branson, the billionaire who controls U.K. carrier Virgin Atlantic Airways Ltd., plans to start an airline in Russia to tap into a market growing at 10 percent a year.

Branson is in talks with two or three possible local investors and may name a partner within three months to set up a carrier tentatively called Virgin Russia, the entrepreneur said in an interview at an investor conference in Moscow today.

``What they haven't got is a decent airline'' in the country, Branson said.

Russian carriers, led by state-controlled OAO Aeroflot (AFLT), are leasing more aircraft, starting routes and forming international partnerships as economic growth buoyed by oil prices boosts leisure and business travel. The country, which spans 11 time zones, is home to more than 160 airlines. The government is pushing carriers to merge, with Aeroflot and OAO AirUnion to form Russia's two dominant competitors.

Sky Express, a discount airline, and Branson's representatives have held discussions and may reach an agreement in two months, Vitaly Korenyugin, a spokesman for the Moscow-based carrier, said in a telephone interview today. Talks included development of low-budget travel in Russia, though the form of any partnership has yet to be identified, he said.

Aviation Holdings

Besides London-based Virgin Atlantic, Branson's aviation holdings include Brisbane-based Virgin Blue Holdings Ltd., which began flying in August 2000, and a stake in Burlingame, California-based Virgin America Ltd., which started service five months ago. The entrepreneur said Jan. 21 that he may start a domestic Indian carrier.

Virgin Russia may begin operations within 12 months, a project requiring ``hundreds of millions of dollars of investment,'' Branson said. The carrier will initially fly domestic routes, though may add destinations abroad.

A partner wouldn't have to be another airline, as ``what we are looking for is people we can trust, people we could work with,'' Branson added.

Russia's economy expanded by 8.1 percent last year, the fastest pace since 2000, according to government figures released today, and the country is in its 10th consecutive year of growth. Russian airlines flew 45 million passengers last year, an 18 percent increase from 2006, Transport Ministry numbers show.

Aeroflot's Market Share

Aeroflot has an 11 percent share of Russia's scheduled domestic flights and 65 percent of international services. The airline is awaiting government approval to consolidate Dalavia and Sakhalin Aviatrassi, a regional carrier in Russia's Far East.

``The Russian market is competitive and is attracting more and more interest, with various business models,'' Aeroflot Deputy Chief Executive Officer Lev Koshlyakov said in a telephone interview from Moscow today. ``A new player coming in will make everyone mobilize their resources.''

Sky Express began operations a year ago and flies to nine domestic destinations from Moscow, including the Black Sea resort of Sochi, the Arctic town of Murmansk and St. Petersburg, Russia's second-biggest city. The airline is majority owned by Boris Abramovich, the Russian businessman who controls Hungary's former state-owned carrier Malev Zrt., and has the European Bank for Reconstruction and Development as an investor.

Russian authorities ran an unscheduled flight safety probe last year into unspecified incidents at Sky Express, according to the Transportation Ministry's Web site. Korenyugin of Sky Express said investigators from the Federal Service of Transport Oversight concluded that the incidents didn't influence flight safety.

Timur Khikmatov, a spokesman for the ministry, said by phone today that the ministry will announce its ruling on the airline on Feb. 4. He said he was unaware of Branson's plans.

To contact the reporter on this story: Lyubov Pronina in Moscow at lpronina@bloomberg.net; William Mauldin in Moscow at wmauldin1@bloomberg.net.

To contact the editor responsible for this story: Lars Klemming at lklemming@bloomberg.net.


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