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The once ridiculed Russian national airline has earned good marks—and profits—with its new Western fleet. Now it's making a bid for Alitalia
Surly flight attendants, disgusting food, antiquated planes, and scary flights—for many seasoned air travelers, such negative images immediately spring to mind at the mention of Aeroflot, Russia's national airline. Aeroflot has long struggled with its poor reputation, which dates from the 1970s and 1980s when the airline seemed to epitomize lousy Soviet service. No wonder the world reacted with surprise in early April when Aeroflot joined the bidding for Alitalia, the Italian national airline now being privatized by the Italian government.
Aeroflot's bid faces competition from Air One, a rival Italian airline, as well as from a consortium including U.S. private equity group Texas Pacific. And it could be months before Rome announces the winner. Whatever the outcome, Aeroflot's international move is a sign that it has put its old ways far behind. "[It's] a recognition of our achievements, first of all in reengineering the company," says Lev Koshlyakov, Aeroflot's deputy general director.
Aeroflot can afford to expand internationally because, in stark contrast to loss-making Alitalia, it is healthily in the black. Last year net profits rose by around 10% to $200 million, while revenues were up 14% to $2.9 billion. That's a huge turnaround since the 1990s when Aeroflot, squeezed by high costs and Western competition, lost hundreds of millions of dollars (see BusinessWeek.com, 2/14/07, "Alitalia: Who Wants This Airline?").
The Benefits of Nepotism
In part, the airline is benefiting from a general boom in Russian air travel, fueled by rapid economic growth and rising incomes. Total passenger numbers for the Russian aviation market grew by 10% last year, to 38 million, with similar growth forecast for this year. But analysts also credit Aeroflot's wide-ranging corporate restructuring measures for the turnaround.
These were spearheaded by Valery Okulov, a 55-year-old former navigator, who became Aeroflot's chief executive officer in 1997. At the time, many criticized his appointment as nepotism: He is the son-in-law of Boris Yeltsin, who was then Russia's President (and who died on Apr. 23) (see BusinessWeek.com, 4/23/07, "Remembering Boris Yeltsin").
But these days analysts give Okulov and his team high marks for their business savvy. "Aeroflot shows very good results, which I attribute to management," says Eduard Faritov, an aviation analyst at Moscow investment bank Renaissance Capital.
New Styles, New Smiles
To maximize profits, Aeroflot halved its number of destinations in 2000 to 55. The airline cut out many unprofitable, long-distance flights to destinations such as Singapore and Sydney and began concentrating on profitable routes to Europe and China. In 2001, Aeroflot also hired Western image consultants such as Britain's Identica to polish its tarnished corporate identity, and tapped McKinsey & Co. to advise on restructuring.
"At that time the public perceived Aeroflot as an outdated bureaucratic company," says Koshlyakov. "We understood we had to send a very strong signal to the market, and we did it." To symbolize the friendlier image, new jets were painted lively red, navy, and silver. Out went the crew's stiff, military-style uniforms, and in came stylish cabin-wear made by leading Russian fashion designer Viktoria Andreyanova. Flight attendants were at last trained to smile.
Last year Skytrax, a London-based agency that ranks airlines, gave Aeroflot an average three stars for overall quality, on par with British Airways (BAB) and American Airlines (AMR). Aeroflot earned four out of five stars for business class, where travelers now enjoy perks such as unusually wide seats and personal DVD players.
Modern Western Planes Key
The airline also picked up an award for the most improved carrier globally. "We now think of Aeroflot as a credible international player," says Brendan Martin, brand consultant at Identica. "Aeroflot is now a completely different company," adds Elena Sakhnova, an aviation analyst at Deutsche Bank (DB) in Moscow.
While Western consultants have helped, Aeroflot's Koshlyakov says that the key to better service is the use of modern Western aircraft, which are more spacious and of higher quality than Russian-made Tupolevs and Ilysuhins. Today the company operates 24 Airbus A320s and 11 Boeing (BA) 767s, which together account for half its overall passenger fleet. That compares with just 10 Western aircraft a decade ago (see BusinessWeek.com, 2/15/06, "Boeing's Plan to Land Aeroflot").
There's still room to improve, of course. One problem is the sorry state of Aeroflot's home airport, Moscow Sheremetyevo, a drab Soviet throwback where passengers sometimes have to wait hours at passport control. A new $500 million terminal, due to open at the end of the year, is planned to ease the congestion. And while Aeroflot now uses modern Western aircraft on all international flights, domestic flights still use creaky Russian-made jets.
Bureaucratic Behavior Continues
Another obstacle facing Aeroflot as it modernizes its fleet is the Russian government— ironically the airline's largest shareholder, with 52% of the shares. To protect the Russian aircraft industry, the government imposes stiff 20% tariffs on imported planes.
And Moscow can be slow in approving new aircraft purchases, evidently weighing the political pros and cons of favoring Europe over the U.S. Only after months of delays, reversals, and missed deadlines did Aeroflot announce on Mar. 15 that it had chosen the Airbus A350 over the Boeing 787 for new long-haul jets.
It's a reminder that state-owned Aeroflot may never be able to shed its bureaucratic image entirely. Still, based on its impressive turnaround in recent years, it's not surprising that Aeroflot now thinks it can teach the Italians a thing or two about how to run an airline.