Aeroflot-Transaero deal, bigger but not better: analysts

Moscow

BY acquiring its struggling rival Transaero, Russia's largest airline Aeroflot is likely to find itself in a tight spot with an additional debt burden and a fleet of ageing aircraft, analysts said.

State-controlled Aeroflot announced last week its purchase of 75 per cent plus one of Transaero's shares for the symbolic price of one rouble, citing the privately-held airline's "extremely difficult financial position". The Russian government had backed consolidation of the two airlines, which was expected to begin on Monday.

It is "undoubtedly the most important and significant decision" Aeroflot has ever taken, company chairman Kirill Androsov said in a statement.

The acquisition would take Aeroflot closer to its goal of carrying 70 million passengers a year by 2025, he added.

The incorporation of Transaero will increase Aeroflot's domination of the domestic market, controlling over half of the country's air traffic with a fleet of more than 300 aircraft - larger than that of British Airways and Alitalia.

In any event, being 51-per cent owned by the state, Aeroflot could hardly turn down the deal.

"The Russian government has decided to rescue Transaero - Russia's second-largest airline - from bankruptcy by forcing state-owned Aeroflot to buy the carrier," analysts at Gazprombank said.

Investors and analysts have been sceptical about the deal after the details of government talks were leaked earlier last week, with Aeroflot's shares tumbling nearly 10 per cent on the Moscow exchange on Tuesday and Wednesday.

"I think that the management of Aeroflot is not jumping with joy because they have serious work ahead of them," the head of the Federal Anti-Monopoly Service, Igor Artemyev, told reporters.

Mr Artemyev - whose service had no major objections to the deal - added that the authorities "could not imagine spending two to three years on a bankruptcy procedure" for Transaero.

Transaero, which began operating in 1991, was the country's biggest privately-owned carrier. The company has been strangled with debt - estimated at 65 billion roubles (S$1.4 billion) as of late 2014 - since the rouble collapsed last year on the back of Western sanctions over the Ukraine crisis and lower energy prices.

The Russian currency's weakness increased Transaero's spending in US dollars for the leasing of aircraft, technical maintenance and loan reimbursement.

Meanwhile, Russians' falling purchasing power has led Aeroflot, which flies to many popular holiday destinations in Asia and the Caribbean, to sell cut-price tickets to fill planes.

After having offered financial support to Transaero when the rouble crashed last year, the Russian government then turned to Aeroflot to save the carrier, instead of reaching into state coffers.

"It will be a costly and lengthy process for Aeroflot to restructure this new acquisition," Gazprombank analysts said in a note. "Transaero suffers under a mammoth debt burden and it is unclear how this debt will be restructured." AFP