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Knights of the Vine RUSSIA


Budget Travel in Russia’s Friendly Skies
Sky Express, Russia’s first budget airline, was established in 2006 and made its first flight in 2007. Today, it serves 11 cities throughout Russia and ranks fifth in the Russian market in number of passengers carried on domestic flights. Maria Bukalova, the company’s general director, talks about market turbulence, holding patterns, and how low-cost airlines are faring.
Interview and photos Boris Sorokoumov

What catalyzed the advent of Sky Express? Why has it appeared now?

When the Soviet Union collapsed, the Soviet airline, Aeroflot, was broken up into hundreds of small carriers. Since then, the idea of resurrecting a “national” airline has been on the minds of those in the Russian aviation industry. For a while it seemed like Novosibirsk-based Aerofl ot Siberia had its eye on the prize of becoming a national airline, but then it decided to go in a diff erent direction, focusing on expanding its international service.

Then the Sky Express team, which included experienced people from both inside and outside the airline industry, entered the scene. The primary goal was to make domestic travel easier and more accessible to a broader range of customers. Today the company is a success nationwide with over a million customers served, but the members of the original start-up group admit that they wouldn’t risk doing it all again.

Why is that?

The main reason is the inertia of the Russian market. The airline industry in Russia remains averse to innovative business models and reluctant to make basic regulatory changes. In addition, the Russian public continues to be wary of cheap flights and tends to perceive them as the proverbial free lunch, which everyone knows doesn’t exist.

When Sky Express introduced a 500-ruble fare, it seemed outlandish to passengers. They assumed there would be no seats and they’d have to stand the entire flight. Or maybe there would be milk crates to sit on. Even within the industry, there was skepticism about low-cost carriers because of a perception that Russian airports were not equipped to meet the service needs of a budget airline.

But the diverse start-up team was able to mobilize support from big players in the industry such as the Abramovich brothers of AirUnion [Russia’s first airline alliance]. After that, as they started to work on a business plan, it became clear how it was possible to cut costs and pass along the savings to the consumer by offering lower airfares.

What were some of these cost-cutting strategies?

From the start, Sky Express made business decisions that distinguish it from other Russian carriers. First, Russian airlines typically have fleets that include aircraft made by different manufacturers. A unifi ed fl eet optimizes maintenance costs. Second, Russian airlines are administratively overloaded — with daughter companies, lots of offices and sales outlets, home bases at numerous airports. Choosing one airport as a home base, keeping administrative offices to a minimum, and opting for inexpensive sales outlets are all approaches that led to signifi cant savings.

Our in-flight costs — such as fuel, navigation, flight crew salaries, airport fees, aircraft leasing agreements — are the same as those of any other carrier. One exception is refreshment service: At Sky Express snacks are for purchase and not included in the ticket price. This allows us to save money on food, and that savings is passed along to the customer, who can decide whether or not he or she wants to bear this expense.

The Internet is the most direct and least expensive channel of communications and sales, and Sky Express is one of the fi rst airlines on the Russian market to offer the customer a full range of services online. Through the airline’s web resources, our customers can book and buy tickets in any of the 11 cities Sky Express serves. Within one to two hours after payment, the plane tickets and other travel documents are sent to the customer’s email address. Besides that, our web check-in service eases the burden of some pre-flight formalities, such as the need to arrive at the airport two hours before departure in order to allow time to wait in line for a boarding pass. So we were able to use low-cost technology to reduce our administrative expenses, lower our prices, and increase customer convenience.

Who is your “typical” passenger? What types of clients would you like to see more of?

Research informed our decision to focus on 25-to-35-yearolds because they are the most mobile. This segment of the market includes business travelers, particularly mid-level management and owners of small and medium-sized businesses. We did not focus on employees of large companies because this group tends to fly business class, which we don’t have. Our target audience also includes homemakers — that is, women who decide how the family budget is spent and make the family travel plans. And, naturally, students. That said, we of course work with the entire existing market, especially as we are rapidly expanding our service routes.

Did you borrow anything from the experiences of low-cost airlines elsewhere in the world?

We borrowed the term “low cost,” which we imported phonetically into Russian. The term originated in the U.S., where Southwest Airlines introduced an entirely new business model to the airline industry. In 1967, Rollin King and Herb Kelleher started Air Southwest, providing service to three Texas cities: Dallas, Houston, and San Antonio. The company’s plan was to offer airfares that were lower than the cost of driving between these cities.

Southwest made its first profit in 1973 and has earned a profit ever year since, a record that no other airline in the world has been able to break. During the American oil crisis of the 1970s, Southwest developed a technique of entry into the market that allowed profi tability through high utilization rates of aircraft and cost-cutting on the management side.

The success and profi tability of Southwest’s business model led to a trend that is named for the company: The Southwest Effect. The basic idea of the Southwest Effect is that when a budget airline or other innovative and aggressive company enters the market, the market itself changes, usually growing with tremendous speed. For example, if prices drop by 50 percent, the number of customers in that market may not only double but increase by four times or more.

Southwest became the inspiration for other budget airlines around the world, who adopted Southwest’s business model. European budget airlines easyJet and Ryanair have applied the Southwest model (though today easyJet uses to different types of aircraft), as have Canada’s WestJet, New Zealand’s Freedom Air, and Thailand’s Nok Air.

And 35 years later, the model appeared in Russia in the form of Sky Express.

Did you have to make any adjustments to account for the particularities of the Russian market?

Along with its innovative business model, Sky Express paid consistent attention to customer service. From the start, we encouraged our employees to derive satisfaction from doing their jobs well and making the passengers’ travel experience comfortable and pleasant. This required the development of a new corporate culture and philosophy, with an emphasis on friendliness and good interpersonal relations at its core.

In addition, while Sky Express is on its way to being a real low-coster in the European sense of the term, at present there are still many economic and administrative factors in Russia that do not allow low-budget airlines to operate as they do elsewhere. For example, high customs duties hinder the development of low-cost carriers in Russia. This factor forced us to develop a cost-eff ectiveness calculus that is different from that of low-costers operating elsewhere. In addition, there is contradictory legislation, and the system of allotting runway time at airports is less than transparent.

What are some of the lessons you’ve learned after a year and half on the Russian market?

A year and a half have gone by, for almost nine months of which the oil crisis has been going on. The airlines have had losses. They are downsizing and modernizing their fleets, reducing the number of flights, and optimizing expenses in all areas. The low-cost era has begun in the airline industry throughout the world. All airlines, including traditional ones, are actively trying to cut costs.

The potential market for low-costers in Russia is huge, and there will probably be other start-ups who want to tap into this market. But it’s tough to make it work, and, as they say, you’ve got to be in the right place at the right time. In January 2007, that’s just where we were, and today Sky Express has carried 1.2 million passengers to date on 11 routes and has a nearly 5 percent share of the domestic passenger market.

Whom do you see as your main competitors, and how do you compete with them?

Sky Express’ strategy for entering the market was a departure from the usual procedure. Typically, a new airline will use low prices to attract passengers from other carriers. Then, once the newbie has established itself on a particular route and secured a customer base, it raises prices.

In contrast, Sky Express took the completely different approach of trying to expand the ranks of air travelers. Sky Express targeted non-fl yers who were interested in plane travel but considered it too expensive. With low fares and a pricing policy that is easy to understand, we were able to appeal to these potential new customers. Even a ticket bought at the highest fare two hours before a flight will cost the same as the cheapest ticket on a traditional carrier. The transparency of our pricing structure is remains a big advantage in the battle to attract customers.

But because our chief task is to increase the nation’s mobility, our main challenge is the inertia of the population. And we are making inroads in this area. For example, in a single year, the volume of passengers on our Moscow-Murmansk route increased by 61 percent, on our Moscow-Rostov route by 47 percent, on our Moscow-St. Petersburg route by 33 percent.

The key is changing customer behavior, to convince someone not to spend the weekend in Moscow but to get out and go somewhere else. Tell the passenger that there’s a great concert in Ekaterinburg, and it’s easy to get there quickly. Two hours’ flight, a night in a hotel we are partnered with, a ticket to the concert, the organizer of which is also our partner, and fly home. Our task is to get into the head of each person and say, “Now you can spend time differently.” That’s the hardest thing — not competition with Russian Railways or other airlines.

For many people, the word “budget” is associated with poor quality. How do you maintain high quality and safety of your flights?

In our case, budget means no-frills but never poor quality. We simply allow the customer to pay the basic cost of a ticket from point A to point B.

As to safety, Sky Express strictly adheres to all the current air travel standards and regulations. This year Sky Express passed an Operational Safety Audit conducted by the IATA [International Air Travel Association]. The results of this audit confirm the quality and safety of our service.

What plans does Sky Express have for the future?

Sky Express continues to grow. There are over 20 airports located within a 3000 kilometer radius of Moscow that have the infrastructure to accommodate our Boeing 737s. We plan to increase the number of daily flights between Moscow and Ekaterinburg to three, and to increase the frequency of flights to Sochi on a seasonal basis.

Our plan remains to expand domestic service to at least 20 routes. In 2009 we’ll introduce new routes in connection with the expansion of our fl eet to 17 planes. In 2007, the airline had a sales volume of $66 million and carried 677,000 passengers. We hope to increase those figures to $900 million and over 4.5 million passengers by 2011.

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