Russian aircraft market: re-exemption

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For three years Russian carriers were enjoying a special aircraft import tax regime, allowing them to save almost 40% on additional duties and fees, or approx. USD 1 billion. The tax exemption ended on the 1st of January 2014 and was reintroduced just a couple of months later for another period of three years. While the decision will clearly help carriers to achieve significant savings when acquiring new aircraft, what else does it imply for the local airlinesindustry?

In March, 2014 the Eurasian Economic Commission (EEC), an intergovernmental regulatory body of the Customs Union and Single Economic Space, declared its decision to re-introduce tax exemptions for certain groups of commercial aircraft thus prolonging a special aircraft import regime in Russia, Kazakhstan and Belorussia until the 1st January, 2017. This decision allowed carriers in all three countries to operate tax-free imported aircraft until the end of 2021.

“According to the current regulations, certain aircraft groups are subject to import duty, customs fee and VAT which all increase the price of imported aircraft by almost 40%. Amongst others, these taxes were also applicable to such aircraft as Boeing 737 and Airbus A320 – one of the main aircraft types operated in the region. Considering the rapid growth of the local air travel market prompting the expansion and modernization of the local fleets, we are talking about billions of dollars paid by airlines for importing foreign aircraft during the past several years,” comments the CEO of AviaAM Leasing, Tadas Goberis. 

For instance, during 2010-2013 the number of passengers carried by Russian airlines grew by almost 50% - from 56.95 million to 84.56 million. At the same time, the number of newly delivered aircraft reached 460. Over 90% of them were foreign-built. 

However, the scope of the latest special tax regime was significantly expanded by adding aircraft with 170-219 seats (such as Airbus A320 Family and Boeing 737). The decision was based on the carriers’ needs for further fleet development with no effective alternative offered by local manufacturers in this segment (except for Tu-204SM which has failed to gain any substantial interest from operators). 

In the meantime, the potential of the Russian market alone is anything but unsubstantial. In 2014 the Aeroflot Group anticipates to see an additional 15-20% increase in its passenger traffic whilst Russian airlines carried over 5.8 million passengers in January 2014 alone. It is approx. 10.2% more than in January 2013.   

In addition, local carriers continue maintaining ambitious development plans. For instance, Aurora, recently formed by amalgamating SAT Airlines and Vladivostok Avia, is planning to increase the number of flights almost 18 times in five years time, while expanding its root-map to cover 128 destinations. 

Strong expectations are also placed on the upcoming new low-cost carrier Dobrolet. The airline will start its operations with Boeing 737 NG aircraft thus the new tax exemption regime will significantly help the low-coster to minimize its aircraft financing costs. 

“However, foreign 50-110-seaters remain under the tax regime. The situation is quite understandable, as Russia is concerned about supporting its latest aircraft in the domestic market. Might be, once Irkut MS-21 is introduced, the tax exemption will be lifted for the 170-220 seat aircraft group as well. Meanwhile, one must understand that the latest decision of the EEC not only provides the opportunity for substantial savings, but also demonstrates the position of the regional authorities with regard to supporting the development of their carriers. This is an important signal to the local airline industry which is constantly faced with both global and local challenges, including the rising operational costs and controversial initiatives such as an intention to legally limit carriers’ ticket pricing policies,” concludes the CEO of AviaAM Leasing.