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ANALYSING AND IMPROVING THE PRICING OF AIRFARES IN THE NORTH (DEMONSTRATED ON THE REPUBLIC OF SAKHA (YAKUTIA) AS A CASE STUDY)
© Faizulina O.E.*
Economic & Financial Institute of North-Eastern Federal University, Yakutsk
Today, the high and ever-rising airfares in the Republic of Sakha (Yakutia) are a major constraint to socio-economic growth of the region.
In this regard, the author has attempted to explain the trends taking place in the airline industry in the region, namely:
* Postgraduate student of International economic relation department.
1. Explained the social significance of air transportation in the region;
2. Studied the characteristics of the airfares formation in the region;
3. Compared the amount of the cost of air travel in foreign practice;
4.Put forward proposals to reduce the cost of airfares in the North.
The results showed that the nature of the problem of high airfares in the region, not economic, but rather social. Therefore, increase the affordability of air transportation for small communities will be possible only with the help of massive government support.
Key words: aviation industry, air transportation, airfares, the North, the Republic of Sakha (Yakutia).
Introduction
The researched issue is the large disproportion in the airfare levels between different segments of the air transportation market in Yakutia. High airfares for local lines compared with distant flights (i.e. flights outside the country) are of interest to investigate specifics of airfares pricing in the North.
Taking into account the fact, that air transportation is the only year-round mode of transport for 93 % of Yakutia territory, the permanent and frequent (several times a year) increase of airfares has a strong negative impact on these areas. The consequences of introducing regularly pricey airfares are:
1. Low quality of life: shortage and poor quality of food, goods and services which come in high prices in small communities with very low income levels.
2. Out-migration, particularly among the rural youth;
3. Small and medium-sized businesses in the North face more challenges in comparison with the Central and South parts of Yakutia.
The research objective is to identify the main ways of improving airfares pricing in the North, by applying practical analysis on the aviation industry in the republic.
Research tasks are:
1. To analyze and evaluate the most important of the existing theoretical approaches for the calculation of air fares in the Russian civil aviation;
2. To analyze the aviation industry of the Republic of Sakha (Yakutia) and compare it with the foreign experience of aviation management;
3. To identify the main characteristics of the air fares formation in the North;
4. To offer new policy approaches for reducing airfares for small communities in the Arctic part of Yakutia.
The object of the research is the aviation industry of the republic. The subject of the research is the pricing of airfares by the Yakutian state airlines.
Pic. 1. The Republic of Sakha (Yakutia) on a Russian Federation map
Pic. 2. Arctic zone served only by air transportation in the Republic of Sakha (Y akutia)
Short overview of the Republic of Sakha (Yakutia) aviation indusrty
There is a total of 5 air companies in the republican air transportation market. The republican airport network consists of 32 airports and 133 currently function-
al landing platforms. Yakutsk Airport is the largest and the only hub airport in Yakutia. It connects all the northern regions of Yakutia with the rest of Russia. The total aircraft fleet amounts to 263 units.
From late December until April a winter road operates in the Arctic regions of Yakutia. As the winter road covers a very long distance (3-14 days drive) and can be quite dangerous for transporting passengers, it is used solely for freight transportation.
Pic. 3. Yakutia fleet AC types, 2010 data
Source: The socio-economic situation in Yakutia, January-December 2010: Statistical yearbook. -Yakutsk: SakhaYakutiyaStat, 2011.
Two state airlines carry out scheduled flights to the hard-to-reach Arctic regions all year round: Open Joint Stock Company «Yakutia» and Open Joint Stock Company «Polar Airlines».
The aircraft fleet serving regional and intra-regional transportation is limited to the following types of aircraft: aircraft - AN-24, AN-26, AN-2, AN-3, A-410 and MI-8 helicopter.
In recent years there has been a significant deterioration in the operating conditions of air transportation in the Far North of Russia, particularly in the Republic of Sakha (Yakutia).
Pic. 4. Dynamics of the air transport mobility of Yakutia population
Source: The Ministry of Transport and Roads of the Republic of Sakha (Yakutia).
100
90
80
70
01 60
Л
С 01 50
01 40
a.
30
20
10 -
о -L
I 17,52 ■ 14,34 11,15
18,08
23,27 22,28 ■
■ 55,12
54,1 59,49
15,66
5,11 3,89
I General aviation
Local flights I Flights outside the republic International flights
2008
2009
2010
Pic. 5. Dynamics of the air transportation market structure in Yakutia, %
Source: The Ministry of Transport and Roads of the Republic of Sakha (Yakutia).
Pic. 6. Dynamics of growth rates of passenger traffic and turnover in Yakutia
Source: The Ministry of Transport and Roads of the Republic of Sakha (Yakutia).
Pic. 7. Dynamics of the main quality indicators of the air transport performance in Yakutia
Source: The Ministry of Transport and Roads of the Republic of Sakha (Yakutia).
The main problems of the aviation industry are:
1. An outdated airlplane and helicopter fleet serving regional and intraregional destinations;
2. Persistent fiscal deficits, as well as physical and moral depreciation of fixed assets in the majority of the northern local airports;
3. The high cost of aviation fuel, handling and airport fees charged at northern airports;
4. Stagnation in the regional local air transportation.
The main conclusions of research
There is a strong growth in air transportation passenger mobility in the period 2002-2010 in the republic as well as across Russia, despite the above-mentioned problems in the country. The main reason for this trend is the national economic growth, in particular, the rise of the population average income, which has caused a strong demand for air travel for business and leisure reasons. A characteristic feature of the growth of the air transportation passenger mobility in 2008-2010 is a large increase solely due to the international and extra-regional air transportation of the main airlines of the Republic of Sakha (Yakutia).
Pic. 8. Dynamics of the average population income and the passenger turn in Yakutia
Source: The Ministry of Transport and Roads of the Republic of Sakha (Yakutia) and the Ministry of Finance of the Russian Federation.
In this paper, we consider the issue of airfare pricing. We have performed an analysis of the dynamics of airfare rates and factors that affect them.
The main conclusion of the research is that currently the average level of the round air trip cost in the republic satisfies the effective demand of the population. But it still remains too high for the average Russian and Yakutian people, in comparison to American figures.
Jun., 2007 Jun., 2008 Oct., 2010 Oct., 2011
Pic. 9. Dynamics of the air fares level in Yakutia
Source: Yakutian state air companies
Pic. 10. Example structure of the operating expenses for each local flight operated by Yakutian airlines
Source: JSC «Aircompany «Yakutia».
We have identified the main features of the formation of regional airfares in domestic flights in 2007-2011:
1. a decrease in the average cost of transportation per 1 pass.-km. in the overall structure of fares on similar routes;
2. due to a reduction in the cost of transportation an increase has appeared in the average operating margin for the same routes;
3. due to an increase in the operating margin an additional increase has appeared in the average revenue rate of air fares on similar routes.
As a result, the republican air companies increase the average net profit per ticket.
Thus, the assumption that reducing airfare cost in a short term is rebutted by the fact that a decrease in the prime cost triggers the mechanism of increasing operating margins therefore, increasing the rate of airfare revenue. In addition it triggers a reverse mechanism due to the increase of the prime cost - a decline of the operating margins and revenue rates.
As a result of applying such measures, local airlines have managed to contain the level of air fares on some lower level.
The factor «reduction or increase of the prime cost of transportation» eventually has lost its primary importance. As a result, other factors have begun to influence the pricing of airfares in the region such as the average income of the population. In the analysis of the economic characteristics of the United States, Russia and, in particular, the Republic of Sakha (Y akutia) airlines it is found that affordability of air transport services appears together with the improvement of living standards in the region. Consequently, this causes the correction of the airfares' cost in various segments of the air transportation market.
Pic. 11. Ratio of the average cost of a return trip (regional lines) & the average monthly salary
Source: www.ato.ru.
Alexander Fridlyand, the Russian aviation analyst, states that the nature of the problem of regional domestic air travel stagnation in Russia is not economic, but rather social.
In our research we introduce suggestions for reducing the cost of transportation for regional domestic destinations of the republic, utilizing foreign experience to solve the existing problems in the aviation industry and by introducing specific practical measures to improve the tariff policy of the airlines:
1. Intensive modernization of aircrafts, small aircraft fleet renewal by replacing old inefficient aircraft type Antonov-2 and mainline fleet and regional aircraft AN-24 and AN-26 for modern fuel-efficient;
2. Expansion, development and providing sustainable operation of the airport network through a permanent source of funding from the federal
budget, suggesting cancellation of the landing charge in the northern regional and local airports in the future.
3. Cancellation of levying value added tax for passengers on regional domestic air routes in the Far North and equivalent areas, particularly in the Republic of Sakha (Yakutia);
4. Government regulation of fuel prices in the Far North and equivalent areas, particularly in the Republic of Sakha (Yakutia);
5. Development of competition in the air transport market;
6. Expanding the category of airfares at the legislative level, including tariffs with disabilities to return the funds in case the passenger chooses to return the ticket and tariff restrictions on changing the date of departure;
7. Expanding the list of services at the legislative level, the cost of which may not be included in the fare for air travel, and charged as a separate fare, i.e. on:
8. Free baggage allowance;
9. In-flight meals.
10. Each proposed method to reduce airfares in the region demonstrates that the improvement of the formation of air fares in the North is possible only through an active and long-term government support.
List of used sources and literature:
1. Alaska Far and Close // Airports International. - 2010. - October. - P. 18-20.
2. Data of the JSC «Air Company «Yakutia».
3. Data of the Ministry of Transport and Roads of the Republic Sakha (Yakutia).
4. The results of the development of transport and communication complex of Yakutia in 2010: Information and analytical review. - Yakutsk: Ministry of Transport, Communications and Informatization of the Republic of Sakha (Yakutia), 2011. - P. 13-16, 22.
5. Kutuzov T.F. Analysis of the formation of the cost of air transportation in the RussianFederation [Electronic resource]. - URL: http://lib.herzen.spb.ru/text/ kutuzova (date accessed 15/03/2011).
6. Key indicators in the transport sector, 2010 // About the main results of socio-economic development of the transport sector in 2010 and tasks for 2011 and the medium term to 2013: an Information - analytical review. - Moscow: Ministry of Transport, 2011. - 225 p.
7. The official website of the State Research Institute of Aviation [Electronic resource]. - URL: www.gosniiga.ru.
8. The official website of the Ministry of Transport and Roads of Sakha (Y a-kutia) [Electronic resource]. - URL: sakha.gov.ru/mintrans.
9. The official website of the Ministry of Transport of the Russian Federation [Electronic resource]. - URL: www.mintrans.ru.
10. The official website of the Ministry of Finance of the Russian Federation [Electronic resource]. - URL: sakha.gov.ru/minfin.
11. The official site of Rosstat in Yakutia [Electronic resource]. - URL: www.sakha.gks.ru.
12. The official website of JSC «Polar Airlines» [Electronic resource]. -URL: www.polarair.ru.
13. The official website of JSC «Air Company «Yakutia» [Electronic resource]. - URL: www.yakutia.aero.
14. The socio-economic situation in Yakutia, January-December 2010: Statistical yearbook. - Yakutsk: SakhaYakutiyaStat, 2011. - P. 18.
15. Transport of Russia: Information and Statistical Bulletin, January-December 2010. - Moscow: Ministry of Transport, 2011. - 70 p.
16. Fridlyand A. Airfares and prime cost of transportation: comparative dynamics, long-term trends and surprises autumn 2010 // Analytics. - 2011.
17. Fridlyand A. The cost of transportation and income: the social aspect // Analytics [Electronic resource]. - 2011. - URL: http://www.ato.ru/content/stoi-most-aviaperevozok-i-dokhody-naseleniya-sotsialnyi-aspekt (date accessed 01/04/2011).
18. Shapkin V.S. Status and prospects of the development of aviation in Russia [Electronic resource] // Analytics. - 2011. - URL: http://www.ato.ru/content/ sostoyanie-i-perspektivy-razvitiya-grazhdanskoy-aviacii-rossii (date accessed 27/02/2011).
