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Pressured Aeroflot eyes expansion

Aeroflot's is upgrading its fleet by replacing its 27 foreign planes with newer models.
Aeroflot's is upgrading its fleet by replacing its 27 foreign planes with newer models.

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LONDON, England (Reuters) -- Russia's biggest airline Aeroflot is banking on bold expansion and a batch of foreign planes to stay ahead of a surging pack of rivals springing up across the country.

"We plan a significant increase, certainly by 2010 we aim to double the number of passengers carried to 12 million and we would need at least 150 planes," spokesman Lev Koshliakov said by telephone from Moscow.

That would add more than 60 planes to its fleet of 89.

A strong economy and poor land transport to regions such as Siberia are fuelling explosive growth in upstart airlines, but analysts say Russia's market still has plenty of potential.

"We have too many airlines, about 300 ... but we still have not recovered the (traffic) levels of the 1990s," said transport analyst Elena Sakhnova at United Financial Group in Moscow, referring to record volumes prior to the 1998 rouble crisis.

The competition and economic growth helped Aeroflot boost net profit 140 percent last year to 3.2 billion roubles ($107 million).

Aeroflot shares rose six percent last month versus an 11 percent fall in Russia's benchmark RTS index.

Even while the arrest late last month of the chief executive of Russia's largest oil company YUKOS hurt Russian shares, the airline's shares stayed strong.

New planes

Aeroflot's first move in upgrading its fleet has already begun as it replaces its 27 foreign planes with newer models.

It plans to take delivery of 18 planes from Airbus by the end of 2004, including six as direct purchases and a dozen via U.S. aircraft lessor GECAS, Koshliakov said.

GECAS is also delivering nine 767-300 planes built by U.S. maker Boeing Co.

"The financing terms of the deals are very attractive," said Sakhnova at UFG. "These are comparable with terms foreign airlines usually receive."

Foreign planes are cheaper to operate than Russian aircraft and allow the carrier to charge higher fares.

"Curbing of costs, related to the fleet upgrade, looks set to be a key value-driver in coming years, as does a higher yield per passenger with more people flying business class," analyst Andrei Ivanov at Moscow brokerage Trokia Dialog said in a recent report.

Analysts say such benefits are vital as Sibir Airlines presses on domestic routes throughout the country, and carriers Pulkovo and KrasAir grab traffic in regions of Russia.

One of the biggest advantages for Aeroflot Chairman Alexander Zurabov is a deal with the government that allows the carrier up to 27 foreign planes without paying hefty duties and the taxes usually imposed on such imports.

The current fleet plans show that he will use the waiver to the full.

But there are also drawbacks in being majority-owned by the government compared with independent rivals such as Transaero.

Aeroflot's staff costs are higher, and it faces pressure to support a Russian aircraft industry, which is eclipsed by global leaders Boeing and Airbus.

Plans for its Russian fleet include the lease of six widebody 350-seat Ilyushin Il-96 aircraft expected by the end of the year.

Copyright 2003 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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