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“We are undergoing a very serious, 
radical change of the entire business 
model of the company”




                                              Valery Okulov, General Director, Aeroflot
                                              describes the ongoing transformation from a
                                              production company to a service company

What are the challenges of running            would like to have two complementary          fleet. The most serious challenge, which
a company which has one foot in the           schemes, one international, and one           is quite hidden, is to transform Aeroflot
state sector and one in the private           domestic. Now, in the situation of soar-      from a production company to a service
sector?                                       ing fuel prices, we have to have a fleet       company with a focus on people.
This business now is living through           which is less energy dependent. That is
very hard times. But the more complex         one of our priorities.                        Have you learned from other interna-
the situation, the more it is of interest        In order to ensure stable flights be-       tional airlines?
to the international community. Our           tween Europe and the Far East, we have        Of course, we carefully watch our col-
business is operating in a rather shifty      to set up a very good hub at Shereme-         leagues and competitors. The most dra-
environment. To be successful, one has        tyevo.                                        matic experience which I have seen was
to adjust quickly to the situation. That is      That is why there is the project for a     the PanAm story. Like Aeroflot, at one
why we are undergoing a very serious,         new terminal at Sheremetyevo – which          time, it was focused entirely on inter-
radical change. I mean a radical change       will combine domestic and internation-        national business. The crisis in interna-
of the entire business model of the com-      al flights.                                    tional flights brought about the end of
pany. Previously, Aeroflot was not a              In order to be attractive to the passen-   the company. That influenced me when
commercial entity at all. And in order to     gers, we are re-branding the Aeroflot          we decided to move towards domestic
become commercial, we had to radically        brand and we aim to change, positively,       flights – so that we could have two feet:
change the model and flights. Then we          the Aeroflot image. It is a very serious       one in the international business, one in
had to undergo a rather painful change        undertaking. It has been going on for         the domestic business. We learned a lot
in the management system. We had to           two years already.                            from Quantas in terms of security and re-
get rid of some of Aeroflot’s traditional         We now have a new product for              liability of the flights. Asian experiences
routes. We also focused Aeroflot on the        mid- and long-range routes. It is based       are also very important for organising the
internal market – on the former Soviet        on three values: ‘from Russia’, ‘Rus-         service for the passengers – Singapore
Union countries. Just two years ago, we       sian hospitality’ and ‘reliability’. All      Airlines, and Emirates in particular. We
had only two flights to St Petersburg,         these three values are equal – there is       are also watching carefully the low-cost
now we have about 25. Our internal            no number one value. Also, there are          airline experience. But this experience
routes are our first priority. That is the     new uniforms for the attendants, a new        is well known to the big Soviet Aeroflot
reason why we have two grades – we            menu, new chairs and a renewed air            – because it was one big budget airline!

10 • Russian Investment Review •
                                                                                                                      profiles


How does the business break down in           additional guarantee of financial stabili-     16%. But it is quite difficult to make a
terms of profits and revenues between          ty. In our leasing contracts, with our loan   reliable forecast because all the experts
domestic and international fights?             agreements, there is a clause which says      produce different figures. There is one
Over 80% are international revenues.          that if the relationship with the govern-     sure thing: the prices are not going to go
The share of domestic revenues is going       ment changes, this could be a cause to        down.
up gradually. Our plan is to have 30%         review the contract.
from domestic sales by 2010.                                                                National Reserve Corporation owns
                                              How important are your Moscow-                part of Aeroflot. It has been a dream of
How do you overcome initial negative          London routes?                                Alexander Lebedev to revive the air-
perceptions about Aeroflot to get pas-         There is obviously a shortage in our          craft manufacturing industry in Rus-
sengers on to the flights?                     flights to London. At the moment we            sia. Is this possible?
We have to use various channels of com-       have 17 a week, which is short of what        We shall not try and proceed in this busi-
munication to bring this idea to the peo-     we would like. This is not just because of    ness. We shall proceed with our hard,
ple. First, we have to demonstrate the        the number of Russians travelling; it is      complex job and the plans of building a
positive changes and the results of the       a fact of life that London is the business    joint aircraft corporation are good. This
changes which we have made in pre-            capital of the world. Quite a number of       corporation and aircraft building in
vious years. Last year we had a rather        meetings and conferences, including           general are aiming at two areas: First of
aggressive advertising campaign. This         those focused on aviation, are being held     all the production of a competitive air-
year, we have less money for advertis-        in London. And, if a meeting is held in       craft for the international market. This
ing. But this is not the most effective       London, I know it is important.               is our chief project which is a regional
channel of communication. All the                                                           aircraft. Then there will be joint coop-
means that we deploy, the re-branding                                                       eration with the producers in the area
etc, are all vehicles to bring the informa-                                                 where we can not put forward some-
tion to the people. I think that we have        We, at Aeroflot,                            thing competitive.
found a very good slogan for the people:        have a unique
‘sincerely yours’. In Russian, this has a                                                   Have you had to implement extra secu-
very good connotation in the national           security product: it                        rity measures in the last couple of years?
tradition. It is very interesting that the                                                  How has this impacted on costs?
idea was put forward not by our market
                                                is a bio detector for                       Traditionally, our security measures
experts, but by questions asked of our          finding explosives                          were tighter than in the United States
employees and passengers.                                                                   prior to September 11. Our doors to
                                                and drugs. We                               the cabins have always been steel. The
Are there plans to expand on the
number of Airbuses and Boeings?
                                                produced                                    security checks have become more se-
                                                                                            rious and detailed. This produced an
Or will you keep a large number of              a unique breed of                           effect on the costs of the company. First
Russian planes?                                                                             of all, this was related to increasing the
There is no alternative to the modern           husky and jackal                            staff. Then we had to organise addition-
western made aircraft at the moment.                                                        al training. As for additional security
The winner will be the company that can                                                     equipment, it is bought by the airports
switch quickly to a new, energy saving                                                      and it doesn’t effect our costs.
fleet. All companies, even if the econom-      Will there be a time when Aeroflot will          At Aeroflot, we have a unique security
ic situation is very serious and money is     be wholly privately owned?                    product: it is a bio detector for finding
tight, will try to modernise their fleets as   There are no such plans at the moment. I      explosives and drugs. In the ‘90s we
quickly as possible.                          think that in the short to mid term, there    produced a unique breed of husky and
                                              will be nothing done about this. The          jackal. Later the government stopped
How many planes can you replace each          most important issue is not privatisation     providing funds to the laboratory, so we
year?                                         but the most efficient use of the govern-      took it under our wing. The results are
About 12 – that is our plan.                  ment share. I think that the French gov-      amazing. The sensitivity of these dogs
                                              ernment used its share very effectively,      is much higher than any other breed. At
As a semi-nationalised industry, is           especially when they bought KLM. The          the moment there is no device, which
there pressure to keep open unprofit-          share of the French government in Air-        can detect plastic explosives, but these
able routes?                                  France was reduced from 57% to 40%,           dogs can. The only shortcoming is that
This is not exactly the case. Our short       and they used the proceeds to buy KLM.        they can’t work around the clock – they
range routes are in fact helping the long     After the deal, the value of the 40% be-      have to have a rest after two hours.
range routes. We get a number of tran-        came more than the 57% because of the
sit passengers. Our model envisages not       increasing capitalisation.                    Have you introduced them to other
only bringing people to Moscow, but a                                                       airlines?
focus on transit. As to the government        What oil price are you using to base          There is a huge lobby in the world which
has a majority share in the company, I        your model for next year?                     is pushing for very expensive, cumber-
should say that investors and banks con-      It is a crazy situation. In our economic      some, detectors and they block the way
sider it an advantage. Because this an        model we see the rise of fuel prices by       to other technology. rir

                                                                                                        • Russian Investment Review • 11

				
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