Transcript of Sergei Ivanov's speech:

Good afternoon, colleagues.

We have two issues today on the commission meeting’s agenda. The first is improving competition in the airline industry. The second is the financial status of the state company Rossiiskiye Avtomobilniye Dorogi (Russian Motorways) and its prospects for the next two years.

Regarding the first issue, it is, let us say, of a quite resonant nature. The public has repeatedly raised the issue of ticket costs. The issue here is, of course, complex. And we will consider it separately in January at another meeting dedicated to the issue of the cost of air travel and the problem of competition. There is competition – we see it on many major air routes. Prices, at least, are not rising. And where there is no competition – and we also have such routes, as everyone knows, that only one airline services – what's going on is, to put it mildly, God knows what. Everyone understands what's going on.

For us, this issue is, of course, not limited to transportation or, let’s say, the technical issues involved in modern aircraft, but, of course, it extends to a problem of a distinctly social character.

Implicit is the fact that there are no other forms of transportation whatsoever in more than 60% of the territory of Russia, which is home to 15 million people. In these areas, aviation is the only form of long-distance transportation. In other words, for at least 15 million of our compatriots, the availability of air links is, if I may say so, a matter of life and death.

As I said, one of the key issues here is competition. What do we have on this subject to date? At the moment, 160 companies have Air Operator Certificates in Russia – 160 companies have the right to transport passengers by air. Of these, 30 companies transport 95% of passengers, and the three leading companies are responsible for over 44% – almost half of the passengers, in fact. There is an obvious and pronounced imbalance.

In other words, the trend of market consolidation in air travel is obvious. Moreover, given the current set of players, that consolidation is reaching its limit. This is the first issue.

Second, I consider it necessary to draw your attention to the fact that we have recently witnessed a number of companies leaving the market – about 10 companies have folded over the last year after violating the rights of their passengers with endless flight disruptions, non-competitiveness, and safety failures. In other words, we can see another – in my opinion very healthy – trend, by which the market is eliminating unscrupulous carriers (I call them “wildcats”), of which a huge number still remains. These are three- or four-plane airlines that are simply not able to perform normal passenger transportation.

Third, I would like to focus your attention on the prospects of so-called budget airlines, known in the household as “low-cost,” that transport passengers at reduced fares. Such airlines occupy 40%-45% of the global market. In Russia, this sector is in its infancy. Therefore, this is still one of the major lines of development for the passenger airline industry, and this market segment is, essentially, open in Russia.

In 2009, in response to the crisis, there was a sharp drop in both low-cost flights and so-called business aviation. The latter is also an important market segment, in which we lag behind the traffic we see in developed countries. But in the past year, 2010, business travel has again started to increase.

Another subject entirely, of course, is the equipment used by our airlines because obviously, there are not enough modern, domestically produced aircraft. Our fleet is going through a very turbulent transformation. It is characterised by a consistent expansion of the share of foreign-made aircraft in order to meet modern safety and operational requirements, especially in terms of engine equipment and fuel costs.

Here, I believe that the commission members know the situation well. When we experienced peak prices for jet fuel in 2008 and early 2009, airlines' fuel costs accounted for 40%-45% of the total cost of air travel. This share is 25%-27% for modern aircraft with fuel-efficient engines. As they say: feel the difference.

In addition, we must consider the high cost of maintenance of outdated domestic equipment, as well as the need for costly improvements that will inevitably follow from current environmental requirements, noise-reduction requirements, etc.

Therefore, you can essentially understand why carriers buy mostly foreign-made planes. On the other hand, I'd like the carriers to understand the stance of the government, which is also interested in the development of a domestic aeronautics industry. Therefore, the line is rather thin. And I know that the Transport Ministry and other ministries and agencies approach this issue with due attention to both sides of the same coin. In other words, on the one hand, the airlines want to acquire the most efficient aircraft on the market, while on the other hand, they should not forget about domestic manufacturers.

Another issue, of course, is our weak airfield infrastructure. I'm not talking about the hubs constructed over the past few years – we have invested a lot in the airport infrastructure of major cities, and these are now all more or less sorted out. But most airports are not hubs, yet nonetheless require massive investments in order to build runways and bring navigation and lighting equipment into compliance with current regulations.

Incidentally, this issue facilitates lower competition. We have cases where runways are in poor condition at fairly major airports. And many of the major carriers simply won’t fly there. As a result, one local airline operates the route, and there is no competition. Hence the problem with high fares.

That's the whole set of airline issues we are reviewing today. Our keynote speaker is Deputy Director of the Federal Anti-Monopoly Service Anatoly Golomolzin.

I'll address the second item on the agenda very briefly. The state company Rossiiskiye Avtomobilniye Dorogi (Russian Motorways) was established about a year ago. It was entrusted with more than 2,000 kilometres of so-called “investment-attractive roads” – i.e., roads that have the potential to attract investment. In the future, a network of modern toll roads is to be established on the foundation of these roads. But, according to Transport Ministry estimates, we need at least 12,000 – not 2,000 – kilometres of modern national toll roads in Russia. And so far, we have only two private pilot projects that are well known. I think that the state company Rossiiskiye Avtomobilniye Dorogi should actively learn from this experience. We also need competition in the sector. And the experience of operating private toll roads, I think, can serve as an indicator of what the state company needs to take into account.

We have already fully worked out the legislation to this end. All necessary legislative acts have been adopted. Since the company was only founded in 2010, I don't think there is much sense in examining its financials. There simply are none. And we now essentially have to consider the company's plans for the next two years. That's all I wanted to say. Thank you for your attention. Let's get to work.