Kyra Dempsey
RUSS 5120 Russia After Communism
15 Dec 2021
THE RISE AND FALL OF TRANSAERO AIRLINES AND THE REASSERTION OF THE RUSSIAN STATE
At 11:54 p.m. UTC on the 25th of October 2015, Transaero flight 160 from Magadan touched down at Moscow’s Vnukovo Airport and taxied to the gate. As the crew stepped off onto the jet bridge, they closed the door on 24 years of aviation history: flight 160 would be the last ever flight by Transaero, Russia’s oldest privately-owned airline. The next day, the 26th of October, the airline’s certificate of operations was permanently revoked.
Transaero’s last flight was neither the beginning nor the end, but rather the middle of a long and convoluted tale whose plot and cast of characters may never be fully elucidated. From the failed attempts to save the stricken carrier to the redistribution of its assets to the lawsuits filed against its owners, the story of Transaero’s demise is as complicated as it is murky, but behind the myriad legal and rhetorical façades, a pattern can be discerned. In fact, the preponderance of evidence shows that Transaero Airlines did not merely go bankrupt, but was systematically destroyed by the actions of the state, which took control of its assets and market share not only to advance the interests of state-owned corporations, but to exact political retribution against its owners. In the process, the government utilized tactics borrowed from the shadowy world of “corporate raiding,” or “reiderstvo,” an anti-competitive and usually illegal practice which it had previously pledged to eradicate. The use of these tactics by state-owned corporations against a privately-owned competitor is consistent with a broader trend toward re-nationalization in the Russian economy, wherein the state has used sometimes questionable means to regain monopolistic market shares in key industries.
THE RISE OF TRANSAERO
As the economic reforms of Perestroika transformed the economy of the Soviet Union, an opportunity emerged for private entrepreneurs to enter the airline industry, which until then had been the sole purview of the state aviation company, Aeroflot. Like in other industries, most of those who took it upon themselves to start airlines already had government connections, and most of them got started by privatizing Aeroflot’s regional subsidiaries. However, the very first private airline in the Soviet Union was not a former Aeroflot branch but a brand new start-up, christened Transaero Airlines.[1] Transaero was incorporated on September 30th, 1990 by Tatiana Anodina, [2] Director of the Institute for Aeronavigational Research and wife of the late Soviet Minister of Radio Communications,[3] and her son, Aleksandr Pleshakov—a pair whose extensive connections within the Soviet aviation industry left them ideally positioned to found an airline. At first, Transaero leased its airplanes from Aeroflot, but by 1993 it had begun to expand on its own, becoming the first Russian airline to operate Boeing aircraft.2 Its readiness to import Western airplanes was not the only thing that made Transaero unique: it was also the first Russian airline to take seriously the concept of quality service, upending the stereotype of dour Soviet flight attendants and terrible food with its comfortable cabins and multilingual crews. Indeed, Transaero quickly disavowed Aeroflot and the reputation it had given to the Russian aviation industry, and in 1994, Transaero Director of Marketing Sergei Grachev said, “We refuse to hire anyone who has more than five minutes’ work experience with Aeroflot.”[4]
Transaero grew rapidly throughout the 1990s, both in terms of passenger turnover and fleet size, introducing a wide variety of aircraft which had not previously been seen in Russia, including the Boeing 737, 757, and 767; and the McDonnell Douglas DC-10. Under the stewardship of the Pleshakovs, Transaero was able to weather the financial crisis of 1998 by reorienting from domestic to international routes, positioning itself as a competitor to Aeroflot, which had made a similar transition at around the same time.[5] By the mid-2000s, Transaero was again growing quickly, becoming the second largest airline in Russia, thanks to rising demand for its flights to holiday destinations in the Mediterranean and Asia. In 2010 it became the first Russian airline to operate the iconic Boeing 747, and in 2012 it announced plans to go even bigger, ordering several examples of the double decker Airbus A380, although the purchase was never completed.[6] And perhaps most remarkably, by 2015 Transaero had managed to climb to 17th on the JACDEC Index of the safest global airlines, the only Russian company before or since to make it into the top twenty.[7] Indeed, throughout its 24 years of operation, Transaero never suffered an accident or serious incident.
THE FALL OF TRANSAERO
For all its short-term success, however, Transaero’s long-term business model was not sustainable. Its continuous, rapid expansion left the company without the liquidity to weather another serious downturn. When the Russian economy crashed under the weight of sanctions imposed over the 2014 Ukraine Crisis, leading to a significant devaluation of the ruble, Transaero’s customer base contracted significantly as Russians became less able to afford vacations abroad.[8] Unable to maintain its obligations with a lower-than-expected cash flow, Transaero quickly racked up $3.85 billion (250 billion rubles) in debt, much of it owed to state-owned banks, including the VEB group (42 billion rubles), VTB Bank and its subsidiaries (28.7 billion rubles), and Gazprombank (13.6 billion rubles).[9] Sberbank, in which the government owns a controlling stake, and Alfa Bank, which is privately owned, were also among the airline’s creditors.[10]
By the second half of 2015, Transaero was unable to service these debts, and both the owners and the creditors had begun looking for a way out. On September 1st, following a meeting chaired by First Deputy Prime Minister Igor Shuvalov, it was announced that Aeroflot would acquire Transaero for the symbolic price of one ruble, a move which the Economic Development Ministry insisted would not lead to “monopolization of the air traffic market.”[11] However, the following day, Transaero CEO Aleksandr Pleshakov clarified that Transaero had not initiated the consolidation offer and was pursuing two other strategies which would not lead to a merger with Aeroflot.[12] The deal was in fact arranged by the government, ostensibly in an attempt to preserve the jobs of 11,000 Transaero employees, against the wishes of company management. At the behest of the state, Aeroflot took on responsibility for Transaero’s operations, injecting capital to ensure that the ailing airline “fulfilled its obligations to passengers.” However, Aeroflot’s attempted takeover fell through on September 28th, when Transaero’s shareholders missed a deadline to submit a proposal for the merger, probably because they had no intention of actually merging with Aeroflot.[13] Another source claims that Aeroflot was hesitant to enter the deal in the first place, due to the potential difficulty involved in restructuring Transaero’s “bad debts.”[14] Either way, the collapse of the one-sided deal left Transaero’s future in doubt.
On October 2nd, in a meeting chaired by Prime Minister Dmitry Medvedev, the government announced that Transaero would be declared bankrupt and would be barred from selling any further tickets to passengers.[15] Among Transaero’s creditors, this announcement elicited mixed reactions. Noting that VTB Bank and Sberbank had filed the bankruptcy claims, Uralsib Bank analyst Dmitry Vorchik told the Financial Times, “For the state-owned banks, it’s easier to be in favour of letting Transaero go bankrupt because the state will come in to help cover loan losses.”[16] Private lenders, who could expect to see little or no such assistance, were less thrilled, with oligarch Mikhail Prokhorov’s International Financial Club[17] and Mikhail Fridman’s Alfa Bank coming out against the move, which the latter called “incorrect,” although it eventually joined the suit.[18]
Desperate to avoid bankruptcy, the Pleshakovs eventually found fertile ground in Vladislav Filev, owner of rival airline S7. S7 was the next largest airline in Russia after Transaero and Aeroflot and was in much better financial condition. A plan for Filev to acquire a controlling stake in Transaero was announced on October 20th, along with a plan to normalize Transaero’s relationship with its creditors. When asked what the sale price would be, Aleksandr Pleshakov jokingly replied that it was “substantially more than one ruble.” In an interview with RBC, he added “I prepared this agreement because, among other reasons, I didn’t want to allow the monopolization of the aviation market, so that passengers and industry workers would have the opportunity to choose between airlines.”[19] The target of his statement was evidently Aeroflot, which, despite the claims of the Economic Development Ministry, would indeed have achieved a near-monopoly over passenger air travel in Russia had it absorbed Transaero.
The day after Pleshakov and Filev announced the S7 deal, Rosaviatsiya, the state aviation regulator, revoked Transaero’s certificate of operations, effective October 26th. Rosaviatsiya said in a statement that an audit of Transaero’s books showed that it was unable to pay for maintenance, pilot training, and inspections, which endangered the safety of its passengers.[20] Russian law gives Rosaviatsiya the right to take various measures up to and including the revocation of the certificate of an air carrier whose financial situation is negatively impacting its safety standards, although in practice this right is exercised rarely, and usually only after an airline has already had an accident. The irony of the law being used against Transaero, which had been deemed the safest airline in Russia earlier that same year, was not lost on anyone.
For Transaero Airlines, the revocation of its certificate was the end—the airline could not possibly be saved. The S7 deal fell through on November 4th; even though Vladislav Filev had claimed he could restore Transaero’s operations, government officials and the airline’s creditors had publicly cast doubt on the plan, noting that the revocation of the airline’s certificate was explicitly defined as irreversible.[21] By then, the airline’s last ever flight had already landed, and Aeroflot was already carrying 90% of the passengers who had previously booked tickets through Transaero.[22]
What happened to Transaero’s assets following its shutdown is just as fascinating as the shutdown itself. As it turned out, Aeroflot, having previously been ordered to take control of Transaero’s day-to-day operations, was able to take a very large slice of the pie. In addition to carrying Transaero’s already-booked passengers through December 15th, Aeroflot initially received 12 aircraft and 56 international routes which had belonged to Transaero.[23] Many additional airplanes were seized by creditors including VEB (at least nine aircraft), VTB (at least ten aircraft), and Sberbank (at least 14 aircraft), most of which were then leased to Aeroflot within days or weeks of their seizure. According to Russian Aviation Insider, Aeroflot planned to use 24 former Transaero aircraft to jump start its new subsidiary, Rossiya Airlines.[24]
Following the shutdown of the airline and the redistribution of its assets, Transaero’s owners engaged in a lengthy court battle before the company was finally declared officially bankrupt in 2017.[25]
THE MARKET AND THE STATE
The bankruptcy of Transaero Airlines took place against a background of increasing state control over the Russian economy. Transaero was originally part of the wave of privatization which occurred in the early 1990s, a vast devolution of state power and infrastructure which led to massive economic destabilization before some semblance of order began to take shape in the early 2000s. But it has perhaps not been adequately appreciated just how thoroughly Yeltsin’s privatization movement has since been reversed. The share of Russia’s GDP produced by private corporations in fact peaked at 70% in 2004 and has been falling ever since.[26] According to one study, by 2018 the situation had completely flipped, with state-owned corporations now accounting for 70% of Russia’s GDP.[27] The beginning of this reversal coincided with President Vladimir Putin’s initiative to restore state control over the oil and gas industry, widely considered to have begun with the Yukos affair in 2004, during which Russia’s largest private oil company was broken up by the state and absorbed into Rosneft and Gazprom. Consolidation in other industries followed rapidly. In 2006, Russia restricted foreign investment in a wide range of industries deemed strategically important, and re-nationalization of key players in these industries swiftly followed. The targets of this campaign included automobile and aircraft manufacturers, which were already being consolidated under state control by the end of that year.[28] As a result, in many industries private companies must now compete against state-owned corporations in order to survive. In a 2018 article for the Foreign Policy Research Institute, David Szakonyi writes, “[T]he most important development over the last decade has been the state’s direct takeover of valuable economic assets and the creation of massive state-owned enterprises (SOEs). This (re)nationalization jeopardizes the economic viability of many private firms by concentrating wealth and opportunities in a small group of well-connected SOEs.”[29] He further adds, “If during the 1990s business[es] feared hostile takeovers from rivals and rackets, the new threat to their business is the state itself. The private sector is not just reliant on the state for subsidies and regulation, but also actively competing with it for profits.”[30]
The airline industry, although not explicitly included in the government’s list of strategic industries, has not been immune to this shift in the structure of the Russian economy. After selling off large sections of its fleet in the 1990s, the state airline Aeroflot officially reversed course in the early 2010s, beginning an aggressive campaign of expansion which continues to this day. As late as 2009, Aeroflot was still privatizing subsidiaries (notably Aeroflot Nord, now Smartavia), but by 2011 the calculus had changed. At that time Transaero was increasing its passenger and cargo turnover by 30% year on year, while Aeroflot’s passenger turnover grew 24% and its cargo turnover fell 3% during the same period. The following year, seemingly in response to these market forces, Aeroflot announced an ambitious plan to increase its market share to 36% by 2015, 40% by 2020, and 45% by 2025.[31] To accomplish this, Aeroflot needed to absorb many of its competitors, and indeed by the time these numbers were published it had already begun to do so, buying controlling stakes in Rossiya,* Kavminvodyavia, Orenair, Vladivostok Air, Donavia, and SAT Airlines.[32] However, reaching the target market share would require Aeroflot to eliminate or acquire at least one of its three largest competitors: UTAir, S7, or Transaero, each of which controlled just over 8% of the domestic market in 2012.
That year, Igor Artemiev, head of the Federal Anti-Monopoly Service, said the FAS “might prohibit Aeroflot from undertaking any mergers or acquisitions in the future if its share on the domestic market exceeds 35%.”[33] Needless to say, the FAS did not actually stop Aeroflot’s continued growth, because by 2020 the airline and its subsidiaries represented a market share of 42.3%,[34] which in the airline industry is considered a monopoly. Much of this growth could be attributed to Aeroflot stepping in to fill the void left by the collapse of Transaero.
Thus, in addition to receiving numerous passengers, airplanes, and routes, Aeroflot also benefited from Transaero’s bankruptcy in the form of reduced private sector competition and an opportunity to meet growth targets. The disappearance of Transaero gave Aeroflot particular dominance in long-haul international routes, where Transaero had been its only real competitor. Considering this fact, the hand of the state in Transaero’s bankruptcy looms rather large. The following sections will examine the tactics the state used to ensure a particular outcome in the Transaero case, and the reasons behind their actions.
THE ART OF RAIDING
In a developed capitalist economy, most corporate acquisitions are considered “friendly,” in that both parties agree that a merger should take place. In Russia, however, the majority of corporate takeovers have historically been hostile. This is due in part to the prevalence of “corporate raiding,” or reiderstvo, a practice by which an aggressor company uses legal loopholes or criminal sabotage to take cont
