A consortium consisting of Basic Element, Russian Direct Investment Fund (RDIF) and Changi Airports International (CAI) recently won the operating rights for Vladivostok International Airport in Russia as part of a US$109m deal. Andrey Elinson, deputy head of Basic Element, talks to Passenger Terminal World about the recent acquisition and the consortium’s plans for the future.
How does the relationship work between Basic Element and Changi Airports International?
Basic Element has a long history of cooperating with Changi Airports International (CAI). In 2012, together with Russia’s largest bank Sberbank, Basic Element and CAI established a joint venture called Basel Aero that operates the airports in the Russian southern cities of Sochi, Krasnodar, Gelendzhik and Anapa.
A total revamp of Sochi International Airport was carried out in preparation for the 2014 Winter Olympics with the help of our Singaporean partners. Based on this previous successful experience, we’ve again united our expertise with Changi, this time in Russia’s Far East.
At the moment we are discussing how the Changi managers in the consortium will be focusing on developing the route network, attracting new carriers and marketing both aviation and non-aviation business projects. Basic Element will be in charge of operational and financial management. However, it’s impossible to distinguish between all areas of responsibility, as the companies will contribute equally to the development of Vladivostok Airport.
What percentage of shares does the consortium now own in Vladivostok International Airport and how much did they cost?
The consortium of Basic Element, RDIF and CAI owns 100% of Vladivostok International Airport, worth around RUB6bn (US$109m). Each member owns 33.3% of the airport.
Why did the consortium choose to bid for Vladivostok Airport?
Vladivostok International Airport enjoys a strategic position as it lies at the junction of Russia’s Far East and the Asia-Pacific region. It only takes an hour and a half to get to Beijing, Seoul or Tokyo. On top of that, it boasts Open Skies status since 2011, an agreement that allows foreign carriers to use the airport without interstate agreements. However, the Open Skies policy is underdeveloped with only a handful of Korean and Chinese airlines utilizing this benefit. Together with the Far East’s official status as one of Russia’s authorized gambling zones and its proximity to Asian Pacific countries, Open Skies opens great opportunities for developing the airport and increasing its revenue.
Vladivostok Airport also underwent major refurbishment in 2012 ahead of the Asia-Pacific Economic Cooperation (APEC) Summit. It was upgraded with a new 510,000ft2 terminal, a 100,000-ton cargo terminal, new engineering infrastructure facilities and a revamped apron tailored for 25 aircraft. Therefore, we could not miss the opportunity to acquire the airport since there are tremendous opportunities for development without the need for further capital investment.
What are the short-term plans for the airport?
Basic Element, together with Changi and RDIF, has sealed a two-stage airport development strategy. During the first stage in 2015-2020, we’ll focus on boosting non-aviation revenues from parking, business lounge services, fast track services, etc. Vladivostok airport will also attract additional duty-free and duty-paid operators such as leading travel retailer Nuance, with whom we’ve been working since 2013 through a joint venture with Basel Aero.
On the aviation side of the business, Vladivostok International Airport will continue to negotiate with carriers encouraging them to increase traffic volume through introduction of special tariffs and discounts. The airport’s short-term strategy also stipulates the expansion of international routes through establishing direct air links with India, China, Vietnam, Indonesia, Malaysia, and Singapore as part of the Open Skies policy.
At the same time, the airport’s further development depends on political decisions such as a widely discussed draft bill about granting Vladivostok Free Port status. The legislation that is expected to come into force in mid-2015 will encourage domestic and international entrepreneurship and trade as there will be no customs duties and visas. For the airport, it will give a tremendous boost to cargo and passenger traffic. The airport has already launched certification of its aerodrome complex to prove that it’s capable of handling cargo jets like the Boeing-748F.
Vladivostok International’s development will go hand in hand with the promotion of the region’s tourism attractiveness. The city received its 15 minutes of glory in 2012 when it hosted APEC but no further promotion of Russia’s Far Eastern region has been made. While more and more Russian tourists affected by the ruble’s devaluation choose Black Sea resorts as the alternative to holidays in Europe, Vladivostok remains a rather unpopular destination among Russian travelers because of the expensive tickets (Moscow-Vladivostok return ticket on average goes for US$250). We plan to ask the regional government and tourism authorities to subsidize Vladivostok-bound flights to help stimulate a hike in tourist flow to the city.
How does the consortium plan to develop the airport further?
The second stage of the airport’s development is planned for 2020-2030. By looking at the dynamics of the airport’s growth over the past five years (a 2.7-fold increase), we expect the annual traffic to reach six million passengers by 2030. Under the next cycle of the airport’s expansion we’re planning to upgrade its tech environment and add more boarding gates, security checkpoints, check-in counters and aircraft parking areas. That will require an additional RUB1bn (US$20 million) of investment. Moreover, if the tourist flow keeps increasing then there will be more hotels built near the airport and a new airline catering facility.
How will the airport be adapted to meet future demands and what will these demands be?
The major demand for the airport and for us as the owners is to make it profitable. Other objectives that derive from the main one include optimization of the operations, cost reduction, increasing passenger traffic, encouraging aviation and non-aviation commerce, adjusting relations with the airport’s partners, and development of real estate business on the territories adjacent to the airport.
The strategic goal of Vladivostok International Airport is to become a major transport point on the road to Southeast Asia for Russian passengers, and an airport hub for flights between Northeast Asia and North America.
The development of Vladivostok Airport will have substantial social and economic benefits, which will result in increased viability on the international air traffic market, and reduce tariffs on international flights from Vladivostok. This will positively impact the accessibility of air transport services, the mobility of the region’s population, infrastructural development, creation of new jobs, and the improvement of the overall quality of life.
What potential challenges lie ahead?
The main challenge we’re facing now is the rapid development of the Asia-Pacific region which is causing fierce competition among the airports. Asian-Pacific countries are among the world’s most densely populated with over 400 million people living within a two-hour flight from Vladivostok. It’s an attractive market which should not be ignored.
Since the airport cannot exist in isolation from the region itself, our biggest challenge may be related to the overall image of the [Russian] Far East as a backward territory with no famous points of attraction. It’s the risk that we’ve taken following Basel Aero’s successful experience of running Sochi International Airport. Sochi used to be a Soviet-style resort with a dilapidated infrastructure and low-quality service. It is now one of the most attractive resort cities in Russia following the major facelift it underwent before the Winter Olympics in 2014. As a result, Sochi International Airport has seen growth, both in passenger numbers and in non-aviation commerce.
April 30, 2015
Interview by Daniel Symonds