Resources and Suppliers

Characteristics

Current situation

Future trend

What are the most important resource markets used by this industry?

The most important resource is fuel, because it plays the main role in the pricing of the ticket. then go the planes themselves, they present a resource of one-time capital-intensive investment, then go general necessities.

Nothing is supposed to change in the nearest future with resouces. However, there may be some changes with main suppliers. A lot depends on government policy, but in short-term period the situation probably will not change. In long term period fuelling stations may be transformed into another structure, because right now they are the remnants of Soviet Structure and not the best way to supply the fuel.

Are these markets concentrated? Who has more market power at these markets: buyers or sellers?

There are 3 segments of suppliers, the concentration is different. Plane producers are divided into foreign and Russian; however, even major Russian plane producers are too weak and exist only with the help of the government. Also some companies do not trust the quality of Russian new-built planes. So, in Russia most of new planes are foreign. The major companies-producers (Boeing, EADS, Bombardier, Embraer) are the main suppliers. This industry is very concentrated because it requires high level of capital investments. Concentration in the plane producing industry is higher than in airlines industry. This allows the plane producers to exert market power on the airlines, especially in the case of Russia where there are many not very big airline companies. As for fuel, the value chain consists of 4 elements: extracting companies, operators, fuelling stations inside the airports and airlines. We are going to consider only fuelling stations inside airports. They have a natural monopoly, which is a consequence of remnants of the Soviet Era. Thus, their concentration is also higher than that of airline companies and they are, thus, able to exert market power on the airlines. And as for general necessities, like food and similar – these suppliers are much less concentrated. Their concentration is smaller than the concentration of airlines and the airlines may try to exert market power on them. However, this opportunity is limited by the fact that the airlines are not the only potential client of these suppliers.

The trend is for further consolidation. If we talk about Russian airplane producers, all of the companies which had some survival chance already have been united into the UPC (United Plane-producing company), which still didn’t bring any positive results. As for consequences for airlines, it didn’t bring any positive results, Russian airlines prefer to procure from foreign producers.

Dofirmsintheindustrypurchaserelativelysmallvolumes relative to other customers of supplier? To sales of typical supplier?

If to talk about volumes, we need to mention that for Fuelling stations and plane producers airlines are the only buyers, which is the main factor. As for general necessities, such as food and drinks, here the situation is absolutely different, for example, for Wimm-Bill-Dann which works with Aeroflot, it is a small share of the operations.

We also need to mention airports, which are the important contractors for our industry. They allow airlines to operate and provide them with spots to place the planes, and also with some technical services.

There may be some changes in case new laws, which control the monopolies, will be approved. In this case Aeroflot will probably buy less.

Are there substitutes for these resources?

No direct substitutes for planes and fuel, general stuff – easily substituted.

No changes.

Credible threat of forward integration

No. The segments of the suppliers are too different, they have completely different business models. Airlines don’t have a chance to integrate into the structure which belongs to airport (fuelling stations) and integrating into

No changes.

Are suppliers able to price discriminate?

We think, that while selling planes or fuel and also general necessities no price discrimination occurs

Price discrimination is possible, if, for example, the situation with fuelling complexes will not change.