BAN's World GazetteerRussia
Moscow's decision to gradually ease customs duties on jets has received only a cautious welcome from business aircraft operators and private aviation analysts who have examined the small print in the planned legislation. Total taxes are estimated to add 40 per cent to the cost of the purchase of a jet inside Russia as compared to acquiring the same aircraft in locations in Europe.
Dmitry Yuriev of Jet Media told EBAN that initial "champagne celebrations" became muted after officials expanded on a briefing by Igor Konkov, adviser to the head of ministry of economic development and trade of the Russian Federation. Konkov said: "The reduction of customs duties for jets weighing less than 20 tonnes will allow business aviation operators to update their fleets. As for companies that used to register their 'planes in offshore centres, they will have an opportunity to legalise their aircraft in Russia. In mid-2008 the government plans to cancel all the import duties for all business jets weighing less than 20 tonnes."
He was referring to business enjoyed by a number of operators in Europe who manage aircraft purchased abroad by or on behalf of Russian owners.
Russian officials in early August announced the new approach to import duties on business jets manufactured abroad. Currently the duties scheduled to be abolished are estimated to comprise 10 per cent of a jet's cost. Mikhail Fradkov, Russian prime minister, signed a resolution to introduce amendments to the customs tariff.
"The Russian business media were quick to write on the matter, as clearly it is of interest to potential owners of business jets and business aviation operators," says Yuriev. "But the celebrations did not last long. We scrutinised the particular resolution No. 508 regarding amendments of the customs tariff to its addenda. What we discovered was that, while the minimal duties apply only to models weighing less than 20 tonnes, they have to weigh more than 15 tonnes for the reduction to apply.
"Officials, naturally, preferred not to talk about the second clause, but this detail is far more important for those who wish to buy a business jet. Only 20 models of business jets out of some 200 fall into the 15 to 20 tonne category."
Economic ministry and federal customs service officials were then pressed to confirm whether the exemptions were meant to be limited to this extent. Meanwhile Konkov pledged that two additional measures would be signed. The first would reduce duties on business jets weighing between two and 15 tonnes. The second resolution would exempt aircraft that weigh less than two tonnes from customs duties. Thus, in 2008, Konkov says, all business jets weighing less than 20 tonnes, with up to 19 passenger seats in the cabin, will receive some form of reduction in duties.
Sergey Filatov of Jet Transfer also points out that the initial exemption would represent only a "very small step for Russian business aviation development." He adds: "The announced reduction of import duty on business aircraft from 20 per cent to 10 per cent is applicable to
only aircraft with basic operating weight from 15,000 kg to 20,000 kg. In other words only a few business aircraft will be affected by this reduction including the G350 and the Challenger 850.
"We have been told that this situation will be corrected in a few months and import duty reduction will be extended to aircraft with lower basic operating weights (down to zero) and later import duty will be abolished. When it happens, we believe it will help to bring more business aircraft into Russia. Of course, it will take some time before aircraft owners realise the full benefits of registering aircraft in Russia, but it will happen eventually."
Helicopters miss out
But Filatov adds: "Our company is an independent sales representative of Bell Helicopter and Cessna propeller aircraft in the Russian Federation. Unfortunately, as far as we know, import duty reduction will not be applicable to helicopters. When reduction of import duty is extended to aircraft with BOW from zero, we hope to sell a lot of Cessna single engine aircraft and the Cessna Caravan in Russia. With the big distances that have to be covered in Russia and the relatively poor transport infrastructure, these aircraft have huge potential on the Russian aviation market."
Alexander Shubin of Beechcraft Hawker Russia believes the changes will help the private business aviation sector. "They will lead to more aircraft being based in Russia and help increase the prospects for our business," he told EBAN.
The initiative and its implications were a topic of discussion at Jet Expo 2007. "The market for business aircraft in Russia is sophisticated and dynamic and every development is of key interest," says Bob Horner, vp, international sales, Bombardier Business Aircraft.
Peter Hoegsberg, Air Alpha director Russia, says that one of its big clients, Dexter Air Taxis, is marketing services based on an imaginative comparison. "It is pointing out that its rates for aircraft like the PC-12 are the same as for Moscow's land taxis. It is a really clever sales message," says Hoegsberg.
Air Alpha has the dealerships for the Pilatus PC-12 in the Baltics and Russia and for Piper in Scandinavia, the Baltics and Russia. Air Alpha Aircraft Sales reports brisk sales to corporate owners since it gained certification in Russia for the PC-12 over a year ago. It is focusing on the demand for aircraft that are bought for more "local" journeys - the shorter haul sector which is becoming synonymous with smaller private aircraft designated as "air taxis."
"The PC-12 is attractive for journeys not only in Moscow but further out," says Hoegsberg. One private company has bought the
PC-12 so its executives and staff can travel efficiently to Moscow. "Some clients are choosing as a company to own their own aircraft and use it as an air taxi for its staff and management to carry out business. Other firms are setting up as air taxis to meet the needs of the same kind of clients but those who own or work for companies which do not own their own aircraft."
Hoegsberg says: "The easing of taxes will help our sales. One of the biggest problems in Russia is the financing of aircraft purchase. Clients tend to want to invest their available cash in their core business and they want to finance the purchase of the aircraft but the exercise is not as straightforward as it is in Europe."
Total taxes in Russia, he estimates, can add around 40 per cent to the cost of the aircraft. "Finance companies, including those who are traditionally happy to finance the purchase of the PC-12 in Europe, therefore have a problem because the taxes make for very much higher valuations inside Russia.
"But there are practical problems if smaller aircraft are registered outside Russia. They need to leave the country every two weeks and, as
they tend to be bought for use locally, this is a difficulty that militates against foreign registration. The longer range aircraft operated
by airlines or others for long haul charter go out of Russia all the time so it's not a problem."
Hoegsberg adds: "If the taxes are designed to help local industry they do not make any sense. There are no manufacturers of entry-level aircraft in Russia. It is just something that exists historically."
But Hoegsberg believes the massive demand for air taxis in will continue. The PC-12, he says, is sold out until 2010. And the Piper Jet is expected to help meet the pent up demand in Russia.
ExecuJet Europe md Peter Hartmann says there is an "explosion of charter demand out of Russia." The importance of the market was reflected by the fact that Hartmann was part of an eight-strong team at Jet Expo including Marcel Wepfer, director aircraft management and sales director Paul Schilling. "Business aviation in the region is growing each year by an average
30 per cent according to the
Russian Business Aviation Association, with an average of 70 private jets operating each day into Russia's airports," says Hartmann.
There is general agreement that the number of air taxi operations in Russia could take off if taxes are eased. Tom Perry, Cessna's regional sales manager covering Russia, says: "We have seen interest from Russian operators who might consider launching an air taxi service with
"However, the aircraft would first need Russian certification and this can be a lengthy process. Another important factor is whether we will see a reduction in Russian import duties on business aircraft.
"If this goes through soon, it should kick start a new wave of demand for all classes of business jet. Once aircraft can be placed more economically on the Russian register, the associated rights of cabotage should encourage many more air taxi operators to step forward."