Friday, 13 December

Armavia: Beginning of the End for Armenia’s National Carrier

Part Five

2011 was a year full of developments for Armavia, Armenia’s national carrier. In January, the first flight to Slovakia’s capital Bratislava occurred. During the year, flights were added to Amritsar (India), Munich, Venice, Lyon and Madrid.

The Odyssey of Sukhoi Superjet 100 in Armenia

The Sukhoi Superjet 100 finally arrived in Armenia on April 19, after a long wait. Armavia and the Russian company Sukhoi Civil Airlines (SCA) had reached a deal on September 14, 2007 for obtaining such airplanes. It was planned to receive the first airplane in Nov-Dec 2008 and a second in the next six months. Armavia also had the right to obtain two more such planes until 2012. Production and tests of the Sukhoi Superjet 100 dragged out, but Armavia finally received the plane, becoming the first in the world to fly it. The first flight, with 90 passengers, left from Yerevan’s Zvartnots Airport headed to Moscow’s Sheremetevo Airport.

Traditional entourage welcomes the new plane at Zvartnots Airport (April 19, 2011)

Armavia’s new SSJ 100-95B was finished on November 4, 2010.  It was designed to carry 98 persons and travel a maximum distance of 3,048 kilometers. (The SSJ 100 class of aircraft currently has two types of planes – the SSJ 100-95B and the SSJ 100-95LR) With it, Armavia started to fly to Russia, Ukraine, Eastern and Western Europe and the Middle East. The airplane was registered as EK-95015 (MSN 95007) in Armenia and was christened the Yuri Gagarin, in honor of the first man to travel to space On April 12, 1961.

Yuri Gagarin successfully completed the first passenger flight of the SSJ 100 (Moscow, April 21, 2011)

Jumping ahead a bit, let’s see what happened to the plane later on. Disagreements broke out between Armavia and SCA Ltd. in 23012. Let’s point out that the EK-95015 flew more than 760 flights (1,870 hours in the air) between April 21, 2011 and April 20, 2012. All told, the plane transported more than 48,000 passengers more than 1.4 million kilometers.  According to flight service crew chief Sergei Kharatyan, “The plane justified our expectations. It is liked by passengers. Our pilots, boarding crews and engineers had no trouble in operating it. We believe that the SSJ 100 has a great future.”

Days later, on May 9, during an exhibition flight in Indonesia, SCA’s SSJ 100-95B (the same plane as Armavia’s) collided into a mountain, resulting in 45 fatalities. There were no survivors. Months later, an investigation concluded that the accident was the result of crew mistakes. This tragedy and reports of minor disorders in domestic Russian flights negatively impacted the reputation of the SSJ 100 in Russia and elsewhere.

On June 4, the EK-95015 was sent back to Russia to be warehoused at an airport right outside Moscow. Armavia was inclined to refuse the airplane and stated so in August. Prior to this, it became known that Armavia had rejected the purchase of a second SSJ 100.

The second SSJ 100 (EK-95016) named after the actor Frunzik (Mher) Mkrtchyan had already been painted with Armavia’s colors. It was never delivered. (Novosibirsk, July 21, 2012)

Mikhail Baghdasarov noted that the refusal reason wasn’t Russian debts, as was talked about, but the fact that the airplane didn’t meet stated standards. “Armavia has no desire to take that airplane back [EK-95015-VS] because it’s not financially profitable. Accepted practice throughout the world is that the first airplane is worked on. In this case, the airplane is just built and needs more serious work. Armavia, as a small private company, cannot assume such improvement expenses,” stated Armavia’s PR department. SCA, in turn, said that Armavia still owed it US$4 million for the first plane but that it couldn’t get it back because it had been placed as collateral with an Armenian bank.

As we have written, to buy Russian manufactured planes Armavia had entered into a loan agreement with VTB Bank. Press reports stated that VTB had lent Armavia $50-60 million to buy the two planes.

In response to the Russians, Baghdasarov noted that he owed nothing. “The plane was worth $20 million. We immediately paid $16 million. That left $4 million but we returned the plane later. Thus we owe nothing for the refurbishing. They believe we should pay another $1 million to get the plane out of collateral.” SCA stressed that if Armavia rejects the plane and wants to return it, then it must remove it from collateral at the bank which would cost $1 million. The Armenian monopolist stressed that if SCA had a buyer it would have long ago removed it from collateral. Contrary to the prior glowing statements of Armavia and SCA, the businessman complained about the frequent breakdowns of EK-95015 and claimed financial losses as a result.

In June, after the EK-95015 had been sent to Russia and after several months of long-range arguments, the sides finally reached an agreement. Armavia would lease the plane for six months. It entered into service in Oct. 2012. But the Armenian side was again dissatisfied with its technical state and two weeks later, on Oct 15, the plane was sent back to Moscow; this time for good.

Yuri Gagarin parked at Moscow’s Zhukovsky Airport (February 18, 2013)

In May 2013, the Yuri Gagarin was painted with the colors of the Russian Moskovya airlines, but it was never put into operation. It remained parked at Zhukovsky. On the other hand, in that same month the Frunzik Mkrtchyan was renamed in honor of Soviet cosmonaut   Yuri Sheffer (RA-89021) and started to fly for Moskovya (now Red Wings).

VTB’s legal suits against Armavia rejected

In July 2010, VTB-Armenia lent Armavia $1.8 million at 9.71%. The company was to pay off the loan by July 2012. In 2011, the bank gave up its creditor rights to its Russian parent Bank VTB. In October 2010, VTB-Armenia allocated an $8 million loan, in portions, to Armavia at 9.75%. In both loans, Mikhail Baghdasarov and Mika Corporation stood as guarantors. According to the Russian newspaper Izvestia, Armavia took out a loan with VTB in order to refinance a loan it had taken at Ardshininvestbank to buy airplanes. Armavia had also taken a loan from Russian Vnesheconombank. That’s to say, Armavia obtained the “SSJ 100” through loans from these three banks.

Of interest is that in October 2010, Baghdasarov’s offshore Mika Limited took at $2 million loan at 9.75% from VTB-Armenia whose guarantor was Armavia. The loan was to be paid off by April 2012. However, Izvestia wrote that the loan was for $8 million. A Russian attorney told the newspaper that VTB had a good chance of winning against Armavia in court but that the same couldn’t be said in the case of the offshore Mika Ltd. since it would be very costly to send its representatives to court in the Jersey Islands and that the process could be delayed due to the absence of the defendant.

In February 2013, when the loan payment deadlines had arrived, Bank VTB and VTB-Armenia filed three legal suits against Armavia with the courts in Armenia. Two dealt with loans received by Armavia and the third dealt with Mika Ltd. While the suits were being reviewed in court, in July 2013 an agreement was signed between Armavia/Baghdasarov/Mika Corporation and Mika Ltd., on the one hand, and VTB-Armenia, on the other, regarding the sale-purchase of shares. Accordingly, Baghdarsarov’s team sold (allocated) shares to the bank in lieu of Armavia’s and Mika Limited’s obligations. Taking this into account, the three suits were rejected in 2014.

Unprecedented updating of fleet

In 2011, Armavia added six planes to its fleet all at once. This was unprecedented for the airline. We have already covered the addition of the SSJ 100 in April.

On May 6, the airlines obtained its second Canadair CRJ 200LR type plane that had been operated by Lufthansa CityLine. This new 50-seater was registered in Armenia as EK-20017 and was christened the Martiros Saryan. The plan was to use the plane for flights to CIS countries and Europe. In Dec.2013, after Armavia quit the airlines market, the plane was sold and is still operated by Afghan Jet International Airlines.

(In September 2009, the Armenian carrier had obtained another CRJ 200LR that was named the Sergey Mergelyan (EK-20014). Mergelyan was famous Soviet-Armenian scientist.)

Martiros Saryan in Munich (May 21, 2011)

In July, Mikhail Baghdasarov stated that it was more conducive to purchase planes through loans rather than leasing. He said that the demand for flights in the world had decreased and thus there were more planes than needed to transport passengers. As a result, the purchase price for planes had dropped but leasing costs had remained the same. The businessman argued that the company’s increasing loan portfolio wouldn’t have a negative impact; just the opposite. “We believe that it’s better to pay off loans than leasing planes because you don’t get the plane back after paying for the leasing it.” This was the logic behind the purchase of the CRJ’s and the Boeing’s in 2011. When asked about the possibility of bankruptcy, Baghdasarov replied that no such risk existed but that the press was out to malign the company by circulating such rumors. One year later, Baghdasarov would state that he was certain that the demand that Zvartnots implement a 25% discount to Armavia wasn’t enough and that he would declare the company bankrupt and would sell it. Below, we will see that making such contradictory statements was commonplace for Armavia.

The second CRJ 200LR arrived in Armenia on August 1. This plane too had the same operators as the previous one – German, Armenian and Afghani. It was given the name Arno Babajanyan (famous composer) in Armenia and registered as EK-20018. In Dec.2013, like the Martiros Saryan, it too was given to Afghan Jet International Airlines. Other than these two former Armavia planes, Afghan Airlines has no other craft.

Arno Babajanyan lands in Milan (May 3, 2012)

At the end of 2011, three Boeing 737-500 were added to the Armavia fleet.

In September, Armavia obtained the first that had been operated by Czech Airlines. It was registered EK-73771. (From 2007-2009, the only plane operated by the Armenia carrier had been a leased Boeing 737-300. It remained registered with the Georgian 4L-TGL and was later returned to Georgian Airways.)

But very quickly, on Sept. 20, the EK-73771 was leased to Slovakian Airlines. The lease wasn’t accidental. Baghdasarov was the co-founder of the new company. His partner was the local businessman Arnold Medzihradsky. Of note is that in January 2011, the first Armavia Yerevan-Bratislava flight took off. It can be said that Baghdasarov planned to link Europe and Armenia via Slovakia. Before arriving in Bratislava, the plane’s Czech Airlines colors were changed to that of Slovakian Airlines in the English town of Norwich. This was the company’s only plane that had to wait for permission to fly regular flights. But the Armenian-Slovakian cooperation failed and the plane never took off. Later, Baghdasarov stated that, “It failed because it demanded huge investments that are currently not possible.” It’s interesting as to what the two sides were thinking before starting the initiative.

In December, the plane was returned to Armavia but was never painted with the colors of the Armenian company, The Slovakian Airlines mark was merely covered with white paint. The paint faded in time and the original lettering reappeared in ugly fashion. The plane was taken out of service and has been parked ever since Armavia went out of business.

EK-73771 permanently parked at the Polish Katowice Airport (July 7, 2014)

The second Boeing 737-500 arrived in Yerevan from Prague in Nov. 2011. Like the previous one, this had only flown under the colors of Czech Airlines. In Armenia, it was registered as EK-73775 and was christened the Hovhannes Ayvazovsky by Armavia.

EK-73775 in Barcelona (August 26, 2012)

Armavia operated the plane until the spring of 2013 when the company stopped doing business. The plane was later picked up by Taron-Avia, a company which Hetq has written about. And, despite the fact that according to that this company is the owner of the plane currently, Taron-Avia chief Garnik Papikyan told Hetq that the company owns no planes. It cannot be ruled out the owner is Papikyan’s Ala International; a company registered in Sharjah engaged in organizing plane leasing and charter flights.

In Dec. 2011, Armavia obtained its last Boeing and its last airplane. The third Boeing 737-500 from Czech Airlines was given the registration EK-73772. Like the EK-73371, it was never painted with Armavia’s colors. Later, along with EK-73775, it too passed to Taron-Avia. It now sits in Amman’s airport. Garnik Papikyan, Taron-Avia’s founder, told Hetq that the two noted planes and a Boeing EK-73797 once operated by Air Armenia, have been painted with the company’s colors and that they will only be brought to Armenia if he receives operating permission.

EK-73772 over the skies of Venice (June 23, 2012)

The fact that the two Boeing’s that arrived in Armenia in December were never given the Armavia colors seems to imply that there were problems. Given that such work isn’t done in Armenia, the planes had to be taken overseas. (200 liters of paint are needed for one “Boeing 737”). Armavia never shelled out the money or time to paint the planes. After the fall of Armavia, Baghdasarov stated that 2007-2010 were years of growth and that the downward slide began in 2011 and ended in 2013. It’s interesting to note that regarding 2010 Baghdasarov said that, “This was a hard year for Armavia or put another way, it wasn’t the best.”

Of note are the periodic contradictory statements of Baghdasarov and Armavia. Above, we noted the praise, and later complaints, heaped on the Sukhoi Superjet 100, and statements regarding the on and off bankruptcy of the company. Regarding 2010, Baghdasarov also said that while the company carried 700,000 passengers in 2009, instead of the expected number of 900,000, the company would only carry 730,000-740,000 passengers. Later, however, Armavia declared that it had transported more than 800,000 passengers in 2010.

Financial problems, debt, delayed flights

Nevertheless, if we are to believe the company’s data, 2011 wasn’t a good year for the company; at least financially. While Armavia was listed as the 174th largest taxpayer in Armenia (376.156 million AMD) in 2009, it rose to 87th place in 2010 (840 million AMD). In 2011, Armavia dropped to 514th place (148.546 million AMD).

In 2011, Armavia owed the Armenian government $1 million. According to the March 14, 2003 agreement (between Siberia, Armavia and the RA government), Armenia received the flight rights to several routes and thus became Armenia’s national carrier. This agreement sounded the death knoll for Armenian Airlines.  For such special rights, Armavia was obligated to pay $5 million in 2003 and $1 million annually for the next ten years – for a grand total of $15 million. Armavia also had to grant discounts or free service to those with disabilities and vets of the Great Patriotic War and relatives, for which the government would pay. More correctly, these amounts would be deducted from the company’s profit tax. However during the financial crisis years of 2008-2009, Armavia was freed from paying profit tax and had no profit in 2010 and 2011. This is official information that was used as a basis for the government’s Oct. 4, 2012 decision. We should note that according to Armenia’s State Revenue Commission, Armavia paid 803 million AMD in direct taxes (profit, income) in 2010 and 125 million in 2011.

From 2006-2011 Armavia provided 355.6 million AMD in services to the disabled and war vets. Given that the company was obligated to pay the government $1 million annually (equal to 385.7 million AMD at the time), in the fall of 2012 the government decided to compensate the company only 30 million and offset the rest.

Armavia started having problems with Zvartnots Airport, its main terminal, as early as 2010.

On Sept. 16, 2010, Zvartnots stopped servicing the company’s flights due to the debt it owed. Soon afterwards, the airport’s PR division stated that “in the interest of passengers” those services would be reinstated but could be stopped again given the debt issue hadn’t been resolved.

In response, Armavia delayed its flights for one hour, declaring that Zvartnots charges three times more for its services than any Moscow airport and twice as much as European ones. Armenia International Airlines Ltd. the concession manager at Zvartnots, replied that it was servicing Armavia at a discount.

As of March 2011, Armavia owed Moscow’s Vnukovo Airport 70 million rubles.

Later we will see that Armenian and Russian aviation companies, and others, servicing Armavia had constant problems with Armavia.

To be continued

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