Tuesday, 20 August

Armavia: Armenia’s Faded Colors

Part Six

The start of 2012 wasn’t promising for Armavia, even though the company had hopes to the contrary. The press had been writing up staff cuts in the company. Norayr Belluyan, the company’s newly appointed president, declared that it didn’t make sense to keep 1,000 employed on the payroll during the crisis if the same work could be done by 500. He added that the staff had been cut by 20%.

As of January 2012, Armavia had a staff of 380. Belluyan also refuted reports about the sale of Armavia. Belluyan had served as the chief executive of the company since 2005, after leaving Russian shareholder Siberia. In December 2011, he became the president, a position that had been filled by owner Mikhail Baghdasarov. Belluyan was replaced by Armen Aznavouryan.

“I can’t do all the work by myself. I’m not made of iron. This is why it was decided to share the responsibilities. Now, as president, I am mostly dealing with external matters. This was done solely to raise the effectiveness of the company,” Belluyan said.

According to the president, Armavia transported 700,000 passengers in 2011, the same number as in 2009. In 2008, that number was 800,000. Belluyan expressed the hope that 8-9% growth would be registered in 2012. As regarding debts, Belluyan said debt was normal for an aviation company. “All aviation companies in the world fly with debt. Those debts are paid off later on,” he said. But Armavia’s debts immediately impacted passengers since flights were being delayed.

Armavia – Armenia: Deepening Confrontation

On March 6, Russia Aviation declared that air navigation services were being halted to Armavia flights in Russia, given that Armavia had racked up US$178,000 in debt since December 2011. Armavia said nothing on the matter. Instead, it stated that it was launching an open ended work stoppage due to the high prices being charged by Zvartnots Airport and demanding that airport rates be reviewed. Armenia International Airports CJSC, the airport’s concession manager, declared such a move baseless and a false gambit, noting that it had applied discounted rates to Armavia. Flights recommenced only when the company Russia Aviation guaranteed debt repayment as of March 20.

Armavia’s position was known since the spring of 2011 when owner Mikhail Baghdasarov complained about Zvartnots policy. He noted that the airport charged the same rates to those only flying four flights per month and that Armavia was flying 950 per month.  “Parking our planes in overseas airports is cheaper than in Zvartnots. We are forced to receive numerous services abroad, particularly purchasing fuel.”  Baghdasarov claimed that he was paying Zvartnots $4-8 million monthly for services. In response, Armenia International Airports (AIA) said the rates had been set in 2005 and hadn’t changed since. On the other hand, according to AIA, the airport obtained aviation fuel from Mika Limited (a company belonging to Armavia’s owner), and that the sale price was set in accordance to a formula devised by Armenia’s State Commission for Economic Protection. (Mika Corporation CJSC deals with the import/export of fuel in Armenia) AIA claimed it paid for fuel on the same day when delivered.

A Hetq source, who used to work for Armavia, said that Baghdasarov wound up paying $200 more for every ton of fuel that he imported to Armenia and then purchased from Zvartnots. The market price for a ton of fuel went up and down based on world prices, flying season, and specific airport. The source said that if, for example, a ton of fuel cost between $1,300 and 1,600 last year, the average price in the first six months of this year was $400 - $500 but $1,050 - $1,200 at Zvartnots. Thus, airlines arriving in Yerevan didn’t fill their planes that often. If a middle haul flight needs 7-8 tons of fuel, companies only filled up at Zvartnots to the tune of 10-20 tons. Companies preferred to fill up at cheaper airports. Hetq’s source added that if the accepted international standard is the fuel accounts for 30% of an airplane ticket, it was 30-40% for Armavia given that the company was forced to fill up more frequently at Zvartnots – its home base of operations – or, rather than importing cargo, it transported aviation fuel to use. On the other hand, according to the same source, each take off/landing at Zvartnots costs 700 Euros and Armavia used this airport the most.

In 2011, while talking about a negotiated resolution of these issues, Baghdasarov said that he had been negotiating with Zvartnots management for the past four years unsuccessfully. “Airport management feels itself strong enough to pressure us,” he said.

Nevertheless, Armavia and AIA started negotiations on March 12, 2012. Government reps also participated. Armavia was demanding a 25 year discount on all service rates. Prior to this, Baghdasarov had said that if their demands weren’t met the company would declare bankruptcy. He also noted that due to Armavia’s situation he wouldn’t be able to finically support any candidate in the upcoming National; Assembly election and that his support would merely be moral. This seemed like blackmail on the part of Baghdasarov, given his close ties to the ruling Republican Party.

Negotiations lasted until Match 15. On the same day AIA General Manager Marcello Vende announced that they had accepted Armavia’s suggestions and signed an agreement obligating them to stick to a timetable to resolve the problem. Accordingly, they were to employ the rates demanded by Armavia. (Baghdasarov claimed not for all services) AIA Deputy Director Andranik Shkhyan noted was six months in arrears totaling $5.3 million. He said that a timetable specifying September as the deadline for payment had been devised. In case the timetable was violated, the new agreement wouldn’t operate. Armavia also promised to present a new business strategy to the airport.  

Bulletin: On the basis of the December 17, 2001 contract between Argentine-Armenian businessman Eduardo Eurnekian’s Corporacion America company and the government of Armenia, Armenia International Airports CJSC has assumed management of Zvartnots Airport for thirty years as of June 2002. Management of Gyumri’s Shirak Airport was added to the contract in 2007.A new passenger complex was launched at Zvartnots in the fall of 2011.

Disagreements between the airline and airport continued in the fall. Zvartnots, claiming that Armavia had violated the payment timetable, periodically stopped servicing the Armenian carrier. Armavia noted that payment was made and it wasn’t at fault. Today, Zvartnots is the largest creditor of Armavia – AIA ranks 125th on the list of the companies 172 creditors. The debt owed amounts to 10.6 million AMD, more than $40,000, and about 3.6 million Euros. 

Armavia also racked up debt to the Zvartnots weather station. Armavia’s debt to this state agency amounted to 48 million AMD in 2011 and 93 million in 2012. Each weather report costs airlines 33,000 AMD per flight and Armavia was charged 25,000. But Armavia wanted to be charged that amount for the day. The problem was that Armavia could get the station’s weather details on an open system that all airlines use. The weather station, according to employees, owed 17 million AMD to the airport in 2012.

Reorganization and Possible Sale

In June 2012 Mika Corporation CJSC was removed from the list of Armavia shareholders. Two owners remained – Aviafin Ltd. registered in Yerevan (65%) and Mika Ltd, registered in the Jersey Islands (35%). Aviafin was wholly owned by Mika Ltd.

In the summer, the local and Russian media wrote that businessman Haroutyun Pamboukyan wanted to purchase Armavia for $55 million with his Moscow partners. This news spread quickly but Pamboukyan’s partner Khachik Manoukyan (Maks Concern) immediately refuted the news. The next report about a sale came in the fall and Baghdasarov confirmed it. A list of possible buyers included Mikayel Minasyan (Armenian president’s son-in-law), airport manager Eduardo Eurnekian, and businessman Gagik Tsaroukyan. Armavia’s owner announced that no Russian investors were in the list of candidates. Armavia spokesperson said that the company was partially being sold. While Baghdasarov wanted to wrap up the transaction in 2-3 weeks, no one was found to share the heavy debt burden of the company.

The End Finally Comes

On March 29, 2013, Armavia issued a statement that it would be halting all flights as of April 1, given that continuing to operate was impossible. “In the present situation it is impossible to operate further. Thus, we have decided to halt flights and begin the bankruptcy process. We thank all our passengers over the past twelve years and wish them success,” read the statement.

As of April 1, Armavia owed its employees, the Armenian government (some 7 billion AMD according to the company, of which 5.4 million was air tax, for a total of 17.3 billion AMD, including penalties), creditors and service providers huge amounts of debt. At the end of April, Armavia had 40 pilots, 50 on board staff, 70 technicians, 98 other specialists, and some 400 in financial and management sectors.

Armavia’s fleet as of April 1, 2013 consisted of 3 Boeing 737-500’s (EK-73771, EK-73772, EK-73775), 3 Canadair CRJ 200LR’s (EK-20014, EK-20017, EK-20018), 1 Airbus A320-211 (EK-32008), 1 YAK-42D (EK-42470), 1 Tu-134Ա-3 (former presidential plane, EK-65072).

Foreign carriers quickly rushed in to fill the void led by Armavia. Some carriers raised their ticket prices; especially Aeroflot. State Commission for Economic Protection Chairman Artak Shaboyan announced that companies raising prices for no good reason would be punished. The fall of the Armenian carrier gave rise to various speculations in the press. One rumor was that Baghdasarov was pulling out of doing business in Armenia.

Oil Assets are Sold; Cement Factory Also on Verge of Bankruptcy

That rumor later was proven correct. Mika Corporation, according to the press, sold its oil assets (gas stations and offices) to Rosneft.

For a long time the press had also focused on the possible sale of Mika Cement in Hrazdan owned by Baghdasarov. The once great cement plant had racked up large debt and wasn’t able to be sold. The press wrote that the plant was placed as collateral at VTB Bank for a $20milion loan and that the bank was paying employee wages. Later the press wrote that the plant would be purchased by Moscow-based friends of former Deputy Defense Minister Gagik Melkonyan. The sale never went through. Recently, on August 28 of this year, the Kotayk Administrative Court accepted a suit filed by PPF banka to declare Hrazdan-Cement Ltd. bankrupt.

Armavia’s 'Return to Solvency' Plan

On April 25, not long after the March 29 announcement regarding the bankruptcy process, Armavia presented a document (Minimum Primary Conditions to Restore Functioning to Armavia) to the Public Council. The press was quick to call this the recovery to health plan, despite the fact that in the case of a bankrupt company the recovery to health plan is something else as per the law.

Armavia commercial director Levon Karamyan said that the Public Council had requested a document from him listing the conditions under which the company could restore functionality and that it had done so. In other words, this was a document suggesting various steps that the government could take to prevent the case ending up in bankruptcy court.

Thus, Armavia proposed that the pre-2009 parity be restored whereby Armavia and foreign carriers had the right to fly equal numbers of seats, which was later changed from the number of seats to flights. This went against the interest of Armavia given the larger planes of the foreign carriers. It was proposed that the state tax of 10,000 AMD be removed from the price of tickets; that weather station data not be regarded as a separate service but be included in the air navigation service price; to apply a 30% discount in the airport, contrary to foreign carriers; to permit Armavia to obtain its own fuel and to pay Zvartnots only for storing and filling it. Armavia was ready to sell off 74% of outstanding shares. 24.1% was to go to paying off government debt and 49.95 to investors. The rest of the sales income would pay of other debt. 

The Public Council proposed to the government to draft corresponding steps to have local carriers. The Council also emphasized the importance of creating equal competition conditions for local companies. On the other hand, the Council deemed the stage by stage liberalization of the sector option vital (American experts were already working on this strategy). The Council said that tendencies in international aviation made such a strategy all the more necessary.

Days before, on April 12, the deadline of the 2003 agreement between Armavia and the government had come due. According to that agreement, Baghdasarov’s company had paid $15 million to become the sector monopolist for ten years. In other words, either the agreement were to be renewed (highly unlikely given the created conditions), or the Armenian airspace was to be allocated to aviation companies fulfilling the demands of the legislation on the books.

Mikhail Baghdasarov gave an interesting interview at the end of May. “I do not believe that a national carrier is very necessary. All that is needed is a good carrier, national or otherwise. Aviation is needed for the security of the country, for the development of tourism and the economy. There must be rules for aviation that shouldn’t change. Those rules must be acceptable for all. Here, those rules change constantly. We are against monopolies. We do not need it. We have spoken about this often but to no avail and losses have been great. One must pay millions of dollars for that monopoly, but no one can say what that monopoly is. A monopoly is when all are prevented from operating flights, but now, all are permitted to. No one needs such a monopoly. This is fiction,” stated Baghdasarov, who hadn’t voiced such a complaint in over ten years.

The government did not meet the demands of Armavia. By the spring of 2013 the government was already developing a new approach to Armenian aviation approved of at the highest levels. At the instruction of the president of the National Competitiveness Foundation, a contract was signed with the American company McKinsey. Their experts crafted a liberalization policy for Armenian air carriers that was approved by the government on June 6, 2013. On October 23 the government adopted the Open Skies program that was tasked with insuring the competitive and stable provision of air carrier services. Hetq has covered the difficulties in implementing such a policy, the concerns of experts and the overall situation.

Towards Bankruptcy

A former Armavia employee verified to us that the company’s financial situation was getting quite bad. The employee said that Baghdasarov really wanted to get out of the domestic aviation market and that this was the primary reason why the company ceased to operate. Also having not a small impact was the slapdash work ethic of lower management. The employee claimed that oftentimes planes flew with a more than normal payload, which was visible to experts following flights on a specially installed internet system. Allegedly, a part of the payloads was never registered on official documents. Our source said that the transport of such undisclosed loads made money for certain individuals. The Sukhoi Superjet 100 also resulted I huge losses to Armavia since, according to the expert, it flew one day and was parked several days later due to technical problems. Hetq has already written about the inconvenience of certain of the newly opened flights, in particular, to Tel Aviv, Zurich, Birmingham. Also, the company’s plan to enter the market of Slovakia crashed given that the details hadn’t been worked out.

Due to the debts owed by Mika Corporation CJSC (owned by Armavia and Baghdasarov) to the Armenian government, the Mika Stadium reverted to the state in September 2014. The stadium was listed at 9 billion AMD at auction but there were no takers. As we have written, the state takeover of the stadium was fraught with violations. Armavia’s state debt, however, never decreased by this amount.

On October 6, 2014, Armavia was declared bankrupt by the Malatia-Sebastia Administrative Court. The suit was filed by Mika Limited. Creditors of Armavia had previously been listed as 153 and now became 172. New creditors cropped up later. UniBank CJSC was the largest creditor at US$6.6 million, followed by Armenian Development Bank (680 million AMD), AmeriaBank $1.2 million) and Armenian Business Bank ($10.4 million and 17,835 Euros). (These amounts were insured). Other creditors included Kharabakh Telecom (1.6 million AMD), Electric Networks of Armenia (792,000 AMD), Ural Airlines (43,214 Euros), Aeroflot-Russian Airlines (740,000 AMD and $90,147) Mika Corporation (28 million AMD and $792,014) and Mika Limited ($38.378 million).  

In Lieu of an Ending

Starting it meteoric ascent in 2001, Armavia was able to capture the Armenian market in 2002 due to investments by the Russian Siberia company and by the agreement, one can say monopolistic, with the Armenian government. Despite certain negative measures, in two years the Russian investors seriously assisted the new airline and fostered the development –financially, technically and in terms of personnel – of Armenian passenger aviation. The ascent of Armavia started with its collaboration with Siberia and continued afterwards, even more so, since there was no alternate carrier post 2005. The Sochi air disaster was a great blow to the company both economically and in terms of personnel. However, Armavia was able to persevere and improve its numbers yearly. If, in 2003, the company transported some 250,000 passengers, that number grew to 800,000 by 2010. Even in the Siberia era, the new brand made Armavia known to the world.

The baseless cutting of flights, the use of airplanes problematic for specific flights and for our region, the failed policy, due to haphazard research, to capture new markets, the inattention of primary staff regarding decision making, and constant contradictions with domestic and external partners, general inadequate management, led not only to millions of dollars of debt assumed by Armavia but to Baghdasarov shutting down the company.

Armavia, regarded as Armenia’s flying colors, could have continue to operate. However artificial its dominancy over the ruins of Armenian Airlines may appear, the liberalization of the aviation sector – with all its negative consequences - was equally natural. In the history of Armenian aviation, the ten years between 2003 and 2013 will perhaps go down as the Armavia decade, rich with the extreme ups and downs particular to the aviation of independent Armenia.

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... read more on "Armavia: An Airline’s History"
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