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Rising fuel prices compound Russian airlines' pandemic woes

MOSCOW, March 23 (Reuters) - Demand for domestic air travel is rising in Russia but not nearly as strongly as fuel prices, squeezing airlines’ still-brittle finances, as competition between carriers helps to rein in fares.

Airport fuel prices have returned almost to pre-crisis levels after having fallen close to 2016 levels early last year as airlines grounded their fleets in April during Russia’s first and only lockdown, which ran until June.

Passenger flows have gradually recovered since autumn, primarily on domestic flights, though demand remains far from pre-crisis levels and ticket prices are unchanged because of competition between carriers and low customer spending power.

“The rise in prices for jet fuel is bad for airlines given the equal prices and reduced demand,” a spokesman for flagship state carrier Aeroflot told Reuters.

Aeroflot said fuel costs tripled from the second quarter to the fourth quarter to 15 billion roubles ($201 million). Prices have risen more than 40% since June, the spokesman said.

The average fuel price at Moscow airports is almost 70% higher than last May, not far from a peak in 2018-19, according to Refinitiv data.

At that high, fuel accounted for 26% to 31% of airline Red Wings’ total expenditure before falling to 19% in 2020, a company spokesman said. Now it is rising rapidly, he added.

“This will definitely worsen the financial condition of airlines, because it is impossible to transfer this increase onto the ticket price - competition is strong, but effective demand is low,” he said.

Airlines expect a further seasonal increase in May and June, said a spokeswoman for Ural Airlines.

“This will add to the losses of airlines that are already in a very difficult financial situation ... sooner or later it will lead to the need for state support for the whole industry,” said Mikhail Ganelin, a senior analyst at Aton, a brokerage.

The lockdown and shutdown of many international flight routes halved passenger flows last year.

The government provided airlines with support of almost 21 billion roubles and helped Aeroflot by buying shares in a new share offering.

Airline losses may have totalled 200 billion roubles last year, the Association of Air Transport Operators (AEVT) said.

AEVT, which groups most large airlines except Aeroflot, has made proposals to the government to help carriers with concessions such as subsidies and tax breaks, an industry source told Reuters. ($1=74.5700 roubles) (Reporting by Gleb Stolyarov; additional reporting by Natalya Chumakova and Elena Fabrichnaya; Editing by Tom Balmforth and Clarence Fernandez)

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