Graham Stack in Berlin -

With an increasing number of Russians splashing out on foreign vacations, the leading homegrown operators are moving to acquire their own charter airlines, while oligarchs are buying into Europe's largest operators.

Russians are increasingly popping up in places the West does not expect to see them: on the seabed of the North Pole, in the semifinals of Euro 2008, and on sundrenched beaches from Turkey to Thailand. Russia is now the world's fastest growing outbound tourist market. In the first quarter of 2008, the number of outbound tourists reached a staggering 1,869,511, up 29% year on year from 2007, according to Federal Tourist Agency figures. According to the Russian Tourist Industry Association, 9.36m Russians went on holiday abroad in 2007, 20.8% more than in 2006, with 1.9m going to Turkey, and 1.2m to Egypt.

The Russian market remains largely under-consolidated, with surveys showing that Russians rarely use the same operator twice. However, the largest operators are reaching a size when they are starting not just to charter flights and book hotels in Egypt and Spain, but to own, run or build hotels in destination countries. The biggest step is to acquire their own air carrier companies to reduce dependency on third party suppliers during peak holiday seasons.

Three of the largest operators - VAO Inturist, successor of the Soviet tourism monopoly, Pegas Turistik and Tez Tours have declared their intention to acquire their own carriers.

But to date, only Pegas Turistik, which handled just over 50,000 guests in 2007 according to media reports, has taken the plunge. The company acquired Nordwind Airlines earlier this year. Nordwind will start flying for Pegas in September with leased Boeing 757s, according to director of marketing Ali Dirik.

But it is not all sunshine for tour operators. Along with the global aviation sector, Russian carriers are sweating due to soaring fuel prices. The issue has even gone to government level, with Prime Minister Vladimir Putin urging in July that the Federal Anti-Monopoly Service get involved.

"We are not worried about the fuel price in the medium term, since we are certain it will fall. And without our own charter division we would be even more exposed to it," Pegas marketing director Dirik told bne.

But the soaring fuel prices mean that Pegas' competitors are getting cold feet on their airline projects. Tez Tours director of marketing Roman Rybakov says that Tez Tour plans have been shelved. "With the current price of fuel, there's no way we're going to take in the risk of running a charter line," he said.

Oligarchs to increase competition

The surge in fuel price is also putting pressure on European operators, just as global financial turmoil has depressed valuations. This is opening doors for Russian oligarchs to buy into West European tour operators and airlines, targeting synergies with the booming Russian tourist market.

First to do so was steel baron Alexei Mordashov, who 2007-2008 accumulated 15% in Germany's TUI to become the largest shareholder in Europe's largest tour operator.

Then in April 2008, Len Blavatnik, one of the TNK-BP shareholders in dispute with BP, snapped up a 19% stake in Air Berlin, Europe's third largest budget airline, and the only one flying to Russia.

Now in July 2008, oligarch Aleksandr Lebedev of National Reserve Bank, owner of a slew of airline assets, announced the purchase of a controlling stake in Oger Reisen, Germany's sixth largest tour operator for an estimated $125m.

"We want to be one of the major players on the Russian outbound tourism market," Lebedev told Germany's Der Spiegel in July. According to Lebedev, Oger can book a huge number of hotel rooms in Turkey and Egypt, while Lebedev's airlines will fly Russian customers to their destinations. "We won't even need to buy a tour operator in Russia," he argued, "instead we can offer customers prices 20% or 30% lower."

Lebedev's German-based Blue Wings airline currently has only ten planes, but 20 Airbuses have been ordered from EADS for delivery 2009-2011. Lebedev plans to launch a new brand on the Russian market - Oger-NRK - and to start flying Russians and Ukrainians to Turkey and Egypt starting next year, and earn €100m in turnover, the first year's target.

Pegas Turistik and Tez Tours both claim they are not afraid of the competition from oligarchs in conjunction with large European businesses due to the specifics of the Russian tourism business: they argue that Russians behave very differently from Europeans, frequently booking only days ahead of their departure date. A further difference is the structure of the holiday season. Russians enjoy two weeks of national holidays straight after New Year. When the rest of the world is back at work, Russians in their masses escape the winter for warmer climes.

But since outbound tourism is by definition an international business, with flights and hotel rooms the key factors, international set-ups like Oger and TUI in conjunction with local oligarchs could be a hard team to beat. Of the Russian market leaders, only Inturist VAO, successor to the Soviet tourism monopoly, now owned by oligarch Vladimir Yevtushenkov, has both the brand and the financial clout to compete on similar terms.

However, the Inturist PR team were unavailable for comment to bne, since they are all abroad on vacation.

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