February 2, 2010 / 1:23 PM / 10 years ago

UPDATE 1-Russia creates giant airline under Aeroflot wings

* RosAvia to transfer all assets to Aeroflot

* Aeroflot local passenger number share to jump to 35 pct

* Co expected to pay with own stock bought from Lebedev

(Adds government comments, detail)

By Darya Korsunskaya and Gleb Stolyarov

MOSCOW, Feb 2 (Reuters) - Russia has scrapped plans to set up a second big state airline and will merge fragmented aviation assets into its flagship carrier Aeroflot (AFLT.MM), moving a step closer to reviving the powers of the Soviet-era monopoly.

On Tuesday the government said six airlines which were to be run by the state under RosAvia will be privatised this year in order to then merge with Aeroflot.

The semi-privatised Aeroflot, which was set up in 1923 as the Soviet national airline, inherited some fleet after the collapse of the Soviet Union in 1991 but had to compete with hundreds of rivals, set up on a regional basis to fly over Russia, the world’s largest country.

Some of those assets remained under state control while others were privatised, but many have since gone bust amid the worst aviation sector downturn in history.

The Kremlin had wanted to combine bankrupt state aviation assets under the umbrella of state corporation Russian Technologies and set up a subsidiary RosAvia to merge six firms — Rossia, KavMinVody, Vladivostokavia, Orenburg, Saratov and Sakhalin Airlines.

But as Russian Technologies struggled with hundreds of loss making assets, including Russia’s largest car maker AvtoVAZ AVAZ.MM, the plan to fully wrap all aviation assets within RosAvia to compete with Aeroflot has been repeatedly delayed.

“I’M READY”

On Tuesday, the government quoted on its website Transport Minister Igor Levitin as telling Prime Minister Vladimir Putin, that all six companies will be privatised and merged with Aeroflot.

“I’m ready to agree that (transaction) but would like to ask you one question. Won’t the decision contradict our anti-monopoly legislation?” Putin asked Levitin.

Levitin said the deal would boost Aeroflot’s domestic passenger number share to 30-35 percent from the current 15 percent, saying it would be in line with the legislation.

“Good. The decision is taken. I agree with your proposal. You can start working,” said Putin, Russia’s most powerful politician and the ultimate decision maker.

The move marks another blow to the handful of Russian state corporations, such as Russian Technologies, set up by Putin a few years ago during his presidency to manage fragmented state assets.

Putin’s successor as president, Dmitry Medvedev, said last year the corporations were inefficient and must disband, a move that analysts said must have been agreed with Putin [ID:nLC503874]

The shares of Aeroflot edged up on the news but later pared gains to trade 0.12 percent up at 1302 GMT, underperforming the broader market .MCX.

The news was largely anticipated after tycoon Alexander Lebedev said Aeroflot would buy back his 25.8 percent stake in the carrier for around $400 million. [ID:nLDE60Q162]

Industry sources have said the stake would be used to pay the government for new aviation assets to be merged with Aeroflot. The move would increase government ownership of Aeroflot to around 75 percent from 51 percent now. (Writing by Dmitry Zhdannikov, Editing by John Bowker and Sharon Lindores)

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