Aeroflot Group increases revenue, market share

Photo by Leonid Faerberg / Transport-Photo.com

Aeroflot Group’s revenue amounted to 309,510 mln rubles (about $4,500 million at the current exchange rate) in the first nine months of 2015, up 30.8% year-on-year, according to the company’s financial report under the International Financial Reporting Standards.

Against the backdrop of a general decline in passenger traffic in Russia, Aeroflot Group carried 13.3% more passengers year-on-year in January-September 2015, allowing it to increase its share on the Russian air transport market by 5.0 percentage points (p.p.) year-on-year, to 35.2%.

Besides the parent airline Aeroflot, which is Russia’s largest air carrier, \the group of companies includes Russia’s only low-fares carrier Pobeda; Aurora Airlines, which operates in the country’s Far East; and three regional carriers: Rossiya, Donavia, and Orenair. Aeroflot aims to merge the latter three under the Rossiya brand, thus forming the country’ second largest carrier.

The revamped Rossiya will be part of Aeroflot Group’s strategy to capture all segments of the Russian market, from premium to budget. The parent carrier Aeroflot will offer premium services from Moscow’s Sheremetyevo airport under the hub-and-spoke model. Pobeda has been demonstrating successful point-to-point low-fares performance. Rossiya, for its part, will focus on domestic regional operations in the medium-price segment, with elective exposure to international routes.

Aeroflot Group market position

Aeroflot Group market position (click to enlarge)

“Our fleet optimization and cost-cutting initiatives have enabled us to limit the growth of operating costs, despite significant exchange rate fluctuations,” said Shamil Kurmashov, Aeroflot’s deputy CEO for finance, network and revenue management. “As a result, our EBITDA and EBITDAR margins increased by 5.5 and 8.6 percentage points to 15.5% and 25.6%, respectively.” In the third quarter, and in the first nine months of 2015, Aeroflot Group’s net profit stood at 5.4 bln rubles and 1.8 bln rubles, respectively.

Aeroflot says the overall increase in its revenue is primarily due to the growing earnings from scheduled passenger services and other revenues.

Aeroflot Group financial highlights

Aeroflot Group financial highlights (click to enlarge)

Revenue from scheduled passenger operations grew 36.7% year-on-year in the first nine months, reaching 258,219 mln rubles, due to a 13.3% year-on-year growth in passenger traffic. Revenue from charter flights decreased by 71.1% to 3,861 mln rubles, thanks to Aeroflot Group’s strategy to reduce its presence in this market segment, as well as due to the overall leisure market performance.

Despite a 4.6% year-on-year decrease in the volume of cargo and mail carried in the first nine months of 2015, Aeroflot Group’s cargo revenue grew 8.6% year-on-year on the back of stronger yields in the segment.

Other types of revenue grew 43.4% year-on-year to 40,948 mln rubles, mainly driven by an increase in FX-denominated revenue from airline agreements following changes in the exchange rate.

In the first nine months of 2015, aircraft fuel costs grew 9.7% year-on-year to 71,001 mln rubles, due to the weakening of the ruble and the increased traffic volume. Excluding the FX rate effect, aircraft fuel costs decreased by 19.3% due to a decline in the oil prices and to Aeroflot Group’s initiatives to improve fuel efficiency.

Operating costs minus aircraft fuel grew 27.4% year-on-year to 201,701 mln rubles.

Aircraft handling and passenger servicing costs amounted to 56,333 mln rubles, up 24.2% year-on-year. This increase was mainly due to the changes in the ruble exchange rate versus foreign currencies. Excluding the FX rate effect, these costs increased by 7.1%, primarily due to the expanding scale of operations and traffic volume, as well as to changes to the service rates charged.

Personnel costs increased by 6.3% year-on-year to 40,643 mln rubles, mainly due to increases in the ruble equivalent of salaries for employees based outside Russia, and to additional motivational compensation for cabin crew.

Aeroflot Group cost analysis

Aeroflot Group cost analysis (click to enlarge)

Operating lease expenses amounted to 31,341 mln rubles, up 88.6% year-on-year, mostly due to the changes to the ruble exchange rate (nearly all of these expenses are denominated in foreign currencies). In addition, Aeroflot Group took net delivery of 17 more aircraft under operating lease agreements, up 9.3% compared to 30 September 2014. The LIBOR rate also grew during the reported period.

Aircraft maintenance costs grew 32.7% year-on-year to 21,809 mln rubles, mainly due to the change in the ruble exchange rate. Excluding the FX rate effect, these costs were up just 10.4% year-on-year.

Sales and marketing, administration, and general expenses increased by 24.4% year-on-year to 17,790 mln rubles. This growth was due to an increase in sales and marketing expenses, which are denominated in foreign currencies.

Depreciation, amortization, and customs duties increased by 11.5% year-on-year to 11,038 mln rubles, driven by the addition of six new Boeing 777-300ER aircraft under finance lease contracts during 2014.

Other net expenses grew 30.3% year-on-year to 22,747 mln rubles, primarily due to the increased GDS costs and costs associated with in-flight duty-free sales. Refunds for fuel excise duties, as a result of changes in the Russian legislation, had a positive impact on other net expenses.

As a result of the above factors, Aeroflot Group’s operating profit in the first nine months of 2015 amounted to 36,808 mln rubles (11.9% of revenue). EBITDAR reached 79,187 mln rubles, while the EBITDAR margin grew 8.6 p.p. to 25.6%. EBITDA reached 47,846 mln rubles, and the EBITDAR margin grew 5.5 p.p. to 15.5%.

Aeroflot Group’s financial income for the first nine months of 2015 was more than five times higher than that the year before, standing at 7,987 mln rubles, mainly due to the foreign exchange rate gains from PDP refunds, interest income earned on bank deposits, as well as the positive effect from revaluation of derivative financial instruments not subject to hedge accounting.

The increase in finance costs to 21,116 million rubles for the first nine months of 2015 was mainly due to the impairment of the Group’s loan to Transaero airline, as well as to an increase in interest expenses and realized losses on derivative financial instruments not subject to hedge accounting.

The realized loss from the hedging of 15,731 mln rubles is attributable to settlements under derivative instruments recognized in equity, as well as to the effect of revenue hedging with liabilities in foreign currency (finance lease).

As a result of the above factors, Aeroflot Group’s net profit for the first nine months of 2015 amounted to 1,826 mln rubles.

Its total debt as of 30 September 2015 had grown by 12.5% year-to-date, to 196,031 mln rubles, mainly driven by the increase in loans and borrowing, as well as by the revaluation of Aeroflot Group’s financial lease liabilities. As of 30 September 2015, undrawn lines available to Aeroflot Group from major Russian and international banks amounted to 22.8 bn rubles.

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