The rapid deterioration of the entire air transport sector in March due to the spread of COVID-19 saw the Aeroflot Group descend into a net loss of RUB16.1 billion (US$215 million), according to figures calculated via the Russian Accounting Standards (RAS) system. Furthermore, the nation’s largest airline grouping is also expecting a significant degradation in its financial health in the second quarter of this year.
Commenting on its RAS financial results for the quarter ending 31 March 2020, which are presented on a non-consolidated basis, Aeroflot has explained that the positive trends experienced in January 2020, including yield growth and a reduction in operating costs, would have heralded an improvement in profitability for the overall financial result for the January-March period. However, the impact on the global aviation industry of the spread of Coronavirus has effectively led to the complete halting of all international flights, as well as a significant decrease in passenger numbers on domestic flights. This development has cancelled out the positive trends seen at the start of the year, and has therefore had a significant negative affect on Aeroflot’s financial result in March.
Trends in the financial results have been confirmed by actual operating results. In February 2020, the impact of COVID-19 in Russia was limited to a decrease in demand and load factors on flights between Moscow and destinations in China, and a knock-on network effect on transit traffic, whereby Aeroflot airline’s passenger turnover decreased by 4.1 per cent as a result. But, by contrast, in March, passenger turnover collapsed by 43.6 per cent as flights to other international destinations were abruptly halted and indicators began to decline on domestic routes. As a result, passenger turnover for the first quarter as a whole decreased by 17.9 per cent.
Not surprisingly, reduced passenger numbers drove a decrease in revenue in the first quarter of 2020. Revenue for the period was RUB100.96 billion, down 11.5 per cent year-on-year. As yields increased by 7.5 per cent, a reduction of 9.1 p.p. in the load factor led to a decrease in RASK of 5.5 per cent year-on-year.
Cost of sales in the first quarter was RUB123.3 billion, down 7.4 per cent year-on-year. The key driver of the reduction in cost of sales was a 6.6 per cent decrease in capacity, which led to a reduction in variable costs dependent on operational volumes.
Individual cost items that decreased included fuel, due primarily to fewer flights, airport servicing expenses, and in-flight passenger servicing costs. Operational fixed costs did not change materially in March even as operational volumes decreased, although there was a small decrease in leasing costs year-on-year due to the decommissioning of six aircraft leased by Aeroflot Group. At the same time, maintenance costs increased slightly due to planned work that took place as scheduled. Due to the increased focus on mitigation of the spread of Coronavirus, additional funds were allocated for enhanced pre-flight and aircraft disinfection procedures.
The rapid deterioration across the sector in March, due to the spread of COVID-19, has required a number of immediate cost-optimisation initiatives to reduce net losses that, for the first quarter, were RUB16.1 billion, Aeroflot says. This result however is comparable to a result for the year-ago period (a loss of RUB16.8 billion), which was unusually high as a result of substantial pressure on costs from higher fuel prices and currency adjustment factors.
As the aviation industry is facing an extremely challenging situation including a significant decrease in demand and bookings for the coming months amid restrictions and flight bans, as well as limited possibilities to optimise fixed costs, including the need to retain key flights and operational staff, Aeroflot is anticipating a further significant deterioration in its financial results for the second quarter of 2020.
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