Credit ratings agency Fitch raises Aeroflot’s status to ‘BB’

Aeroflot Aeroflot airline network business will remain the core of the group's business model (Aeroflot)

Global credit ratings agency Fitch has upgraded the credit status of Aeroflot Group, Russia’s largest airline consortium, to ‘BB’ from ‘BB-‘ with a stable outlook, as part of its annual review of the Group’s credit classification.

Among key drivers, the agency notes that Aeroflot Group’s solid business profile is supported by a strong market position that, in the first six months of this year, has strengthened to a 43 per cent market share on both international and domestic routes from 31 per cent in 2014.

The Group’s raised status is further supported by its relatively diversified route network and favourable hub position. It is also enhanced by a multi-brand strategy within the Aeroflot Group, including daughter companies Rossiya and low-cost carrier (LCC) Pobeda, which is aimed at capturing customers in all market segments – and also increasing passenger traffic numbers. At the same time, Aeroflot operates a young aircraft fleet, with an average age of 6.3 years.

The group is continuing to grow, with its passenger traffic now up to 28 million, a 13.4 per cent increase in the first six months of this year, outpacing the overall Russian market growth figure of about nine per cent, a market beating performance which was influenced primarily by the contribution of its budget carrier Pobeda.

Aeroflot Group’s new ‘BB’ rating is a two-notch uplift because the Russian Federation is the majority shareholder of Aeroflot Group with a 51.2 per cent direct ownership. In calculating its ratings, Fitch considers status, ownership and control as well as track record and expectations as strong factors due to the Aeroflot Group’s inclusion in the nation’s list of strategically important enterprises.

Fitch currently views the socio-political implications of Aeroflot Group’s default as moderate, since the airline is important for developing connectivity among various regions in Russia and substitution is likely to lead to temporary disruptions in service.

Meanwhile, the Aeroflot Group continues to be exposed to foreign exchange fluctuations as almost all of its debt at the end of 2018 was denominated in foreign currencies, mainly US dollars. The majority of debt is in the form of finance leases for aircraft purchases. This is partially mitigated by over half of its revenue being generated in dollars or euros, or linked to euros, although over a third of its operating expenses are also denominated in foreign currencies.

The group’s 2018 EBITDA decreased by another 38 per cent year-on-year following a 26 per cent year-on-year decrease in 2017 despite higher passenger load factors attracting a 15 per cent increase in revenue. The EBITDA decline was due mainly to higher fuel and operating lease costs, partially mitigated by the group’s cost-cutting and efficiency initiatives.

According to the Fitch report, based on its cost position, the Aeroflot Group is favourably placed compared with other European network carriers the agency believes. The Group’s cost-per-available-seat-kilometre (CASK) is also comparable to some low-cost carriers (LCCs). “Although we expect Pobeda to achieve double-digit growth over the next four years, the Aeroflot [airline] network business will remain the core of the group’s business model,” the ratings agency notes in its statement.

Pobeda contributed only around 13 per cent of total passengers in 2018 (nine per cent in 2017). Overall, the business’s cost advantage is offset by immense pressure on yields due to the highly competitive nature of the industry, competition from rail, the price sensitivity of customers and, to a lesser extent, the government’s drive to facilitate air travel at affordable prices.

Aeroflot’s low cash-to-revenue of around 10 per cent, compared to the global average of approximately 20 per cent, is compensated for by the availability of government credit facilities – and the generation of an expected positive free cash flow.

In the first eight months of 2019, the Aeroflot Group, which comprises Aeroflot, Rossiya Airlines, Pobeda and Aurora, transported some 41 million passengers, up 11.4 per cent year-on-year. As of the end of August, the Group’s combined fleet consisted of a total of 364 aircraft, 249 of them operated by Aeroflot airline.

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