Despite growth in revenues and traffic, losses mount up (780 words)

Published: 7/20/2000

Aeroflot's results for the first quarter released to Russia's Federal Security Commission show a disappointing increase in pre-tax losses of 218.5 rubles ($7.7m) and an increase of 10.5% on the same period last year, reflecting the changing cost and revenue profile with the expansion of the domestic network. At the operating level however, losses increased significantly to 517 m rubles ($18m) again reflecting rises in costs, but following an operating profit of $20m in the last quarter of 1999. Despite the exceptional millennium conditions that created the profit, many will be disappointed not to see the trend at least partially continued. Although they can take some comfort in how much worse they could have been if the company had not started to deal with the restructuring of the chronically unprofitable international long haul routes. The company however, are reluctant to talk about the figures, arguing that the FSC filing is not an official release. This is however, a fairly traditional practice for the release of results from the carrier, which normally leaks the results through financial news agency AK&M and then refuses to comment on the unofficial release. By the time the official figures are released a few weeks later, all the debate and the news interest has passed without a proper account from Aeroflot. Whether this practice will continue when the company attempts to raise money from the international capital markets later this year we will have to wait to see. Aeroflot will however, find international investors less than happy if the practices continue. The first quarter for Aeroflot, traditionally the Russian air transport sector's weakest, showed some reasonable top line growth with revenues up by 7.5% in dollars and comparing favourably with the aggressive competitors in the market such as Sibir. In line with the rest of the market, passenger volume figures showed an increase of 4.3% to 990,000 passengers, accompanied by a load factor improvement that took the state carrier from 57.3% to 59.8%. Cargo traffic also reflected the upswing in activity with an increase of 27.9%. Given that the management and commercial expenses have now been split out of operating costs, costs showed a considerable jump in the period. On a comparable basis, costs rose by 19.7% reflecting the 184% rise in domestic and 120% rise in international fuel costs over the period. It also seems likely, in the absence of official confirmation, that the much of the volume growth came from domestic routes using less fuel-efficient aircraft as well as lower yielding passengers as ticket prices struggled to return to pre-crisis levels. This view is partially supported by statements from General Director Okulov who claims that many of the airlines long haul routes to Vladivostok, Khabarovsk, Petropavlovsk-Kamchatski, Yuzhno-Sakhalinsk are loss-making but being maintained in anticipation of recovery in these regions. The introduction of new aircraft to replace the ageing Il-62 and other aircraft may also improve the profitability on these routes. It seems likely however, that many of the domestic routes are yet to achieve profitability being, in many cases, effectively start-up businesses. Others, such as the Aeroflot-Don joint venture, are reversing long-term regional declines in air transport and are likely to take some time to make contributions. However, performance should be improved as the rise of ticket prices of 10-12% in first half of 2000 over 1999 gives reason for believing the full year may be better, particularly when accompanied by a more stable fuel situation The improvement at the net earnings level was achieved by non-operating contributions, about which there are little details but are assumed to be route leasing and overflight rights.

Article ID: 1953