The restructuring continues, but privatisation may not come next year(1300 words)

Published: 9/18/2000

Aeroflot has increased the number of passengers carried in the first eight months by 8.5%, to 3,406,000 compared to the same period in 1999. Cargo traffic also continued to grow, with the airline carrying 66,200 tonnes of cargo in the first eight months: an increase of 22.4%. Commercial load factor increased 4.4% to 54.1% and seat load rose by 5.6% to 64.7%. For Aeroflot, the increase of traffic is attributed to the airline's implementation of its restructuring plan and the gradual recovery of the economy, boosting traffic during the summer period, with August traffic rising by 12% on July 2000 and giving the airline its best month since August 1998. July's seven month traffic figures showed a 7.5% growth in passenger numbers. Cargo traffic also continued to sustain the seven-month growth figure of 24.3%. Traffic growth has been accompanied by a steady improvement in commercial load factors. These increased by 2% from 53.1% for the first seven months of 2000, to 54.1% over the first eight months of 2000 and seat load factor rose 3%, from 62.8% for the first seven months of 2000 to 64.7% for the first eight months 2000. The airline is continuing to see improvements for the third quarter, according to reports. Sources within the company claim that domestic load factors are reaching 73% and, internationally, are close to 65%. The airline's growth in latter part of the year could be a little slower year-on-year as the industry experiences its seasonal slowdown and some of the one- off millennium benefits fall out in the period around the year-end. The steady improvement in the Russian economy during the rest of the year, assisted by the pickup in the oil price is, however, likely to keep volumes up. Aeroflot's foreign aircraft continued an upward trend in passenger traffic, with 60.2% of passengers carried in the first eight months on its Airbuses and Boeings, compared with 55.9% in 1999. This steady increase reflects not only Aeroflot's belief that foreign aircraft are more attractive to Russian and other passengers, but also that the airline has to keep the aircraft fully utilized in order to maintain lease payments. It experienced problems in this respect at the end of 1999 and at the beginning of this year. The airline is currently reviewing the future shape of its fleet and is rumoured to be considering a single type option in the longer term of either an all Russian, Boeing or Airbus as part of a five-year fleet upgrade plan. Currently, the airline is reported to be negotiating an extension on four Airbuses A-310s, but is seeking better terms. The impact of the greater utilization of western aircraft and the restructuring of the route structure was reflected by the airline's fall in fuel consumption, which fell by 10.9% per 1 tkm for the eight-month period 2000 on 1999. The decline in fuel consumption, which constitutes 20% of total costs at a time when fuel cost have been rising dramatically, can only benefit the airline's financial results. Aeroflot did not give any details about those results for 8mo00 but according to Alexander Zurabov, the First Deputy General Director responsible for finance, Aeroflot's financial results are improving. Analysts anticipate that the added traffic could add $50m to Aeroflot's top line for 2000. Valery Okulov, General Director of Aeroflot, anticipates that the restructuring of the airline will bring savings of $100m over the next three year through the optimising of the route structure. This will involve the continued shrinking of international destinations, with Miami and Sao Paulo being mentioned as candidates for the cut. The overhaul of the routes structure is also ongoing, with the recent internal approval of the new route schedule for summer 2001 potentially generating costs savings of $50-60m from better fleet utilization alone. The development of the Sky Team global alliance relationship is continuing, with working parties with Air France and Delta being formed ahead of discussions over cooperation in early October. The provision of a dedicated terminal at Sheremetyevo Airport - reported to be a condition of full membership of the partnership - still remains undecided, with the Skanska supported bid viewed by the airline as being overly onerous in terms of state guarantees for the project. In the last few days, Okulov has even been quoted to be considering the possibility of a terminal at Domodedovo, suggesting that Sheremetyevo Airport is being warned that it should not regard its status as Moscow's major international airport as a foregone conclusion. Additional savings for the airline are anticipated through a number of other avenues, including a joint venture with a western partner for aircraft maintenance with rumoured partners, Lufthansa Technic, Air France, Boeing and Airbus. This would separate the maintenance of western and Russian aircraft, in order to achieve savings in an area that the airline considers to be operating poorly. The consolidation of the airline's global cash management, now under the control of Chase Manhattan, is also reported to be generating revenues, with management talking of potential additions to revenues amounting to $20-40m over those achieved through the previous Geneva-based system, currently the subject of criminal investigation. As part of the development of the airline's business, Aeroflot has introduced a programme of test routes called “737”, comprising seven international routes, three CIS routes and seven domestic routes. The intention is to use these routes for testing the development of the airline's product, particularly in relation to the business customer. The airline is reported to have a domestic market share objective of 12.5% by the end of 2000, growing to an ambitious 30% by 2005. Okulov has stated that he sees Aeroflot as a key player in the consolidation of Russia's air transport sector. The airline has expressed concern, however, that the privatisation of many of the struggling regional carriers should not leave open the possibility of cancellation at a later date, owing to changes of political stance or to such transactions becoming politicised. The objective of a 30% share suggests however, suggests that Aeroflot will considerably increase the momentum of its commitment to the development of its regional hubs and affiliated carriers similar to those established in Nizhni Novgorod and Rostov. There are however, reports that the Nizhni hub venture with the Nizhni Novgorod Airport is proving to be less attractive than initially expected and its future within Aeroflot is subject to ongoing review. The creation of these affiliation networks is therefore unlikely to be plain sailing and is likely to severely tax Aeroflot's middle managers, often seen as being the weakest link in the increasingly commercial orientation of the airline. Of the projects currently underway the company says that Perm Airlines, has an investment requirement of $10m to restore Perm Airport, which will be borne by the local authorities. As part of the programme to increase the attractiveness of its domestic fleet the airline plans to refurbish its Tu-154Ms on domestic routes. Introducing a three-cabin layout, with a first class for the first time on domestic routes. The carrier is also continuing to look for regional aircraft in the 50-70 seat category and is considering acquiring western aircraft to fulfil the role in the short term at least until appropriate Russian aircraft are available. Initial commitments being made to the Tu-334 with Rolls Royce engines and potentially according to reports, the new Alliance Aircraft regional jet involving Sukhoi among other Western RJs. The airline's management, despite government plans to put Aeroflot on the block for privatisation in 2001, is reported to be trying to convince the government that a period of two years would allow them to achieve a considerably higher return on their 52% holding as the benefits of changes begin to come through. The airline is however, going ahead with a GDR programme with 5% of the stock from the end of September subject to board approval.

Article ID: 2079