Aeroflot

Transcription

Aeroflot

APRIL 14, 2014
RUSSIA > EQUITY RESEARCH > TRANSPORTATION
INITIATION OF COVERAGE
Research Analyst:
Mikhail Ganelin
[email protected]
Aeroflot
Reaching for the horizon
We resume coverage of Aeroflot, Russia’s leading airline controlling a
30% market share by passenger turnover. The company is well-positioned
to deliver a robust passenger turnover 5Y CAGR of 7.4% vs. the 4.5%
global average thanks to its multi-segment strategy, valuable brand
recognition among Russians, low operating costs and healthy balance
sheet. Aeroflot currently trades at a 17% discount to its 3Y historical
average EV/EBITDA. We value the company at $2.14 per share (RUB 76)
and assign an OVERWEIGHT recommendation to the stock.
TICKER
AFLT RX
Target price, USD
2.14
Closing price, common, USD
1.50
Recommendation
OVERWEIGHT
Upside
43%
International flights are slowing amid economic weakness... Passenger
turnover on international flights decelerated to 8.5% YoY in 2M14 in Russia
compared to 25.6% growth a year ago on the back of the slowing of Russian
economic and real wage growth amid ruble devaluation. We expect this trend to
continue and forecast around 5% growth this year.
MCap, $ mln
1,590
Net debt, $ mln
2,040
EV, $ mln
3,847
52-week high, USD
2.48
52-week low, USD
1.32
Valuation and catalysts. Aeroflot trades at a 2014E EV/EBITDA of 4.4x
(unadjusted for Siberian flyover fees), implying a 17% discount to its historical
trailing EV/EBITDA of 5.3x. Turkish Airlines, which is the best peer for Aeroflot,
is also trading at a 2014E EV/EBITDA of 6.0x, though this suggests a higher
EPS and 3Y EBITDA growth rate (23.5% and 26%, respectively) as well as
better liquidity compared to Aeroflot. Our target price of $2.14 per share is set
based on a simple average of EV/EBITDA, P/BV and DCF valuation at a 13%
WACC and 3% growth rate. There is a lack of short-term catalysts in the name,
aside from the monthly publication of operating results. The first half of the year
is traditionally a low season for airlines, while summer operating results are
particularly important, as this is a period when Aeroflot generates the bulk of its
earnings (to be disclosed in the 3Q14 IFRS report in October).
Research Department
1
Aeroflot share price performance
170
150
130
110
90
AEROFLOT (REBASED)
APR 14
MAR 14
JAN 14
FEB 14
DEC 13
NOV 13
SEP 13
OCT 13
JUL 13
AUG 13
JUN 13
70
APR 13
This year will not be easy for airlines, but Aeroflot operates confidently in
the market. We conservatively forecast Aeroflot’s passenger turnover growth at
7.5% this year, while the management guides double-digit growth that might be
realized in case of the successful launch of a low-cost carrier. Its passenger
yields should decline by 3% YoY this year due to the launch of Dobrolet, ruble
devaluation and rising competition. As a result, the company’s EBITDA will
decline 12% YoY, while 2014E-20E EBITDA CAGR will remain at 13%. Aeroflot
enjoys low operating costs, but there are more options to further cut
maintenance costs and improve operating efficiency in regional subsidiaries.
Solid cash flow and a comfortable debt burden (net debt/EBITDA of 2.0x) do not
raise any concerns regarding the company’s financial stability.
Source: Bloomberg, Gazprombank
MAY 13
…while domestic flights remain resilient at the expense of Russian
Railways. In contrast, demand on domestic flights remains robust (up 10.4% in
2M14 vs. 9.6% year ago) driven by an influx of passenger traffic from Russian
Railways and the Olympics. The difference in fares between railway and airline
tickets in Russia is narrowing, while the gap in time between these two means
of transport is enormous. As a result, Russian Railways lost 5% of long-distance
traffic in 2013 (5.8 mln passengers) and another 6% (1 mln) during 2M14. In
contrast, passenger traffic on domestic airlines increased 11% (3.8 mln) in 2013
and 14% in 2H14. If this trend continues, the domestic market may grow by as
much as 70% to 65 mln passengers by 2018, which is well above current
market expectations.
GENERAL INFORMATION
MICEX (REBASED)
Source: Bloomberg
Aeroflot IFRS financials
Revenues,
$ mln
EBITDA,
$ mln
EDITDA
margin
Net income,
$ mln
2013
2014E
2015E
2016E
9,136
9,319
10,450
11,226
1,000
879
1,121
1,240
11%
9%
11%
11%
252
240
371
416
Net margin
3%
3%
4%
4%
EV/EBITDA
3.63
4.38
3.59
3.19
P/E
6.32
6.61
4.28
3.82
P/BV
0.96
0.86
0.75
0.65
Div. yield
3.4%
3.4%
5.6%
6.2%
FCF yield
15%
neg.
neg.
14%
Source: Company, Gazprombank
Copyright © 2003-2014. Gazprombank
(Open Joint-Stock Company)
APRIL 14, 2014
COMPANY DESCRIPTION
Aeroflot is Russia’s leading airline, controlling a 30% market share by passenger
turnover. It combines six carriers, including Aeroflot standalone and four regional airlines
(Rossiya, Orenair, Don-Avia and Aurora). It plans to launch a low-cost carrier in 2H14
named Dobrolet. The company operates a modern fleet of 239 planes, mainly Airbus
and Boeings with an average age of 5.5 years. Moscow’s Sheremetyevo airport is the
main hub for Aeroflot, while its subsidiaries operate mainly from regional airports. The
government owns 51% of the company, while 40% is in free float. The stock currently
trades on MICEX.
Key financial data
Shareholders structure
AEROFLOT
Bloomberg tickers
40.3%
AFLT RX
Current price, $
1.50
Target price, $
2.14
Upside, %
43.0%
Recommendation
5.0%
Overweight
Shares outstanding, mln
1,057
Authorized shares, mln
1,111
Market capitalization, $ mln
1,590
EV, $ mln
3,847
EV, end 2013
3,630
Free float
3.6%
51.2%
STATE PROPERTY
ROSTEC
TREASURY SHARES
FREE FLOAT
40.3%
KEY INDICATORS
2012
2013
2014E
2015E
2016E
Brent price, $/bbl
112.0
109.0
108.1
110.3
112.5
RUB/USD, average
31.07
32.53
35.50
35.50
35.50
CPI (Russia) %
6.6%
6.8%
6.0%
5.7%
5.5%
FINANCIAL RATIOS
Source: Company
2012
2013
2014E
2015E
2016E
Capex/depreciation
2.40
1.98
2.06
2.04
1.64
Capex/sales
0.08
0.07
0.09
0.09
0.07
Net debt/Equity
1.18
1.11
1.11
1.06
0.90
Net debt/EBITDA
3.12
2.04
2.57
2.18
1.91
P/E
7.2
6.3
6.6
4.3
3.8
KEY OPERATING DATA
Adj. P/E*
n/m
7.2
6.6
4.3
3.8
Number of planes,eop
216
239
247
261
269
EV/EBITDA
5.5
3.6
4.4
3.6
3.2
ASK, bln pass-km
96
109
118
130
139
75
85
92
102
108
50
56
58
62
65
24
29
33
40
43
Passenger turnover, bln
pass-km
International, bln
pass*km
Adj. EV/EBITDA**
5.8
3.8
5.1
4.0
3.5
EV/Sales
0.5
0.4
0.4
0.4
0.4
P/BV
1.0
1.0
0.9
0.7
0.7
Div. yield
2.5%
3.4%
3.4%
5.6%
6.2%
27
31
34
38
41
Payout ratio
25%
25%
25%
25%
25%
Domestic, mln
12
14
16
19
21
CF yield
neg.
15.4%
neg.
neg.
14.5%
International, mln
16
17
18
19
20
ROE
12.5%
13.7%
11.8%
16.1%
15.9%
9.05
9.12
8.83
8.98
9.08
ROA
3.6%
3.9%
3.5%
4.7%
4.8%
Domestic, US cents
10.50
10.40
9.40
9.59
9.68
ROIC
2.6%
3.3%
2.7%
4.0%
3.7%
International, US cents
8.30
8.50
8.50
8.59
8.67
Load factor, %
78.1%
78.2%
77.5%
78.0%
78.0%
MARGINS
Domestic, bln pass*km
Passenger traffic, mln
Yields, US cents
EBITDA margin, %
8.3%
10.9%
9.4%
10.7%
11.0%
Fuel price, $/t
920
920
920
920
920
EBIT margin, %
4.4%
6.8%
4.6%
6.1%
6.3%
CASK, US cents
8.06
7.73
7.52
7.53
7.58
Net margin, %
2.7%
2.8%
2.6%
3.6%
3.7%
CASK-ex fuel, US cents
5.66
5.45
5.25
5.27
5.32
2
APRIL 14, 2014
INCOME
STATEMENT,
$ MLN
Accounting
standards
Revenues
2012
2013
2014E
2015E
2016E
CASH FLOW
STATEMENT, $ MLN
2012
2013
2014E
2015E
2016E
IFRS
IFRS
IFRS
IFRS
IFRS
Net income
222
252
240
371
416
8,138
9,136
9,319
10,450
11,226
269
335
409
439
488
Traffic revenue
7,118
8,087
8,414
9,482
10,201
-28.3
9.7
-18.8
-21.0
-23.3
Other revenue
Operating
expenses
1,020
1,049
905
968
1,025
Depreciation
Change in working
capital
Other
77.7
312.8
105.6
137.5
151.6
-7,780
-8,514
-8,893
-9,811
-10,518
Operating cash flow
541
909
736
926
1,033
-852
-689
-842
-893
-802
208
26
0
0
0
-645
-664
-842
-893
-802
-62
-41
-58
-58
-93
246
-93
217
388
282
Capex (inl. finance
lease)
Other
Fuel costs
-2,288
-2,485
-2,678
-2,949
-3,138
Staff costs
-1,242
-1,424
-1,387
-1,558
-1,675
SG&A
-760
-860
-889
-1,000
-1,075
DDA
-269
-335
-409
-439
-488
Operating lease
EBITDA (as
reported)*
-567
-602
-663
-698
-750
671
1,000
879
1,121
1,240
Financing cash flow
184
-133
159
330
189
EBITDA adj
629
964
759
1,001
1,120
Effect of FX
23.6
-38.2
0
0
0
EBIT
358
622
426
638
708
Change in cash
103
74
54
364
420
PBT
358
430
329
530
594
DEBT AND NET DEBT, $ MLN
Income tax
-191
-200
-99
-159
-178
Total debt
2,588
2,610
2,880
3,425
3,777
Minority share
-56
-21
-10
0
0
Net debt
2,092
2,040
2,257
2,438
2,370
252
240
371
416
GROWTH
222
240
371
416
Revenues
51.3%
12.3%
2.0%
12.1%
7.4%
EBITDA
24.9%
73.8%
-31.4%
49.8%
10.9%
496
570
624
987
1,407
Net income
-66.2%
1720.5%
8.3%
54.4%
12.0%
5
8
8
8
8
Capex
5.0%
2.9%
26.9%
6.1%
-10.2%
1,622
1,702
1,724
1,862
1,957
PER SHARE DATA, $
141
151
163
180
192
EPS
0.21
0.24
0.23
0.35
0.39
68
58
58
59
59
DPS
0.04
0.05
0.05
0.08
0.09
Total CA
Inv. in equity
affiliates and JVs
PP&E
Other noncurrent assets
Total assets
2,333
2,489
2,577
3,096
3,623
200
186
186
186
186
2,436
2,713
3,145
3,600
3,914
1,277
1,004
990
1,017
970
6,246
6,392
6,899
7,899
8,693
ST debt
Accounts
payable
712
419
419
419
419
989
1,108
1,161
1,283
1,372
Other CL
545
550
550
604
646
Total CL
2,246
2,077
2,130
2,306
2,437
LT debt
Other noncurrent liabilities
Total non-current
liabilities
Total shareholders
equity
Minority interest
Total liabilities
and equity
1,875
2,191
2,461
3,006
3,358
498
459
459
459
459
2,374
2,650
2,920
3,465
3,816
1,775
1,838
2,032
2,311
2,623
149
173
183
183
183
6,246
6,392
6,899
7,899
8,693
Net income
222
Adjusted net
12
income**
BALANCE SHEET, $ MLN
Cash and
equivalents
ST investments
Accounts
receivable
Inventories
Other CA
Investing cash flow
Dividends paid to
shareholders
Other
Source: Company, Gazprombank estimates
*Adjusted on royalties
**Adjusted on one-off items
3
APRIL 14, 2014
CONTENTS
Company description ..........................................................................................................................................2
Contents ...................................................................................................................................................................4
Aeroflot valuation: a tricky issue to value airlines ...................................................................................5
Relative valuation ..................................................................................................................................................... 5
Aeroflot share price performance .............................................................................................................................. 8
Target-multiple valuation ......................................................................................................................................... 8
DCF valuation ........................................................................................................................................................... 9
Aeroflot revenue drivers: capacity up, yields down .............................................................................. 11
Aeroflot capacity (ASK) additions are easy to manage in case of slowdown ................................................................................... 11
Passenger turnover (RPK) forecast: even single-digit growth looks good ........................................................................................ 11
Passenger yields should be under pressure this year due to ruble devaluation and the launch
of a low-cost carrier ................................................................................................................................................................................................... 12
Revenues forecast: royalties are still in the shadow ................................................................................................................................... 13
Aeroflot cost drivers: the lowest among traditional carriers ............................................................ 15
Fuel consumption efficiency................................................................................................................................................................................... 15
Labor productivity ...................................................................................................................................................................................................... 16
Maintenance costs....................................................................................................................................................................................................... 16
Aeroflot investor day: a well developed plan .......................................................................................... 18
Dobrolet: low-cost airfares for everyone .................................................................................................. 21
How will Dobrolet affect Aeroflot’s financials? .............................................................................................................................................. 21
How will Dobrolet affect the market? ................................................................................................................................................................ 22
Aeroflot 4Q13 IFRS results disappointed investors, raising short-term concerns .................... 23
4Q13 IFRS results ........................................................................................................................................................................................................ 23
2013 IFRS results ........................................................................................................................................................................................................ 23
Regional airlines financial performance and further restructuring ..................................................................................................... 23
Aeroflot cash flow distribution and dividends ............................................................................................................................................... 24
Aeroflot management and corporate governance issues .................................................................... 26
The management ......................................................................................................................................................................................................... 26
Corporate governance ............................................................................................................................................................................................... 26
Global airlines industry: excellent growth opportunities lie ahead ................................................ 28
What are the features of global airlines? .......................................................................................................................................................... 28
Russian airline industry at a glance .................................................................................................................................................................... 29
Case study: correlation of Brazilian airline market with GDP growth ................................................................................................ 33
Risks ....................................................................................................................................................................... 35
4
APRIL 14, 2014
AEROFLOT VALUATION: A TRICKY ISSUE TO VALUE
AIRLINES
We resume coverage of Aeroflot with a target price of $2.14 (RUB 76 per share) based
on a simple average of target multiple valuations (EV/EBITDA and P/BV) and DCF
approach. We assign an OVERWEIGHT recommendation to the stock, as Russia’s
airline market is still one of the fastest-growing globally, enjoying 5Y CAGR above 7.0%
vs. the global average of 4.5%. Aeroflot is the best-positioned to capture this growth
thanks to its multi-segment strategy, professional management and extremely valuable
brand recognition among Russians. The company enjoys a comfortable financial
situation, with one of the lowest costs per ASK among global carriers and we believe
there is still room for further improvement in operating efficiency, which should lift the
company’s profitability and dividends going forward.
At the same time, adverse short-term factors are currently prevailing over favorable
long-term development. In particular, we are concerned about growth in the Russian
airlines sector this year due to the economic slowdown (we forecast GDP growth below
1% and passenger turnover growth by 8%); intensifying competition among airlines and
ruble devaluation should pressure passenger yields this year.
Aeroflot target price calculation
TARGET PRICE
WEIGHTS
RUB
USD
EV/EBITDA
VALUATION METRICS
33%
79.3
2.23
P/BV
33%
75.1
2.12
DCF
33%
75.1
2.12
Target price
76.0
2.14
Current price
53.5
1.50
Upside
43%
43%
Source: Gazprombank estimates
Relative valuation
Aeroflot currently trades at a 2014E EV/EBITDA of 4.4x (unadjusted for Siberian flyover
fees), implying a 17% discount to its historical trailing EV/EBITDA of 5.3x. It also shows
a 35-40% discount to global airlines, which trade on average at around 6.0x (EM at 7.0x
and DM at 5.0x). Turkish Airlines, which is the best peer for Aeroflot, is also trading at a
2014E EV/EBITDA of 6.2x, though this suggests a higher EPS and 3Y EBITDA growth
rate (23.5% and 26.0%) as well as better liquidity compared to Aeroflot.
We avoid comparing Aeroflot with global carriers on P/E, as this multiple is too volatile
across all airlines due to the impact of numerous one-off gains, losses and revaluations.
We also avoid a comparison on EVR/EBITDAR, a ratio that is widely used to value
airline equity but may contain errors in capitalized operating lease estimates. We prefer
looking at the P/BV ratio, which seems a more reasonable basis for comparison.
Aeroflot is currently trading at a 2014E P/BV of 0.9x vs. 1.6x for global peers and 1.4x
for Turkish Airlines.
5
APRIL 14, 2014
Aeroflot peer group valuation
COMPANY
COUNTRY
MCAP, $ MLN
EV/EBITDA
P/E
P/BV
PERFORMANCE
2014E
2015E
2014E
2015E
2014E
beta
1M
3M
12M
YTD
EMERGING MARKETS
GOL Linhas
Brazil
1,518
6.5
5.5
n/a
27.9
5.2
1.3
12%
22%
14%
22%
Thailand
942
8.8
6.7
n/a
15.6
0.5
1.3
2%
5%
-50%
0%
Air China
China
7,522
7.8
6.9
11.1
8.7
0.9
1.0
-7%
-17%
-31%
-18%
China Southern
China
3,773
8.0
6.9
9.9
7.1
0.6
1.1
-6%
-18%
-41%
-15%
China Eastern Airlines
China
4,784
7.6
6.5
11.3
8.5
1.1
1.2
-4%
-11%
-22%
-10%
Hainan Airlines
China
3,622
8.7
7.5
5.7
5.2
0.9
0.9
-3%
-9%
-20%
-9%
Asiana Airlines
South Korea
930
7.3
6.8
41.6
24.9
1.2
0.8
-2%
3%
-7%
3%
Korean Airlines
South Korea
2,107
7.4
7.1
15.5
15.3
1.0
1.0
12%
22%
-18%
25%
China
1,747
7.3
10.3
12.7
n/m
1.0
0.8
0%
-6%
-13%
-6%
Chile
8,029
7.4
6.1
21.9
12.6
1.5
1.2
-3%
1%
-15%
1%
Turkey
4,464
Thai Airways
China Airlines
LatAM
Turkish Airlines
6.2
5.0
8.0
6.7
1.4
1.1
4%
7%
6%
7%
Average
7.5
6.9
15.3
13.2
1.4
1.1
0.5%
-0.2%
-17.9%
0.0%
Median
7.4
6.8
11.3
10.6
1.0
1.1
-1.6%
1.0%
-18.2%
0.0%
DEVELOPED MARKETS
Cathay Pacific
Singapore Airlines
Japan Airlines
Qantas
Air Canada
British Airways
China
7,161
6.8
6.0
12.5
9.1
0.9
0.9
-9%
-15%
9%
-15%
Singapore
9,695
4.0
3.5
25.1
18.0
0.9
0.9
2%
0%
-4%
0%
Japan
9,056
2.9
2.9
6.3
6.5
1.4
n/m
0%
0%
19%
0%
Australia
2,335
6.2
4.1
n/a
n/a
0.4
1.3
0%
4%
-37%
4%
Canada
1,898
3.7
3.2
8.2
4.8
n/m
0.4
-1%
-21%
76%
-23%
UK
14,891
5.2
4.2
12.9
8.8
2.8
1.3
-1%
7%
73%
9%
Air Berlin
Germany
304
16.8
8.5
n/a
n/a
n/m
0.5
-11%
13%
-19%
13%
Lufthansa
Germany
12,745
3.6
2.9
10.7
6.9
1.5
0.9
7%
30%
32%
28%
Airfrance-KLM
France
4,915
4.6
4.0
15.9
7.9
1.6
1.1
18%
54%
60%
54%
Finnair
Finland
504
3.4
2.7
21.5
8.7
0.5
0.8
11%
5%
8%
4%
SAS
Denmark
1,309
4.2
3.9
19.9
10.9
1.6
1.4
-13%
-11%
16%
-11%
Delta Airlines
US
29,397
6.0
5.5
13.3
11.5
2.5
1.1
3%
28%
140%
30%
SouthWest Airlines
US
16,608
6.2
5.6
17.0
14.9
2.3
0.9
5%
27%
88%
28%
WestJet Airlines
US
2,988
4.6
3.9
12.2
10.1
2.1
0.4
-1%
-10%
0%
-9%
JetBlue
US
2,590
5.2
4.6
10.5
8.8
1.2
0.9
5%
5%
39%
6%
EasyJet
UK
12,019
9.5
8.3
16.3
14.0
3.6
1.1
3%
15%
63%
18%
Ryanair
UK
14,679
11.0
9.3
20.6
15.9
3.2
0.7
6%
22%
28%
24%
Alaska Airlines
US
6,355
5.5
5.0
13.5
12.3
3.1
1.0
6%
30%
58%
32%
Average
6.1
4.9
14.8
10.6
1.9
0.9
1.7%
10.1%
35.9%
10.7%
Median
5.2
4.1
13.5
10.1
1.6
0.9
2.7%
7.5%
32.1%
9.4%
Global average
6.8
5.9
15.0
11.9
1.6
1.0
1.1%
5.0%
9.0%
5.3%
1.1
-8%
-32%
3%
-32%
RUSSIA
Aeroflot (Bloomberg cons)
1,590
3.4
3.2
4.4
4.0
0.9
Aeroflot (our estimates)
1,590
4.4
3.6
6.6
4.3
0.9
-36%
-39%
-56%
-64%
-47%
Discount to global peers
Aeroflot (adjusted on
royalties)
1,590
5.1
4.0
11.0
5.8
0.9
Aeroflot (based on
Gazprombank TP)
2,262
5.4
4.5
12.2
8.0
1.25
6
APRIL 14, 2014
Trailing EV/EBITDA
Trailing P/BV
AEROFLOT
BLOOMBERG AIRLINES INDEX
1/3/2014
AEROFLOT
BLOOMBERG AIRLINES INDEX
TURKISH AIRLINES
Source: Bloomberg, Gazprombank estimates
Number of destinations
AEROFLOT
TURKISH AIRLINES
239
233
141
243
9,136
9,826
7,780
8,549
Cargo, $ mln
307
786
Other, $ mln
1,049
491
Revenues, $ mln
Passenger, $ mln
EBIT, $ mln
EBITDA, $ mln
EBITDA margin
EBITDAR, $ mln
EBITDAR margin
Net income, $ mln
Net margin
622
762
1,000
1,226
10.9%
12.5%
1,602
1,770
17.5%
18.0%
230
357
2.5%
3.6%
7.1%
16.6%
3Y EBITDA growth
8.9%
23.5%
3Y EPS growth
11.0%
26.2%
CASK, cents
7.73
7.94
CASK, ex fuel, cents
5.45
4.99
Staff costs/ASK, cents
1.31
1.36
Fuel costs/ASK, cents
2.28
2.96
Passenger yields, cents
9.12
8.92
Domestic, cents
10.4
10.9
International, cents
8.50
6.67
Passengers carried, mln
3Y revenue growth
31.3
48.3
Domestic, mln
13.9
20.1
International, mln
17.4
28.2
109
116
ASK, bln pass-km
RPK, bln pass-km
TURKISH AIRLINES
Aeroflot vs. Turkish Airlines based on 2013 results
Number of planes
3/1/2014
1/3/2013
1/1/2014
1/3/2012
11/1/2013
1/3/2011
9/1/2013
0.00
1/3/2010
7/1/2013
1.00
5/1/2013
1/1/2012
2.00
3/1/2013
3.00
1/1/2013
4.00
11/1/2012
5.00
9/1/2012
6.00
7/1/2012
7.00
5/1/2012
2.00
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
8.00
3/1/2012
9.00
85
92
Load factor, %
78.2%
79.0%
Number of employees
30,726
23,160
7
APRIL 14, 2014
Revenue per employee, $
297,335
424,266
1,590
4,464
2014E EV/EBITDA
4.4
6.20
2014E P/BV
0.93
1.40
MCap, $ mln
Aeroflot share price performance
Due to its status as one of Russia’s most famous consumer brands, Aeroflot is closely
watched by journalists and government officials, who periodically make comments about
the company potentially containing sensitive information for share price performance. As
a result, Aeroflot becomes a sentiment-driven stock from time to time, leading to
heightened volatility. The stock outperformed the MICEX Index in 2013 by a wide
margin, rising 80% vs. flat index performance, on the back of strong 3Q13 financial and
operating results, but is down 32% YTD compared to the 8% drop in the MICEX Index
amid the market sell-off and unimpressive 4Q13 numbers.
Aeroflot price performance vs. MICEX Index
AEROFLOT (REBASED)
4/3/2014
3/6/2014
3/20/2014
2/6/2014
2/20/2014
1/23/2014
1/9/2014
12/26/2013
12/12/2013
11/28/2013
11/14/2013
10/31/2013
10/3/2013
10/17/2013
9/5/2013
9/19/2013
8/8/2013
8/22/2013
7/25/2013
7/11/2013
6/27/2013
6/13/2013
5/30/2013
5/2/2013
5/16/2013
4/4/2013
4/18/2013
160
150
140
130
120
110
100
90
80
70
MICEX (REBASED)
Target-multiple valuation
We use target EV/EBITDA and P/BV for our multiple-based valuation. We apply target
EV/EBITDA of 5.0x for normalized Aeroflot EBITDA of $1,000 mln, which is calculated
as the simple average EBITDA for 2013-15. This approach allows up to smooth onetime earnings volatility that should be present this year. We then subtracted the
company’s Siberian flyover fees (which we estimate at $120 mln) and $2 bln in net debt
(as of end 2013) and divided the company’s equity value of $2.4 bln by the number of
shares (1,111 mln) adjusted for treasury stock (54 mln), which returns a target price of
$2.2 per share.
Applying a target P/BV of 1.1x for the company’s 2014 book value after minority interest
of $2 bln returns an equity value of $2.2 bln, or $2.12 per share.
8
APRIL 14, 2014
Target EV/EBITDA valuation
IMPLIED EV/EBITDA
Target P/BV valuation
4.50
5.00
5.50
Normalized EBITDA
1,000
1,000
1,000
Less flyover fees
-120
-120
-120
Adjusted EBITDA
880
880
880
EV
3,960
4,400
4,840
-2,040
-2,040
-2,040
1,920
2,360
2,800
1,111
1,111
1,111
Less treasury shares, mln
54
54
54
Target price, $ per share
1.82
2.23
2.65
Less 2013 net debt
MCap
Number of shares, mln
IMPLIED P/BV
1.00
1.10
1.20
Book value 2014, $ mln
2,032
2,032
2,032
MCap, $ mln
2,032
2,235
2,439
Number of shares, mln
1,111
1,111
1,111
Less treasury shares, mln
54
54
54
1.92
2.12
2.31
DCF valuation
Our DCF valuation returns a target price of $2.1 per share at a 13.4% WACC and 3%
terminal growth rate. We admit that a DCF valuation is sensitive to even minor changes
of initial parameters, such as yield performance, WACC and terminal value.
Aeroflot DCF valuation
$ MLN
2014E
2015E
2016E
2017E
2018E
2019E
2020E
EBIT
426
638
708
812
901
1,022
1,140
Less taxes
-85
-128
-142
-162
-180
-204
-228
Depreciation
409
439
488
549
605
626
640
Less changes in working capital
-19
-21
-23
-23
-20
-14
-5
Less capex including finance lease
-842
-893
-802
-1,170
-840
-723
-750
FCFF
-111
35
229
6
466
706
797
Discount rate
0.88
0.78
0.69
0.61
0.53
0.47
0.42
-98
28
157
4
249
332
331
DFCFF
SUM of DFCFF
1,002
Discounted Terminal Value
3,274
EV
Cost of equity
Risk free
Equity risk premium
4,276
Beta
Net debt, 2013
-2,040
Mcap
2,236
Shares Outstanding, mln
1,057
2.12
6.1%
10.0%
1.15
Terminal growth rate
3.0%
Cost of debt
7.2%
Tax rate
20%
After tax cost of debt
5.8%
Share of debt
35%
Share of equity
65%
WACC
17.6%
13.4%
9
APRIL 14, 2014
Aeroflot target price sensitivity, $
CHANGES IN YIELD PERFORMANCE
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
11.90%
-5.61
-3.54
-1.40
0.79
3.05
5.37
7.75
10.19
12.70
12.40%
-5.41
-3.46
-1.47
0.59
2.70
4.86
7.09
9.37
11.72
12.90%
-5.22
-3.40
-1.52
0.40
2.38
4.41
6.50
8.64
10.84
13.40%
-5.05
-3.34
-1.57
0.24
2.12
4.01
5.97
7.99
10.05
13.90%
-4.90
-3.28
-1.62
0.09
1.84
3.64
5.49
7.39
9.34
14.40%
-4.76
-3.23
-1.66
-0.05
1.61
3.31
5.06
6.85
8.69
14.90%
-4.64
-3.19
-1.70
-0.17
1.40
3.01
4.67
6.36
8.10
WACC
10
APRIL 14, 2014
AEROFLOT REVENUE DRIVERS: CAPACITY UP,
YIELDS DOWN
Aeroflot capacity (ASK) additions are easy to manage
in case of slowdown
The company will receive 36 aircraft this year, which is the largest capacity addition in its
history, including five long-haul Boeing 777 and 31 medium and short-haul Airbus 320
(14), Boeing-737 (9) and SSJ (8) aircraft. Despite such an impressive capacity addition
amid a slowing market, we do not see a big risk of overcapacity, as the company plans to
dispose of 26 outdated, less-efficient planes, including almost a dozen wide-body Boeing
767 and Il-96 aircraft. As a result, Aeroflot’s net capacity addition assumes an increase of
around 8% to 118 bln pass-km, we estimate, which is close to our market growth forecast.
In case of better than expected demand, Aeroflot may delay the disposal of its old aircraft,
thereby boosting capacity addition to more than 12%.
Aeroflot capacity (ASK) breakdown
Aeroflot ASK, RPK and Load factor performance, bln pass-km
100%
180
79.0%
90%
160
80%
78.5%
140
70%
120
60%
100
77.5%
50%
80
77.0%
40%
60
30%
40
20%
20
76.0%
10%
0
75.5%
LONG-HAUL
MEDIUM-HAUL
SHORT-HAUL
ASK
RPK
2020E
2019E
2018E
2017E
2016E
2015E
2014E
2013
2012
2011
76.5%
2010
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
78.0%
LOAD FACTOR, %
Passenger turnover (RPK) forecast: even single-digit growth
looks good
We expect Aeroflot’s RPK growth to decelerate to 7.5% YoY (91.7 bln pass-km) in 2014
after double-digit growth in previous years, which still looks decent compared to global
growth of 4.5%. This will be driven by new fleet additions and contraction in the
passenger load factor (by 0.4 bps to 77.5%), which may occur as a result of the
economic growth slowdown. Meanwhile, the company’s management is more optimistic
and still expects double-digit growth this year. Aeroflot’s summer schedule assumes
around a 14% increase in capacity addition (ASK), including 27% growth in domestic
mid-haul destinations and 9% in international mid-haul destinations. We do not exclude
that this is achievable in case of economic stabilization and a successful launch of the
low-cost carrier Dobrolet in 2H14, which will grab passenger traffic from Russian
Railways. In fact, this would be visible from the operating statistics that the company
publishes monthly and in case of strong numbers our forecasts might be revised upward
slightly. Our long-term outlook for Aeroflot assumes a passenger turnover growth rate of
7.4% to 121 bln pass-km by 2018, which corresponds to general Russian market growth
and is above the global airlines growth rate of 4.5%.
11
APRIL 14, 2014
Aeroflot capacity expansion
2012
2013
2014E
2015E
2016E
2017E
2018E
Additions
18
27
36
27
27
31
6
A-320
1
8
14
0
5
5
0
A-321
3
5
0
0
2
2
0
B-737-NG
0
3
9
12
15
15
0
B-787 Dreamliner
0
0
0
0
2
9
6
SSJ-100
6
0
8
12
0
0
0
B-777-300
0
4
5
3
3
0
0
-19
-23
-26
-11
-17
-20
0
A-319
0
-1
-2
-4
0
-3
0
A-320
0
-4
-8
-3
-6
-3
0
B-737
-4
-6
-5
-1
-5
-11
0
B-767
-3
-5
-3
0
0
0
0
Disposal
Il-96-300
0
0
-6
0
0
0
0
-12
-7
-2
-3
-6
-3
0
ASK, mln pass-km
95,598
109,064
118,316
130,294
138,668
148,090
155,975
Growth, y-o-y
28.4%
14.1%
8.1%
10.1%
6.4%
6.8%
5.3%
Other
Load factor
78.1%
77.9%
77.5%
78.0%
78.0%
78.0%
78.0%
Passenger turnover (RPK, mln pass-km)
74,617
85,273
91,695
101,608
108,130
115,466
121,611
14.3%
7.5%
10.8%
6.4%
6.8%
5.3%
74,617
85,273
91,695
101,608
108,130
115,466
121,611
Domestic, ‘000
31,747
37,534
43,210
51,432
55,863
61,145
64,683
International, ‘000
63,851
71,530
75,106
78,862
82,805
86,945
91,292
Growth, y-o-y
Passengers carried, ‘000
Passenger yields should be under pressure this year due to ruble
devaluation and the launch of a low-cost carrier
In general, Aeroflot’s passenger yield performance is close to that of major international
carriers. The figure of 9.1 cents per passenger-km in 2013 implies no growth compared
to 2012. According to Aeroflot management guidance, yields that are set in rubles will
remain flat this year, which implies that they would decline by approximately 8-10% in
dollar terms (taking into account ruble devaluation) to 9.4 cents per passenger-km from
10.4 cents in 2013. Notably, our yield forecast does not include the impact of low-cost
carrier Dobrolet. This will likely exert further pressure on Aeroflot’s domestic yields,
though it should also reduce costs, and thus we do not expect material threats to the
company’s margins.
On international flights, Aeroflot’s yield policy is more complicated. At the beginning of
2014, the company announced that it cut international tariffs, which are generally set in
euros, by 5% to protect customers who suffered from devaluation. This news weighed
on investor sentiment, raising concerns about the company’s future profitability. In our
view, this was purely a marketing step, as Aeroflot’s costs are skewed toward a rublebased structure and depreciation (albeit not excessive) brings Aeroflot additional gains.
Thus, the company may be able to reduce euro and dollar-based prices to stimulate
demand and keeping stable margins. In any event, the reduction in international tariffs
was introduced only for passengers traveling from Russia to foreign destinations, but not
for passengers traveling to Russia. We forecast flat YoY performance of international
yields at 8.5 cents per passenger-km in 2014 with a subsequent 1% increase each year
to compensate for cost inflation.
12
APRIL 14, 2014
Investors like to closely watch the performance of Aeroflot’s passenger yields and
become concerned if they decline. That said, we note that yields may decline not only
because of tightening competition, but also falling operating costs and thus the main
factor that should be followed is the difference between revenue per ASK and cost per
ASK (RASK-CASK).
Global and Aeroflot passenger yield performance, US cents
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2008
2009
2010
2011
AEROFLOT
2012
2013
GLOBAL AVERAGE
Source Bloomberg
Note: Based on 31 airlines
Aeroflot passenger yield performance, US cents
12.00
10.00
8.00
9.50
8.30
7.52
9.80
8.70
8.50
10.50
8.30
8.06
1.20
10.40
8.50
7.73
9.68
9.59
9.40
8.67
8.59
8.50
7.58
7.53
7.52
9.88
8.85
9.78
8.76
7.69
7.63
10.07
9.97
9.02
8.93
7.76
7.80
1.00
0.80
6.00
0.60
4.00
0.40
2.00
0.20
0.00
0.00
2010
2011
2012
DOMESTIC YIELDS
2013
2014E
2015E
2016E
INTERNATIONAL YIELDS
2017E
2018E
CASK
2019E
2020E
RASK-CASK
Revenues forecast: royalties are still in the shadow
In light of economic uncertainty, it is rather challenging to make financial forecasts for
Aeroflot. Even the Bloomberg consensus provides a very wide range on the company’s
revenues ($8.8-10.1 bln) and EBITDA ($816-1,300 mln) estimates for this year. We
conservatively forecast revenue growth at 2% YoY in 2014 to $9.3 bln driven by 7.5%
passenger turnover growth and a 3% decline in yields. 2014-18E CAGR assumes 7%
growth to $13 bln in 2018. Around 87% of the company’s revenues are derived from
passenger traffic, 6% from airline revenue agreements (including undisclosed Siberian
flyover fees and revenues from partners under frequent-flyer programs), 3% from cargo
and the remaining 4% from hotel, catering and ground-handling services.
Aeroflot has still not shed any light on its Siberian flyover fees and we do not exclude
them from our financial forecasts, but instead adjust them in our valuation. Meanwhile,
Russia’s deputy transportation minister recently stated that Russia does not plan to
13
APRIL 14, 2014
abandon fees for foreign carriers at this point. According to different media sources, the
size of flyover fees for Aeroflot totals around $120-170 mln, which comprises 1.6% of
the company’s revenues and 17% of 2014E EBITDA.
Aeroflot revenue breakdown, $ mln
Aeroflot revenue breakdown by destination, 2013
16,000
17.0%
14,000
35.0%
12,000
10,000
4.0%
8,000
2.0%
6,000
4,000
2,000
PASSENGER TRAFFIC
AIRLINES REVENUE AGREEMENTS
41.0%
2020E
2019E
2018
2017E
2016E
2015E
2014E
2013
2012
2011
2010
0
CARGO
OTHER REVENUE
RUSSIA
EUROPE
ASIA
NORTH AMERICA
OTHER
Source: Company
14
APRIL 14, 2014
AEROFLOT COST DRIVERS:
THE LOWEST AMONG TRADITIONAL CARRIERS
Aeroflot’s cost per ASK (CASK) was down 4% YoY to $7.8 cents in 2013, making the
company one of the most efficient airlines globally. Low CASK allows the company to
maintain lower passenger yields compared to competitors. Meanwhile, we believe there
is some possibility to reduce CASK further (albeit not substantially) thanks to improving
fuel, labor and maintenance efficiency.
Aeroflot costs breakdown, 2013
Cost per ASK comparison, US cents
7%
17%
8.0
7.0
4%
10%
6.0
8%
5.0
4.0
8%
3.0
2.0
1.0
29%
17%
0.0
2013
2014E
2015E
OTHERS
PERSONNEL
MAINTENANCE
AIRCRAFT FUEL
AIRCRAFT AND TRAFFIC SERVICING
SG&A
STAFF COSTS
OTHER EXPENSES
Source: Bloomberg , Gazprombank estimates
2012
3.8
4.5
4.6
2013
AEROFLOT CASK
AEROFLOT EX-FUEL CASK
OTHER/ASK
Source: Bloomberg , Gazprombank estimates
2.2
2.1
1.9
3.1
3.1
1.0
3.2
1.4
2.8
3.0
1.3
2.3
4.1
4.1
4.2
3.8
3.6
4.2
AEROFLOT
2011
GLOBAL CASK
GLOBAL EX-FUEL CASK
3.4
TURKISH AIRLINES
0
1.5
EMIRATES
2
6.6
2.4
AMERICAN AIRLINES
AIRFRANCE-KLM
4
5.4
3.3
DELTA
6
3.4
2.1
SINGAPOUR AIRLINES
8
3.6
IAG
10
LUFTHANSA
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2010
2018E
Cost per ASK comparison, US cents
12
2009
2017E
Source: Turkish Airlines, Gazprombank estimates
Cost per ASK performance, US cents
2008
2016E
OPERATING LEASE EXPENSES
SG&A
AIRCRAFT AND TRAFFIC SERVICING
UNITED AIRLINES
AIRCRAFT FUEL
MAINTENANCE
OPERATING LEASE EXPENSES
DEPRECIATION
FUEL/ASK
STAFF/ASK
Source: Turkish Airlines, Gazprombank estimates
Fuel consumption efficiency
Fuel costs account for 29% of Aeroflot’s opex, which is close to the global peer average.
Following large-scale fleet renovation, the company has steadily improved its fuel
efficiency over the past several years – its fuel consumption in grams per ASK (g/ASK)
declined 13% to 24.8 in 2014 from 28.6 in 2010, which is very good achievement
compared to global peers. However, there is more to come, in our view, based on the
increasing share of wide-body modern aircraft with better fuel efficiency (such as the
Boeing 777) and the disposal of the gas-guzzling Il-96 and Boeing 767. The company
purchases around 66% of its jet fuel volumes at its base Sheremetyevo airport, where the
price is a bit lower than in other Russian regional airports and Europe. Around 11% of
Aeroflot’s fuel purchases are made at regional airports, while 23% is purchased abroad.
15
APRIL 14, 2014
Aeroflot fuel efficiency is improving steadily, g/ASK
40.0
Global airlines EBITDAR margin, 2013
19.0%
EMIRATES
36.0
35.0
31.8
28.6
30.0
28.1
26.0
24.8
25.0
24.6
TURKISH AIRLINES
18.0%
AEROFLOT
17.8%
15.7%
SINGAPORE AIRLINES
13.9%
DELTA
20.0
12.2%
AMERICAN AIRLINES
15.0
IAG
11.0%
10.0
AIR FRANCE-KLM
10.8%
5.0
UNITED AIRLINES
10.1%
8.3%
LUFTHANSA
0.0
2008
2009
2010
2011
2012
2013
2014E
0.0%
5.0%
Source Company, Gazprombank estimates
10.0%
15.0%
20.0%
Source: Companies, Gazprombank estimates
Labor productivity
Labor accounts for 17% of Aeroflot’s total operating costs, which increased 14.7% in
2013 (vs. 12% revenue growth) driven by a 4% increase in total headcount to 30,726
employees and 15% ruble-based wage inflation. Aeroflot has improved its labor
productivity by 30% over the past few years and currently one employee “services”
around 1,200 passengers. However, we believe there is more opportunity to further
increase productivity by raising the share of outsourcing services. For example, Turkish
Airlines boasts more than 2,000 passengers per employee.
The deficit of qualified pilots is a problem in Russia that leads to accelerated wage
growth in the airlines sector. The government’s recent decision to set a quota to hire
900 foreign pilots within the next few years may cool the market a bit.
Aeroflot Group, headcount performance, employees
Passengers per employee
40,000
2000
30,000
1500
20,000
1000
10,000
500
2,500
2,000
1,500
500
AIRFRANCE-KLM
EMIRATES
SINGAPOUR AIRLINES
IAG
AEROFLOT
AMERICAM AIRLINES
UNITED AIRLINES
LUFTHANSA
DELTA
2020E
2019E
2018E
2017E
2016E
2015E
2014E
2013
2012
OTHER COMPANIES
REGIONAL AIRLINES
AEROFLOT STAND-ALONE
PAX TRAFFIC/AVERAGE HEADCOUNT
TURKISH AIRLINES
0
0
2011
0
1,000
Maintenance costs
Aeroflot’s maintenance costs in 2013 comprised 7.5% of total costs, or $640 mln, which
is rather high given the very young fleet (average age of 5.4 years). Moreover, these
expenditures are well above the level among global peers. For example, maintenance
costs at Turkish Airlines were just 3.4% of total costs, or $312 mln. Partly this is due to
Aeroflot historically delivering a substantial amount of maintenance works in-house,
while global airlines are moving toward increasing the share of outsourcing works. In
16
APRIL 14, 2014
addition, there are also a number of outdated aircraft, namely Il-96 and Boeing 767,
which require heightened maintenance expenses. These aircraft will be disposed of this
year and we expect the share of maintenance costs in Aeroflot’s cost structure to
gradually decline.
17
APRIL 14, 2014
AEROFLOT INVESTOR DAY: A WELL DEVELOPED PLAN
Aeroflot management conducted a large-scale investor day in mid-March, presenting the
company’s long-term strategy. It was generally focused on the Group’s long-term
development, market trends, the company’s market positioning and strategy, industry
specifics, corporate and legal issues, while less attention was paid to the near-term
outlook and potential risks in case of a sharp economic downturn. The key takeaways
from the meeting are the following.
Staying with a multi-brand strategy. Aeroflot Group combines six airlines that carry
out flights under their own brands, but in different niches and regions of presence.

Aeroflot standalone is the core airline inside the Group, positioning itself as a
premium carrier with the best comfort on international and domestic routes. It is the
only provider of business services.

Donavia (Southern regions), Rossyia (North-Western regions), Aurora (Far Eastern
regions) are regional carriers that provide from regional airports and work as feeder
airlines for Aeroflot on some international routes;

OrenAir — charter carrier;

Dobrolet — low-cost carrier that will be based in Moscow, but not at Sheremetyevo
Airport. Should be launched in 2H14.
Aeroflot Group subsidiaries
COMPANY
NETWORK
BASE AIRPORTS
DESTINATIONS
FLEET
PASSENGERS
CARRIED IN 2013, 000
Aeroflot
Internationa and Mainline domestic
Sheremetevo
129
160
20,902
Donavia
Regional
Rostov-na-Donu, Sochi, Krasnodar
30
10
1,354
Rossiya
Domestic, regional
St.-Petersburg
Up to 70
43
4,590
Regional
Vladivostok, Khabarovsk
>100
40
1,403
30
3,141
Aurora
OrenAir
Touristic destinations (charter flights)
Dobroloet
Domestic
Vnukovo or Domodedovo
11
8
Source: Company

Aeroflot expects its passenger traffic to reach 47 mln by 2018, assuming 8%
CAGR. This figure includes 10 mln passengers from Dobrolet. The company’s
guidance matches our own estimate of 46.2 mln passengers by 2018. By 2025,
Aeroflot plans to carry 70 mln passengers (7% CAGR), which will be split equally
between the international and domestic segments.
Aeroflot passenger traffic, mln
Aeroflot transit passenger traffic, mln
60
8
35%
7
50
5.7
6
40
30
20
10
12
16
14
17
16
18
19
21
23
24
25
5
24
36%
7.3
35%
34%
33%
4.2
4
32%
32%
31%
3
19
20
21
22
23
2
25
30%
30%
29%
1
28%
0
0
2012
INTERNATIONAL
27%
2011
2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
2012
2013
TRANSIT PASSENGERS, MLN PAX
SHARE OF TOTAL AEROFLOT TRAFFIC (STAND-ALONE)
DOMESTIC
Source: Company
18
APRIL 14, 2014

Moscow represents an attractive transit hub on many routes between the
Americas/EU and Asia. It holds competitive advantages compared to traditional
hubs namely, Istanbul and Dubai, in terms of flight time. That is why an increasing
share of transit passenger traffic is one of Aeroflot’s strategic priorities (but not the
only one). In 2013, Aeroflot carried 7.3 mln transit passengers, which is 23% of its
total traffic and there is still plenty of growth ahead. We have seen Aeroflot’s largescale advertising campaign in many global airports recently and this should bring
additional passenger traffic going forward. We think that Aeroflot should be well
received by international travellers because of its young and advanced fleet, highquality business class and comfortable economy class (which, in our view, is at
least a non-competitive advantage compared to European carriers), attractive fare
policy, comfortable transit at Sheremetyevo airport, quality food and entertainment
services on board.

Sheremetyevo, Aeroflot’s base airport, is not a threat for its expansion and is
on track to build up its capacity. The third runway and tunnel between the
Northern and Southern passenger terminals will be up and running by 2017. The
Northern terminal will be reconstructed, thus increasing Sheremetyevo’s capacity
from 35 to 42 mln passengers with subsequent expansion to 64 mln passengers by
2030. The comfortable and reliable airport infrastructure creates favorable
conditions for Aeroflot’s rapid development, strengthening its premium positioning
against domestic and international competitors. Sheremetyevo remains the core
hub for Aeroflot, while airports in St Petersburg (Pulkovo), Vladivostok (Knevichi),
Sochi and Rostov-on-Don will remain supporting airports for the Group and a base
for regional subsidiaries.
Aeroflot Group base airports
SAINT-PETERSBURG
MOSCOW
ROSTOV
KRASNODAR
KHABAROVSK
SOCHI
VLADIVOSTOK
Source: Gazprombank

Privatization. The management has not shed any light on potential privatization. In
theory, it may happen in 2H14 in case of favorable market conditions, but as of
today, it seems unlikely to us and will be postponed until better times. To recap, in
total a 10% stake (around $160 mln) in Aeroflot should be placed on the market,
including around a 1.2% state stake, a 3.6% stake of Rostec and 5% of Aeroflot
treasury shares. If the deal occurs, Aeroflot’s free float would increase to 50%, or
$800 mln. We believe that that the stake could be placed on Moscow Exchange.
However, Aeroflot launched an ADR program on NYSE and some free float could
be converted into GDRs going forward.
19
APRIL 14, 2014
Aeroflot current shareholder structure
40.3%
5.0%
3.6%
51.2%
STATE PROPERTY
ROSTEC
TREASURY SHARES
FREE FLOAT
Source: Company

Aeroflot has extended the use of hedging instruments to reduce currency
risks and the risk of rising fuel costs, but this may hurt its bottom line this
year. The company hedged its euro-based revenue against the ruble to bring it in
line with ruble costs. Unfortunately, such a strategy runs serious risks for Aeroflot in
the light of the ruble’s substantial depreciation against the euro. As a result, the
company may need to record losses from revaluation of these hedging instruments
below the EBITDA line in 1H14, but it is difficult to estimate their actual size at this
point. The company also hedges fuel costs using the zero-cost option model. The
company does not disclose the parameters of the option, but we do not expect any
impact on the company’s P&L in light of stable oil prices. To date, Aeroflot has
hedged nearly 70% of its fuel costs for 2014.
Aeroflot currency risk hedges
120%
2%
100%
19%
80%
60%
49%
2%
2%
29%
32%
14%
5%
55%
60%
AFTER HEDGING
COST STRUCTURE
40%
20%
30%
0%
REVENUE STRUCTURE BEFORE
HEDGING
RUB
EUR
USD
OTHER
Source: Company
20
APRIL 14, 2014
DOBROLET: LOW-COST AIRFARES FOR EVERYONE
Aeroflot intends to launch a low-cost carrier named Dobrolet (the name of Aeroflot’s
predecessor established by the USSR in the 1920s) in 2H14. It includes traditional lowcost features: maximum differentiation from the parent company, including brand,
minimum in-flight value-added services, another basic airport (Domodedovo or
Vnukovo), non-refundable tickets, and no free meal on board.

Pricing. The management guides for ticket fares 20-40% lower than for traditional
carriers. The majority of the tickets will be non-refundable and sold online. As a
result, its fares should be very similar or even lower than railway tariffs for
compartments, thus shifting the bulk of traffic not away from airlines including
Aeroflot itself, but from railways.
Comparison of fares between train, traditional airlines and LCC
TRAIN
AIRLINE
AEROFLOT
CURRENT MIN.
PRICE, RUB
DOBROLET
EXPECTED
FARES (AT 30%
DISCOUNT FROM
AEROFLOT)
LLC DISCONUT
FROM MINIMUM
TRAIN FARES
2,300
1,610
15%
0
-44%
From Moscow
Min,
RUB
Max,
RUB
Time of
journey
Min,
RUB
Max,
RUB
Time of
journey
St.Petersburg
1,400
2,700
8:00
2,250
3,000
1:20
St.Petersburg with
Supsan high-speed train
2,850
3,100
3:45
Sochi
3,600
3,800
23:54
2,800
5,000
2:10
4,400
3,080
-14%
Ufa
3,279
4,300
30:16
3,300
3,800
2:00
3,300
2,310
-30%
Kazan
2,000
3,000
11:20
2,850
3,400
1:30
3,360
2,352
18%
Samara
1,809
2900
13:20
2,312
3,800
1:40
2,300
1,610
-11%
Ekaterinburg
3,700
5135
26:50
4,526
5,495
2:10
5,400
3,780
2%
Krasnodar
3,271
4,700
19:27
2,900
4,200
2:10
3,362
2,353
-28%
Volgograd
2,700
2,800
18:43
5,800
6,500
1:45
6,400
4,480
66%
Rostov-on-Don
2,400
3,600
15:42
2,800
3,600
1:40
2,900
2,030
-28%
Note: Prices as of April 1, 2014
Source: marshruty.ru, Gazprombank estimates

Routing network. The company will start flying to 11 point-to-point destinations
inside Russia this year, likely St. Petersburg, Kazan, Sochi, Kransodar,
Kaliningrad, Ekaterinburg, Ufa, Samara and Rostov-on-Don. The number of routes
will be expanded to 27 by 2016 and then Dobrolet plans international expansion.
The company’s passenger traffic flow will reach 10 mln by 2018, or 21% of
Aeroflot’s total.

Aircraft types. Dobrolet will use Boeing-737-800s in a single-class cabin with 189
seats, which are the most widespread and well adapted aircraft for low-cost
business models that make it possible to achieve the lowest cost per ASK.
Dobrolet will start operations with eight aircraft and then expand its fleet to 40
planes by 2018. Only recently this type of plane was exempted from 20% import
duties by the Russian government.

Management team. Dobrolet will be operated by a separate management team
with great experience in managing LCC. In particular, they managed Russia’s first
low-cost carrier (Avianova, established in 2009), but the company went bankrupt in
2011 due to a shareholders conflict. Such experience should help the management
avoid operational mistakes running Dobrolet.
How will Dobrolet affect Aeroflot’s financials?
We currently do not plug Dobrolet into our financial forecasts and valuation, as we
lack sufficient data to build a reliable financial model. However, we admit that its
gradual expansion inside Aeroflot will change the Group’s financial parameters going
21
APRIL 14, 2014
forward. For instance, we expect Aeroflot’s passenger yields on domestic routes to
decline substantially after the LCC is launched. This should not affect margins, as
costs per ASK should decline as well. In the table below, we tallied pro-forma
financials for Dobrolet. We expect it to report a minor loss in the first year of
operations for natural reasons as a start-up project, with its EBITDA subsequently
doubling each year and reaching over $100 mln in 2018, on our estimates, or just 6%
of Aeroflot Group’s EBITDA.
Dobrolet pro-forma financials
2014E
2015E
2016E
2017E
2018E
2019E
Total fleet (year end)
8
14
20
26
32
40
Total fleet (year average)
4
11
17
23
29
36
Seats per plane
189
189
189
189
189
189
Trips per day (one-way)
6.0
6.0
6.0
6.0
6.0
6.0
Average distance, km
1,350
1,350
1,350
1,350
1,350
1,350
Total capacity, bln pass-km
2.24
6.15
9.50
12.85
16.20
20.12
Load factor
82%
82%
82%
82%
82%
82%
RPK, bln pass-km
1.83
5.04
7.79
10.54
13.29
16.50
1.36
3.73
5.77
7.81
9.84
12.22
RPK yields, cents
6.18
6.28
6.35
6.42
6.49
6.55
Revenues, $ mln
113.3
316.7
494.8
676.9
862.2
1,080.2
EBITDA margin
-30%
5%
7%
10%
12%
12%
EBITDA, $ mln
-34.0
15.8
34.6
67.7
103.5
129.6
How will Dobrolet affect the market?
We believe that the emergence of LCCs in Russia will substantially change the domestic
transport market landscape, fuelling growth in domestic passenger traffic. We can
already see that competition between airlines is heating up. Transaero and UTair, which
are the second and third-largest Russian carriers, are moving toward hybrid business
models and combine both traditional and low-cost types of operations. Both companies
order single-class planes with minimum space between seats and thus will be able to
further reduce costs and fares. The main passenger stream should come from Russian
Railways, which will shoulder the brunt of this tariff revolution. The railway monopoly is
already unable to compete with airlines on short-haul distances (up to 2,000 km), while
its tariffs are higher and journey time times longer and difficult to reduce.
Monthly passenger traffic growth, %
20%
15%
10%
5%
12%
9%
1%
9%
9%
0%
11%
10%
10%
12%
14%
16%
14%
10%
9%
12%
2%
0%
-5%
-10%
01/13 02/13 03/13 04/13 05/13 06/13 07/13 08/13 09/13 10/13 11/13 12/13 01/14 02/14
-1%
-4%
-4%
-5%
-6% -7% -6%
-8% -7% -8%
-9%
DOMESTIC AIRLINES
RUSSIAN RAILWAYS
Source FAVT, Russian Railways
22
APRIL 14, 2014
AEROFLOT 4Q13 IFRS RESULTS DISAPPOINTED
INVESTORS, RAISING SHORT-TERM CONCERNS
4Q13 IFRS results
Following Aeroflot’s impressive results for 3Q13 reported at end 2013, the figures for
the last quarter (4Q13), published in mid-March, were well below market expectations.
The main disappointment came from passenger yield performance, which declined
5.4% YoY to 8.8 cents per passenger-km, while analysts and investors had expected
some growth based on the 9M13 historical upward trend. Thus, Aeroflot’s revenues
declined 0.7% YoY to $2.1 bln and posted negative EBITDA of -$131 mln compared
with a gain of $17 mln last year. This negative performance was due to a certain
extent to one-off losses related to regional airlines that Aeroflot calculates above the
EBITDA line, as well as ruble devaluation. As a result, the net loss stood at $315 mln
compared to -$130 mln last year.
2013 IFRS results
Consolidated revenues increased 12.3% YoY to $9.14 bln (consensus: $9.30 bln), driven
by 14.3% growth in RPK (announced earlier) and flat passenger yield performance.
EBITDA was up 50% YoY to $1 bln (consensus: $1,284 mln), while net income stood at
$230 mln (up 38% YoY), including a $106 mln loss from regional airlines.
Aeroflot 4Q13 and 2013 IFRS results, $ mln
2013
Revenues
RPK (mln pass-km)
Yield ($ cents per RPK)
EBITDAR
EBITDAR margin
EBITDA margin
EBITDA margin
Net income
Net margin
Adjusted net income
CASK, cents
2012
CHANGE
2013C
A/C
9,136
8,138
12%
9,285
-1.6%
85,273
74,617
14%
4Q13
4Q12
CHANGE
2,103
2,117
-0.7%
19,910
18,388
8.3%
9.1
9.1
0%
8.8
9.3
-5.4%
1,602.0
1,238.0
29%
27.0
169.0
-84.0%
17.5%
15.2%
1.3%
8.0%
1,000
671
10.9%
8.3%
49%
1,284
-22.1%
-131
17
38%
385
-40.2%
-315
-130
n/m
230
166
2.5%
2.0%
224
125
79%
-315
-130
31
27
14%
7.4
6.5
13.0%
7.61
8.06
-6%
8.59
8.72
-1.5%
C – Interfax consensus estimates
Regional airlines financial performance and further restructuring
Revenues among Aeroflot’s regional airlines increased 13.3% YoY in 2013 to $2.4 bln,
driven by 4% growth in RPK and an 8.9% increase in passenger yield. Regional airlines
contribute 26% to Aeroflot Group’s consolidated revenues and 33% to its passenger
traffic. They remain loss-making, posting a $106 mln loss for 2013, which is still better
than in 2012, when subsidiaries reported a loss of $186 mln. We expect the losses to
continue to decline this year on the back of the restructuring of Aeroflot’s Far East
subsidiaries (Vladivostok Avia and Sakhalin Airlines) and the formation of Aurora on
their bases.
Aeroflot is on track with the integration of regional airlines, having taken the following
actions:

Management centralization. Ongoing transfer of subsidiary airline operations
under 100% operational management of Aeroflot Group. Rossiya airline is the first
one to be 100% operated by Aeroflot starting from 2014.
23
APRIL 14, 2014

Fleet optimization. Aeroflot is unifying its fleet in subsidiaries, including the
cancellation of unprofitable lease contracts in subsidiaries (i.e. Vladivostok Avia)
and no longer using aircraft with low operating efficiency (i.e. Tu-204). The Group
will receive 50 new Boeing 737-800 and 737-900 aircraft until 2017, which will
likely be used in subsidiaries. Such moves will help improve their financial and
operating efficiency.

Network optimization. Aeroflot is optimizing its network, eliminating competition
between regional subsidiaries. Subsidiaries are increasing the frequency of flights
on the most attractive routes with high traffic. They are also operating as regional
feeder airlines, providing additional traffic for Aeroflot’s international flights.

Favorable leasing conditions. As Russia’s leading airline and with state control,
Aeroflot benefits from high credit ratings that allow the company to borrow cheaply
or use finance leases under more attractive terms compared to other Russian
carriers. That benefit will now be extended to regional airlines, allowing them to
optimize their payments under finance and operating lease terms.

Centralized procurement. Aeroflot is able to provide centralized procurement so
that its subsidiaries can receive discounts. This is particularly important in
purchasing jet fuel, during which Aeroflot agrees to direct contracts with oil majors.
In the past, the price of jet fuel in regional airports where Aeroflot subsidiaries’ are
based was higher due to a lack of competition among suppliers and lower
purchasing volumes.
Following these incentives, we expect regional airlines to continue improving their
operating and financial results in the coming years, achieving breakeven at the bottom
line in 2015. As a result, this may boost Aeroflot’s net income by around $100 mln in
2015 compared to the 2013 level ($230 mln). In the long run, we do not expect regional
airlines to become as profitable as Aeroflot on a stand-alone basis, as one of their main
goals is to provide traffic for Aeroflot, while the matter of profit generation is only a
secondary issue.
Aeroflot regional airlines financials
Passenger traffic, ‘000 passengers
ROSSIYA
ORENAIR
AURORA*
DONAVIA
TOTAL
2013
4,590
3,141
1,403
1,354
10,488
2012
4,209
3,194
1,427
986
9,816
2013
9,186
10,984
2,875
2,001
25,046
2012
8,761
10,505
3,385
1,434
24,085
2013
76.0%
82.0%
69.0%
66.0%
77.0%
2012
77.0%
86.0%
67.0%
69.0%
78.0%
2013
1,008
661
470
262
2,401
2012
900
567
430
223
2,120
2013
11.0
6.0
16.3
13.1
9.6
2012
10.3
5.4
12.7
15.6
8.8
2013
-21
-17
-66
-2
-106
2012
-67
-25
-111
17
-186
Passenger turnover, mln pass-km
Seat load factor
Revenues, $ mln
Yield, cents
Net income/loss, $ mln
* formerly Vladivostok Avia and SAT
Source: company data, Gazprombank estimates
Aeroflot cash flow distribution and dividends
Aeroflot’s operating cash flow surged 68% YoY to $908 mln in 2013 on the back of
increasing net income, depreciation and low prepayments for aircraft. Free cash flow
totaled just $74 mln, boosting the company’s cash position to $570 mln. Aeroflot’s net
debt (including finance leases) of $2 bln implies a net debt/EBITDA ratio of 2.0x, which
24
APRIL 14, 2014
is a fairly comfortable level for the airline. Based on a 25% payout ratio from the
company’s net income before minorities ($230 mln), we forecast a dividend of RUB 1.7
per share, implying a yield of about 3%. Aeroflot’s BoD will consider this dividend at the
AGM to be held in May.
Aeroflot net debt performance (incl. finance leases), $ mln
Aeroflot dividend per share, RUB
3,500
3.50
6.0
3,000
3.00
5.0
2,500
2.50
2,000
2.00
10.0%
9.0%
8.0%
7.0%
4.0
6.0%
3.0
1,500
1.50
1,000
1.00
500
0.50
1.0
0.00
0.0
0
4.0%
2.0
2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
NET DEBT
5.0%
3.0%
2.0%
1.0%
0.0%
2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
NET DEBT/EBITDA
DPS
Source: Company, Gazprombank
DIV. YIELD
25
APRIL 14, 2014
AEROFLOT MANAGEMENT AND CORPORATE
GOVERNANCE ISSUES
The management
Aeroflot’s board comprises 13 members. New CEO Vitaly Saveliev headed the company
in 2009 during the global financial crisis, which negatively affected Aeroflot’s financials.
Over the past five years, Aeroflot’s management has done a good job, we believe:
Aeroflot remains the industry leader, despite its large market share, is growing in line
with the market or even faster, its financial and operational efficiency is improving, and
the integration of regional airlines is on track. Below we provide a list of key Board
members responsible for Aeroflot’s operating and financial management.
POSITION
Chairman, CEO
Deputy General
Director – Customer
Service Director
Deputy General
Director for Strategy
and Alliances
First Deputy General
Director – Operating
activities
Deputy General
Director for Finance
and Network and
Revenue
Management
Deputy General
Director – Sales and
Property Issues
Director
NAME
BIOGRAPHY
Vitaly Saveliev
Born in 1954.
In 1977 he graduated from the Faculty of Mechanical Engineering of Leningrad Polytechnic Institute, and in 1986
from the Engineering-Economics Institute named after Palmiro Togliatti.
From 1990 to 1993 — President of the Soviet-American enterprise DialogInvest.
From 1993 to 1995 — Chairman of board of bank Rossiya.
Since November 1995 — Chairman of the Board of Bank Menatep SPb, since September 2001 — Deputy
Chairman ofGazprom.
From 2002 to 2004 — Vice-President of the combined company GROS, Finance Advisor to the General Director
of Svyazinvest.
From 2004 to 2007 — Deputy Minister of Economic Development and Trade.
From 2007 to April 2009 — First Vice-President of Farm Credit Administration Sistema.
Since April 10, 2009 he has been General Director of Aeroflot.
Vadim Zingman
Born in 1970.
Graduated from St. Petersburg University of Economics and Finance with a degree in Economics. He worked in
the St. Petersburg branch of Inkombank (vice-president), Baltoneksim Bank (Chairman), the Interdisciplinary
Institute of Training and Retraining of Personnel (teacher-advisor), Interregional Clearing Bank (President),
Ministry of Economic Development and Trade (Deputy Director of the Department of State Regulation of Foreign
Trade) and Sistema (Director of the Department for Relations with Public Authorities). From 2009 until 2011 he
served as Adviser to the General Director of Aeroflot, and Deputy General Director for Operations and Product
Quality Management. He has held his current position since February 2012.
Giorgio Callegari
Born in1959.
Graduated from Turin Polytechnic University (Turin, Italy) with a degree in Mining Engineering.
From 1990 to 2011 he worked at Alitalia, where he worked as Sales Manager, Vice President for Sales (Italy,
Europe, World), Vice President of the Domestic Network, Vice President for Business Development, Alliances &
International Relations, and Executive Vice President for Alliances and Strategies, a responsibility that also
encompasses Fleet Planning and Acquisition and Cargo.
In 2007 was elected Chairman of the IATA Industry Affairs Committee.
he has worked at Aeroflot since 2011.
Andrey Kalmykov
Born in 1973.
Graduated in 1996 from Moscow State institute for Radiotechnics, Electronics and Automation. He worked as
commercial director of the Business Institute from April 1996;
From 1998 to 2008, he worked as commercial director, general director and chairman of the BoD of Sunrise tour”
company group.
From 2008 to 2010, he worked as aide to the Minister of Transport of the RF.
From 2010 to 2011 he was Deputy General Director – Commercial Director.
He has held his current position since February 2012.
Shamil Kurmashov
Born in 1978.
Graduated from the MGIMO with a diploma in Foreign Economic Relations and knowledge of a foreign language.
Ph.D. in Economics.
From 2002 to 2004 he served as a departmental head at Norilsk Nickel;
from 2004 to 2007 he was Deputy General Director for Finance and Investments at Sistema Telecom;
and in 2007-2009 was director of the Investment Department and Deputy Head of Complex Finance and
Investment atSistema.
He has worked at Aeroflot since 2009.
Dmitry Saprykin
Born in 1974.
Graduated from Moscow State Law Academy with a degree in Legal Sciences. After training at Cornell Law
School, he earned his LL.M with MBA courses. His career began at LLP Group MOST (Assistant Legal Adviser),
followed by work in the Treasury of Bank Menatep (Senior Legal Adviser), International Business Center (Deputy
Director), MTS (Director of Mergers, Acquisitions and Capital Markets), Sky Link (Deputy Director), MCC (CEO),
and Sistema (Deputy Head of the Legal Complex / Director of the Transactions Department).
Corporate governance
Listing and liquidity. Aeroflot currently trades on Moscow exchange. Its free float totals
40%, or $640 mln, with average daily turnover of $3-5 mln, representing the secondmost liquid transportation stock after Globaltrans. The company also has GDRs listed on
the Frankfurt stock exchange, but their liquidity is close to zero. At the end of last year,
26
APRIL 14, 2014
the company registered ADRs (Level 1) on the NYSE with a maximum placement of 277
mln shares (25% of equity) ahead of privatization. A US stock exchange was chosen
because many foreign airlines trade there and the overall perception of the airline sector
among investors in the US is more favorable, unlike the more negative view among
European investors’. However, in light of the recent confrontation between the US and
Russia regarding Ukraine, we are not sure that Aeroflot will convert part of its shares
into ADRs anytime soon.
Dividend policy. Aeroflot does not have an official dividend policy, but as a stateowned company it accepts any government decisions in this area. Last year the
company paid dividends based on 25% of net income before minority interest under
IFRS and we expect that it will continue to do so this year. The government’s decision to
introduce a 25% dividend payout under IFRS for all state-owned companies remains
under discussion and has not been approved yet.
Information disclosure. Aeroflot has improved its financial and operating disclosure
over the past few years. It presents regular financial and operating results for investors,
and conducts non-deal road shows and analyst days.
Privatization. The government is considering reducing its stake in Aeroflot to 25% via the
sale of another 25% on the market by 2016, according to the government privatization
plan. Currently it is too early to make conclusions about this event, but fundamentally it
would have positive and negative outcomes. From the negative side, Aeroflot would lose
its state-owned status, which could lead to deterioration of the company’s credit ratings
and increased borrowing costs. Moreover, the company may lose its flyover fees. From
the positive side, Aeroflot’s liquidity may increase, or a strategic investor more interested in
raising the company’s value might acquire a big stake.
27
APRIL 14, 2014
GLOBAL AIRLINES INDUSTRY:
EXCELLENT GROWTH OPPORTUNITIES LIE AHEAD
What are the features of global airlines?
Airlines suffer from one of the lowest returns on investment compared to all other
sectors of the economy, but this effect is balanced by accelerated growth rates
compared to global GDP growth. After the global financial crisis came to an end, the
airline industry entered a new phase of robust growth at 4.7% passenger turnover
CAGR for 2009-13 compared to 3% world GDP growth. In 2013, passenger turnover
increased another 5.2% (vs. 2.9% world GDP growth) to more than 3 bln passengers
(42% of the global population). Total passenger traffic will increase by another 40% to
4.2 bln people by 2018 based on ICAO projections and this figure is expected to double
by 2030. The key market drivers are the following.

19% growth of the world population by 2030 to 8.3 bln people according to UN
estimates;

Accelerated 37% growth in the urban population by 2030. The number of large cities
will increase dramatically, by more than 50% to 96 cities with more than 5 mln
inhabitants.

The emergence of a middle-class population as a result of urbanization. Most of
this growth will come from Asia, which will represent two thirds of the middle-class
population in 2032 (3.5 bln people). In parallel, middle-class consumption will grow
at the same pace. This will constitute a tremendous level for global consumption
over the next two decades and underscore the shift of consumption to Asia,
following the shift in production.

As a result, this will lead to excess demand for tourism, with airlines travelling
accordingly.
According to Airbus and Boeing estimates, airlines located in the Middle East, Latin
America and Asia-Pacific regions will enjoy above-average traffic development until
2032, growing by 7.1%, 6.0% and 5.5%, respectively. Airlines based in Africa and the
CIS are also expected to register growth above the world’s 4.7% average annual rate to
2032. Finally, North America and Europe, which have more mature growth rates, are
expected to grow at slower rates (3.0% and 3.8%, respectively), but will still contribute
40% of the world’s air traffic by 2032.
GDP and RPK growth
Global passengers carried, bln
35%
4.5
30%
4.0
25%
3.5
20%
3.0
15%
2.5
10%
2.0
5%
1.0
-5%
GLOBAL GDP
RUSSIAN GDP
2018E
2017E
2016E
2015E
2014E
2013
2012
2011
2010
2009
2008
2007
2006
0.5
2005
-15%
1.8
1.5
0%
-10%
2.6
1.2
1.6
0.0
2012
GLOBAL RPK
RUSSIAN RPK
INTERNATIONAL
Source: ICAO, IATA, Gazprombank estimates
2018E
DOMESTIC
Source: ICAO
28
APRIL 14, 2014
Annual RPK growth forecast (2012-32)
Global ASK breakdown, 2013
LATIN AMERICA
6.9
4.0
MIDDLE EAST
ASIA PACIFIC
EUROPE
4%
5.0
3.2
3.4
3%
5.7
4.4
CIS
5%
6.3
4.5
AFRICA
9%
23%
6.3
3.8
WORLD
4.5
25%
4.2
1.8
32%
2.7
2.5
NORTH AMERICA
0.0
1.0
2.0
3.0
4.0
TRAFFIC GROWTH RATE
5.0
6.0
7.0
8.0
GDP GROWTH RATE
ASIA/PACIFIC
NORTH AMERICA
EUROPE
LATIN AMERICA
AFRICA
RUSSIA
Source: Boeing current market outlook, 2012-2032
Source: ICAO, FAVT
We can observe how the airline industry is preparing infrastructure to meet skyrocketing
demand. For instance, the Airbus 380, a giant passenger aircraft capable of carrying up
to 800 passengers, made its first flight in 2007. This was EADS’ timely response to the
robust growth in global passenger traffic and a successful decision to cut flight operating
costs and fares. Emirates has become one of the largest contractors for these planes. It
already operates 45 Airbus 380, while the company has ordered a total of 140 of these
aircraft from EADS. This is a result of the tremendous development of Middle East
countries as important hubs between Asia and Europe.
The world’s largest airport will be built in Istanbul by 2017. It will have six runways with
capacity to service up to 150 mln passengers. By comparison, the world’s largest airport
at present in Atlanta services around 90 mln passengers annually. According to Turkish
authorities, the airport will become the largest transit hub between East and West Africa
and Europe. The project hinges on a concession agreement with total investment
standing at $30 bln.
Global tourism development
1800
25.0%
1600
20.0%
1400
1200
15.0%
1000
800
10.0%
600
400
5.0%
200
0
0.0%
1995
2010
NUMBER OF TOURISTS, MLN
MIDDLE EAST
2020
% FROM TOTAL POPULATION
Source: World Tourism Organization
Russian airline industry at a glance
The Russian airline market is heavily underdeveloped. At present, some 100 mln
Russians use airlines, which is the highest level since 1991. However, 23 years ago the
industry consisted almost entirely of domestic flights, while the Iron Curtain kept most
29
APRIL 14, 2014
people from flying abroad. Currently, only about 40 mln passengers fly domestically,
which is 2.5 times less than in 1991, placing the implied population mobility index at
0.27. This is an extremely low level compared to both EM and DM markets. By
comparison, the Brazilian domestic mobility index is around 0.45; EU – 2.2x and Turkey
4.4x. Taking into account Russia’s vast territory and distances between cities, the
development of airlines looks inevitable over a relatively short time horizon.
Population mobility index
6
5
0.8
4
0.3
3
DOMESTIC FLIGHTS PER PERSON
RUSSIA
TURKEY
0.32
0.27
UK
0.4
EU
0.5
4
2.9
2.2
2
USA
1.6
ITALY
0
1.4
FRANCE
1
0.4
0.5
2
INTERNATIONAL FLIGHTS PER PERSON
Source: Pegasus airlines, Gazprombank estimates
Macroeconomic data
35.0%
31.3%
30.0%
25.0%
18.2%
17.2%
20.0%
15.0%
10.0%
5.0%
13.3%
12.6%
6.4%
3.4%
9.4% 8.5%
8.2%
17.2%
13.6%
11.5%
9.9%
15.0%
8.9%
8.4%
5.2%
5.2%
4.5%
4.3%
2.8%
3.4%
5.3%
1.3%
4.4%
0.6%
0.0%
-5.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
-3.5%
-10.0%
-7.8%-8.2%
-15.0%
GDP
REAL WAGES
PASSENGER TURNOVER
Source: State statistics services, Gazprombank estimates
Over the past five years, Russian air transport has been one of the fastest growing
markets globally, enjoying 2008-13 CAGR at 13% by passenger turnover (including
8.1% for domestic and 16.1% for international flights) against 4.7% for global growth.
Surprisingly, passenger turnover growth accelerated to 15% last year (225 bln pass-km)
even though GDP growth slowed to just 1.3%. International accounted for 65% of total
passenger turnover (up 15% YoY), with domestic passenger turnover occupying the
remaining 35% (up 8.9% YoY). International turnover prevails over domestic not just
because more passengers travel abroad, but also since international flights cover a
longer distance (ca. 3,200 km) vs. domestic flights (2,000 km).
30
APRIL 14, 2014
Russian airlines passenger turnover, bln pass-km
Russian airlines by passenger traffic, mln
400
140
350
120
300
100
40
2015E
2016E
2017E
2018E
2019E
50
54
58
62
2000
0
1000
0
2020E
2014E
47
2019E
109
44
2018E
101
41
2017E
95
39
2016E
89
33
35
2015E
83
29
31
39
2014E
78
49
44
48
52
46
50
45
2013
72
124
28
2010
60
66
2013
20
116
DOMESTIC
60
2012
171
2012
0
158
2011
50
88
124
149
2010
100
100
147
199
3000
54
80
233
2020E
150
184
215
4000
2011
250
200
INTERNATIONAL PASSSENGER TRAFFIC, MLN
DOMESTIC PASSENGER TRAFFIC, MLN
AVERAGE DOMESTIC DISTANCE, KM
AVERAGE INTERNATIONAL DISTANCE, KM
INTERNATIONAL
Source: FAVT, Gazprombank estimates
Market structure: official transport statistics ignore foreign carriers
In 2013, Russian airlines carried 83 mln passengers (+12% YoY), or 58% of the total
Russian population according to official statistics reported by the Federal Aviation
Transport Agency (FAVT). However, this data does not include an additional 19 mln
passengers that were carried by foreign airlines to/from Russia on international
routes. As a result, total passenger traffic in Russia exceeded 100 mln people last
year. Aeroflot Group controls a 37% market share and Transaero 20% according to
official data, while the five largest Russian airlines control a share of more than 80%.
Taking into account the 18% market share controlled by foreign airlines, Aeroflot
Group's share declines to a moderate 30%, which does not seem excessive for a
national carrier. Transaero and UTair, Russia’s second and third-largest carriers,
control just 12% and 8% shares, respectively.
Potential M&A opportunities in the Russian airlines market
Such a market structure indicates that industry consolidation is not over and we may
see more M&A deals in the sector going forward, with small regional airlines and
international players potentially being gradually squeezed out. Importantly, Russian
leading airlines to some extent operate in different market niches and theoretically can
complement each other. For example, Transaero has a strong presence on longdistance leisure destinations, while S7 Group has strong domestic market positions with
majority flights from Moscow and Novosibirsk. UTair is the leading regional carrier in
establishing flight connections between Russian cities (it also enjoys strong financial
support from its tremendously profitable helicopter business). Regarding Aeroflot, we do
not expect the company to engage in any M&A deals in the coming years, as it is fully
involved in the consolidation of regional airlines and the launch of a low-cost carrier.
31
APRIL 14, 2014
Russian airlines market breakdown by passengers carried
according to FAVT 2013
Russian airlines market breakdown by passengers including
foreign airlines, 2013
15%
22%
12%
17%
8%
10%
5%
9%
19%
11%
37%
31%
4%
TRANSAERO
S7+GLOBUS
URAL AIRLINES
TRANSAERO
S7+GLOBUS
URAL AIRLINES
FOREGIN CARRIERS
UTAIR
AEROFLOT GROUP
OTHER RUSSIAN CARRIERS
UTAIR
AEROFLOT GROUP
OTHER RUSSIAN CARRIERS
Source: FAVT
Russian airlines sector performance
RECENT OPERATING RESULTS
PASSENGER TURNOVER, BLN-KM
PASSENGERS CARRIED
LF
2M14
2M13
YOY
2M14
2M13
YOY
2M14
2M13
Aeroflot
9,124,829
8,292,260
10.0%
3,143,521
2,750,373
14%
74%
75%
Rossiya
1,106,884
968,043
14.3%
585,914
451,577
30%
68%
70%
Orenair
1,072,288
1,474,392
-27.3%
330,797
358,009
-8%
73%
80%
Aurora
217,990
385,509
-43.5%
137,447
188,201
-27%
73%
53%
Donavia
300,191
226,429
32.6%
211,391
157,114
35%
59%
61%
Aeroflot Group
11,822,182
11,346,632
4.2%
4,409,070
3,905,274
12.9%
72.5%
74.5%
International
7,708,610
7,928,526
-2.8%
2302.44
2,259,406
-100%
73%
76%
Domestic
4,121,684
3,418,106
20.6%
2111.3
1,645,868
-100%
72%
72%
Transaero
6,702,227
6,588,197
1.7%
1,498,974
1,402,625
7%
83%
85%
UTair
2,537,113
2,250,387
12.7%
1,042,277
1,062,006
-2%
74%
72%
S7
2,170,292
1,975,892
9.8%
1,065,102
958,798
11%
72%
76%
Others
8,513,350
6,931,034
22.8%
3,151,881
2,722,969
16%
76%
76%
Total Russia
31,745,164
29,092,142
9.1%
11,167,304
10,051,672
7,6%
7,6%
International
21,423,841
19,742,036
8.5%
5,706,131
5,260,140
8%
65%
66%
Domestic
10,321,323
9,350,105.72
10.4%
5,461,173
4,791,532
14%
59%
57%
Russian international air traffic growth is at risk near-term…
The past 5Y CAGR was 13.5%, fuelled by general disposable income growth and rapid
development of the tourism market. In 2013, international traffic was up 15% YoY to
44.4 mln passengers (excluding foreign carriers), but it started decelerating in 2H13 to
9.1% in January and 7.7% in February, negatively affected by Russia’s economic
slowdown and ruble depreciation. We forecast moderate growth at 5% in 2014, as a
substantially weaker ruble makes foreign trips more expensive for Russians.
Additionally, tough economic conditions, the risk of recession and falling consumer
32
APRIL 14, 2014
spending have forced companies to cut costs, including business class trips. Until 2018,
we forecast 6% Russian passenger traffic CAGR on international routes.
…while domestic traffic should be driven by an influx of railway passengers
The past 5Y CAGR was 8%, including 8.8% growth to 38.5 mln people in 2013. Unlike
international flights, there was a positive turnaround in 2H13: the growth rate of the
domestic market outpaced the international segment for the first time in many years.
In January-February 2014, the growth rate accelerated to 14% due to an inflow of
passengers from Russian Railways and the Olympics in Sochi. The difference in fares
between railway and airline tickets in Russia is narrowing, while the gap in journey
times between these two means of transport is enormous. As a result, Russian
Railways lost 5% of long-haul traffic in 2013 (6 mln passengers) and another 6.3%
during 2M14 (1 mln), while the Russian domestic airline market increased by 14%
YoY or 0.7 mln passengers. Russian Railways currently carries around 105 mln
passengers. If we assume that within the next five years Russian Railways will lose
one third of its traffic (down 6% each year) or a cumulative 30 mln passengers, who
will migrate to domestic airlines, then the domestic airline market can be expected to
grow by 70% to 66 mln passengers in 2018, which is still 35% below the 1991 level.
Monthly passenger traffic growth, %
DOMESTIC AIRLINES
INTERNATIONAL AIRLINES
JAN 14
DEC 13
NOV 13
OCT 13
SEP 13
AUG 13
JUL 13
JUN 13
MAY 13
APR 13
MAR 13
FEB 13
JAN 13
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
RUSSIAN RAILWAYS
Source: FAVT, Russian railways
Case study: correlation of Brazilian airline market with GDP growth
The Brazilian economy has many issues in common with Russia, i.e. the essential role
of the commodity sector in the economy and comparable GDP per capita. Having a
large territory and no developed railway system in Brazil, roads and airlines are the
main means of transportation in the country. Over the past five years, Brazil enjoyed
average passenger traffic growth of 10.3%, but in 2013 the figure dropped sharply to
1.4% (96 mln passengers) triggered by the economic slowdown. A distinctive feature
of the Brazilian airline market is that 94% of its passengers take domestic flights,
whereas international flights account for only a small portion. This implies that Brazil’s
population mobility index is around 0.6, which is double Russia’s level.
Load factor is the key input of flight profitability
The airline industry features an excessive share of fixed costs, and thus the higher
passenger load factor (number of passengers in an aircraft) generates more profit than
the flight does.
The passenger load factor improved by 1.2 pps to 79.5% in 2013 in Russia, which was
an all-time high and above the global average of 79%. The load factor on international
33
APRIL 14, 2014
flights stood at a remarkable 82.1% (up 0.3 pps), while the load factor on domestic
flights reached 75% (up 2 pps). The high load factor on international flights makes
international flights more profitable for airlines, while the lower load factor on domestic
flights forces companies to increase domestic fares, improving low profitability. On the
back of rising demand for domestic flights, we have seen gradual improvement in the
domestic load factor, thus improving the profitability of domestic flights, which, in turn,
allows airlines to further cut domestic fares and grab more passengers from Russian
airlines. In January-February, the load factor weakened by 0.5 pps to 75.8%, which is a
worrisome sign, indicating that the company’s margins may decline in 2014. However,
the first half of the year is the low season for airlines and it is still too soon to draw any
conclusions about how the entire year will look.
Load factor performance
80.00%
78.1%
78.00%
76.7%
75.8%
76.00%
77.9%
78.7%
79.0%
76.6%
74.00%
72.00%
70.00%
68.00%
2007
2008
RUSSIAN AIRLINES
2009
2010
2011
2012
2013
GLOBAL AIRLINES
Source: IATA, FAVT
34
APRIL 14, 2014
RISKS

Risk of economic slowdown. The airline industry is very sensitive to general
economic and real wage performance. In case of economic recession, there is a risk
that Russian airlines will perform worse than other Russian sectors. Meanwhile,
Aeroflot’s financial position looks more healthy compared to other leading Russian
carriers and in case of economic troubles we do not see a solvency risk for the
company, though its growth rate and profitability might decelerate.

Cancellation of Siberian flyover fees. There is risk that Aeroflot may lose
Siberian flyover fees, which we estimate at around $120-150 mln per year. This
might be taken negatively by the market, should it occur, but would not be crucial
for the company’s financials and valuation. Aeroflot remains profitable without
royalties, while their contribution to the company’s earnings is expected to fall
going forward, as the company’s financial results from core business are
expanding. In addition, Aeroflot is trading at a discount to global peers on multiples
assuming that the risk of cancelled royalties is priced in. Finally, we do not think
that Aeroflot will lose 100% of royalties, if any, while the government may provide
some alternative compensation to the company in the form of additional slots on
international routes, the introduction of non-refundable tickets, and liberalization of
the pilot labor market.

Falling yields due to competition. There is a risk that yields will continue to
decline in light of tightening economic conditions and rising competition. We will
likely see this trend materialize this year, but expect that it will be accompanied by
cost reduction, thus allowing Aeroflot to keep margins stable.

Currency risk. Aeroflot uses hedging instruments to reduce currency risks,
although due to substantial ruble devaluation it may add additional losses to the
company going forward. The company recognizes the revaluation of hedging
instruments below EBITDA as a non-operating loss/gain affecting the company’s
bottom line.

Regulatory risk. Aeroflot is a state-owned company and the largest player on the
Russian airline market. Thus, it is under scrutiny from the Federal Antimonopoly
Agency, Rosaviation and the Federal Audit Chamber, who periodically blame
Aeroflot for its dominant market positioning on certain routes and overpriced
tickets. Such news creates negative sentiment toward the company, leading to
higher share price volatility. However, the company’s management has always
proven Aeroflot’s reasonable position whenever such issues have been raised in
the past.
35
APRIL 14, 2014
INCOME STATEMENT, $ MLN
2012
2013
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Accounting standards
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
Revenues
8,138
9,136
9,319
10,450
11,226
12,097
12,859
13,502
13,928
Traffic revenue
7,118
8,087
8,414
9,482
10,201
11,014
11,718
12,305
12,675
Other revenue
1,020
1,049
905
968
1,025
1,083
1,141
1,198
1,252
Operating expenses
-7,780
-8,514
-8,893
-9,811
-10,518
-11,285
-11,958
-12,481
-12,788
Fuel costs
-2,288
-2,485
-2,678
-2,949
-3,138
-3,352
-3,530
-3,663
-3,724
Staff costs
-1,242
-1,424
-1,387
-1,558
-1,675
-1,809
-1,922
-2,049
-2,115
SG&A
-760
-860
-889
-1,000
-1,075
-1,160
-1,234
-1,296
-1,336
DDA
-269
-335
-409
-439
-488
-549
-605
-626
-640
Operating lease
-567
-602
-663
-698
-750
-796
-848
-865
-882
EBITDA (as reported)
671
1,000
879
1,121
1,240
1,405
1,550
1,692
1,823
EBITDA adj
629
964
759
1,001
1,120
1,285
1,430
1,571
1,701
EBIT
358
622
426
638
708
812
901
1,022
1,140
PBT
358
430
329
530
594
669
755
870
979
-191
-200
-99
-159
-178
-201
-226
-261
-294
Minority share
-56
-21
-10
0
0
0
0
0
0
Net income
222
252
240
371
416
468
528
609
685
12
222
240
371
416
468
528
609
685
496
570
624
987
1,407
1,940
2,577
3,281
4,030
5
8
8
8
8
8
8
8
8
1,622
1,702
1,724
1,862
1,957
2,064
2,157
2,235
2,287
141
151
163
180
192
206
218
227
233
68
58
59
59
59
59
59
59
59
2,333
2,489
2,577
3,096
3,623
4,276
5,018
5,810
6,617
200
186
186
186
186
186
186
186
186
PP&E
2,436
2,713
3,145
3,600
3,914
4,534
4,769
4,866
4,975
Other non-current assets
1,277
1,004
990
1,017
970
1,160
989
929
929
6,246
6,392
6,899
7,899
8,693
10,156
10,963
11,791
12,707
ST debt
712
419
419
419
419
419
419
419
419
Accounts payable
989
1,108
1,161
1,283
1,372
1,469
1,553
1,621
1,661
Other CL
545
550
550
604
646
692
733
768
790
Total CL
2,246
2,077
2,130
2,306
2,437
2,580
2,705
2,808
2,870
LT debt
1,875
2,191
2,461
3,006
3,358
4,326
4,639
4,968
5,350
Other non-current liabilities
498
459
459
459
459
459
459
459
459
Total non-current liabilities
2,374
2,650
2,920
3,465
3,816
4,785
5,097
5,427
5,808
1,775
1,838
2,032
2,311
2,623
2,974
3,343
3,739
4,211
149
173
183
183
183
183
183
183
183
6,246
6,392
6,899
7,899
8,693
10,156
10,963
11,791
12,707
Income tax
Adjusted net income
BALANCE SHEET, $ MLN
Cash and equivalents
ST investments
Accounts receivable
Inventories
Other CA
Total CA
Inv. in equity affiliates and JVs
Total assets
Total shareholders equity
Minority interest
Total liabilities and equity
36
APRIL 14, 2014
CASH FLOW STATEMENT, $ MLN
2012
2013
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Net income
222
252
240
371
416
468
528
609
685
Depreciation
269
335
409
439
488
549
605
626
640
-28.3
9.7
-18.8
-21.0
-23.3
-23.3
-20.0
-14.5
-4.8
78
313
106
137
152
190
203
216
232
541
909
736
926
1,033
1,184
1,316
1,437
1,552
Capex
-852
-689
-842
-893
-802
-1170
-840
-723
-750
Other
208
26
0
0
0
0
0
0
0
-645
-664
-842
-893
-802
-1,170
-840
-723
-750
Dividends paid to shareholders
-62
-41
-58
-58
-93
-104
-117
-158
-213
Other
246
-93
217
388
282
622
278
148
159
Financing cash flow
184
-133
159
330
189
518
161
-10
-54
Effect of FX
23.6
-38.2
0
0
0
0
0
0
0
Change in cash
103
74
54
364
420
532
638
704
749
Total debt
2,588
2,610
2,880
3,425
3,777
4,745
5,058
5,387
5,769
Net debt
2,092
2,040
2,257
2,438
2,370
2,806
2,481
2,107
1,739
P/E
7.16
6.32
6.61
4.28
3.82
3.40
3.01
2.61
2.32
EV/EBITDA
5.48
3.63
4.38
3.59
3.19
3.13
2.63
2.18
1.83
EV/Sales
0.45
0.40
0.41
0.39
0.35
0.36
0.32
0.27
0.24
P/BV
0.98
0.96
0.86
0.75
0.65
0.57
0.50
0.45
0.39
Div. yield
2.5%
3.4%
3.4%
5.6%
6.2%
7.0%
9.5%
12.8%
12.8%
ROIC
2.6%
3.3%
2.7%
4.0%
3.7%
3.6%
3.8%
3.8%
3.7%
ROE
12.5%
13.7%
11.8%
16.1%
15.9%
15.7%
15.8%
16.3%
16.3%
Change in working capital
Others
Operating cash flow
Investing cash flow
DEBT AND NET DEBT, $ MLN
KEY RATIOS
37
HQ: 16/1 Nametkina St., Moscow 117420, Russia. Office: 7 Koroviy val St.
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Copyright © 2003-2014. Gazprombank (Open Joint Stock Company). All rights reserved
This report has been prepared by the analysts of Gazprombank (Open Joint Stock Company) (hereinafter — Gazprombank) and is based on information obtained from public sources believed to be reliable, but is not guaranteed as necessarily being
accurate. With the exception of information directly pertaining to Gazprombank, the latter shall not be liable for the accuracy or completeness of any information shown herein. All opinions and judgments herein represent solely analysts’ personal opinion
regarding the events and situations described and analyzed in this report. They should not be regarded as Gazprombank’s position and are subject to change without notice, also in connection with new corporate or market events that may transpire.
Gazprombank shall be under no obligation to update, amend this report or otherwise notify anyone of any such changes. The financial instruments mentioned herein may be unsuitable for certain categories of investors. This report should not be the only
basis used when adopting an investment decision. Investors should make investment decisions at their own discretion, inviting independent consultants, if necessary, for their specific interests and objectives. The authors shall not be liable for any actions
resulting from the use of this report. Any information contained herein or in the appendices hereto shall not to be construed as a solicitation or an offer to buy or sell any securities or advertisement, unless otherwise expressly stated herein or in the
appendices hereto.

Aeroflot

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