Aeroflot company: the history of the origin
«Aeroflot - Russian Airlines» is a Russia-based
company concerned in the provision of
passenger and cargo air transportation services,
both domestically and internationally. The
company and its subsidiaries also provide
airline catering and insurance services. Its
branches are mainly composed of cargohandling services, fueling services and dutyfree retail businesses. It contains a fleet of 128
liners to provide scheduled flights to 115
destinations to 52 countries around the world.
The history of Aeroflot began in the 20s of the
last century. After the end of the First World War, European countries gradually reoriented to the
production of civil aviation, intended for postal and cargo transportation. The first regular flight was
on May 1, 1922, although, officially, the history of Aeroflot began in 1923. It was this year that the
Society of Friends of the Air Fleet was formed. The new organization took on several fundamental
functions:
• Fundraising for the construction of airfields and fleet.
• Promotion of a new vehicle.
• Aviation development.
The next stage in the history of Aeroflot was the formation of the central department, which was
responsible for the country's civil aviation. Consequently, well-known designers Tupolev, Antonov
and Ilyushin played a significant role in the development of the airline, since their designs were
broadly used in the Soviet era and are in demand today.
After the end of the Second World War in 1947, Aeroflot was recognized as one of the largest
airlines in the world, and in 1956 the Tu-104 appeared, which was the primary jet engine aircraft.
One of the most significant events was related to the opening of a new Sheremetyevo Airport,
which has become the main platform for international flights. The company was highly widespread
thence for ordinary people the word aviation and Aeroflot had the same meaning.
An essential event in the history of the airline was the appearance of the Central Administration,
which controlled international air traffic. In 1976 Aeroflot became the first airline in the world in
transporting over 100 million passengers in a year. Flights were made in various directions, among
which were continents such as Africa, Europe, America (North and South), and Asia.
In 1978 the first flight abroad was completed. In 1980 Aeroflot acted as the official carrier of the
Summer Olympic Games in Moscow, this is indicated by the inscription “Official Olympic Carrier”
with the emblem of the games on boards some aircraft of the airline company.
On September 15, 1983, two weeks after the incident, when a Korean Boeing 747 was shot down
over Soviet territory, Aeroflot was banned from flying to the United States by decree of Ronald
Reagan. The ban remained in force until April 1986. In 1989 Russian airline became part of the
IATA International Association.
It should be mentioned that the range of activities of the airline was not limited to the provision of
services to citizens. The company was engaged in the transportation of heavy goods, agricultural
products and military goods. In 1990 Aeroflot was registered in the Guinness Book of Records as
the company that carried 139 million passengers.
After the collapse of the Soviet Union, each of the individual republics created their specific airline.
The recession of the work of government parties was expected by the end of 1991, thus the worldfamous brand could be eliminated due to the lack of legal entity registration. V. M. Tikhonov, Head
of the International Commercial Administration of Civil Aviation, proposed registering Aeroflot as
a production and commercial association of the International Commercial Administration and the
Central Office of International Air Transport. Documents for registration were submitted to the
Moscow Registration Chamber more than once, though each time they were returned with a refusal.
The main reason for the rejections was justified as the struggle against monopolism in the global
market. Then S. A. Konstantinovich proposed to register the company in another region, and in
June 1991 the Production and Commercial Association Aeroflot-Soviet Airlines was registered in
the Leningrad District Executive Committee. Thus, modern Aeroflot inherited the Soviet brand and
regular foreign exchange earnings from flights along the Trans-Siberian routes, which amounted to
about $500 million per year.
In 1992, Aeroflot was reorganized into an open joint-stock company and experienced partial
privatization, since 51% of the shares remained with the state. Every year new technologies were
introduced that increased the reliability of the company and the level of comfort of the services
provided. In 1999, the company launched its official website. In 2000, the airline was renamed
«Aeroflot - Russian Airlines».
The end of the 90s was marked by a scandal involving former airline executives. As a result of a
conspiracy with the CEO, about 250 million rubles were transferred to the account of the Swiss
company. The hearings have been continued for several years, and the court has passed a sentence
in which the defendants received punishments of up to three years.
The next stage of Aeroflot’s activity was the creation of two branches: the official Aeroflot school
and the high-tech Situation Center. In 2000, Aeroflot invited a group of British consultants to
rebrand. In 2003, Aeroflot introduced a new version of the coloring of its aircraft and team
uniforms, moreover, the company launched a major advertising campaign. By 2004, the airline’s
total fleet size exceeded 100 aircraft.
In the spring of 2004, Aeroflot achieved stability in the foreign transportation market and began
active expansion into the domestic airline market, where at that time Siberia Airlines (nowadays S7
Airlines) held the lead. By 2006, the airline had almost a tenth of the entire market, and its plans
included the takeover of smaller enterprises. In the same year, passenger traffic reached
approximately 22 billion people.
The company wanted to subdue 30% of the market by 2010. One of the first steps in this direction
was the purchase of Arkhangelsk Airways and its transformation into a subsidiary of AeroflotNord. On April 14, 2006, Aeroflot joined the SkyTeam Alliance.
In 2013, the airline became the official carrier of Manchester United, the largest football club in
England. For the reporting period, Aeroflot's net profit remained 7 335 million rubles. During the
same year, Aeroflot itself carried 20.9 million passengers, and 32.3 million, including all airlines of
the Aeroflot Group.
In October 2014, Aeroflot announced the launch of a new low-cost carrier, which operates under
the new name «Pobeda». In 2015, the company bought back the shares of Transaero, which was
unprofitable for that period, and in September fell under the sanctions of Ukraine, which negatively
affected profit.
In 2018, Aeroflot celebrated its 95th anniversary, making it one of the oldest airlines in the world
yet it operates one of the youngest and most modern fleets. In October 2018, Aeroflot for the first
time became the winner of the International Business Traveler UK Reader Awards in the
nomination «The Best Airline of Eastern Europe», and in October 2019 the company won the
award for the second time. In June, at the Skytrax World Airline Awards, the airline was identified
as the “Best Airline in Eastern Europe” for the eighth time.
Aeroflot market share and performance reporting
Aeroflot Group is the largest aviation holding in Eastern Europe operating in key market segments:
from premium to budget air travel, from long-haul to regional. At the end of 2018, the share of
Aeroflot Group amounted to 40.7% of the total traffic in the Russian market (in 2017 - 40.5%).
Aeroflot Group's share in the “clean” market was 38.4% in 2018 and 39.0% in 2019. The share of
the Russian air transportation market in the 1st quarter of 2019 increased by 2.4 percentage points,
compared to the 1st quarter of 2018, and amounted to 45.4%. The closest competitors of Aeroflot
Group are S7 Group (12.2%), Ural Airlines (6.5%), UTair Group (5.5%). The share of other
Russian airlines and foreign carriers amounted to 21.6 and 13.0% respectively in 2019.
Figure 1 Top competitors of Aeroflot, 2020
The table below presents the balance sheet of the company, and it should be mentioned that
liabilities were less than assets only in 2017. Moreover, in 2018 there were more assets than in 2019
and 2017, and liabilities were also higher than in the other two years. The assets of the Aeroflot
group decreased by 4%: from 967.8 to
933.3 billion rubles. Over the year, the
company has less money and cash
equivalents in its accounts: 12.9 billion
rubles in 2019 compared to 23.7 billion
rubles in 2018.
Figure 2 Source: https://www.bloomberg.com/quote/AFLT:RU
Accounts receivable and prepayments increased by 23% to 96.5 billion rubles. The main share in
the assets is occupied by non-current assets. At the end of 2019, such assets cost 629.1 billion
rubles. Many loans can be explained by the fact that the company takes airplanes on lease instead of
buying them, which affects the debt burden.
Table 1 Balance sheet of Aeroflot, 2017-2019
In terms of production indicators, 2019 was a good year for Aeroflot Group: passenger turnover
grew by 9.2%, passenger traffic - by 9%. It is worth mentioning that the company, being the largest
player in the market, overtakes industry average indicators both in terms of passenger turnover and
passenger flow for the third year in a row.
An expansion in passenger traffic allowed to increase revenue to 677.9 billion rubles. The chief
financial result of the year for shareholders was a significant rise in net profit, which made up 13.5
billion rubles.
Measure
Passenger traffic million PAX
- international
- domestic
Passenger load %
factor
- international
- domestic
2019
60.7
27.1
33.6
81.9
2018
55.7
24.7
31.0
82.7
2017
50.1
22.5
27.6
82.8
80.3
84.1
80.9
85.3
82.5
83.4
Passenger turnover billion RUB
- international
- domestic
Available seat- billion RUB
kilometers
- international
- domestic
156.3
91.4
64.8
190.9
143.2
83.3
59.9
173.1
130.2
77.0
53.2
157 2
113.8
77.1
102.8
70.2
93.4
63.8
Table 2 Key operating highlights, 2017-2019
Aeroflot Group has improved its financial performance due to the positive result of the high
summer season and a reduction in seasonal loss from 16.3 in 2018 to 6.8 billion rubles in 2019.
Revenue
EBITDAR
EBITDAR (margin)
EBITDA
EBITDA (margin)
Net profit
Operating profit (margin)
Operating income
Gross profit
2019
677 881
190 976
168 924
24.9%
13 512
8.9%
522
454 194
2018
611 570
122 479
20.0%
151 517
5.5%
5 713 (-55 694)
3.2%
47 288
403 952
2017
532 934
121 808
22.9%
56 015
10.5%
23 060
7.6%
20 437
308 023
Table 3 Financial highlights, 2017-2019
* Everything is expressed in millions of rubles.
The financial statements confirmed positive trends related to the main activities of the airline. The group
shows steady long-term growth. Over the 12 months of last year, the company's revenue showed a 10.8%
increase. The main contribution to the growth of the group’s turnover was made by the passenger
transportation segment, which increased by 60,278 million rubles. The most significant factors affecting the
financial results were the high growth in the average cost of jet fuel and the weakening of the ruble.
The net profit for the end of 2019 amounted to 13.5 billion rubles, and here for the first time, we see serious
adjustments according to the new accounting rules. The group recounted the results of 2018 according to
new standards and, instead of a net profit of 5.7 billion rubles, received a net loss of 55.7 billion rubles. The
fact is that Aeroflot recorded a «paper» loss from exchange rate differences as a result of the revaluation of
leasing contracts for the entire period of validity. The main change in reporting under the new standards is
the inclusion of leasing obligations in debt structures. In 2019, such a distortion did not happen since the
group began to consider only the exchange rate difference, which relates to the reporting period. The
powerful influence of exchange rate differences is explained by the fact that most aircraft leases are
concluded in US dollars.
Figure 3 Aeroflot’s stock price
The diagram illustrates the share price for a period of three years, from 2017 to 2019. Overall,
strong fluctuations in share prices over the former three years are noticeable. In the summer of
2017, the share price reaches its maximum value of 225 rubles per share and gradually decreases to
a minimum of 89.45 rubles per share in the summer of 2019. However, nowadays, stocks are even
cheaper due to global coronavirus pandemic. Even though the assessment of financial indicators of
shares (Table 4) suggests that the current share price is unfair and may rise soon, we will make a
conclusion at the end.
P/E Ratio
Debt/EBITDA
Price to Sales ratio
1-year return
EPS
P/BV
EV/EBITDA
PJSC Aeroflot shares and depository receipts are publicly
traded. Common shares are traded on the Russian market, while
depositary receipts are traded on international markets. Under
PJSC Aeroflot’s Charter, the Company’s capital comprises 1
110 616 299 common shares. The Company placed no preferred
shares. Ordinary shares are traded on the MOEX exchange and
are included in the Level 1 Quotation List under the symbol
«AFLT». The last announced selling price on March 22, 2020,
was 64.32 rubles per share.
6.71
0.06
0.11
-32.54%
9.96
-4.51
0.56
Table 4 Key statistics of Aeroflot`s share,
2020
2017
2018
2019
17 4795
12 8053
2 6877
50.0%
50.0%
50.0%
Accounts used to determine net profit
RAS
IFRS
IFRS
Form paid
Cash
Cash
Cash
Dividend per share, RUB
% of net profit
Table 5 PJSC Aeroflot’s dividend history
Aeroflot calculates dividend payments based on net profit by the International Financial Reporting
Standard (IFRS). The company's dividend policy states that the target level for dividend payments
is 25% of profit (₽3.378 billion for 2019). According to the results of 2018, Aeroflot allocated 50%
of net profit to dividends. The amount was ₽2.856 billion. At the end of 2017, the company allotted
50% of RAS profit for dividends. In 2019 Aeroflot supported the trend and again sent 50% of IFRS
profits on dividends, therefore the payment was ₽6.756 billion. Based on the value of shares on
March 22, the dividend yield will be 7.79%.
Aeroflot shares are included in the main Russian
stock indices: MOEX Russia Index, MICEX
Broad Market Index (RUB and USD), MICEX
Transport Index (RUB and USD), MICEX 10
Index, and RTS Index.
The largest shareholder of Aeroflot PJSC is the
Russian Federation represented by the Federal
Property Management Agency, which owns
51.2% of the company’s shares. 40.9% of the
total number of ordinary shares are in free float.
Figure 4 Shareholder сapital structure, 2019
Outside Russia, PJSC Aeroflot shares are
traded as global depository receipts on the Frankfurt Stock Exchange. One GDR equals 5 ordinary
shares of the company. Deutsche Bank Trust Company Americas acts as the depository bank.
Holder
Legal entities
Russian Federation
National Settlement
Depository
Treasury shares
Aviacapital-Service
RT-Business
Development
Individuals
Status
31 December 2017
number of shares
shareholding, %
31 December 2018
number of shares
shareholding, %
1,053,301,607
568,335,339
445,556,945
94.84
51.17
40.12
1,053,635,279
568,335,339
398,072,821
94.87
51.17
35.84
Owner
–
22,688,599
16,720,724
–
2.04
1.51
47,817,796
22,688,599
16,720,724
4.31
2.04
1.51
Owner
57,314,692
5.16
56,981,020
5.13
Owner
Nominee
Owner
Owner
Table 6 Key shareholders of PJSC Aeroflot, 2017-2018
Figure 5 PJSC Aeroflot share price performance vs MOEX Russia Index,
2017
If we analyze the dynamics of stocks and
the Moscow Exchange index over three
years, we can see an opposite effect. Thus,
in 2017, the performance of the airline’s
shares was much higher than the Moscow
Exchange index and reached its maximum
in the summer (about 50%). At that time,
the Moscow Exchange index trend did not
have such sharp fluctuations and kept
rather stable, reaching its maximum in the
region of 0%. However, after Aeroflot
shares reached their highest value, they
began to fall and took negative rates, while
the value of the Moscow Exchange index
has been slowly increasing.
In 2018, Aeroflot shares continued to
decline sharply, while fluctuating strongly
in values, meanwhile the Moscow
Exchange index, on the contrary, gradually
increased.
Figure 6 PJSC Aeroflot share price performance vs MOEX Russia
Index, 2018
In 2019, the Moscow Exchange index
reached almost 30%, and in the next year,
it fell off sharply and returned to negative
values. Aeroflot stock performance suffers
up-down jumps and gradually gets positive
rates again, after which, together with the
Moscow Exchange index, it collapses in
the winter of 2020.
The company grows well in scale and
increases transportation, gradually
destroying its competitors, for instance,
Transaero and UTair. However, along with
Figure 7 PJSC Aeroflot share price performance vs MOEX Russia
an increase in revenue due to high
Index, 2019
passenger turnover, costs are also rising.
More flights mean that more expenses will be spent on servicing, expanding advertising and
increasing fuel costs. These are all costs: airport parking, the work of the dispatcher, food on the
plane. Very stable, positive dynamics, yet the company refrains from any forecasts for 2020. It sets
only a long-term goal of increasing traffic by 6-7%.
Nowadays, the company in a difficult situation: the coronavirus epidemic is forcing countries to
cancel or reduce flights to the most dangerous destinations. In addition to coronavirus, recent ruble
devaluation harms demand. Holidays abroad are becoming more expensive and less attractive for
citizens of the country. However, ticket prices are growing. Some of the risks that the company
identified in the report, namely the decrease in the solvency of the population, and currency risk
came true at the beginning of the year. It is important to consider that Aeroflot is a state-owned
company, and first it performs a social function, and only then it makes money for its shareholders.
The main owner is interested in ensuring that the airline's business does not suffer too much.
Consequently, the group became the only airline with flights to China.
Reducing the number of flights can adversely affect the company's operating and financial
performance in 2020. Though in the long run, this situation may allow Aeroflot to increase its share
in the air travel market if the company retains the monopoly on flights to Germany, Spain, Italy,
and France in the long term. Low oil prices can help Aeroflot since a substantial part of its expenses
is spent on aviation fuel. Hence by the end of 2019, this expense item amounted to more than 35%
of all company expenses excluding depreciation. In February, aviation fuel fell 1.32%, and if prices
fall, this could increase the profitability of the business.
Aeroflot is a distinct leader in its sector, which is quite cheap in terms of multipliers. However, the
way that management distributes money and the social burden that hangs over the company due to
state participation casts doubt on long-term investment. Due to the coronavirus, which can provide
the company’s loss in 2020, we can conclude that speculation is also dangerous. Given the above,
we can conclude that it is not beneficial to add Aeroflot shares to the portfolio in a current period.
References
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