Financial Results

Financial Highlights

	2014	2015	2016	2017	2018	Change 2018/2017, %
Revenue	319,771	415,173	495,880	532,934	611,570	14.8
Growth, %	9.9	29.8	19.4	7.5	14.8	7.3 p.p.
EBITDAR	48,673	103,118	137,567	121,808	122,479	0.6
EBITDAR margin, %	15.2	24.8	27.7	22.9	20.0	(2.9) p.p.
EBITDA	24,839	58,703	78,004	56,015	33,598	(40.0)
EBITDA margin, %	7.8	14.1	15.7	10.5	5.5	(5.0) p.p.
Operating profit	11,268	44,107	63,254	40,411	19,657	(51.4)
Operating profit margin, %	3.5	10.6	12.8	7.6	3.2	(3.4) p.p.
Profit/(loss) for the period	(17,146)	(6,494)	38,826	23,060	5,713	(75.2)
Net profit margin, %	–	–	7.8	4.3	0.9	(3.4) p.p.

^{Note. Hereinafter, EBITDAR = EBITDA + operating lease expenses. EBITDA = operating profit + depreciation and amortisation + customs duties.}

2018 was another year of operational growth for Aeroflot Group – increased passenger traffic and passenger turnover were the key drivers of a 14.8% revenue expansion to RUB 611.6 billion. The Group demonstrates sustainable longterm growth. At the same time, there is a decline in profitability compared to the previous years. In a historical context, 2018 financial performance proves that the unprecedented pressure on costs from macroeconomic factors complemented the normalisation of profitability amid the growing competition within the sector in 2017.

The record growth of the average cost of jet fuel and the depreciation of the rouble were the key factors that influenced the Group’s financial performance in 2018. Across Aeroflot Group, jet fuel prices increased by 36.1% year-on-year, which led to the additional RUB 48.3 billion worth of cost given the Group’s current consumption volumes. The depreciation of the rouble put additional pressure on financial results, given that almost half of the Group’s costs are denominated in foreign currencies.

A special optimisation programme was launched in addition to the existing measures to boost operational efficiency and reduce costs. Along with direct cost reduction, the programme focused on active capacity and revenue management and has already delivered strong results: excluding fuel, CASK for the full year increased by only 0.8% despite increasing currency pressure on FX-denominated cost lines. We were therefore able to limit the increase in total unit operating costs, including fuel, to 9.2%. Although consumers are being conservative with their travel spending, the Group was able to generate a 4.9% growth of RASK while also maintaining stable load factor levels.

In 2018, due to its extensive optimisation programme, the Group was able to record a profit of RUB 5,713 million despite the record increase in jet fuel prices complemented by the rouble depreciation.

Traffic and Other Revenue

	2017	2018	Change, %
Revenue from passenger flights,	458,390	534,292	16.6
including scheduled flights	427,529	496,454	16.1
charter flights	30,861	37,838	22.6
Revenue from cargo	16,526	18,900	14.4
Total traffic revenue	474,916	553,192	16.5
Revenue from airline agreements	33,196	36,646	10.4
Revenue from FFP partners	11,588	12,704	9.6
Other revenue	13,234	9,028	(31.8)
Total other revenue	58,018	58,378	0.6
Total revenue	532,934	611,570	14.8

In 2018 Aeroflot Group’s revenue increased by 14.8% year-onyear to RUB 611,570 million.

Revenue from scheduled passenger flights increased by 16.1% year-on-year to RUB 496,454 million, driven by an increase in passenger traffic. Revenue growth was also affected by an increase in yields, primarily on international routes, due to the rouble depreciation against the euro and a corresponding adjustment to FX-denominated revenue.

Revenue from charter flights was up 22.6% year-on-year to RUB 37,838 million primarily due to an increase in unit yields on charter flights and the expansion of Rossiya airline’s charter programme. The share of charter flights in the Group’s total revenue increased to 6.2% from 5.8% in 2017.

Cargo revenue grew by 14.4% year-on-year to RUB 18,900 million following a 11.2% increase in cargo and mail volumes.

Yields

In 2018, scheduled flight yields increased by 5.0% year-on-year including yields on international destinations (by 8.2%) and yields on domestic destinations (by 0.9%). Yields were mainly influenced by the competitive environment in the market and the need for gradual transfer of fuel costs into yields through adjusting the fuel surcharge. Another Group-wide driver was the accelerating development rate of Pobeda airline which, being a low-cost carrier, provides air transportation with lower yields. It is important to note that a low-cost carrier can have low yields due to cost efficiency (low CASK), which helps ensure profitability of transportation operations in the low-cost segment.

Domestic yields demonstrated growth with RASK increasing by 3.5% year-on-year due to higher load levels. Yields experienced pressure from the introduction of flat fares for Rossiya airline’s flights to the Far East to improve affordability of air travel to remote regions.

International yield increase primarily resulted from the foreign exchange effect as all fare groups (for outbound and inbound flights and for international transfer) are denominated in foreign currencies. In particular, during the year, the rouble depreciated by 12.2% against the euro and by 7.5% against the US dollar (RUB 65.9 per EUR and RUB 58.4 per USD in 2017; RUB 74.0 per EUR and RUB 62.7 per USD in 2018). Moreover, unlike domestic flights, the passenger load factor decreased leading to RASK in this segment growing by 6.0%, slower that the yield.

Operating Costs

	2017	2018	Change, %
Aircraft, traffic, and passenger servicing	96,418	108,589	12.6
% of revenue	18.1	17.8	(0.3)
Staff	82,801	82,817	0.0
% of revenue	15.5	13.5	(2.0)
Operating lease	65,793	88,881	35.1
% of revenue	12.3	14.5	2.2
Aircraft maintenance	36,433	45,527	25.0
% of revenue	6.8	7.4	0.6
Selling, general and administrative expenses	36,139	31,743	(12.2)
% of revenue	6.8	5.2	(1.6)
Depreciation, amortisation and customs duties	15,604	13,941	(10.7)
% of revenue	2.9	2.3	(0.6)
Communication expenses	14,795	15,584	5.3
% of revenue	2.8	2.5	(0.2)
Other expenses	21,855	22,967	5.1
% of revenue	4.1	3.8	(0.3)
Operating costs, excluding aviation fuel	369,838	410,049	10.9
% of revenue	69.4	67.0	(2.3)
Aviation fuel	122,685	181,864	48.2
% of revenue	23.0	29.7	6.7
Total operating costs	492,523	591,913	20.2
% of revenue	92.4	96.8	4.4

In 2018, aviation fuel costs increased by 48.2% year-on-year to RUB 181,864 million. The increase was driven by a 36.1% year-on-year growth of rouble-denominated average price of aviation fuel amid changes in the price of oil, as well as an increase in traffic and flight hours. Thus, the change in rouble-denominated jet fuel price only (including the change in US dollardenominated price and rouble depreciation) put a RUB 48,255 million worth of pressure on the Group’s profitability.

Operating lease expenses grew to RUB 88,881 million, up 35.1% year-on-year, mainly due to a significant fleet expansion (the increase in the Group’s leased fleet was 47 aircraft, or 16.8%, compared to 31 December 2017) and a year-on-year increase in the 2018 LIBOR rate (in particular, the average LIBOR 3M rate grew by 1.05 p. p. to 2.31%).

Communication expenses including the services of global distribution systems totalled RUB 15,584 million having increased insignificantly by 5.3%, which is lower than the operations growth, thus leading to savings under this cost item.

Other expenses were up 5.1% year-on-year.

Cost per Available Seat-Kilometre (CASK)

Total cost per available seat-kilometre (CASK) increased by 9.2% to RUB 3.42, which is explained almost exclusively by the growing jet fuel prices. To offset this price growth, the Company implemented a large-scale savings programme which led to controllable CASK (CASK excluding jet fuel) rising by only 0.7% to RUB 2.37. Taking into account the rouble depreciation against US dollar and euro, and the fact that a series of major cost items including operating lease, aircraft maintenance and repair, and airport taxes abroad are fully or partially denominated in foreign currencies, this programme may be considered a success.

EBITDAR и EBITDA

Following the impact of the above drivers, earnings before interest, taxes, depreciation, amortisation, and operating lease expenses (EBITDAR) amounted to RUB 122,479 million, while EBITDAR margin stood at 20.0% (22.9% in 2017).

In 2018, EBITDA totalled RUB 33,598 million. EBITDA margin decreased to 5.5% (10.5% in 2017). These changes reflect the fuel and FX pressure on the Company’s performance, detailed earlier.

Finance Income and Costs

	2017	2018	Change, %
Operating profit	40,411	19,657	(51.4)
Loss from investments, net	(144)	(689)	4.8х
Finance income	7,127	4,164	(41.6)
Finance costs	(8,225)	(7,904)	(3.9)
Hedging result	(5,613)	(6,788)	20.9
Share of results of associates	170	254	49.4
Results from disposal of companies	–	1,240	–
Profit before income tax	33,726	9,934	(70.5)
Income tax	(10,666)	(4,221)	(60.4)
Profit for the period	23,060	5,713	(75.2)

In 2018, finance income decreased by 41.6% year-on-year to RUB 4,164 million, which reflects lower foreign exchange gains and the general trend of lower interest rates in the Russian economy leading to lower interest income from placement of available cash.

Finance costs decreased by 3.9% year-on-year to RUB 7,904 million, mainly due to the reduction in loan interest expense following debt levels falling significantly in 2017.

The hedging result of RUB 6,788 million is the effect of revenue hedging with liabilities in US dollars (finance lease liabilities).

Cash Flows

	2017	2018	Change, %
Profit before income tax	33,726	9,934	(70.5)
Depreciation and amortisation	14,084	12,912	(8.3)
Change in impairment provision	10,852	11,352	4.6
Foreign exchange loss/(gain), net	(2,409)	1,086	–
Hedging result	5,613	6,788	20.9
Interest expense	8,179	6,445	(21.2)
Interest income	(4,718)	(4,156)	(11.9)
Results from disposal of companies	–	(1,240)	100.0
Change in cost of investments	144	689	378.5
Other adjustments	(576)	(531)	(7.8)
Working capital changes and income tax paid/refunded	(17,463)	(23,784)	36.2
Net cash flows from operating activities	47,432	19,495	(59)
Deposits return	13,649	23,926	75.3
Deposits placement	(16,300)	(21,152)	29.8
Proceeds from sale of assets held for sale	1,856	4,203	126.5
Interest received	4,241	3,115	(26.6)
Purchases of property, plant and equipment, and intangible assets	(7,681)	(13,131)	71.0
Prepayments / return of prepayments for aircraft, net	18,343	10,080	(45.0)
(Repayment)/return of operating lease security deposits, net	114	(2,428)	–
Other	147	229	55.7
Net cash flows used in investing activities	14,369	4,842	(66.3)
Free cash flow	61,801	24,337	(60.6)
Placement of loans and borrowings	–	350	100.0
Repayment of loans and borrowings	(17,417)	(131)	(99.2)
Sale/(purchase) of treasury shares	9,730	(7,040)	–
Repayment of the principal element of finance lease liabilities	(15,513)	(21,955)	41.5
Interest paid	(4,762)	(5,207)	9.3
Dividends paid	(18,859)	(14,543)	(22.9)
Net cash used in / from financing activities	(46,821)	(48,526)	3.6
Effect of exchange rate fluctuations	(478)	1,922	–
Net increase/(decrease) in cash and cash equivalents	14,502	(22,267)	–
Cash and cash equivalents at the beginning of the year	31,476	45,978	46.1
Cash and cash equivalents at the end of the year	45,978	23,711	(48.4)

Cash flows from operating activities

In 2018, net cash flows from operating activities reached RUB 19,495 million while profit before income tax amounted to RUB 9,934 million.

The record growth of the average cost of jet fuel was also one of the main factors that impacted the 2018 profit before income tax.

Key non-cash adjustments of profit before income tax made to net cash flows from operating activities for 2018 were related to:

• changes in provisions, mainly attributable to accrual of the provision for scheduled maintenance and repair of aircraft, and the provision for doubtful accounts
• hedging result – the effect of revenue hedging with liabilities in foreign currency (reflection of the FX effect of finance lease revaluation in the reporting period)
• depreciation and amortisation.

Working capital

In 2018, working capital change was RUB 6,321 million. Increase in accounts receivable and prepayments in the amount of RUB 15,916 million had the most significant impact backed by the growth of revenue and prepayments made by Aeroflot under the operating lease of 18 aircraft in 2018.

Cash flows from operating activities were largely affected by an increase in accounts payable and accrued liabilities, amid the growth in operating costs by 20.2% in 2018.

Free cash flow

In 2018, free cash flow totalled RUB 24,337 million. The year-on-year decline was mainly due to the growing average cost of jet fuel. Prepayments for aircraft leased in 2018, repayment of operating lease security deposits, and growing capital expenditure were among other factors.

Cash and cash equivalents decreased by 48.4% to RUB 23,711 million, due to, among other factors, the effect of exchange rate fluctuations. Aside from the above factors, the decline in available cash was also attributable to the purchase of treasury shares in the amount of RUB 7,040 million in 2018 (in 2017, proceeds from the sale of treasury shares totalled RUB 9,730 million).

Capital Expenditure

	31.12.2017	31.12.2018	Change, %
Purchases of PPE and intangible assets	(7,681)	(13,131)	71.0
Proceeds from sale of assets held for sale	1,856	4,203	126.5
Proceeds from sale of property, plant and equipment	88	93	5.7
Net capital expenditure	(5,737)	(8,835)	54.0

Debt and Liquidity

As at 31 December 2018, total debt decreased by 6.8% yearon- year to RUB 97,618 million driven by lower finance lease liabilities following a disposal of 12 aircraft and a transfer of several aircraft into assets held for sale. In 2018, Aeroflot Group had RUB 84.2 billion undrawn credit lines from major Russian and international banks.

	31.12.2017	31.12.2018	Change, %
Loans and borrowings	3,181	3,486	9.6%
Finance lease	100,689	93,224	(7.4)%
Pension liabilities	922	908	(1.5%)
Total debt	104,792	97,618	(6.8%)
Cash, cash equivalents, and short-term investments	54,909	30,148	(45.1)%
Net debt	49,883	67,470	35.3%
Net debt/EBITDA ratio	0.9x	2.0x	–