Development Strategy

Key growth areas and goals of Aeroflot Group

Key initiatives and work streams within the long-term strategy

DEVELOPMENT SEGMENTS

• Develop the premium passenger segment through improving the passenger experience, flight schedule, and expanding the route network
• Develop the low-cost passenger transportation segment
• Promote transfer traffic, including the international transit traffic
• Support national and regional passenger service programmes sponsored by the Government

Impact of risks on the Group’s strategy

The key potential risks that may affect the Group’s development strategy are:

• risk of changes in the external business environment
• risk arising from infrastructure constraints
• macroeconomic risks.

To mitigate the key risks, the medium-term strategy of the Group provides for:

• development of an efficient hub at Moscow Sheremetyevo airport to promote international transfer traffic
• availability of different capacity aircraft in the fleet and a reasonable balance between fleet diversification and standardisation to maximise operational flexibility
• growth planning and control at each of Aeroflot Group companies to maintain the Group’s effective presence in all market segments
• monitoring the progress of infrastructure development and new facilities construction at Moscow Sheremetyevo airport
• diversification of revenue streams by currency and geography.

Passenger traffic targets across Aeroflot Group

Key programmes supporting the Development Strategy

The Investment Programme for 2019 was approved by PJSC Aeroflot’s Board of Directors on 13 December 2018 (Minutes No. 10). It is designed to address long-term strategic objectives, improve the operations of business units, and continue the overall dynamic development of the Company’s investment activities.

The 2019 Investment Programme focuses on the established investment agenda such as property, plant and equipment, capital construction, and software, and sets new development projects designed to:

• ensure maintenance operations: procurement of tools and equipment to perform maintenance for all types of aircraft; fitting out of hangar facilities
• develop a training platform: purchasing and delivering an FFS А350 flight simulator; purchasing A321 and SSJ100 Door Trainers; upgrading the software for the FFS B737 flight simulator; purchasing airport visuals for the FFS SSJ100 flight simulator, etc.
• upgrade aircraft: ongoing equipment of aircraft with WiFEC; replacement of business class seats aboard Airbus A330s; having wheelchairs aboard Boeing 777 aircraft
• construct new facilities: continued construction of a new hangar for aircraft servicing; designing a building for the training platform; designing a facility for composite materials maintenance and repair, etc.
• develop the IT infrastructure: maintaining the existing and developing new information systems and further business process digitisation; developing digitisation projects; purchasing communication, telephone, and computer equipment
• ensure high-quality passenger experience; PJSC Aeroflot’s website design; procurement of uniforms for front line employees
• provide software solutions: developing the SAP system; maintaining and developing the Company’s website, commercial, operations-related, office, and other systems
• invest in R&D projects under the Group’s Innovative Development Programme
• provide other types of investment in property, plant and equipment: running fire safety initiatives, purchasing workwear, ensuring seamless operation of business units

Aeroflot Group’s Innovative Development Programme 2025 was fully aligned with the regulatory guidelines of federal executive authorities and adopted by PJSC Aeroflot’s Board of Directors on 25 August 2016.

The Innovative Development Programme covers the main innovation focus areas and activities at PJSC Aeroflot and its Rossiya and Aurora subsidiaries, as well as key midand long-term innovation KPIs to 2025. For more details on Aeroflot Group’s Innovative Development Programme see the Information Technology and Innovation section.

Cost cutting management plan for 2018

An emergency team was set up in 2018 to optimise costs and improve performance.

Emergency measures developed by the team to improve operational performance helped achieve positive financial results for the year despite the strong growth of the average jet fuel prices.

KEY COST CUTTING INITIATIVES INCLUDED

• reducing selling, general, and administrative expenses
• streamlining the marketing budget
• negotiating discounts and special terms with service providers, including fuel suppliers
• postponing further investment in customer service (to avoid any undue increase in operating costs)
• reducing management remuneration, including through releasing funds by early completion of the Long-Term Incentive Programme, etc.

Along with these initiatives, the Company focused on its income, including by optimising the day-to-day management of flight profitability and network operation, improving fares, adjusting the fuel surcharge, enhancing sales and load factor supervision and monitoring, developing additional revenue sources, and adopting operational changes.

Strategy implementation report

	2009	2018	Outlook for 2025
Join the Top 20 global players by passenger traffic	68th globally by passenger traffic	19th globally*
Join the Top 5 European players by passenger traffic	15th in Europe	5th in Europe*
Carry over 70 million passengers	11.1 million passengers	55.7 million passengers
Carry at least 30 million domestic passengers	4.9 million passengers	31.0 million passengers

^{* Rating for 2017. Ranked 5th among European traditional carriers.
Sources: Air Transport World’s rating, Company data.}

Long-term development programme

Aeroflot Group’s Long-Term Development Programme (the LDP) was designed in accordance with Instruction of the President of the Russian Federation No. Pr-3086 dated 27 December 2013, and approved by PJSC Aeroflot’s Board of Directors on 2 December 2014 (Minutes No. 8). On 13 December 2018 (Minutes No. 10), PJSC Aeroflot’s Board of Directors gave a general approval to the main provisions of Aeroflot Group’s LDP for 2019–2023 updated to reflect the new Aeroflot Group Development Strategy 2023.

This involved a review of the Programme’s key initiatives to support its implementation.

The LDP’s key goal is to ensure the Group’s long-term sustainable development, strengthen its competitive position, create and develop a competitive edge, and improve performance and financial stability.

THE LONG-TERM DEVELOPMENT PROGRAMME’S KEY OBJECTIVES ARE TO:

• Develop the list of activities to ensure the achievement of the Group’s strategic growth targets
• Identify areas and initiatives to improve the Group’s competitive edge and performance
• Analyse risks to, and opportunities for, achieving the strategic targets and implementing the LDP initiatives.

The LDP details strategic areas for the Group’s development and includes a list of key initiatives and activities aimed at the strategy implementation in the medium term. The LDP complements and expands the key strategic initiatives set out in the Aeroflot Group Development Strategy 2023.

KEY INITIATIVES TO SUPPORT THE LONG-TERM DEVELOPMENT PROGRAMME PROGRESS:

• Develop within Aeroflot Group’s multi-brand platform
• Expand the route network and aircraft fleet
• Enhance the production capacity
• Implement Aeroflot Group’s Innovative Development Programme
• Implement the investment programme
• Ensure an adequate talent pipeline
• Increase labour productivity.

The 2018 progress on Aeroflot Group’s Long- Term Development Programme was audited by an external auditor, Nexia Pacioli. The auditor’s opinion was issued on 29 March 2019.

Following the independent audit, the auditor expressed an opinion that the report reflecting the progress on Aeroflot Group’s Long-Term Development Programme and achievement of the 2018 target KPIs was reliable in all material respects and was prepared in compliance with Aeroflot Group’s Long-Term Development Programme for 2018–2022 which was approved by PJSC Aeroflot’s Board of Directors on 21 December 2017 (Minutes No. 7).

The auditor confirmed the reliability, in all material respects, of the following data in the 2018 LDP progress report:

• Actual KPI performance: 7 out of 11 KPIs were achieved in 2018
• Progress on the initiatives and their current status: most of the initiatives had been completed
• Spending budgets in line with their intended purpose (compensations for the carrier’s lost earnings and partial compensations for lease payments made under the Russian-built aircraft operating lease)

KPI system

The 2018 KPI list, weights, and targets for PJSC Aeroflot’s CEO, which reflect the Company’s KPI system, were approved by PJSC Aeroflot’s Board of Directors on 21 December 2017 (Minutes No. 7), and updated by PJSC Aeroflot’s Board of Directors on 26 April 2018 (Minutes No. 13) for the second quarter of 2018 and then on 31 October 2018 (Minutes No. 7) for the third quarter of 2018, in line with Aeroflot Group’s adjusted 2018 budget.

From 2015 onward, the scope of the CEO’s KPI list (with KPI weights and targets) is fully in line with the KPIs of our Long-Term Development Programme and extended to include all members of PJSC Aeroflot’s Management Board to provide incentives for the management to pursue Group-wide corporate objectives. The list now also includes individual KPIs for Deputy CEOs and other members of the Management Board, with the aim to improve the Group’s overall performance.

The KPIs for other employees of PJSC Aeroflot were approved by the CEO’s Order No. 539 dated 29 December 2017; they were updated by the CEO’s Order No. 375 dated 14 September 2018 for the second quarter of 2018 and then by the CEO’s Order No. 490 dated 17 December 2018 for the third quarter of 2018, in line with Aeroflot Group’s adjusted 2018 budget.

KPI*	Unit	2017				2018				Reasons for variance (2018A vs 2017P)
		Weight	Plan	Actual	Performance to plan	Weight	Plan	Actual	Performance to plan
Total Shareholder Return (TSR)	%	10.0	13.5	1.2	8.89	10.0	20	(18)	0.00	Negative macroeconomic impact on Aeroflot Group’s operating margins and net income during the year (due to higher fuel costs)
ROIC	%	20.0	14.9	14.9	100.00	20.0	12.9	12.0	93.02	Higher fuel costs
Long-term debt/EBITDAR	–	5.0	0.93	0.86	107.53	5.0	0.75	0.80	93.33	Higher fuel costs
Integrated Innovation Key Performance Indicator (IIKPI)	%	10.0	80%	80*	100.00	10.0	100	100**	100.00
Investment Programme Efficiency	–	5.0	5.22	6.88	131.80	5.0	10.91	20.11	184.33	High returns on the 2018 investment projects and lower capex
CASK	cent per ASK	5.0	4.9	5.32	91.43	5.0	4.9	5.45	88.78	Higher fuel costs and exchange rate fluctuations in 2016–2018 (the target of 4.9 cent per ASK was the lowest value achieved in 2016)
Share of State-Subsidised Funding in Total Funding Secured	%	5.0	0	0	100.00	5.0	0	0	100.00
Punctuality	%	5.0	87.0	90.4	103.91	5.0	87.0	89.9	103.33	Aeroflot Group’s initiatives to improve punctuality of aircraft departures include: · joint initiatives of PJSC Aeroflot, its business units, and third-party companies to improve punctuality of arrivals and departures to and from base/non-base airports · air traffic management to improve flight arrival punctuality and, consequently, flight departure punctuality
PJSC Aeroflot’s Flight Safety	%	15.0	99.957	99.972	103.49	15.0	99.957	99.974	103.95	Effective flight safety management, including: · implementation of initiatives based on the results of air accident and incident investigations · monitoring of key operational risks and development of up-to-date corrective measures to mitigate them to acceptable exposure · reduction in number of air accidents and incidents associated with errors and violations in flight operations · reduction in the number of close-call incidents (from 2017)
Passenger Load Factor	%	10.0	80.0	82.8	103.50	10.0	82.0	82.7	100.85	Effective measures to increase utilisation of aircraft fleet
Overall Productivity	mn ASK per emp.	10.0	4.235	4.431	104.62	10.0	4.489	4.551	101.38	Higher productivity levels across Aeroflot Group supported by budget-controlled increase in work loads and headcount growth optimisation

^{* The value shown is the minimal value achieved in 2017.
** According to Minutes No. 1 dated 27 February 2018 of a meeting of Inter-Agency Working Group on Supporting Innovative Development Priorities, the IIKPI bonus can be paid in full if the variance between the target KPI and actual performance does not exceed 10%. Note. 2017 and 2018 KPIs are calculated for Aeroflot Group, except for PJSC Aeroflot’s Flight Safety KPI.}

Pursuant to the directives of the Russian Government, PJSC Aeroflot’s KPI system embraces financial, economic, and industry-specific indicators, including:

• mandatory financial KPIs – Total Shareholder Return (TSR) and ROIC for Aeroflot Group – in line with the KPI Guidelines (Letter of the Federal Agency for State Property Management No. OD-11/22160 dated 26 May 2014)
• Overall Productivity KPI (for Aeroflot Group) – in line with the Russian Government’s Directive No. 6362p-P13 dated 24 October 2013
• Share of Supplies from Small and Medium- Sized Businesses, Efficient Energy Use, and Environmental Friendliness KPIs were incorporated into PJSC Aeroflot’s KPI system and KPI lists for relevant department heads – in line with the Russian Government’s Directive No. 6362p-P13 dated 24 October 2013
• Integrated Innovation Key Performance Indicator (IIKPI) (for Aeroflot Group) – in line with Letter of the Deputy Minister of Economic Development of the Russian Federation No. 3142-OF/D06 dated 24 February 2012 and the Russian Government’s Directive No. 1472p-P13 dated 3 March 2016
• Investment Programme Efficiency KPI (for Aeroflot Group) – in line with Directive of the Federal Agency for State Property Management No. PF-11/35029 dated 14 August 2014
• CASK KPI (for Aeroflot Group). As per the resolution of PJSC Aeroflot’s Board of Directors dated 20 April 2017 (Minutes No. 14), the Company achieved the CASK reduction target in line with Directives of the Russian Government No. 2303p-P13 dated 16 April 2015 and No. 4750p-P13 dated 4 July 2016. Since 2017, the Company’s objective is to maintain the achieved level
• Share of State-Subsidised Funding in Total Funding Secured KPI – in line with paragraph 2 of Instruction of the Russian Prime Minister Dmitry Medvedev No. AD P36-4617 dated 11 July 2015 on including the indicator showing investment capital raised in the private equity market.

As per the resolution of PJSC Aeroflot’s Board of Directors adopted in 2017, Aviation Accident with Fatalities (Plane Crash) was set as the disqualification indicator (cancelling the bonus) in the KPI system.

KPI	Weight	Unit	Plan
Revenue per Available Seat-Kilometre (RASK)	20%	RUB per ASK	3.76
CASK*	10%	cent per ASK	3.3
Integrated Innovation Key Performance Indicator (IIKPI)**	10%	%	100
Investment Programme Efficiency	5%	–	16.32
Share of State-Subsidised Funding in Total Funding Secured	5%	%	0
Punctuality	10%	%	87.0
PJSC Aeroflot’s Flight Safety	20%	%	99.957
Passenger Load Factor	10%	%	82.4
Overall Productivity	10%	mn ASK per emp.	4.739***

^{* Calculations exclude fuel prices.
** According to Minutes No. 1 dated 27 February 2018 of a meeting of Inter-Agency Working Group on Supporting Innovative Development Priorities, the IIKPI bonus can be paid in full if the variance between the target KPI and actual performance does not exceed 10%.
*** The target is based on the 2019 budget.
Note. KPI performance is assessed on the basis of the Regulations on Bonus Payments to the Managers and Specialists of PJSC Aeroflot. KPIs are calculated for Aeroflot Group, except for PJSC Aeroflot’s Flight Safety KPI.}

In 2018, the majority of the Long-Term Development Programme KPIs for PJSC Aeroflot’s CEO were met/exceeded as a result of efficient operations. KPI performance was affected by negative macroeconomic factors and higher potential sanctions risks.

Aeroflot Group Development Strategy 2023 involves a considerable increase in operational KPIs and development of new growth areas, including the launch of a new hub and regional bases. In view of these prospects and the significant increase and volatility of fuel costs, the existing financial KPIs – TSR and ROIC – which were earlier adopted as part of Aeroflot Group’s Long-Term Development Programme and PJSC Aeroflot’s CEO incentives, will not be used in 2019.

To bring the management incentive system in line with Aeroflot Group’s short-term strategic priorities, PJSC Aeroflot’s Board of Directors approved the following 2019 KPIs for PJSC Aeroflot’s CEO (Minutes No. 12 dated 7 February 2019). The CEO’s KPI list and weights for 2019 reflect the Company’s profile and strategic priorities and have been approved by the Russian Ministry of Transport, a federal executive body that oversees PJSC Aeroflot’s activities.

Aeroflot Group’s strategic approach continues to be based on multi-brand offering, which helps maximise the coverage of all the key market segments. Each of the Group’s airlines targets a dedicated market segment, thereby minimising intra-Group competition. Rossiya’s scheduled flights were moved from Vnukovo airport to Aeroflot’s hub, Sheremetyevo airport to drive internal synergies through additional transit flows between the route networks of Aeroflot Group airlines.