Logistics and

International freight forwarding

REPORT ON AEROFLOT RUSSIAN AIRLINES

Nguyễn Phương Anh 1111150015

Tô Hà Anh 1111150135

Đỗ Kim Anh 1117150061

Phạm Thị Duyên 1115150195

I. TERITORY:

Aeroflot – Russian Airlines commonly known as Aeroflot is the flag carrier and largest airline of the Russian Federation. The carrier operates domestic and international passenger services, mainly from its hub at Sheremetyevo International Airport.

Aeroflot is one of the oldest airlines in the world, tracing its history back to 1923. During the Soviet era, Aeroflot was the Soviet national airline and the largest airline in the world.

Following the dissolution of the USSR, the carrier has been transformed from a state-run enterprise into a semi-privatized company which ranked 19th most profitable in the world in 2007. Aeroflot is still considered the de facto national airline of Russia. It is 51%-owned by the Russian Government. As of September 2013, the Aeroflot Group had 30,328 employees. The company has embarked on a fleet modernization program, extensive route restructuring, and an image overhaul. The airline joined SkyTeam in April 2006, becoming the 10th member of the alliance.

Flag of Aeroflot – Russian Airlines

In January 1971 the Central Administration of International Air Traffic was established within the framework of IATA, and became the sole enterprise authorized to operate international flights. Abroad, the airline was known as Aeroflot Soviet Airlines. In 1976 Aeroflot carried its 100 millionth passenger. Its flights were mainly concentrated around the Soviet Union, but the airline also had an international network covering five continents: North and South America, Europe, Africa and Asia. The network included countries such as the United States, Canada, United Kingdom, Spain, Cuba, Mexico and the People's Republic of China. Since the 1970s some transatlantic flights were flown using Shannon Airport in Ireland as an intermediate stop, as it was the westernmost non-NATO airport in Europe.

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The "winged hammer and sickle" is the most recognizable symbol of Aeroflot.

Slogan

Today Aeroflot–Russian Airlines announced the airline company’s new slogan that reflects best the essence of the company’s new brand. New slogan now is “Sincerely Yours. Aeroflot”.

II. OPERATING – LEVEL ACTIVITIES:

2009

In December 2009, the company carried 740.6 thousand passengers

(including 2.2 thousand by charter), and performed 2,224 million passenger kilometers.

In the 12 months of 2009, Aeroflot carried 8,755 thousand passengers, and

performed 25,986 million passenger kilometers. Passenger load factor was 69.5%,

revenue load 55.9%.

In 2009, Aeroflot for the third time confirmed its compliance with the new

and stricter IOSA standards, and became Russia’s first carrier to successfully pass

ISAGO (IATA Safety Audit for Ground Operations)

Aeroflot also supports environmental initiatives of IATA, which aspires for

making civil aviation a maximally clean transport, and driving hydrocarbon emissions to

a close to zero level. The energy-saving program adopted by Aeroflot fully conforms

with IATA’s ecologic strategy.

Aeroflot CEO Vitaly Savelyev presented Aeroflot’s innovative IT projects.

In particular, Vitaly Savelyev showed the work of Aeroflot’s automated call center, based

on a Russian speech recognition synthesis technology. First in Russia, this unique project

enables Aeroflot passengers to address the company’s call center and talk to a computer,

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which can handle any number of voice calls, give comprehensive flight info, and soon

will be able to book air tickets.

October 12 2009, Moscow. Aeroflot Opened New Branch in Vladivostok.

The division has been based upon the company’s representative office, aimed to develop

long-haul air connection in the strategically important Far East region, and to meet the

demand of Vladivostok and the Primorie Territory population.

October 5 2009, Moscow, Aeroflot participates in national charity

campaign ‘Train of Hope’ the participants of Russian national charity campaign ‘Train of

Hope’, held by Radio Russia within the ‘Детский вопрос’ social project, flyed on

Aeroflot’s flight to Krasnoyarsk where the campaign events were scheduled to take place.

Aeroflot provided the project members – potential adoptive parents of orphan children –

with 35 free tickets for its flights to make this journey.

2010

Buenos Aires, 30 November 2010 – Aerolíneas Argentinas, the flag carrier

of Argentina, signed an agreement to join SkyTeam in 2012. Aerolíneas would be

SkyTeam’s first South American member, adding 38 new destinations to the SkyTeam

network.

JSC Aeroflot Russian Airlines increased its social networking presence.

Aeroflot opened its offices in the V kontakte and Facebook social networking sites as

well as in the Twitter micro blog system starting from December 2010.

November 13, 2010, Moscow. JSC Aeroflot Russian Airlines acquired its

35th A320 plane manufactured by Airbus. The aircraft is named “N. Lobachevsky” in

honor of Nikolay Ivanovich Lobachevsky, a famous Russian mathematician.

2011

March 15, 2011 Aeroflot offers a new product: business ticket card

Moscow - Aeroflot offers a new service, ‘Business Ticket Card’. It is intended for

passengers who frequently fly between the two Russian capitals. ‘Business Ticket Card’

is an electronic ticket valid for a certain number of trips.

Aeroflot also contributed a lot in this year’s full operational launch of the

IATA BSP (IATA’s Billing and Settlement Plan) in Russia. This project which will

significantly raise air carriage sales efficiency has resulted from IATA’s strategic

partnership with Aeroflot and VTB Bank.

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Aeroflot also supports environmental initiatives of IATA, which aspires for

making civil aviation a maximally clean transport, and driving hydrocarbon emissions to

a close to zero level. The energy-saving program adopted by Aeroflot fully conforms

with IATA’s ecologic strategy.

IATA’s member, Aeroflot can participate in discussion and adoption of the

most important documents regulating the operation of the international air transport.

Aeroflot traditionally represented in IATA’s administration. At IATA’s 65th annual

General Assembly which took place in Kuala Lumpur (Malaysia) this June, Aeroflot’s

CEO Vitaly Savelyev was elected to IATA’s board of governors for the period of 2009-

2012. This is the first time that a Russian company’s director has been included in one of

the key committees – the Nominee Committee, whose responsibility is to nominate

candidates to the Board of Governors

2012

December 29, 2012. Brand new A320 aircraft “I.Tamm” was set in

operation by Aeroflot. Aeroflot took delivery of A320 airplane made by Airbus. The

aircraft is named in honor of Igor F. Tamm, an outstanding Russian theoretical physicist

awarded the Nobel Prize in physics in 1958.

Considered as an absolute leader of Russian civil aviation. Group’s

operating indicators increased at substantially higher growth rates than those of European

competitors. In the abovementioned period passenger traffic of Aeroflot Group reached

12.1 million passengers – therefore Group’s share in Russian civil aviation by passenger

traffic grew to 37.8%. Revenue of the Group according to IFRS increased by 54%

compared to the corresponding period of 2011 and totaled 3,614 million US dollars

During the discussion on procurement activities of JSC “Aeroflot” for the

second quarter and 6 months of 2012, the fact that during the first six months of 2012

quantity of electronic trading operations totaled 4,151 trades (98.66% of all trades) has

been outlined. During this period the share of electronic purchases amounted to 15.22%

of all purchases, which complies with Federal Agency for State Property Management

requirements. Procurement activities were carried out at JSC “Aeroflot” with the help of

competitive methods including electronic trading floors.

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The company posted information on procurement activities at the official

website www.zakupki.gov.ru.com and is going to place the information starting from

October 1, 2012.

2013

June 10, 2013 Moscow: Aeroflot has successfully passed the fifth regular

IOSA procedure (IATA Operational Safety Audit). The IOSA certificate and the status

of IOSA-registered operator have been prolonged till October 14, 2015.

The audit was conducted in all the activity areas: Organization and Management Systems, Safety Flight Operations, Flight Planning and Management, Aircraft Engineering and Maintenance, Passengers Salon Safety, Aircraft Ground Handling, Cargo Transportation, Operational Security and Safety.

July 1, 2013 MOSCOW: Aeroflot organized free service for the passengers

from 22 countries all over the world in the unified call center.

September 17, 2013 MOSCOW: Aeroflot reduces by 20% all economy

fares for the flights from Moscow to the cities of Russian Far East: Blagoveshchensk,

Vladivostok, Khabarovsk and Yuzhno-Sakhalinsk. The discount will apply to the tickets

on sale from September 18 and untill the end of 2013.

Aeroflot Introduces New Low-Cost Airline – Dobrolet: Aeroflot Group

now includes a budget airline named Dobrolet. Originally, it was the name of the joint-

stock company established in 1923, a predecessor of today’s Aeroflot.

Aeroflot and Europcar enter an exclusive strategic partnership: Aeroflot,

Russia’s flagship airline and the largest national air company, and Europcar, the leading

car rental company in Europe, today announced an exclusive strategic partnership for the

next 5 years to provide quality car rental services to all Aeroflot business and leisure

customers.

December 25, 2013, Moscow. — Starting from December 24, Aeroflot’s

transit passengers departing from Rome, Milan, Venice, Los Angeles, Washington,

Miami and Toronto to cities of the Russian Federation now have the possibility

of seamless baggage check-in to the final destination in Russia without any need

to receive their luggage in Sheremetyevo airport. The service is only available for the

baggage with no items subject to a written customs declaration.

2014

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In October, the company introduced an affiliated low-cost

carrier (LCC), Dobrolet. The LCC started operations in June 2014; they ceased on

4 August 2014 owing to EU sanctions over the airline launching flights to Crimea. In late

August 2014, Aeroflot announced it will launch a new LCC in October 2014; it will

replace Dobrolet and will use aircraft transferred from Orenair.

In March 2014 as a response to 2014 Ukrainian revolution the company

announced rerouting their flights to avoid flying over the territory of Ukraine. The

announcement (together with worse than expected financial results) caused an almost

10% drop in the share price of the company.

III. TATICAL – LEVEL ACTIVITIES:

Orientations:

Becoming a leader in uplift volumes;

Being dominant on the domestic market;

Creating an efficient system of transportation junctions including a major

competitive hub in the Sheremetyevo airport;

Being available for a developed long-haul flight network;

Gaining leadership in the quality of products.

Basis

Development of competences required for creating a global network

company; the priority is to increase the market share and enhance positions on major

target marketplaces.

The creation of a global carrier requires the company’s consistent move to

new strategic goals:

Growth of passenger traffic (to become a leader among European airlines

and airline groups);

Creation in the Moscow Aviation Junction of a major hub whose services

would be comparable by volume and quality with those offered by hubs of major

European carriers;

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Strengthening of positions on the domestic marketplace (No. 1);

Development of a strategic long-haul international network;

Improvement of the quality of services on land on onboard to standards of

the world’s leading carriers.

Key factors of Aeroflot’s success by 2015:

Streamlining of efforts on О&D (origin and destination) flights;

Boost of passenger loyalty;

Competition for increase in fraction of high-revenue passengers;

Highest security of flights in Russia;

A full-fledged HUB in the Sheremetyevo airport; efficient connections and

high throughput capacity;

Leading positions in Russia’s civil aviation market;

Economically efficient aircraft fleet adequate to the developed network;

Additional consumer value generated by products and the brand.

IV. AEROFLOT RUSSIAN AIRLINES’ SWOT ANALYSIS:

Strength

A powerful market share in Russia delivers benefits

The Aeroflot Group is the largest player in the Russian market, with 30% of passengers in 2013. Its nearest competitor, Transaero, has 12% and Aeroflot's share is as big as the combined share of the groups ranked second to fourth.

Foreign airlines have only 18% of the market, less than in most other European countries, reflecting the more closed nature of the Russian market.

Share of domestic and international passengers in Russia: 2013

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Source: Aeroflot Capital Markets Day presentation Mar-2014

Aeroflot dominates the key Moscow Sheremetyevo hub (and others)

Aeroflot's principal hub, Moscow Sheremetyevo, is undergoing a two stage expansion programme. Stage 1, to be completed by 2017, will see a third runway being built and terminal improvements being made, bringing the airport's capacity to 42 million passengers p/a. In Stage 2, capacity will be further expanded to 64 million passengers p/a, through new terminal facilities and development of the second landing area.

Aeroflot dominates its Moscow Sheremetyevo hub, with 85% of seats at the airport (source: OAG, week of 31-Mar-2014), a stronger position than almost any major European national carrier at their respective hubs. Aeroflot Group companies are also the leading carriers at most of the other Group hubs in Russia, which extends from Europe to within a short distance of China, Korea and Japan.

Aeroflot's multi-brand strategy allows coverage of most sectors

The Aeroflot Group includes carriers in all market segments: business, regional, leisure (charter) and (soon to be launched) LCC. This allows it to compete for a wide range of passengers both domestically and internationally. However, in some aspects this strategy can also be considered a weakness (see below).

Lack of domestic LCC competition has allowed steady strengthening

Since the collapse of Avianova and Sky Express in Oct-2011, LCCs have not been a feature of the domestic Russian market. Moreover, LCCs have had only limited penetration of international markets to/from Russia. In the absence of significant LCC

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competition, Aeroflot’s relatively efficient unit cost structure has allowed it to enjoy fairly healthy margins and traffic growth.

The Russian Government is now encouraging the establishment of LCCs through legislative changes and Aeroflot plans to gain first mover advantage through establishing its LCC subsidiary Dobrolet (see below).

Russian Federation: LCC Capacity Share (%) of Total Seats: 2001 - 2014*

* 2013 Year to Apr Source: CAPA - Centre for Aviation with data provided by OAG

Profitability continues strong

The Aeroflot Group has been profitable for many years, with no annual losses for at least 23 years (although the subsidiaries acquired in 2011 weighed on its 2012 and 2013 profits). Over this period, other major European national carriers have all made losses more than once.

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Aeroflot Group revenues, operating profit and net income (USD million) 2004 to 2013

Source: Aeroflot

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Aeroflot's has one of the most modern fleets in Europe

The Aeroflot parent airline's fleet has an average age of 4.5 years, according to the CAPA Fleet Database, making it one of the youngest in Europe, certainly among legacy carriers. With 139 aircraft expected to be delivered by 2020 (source: CAPA Fleet Database), the company's fleet replacement programme should ensure that its average age remains low. This brings advantages in terms of customer appeal, fuel efficiency andmaintenance spend.

Strong - and probably realistic - market growth projections

Aeroflot expects its passenger numbers to grow from 31.4 million in 2013 to around 70 million in 2025, implying an average annual growth rate of 7%. If achieved, this implies growth that is faster than the market.

Government championing of Aeroflot has delivered real advantages

Aeroflot's strong position in the Russian market has benefited from a government “national champion” policy, which led to the 2011 acquisition of former state-owned regional carriers. It has been allowed to lead consolidation of the Russian market, while effectively being shielded from LCC competition.

With this consolidation phase now substantially complete, the government now appears to be seeking to usher in a new era of LCC-led aviation growth and Aeroflot has been given the opportunity to drive this development in the domestic market before taking it to international markets.

Aeroflot is relatively cost efficient vs European legacy carriers

Aeroflot is among the more cost efficient European legacy carriers, judged by its position on the chart below (based on 2012 results). With a similar average sector length to major flag carrier groups such as Air France-KLM and IAG, it has unit costs that are 20% to 30% lower than those groups.

In CASK and sector length terms, the Aeroflot Group is positioned close to smaller European flag carriers such as TAP Portugal and Finnair, although it is roughly three times the size of the latter two in terms of traffic. This gives it a solid base from which to compete with other European legacy carriers, although, importantly, its CASK is significantly higher than those of Europe’s LCCs.

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Cost per ASK, CASK, (US cent) and average sector length for selected European legacy and low-cost carriers: 2012*

*Financial year ends as follows: Jet2.com, Ryanair Mar-2013; Virgin Atlantic Feb-2013; Aeroflot, Pegasus Airlines, Air Berlin, Turkish Airlines,Lufthansa, Aer Lingus, IAG, Iberia, BA, Air France-KLM, Finnair, Norwegian, Vueling Dec-2012; Monarch, SAS Oct-2012; easyJet Sep-2012; Wizz AirMar-2012. Source: CAPA analysis of airline company traffic and financial statements and press releases

Weaknesses

Losses in subsidiaries remain a worry

In 2013, the Group's subsidiary airlines made a combined net loss of USD105 million, although they managed to achieve a positive operating profit of USD14 million.

Both figures were an improvement from heavy losses in 2012, but the subsidiaries continued to weigh down the Group result of USD230 million at the net profit level. If they can be restored to profit, the subsidiaries offer a substantial opportunity in terms of improving the Group result.

Aeroflot's multi-brand strategy is ill-defined

This is also a strength (see above), but the Aeroflot Group's presence in all market segments and geographies means that it does not have a focus on a strong core competence.

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The challenges of being all things to all people, and the consequent complexity, can mean that management is spread too thinly. It can also make brand maintenance more complex.

SkyTeam Alliance  relationship is still unsatisfactory

Aeroflot has been a member of SkyTeam since 2006. Its public position, as summarized in its recent Capital Markets Day presentation, is that membership allow it to increase its presence on existing markets and to enter new markets. Indeed, it said that SkyTeam gave it access to 87 incremental markets in 2013 (up from 63 in 2012).

However, Aeroflot is notably not a part of the trans-Atlantic joint venture that lies at the heart of SkyTeam, having reportedly been blocked from entering the JV by the two leading members, Delta and Air France-KLM. There were even reports in mid-2013 that Aeroflot was considering leaving SkyTeam altogether, although these reports have been downplayed by the carrier. In Sep-2013 the Aeroflot board said it had decided Aeroflot would remain in SkyTeam.

The Mar-2014 Capital Markets Day presentation made reference to "strengthened" relationships with Delta, Air France, KLM, Alitalia and China Eastern. What is clear is that Aeroflot views partnerships with other carriers as a very important element in achieving its growth plans.

If SkyTeam cannot provide all that it wants, it looks increasingly likely that it will turn to airlines outside the alliance to forge bilateral relationships in order to serve these ends. Of course, the potential to meet its needs through new relationships is also an opportunity.

Opportunities

The Russian market's growth potential is strong

Aeroflot estimates that total passenger numbers in the Russian market will grow at a compound average growth rate of 6.1% pa from 2013 to 2018. In addition to the superior market growth enjoyed by most emerging markets, driven mainly by superior GDP growth and relative under penetration of air travel compared with more developed markets, Russian aviation is also benefiting from the modernization of its infrastructure.

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Air passengers per capita*

*UK and EU-27 data as of 2011, US as of 2012, Russia as of 2013 Source: Aeroflot

Moreover, Moscow's hubs are increasingly serving as hubs for transfer traffic between CIS countries and long-haul destinations such as North America. Moscow also has some geographical advantages to capture some East-West global traffic flows.

For example, Moscow is positioned more or less on the great circle route between New York and Mumbai and between Milan and Shanghai. Transfer traffic provides incremental traffic growth potential for Aeroflot. The parent company airline saw transit traffic grow from 30% of its passengers at Sheremetyevo in 2011 to 35% in 2013.

Liberalization  of market access on international routes will open

up new routes

The Russian Government is gradually renegotiating bilateral air service agreements with the governments of other nations to allow greater access. This will lead to more opportunities for Aeroflot (- although it also opens up the potential for increased competition from foreign carriers in what has been a protected market).

Greater integration of subsidiary airlines will add coherence

Aeroflot has four Russian subsidiary carriers; Rossiya (St Petersburg regional carrier). Donavia (Rostov-on-Don regional carrier), OrenAir(Orenburg charter carrier) and Aurora (Far East regional carrier formed from the merger of Vladivostok Air and SAT Airlines). Donavia is already fully integrated into the Group and Rossiya is 100% operated by Aeroflot as of Apr-2014.

The subsidiaries extend Aeroflot's domestic network and their further integration should lead to further optimisation of this network.

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Introduction of its own LCC, Dobrolet, will generate new business

Aeroflot is close to launching its LCC subsidiary Dobrolet in the domestic market and is awaiting its AOC. It expects ticket prices to be around 20%-40% lower than mainstream carriers and that this will stimulate new demand (rather than cannibalize existing Aeroflot sales).

Adopting classic LCC strategies, Dobrolet expects to achieve lower costs through seat densification and direct sales channels. In addition, it plans to maximize revenues through the unbundling of features such as checked baggage, priority boarding and catering and to generate ancillary revenues through its website.

It is planning to base the new airline at a Moscow airport other than Sheremetyevo, initially with a fleet of eight Boeing 737-800 aircraft in a single cabin 189 seat configuration, and to focus on the most popular destinations in European Russia initially. It will expand to international routes from 2016. Aeroflot says that it will grow the Dobrolet fleet at an average rate of eight aircraft per year to reach 40 by 2018. It expects to invest USD100 million in the new venture in its first two years, a figure that suggests the fleet will be financed mainly through operating leases

Threats

Domestic competition is growing as liberalization spreads

Aeroflot has a strong position on many domestic routes and is the overall leader in the market.

Nevertheless, it faces a greater number of competitors (and on a greater proportion of its leading routes) in the domestic market than on international routes. Transaero, S7 Airlines and UTAir all provide more significant competition in the domestic market than Aeroflot faces internationally.

LCC competition is increasing, domestically and internationally

As part of the gradual process of the liberaliZation of market access, Aeroflot is seeing a growing level of competition from LCCs, in particular on short and medium-haul international routes to/from Europe. The carrier's recent capital markets day presentation referred to "Aeroflot's superior product quality and competitive cost structure" as being "winning factors".

This is something of an echo of the response of Western European legacy carriers to LCC competition when the new entrants started to pose a threat in the 1990s. Their experience

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suggests that Aeroflot cannot afford to be complacent, as cost conscious travelers voted with their feet, discarding the need for full service products on short haul. Aeroflot cost structure is competitive when compared with European FSCs, but not with LCCs. If its LCC Dobrolet is successful in the domestic market, it may also become a useful weapon on international markets.

Geopolitical events add unpredictability

Although the threat from geopolitical events such as war, terrorism, epidemics and natural disasters is a generic one facing all airlines, the crisis inUkraine highlights that it is perhaps a more significant one for Aeroflot than for its counterparts in Western Europe at the moment.

There were temporary restrictions over Ukraine airspace in Mar-2014 and Aeroflot shares fell heavily at the outset of the crisis. At present, the Group's operations in Crimea are continuing – it has even announced plans to increase capacity to Simferopol – but it is cutting fares to stimulate demand.

It appears as though Aeroflot is fulfilling the Russian Government's desire to integrate Crimea into Russia. While it is a listed company, Aeroflot remains majority owned by the Russian State and is scarcely free of government influence - including the danger of having to perform as a national instrument.

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REFERENCE

Aeroflot, Charity campaign "Train of Hope", (2009), accessed at 15/09/2014. Available at: http://www.aeroflot.ru/cms/en/new/585

Aeroflot, , (2009), accessed at 15/09/2014. Available at:

JSC Aeroflot Russian Airlines increases its social networking presence (2010), accessed at 15/09/2014. Available at: http://www.aeroflot.ru/cms/en/new/8578

Aeroflot, accessed at 17/09/2014. Available at:

http://vi.wikipedia.org/wiki/Aeroflot

Aeroflot, Aeroflot puts А320 “N. Lobachevsky” into commission, (2010) accessed at 15/09/2014. Available at: http://www.aeroflot.ru/cms/en/new/7936

Aeroflot, Aeroflot offers a new product: business ticket card (2011), accessed at 15/09/2014. Available at: http://www.aeroflot.ru/cms/en/new/10587

Aeroflot, Brand new A320 aircraft “I.Tamm” was set in operation by Aeroflot (2012). Accessed at 15/09/2014. Available at: http://www.aeroflot.ru/cms/en/new/23555

Aeroflot, aeroflot-swot-analysis-russias-national-champion-is-well-positioned-to-confront-new-challenges-160933 at: http://centreforaviation.com/analysis

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