Aeroflot airline report

1. Logistics and
International freight forwarding
REPORT ON AEROFLOT
RUSSIAN AIRLINES
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2. 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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3. 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
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4. enables Aeroflot passengers to address the company’s call center and talk to a computer,
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
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5. significantly raise air carriage sales efficiency has resulted from IATA’s strategic
partnership with Aeroflot and VTB Bank.
· 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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6. · 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.
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7.  2014
· 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);
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8. · 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;
· 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.
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9. Share of domestic and international passengers in Russia: 2013
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
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10. penetration of international markets to/from Russia. In the absence of significant LCC
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.
10

11. Aeroflot Group revenues, operating profit and net income (USD million) 2004 to
2013
Source: Aeroflot
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12. · 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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13. 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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14. 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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15. 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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16. · 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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17. 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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18. 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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