Page 106 - RUSRptSept18

Russia’s transport ministry proposes one-off RUB22.5bn grant to Aeroflot to compensate for rising costs. Aeroflot has been a darling for portfolio investors for the last few years, but the national airline has lost its lustre this year on the back of sharply rising costs and as one of the companies in the US Treasury Department (USTD) sanctions cross hairs. The biggest problem the company faces is rising fuel costs that have been eating into its profitability. Russian national air carrier Aeroflot is not living up to investors' expectations after posting RUB7.2bn loss in the first half of 2018 under Russian Accounting Standards (RAS),bn e IntelliNews r eported earlier this month, because of the cost issues. The company has also been having a problem retaining its pilots who can earn more than double as much from other airlines following the 2014 devaluation of the ruble that is also driving up staff costs. BCS Global Markets warns that company's costs are growing at 7-9% currently and are likely to increase more, due to anticipated 50% hike in fuel prices. The analysts thus expect "only a 6.4%" Ebitda margin, down 4pp year-on-year and below the 10% management guidance. Russian Transport Minister Evgeni Dietrich is prosing to alleviate some of this pain with a grant of R22.5bn ($336mn) one off payment to compensate for the sharp increase in fuel prices this year. Dietrich estimated that this amount would be equal to around 50% of the industry's "fuel-related losses" this year. “The increase in fuel costs has indeed been the main headache for Russian airlines this year, especially given that the ruble has weakened, in part due to the so-called "budget rule." We expect Aeroflot to spend circa RUB177bn on jet fuel in 2018, which would be 45% more than last year (implying a 31% higher cost factoring out the traffic growth),” Sberbank CIB said in a note.
The US will not impose direct sanctions on Russia’s national carrier
Aeroflot , as share prices in Moscow tumbled on August 8 following the announcement of fresh sanctions this week in retribution for Russia’s alleged involvement with a chemical weapon attack on former spy Sergei Skripal in the UK in June. Investors feared that Aeroflot’s right to fly to the US would be cancelled . Aeroflot flies to five cities in the US, which collectively account for 5% of its revenue. Banning Aeroflot flights to the US would almost certainly result in both tit-for-tat bans on US fligths, but more damagingly Russia could close its air space to international flights and so significantly increase the distance for flights between Europe and Asia.
Russian national air carrier A eroflot is not living up to investors' expectations after posting RUB7.2bn loss in the first half of 2018 under Russian Accounting Standards (RAS). BCS Global Markets on August 8 has slashed the target price for Aeroflot's shares by 45% to RUB110 per share and changed the recommendation to Sell, arguing that carrier's costs are growing significantly faster than the profitability. In March Aeroflot was re-rated to Buy by Aton Equit y, arguing that concerns that concerns of Aeroflot's earnings are behind it, and the stock is expected to return to investors' attention due to a new wave of earnings per share (EPS) growth, stable dividends, and currently low valuation. The company has adopted a new dividend policy , attracted large institutional investors , had given the market a surprise buyout offer, and argued that its worsening results in the beginning of 2018 were nothing but seasonal . Resuming air traffic to top tourist destinations such as Egypt also supported sentiment on Aeroflot. However, BCS now warns that company's costs are growing at 7-9% currently and are likely to increase more, due to anticipated 50% hike in fuel prices. The analysts thus expect "only a 6.4%" Ebitda margin, down 4pp year-on-year and below the 10% management guidance. BCS also argues that Aeroflot has historically hedged fuel prices with ruble-adjusted contracts, but the breaking of the ruble-oil price tie in 2017 and 2018 means that the company will be more exposed to risks in its key cost item. In the medium term operational performance of Aeroflot is likely to keep improving, but the margins will shrink, BCS argues, expecting Aeroflot to continue to disappoint.
106 RUSSIA Country Report September 2018 www.intellinews.com