Aeroflot announced 9M 2019 IFRS financial results.

On November 29, 2019, Aeroflot (“the Aeroflot group”) published its condensed consolidated interim financial statements for the first nine months of 2019, in accordance with International Financial Reporting Standards (IFRS). The results were published in accordance with the new IFRS 16 Leases rules.

Key financial highlights for 9M 2019

The revenue increased by 12.4 percent year-on-year to RUB523,983 million. The EBITDA amounted to RUB141,675 million. The net profit totaled RUB20,305 million. Andrey Chikhanchin, PJSC Aeroflot’s deputy CEO for commerce and finance, said, “The results of the third quarter – the high summer season – were positive for the Aeroflot group. The Aeroflot group posted a net profit of RUB29.1 billion for the quarter and generated a positive result of RUB20.3 billion for the first nine months of 2019. These results were achieved through the development of our revenue and expense management initiatives, launching new services to improve passenger comfort, and maintaining strict cost control. Along with simple decisions on the budgeting and financial control front, we implemented a number of initiatives to increase internal efficiency, including negotiations with partners to agree on more favorable financial terms. In the nine months and the third quarter of 2019, CASK (cost per available seat kilometers) saw a slight increase of 3.0 percent and 1.2 percent, respectively.”

The nine-month results should be considered in the context of external factors, including market trends during the first half of the year. The year began with consistently high fuel prices and FX pressures on the non-ruble component of the Aeroflot group’s expenses, which contributed to moderate results in the first half of 2019.

While there have been no sharp jumps during 2019, fuel costs remained significantly above the historical average. Given the passengers’ limited purchasing power, this development put additional pressure on the company’s financial results. In addition, in the second quarter, the closure of Pakistan’s airspace led to additional fuel costs, as flight times to destinations in Thailand, India, and Vietnam increased.

When comparing the results of the summer season with the corresponding period of the previous year, it is important to note that for June and July, the comparable period corresponds with the World Cup, which Russia hosted in 2018. Higher demand, primarily from overseas, and an increased load factor on the domestic route network, resulted in a high base effect in terms of yields that could not be further increased. Given excess capacity in the market and continued airport services rate hikes, the Aeroflot group’s management remains committed to strict cost control and the development of programs to generate additional revenue streams.

In the first nine months of 2019, the Aeroflot group carried 46.7 million passengers, up 10.6 percent year-on-year.

In the nine months of 2019, the Aeroflot group’s revenue increased by 12.4 percent year-on-year to RUB523,983 million.

The revenue from scheduled passenger flights increased by 13.6 percent year-on-year to RUB431,181 million, due to an increase in passenger traffic and the additional impact of rising yields. The revenue from charter flights increased by 0.9 percent to RUB30,853 million.

Cargo revenue rose by 6.0 percent to RUB13,613 million year-on-year, as cargo and mail volumes grew by 4.6 percent.

Other revenue increased by 11.0 percent year-on-year to RUB48,336 million, due to a rise in FX-denominated revenues from agreements with other airlines and a rise in revenues from the frequent flyer program.

Operating costs

In the first nine months of 2019, operating costs increased by 15.8 percent to RUB462,288 million, primarily due to an increase in operations supported by capacity expansion of 12.4 percent year-on-year.

Aircraft fuel costs increased by 10.3 percent year-on-year to RUB145,569 million. This was mainly due to the Aeroflot group’s operational development and an increase in carrying capacity.

Excluding fuel costs, operating costs increased by 18.4 percent year-on-year to RUB316,719 million.

Expenses related to aircraft servicing and passenger service amounted to RUB96,893 million, a 20.7-percent increase year-on-year, due primarily to the growth of passenger traffic and increased airport fares in domestic airports.

Amortization and customs tariffs increased by 21.6 percent year-on-year to RUB79,980 million. This increase was due to the expansion of the Aeroflot group’s fleet over a 12-month period. Following the introduction of the IFRS 16 standard, depreciation expenses have become more significant, as they affect all aircraft on the company’s balance sheet.

Staff costs increased by 9.9 percent year-on-year to RUB66,859 million, mainly due to an increase in the number of flight crew to support the Aeroflot group’s growth.

Expenses related to aircraft maintenance increased by 44.6 percent year-on-year to RUB23,942 million. These expenses were affected by an increase in aircraft servicing, which in turn was due to an increase in flight hours and the depreciation of the ruble, as well as to maintaining product quality.

Selling, general, and administrative expenses (SG&A) increased by 13.2 percent year-on-year to RUB22,481 million, due primarily to business growth. The Aeroflot group continues to maintain strict control of non-operating expenses.

Lease expenses amounted to RUB5,758 million. These include expenses associated with short-term leases, variable lease payments, and leases of low-value assets, which under the IFRS 16 standard are not totaled as the Aeroflot group’s liabilities and assets.

Other expenses increased by 4.7 percent year-on-year and amounted to RUB20,806 million.

As a result of these factors, the EBITDA totaled RUB141,675 million, while the EBITDA margin was 27.0 percent.

Non-operating gains & losses

In the first nine months of 2019, finance income increased by 5.3 percent year-on-year to RUB5,180 million. Finance costs decreased by 52.2 percent year-on-year to RUB41,531 million. This was due to the fact that in 2018 special accounting rules regarding liabilities related to leases previously classified as operating leases were not applied. As a result, a non-cash FX revaluation of total lease-related liabilities was reflected in finance costs following a 13.9-percent appreciation of the U.S. dollar from the beginning of 2018 to September 30, 2018.

Given the factors noted above, the Aeroflot group’s net profit for the first nine months of 2019 amounted to RUB20,305 million.

Debt & liquidity

Following the introduction of the IFRS 16 standard, lease liabilities increased mainly by the stated amount of liabilities that existed under lease agreements previously classified as operating leases. Previously, future payments under these agreements were not classified as liabilities and were not reflected in the balance sheet, while current payments under agreements relating to comparative reporting periods were reflected in the profit and loss account. Therefore, the change in debt under the IFRS 16 standard is an accounting (“paper”) change that is not associated with a real increase in the company’s liabilities or a change in its financial position. The business model of the Aeroflot group and its contractual obligations have not changed.

As of September 30, 2019, total debt in accordance with IFRS 16 decreased by 9.5 percent compared to December 31, 2018, to RUB597,702 million. The reduction was due to adjustments to the valuation of leases following the strengthening of the ruble against the dollar as of September 30, 2019 compared to December 31, 2018, and the repayment of debt in accordance with the payment schedule.