Okulov sets out agenda for Aeroflot

Published: 2/1/2000

Valery Okulov, General Director of Aeroflot, has set out his vision for the airline and, in a recent interview with the Vedomosti newspaper, attempted to lay to rest rumours that have been circulating on the carrier"s future. Okulov insisted that no further privatisation of Aeroflot is planned in the short term and suggestions that a 25% stake would be sold off to pay off debts, recently rumoured to be $100m on leases, were unfounded. The sale of a stake was, however, never likely to raise money for the company, as the seller was the federal government which, given current finances, is unlikely to hand the proceeds back to the airline. The reason for the delay in the sale is negative investor feedback for the airline"s investment bankers, who would have argued that placing stock at the moment would be difficult and unlikely to generate a fair value for the flag carrier. This is particularly so if the intention was to raise additional funds through a rights issue. Okulov confirmed that new payment schemes have been developed to replace the previous arrangements with Swiss-based Andawa and that Chase Insight, an affiliate of Chase Manhattan Bank, would ultimately oversee international cash management. He added that Moscow Sberbank, the London-based Moscow Narodny Bank and Guta-Bank now play principal roles in handling Aeroflot"s accounts and that the company"s settlement system was now fully automated. Olkulov further confirmed that consultants, McKinsey, were preparing a corporate strategy document, entitled “Aeroflot in 2003", outlining medium term plans and objectives. He referred to the development of a sales and ticket distribution system, which focuses on Aeroflot"s own sales networks. The company does not intend to spin off activities such as charter and cargo, according to Okulov, although other sources suggest that the carrier is examining a wide range of structuring options, including a regional airline company constituted separately from the carrier for some of its domestic operations. He also refuted rumours of redundancies, arguing that better management of the airline would improve productivity. It appears that powerful Aeroflot unions, which recently delivered a damning indictment of the arrier, still wiled a fiar degree of lunch in the overmanned company. Okulov expressed confidence in Aeroflot"s strength in European markets, but observed that, in order to sustain this, it would need to maintain a higher frequency of flights on major routes, such as Berlin, Paris and London. He stated that, while passenger fell during the first half of 1999, traffic began to increase in September, yielding growth of 3% compared to 1998. He confirmed that Aeroflot is now aiming to achieve annual growth of 5-7% and that its key objective for 2000 is to maintain profitable operations, by increasing seat-load factor from its current 60% to 65%. The company estimates that this will result in 9% growth in passenger turnover, so improving the bottom line by 16%. According to Okulov, seat load factors in excess of 65% to 68% are unrealistic, given the requirement in the near term, to open up new routes and increase flight frequencies. He also mentioned that, as with all carriers, the adoption of new capacity puts pressure on profitability, suggesting that he is continuing to have problems with his Boeing 777s, which he recently admitted were proving lucrative on the North American routes. While having a relatively easy run internationally, with few really credible competitors among the domestic carriers, volumes are soft and seem likely to remain so for the forseeable future. In the domestic market, where Aeroflot is seeking to grow, there are some aggressive competitors – notably Sibir - breathing down its neck, with tight pricing and rising costs. The impact of management consultants, McKinsey, in clarifying and implementing the airline"s future strategy could, however, be significant and, for a company noted for obfuscation rather than transparency, this wide ranging interview may signal a new and more open relationship with the media and the public. Associated article: www.concise.org. 24th November 1999

Article ID: 1377