Figures unconfirmed by Aeroflot paint a very rosy picture of Aeroflot in 1998 under Russian accounting standards

Published: 5/27/1999

On May 26th 1999, AK&M, the Russian financial information agency, published Aeroflot"s 1998 financial results under Russian accounting standards. However, although AK&M cited the company as the source of the information, Aeroflot officials told Concise Aerospace that the company had not yet made public its 1998 results, and that the results are still being audited. Unofficially, some even expressed surprise at the strength of the figures reported by AK & M. AK&M did not publish comparable 1997 results in its report. Concise Aerospace has therefore compared the numbers published on May 26th 1999 with the official 1997 results published in Aeroflot"s annual report. The results show a 6.0% decline in operating revenues, a 7.8% decline in operating costs, and dramatic increases in profits (in dollar terms) and margins. These numbers beg many questions. Concise expected the company"s 1998 results to be significantly worse, for the following reasons: *Russia"s economic slump forced Aeroflot to set its domestic prices in roubles, and to offer low prices on international routes in order to avoid losing passengers to other carriers and maintain its share of a weak market. Other airlines, with a few exceptions, have shown substantial declines in both revenue and profit. *Aeroflot aggressively cut domestic prices, so continuing its effort to take market share from local airlines as it embarked on new routes within Russia. *It also incurred considerable additional costs in 1998, compared to 1997, particularly from leased new jets, but also from its improved service and higher marketing costs. If the results published by AK&M prove to be accurate, the improvement may be at least partially explained by some of the following factors: Improved revenues: *Aeroflot may have posted a very strong financial performance in January-July, and the impact of the crisis that began in August may have been less severe than we expected, although traffic indications do not strongly support this theory. Lower costs: *Aeroflot may have saved on fuel expenses - the largest component of its costs (20%)- as oil prices decreased in 1998, and jet aviation fuel prices within Russia were maintained in roubles. It also replaced inefficient Russian jets with efficient western jets. *Concise expected the greatest impact on the company"s bottom line to come from high leasing costs, as the company took delivery of ten new jets in 1998. Aeroflot may have made prepayments on some of these leases in1998, before the devaluation. *Aeroflot may have achieved significant savings on labour costs. It reduced its staff in 1998 and may have also delayed paying salaries and held employee-related costs steady in rouble terms or even decreased them. *It may have entered into rouble forward contracts in January-July 1998, which would have hedged it against devaluation and left it with enough dollars to meet dollar-related costs after the crisis began. *Aeroflot"s expenses on domestic routes were in roubles, so that even when it fixed domestic ticket prices in roubles it did not suffer from the devaluation. *It may have benefited significantly from financial and non-core-business investments in 1998 and it may have avoided investing in GKOs. *Aeroflot cancelled unprofitable routes and closed redundant representative offices. It is even possible that the investigations of the Berezovsky/Andawa connection revealed more income or less cost than expected! Whether or not the more detailed version of the 1998 results will demonstrate that Aeroflot has achieved the unachievable and beaten the market downturn, remains to be seen. The board of Aeroflot has declared a dividend of Rb 0.0082 or $0.0004 per share, at a total cost of $440,303. Concise Aerospace considers that such a low level of dividend reflects the company"s deteriorating financial situation in 1998, owing to the crisis that resulted in the significant outflow of passengers and lower real revenues from those who remained. The motivation for paying a dividend principally comes from the state which, as the major shareholder in Aeroflot, continues to look for cash flow from its holdings.

Article ID: 553