On October 14, Russia’s flag air carrier Aeroflot released its 1H 2008 financials. Revenue rose 28.4% y-o-y to USD 2.14 billion, while EBITDA was down 34.0% to USD 216.0 million. Net profit came out at USD 72.2 million, down 55.2% on the year-earlier period.
Table 1. Aeroflot: key financial indices for 1H 2008, USD mn
| Indicator | 1H08 | 1H07 | Change |
|---|
| Revenue | 2138.4 | 1665.3 | 28.4% |
| Operating expenses | 2001.6 | 1408.5 | 42.1% |
| Operating profit | 136.8 | 256.8 | -46.7% |
| Operating margin | 6.4% | 15.4% | - 9.0%. |
| EBITDA | 216.0 | 327.1 | -34.0% |
| EBITDA margin | 10.1% | 19.6% | - 9.5% |
| EBITDAR | 312.5 | 403.0 | -22.5% |
| EBITDAR margin | 14.6% | 24.2% | - 9.6% |
| Net profit | 72.2 | 161.2 | -55.2% |
| Net margin | 3.4% | 9.7% | - 6.3%. |
Source: company data, Finam estimates
We regard these financials as negative: The rise in expenses, by 42.1%, markedly surpassed revenue growth of 28.4%. As a consequence, the operating profit dropped 46.7% and net profit plunged 55.2%. According to our estimates, royalties charged on foreign airlines for trans-Siberian flights accounted for a major portion of the first-half profit.
Growth in operating expenses is blamed on price rises for aviation kerosene (up 63.8% y-o-y), rising payroll costs (up 50.2%), expenditures on aircraft maintenance (up 46.4%) and expenses on passenger services (up 59.3%). Management attributed the rise in payroll costs to the recruitment of personnel for the Sheremetyevo-3 terminal and growth in technical maintenance costs due to expansion of the company’s aircraft fleet.
We consider a marked rise in the average salary to be another reason for rapid growth in the payroll costs, which may eat into the company’s current and future profit margins. We also link the rise in technical maintenance costs to the company’s ageing aircraft fleet, more than half of which is made up of obsolete Tu-154, Tu-134, An-24, An-26 and Il-86 airplanes.
We believe that the air travel industry at large, and Aeroflot in particular, will face low profit margins in the future. The refueling companies, which hold a monopoly position on the market, will likely prevent price decreases on aviation kerosene, despite falling oil prices. The airline may take more time to upgrade its aircraft fleet, due to its limited access to credit resources. Worse still, the possible decline in personal incomes in the fallout from the financial crisis may further damage air travel in Russia.
Our recommendation on Aeroflot shares is now under review.
0.244
0.616
