Daily analyst comments

On October 16 Russia’s Aeroflot airline reported its performance in 9M 2008. The passenger numbers rose 14.8% y-o-y, while the passenger turnover sped up 10.75% to 20.8 billion passenger-kilometers.

Table 1. Aeroflot: basic operating results for 9M 2008

The passenger turnover grew at about the same rate as in the year-earlier period, while falling short of the average growth figure for the industry as a whole, at 10.75% vs 14.2%. At the same time, the carrier’s passenger numbers slightly exceeded the industry average. The large gap between the pace of growth in the passenger turnover and passenger numbers, at 10.75% and 14.83%, respectively, is due to a decrease in the average length of flight per passenger, which resulted from a 32% boost in domestic flights against a more modest 6% rise in international flights, as the airline put more emphasis on its domestic operations. We believe that a shift in the company’s focus to domestic flights may impair its financials, as profit margins on international flights are larger than those on domestic operations.

We view the results posted as moderately negative. To begin with, the rates of growth in the passenger turnover and passenger numbers lagged behind the average for the industry. Moreover, the airline’s profits are bound to narrow as price competition on the domestic market stiffens. For all that, we believe that Aeroflot shares hold the most appeal for long-term investors in the sector, as the airline is better placed than its rivals to secure debt financing for the upgrade of its aircraft fleet. Finally, the carrier is the recipient of the royalties paid by foreign airlines for the right to perform Trans-Siberian flights, which should lend further support to its shares. Our recommendation on Aeroflot shares is currently under review.