Fitch Ratings-London/Moscow-15 March 2010: Fitch Ratings has today assigned OJSC Aeroflot – Russian Airlines (Aeroflot) Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BB+' respectively. Both ratings have Stable Outlooks. Fitch also assigned Aeroflot Short-term foreign and local currency IDRs of ‘B’, and senior unsecured foreign and local currency ratings of ‘BB+’. Aeroflot has additionally been assigned a National Long-term rating of ‘AA(rus)’ with a Stable Outlook, and a National Short-term rating of ‘F1+(rus)’.
Aeroflot, the Russian flag carrier, is 51% directly owned by the Russian Federation (‘BBB’/Stable/‘F3’). According to Fitch’s Parent and Subsidiary Rating Linkage Methodology, Aeroflot’s standalone rating benefits from a one-notch uplift provided by parental support as strategic and operational ties between the group and its parent, the state, are considered by Fitch to be relatively strong.
The ratings reflect Aeroflot’s strong position in scheduled air passenger travel in Russia and its growing presence in international markets, which together represented around 76% of the group’s total FY08 revenue. Given Aeroflot’s size and operational scope compared with its domestic peers, Fitch expects it to benefit in a commercially astute and profitable manner from the government’s plan to develop the airline sector to facilitate domestic economic growth.
Aeroflot’s credit profile deteriorated in 2008 under adverse macro-economic conditions with total lease-adjusted leverage increasing to 4.2x in 2008 from 2.8x in 2007 on the back of lower EBITDA, mainly driven by significantly reduced traffic as a result of the economic crisis, combined with high fuel prices in H108. However, compared to European airline peers, Aeroflot’s operating performance has demonstrated a good degree of resilience to the current downturn with an EBITDA margin sustained at a double digit of 10.8% in 2008, which improved to 16.4% in the first three quarters of 2009. Aeroflot is among the few airlines in Europe that was able to retain positive net income throughout the downturn, partly due to the government enhanced fuel price policy and a switch to a bidding system for fuel suppliers. Fitch expects the EBITDA margin to improve over the next three years as a result of significant changes in its cost base, which involve considerable staff and maintenance cost reductions, together with a cost-efficiency improvement from adding more modern fuel-efficient aircraft to its fleet. These factors should more than offset the expected increases in operating lease costs as a result of this being the preferred means for new fleet financing.
The current ratings incorporate Aeroflot’s flexible cost structure, mainly due to a high proportion (84%) of its fleet being under lease agreements (20% on finance leases and 64% on operating leases).
The ratings also take into account that Aeroflot’s creditworthiness is constrained by its plans to pursue an aggressive expansion strategy (fleet renewal, a new terminal, and the potential Rosavia transaction), and its limited track record of successful implementation of large scale projects without jeopardising credit metrics. Fitch believes the company’s strategy is prone to significant execution risks, especially amid current macro-economic conditions.
The Stable Outlook reflects Fitch’s forecasts for Aeroflot which show a progressive reduction in total adjusted leverage (excluding Terminal debt) over the next 3 years to a sustainable level of 4x by end of 2013, from a peak of above 5x at FYE10. Sustained leverage at this level is commensurate with a stable ‘BB’ standalone rating for an entity with Aeroflot’s business profile. Free cash flow throughout Fitch’s forecast period (2010-2013) is also expected to stay positive as the company plans to spend minimum sums on expansionary capex and dividend payouts. Fitch also expects the new management strategy to be carried out under good financial discipline. These medium-term forecasts assume an economic recovery in Russia and prospective increases in global air traffic demand driven by a revival of business class travel. Any deviation from the forecast profile could have implications for the future rating level.
Although Fitch acknowledges the positive aspects of Aeroflot’s relatively strong ties with the state, there is also a risk that the state’s influence on the company’s development may result in more aggressive consolidation plans and/or acquisition of non-core or financially weaker assets at the expense of its credit profile. Fitch treats such plans as event risk.
Aeroflot is the largest airline in Russia and the CIS region. Three quarters of its USD4.6bn total revenue in FY08 came from the scheduled air passenger segment, of which one-third was generated by domestic traffic and two-thirds by international traffic.
Applicable criteria, 'Corporate Rating Methodology', dated 24 November, 2009, and ‘Parent and Subsidiary Rating Linkage Methodology’, dated 19 June 19, 2007, are available on Fitch’s website at www.fitchratings.com
Contact:Sabrina Ran, London, Tel.: +44 20 7070 5817;Angelina Valavina, London, Tel.: +44 20 7682 7383.
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Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(rus)’ for National ratings in Russia. Specific letter grades are not therefore internationally comparable.
Additional information is available at www.fitchratings.com.