Fitch Ratings-London/Moscow-23 March 2011: Fitch Ratings has affirmed OJSC Aeroflot - 'Russian Airlines' (Aeroflot) Long-term foreign currency Issuer Default Rating (IDR) at 'BB+', with a Stable Outlook. A full list of ratings actions is at the end of this release.
According to Fitch's Parent and Subsidiary Rating Linkage Criteria, Aeroflot's IDR continues to benefit from a one-notch uplift due to parental support, as strategic and operational ties between the group and its parent, the Russian Federation ('BBB'/Positive/'F3') which owns a 51% stake, remain relatively strong, in the agency's opinion.
Aeroflot's standalone credit profile is commensurate with a 'BB' rating reflecting the group's leading position as Russia's national flag carrier and the largest airline in the country. It has experienced steady growth over the past six years with a compounded growth rate of 12% on passenger turnover, driven by organic expansion as well as acquisitions. Passenger load factor has also improved significantly in the same period by nine percentage points to 77%, which is at par with that of British Airways. The group is well positioned to further benefit from the government's plan to develop the airline sector to facilitate domestic economic growth.
Compared with its European airline peers, Aeroflot's performance has demonstrated a degree of resilience during the recent downturn, with double-digit EBITDA margins and positive net income over the past three years. The global airline market began to recover in late 2009. In FY2010, Aeroflot achieved better-than-expected operating results in all regions. However, passenger yield remained low as the group was unable to rapidly increase fares due to the fragile global economic recovery, combined with fierce competition for additional traffic volume in the market.
Nevertheless, as positive trends were already occurring in both business and economy routes to North America, Fitch anticipates that yield bottomed out in 2010, and the average yield is expected to gradually recover as business and consumer confidence continues to return in 2011.
The Stable Outlook reflects Fitch's expectations of a progressive reduction in Aeroflot's total adjusted leverage to below 4x in the medium term. This will be supported by a de-consolidation of the debt at OJSC Terminal - a 52.82%-owned subsidiary of Aeroflot (currently constituting two-thirds of the group's financial borrowings, excluding finance leases) in 2012 as the group expects to transfer a part of the control of this project back to the state. The group is expected to have deleveraged to below 5x (measured as total lease adjusted debt to EBITDAR) at YE10, one year earlier than previously anticipated, from a high of 5.7x at YE09, primarily driven by strong EBITDAR growth to pre-crisis levels.
The agency also expects 2010 free cash flow (FCF) to be positive, and largely remain so for the forecast period as the company plans to spend minimal sums on expansionary capex and dividend payouts. Additionally, Fitch expects EBITDA margins to stay above 11% in the medium term, since Aeroflot has room for further cost reductions and efficiency improvements, compared with most of its peers, although fuel costs are expected to increase in the near term due to the sharp rise in fuel prices in 2011.
Following the trend of consolidation in the global airline market, and encouraged by the government of the Russian Federation, Aeroflot has taken the leadership in domestic market consolidation by proposing to merge with six regional airlines of Rostechnologii. The deal, which is expected to be completed by end-2011, is likely to be achieved through share-swaps with no impact on Aeroflot's cash flow profile. Upon completion, Fitch expects that Aeroflot's overall market share, in terms of passenger turnover, will increase by 10% to around 37%, further strengthening its dominant position in Russia's airline sector. However, given its limited experience of integrating assets on such a large scale, execution risks for the expected synergies remain high. Aeroflot's rating is likely to come under pressure if the company is to consolidate all of Rostechnologii's current debt, which is currently not expected by the agency.
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 views this as an event risk.
Aeroflot is the largest airline in Russia and the CIS region. 80% of its USD3,160m total revenue in the first three quarters of 2010 came from the scheduled air passenger segment, of which 59% was generated by international traffic and 41% by domestic traffic.
The rating actions are as follows:
- Foreign currency Long-term IDR affirmed at 'BB+'; Stable Outlook
- Foreign currency Short-term IDR affirmed at 'B'
- Foreign currency senior unsecured rating affirmed at 'BB+'
- Local currency Long-term IDR affirmed at 'BB+'; Stable Outlook
- Local currency Short-term IDR affirmed at 'B'
- Local currency senior unsecured rating affirmed at 'BB+'
- National Long-term rating affirmed at 'AA(rus)'; Stable Outlook
- National Short-term rating affirmed at 'F1+(rus)'
- National senior unsecured rating affirmed at 'AA(rus)'
Primary Analyst Sabrina Ran
+44 20 3530 1127
Fitch Ratings Limited 30 North Colonnade
London, E14 5GN
Secondary Analyst Angelina Valavina
+44 20 3530 1314
+44 20 3530 1287
Peter Fitzpatrick, London,
Tel: +44 20 3530 1103,
Email: firstname.lastname@example.org .
Additional information is available at www.fitchratings.com
Applicable criteria, 'Corporate Rating Methodology', dated 16 August, 2010,
is available at www.fitchratings.com .
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