Fitch Ratings has upgraded Public Joint Stock Company Aeroflot - Russian Airlines' (Aeroflot Group) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'BB' from 'BB-'. The Outlook on the IDR is Stable. A full list of rating actions is available at the end of this commentary.

The upgrade reflects our reassessment of Aeroflot Group's standalone credit profile (SCP) to 'b+' from 'b', underpinned by the continuing strength of the group's business and financial profile compared with that of peers including GOL Linhas Aereas Inteligentes S.A. (B+/Stable) and LATAM Airlines Group S.A. (BB-/Stable). The group's operations are supported by a strong market position on domestic and international routes, which is enhanced by a multi-brand strategy, a relatively diversified route network and an ability to maintain adequate leverage despite costs pressure over the last couple of years.

We continue to apply a two-notch uplift to its SCP under Fitch's "Government-Related Entities (GRE) Rating Criteria". The group is majority state-owned. Based on the overall support and the rating differential between Aeroflot Group's SCP and the Russian Federation (BBB/Stable), the group's rating is capped at three notches below the sovereign's.


Solid Business Profile: Aeroflot Group's business profile is supported by a strong market position, which the group strengthened to about a 43% share in 6M19 on both international and domestic routes from just about 31% in 2014. It is further supported by a relatively diversified route network and favourable hub position. It is also enhanced by a multi-brand strategy within the Aeroflot Group, including Rossiya and Pobeda, aimed at capturing customers in every market segment and increasing passenger traffic. Aeroflot operates one of the youngest aircraft fleets in the industry with an average age of 6.3 years.

Passenger Traffic Growth Continues: The group continues to grow its passenger traffic to about 28 million passengers in 6M19, a 13.4% increase, outpacing overall Russian market growth of about 9%. The above-market growth was primarily supported by its low-cost carrier (LCC) Pobeda, although growth was reported in all segments. In 6M19 Aeroflot Group reported a 14% growth in revenue passenger-kilometres (RPK) and we expect this trend to continue over 2019-2022, at about 10% on average.

Two-Notch Uplift: The Russian Federation is the majority shareholder of Aeroflot Group, with a 51.2% direct ownership. Fitch views status, ownership and control as well as support track record and expectations as strong due to the state's majority ownership and Aeroflot Group's inclusion in the list of strategically important enterprises in accordance with the GRE Rating Criteria. We expect tangible state support for Aeroflot Group would be forthcoming, if needed. Aeroflot Group has also consistently received airline agreement revenue.

Fitch views socio-political implications of Aeroflot Group's default as moderate, since the airline is important for developing connectivity among various regions in Russia and substitution is likely to lead to temporary disruption in service. Financial implications of a default by Aeroflot Group for the sovereign or other GREs are weak, in our view.

High FX Exposure: Aeroflot Group continues to be exposed to FX fluctuations as almost all of its debt at end-2018 was denominated in foreign currencies, mainly US dollars. The majority of debt is in the form of finance leases for aircraft purchases. This is partially mitigated by over half of its revenue being generated in dollars or euros, or linked to euros, although over a third of its operating expenses are also denominated in foreign currencies.

High Costs Pressure Profitability: The group's 2018 EBITDA decreased by another 38% yoy (or RUB21 billion) - following a 26% yoy decrease in 2017- despite higher passenger (PAX) and a stable load factor, leading to 15% increase (or RUB79 billion) in revenue. The EBITDA decline was mainly due to higher fuel and operating lease costs, partially mitigated by the group's cost-cutting and efficiency initiatives. We forecast a gradual improvement in margins over 2019-2022, driven by a marginal increase in yields and our expectations of fuel prices remaining at moderate levels.

De-leveraging Expected: We believe Aeroflot Group's financial performance will remain sustainably manageable over 2019-2022, supported by improving operations and deleveraging from 2020. We forecast funds from operations (FFO) adjusted gross leverage to decline to around 5.5x over 2020-2022, following an increase to above 6x in 2019. This makes Aeroflot Group comparable to LATAM, GOL and American Airlines, Inc (BB-/Stable). We forecast FFO fixed charge cover to remain at around 1.2x-1.3x over 2019-2022.

Competitive Cost Position: Aeroflot Group is favourably placed compared with other European network carriers based on its cost position. The group's cost per available seat-kilometre (CASK) is also comparable to LCCs'. Although we expect Pobeda to achieve double-digit growth over the next four years, Aeroflot network business will remain the core of the group's business model. Pobeda contributed only around 13% of total PAX in 2018 (9% in 2017). We believe cost advantage is offset by immense pressure on yields due to the highly competitive nature of the industry, competition from rail, price sensitivity of customers and to a lesser extent, the government's ambition to facilitate air travel at an affordable price.


Aeroflot has a stronger business profile than GOL and LATAM in terms of scale and diversity of operations, its strong market position and favourable cost position. Its credit metrics are comparable to those of GOL but are somewhat weaker than LATAM's. This supported a reassessment of Aeroflot Group's SCP to 'b+', which is in line with that of GOL.

Aeroflot Group has a weaker competitive position than American Airlines Inc. and Air Canada (BB/Stable). This is mainly due to its smaller scale of operations and higher leverage, somewhat mitigated by the high frequency of international flights, a favourable hub position and young average fleet age.

Aeroflot Group's 'BB' rating benefits from a two-notch uplift for state support.


- Russian GDP growth of 1.2% in 2019 and 1.9% thereafter

- Russian CPI of 4.9% in 2019, 4.2% in 2020 and 4% thereafter

- Average USD/RUB exchange rate of 66 in 2019, 67 in 2020 and 67.5 thereafter

- Capex in line with management forecast

- Revenue passenger kilometres growth of about 10% per annum on average over 2019-2022;

- Yield recovery in the low single digits


Developments That May, Individually or Collectively, Lead to Positive Rating Action

- Evidence of significantly stronger state support, although unlikely at present in our view.

- Improvement in the financial profile (eg FFO adjusted gross leverage below 5x and FFO fixed charge cover above 2.5x on a sustained basis), due to yield recovery, efficient cost management and/or moderation of investments in the fleet, coupled with an upgrade of the Russian sovereign rating.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- Material deterioration of the credit metrics (eg FFO adjusted gross leverage above 6x and FFO fixed charge cover below 1.5x on a sustained basis) due to further rouble depreciation, a protracted downturn in the Russian economy, drop in yields or overly ambitious fleet expansion.

- Weakening of state support.

- Break-even or loss-making operational performance (excluding airline agreement revenue) on a sustained basis.


Strong Liquidity: Aeroflot's low cash-to-revenue ratio of around 10%, compared with a global average of around 20%, is offset by available credit facilities and expected positive free cash flow (FCF) generation. At end-2018, its cash and short-term deposits stood at RUB30 billion, which together with available credit facilities of RUB84 billion, comfortably covered short-term debt maturities of RUB15 billion. The group does not pay commitment fees under its credit lines but given its state ownership we would expect funds from banks to be available in case of need. Fitch expects Aeroflot to generate positive FCF during 2019-2022 on the back of improving operation and moderate cash capex.


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