Meeting with Aeroflot CEO Vitaly Savelyev
Excerpts from transcript:
Mikhail Mishustin: Good afternoon, Mr Savelyev.
We have a difficult situation on the air carrier market, and Aeroflot, being the key air carrier in Russia, of course, is also incurring substantial losses due to the coronavirus. In particular, there has been a significant decrease in the number of domestic flights, and the fact that international flights have almost come to a halt has affected the company’s income and its work. However, I would like to say that the support measures we have adopted give the company a chance to preserve, above all, its human resource potential at this point. In fact, I know, and you have spoken about this, that all experts, pilots and ground crews work in groups. In order to support aviation, the Government has adopted a number of important decisions. In particular, aviation has been included in the list of the most hard-hit industries, and corresponding resources have been allocated. In particular, a system of postponements and incentives has been designed for air transport enterprises. Moreover, we have allocated 23.4 billion roubles to compensate for the losses sustained by Russian air companies as a result of the decrease in passenger flights.
The Government has also included Aeroflot in the list of backbone companies that receive additional support measures. I have signed the directive to provide state guarantees for 70 billion roubles worth of loans to the company. We will also take other measures to help aviation develop successfully in the future.
Mr Savelyev, I would like to listen to you, to hear your opinion on the developments in aviation in general and the company in particular. Perhaps you could say a few words about the global transport market and what is going on there. And, of course, I would like to hear about Aeroflot’s development strategy considering the situation due to the coronavirus.
Vitaly Savelyev: Thank you, Mr Mishustin.
First of all, I would like to thank you personally and express my great respect – to you, and hereby to the rest of the Government – for the decisions you’ve made regarding the airline industry in general and Aeroflot Group in particular. You mentioned the guarantees that we will receive for taking out the loan. We are ready for that.
I will say a few words about the company and what is going on in general. The year 2019 was very successful for us. We carried 60.7 million passengers. In these terms, Aeroflot Group ranks among the 20 largest airlines in the world. We operate a fleet of 359 planes; Aeroflot’s fleet is 246 planes. In 2019, our revenue was 678 billion roubles, which is an 11 percent increase over the previous period. Our EBITDA margin was also over 11 percent, 169 billion roubles. The group’s net profit was 13.5 billion roubles, which is almost three times more than the board of directors outlined. Our success last year has allowed us to stay afloat when the pandemic began, but the lockdown period was too long.
I would like to note that the main growth driver for Aeroflot Group is the low-cost Pobeda Airlines. I consider this one of the most successful expansions in the Russian airline industry. Pobeda has been operating for five and a half years and has carried over 30 million people. Last year, it carried 10.3 million passengers. Pobeda is a world record holder in many categories, for instance in terms of using Boeing aircraft in its fleet, it has 30 of them. According to Boeing itself, Pobeda is the best. The passenger load factor was at 94 percent last year. In the summer it was 100 percent. For instance, the average load factor of Aeroflot Group is 82 percent, while Aeroflot Airlines is 79 percent. These indices show how efficient Pobeda is. In the five and a half years of its history, Pobeda has received over 14 billion roubles in net profit, it is a highly efficient company. All international airline groups have a low-cost carrier that is the main growth driver both for capitalisation and profit in general.
It is also noteworthy that 12 percent of passengers who currently use Pobeda are flying for the very first time. This is how efficient it is.
As for the pandemic, you are absolutely correct, it has hit all airlines, both Russian and foreign, very hard. We had very difficult times, especially in April and May, when passenger traffic dropped by 93-95 percent. In June, it was 83-85 percent, but we are already recovering now. I can say that we are currently making some 300 flights per day. This is still low as usually we make 800 flights, but we are already carrying some 30,000-35,000 people a day. Our usual number is 110,000-120,000 people. But not long ago, just a month ago the number was 3,000-5,000. Therefore, the support of the Government and the fact that you began to facilitate the recovery of the market is very important for us. I can use some foreign companies as an example. For instance, Lufthansa’s operations dropped by 95 percent, Air France-KLM lost 96-98 percent. The state also provides them with substantial support. Lufthansa Group received 9 billion euros, while Air France was provided with 7 billion euros. These companies are larger than us: Air France-KLM is 34 percent bigger than Aeroflot.
You mentioned what the state is doing for us, and in this case it is doing a lot. Of course, being a major airline, Aeroflot has lost a lot, but we have managed to keep our team and our business. As a designated enterprise we went through the process of securing this guarantee. We prepared a mathematical model, worked it out – with the Ministry of Economic Development – and received a positive decision from all the commissions. We discussed this with the Finance Ministry, there was a government commission led by your first deputy Andrei Belousov. And we received 70 billion roubles.
Mikhail Mishustin: This is a loan; the state guarantees it for five years.
Vitaly Savelyev: Yes, it is. Overall, Aeroflot Group received significant assistance. This is very important to us.
But what is most important: in this model that I just mentioned, we used an optimistic scenario when we fly. The airline industry is a capital-intensive industry and if we do not fly... According to our model, we need to begin making more domestic flights, then we will be able to recover efficiently and quickly. The Russian industry will recover faster than the global and European airlines. We have more experience. I have worked there for 12 years, and we have overcome other crises, maybe not as big as this one.
Overall, Russia’s airline sector is growing by an average of 9-10 percent. The global average growth rate is 6 percent, and the European - 4.5 percent. So our recovery will be faster.
But the most important thing is to resume our flights. As for our strategic obligations, Mr Mishustin, we are maintaining them and our strategic goals as well, including using Russian-made aircraft. We confirmed our contract for 150 Sukhoi Superjets. We have 54 of them now and operate them. We have a contract for 50 MC-21 aircraft plus an option for 35 more. These aircraft will stay permanently in Aeroflot Group, thus we will fulfill our obligations for the sector.
We are also retaining our flat fare rates, which is a socially important mission for us, in five cities in the Far East, plus Kaliningrad and Simferopol.
Mikhail Mishustin: Mr Savelyev, please pay special attention to the development of tourism this summer. We are taking a lot of measures to support certain locations, opening tourist season in Russia, and Aeroflot could be of assistance here – certainly with reasonable prices – in terms of carrying our citizens within Russia. And then, when you go to the foreign market, I hope that many routes can be preserved.
Vitaly Saveyev: Yes, we understand these goals very well. I want to tell you that a bit later I will introduce our new strategy to you. It was decided on last December but it is still very relevant now. The strategy is called 30/30. What does that mean? We are prepared to increase passenger traffic by 30 million; this means we wanted to carry 100 million passengers by our 100th anniversary, which is a very high figure, then we will probably be among the top 10 airlines. However, in reality we can carry 130 million. And the second 30 indicates that we can cut economy class prices by 30 percent. I will explain it to you, how this can be done. We worked a lot on this, and we can really do it.
As for the flights, they are beginning now and at a good rate. For example, Air France opened 57 flights to 35 countries. We can – all Russian airlines, including Aeroflot Group - we could lose some historical slots unless we set the date when we can do it (and we must sell tickets). Look, an international airline, say, Qatar Airways, a five-star company and our rival in Asia, we have gained on them in China: we are always competing with them for the title of best transit airline from China to Europe, and we won. Aeroflot was recognised as the best foreign airline in China over the past three years. We knocked them out of first place. But now we could lose this lead because they have started flying again. They have opened 89 flights in 49 countries, and so on. I can tell you about each airline, including Belavia: hundreds of flights all around Europe have begun. This is why, Mr Mishustin, I have prepared some proposals. If you wish, we can discuss them later in more detail.
IATА is the international airline organisation that has been functioning since 1945; it represents 290 carriers. It has the board of governors, of which I am a member, for 10 years now. Here is their advice and request for all governments (and I am conveying them to you, too): the two-week lockdown rule should be replaced with another approach. This is a call to all countries. Europe is cancelling it. This is because you can do anything – we are observing all standards imposed by the Federal Service for the Oversight of Consumer Protection and Welfare – both during the preflight checkout and during the flight – but the two-week lockdown really scares tourists and passengers away. And this affects all airlines. So, this is one of the subjects the IATA asked us to discuss with all regulators.
Mikhail Mishustin: Perhaps, the IATA should first talk to the World Health Organisation. And should understand that since the epidemiologic situation is different in different countries, the IATA cannot just give advice to every country at the same time. It all depends on the country’s evaluation of its epidemiologic situation. The WHO says the same. For this reason we will proceed from the situation in this area: follow the advice of the Federal Service for the Oversight of Consumer Protection and Welfare.
Vitaly Savelyev: This is correct. As for tourism and reestablishing our air services, many cities have already opened. Only some Russian cities are still closed. There are about 20 cities that require a two-week quarantine. Many cities have opened hotels and popular resort destinations. Naturally, all carriers, including Aeroflot, are oriented to these cities.
I’d like to say a few words, if you will, about the strategy I mentioned. Mr Mishustin, how can we carry out our 30/30 strategy? We have four companies in our group. Aurora is a regional company operating in the Far East and it is managed separately. Aeroflot, Pobeda and Rossiya occupy their own niches.
Aeroflot has always been and remains a premium airline. Global market analysis shows that the premium segment exists. It does not grow as fast as the low-cost sector but it will continue growing.
Pobeda is the second company. Today, it is fourth in Russia in passenger traffic. This company is really able to compete with Western airlines because it is a classic low-cost carrier.
We want to focus Aeroflot on long-haul flights under our new strategy to turn it into a five-star company. Later, I will show how this can be done. By flying Aeroflot routes, Pobeda will considerably change the picture because of its cheap tickets. It is selling 10 percent of its tickets for 499 roubles compared to 999 roubles before. This makes a huge difference for passengers (this is why the passenger load is so big!) Rossiya will concentrate on social routes (including on flat tariffs) and the use of domestic aircraft since Aeroflot will operate only long-haul flights. This is how it will look. Aeroflot will… Today, we have four Skytrack stars for service and five stars from the US APEX Association for service as well. We can really be in the top ten (these are Skytrax five-star companies).
I would like to emphasise that, except Lufthansa, all other airlines do not carry over 35 million passengers because quality service can only be achieved in a narrow segment. It cannot be infinitely expanded. Considering our fleet (and we have a very modern fleet, as you know) we can really be among the top five in this group. In this way, we will considerably increase our capitalization, upgrade our service and improve our prestige, both as a company and the state in general. Aeroflot now has a similar fleet to Pobeda. Both companies operate Boeing 737-800s but for Aeroflot this aircraft has 156 seats because we have both business and economy classes and a kitchen. Pobeda only offers economy class and no kitchen equipment. This makes it lighter since its takeoff mass is smaller.
Mikhail Mishustin: How many seats does it have?
Vitaly Savelyev: It has 189 seats. This is the first point. Second, it takes about 50 minutes to an hour to prepare our aircraft for a return flight. We must clean it because we provide top service and we are obliged to do this. We also load the catering supplies. Pobeda doesn’t. It takes only 25 minutes to prepare the aircraft for a return flight. This is almost twice as fast, which makes a big difference.
As for aircraft use, we use ours about 10-11 hours per day, whereas Pobeda is the world champion – it uses kits aircraft about 14 hours a day. All these parameters allow Pobeda to offer better prices than the market in general. This is why we can talk about a 30 percent reduction in airfare.
Rossiya will also remain in the social sector where it will fulfil its social role like other airlines.
I have said a lot about Pobeda. I would add that Pobeda is popular. Our passengers do respect it and are used to it. According to our surveys, over 60 percent of passengers want to fly Pobeda only because it has cheap tickets and quality service.
What will the picture look like by 2027-2028? Aeroflot will focus on its five-star status and will operate a fleet of 170 aircraft. We will carry 35-40 million passengers. This conforms to the standards of five-star companies operating in the market today. Pobeda will carry 55–65 million passengers; this is also very important when you consider airfares. It will operate a fleet of about 170 medium-haul aircraft.
Rossiya will meet social needs, operating domestic aircraft. It will have 250 planes, including 235 Russian-made planes, which is very important. Of course, if MS-21 turns out to be a good aircraft – and we believe and hope it will – we’ll also use it in Aeroflot. For now, we are merely giving the airline an opportunity to gain experience and learn best practices.
And now the highlights – global figures. We believe fares in economy class will be reduced by about 30 percent because Pobeda offers the world’s lowest prices, a fact that has been recorded. Its capitalisation will increase substantially and this will happen because Pobeda will be the main driver of all this. Profits will also increase considerably and we’ll then be in a position to talk about dividends and what our group of companies can do for Russia, in part, for our people.
Mikhail Mishutstin: Thank you, Mr Savelyev. These plans are indeed well thought out. I think your new strategy will be very effective. I believe that the measures we have mapped out will allow Aeroflot to join the world’s top ten airlines, as you said.
