President of Russia Vladimir Putin: Let’s discuss how the company is doing and its results. The summer season is over. What is your assessment of its results? What do you think about the future? Go ahead, please.
General Director of Aeroflot Russian Airlines Vitaly Savelyev: Mr President, first of all, I would like to report on the fulfilment of the objective to establish Aeroflot Aviation Group, a first entity of this type in Russia. The group includes four airlines. Aeroflot stayed in the premium segment. Rossiya Airlines, with two airlines that were merged into its structure, will operate as a mid-range carrier. The third airline is Pobeda, a very successful project launched with your approval and support – I will elaborate on it later in the presentation. There is also Aurora Airlines, a regional carrier operating in Russia’s Far East. The group has been created, it is up and running, as I will show a little later.
As for Pobeda, this has turned out to be a very successful low-cost airline. Last year, Pobeda’s passenger traffic was equal to 3.1 million people, with a passenger load factor of 86 percent. It is about to become profitable, which is sooner than initially expected. This year, Pobeda is expected to generate a profit of over two billion, which is a substantial achievement, and goes to show the efficacy of our efforts.
As for the pricing, I would like to draw your attention to the fact that on all destinations operated by Pobeda analysts noted that competitor prices declined by an average of 20 percent. This is my first point. Last year, 10 percent out of the 3 million Pobeda passengers bought tickets for 999 rubles. This trend remains in place, which means that Pobeda’s statements on offering tickets at very low prices are more than just words. We think that Pobeda has good prospects and we thank you for backing this project.
The third objective we had and that you supported was the flat rate programme. Our group carried 1.7 million passengers last year under this programme, up from 1.1 million in the previous year, which means that the progress is clearly visible. We transported some 700,000 passengers in Russia’s Far East, up 43 percent year-on-year. There are flights to Kaliningrad, to Simferopol. We propose to keep this programme going, since it was initially designed and approved by you for two years, but we now see how relevant it is. So we think that this can be done.
Regarding strategic targets, we are working towards the approved strategic targets and we are close to becoming one of the world’s top 20 airlines. We are in 24th place now, but in 2008 we were 68th. Today, we hold seventh place in terms of passenger turnover in Europe, up from 15th place only recently.
I would like to stress that the number of passengers on domestic routes has increased dramatically, from 4.9 million out of the total of 11 million on Aeroflot flights in 2009, to 23 million out of the total of 39 million last year. In other words, we have shifted the focus to Russian consumers and the domestic market.
Mr President, we have greatly improved the quality of our services this year. For the first time in the history of Russian aviation, a Russian air carrier has joined the group of the world’s 40 certified 4-star airlines. Aeroflot is rated by Skytrax as a 4-star airline. This means that we can fly where Emirates, Lufthansa, British Airways and Air France fly, and we have been officially identified as a 4-star airline. There are only eight 5-star airlines, but we will be working to join this group. The 5-star airlines are mostly Asian companies; there are no European or American airlines among them. But this is our next goal, about which I will speak later.
As for our achievements, Aeroflot has been ranked the best company in Eastern Europe according to TripAdvisor for the fifth time. TripAdvisor, a travel site with 340 million monthly visits, has held a survey on the world’s most-loved airlines, and Aeroflot is eighth on this list. This is an achievement.
Now for the situation in the airline industry, which is currently on the decline. Happily, the volume of internal transportation has been growing in Russia, and Aeroflot has been growing, too. This is very important for us, because we expect to report a 10 percent increase this year despite the slumping international market. We have earned a net profit of over 20 billion rubles, and we believe that if the Government decides that we should pay dividends this year after we complete all the corporate procedures, we will be able to pay out some 50 percent of our net profit in dividends.
We have done a great deal to introduce digital technology and solutions into the company. Here is another ranking: Aeroflot is one of the world’s leading air carriers in terms of digitising its business processes and operations, which is a substantial achievement.
How were we able to adopt digital technology and operate this way? An international agency looked at Aeroflot’s data. In terms of revenue, Aeroflot is behind the world’s leading airlines. But where do our profits come from? We have been able to cut costs to such an extent that even with our modest revenues we are able to remain profitable. This cost-cutting effort makes us feel quite confident in the market.
Pobeda also shows positive results compared to US and European low-cost airlines. Its revenues may be lower, but so are the costs. This is what makes Pobeda so efficient and has helped it generate over two billion in net profit.
As for market capitalisation, despite a challenging market environment, we have reached a historic high. As of today, Aeroflot is valued at 116 billion rubles. In fact, Aeroflot’s market cap in US dollars is higher than that of Air France-KLM. This means that our company is expanding, reaching unprecedented highs. Aeroflot is currently valued at 116 billion, which I think will please both our majority shareholders, including the state, and minority shareholders.
Vladimir Putin: How about the dividends? How much do you intend to pay out?
Vitaly Savelyev: Assuming that the net profit will total at least 20 billion or even more, 50 percent will be paid out in dividends, and the state will get half of it since it holds a 51 percent stake.
As for the Russian air passenger market, Aeroflot is expected to carry 28.9 million passengers, up 10 percent, as I mentioned. Overall, the group’s passenger traffic is expected to reach 43.4 million passengers. Despite a challenging market environment, we are seeing an upward trend and steady growth.
Here are some data from Rome2rio, an Australian agency, to show that we are quite efficient in what we do and that our prices for economy class are quite low. According to Rome2rio, Aeroflot was the number one carrier in the world in terms of M-class ticket prices in the first six months of 2016.
Vladimir Putin: Go tell your passengers how cheap your tickets are. I doubt they would agree.
Vitaly Savelyev: Mr President, I am referring to rankings by major companies. Of course, there are some small carriers out there, but we have Pobeda in this category. It is not just Rome2rio; the Daily Telegraph also published a ranking in which we were listed as the second best airline in the world in terms of economy-class fare prices.
Vladimir Putin: The problem is that they do not factor in the income levels in the respective countries.
Vitaly Savelyev: Maybe so, Mr President, but rankings are what they are, and we do not have any influence over them.
A few words about our fleet. Aeroflot once again has the world’s youngest fleet, with the average age of our aircraft being 4.3 years.
Vladimir Putin: This is good.
Vitaly Savelyev: We have Russian-made planes in our fleet, including 30 Sukhoi SuperJet planes, and our fleet is changing rapidly. We now have both long- and short-range aircraft. We are working on a contract for an additional 20 SuperJet planes and 50 MC-21 aircraft.
Regarding Sukhoi SuperJet, we expect to receive 20 SSJ aircraft in 2017 and 2018, if our colleagues from Sukhoi Civil Aircraft can keep up the pace. We are discussing the timeframe now. This is the current situation in the company.
As for our immediate objectives, the first thing we plan to do is to attain the strategic goals that have been set for us, that is, join the world’s top 5 and top 20 in terms of passenger turnover.
We want Pobeda to become the third biggest airline in Russia; we will be working towards this in the immediate future. We want to be certified as a 5-start airline by Skytrax, but we need to work hard not only in the air but also on the ground to achieve this goal. But there are reasons to believe that we can do this.
We want to be the best airline not only in Eastern Europe but in Europe as a whole. We want to achieve this goal in the near future.
Vladimir Putin: Which company is the best now?
Vitaly Savelyev: Turkish Airlines; it has been ranked the best in Europe twice. Europe is divided into segments, and we are in the Eastern European segment. But there is also a general indicator, and I believe there is every reason to believe that we can join the fight.
We will continue to digitalise our business since there is the big data and everything else connected with the analysis of passenger flow. We also want to change our fleet in the near future so that 40 percent of our aircraft will be Russian-made. This is another goal for us.
There are two issues I would like to focus on here.
The first issue concerns support for the flat rate programme in the next two years, about which I would like to speak in more detail.
The second issue concerns supporting us on the issue of blacklisted passengers, because the situation is absolutely abnormal. There are 3,090 people on the internal black list.
People are becoming harder to deal with, and there are only minor administrative penalties for such misbehaviour. We cite the western legislation in this respect, in particular European and US laws, which stipulate not only huge fines but also prison sentences of up to 20 years for attacking the crew.
First, we suggest that some administrative penalties be reworded as criminal penalties, and that fines are increased to 500,000 rubles. In some European countries, fines for such offences committed on the airplanes are as high as 100,000 euros.
We ask you to allow us to carry such restrains as handcuffs and belts on board, just as other European companies have, because now we use blankets to immobilise the violators. I believe that these measures, along with black lists, will help us discourage misbehaviour if we banish some passengers from our flights for five years, as our foreign colleagues do.
We ask you to support this idea; this is very important to us because of what this means for our cabin crews.
The situation at Aeroflot is very good; everything is fine and we hope to be able to achieve the targets set to us.
Vladimir Putin: I support your proposal. We should have done this long ago.
Vitaly Savelyev: Thank you.