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Edited Transcript of AFLT.MZ earnings conference call or presentation 3-Mar-20 12:00pm GMT

Full Year 2019 Aeroflot-Rossiyskiye Avialinii PAO Earnings Call (IFRS)

Moscow Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Aeroflot-Rossiyskiye Avialinii PAO earnings conference call or presentation Tuesday, March 3, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrey Chikhanchin

Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board

* Andrey Napolnov

Public Joint Stock Company Aeroflot - Russian Airlines - Head of IR

* Andrey Panov

Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing

* Ivan Batanov

Public Joint Stock Company Aeroflot - Russian Airlines - Head of Revenue Management

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Conference Call Participants

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* Elena Jouronova

JP Morgan Chase & Co, Research Division - Research Analyst

* Igor Goncharov

Gazprombank (Joint Stock Company), Research Division - Senior Analyst

* Matvey Tayts

Sova Capital Limited, Research Division - Research Analyst

* Maxim Nekrasov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Mikhail Ganelin

Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport

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Presentation

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Operator [1]

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Good day, and welcome to the Aeroflot Group 12 End 2020 IFRS Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Andrey Napolnov, Head of Investor Relations. Sir, please go ahead.

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Andrey Napolnov, Public Joint Stock Company Aeroflot - Russian Airlines - Head of IR [2]

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Good afternoon. Thank you for joining us on the call to discuss Aeroflot Group's 12 months and Q4 financial results. Today, I have following speakers on the call: Deputy CFO for Commercial finance, Andrey Chikhanchin; Deputy CEO for Strategy, Service and Marketing, Andrey Panov; Director of Revenue Management Department and Network Planning, Ivan Batanov; and Head of IFRS, Artem Glaznev; and myself.

We're going to have, first of all, the presentation and then a Q&A session. Before we begin, I'd like to remind that press release, IFRS statements and Excel data book are available at our website's Investor Relations section. And webcast presentation will be available at the website after the call.

Also, I'll draw your attention to the forward-looking statements, disclaimer about the forward-looking statements and future performance that may differ from projected results due to known and unknown risks and uncertainties.

So before I pass the floor to the management team, I'd like to summarize the key achievements of 2019. So overall, operational growth has been quite strong. During the 12 months of 2019, capacity increase of 10% helped to boost passenger traffic numbers by 9%, in line with what we have guided, while keeping yield in the port of territory, an increase of 2% for the blended yield, despite higher competition in the international segment from the local carriers. Also, increased tax translated in revenue growth and importantly, improvement in net income. And net income, the base for the dividend, almost doubled when we compare with 2018 income.

So to discuss these operational trends, I would like to pass the floor to Andrey Panov. Andrey, please.

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [3]

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Hello, everyone. So we are on the Slide #5. Let me start. So Russian market continues to grow at a base of 7.5% year-on-year in 2019, in line with our expectation, as Andrey already mentioned, for the year, and in line with our long-term projection of 7% -- 6% to 7% CAGR. Both domestic and international segments are posting strong growth in 2019, and the international segment is expanding by 9% in last year, supported by performance of Russian carriers, which added 60% of passengers in the segment. Alongside with Ural Airlines hedging 18% PAX in the segment, smaller companies like Nordwind to Azur Air grew by 33%, which is also important contributors to the growth.

Foreign carriers decreased PAX numbers throughout 2019 by 8% and showing modest growth in Q4 2019, plus 4%. However, this doesn't mean that all foreign companies suggested the exposure to Russia. Like CIS companies, for example, Uzbekistan Airways, there was a increased passengers numbers in the -- like they were focusing mainly on regional routes, regional sites in Russia.

The domestic segment added 6% of PAX in 12 months of 2019 year-on-year basis. And the key growing companies grew Aeroflot Group due to active expansion of Pobeda and S7 Airlines.

Ural Airlines decreased PAX numbers in the segment in 2019 in favor of international flights UTair was growing mostly in local -- I mean, regional flight segment.

It is important to mention continued acceleration of S7 expansion in their hub in Novosibirsk, which actually are based the majority in terms of number of seats, it is according to available databases. And I should say also that in 2019, Aeroflot flights increased its market share if we don't count international transfer to 39%.

Let's go to next Slide #6. And in 12 months, in line with our strategic approach, we have seen growth in all of our key brands. Aeroflot was growing on the back of hub expansion in international transit segment. I mean new routes opened in 2019, measuring and contributing significant network, affecting the following year. Rossiya Airlines finalized an important project of delegating the scheduled operation to Sheremetyevo airport in Q4. We saw, therefore, positive results of this in 2019, particularly in the long-haul segment with improving load factors.

In Q4, the company adjusted its narrow-body program in Sheremetyevo by keeping only long-haul flights to the far east of Russia and quite selected international destination, further streamlining the company's value proposition.

Rossiya now operates in 3 different segments, which are focusing on different types of passengers and in different geographies, scheduled international and domestic operations from St. Petersburg, long-haul operation from Sheremetyevo and the charter program from Vnukovo.

Pobeda led the group with 43% growth or 3.1 million passengers added in absolute terms showing outstanding results, which we will discuss on the next slide.

And finally, our far east regional subsidiary, Aurora was developing in line with our expectations, posting double-digit growth of passengers in the international segment. That means increasing capacity on routes to Japan, backed by facilitation of Pobeda process.

Let's go to the next Slide #7. Let's dig deep about Pobeda. So Pobeda continues its remarkable growth backed on -- by capacity addition in 2019 as it was able to maintain efficiencies throughout the year, keeping a load factor at consistently high level -- I mean, growing yields. This allowed the company to enter the year with PAX number seeing 10 million as passengers and load factor amazingly high of 94%.

As the record shows from interception, Pobeda has been actively stimulating the market, and the process continues even in this year of operations. So let me give you some numbers. In 2019, Pobeda added 2.5 million PAX in domestic segment, which actually represents 60% of total market addition. In Q4, the market added 660,000 PAX, while Pobeda increased the number of passengers on domestic routes by 690,000 PAX, fully covering total growth of the industry.

Now let's move to the next slide. We talk about our report here and domestic and international sales. So in 2019, we have continued to grow transit passengers volumes in line with our strategy. Reallocation of scheduled flights of Rossiya Airlines to Sheremetyevo at the end of 2018 yielded positive results on blended point in 2019. Additional synergies were formed with the airport network, which helps to connect CIS passengers to grow their network of the group flagship carriers.

In 2019, Aeroflot transported 5.3 million PAX on international transit routes, while Rossiya contributed more than 200,000 transit bags, bringing overall growth of group transit passengers flow to plus 13% year-on-year basis.

I should also mention that base of growth for 12 months -- this 12 months was also affected by a number of quite specific factors, which influenced mostly second half of the year. And this includes calendarization of holidays in Israel, one of our main destination, short-haul destination, and the situation in Hong Kong and the adjustment of long-haul capacity in the low season in Q4.

The growth in transit segment remains within our plan and will be reinforced in 2020 by -- hopefully, will be enforced in 2020 by additional long-haul routes, which we will discuss in a moment.

Thank you. And I will pass the floor to Ivan Batanov, head of our network.

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Ivan Batanov, Public Joint Stock Company Aeroflot - Russian Airlines - Head of Revenue Management [4]

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Good afternoon, everyone. So let's start with Aeroflot Group network update.

So development of the network, put into depth principle remains our first priority. However, as we have already a skew in key markets, we are increasing our focus on other less sizable markets. Most of the recent additions to the network took place in winter '18, with minor expansions in summer '19, which particular, Marseille and Palma.

As opposite to significant additions to the new routes a year ago, in 2019, we focused on a lot of efforts in rolling out the routes opened earlier and pushed routes to Vnukovo to maturity stage. A number of routes reached remarkable results, significantly improving passenger route factors and overall economics as well as their contribution to network synergies, particularly Lublin and domestic Zhukovsky region, to name a few.

Exceptional results were recorded by Rossiya Airlines now with domestic -- Moscow -- excuse me, Moscow-Denpasar route, starting with a low passenger load factor. In the beginning, the company managed to improve the loss by more than 25 percentage points in 12 months of '19 with significant progress and profitability of the route. That's a very quick ramp up of the long-haul route due to higher [strategy] and the size of the market, both for Russia and transit tourists.

In 2020, according to our new plans, we see more long-haul destinations headed to Aeroflot's route networks. These destinations are not the easiest ones from a rolling out perspective and expected effort to be invested. And for sure, we do not anticipate any immediate results. The brand-new Airbus 350 aircraft in report in our results Aeroflot's really positions to new sites now offer among other transport carriers will be very competitive.

Now let's move on to the yields and RASK dynamics that summarize results of revenue management activities this year and in the recent quarter. 2% increase in group's 12 months yield was driven by domestic segment, up by 7.3%, while international yields have been slightly down by 1.7%.

During the year, we have been improving our yield's performance with key improvements in Q4. That means secured growth accelerated to 8%. International yields turned positive despite currency trends that didn't favor revenue side.

Let's summarize factors that have determined full year and Q4 dynamics. With regard to domestic yields, in most cases, flying domestic reason consistent, which might be business trips, visiting friends, relatives or affordable vacations. And those existing demand and rational approach to capacity in the domestic sales sector, we succeeded to increase yields. So that is the fundamental explanation. Technical explanation is inflation-based adjustment associated with the need to compensate extra fuel cost due to high jet price.

We also noticed positive contribution of ancillaries on the back of active revenue management and large sale to higher booking classes. Softer performance on international yields is mainly attributed to inorganic increase in capacity by some players and ForEx trends. As we stated in the market section of the presentation, Russian key RASK seen a growth of 16%. And in international segment was too fast not to disrupt pricing, while smaller airlines have been growing twice as fast. At the same time, we have been seeing ruble appreciation versus euro, which is 2% in '19, now -- which, together with competitor's capacity, explained 2% decline in international yield.

In Q4, we have managed to improve international yields in an even higher RASK. Key challenge here for euro-denominated fares was 7% year-on-year appreciation of ruble versus euro. But at the same time, much stronger ruble [produced] to international demand. Market rents contributed to the improvement, with positive improvement in key regions that have pressured our operation for most of the year, including European yield returning to positive territory.

At the next slide is a reminder to illustrate, we just have to show yield growth in 2018 and 2019 by month. Through Q4, we have posted strong yields by Aeroflot's airline despite already high base of '18. And after almost 2 years of consecutive increase in yields, we believe that we have set high base. We will definitely continue to exploit all the opportunities provided by the market, but current agent of the global aviation market and capacity deployment by global carriers in respective markets presents strong headwinds for the airlines from the revenue management perspective.

And now let me hand it over to Andrey Chikhanchin.

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [5]

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Thank you, everyone. Morning. Let's talk about fleet plans on Slide 14. Gross fleet amounted to 359 aircraft at the end of 2019. Net decrease of 7 aircraft in 2019 is just primarily explained by transfer of a number of deliveries intent to Q4 to 2020, especially 10 Sukhoi Superjet. In 2020, we expect a net addition of 31 aircraft loss, transfers of deliveries from Q4, as I mentioned earlier, and minus 1 A330 phased out ahead of schedule in Q4 2019, which, in total, gives us a net addition of the 42 aircraft.

We are also taking delivery of 11 A350 aircraft in 2020. The first one is already delivered in Sheremetyevo and the first commercial flight scheduled at 6th of March. A350 aircraft is -- will substitute A330s leaving the fleet. The new aircraft will be more spacious, 316 seats in A350 versus less than 300 seats in A330. More fuel-efficient and well over a real product on the long haul for our customers. A350 addition is quite sizable, but it roughly matched numbers of A330 that will leave our fleet, as I mentioned earlier.

Financial highlights on Slide 16. In both Q4 and 12 months of 2019, we have posted an improvement in all financial metrics across the board. Net income grew more than twice, notwithstanding with major headwinds during the year, which were challenging in Q1 2019, especially from a market perspective, and elevated jet fuel price during the year and a very tough year-on-year comps with June and July, as Ivan mentioned earlier. A net loss of circa about RUB 16 billion in Q4 2019 was decreased to RUB 6.8 billion in Q4 2019, which is slightly above historical average for the last quarter of the year. Improvement in Q4 2019 was crucial for improvement of full year performance, and better results in the quarter were recorded on an operational level with EBITDA margin. And so despite a number of one-offs during 2019 and challenging external conditions, management did every single effort for the results of the year to be strong.

Next slide is revenue growth decomposition. Group's total revenue amounted to RUB 680 billion. In 12 months, it's about 11% year-on-year. The increase was largely driven by scheduled tax volume, about RUB 40 billion. But we have also been able to request positive currency effect of RUB 4 billion and RUB 20 billion on pricing. Additional contribution to revenue was generated by ancillary revenue projects, which shown positive perception of our passengers.

Operation cost. Growing in operation cost in 9 -- in 12 months by 12% is mainly driven by a 10% increase in capacity. Key pressure came from factor sell side group's control such as aircraft, traffic and passenger services. Expenses increased in 12 months by circa RUB 19 billion. However, management has put a lot of efforts in controlling this line to a certain extent, which resulted in a slower pace of growth in Q4 2019 year-on-year basis. Tighter control was also imposed on staff and SG&A costs. However, staff expenses increased, accelerated in Q4 on the back of profit sharing care -- it was for all employees linked to improve the results of the full year.

Maintenance decreased in Q4. There was a number of extra expenses in the first 9 months of 2019 related to interior upgrades to maintain service standards and one-off cost of the delivery checks, which we mentioned on the -- our previous call, which didn't happen in this last quarter of the year. After thought analysis, we have taken a decision of capitalize about RUB 1 billion to maintain related to renovation of interiors. With reduced fuel bill and lower operational expenses growth, we achieved total OpEx increase of 2% in Q4.

Group unit costs, the next slide. Based on the unit growth analysis, we may conclude that CASK decreased by 1.7% in Q4 2019, resulting in only 1.6% increase in CASK in the whole 12 months, which is the first decreases of cost in the last 24 months. We have to keep in mind that decrease in cost in Q4 was preliminarily driven by fuel cost adjustment. And around 50%, of course, denominated in hard currencies, mostly in dollars, which gained about 3% in 12 months and lost about 4% in -- for fourth quarter 2019 year-on-year, which also influenced CASK dynamics. It is worth to mention that the gap between CASK and RASK dynamics observed in Q4 2019, about 4.1 percentage point is the first positive gap in the last 8 quarters. This allowed us to realize positive operational leverage and increased margin in the last quarter of 2019.

EBITDA evolution. In 12 months, we generated RUB 169 billion EBITDA, which was up by 11.5% year-on-year basis. Key drivers of change in the EBITDA were high net volume and price effect on revenue versus cost and positive net FX effect on the revenue and the cost side.

Let's move to Pobeda financial results. Impressive 9% drop increased and stable passenger load factor, 42% ASK growth and controllable CASK inflation of just 4% result in EBITDA increased to RUB 17.9 billion. Adjusted net income, excluding FX gain losses from revaluation of the lease liabilities and associated deferred tax in 12 months 2019, grew almost 3x year-on-year to RUB 4 billion.

Leverage and liquidity, Slide #22. Net debt as of 31 December 2019, decreased by 13%, presented on a comparable basis on the back of lease repayments as well as the revaluation of lease liabilities due to ruble appreciation during 2019. With current debt -- net debt profile, our leverage is on the -- its best since 2016.

Now let's move to the Slide 2020 guidance. 2019 results are well in line with the guidance announced earlier on our calls and also on the CMD. Regarding our 2020 plans, we have disclosed our plans, as I said, in CMD in December. At the same time, we would like to highlight that the current reviews presents a very strong headwinds for airline globally with reduced demand and pressure on load factors, of course. And IATA has recently rolled its global growth forecast from rising 4% to 0.6% decline. I'm sure that the market would like to know the scale of potential impact, but the estimate is much more difficult than contribution analysis of share of China or Korea or Italy in our revenues or margins, given the ongoing uncertainty on the potential impact of duration of infection, it's quite complicated to give proper guidance for 2020 right now.

Thank you. That is all.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Matvey Tayts with Sova Capital.

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Matvey Tayts, Sova Capital Limited, Research Division - Research Analyst [2]

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First question, in relation with the strong results, fourth quarter, hopefully, for the rest of the year will be more than that. So actually, my questions are, first of all, concerning this coronavirus situation and the current RPK yield. What kind of yields environment do we have at the moment, if it's possible to clarify?

So the second question is about the depreciation of lease assets. I see some kind of acceleration of this depreciation charge as a percentage of the total lease liabilities. So are there any like clear reason or outlook going forward for this type of depreciation in the financials?

And also, the last question, about the compensation for the fuel price the government promised you last year. It was postponed for some uncertain future. Do you have any kind of expectations when this money may come to the Aeroflot? And what is the total amount? Because the total sum was discussed like above RUB 20 billion, and then some proposals from Ministry of Finance assumes like the maximum total payment of RUB 4 billion. So any kind of input concerning to this compensation for fuel price increase in 2018 will be very helpful.

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Ivan Batanov, Public Joint Stock Company Aeroflot - Russian Airlines - Head of Revenue Management [3]

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So this is Ivan Batanov. So let's start with your question with regard to the implication -- coronavirus implication on our current results and also for the -- on the forward bookings. So if will see January numbers, so we haven't seen any implications from January numbers. In fact, Chinese routes performance was very strong comparing to year-on-year numbers due to the calendarization of the new year holidays in China. The first half of February was quite healthy, also because of stable traffic with some pressure on yields linked to year-on-year holiday calendarization also. However, the second half was softer due to the general decline in the demand to the region as well as restrictions taken in China and other countries, including Russia for traveling too from China. In general, we would like to highlight that post Chinese New Year season was low seasons for the market, so it means that the pressure is on the small numbers, less yield in the high season.

So with regard to the forward booking, so what we see in the global markets is, of course, an adjustment in both demand and supply. The demand has materially decreased because of the travel limitations, a number of different travel limitations. Travel life has been also decreased, as many carriers in different regions suspended flights to Mainland China, as you know. Now a number of this optimization is quite sizable, some carriers from the Gulf, in particular have kept the flights provision. But European airlines, you know that they cut the operations. Situation is quite complicated as we are not -- we are not immune to above mentioned trends. So to put it simply as we can so much, currently, significantly lagging previous year, roughly single to double-digit below factor decline depending on the route.

We believe that the forward bookings, the key question is how long it will take to get us to -- to get situation on the full control and how long to take the traffic to return to normalized levels. We have adjusted capacity. So we reduced frequency to all points in China until April now. But we're not playing any flight suspension like [private] carriers, and we are closely monitoring demand and supply. And unfortunately, yes, there are some implications for other destinations in Asia and also Europe. So we do not -- we haven't decided on any decrease in terms of number of operations to other points in Asia yet as well as Europe. But we, in particular, with regard to the Italy, we're closely monitoring the situation. And most probably, we will propose some capacity decrease on Italian routes for the current -- for the time being.

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [4]

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So regarding the second question about depreciation and amortization, which grew by 19% in 2019 and 13% in Q4, so that is the technical explanation here linked to transfer from IAS 17 to IFRS 16, which means that the realized [hold] the aircraft on the balance sheet. And so for the old aircraft, which are leaving our fleet, have been accounted under historical exchange rates at the time when they entered our fleet, so like RUB 30 for example. And when this aircraft, which are fully amortized, leave our fleet and the new aircraft are joining our fleet, the exchange rate of RUB 60, RUB 65, I mean, whatever, the amortization naturally increases to some extent. So I would say that we're going to have inflated level of G&A in the coming years, which will be normalizing a little bit year after year, I would say.

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [5]

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Thank you, Andrey. And regarding to the third question about subsidy of jet fuel, there are no any news. The information that we mentioned on our call according to the 9 months results and the information is the same. There are no any new decisions already taken. And about the figures, which was discussed, it's -- the last one, which we had, it's about 22.4 -- or RUB 22.5 billion, and there are no any changes in the whole sum of compensation. But there are some -- there was some information about -- divided the sum for 2 or 3 years' payments but not any decision already taken as we know.

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Operator [6]

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(Operator Instructions) Our next question comes from Maxim Nekrasov with Goldman Sachs.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [7]

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I have a few questions, I think I'll go one by one. So first is on Pobeda. I was just wondering, in case the situation with MAX 737 is not resolved this year, how many aircraft do you expect to be added in 2020 to Pobeda?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [8]

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Okay. So there was about 11 aircraft should join Pobeda and 4 aircraft is going to extend through [7NG] and the rest are MAX. So the situation is right now -- but now we're in the process, as I said, to move for our group's 737. So -- and we're still waiting for the decision of MAXs.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [9]

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Okay. Understood. My second question is on -- basically on dividends. I was just wondering, with a negative free cash flow last year and basically, this uncertainty around the virus and the demand, how do you think about the dividend payment and whether you think you will sustain 30% payout for this year?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [10]

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So about dividends. According to our dividend policies, as you know, it's about -- it's 25%, our target ratio of payment. But the final decision will be taken by Board of Directors and by -- on annual AGM, of course, yes. As a I stated, the company, we should have a special decision of our government, what will be the ratio of the payment. So previous year, you know we paid 50% of net income in dividends.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Okay. And I also wanted to clarify on the previous comments about booking rates. Did I understand correctly that it was referring to China? Or the decline that you see is like all across the board? And maybe you can provide what decline in booking rates do you see for European destinations so far?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [12]

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So let me clarify on this. So when I was talking about double digits decline, I was talking about China. If you will look at the European destinations, so there are 2 different, let's say, situation. So 1 is that -- so we mentioned that the booking curve, booking forward, have been slightly, let's say, slowdown -- will -- is slowing down, which means that, we'll say, business is thinking about a stable plan. And particularly about Italy, so on Italy, we mentioned that pay loads starts to decline. That urged us to the situation that we need to think about an increase in capacity.

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Operator [13]

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Our next question will come from Alexey Philippov with JPMorgan.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [14]

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It's Elena from JPMorgan. I have a few questions. Do you think there is a risk that globally, in the airline industry, supply will not adjust as much as demand? So what I mean is we all know demand is falling, and other international carriers are halting their flights to certain destinations. But they could be actually putting those planes on other destinations, therefore, increasing capacity on less affected routes. What are your thoughts on this at the moment? And what are you hearing from your competitors?

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [15]

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Yes. So it's like we would say that there is extremely high level of uncertainty in general in the market. Yes. We understand that, yes, I mean, some capacity could be relocated to the markets like in general in the Russian market and in international market. But like let's say coronavirus was quite fast and like this emergency and like special situation emerged literally in 1 month, and it was not enough time for airlines to move capacities from current routes to another route.

Yes. So the reason is like we need time to do it. I mean we expect still that it will be partially like grounded aircraft and new destinations. What would be the proportion, honestly, it's really hard to say. Like what -- historically, yes, I mean, like European companies and United States companies, they need a lot of grounding. Russian companies prefer to fly. But what would happen this time? It's not clear, and especially if we can talk about Russia. Yes, now it's only China closed. I mean, what will happen if other destinations will be closed? Really hard to predict.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [16]

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And with regards to domestic market, my understanding is that as you've said, Russian carriers who cannot fly to China, they are actually using the aircraft to fly to other destinations. So it's not a capacity reduction per se, it's just redistribution from one market to another. Is that right?

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [17]

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But it really depends on the company. Yes. I mean if it was only 1 flight to China on the narrow-body, I mean, okay, it's easy to redistribute, and it will be done. But there were some -- there's Rossiya Airlines, which really fly extensive in China, yes. And it's really like they have these programs, charter programs with Chinese tourists. I mean for them, I mean, it's not that easy. Yes, like it's not that easy to find new routes and to start like sell, let's say, in retail market for airlines, which actually don't know how to do it, I mean. So I would expect that this time, I mean, there will be some ground, yes? I mean, once again, the share with -- honestly, we will see it like probably like in next month. And by the way, March is not like -- March is -- it's hard to say taking in account only March because once again, it's not easiest to launch a new route in 15 days. Yes. So I think that situation will be more clear in April and May.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [18]

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Understood. And the final one for me, and I appreciate that it's hugely difficult to make any forecast at this stage. But from your perspective, what's your worst-case scenario for, like, yield decline, international yield decline this year? Or you can isolate this to, I don't know, second quarter?

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [19]

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Like it's really hard to predict. Sorry for repeating it several times. So like 2 weeks ago, nobody even thought about Italy. Yes. It was kind of surprised. I think for Italian government, like, for the world in the whole, yes, so -- and for us also. And it's really hard to predict. I mean, the worst-case scenario if, like every country, has to like close their borders. Yes, I mean -- and then we will see where it sounds like interesting and not only in aviation. But like really depends on 2 factors, how many countries will close their borders. They -- like will they close border for like Russian citizen? And this, we know still hasn't happened, and hopefully, it will not happen. And how long the situation will proceed. Yes. I mean, we would touch only March, April or will it touch in the whole summer? And results like will be dramatically different depending on this kind of scenario. But from like our point of view, it's really a hard forecast. And I would say, we don't like have enough information, and probably nobody in this world have enough information to do like a solid forecast of it now.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [20]

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Yes. I agree with that. And actually, one final one for me. You're not hedged for your 2020 fuel costs, right?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [21]

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No. We are not hedged already.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [22]

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And you don't plan to enter into hedges there?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [23]

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But -- once again? Sorry.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [24]

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Well, I remember you did hedge your fuel cost exposure for second half last year. So I was just wondering if there are plans to do so this year and if you've hedged already.

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [25]

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No. We are not hedged already, as I said. But we are always looking at the market and trying to find the right time to make a hedge assets. It's possible, but it's on the discussion right now.

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Operator [26]

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(Operator Instructions) Our next question will come from Igor Goncharov with Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [27]

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Just a follow-up question on the China and coronavirus. You mentioned that you felt the softness in the demand in this destination in the second half of February already. Is it possible to -- for you to provide some maybe quantitative indications to which extent the demand has declined for the destination in February? I appreciate you mentioned that in March, you see sort of single- to double-digit decline in bookings. But what happened in February? And to which extent did you already reduce the capacity to China?

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Ivan Batanov, Public Joint Stock Company Aeroflot - Russian Airlines - Head of Revenue Management [28]

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So let me start with the updating on the schedule to China that we have already implemented. So for the current months and for the months of March and April, we decreasing a number of flights to Beijing. So from 2 daily to 1 daily, and with exception for April when we had already planned 3 daily while decrease now to 1 daily only. So with regard to Shanghai, we decreased again from 1 daily. Instead of having to 2 daily, now we have just 1 daily. And in terms of -- for Guangzhou and Hong Kong, so we decreased from daily to -- for weekly frequencies each. So as you can see on some destinations, we have 50% reduction in terms of capacity. On some other destinations, we are closer to 40% reduction. I would say that, that reduction in terms of -- in capacity help us to achieve quite high load factor. So we've been flying with almost full loads after reduction. But again, so on the destination, like Hong Kong now, we can see that we need some further improvements in terms of capacity in there. I'm talking now about heavy reduction. But I believe in the rest destination will be -- will not require some additional couple of reductions, so we'll be flying like this.

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [29]

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And maybe like one more addition, I mean, to this. Yes, I mean, like general demand for this market, like what -- I would not say dramatically. I don't know how to say it. Yes, I mean it's like there is almost no European airlines who are flying to China. Aeroflot, basically, is the only European airline that still has -- who still has this flight. Yes. And we see that in China, like the situation with coronavirus is, I mean, at least, like, not stopped by it. I mean, slowed down, yes. And like levels -- I mean, yes, otherwise, I don't know how to say, but we see less and less like new people who -- with these viruses. So I mean, really situation, it's interesting situation, yes, I would say, in terms of like we are still flying and still have ability to transit these passengers.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [30]

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Okay. Just a follow-up question on this topic. At some point in time, it was mentioned that the airlines who are not -- commercial airlines who are not allowed to fly to China would -- may -- could receive some compensation for that. Do I understand correctly that Aeroflot is not eligible for this hypothetical yet compensation because your reductions that you've taken voluntarily?

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Andrey Panov, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO for Strategy & Marketing [31]

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So basically, we don't know if we're like in pay table entitled to get this hypothetical compensation. I mean, because the way it sounds were more or less, the situation is like the same with this previous question about subsidies. We just don't know.

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Operator [32]

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(Operator Instructions) Our next question comes from Mikhail Ganelin with Aton.

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Mikhail Ganelin, Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport [33]

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I have 1 question about your fleet expansion. So you have a very aggressive plan for this year to get more than 50 planes. So what's the actual status? What's the -- maybe, I would say, the real number which you plan to get? I mean do you think that the number of -- for example, Sukhoi Superjet will be lower than you planned?

And my second question is did you estimate how your gross debt will increase by the end of this year related to all this fleet acquisitions?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [34]

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Thank you for your questions. Let's start from the debt questions. Before coronavirus, we didn't expect any rising in ratio, of debt ratio. So what will happen until today and on the -- and this year, we will see in the next months. So we can make -- we can't make any estimation on this side. So -- and if we are talking about aircraft, as we mentioned, some big portion of deliveries is -- it's a wide bodies, wide-body aircraft, which is -- comes to a substitution -- substitute of phase out A330. So -- and Sukhoi Superjet, there's also -- [perhaps] which we have in our budget. So not any special rising for 2020.

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Mikhail Ganelin, Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport [35]

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Okay. So you plan to get all 20 SSJs this year, right?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [36]

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Yes. We have a plan, but we don't know how the situation will be. So according to the schedule, yes, we want to have this 22 aircraft. But 5 of them is already delivered. So it came from Q4 2019, as I mentioned earlier.

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Mikhail Ganelin, Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport [37]

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And my second question is about your staff costs, which increased quite materially last year. Could you give us some indication for this year? What do you expect in terms of performance in 2020?

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [38]

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We are not planning any material running cost per quarter, and they're only according to the growth of the volume of our business. So they're not -- no plans any changing -- material changing, as I say.

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Mikhail Ganelin, Aton LLC, Research Division - Senior Analyst of Finance, Information Technology, Transport [39]

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So do you think that they will grow in line with inflation or with volumes growth? So if you guided 10%, that should we expect...

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Andrey Chikhanchin, Public Joint Stock Company Aeroflot - Russian Airlines - Deputy CEO of Commerce & Finance and Member of Management Board [40]

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Yes. It's -- I think it's mostly in line in volume of our business. Not on inflation. I think it's stuff in different -- stuff in between inflation and the growth of our business.

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Operator [41]

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Thank you. At this time, I am showing no further questions in the queue. I would now like to turn it back over to management for closing remarks.

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Andrey Napolnov, Public Joint Stock Company Aeroflot - Russian Airlines - Head of IR [42]

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Thank you very much for attending the call. Maybe just the final remark, so we have seen some, I mean, reports that highlighted that the results are quite strong. And we will continue to have questions on coronavirus. So maybe just to add some little bit of positive for the end of the call that what is happening after strong results rather than on the following weak results. So thanks again for your attention, and see you at the next call.

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Operator [43]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.