Annual Report 2015

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Strategy Overview

Development Strategy

Long-term and medium-term strategy

Aeroflot Group's strategic goal is to maintain leadership in the global airline industry by seizing opportunities in the Russian and international air transportation markets.

Aeroflot Group's Development Strategy 2025 was approved by PJSC Aeroflot's Board of Directors on 13 July 2011.

Aeroflot Group's Development Strategy 2016-2020 was approved by PJSC Aeroflot's Board of Directors on 28 May 2015.

Aeroflot Group's strategic plans
Medium-term strategy (2016-2020) Long-term strategy (2025)
Key areas
  • Pillars of Aeroflot Group's growth strategy
  • Orenair's operation in the current market environment
  • Low-cost carrier development
  • Improvement of airport infrastructure at Sheremetyevo and implementation of the Group's growth plans
  • Pillars of the fleet development strategy
  • The Group's updated goals up to 2020
  • Selection of the Group's growth scenario
  • Selection of the “global player” strategy
  • Strategy elements:
    • marketing strategy
    • network strategy
    • fleet strategy
  • Identification of constraints and risk assessment
Strategic goals
A set of operating and financial targets for 2016–2020 in line with the Group's long-term goals Long-term passenger traffic and revenue targets benchmarked against global peers
Aeroflot Group's strategic goals for 2025
2025 GOALS Status

Join the top five European airlines by passenger traffic and revenue

Join the top 20 global players by passenger traffic and revenue

Carry over 70 million passengers, including at least 30 million within Russia

Increase passenger traffic via the main hub in Moscow, with the share of transit passengers reaching at least 32%

Ensure strong presence in the market

Ranked 5th by passenger traffic and 7th by revenueSources: Airline Business, ATW, Flight Global, Company estimates, ranking by revenue based on 2014 Airline Business and ATW official ranking available at the moment of report release.

Ranked 21st by passenger traffic and 22nd by revenueSources: Airline Business, ATW, Flight Global, Company estimates, ranking by revenue based on 2014 Airline Business and ATW official ranking available at the moment of report release.

39.4 million passengers in total, including 23.4 million within Russia

Aeroflot's share of transit passengers is 44.2%

The Group is present in all price segments across all geographies

Aeroflot Group's progress in achieving 2025 strategic goals
Aeroflot Group's progress in achieving 2025 strategic goals
Key initiatives and workstreams underpinning long-term strategy execution
Strategic priorities Marketing priorities Financial priorities
  • Develop the multi-brand platform — strengthen positioning and synergy across the Group
  • Foster international partnerships with major airline groups
  • Network development strategy — set out key route network development principles for the Group's airlines
  • Fleet development strategy — deliver Aeroflot Group's growth in line with the approved route network development principles
  • Customer experience strategy designed to ensure service standards as part of the Group's marketing strategy
  • Deploy technology and innovation to ensure the Group's fundamental advantages
  • Investment strategy aimed at achieving the Group's strategic goals in the medium and long term
  • Improve labour productivity
  • Cut costs to ensure the Group's financial stability in the medium and long term
  • Boost the Group's ancillary revenue

2015 Results

In 2015, the Group made significant progress towards achieving its long-term goals. The key strategic achievement of the year was the consolidation of Aeroflot's unique advantages, primarily, route network development in terms of frequency and connectivity through consistent efforts to improve the hub at Moscow Sheremetyevo airport. Measures were taken to control CASK inflation, optimise the fleet and boost sales efficiency. Pobeda, Aeroflot's low-cost carrier launched in 2014, is making good headway.

Key amendments to the development strategy in 2015 versus 2014:

  • approach to the development of Orenair updated to factor in a significant decline in the leisure market;
  • interim goals, passenger traffic and fleet targets under the initial plans for Pobeda reviewed in line with market expectations for 2016;
  • fleet development strategy adjusted following changes in the market environment and incorporating plans to increase the number of Russian-built aircraft (SSJ 100, МС-21);
  • interim targets for passenger traffic and some other indicators lowered due to the above factors, while strategic goals for 2025 remained unchanged.

Multi-brand Platform

Aeroflot Group strategy is based on a multi-brand platform, with each of the Group's airlines targeting a dedicated market segment. The multi-band platform enables the Group to maximise its market penetration across price segments and geographies.

Operating a number of companies with diverse business models and implementing uniform product standards allows the Group to offer customers a wide spectrum of service classes ranging from premium to budget and leisure with each subsidiary retaining a focus on a dedicated market segment.

Aeroflot airline focuses on addressing the needs of the premium passenger segment by offering best-in-class services, a high frequency route network with extensive flight geography, access to the route network of partners from the SkyTeam Alliance, convenient connecting flights for international transit passengers, and a young aircraft fleet.

Regional airlines — Rossiya, Aurora and Donavia — operate regional and inter-regional flights. They focus on geographical areas with higher price sensitivity by primarily offering their passengers flights from the base regions with lower flight frequency. Orenair's business model initially focused on leisure segment. However, the drop in demand in the segment over the reporting period resulted in tactical adjustment, and new domestic flights were launched.

Pobeda targets the low-cost segment. Domestic flights from Moscow to Russia's regions, along with additional inter-regional flights within Russia make up the bulk of the airline's route network, which is designed to improve links between Russian regions. The airline also started developing an international route network.

On 3 September 2015, PJSC Aeroflot's Board of Directors resolved to adapt the Group's updated multi-brand platform to the changing market environment and establish a single regional carrier by combining Rossiya, Orenair, and Donavia. The transformation will not entail dramatic changes to the airlines' business models and positioning.

Aeroflot Group's multi-brand platform: 2015

Price segmentation —
premium, middle and budget offering
Regional segmentation —
hub in Moscow Sheremetyevo airport, base airports in European Russia, presence in the Russian Far East
Product segmentation —
scheduled and charter flights
PREMIUM PRODUCT
Scheduled flights
Business model
  • Hub-and-spoke model, international and domestic transit traffic
  • High frequency
  • Economy and business class
Flight range
  • Unlimited
Aircraft fleet
  • Narrow-body aircraft
  • Wide-body aircraft
Target group
  • Business tourism
  • Visiting friends and relatives
  • Tourism
Share of international routes in the airline's passenger traffic
MIDDLE-PRICE REGIONAL PRODUCT
Scheduled flights
Business model
  • Point-to-point flights within Russia
  • Limited connectivity
  • Popular international destinations
  • Economy and business class
Flight range
  • Mainly short- and medium- haul flights
Aircraft fleet
  • Narrow-body aircraft
  • Wide-body aircraft
Target group
  • Visiting friends and relatives
  • Tourism
  • Business tourism
Share of international routes in the airline's passenger traffic
~20–30%
(mainly within the CIS)
CHARTER PRODUCT
Charter and scheduled flights
Business model
  • Charter flights to the most popular tourist destinations (international and domestic)
  • Share of scheduled domestic flights increased since the beginning of 2015
Flight range
  • Unlimited
Aircraft fleet
  • Narrow-body aircraft
  • Wide-body aircraft
Target group
  • Tourism
  • Visiting friends and relatives
Share of international routes in the airline's passenger traffic
~20%
(mainly resort destinations)
LOW-COST PRODUCT
Scheduled flights
Business model
  • Point-to-point flights via Moscow
  • Point-to-point flights between regions
  • High passenger load factor and fleet utilisation
  • Economy class
Flight range
  • Up to 3–4 hours
Aircraft fleet
  • Narrow-body aircraft
Target group
  • Tourism
  • Visiting friends and relatives
Share of international routes in the airline's passenger traffic
0%
(international flights launched in late 2015)
REGIONAL PRODUCT FOR FAR EAST
Scheduled flights
Business model
  • Passenger flights in the Far East
  • Local flights to remote destinations within the region
  • Economy and business class
Flight range
  • Mainly short- and medium- haul flights
Aircraft fleet
  • Narrow-body aircraft
Target group
  • Visiting friends and relatives
Share of international routes in the airline's passenger traffic
~20%
(Asia-Pacific countries)
Note: On 3 September 2015, PJSC Aeroflot's Board of Directors resolved to amend the multi-brand platform.

Long-term Development Programme and Progress Report

Aeroflot Group's Long-Term Development Programme 2015–2020 (the Programme) was designed in accordance with Decree of President of the Russian Federation No. PR-3086 dated 27 December 2013, and approved by PJSC Aeroflot's Board of Directors on 2 December 2014. PJSC Aeroflot's Board of Directors on 28 May 2015 approved the amendments made to the updated Programme.

3.1 million passengers
carried by Pobeda airline in 2015

The main goal of the Programme is to ensure the Group's long-term sustainable development, strengthen its competitive position, create and develop a competitive edge, and improve performance and financial stability.

The main objectives of the Programme include:

  • determining the Group's current position in the Russian and global aviation industry;
  • analysing the Group's growth prospects, including aviation industry trends, competitive environment, and projected changes in the Russian and global air transportation market;
  • identifying areas and initiatives to improve the Group's competitiveness and performance;
  • preparing action plans to ensure the achievement of the Group's strategic development goals;
  • analysing risks to and opportunities for achieving the strategic goals and implementing Programme action plans.

The Programme details strategic areas for the Group's development and includes a list of key initiatives and action plans ensuring implementation of the Strategy in the medium and long term. The Programme complements and expands the key strategic initiatives set out in the Aeroflot Group Development Strategy 2020.

The Programme provides for the implementation of strategic projects and activities to ensure the achievement of the Group's strategic development goals:

  • development supported by the multi-brand platform;
  • route network and fleet expansion; Including acquisition and commissioning of new Russian aircraft SSJ100 and the high-potential MC-21.
  • growth in the low-cost segment;
  • fostering strategic partnerships;
  • innovation driven development.

The Programme also envisages action plans to boost the Group's competitiveness and performance, as prescribed by Russian Government directives:

  • labour productivity growth (Directive No. 7389p-P13 dated 31 October 2014);
  • operating costs reduction (Directive No. 1346p-P13 dated 5 March 2015);
  • gradual import substitution (Directive No. 2303p-P13 dated 16 April 2015).

Following the instruction of the Government Commission on Transport and Communications (Minutes No. 6 dated 4 December 2014), in 2015 PJSC Aeroflot, in coordination with PJSC United Aviation Corporation, prepared approved schedules for production and delivery to PJSC Aeroflot of Russian SSJ 100 and MC-21 aircraft; JSC Sheremetyevo International Airport approved the project schedule and completed the upgrade and construction of terminal facilities. Expansion of the Terminal D domestic flights area at the expense of the international flights area — moving the wall separating international and domestic areas to increase the capacity of the domestic area. As a result of Terminal D reconstruction completed on 15 April 2015, the domestic flights area was expanded to 11 parking positions equipped with passenger boarding bridges (prior to reconstruction, there were seven parking positions); the international area has 11 parking positions equipped with passenger boarding bridges.

To overcome infrastructure constraints at Moscow Sheremetyevo airport, Aeroflot Group intends to implement a set of measures to increase the airport's capacity in coordination with JSC Sheremetyevo International Airport, FSUE State ATM Corporation (Air Traffic Control), and FSUE Administration of Civil Airports (Airfields). In addition, there are action plans providing for expansion of Aeroflot Group's operating hub at Sheremetyevo to accommodate the Group's growing demand for increased airport capacity in response to the planned passenger traffic growth rate.

24 SSJ100 aircraft
in Aeroflot Group fleet (as at 31 December 2015)

In 2015, the Group posted sizeable growth in passenger traffic and achieved its key development targets:

  • ensuring rapid growth in the low-cost segment (Pobeda);
  • implementing measures to improve economic efficiency;
  • commissioning new Russian SSJ100 aircraft;
  • overcoming capacity constraints at Sheremetyevo (expanding the domestic flights area, meeting operational targets without redirecting some of the flights to an alternative airport).

In 2015, key performance indicators within the Programme were updated. For more details on the Programme see Appendix 7.8 to this Annual Report.

For more details on the Programme see Appendix to this Annual Report on page 265.

Development Programmes

The Group is implementing its strategy through a number of programmes designed to ensure long-term growth and efficient development.

KEY PROGRAMMES UNDERPINNING PJSC AEROFLOT'S GROWTH AND DEVELOPMENT STRATEGY

Investment Programme

Investment Programme 2016 was adopted by PJSC Aeroflot's Board of Directors on 26 November 2015. It is designed to address the air carrier's strategic objectives and ensure the development of its business units. Planned investments in property, plant and equipment and financial investments in software for 2016 are primarily designed to:

  • ensure maintenance and repair operations (procure tools and equipment to ensure maintenance for all types of aircraft, and invest in hangar facility development);
  • ensure ground handling at the airport (procure equipment and custom machinery for aircraft ground handling);
  • develop a training platform (upgrade the FFS A320 flight simulator, connect full flight simulators in operation to additional visual airport databases);
  • ensure the high-quality of passenger services (procure uniforms for front line staff, catering equipment, and minibuses to transport business class passengers);
  • upgrade aircraft (continue the project to integrate electronic devices for pre-flight and in-flight management of air navigation information on Airbus A320 aircraft (Electronic Flight Bag — EFB), provide wheelchairs onboard Boeing 777 and Airbus A320 aircraft, and expand the programme to install in-flight Wi-Fi systems);
  • construct new facilities (deliver on the project for a new hangar for aircraft servicing and build a central power distribution station to expand the capacity of PJSC Aeroflot's power grid);
  • develop IT systems (maintain existing and develop new information systems, procure communication, telephone and computer equipment, as well as self-service check-in kiosks at airports);
  • invest in R&D projects under the Innovative Development Programme;
  • provide software solutions (develop the SAP system, maintain and develop the Company's website, commercial, operations-related, office, and other systems);
  • provide other types of investment in property, plant and equipment (deliver on fire safety initiatives, procure workwear, ensure seamless operation of a number of business units).

Cost Cutting Programme

Cost Cutting Programme was implemented in 2015 to improve the Group's competitiveness and operating efficiency. It provides for a number of initiatives designed to reduce Aeroflot's operating costs. The Programme included effective low-cost initiatives intended to deliver quick results.

For more details on the results of the Cost Cutting Programme and the Company's financial position see the Financial review section of this Annual Report.

Innovative Development Programme

Innovative Development Programme 2020 was adopted by PJSC Aeroflot's Board of Directors on 24 June 2011 and by the working group on Private-Public Partnership in Innovation under the Government Commission on High Technologies and Innovation on 28 June 2011. The Programme defines the key focus areas of the Company's innovative development.

For more details see the Innovation and Information Technology section of this Annual Report.

Management Incentive Programme

Management Incentive Programme was approved by PJSC Aeroflot's Board of Directors on 2 December 2014. The Programme covers PJSC Aeroflot employees whose remuneration is KPI-based. The remuneration is paid at the end of the year for meeting the net income target and depends on the amount allocated by PJSC Aeroflot's General Meeting of Shareholders for this purpose out of the total net income. The Programme sets the maximum remuneration pool which is subsequently distributed among the employees based on their individual contribution to the year-end financial results.

For more details see the Corporate Governance section of this Annual Report.

Corporate Governance Improvement Programme

Corporate Governance Improvement Programme is linked to the implementation of the Corporate Governance Code as approved by the Board of Directors of the Bank of Russia on 21 March 2014.

For more details see the Corporate Governance section of this Annual Report.