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Strategy Overview

AEROFLOT GROUP’S STRATEGIC VISION
Aeroflot Group’s ultimate strategic goal is to strengthen leadership in the global airline industry by seizing opportunities in the Russian and international air transportation markets.

Aeroflot Group Development Strategy 2025 was approved by PJSC Aeroflot’s Board of Directors and defines the key focus areas and long-term growth targets.

To implement Aeroflot Group’s long-term strategy, the Company has developed a medium-term strategic plan defining the key focus areas, operational and financial targets supporting strategic goals. The medium-term strategy is reviewed and updated on an annual basis.

In line with the medium-term development strategy and pursuant to the directives of the Russian Government, Aeroflot Group has developed and updates annually its Long-Term Development Programme, which covers management-related activities, goals, and KPIs. The Group’s consolidated IFRS budget and KPIs for the budget year are developed in line with the targets of the mediumterm strategy of Aeroflot Group and its Long-Term Development Programme.

Parameter Medium-term strategy Long-term strategy
Period
2017-2021 Up to 2025
Key areas
  • Pillars of Aeroflot Group’s growth strategy
  • Growth taking in the account the infrastructure constraints
  • Pillars of the fleet development strategy
  • Principles of route network expansion
  • The Group’s updated goals up to 2021
  • 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 operational and financial targets for 2017–2021, in line with the Group’s long-term goals Long-term passenger traffic and revenue targets benchmarked against global peers
The date of approval by the Board of Directors
13 July 2011
(Minutes No. 1)
24 November 2016
(Minutes No. 6)

AEROFLOT GROUP’S STRATEGIC GOALS FOR 2025

Join the Top 5 European airlines by passenger traffic and revenue Join the Top 20 global players by passenger traffic and revenueCarry over 70 million passengers, including at least 30 million within RussiaIncrease passenger traffic via the main hub in Moscow, with the share of transfer passengers reaching at least 32%Ensure strong presence in the market
STATUS AS OF THE END OF 2016
Ranked 7th by passenger traffic and 7th by revenue1. Ranked 24th by passenger traffic and 23rd by revenue1.43.4 million passengers in total, including 25.2 million within RussiaAeroflot’s share of transfer passengers is 42.1%The Group is present in all price segments across all geographies
1 As at the publication date of this Annual Report – data for 2015 (published in 2016).
Sources: Airline Business, ATW, Flight Global, the Company’s estimates.

Analysis of Aeroflot Group’s growth trends and changes in external business environment during 2016 suggests that the Group is well-positioned to achieve all goals set in its Strategy 2025. However, the Group’s performance against these goals may be affected by significant fluctuations of FX rates and the continued process of international market consolidation.

Key initiatives and work streams underpinning long-term strategy implementation

STRATEGIC PRIORITIES
Develop the multi-brand platform to strengthen positioning and synergy across the Group Enhance the network development strategy to reinforce the key principles of route network expansion for the Group’s airlines
Promote transit traffic via Sheremetyevo airport (including international traffic) Enhance the fleet development strategy to deliver Aeroflot Group’s growth in line with the approved route network expansion principles
MARKETING PRIORITIES 
Customer experience strategy designed to ensure service standards as part of the Group’s marketing strategy Customer experience strategy designed to ensure service standards as part of the Group’s marketing strategy
FINANCIAL PRIORITIES 
Investment strategy aimed at achieving the Group’s strategic goals in the medium and long term Cut costs to ensure the Group’s financial stability in the medium and long term
Improve labour productivity Boost the Group’s ancillary revenue

Impact of risks on the Group’s strategy

The following types of risks are seen as the key potential risks that may affect the Group’s development strategy:

  • risk of changes in the external business environment;
  • risk arising from infrastructure constraints;
  • macroeconomic risks.

To mitigate the key risks, the medium-term strategy of the Group provides for the following initiatives:

  • development of a high-performing hub at Sheremetyevo to promote international transfer traffic and increase fleet flexibility;
  • growth planning and control at each of Aeroflot Group’s companies to maintain manageable growth and the market share;
  • monitoring the progress of infrastructure development and new facilities construction at Moscow Sheremetyevo airport;
  • flexible development of Aeroflot and Pobeda airlines;
  • diversification of revenue streams by currency and geography.

Strategy implementation and adjustment results

In 2016, Aeroflot Group made significant progress towards achieving its long-term goals, primarily, through continued route network enhancement by frequency and connectivity, supported by consistent efforts to improve the hub at Moscow Sheremetyevo airport. Measures were taken to reduce CASK, optimise the fleet and boost sales efficiency. Pobeda, Aeroflot’s low-cost carrier, is making good headway, having carried 4.3 million passengers in 2016. In 2016, we completed the transformation of regional airlines to set up Rossiya Airlines, a united regional carrier.

Aeroflot Group’s progress in achieving 2025 strategic goals

  2012 2013 2014 2015 2016 2025
Revenue, RUB billion 253.0 291.0 319.8 415.2 495.9 Top 5 and Top 20
Passenger traffic, million PAX 27.5 31.4 34.7 39.4 43.4 Top 5 and Top 20,
>70 mn
Domestic passenger traffic, million PAX 11.5 14.0 17.6 23.4 25.2 >30 mn
Aeroflot’s share of transit traffic, % 32.7 35.5 39.2 44.2 44.2 32

In 2016, the Russian airline industry performed as projected, with no structural shifts; therefore, no significant adjustments or dramatic changes to the development strategy were needed. The action plans outlined in previously approved strategies proved effective. Based on the current market environment, the Company made decisions to accelerate Aeroflot Group’s growth via its parent company Aeroflot, including through active promotion of international transfer traffic and the low-cost carrier Pobeda. We updated a number of targets, including those set for passenger traffic: in 2021, Aeroflot Group plans to carry 66 million passengers, including 41.8 million passengers to be carried by Aeroflot airline. According to our estimates, by this year, the Group’s fleet will comprise 380 aircraft. The fleet enhancement strategy provides for increasing the share of Russian aircraft through execution of contracts for 50 Sukhoi Superjet 100 and 50 МС-21 aircraft.

Multi-brand platform

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

Aeroflot airline focuses on addressing the needs of the premium passenger segment by offering best-inclass 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 modern aircraft fleet.

Rossiya and Aurora airlines target the mid-market price segment and operate regional and inter-regional flights. They focus on the relevant geographical areas with higher price sensitivity by primarily offering their passengers flights from the base regions with lower flight frequency. Rossiya airline also operates in the leisure (charter) segment. In 2016, the Company successfully implemented its decision made in late 2015 to establish a united regional carrier, Rossiya Airlines, by combining airlines of JSC Rossiya Airlines, JSC Orenair, and JSC Donavia.

Pobeda airline 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 expands the international route network.

Aeroflot Group’s multi-brand platform


2015

Position­ing

2016

Position­ing

Type of flights

Business model

Flight range

Aircraft fleet

Target group

Base airport

Share of internati­onal passengers in the airline’s passenger traffic

Aeroflot Group’s multi-brand platform

Premium product

Mid-price regional product

Regional product

Charter product

Low-cost product

Regional product for Far East

Premium product

Regional and charter products in the mid-price segment

Low-cost product

Regional product for Far East

Scheduled flights
Scheduled and charter flights
Scheduled flights

Scheduled flights
  • Hub and spoke model
  • Transit passenger traffic on domestic and international routes
  • High frequency of flights
  • Economy and business class
  • Point-to-point flights within Russia
  • Limited connectivity
  • Popular international destinations
  • Charter flights to the most popular leisure destinations
  • Economy and business class
  • Point-to-point flights via Moscow
  • Point-to-point flights between regions
  • High passenger load factor and fleet utilisation
  • Economy class
  • Passenger flights in the Far East
  • Local flights to remote destinations within the region
  • Economy and business class
Unlimited Unlimited Up to 3–4 hours Short- and medium-haul flights
  • Narrow-body aircraft
  • Wide-body aircraft
  • Narrow-body aircraft
  • Wide-body aircraft
Narrow-body aircraft Narrow-body aircraft
  • Business
  • Visiting friends and relatives
  • Leisure
  • Visiting friends and relatives
  • Leisure
  • Business
  • Leisure
  • Visiting friends and relatives
  • Visiting friends and relatives
  • Business
Moscow (Sheremetyevo)
  • Moscow (Vnukovo)
  • Saint Petersburg (Pulkovo)
  • Airports in Orenburg and Rostov-on-Don
  • Moscow (Vnukovo)
  • Airports in Russia’s regions
  • Vladivostok
  • Khabarovsk
  • Yuzhno-Sakhalinsk
~50% (extensive geography)

 

 

 


~20–30% (mainly within the CIS) ~10% ~20% (Asia Pacific)

Long-term development programme and progress report

Long-Term Aeroflot Group 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 (Minutes No. 8). On 27 January 2016, the Strategy Committee of PJSC Aeroflot’s Board of Directors approved proposed amendments (Minutes No. 1) to the Long-Term Aeroflot Group Development Programme 2015–2020.

In 2016, the Long-Term Aeroflot Group Development Programme 2016–2021 was updated to reflect the key amendments to Aeroflot Group’s strategy for 2017– 2021. This involved the review of the Programme’s key initiatives to support the strategy implementation1. We updated the Programme’s KPI framework to adjust the set and weighting of KPIs. A dedicated section on Ensuring Priority Funding for the Social and Economic Development of the Russian Far East was added in line with Russian Government Directive No. 4531p-P13 dated 28 June 2016.

1 The Resolution of the Board of Directors dated 8 September 2016 (Minutes No. 2); the Resolution of the Board of Directors dated 24 November 2016 (Minutes No. 6); the Resolution of the Board of Directors dated 22 December 2016 (Minutes No. 7).

The progress on PJSC Aeroflot’s Long-Term Development Programme for 2016 was audited by the Company’s external auditor, AO BDO Unicon.

The independent audit was followed by an opinion on the information prepared to reflect the progress on the Programme’s initiatives from 1 December to 31 December 2016, on the actual 2016 KPI values and achievement of target KPIs, in all material respects, against the criteria set out in the Programme, on the relevance, in all material respects, of clarifications made by PJSC Aeroflot’s management on discrepancies between the Group’s actual KPIs and the Programme’s targets, and on spending the relevant 2016 budgets in line with their intended purpose. The auditor’s opinion was issued on 31 March 2017 under No. 1744-BDO-17.

Overall, the Programme planning and implementation are in line with the principles set out in the Programme Development Guidelines, the KPI Guidelines, and other directives and instructions of the Russian Government and the Federal Agency for State Property Management.

In 2017, the Regulations on Updating and Managing the Implementation of Aeroflot Group’s Long-Term Development Programme were approved to improve updating, reporting, and auditor communication processes. These Regulations were developed to comply with the auditor’s recommendation following the 2015 Programme results audit.

The Programme’s key goal is to ensure the Group’s longterm sustainable development, strengthen its competitive position, create and develop a competitive edge, and improve performance and financial stability.

Key initiatives to support the implementation of the Long-Term Development Programme in 2016:

  • reduce operating expenses and increase labour productivity;
  • improve the procurement process;
  • implement the investment programme;
  • implement Aeroflot Group’s Innovative Development Programme;
  • expand the route network;
  • enhance the aircraft fleet;
  • expand the production capacity;
  • develop and adopt mandatory internal documents to improve corporate governance;
  • ensure adequate talent pipeline;
  • implement Aeroflot Group’s marketing strategy.

The Programme’s key objectives are to:

  • develop action plans to ensure achievement of the Group’s strategic growth targets;
  • identify areas and initiatives to improve the Group’s competitive edge and performance;
  • analyse risks to and opportunities for achieving the strategic targets and implementing Programme initiatives.

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 2021.

Development programmes

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

Investment Programme

2017 was adopted by PJSC Aeroflot’s Board of Directors on 24 November 2016 (Minutes No. 6). 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 2017 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 and purchase the TSFT SSJ100 trainer);
  • ensure high-quality passenger experience (procure uniforms for front line staff, equip aircraft with WiFEC, replace business class seats onboard Airbus A330 aircraft);
  • upgrade aircraft (continue the project to integrate electronic devices for pre-flight and in-flight management of air navigation information on Airbus A320 family aircraft (Electronic Flight Bag – EFB), provide wheelchairs onboard Boeing 777, Boeing 737, and Airbus A320 aircraft);
  • build new facilities (continue the construction of a new hangar for aircraft servicing and build a central power distribution station to expand the capacity of PJSC Aeroflot’s power grid);
  • develop the IT infrastructure (maintain existing and develop new information systems, procure communication, telephone and computer equipment, update the situation centre);
  • 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

was implemented in 2016 pursuant to Russian Government Directive No. 4750p-P13 dated 4 July 2016 and the Resolution of the Board of Directors of PJSC Aeroflot dated 25 August 2016 (Minutes No. 1), to achieve the KPI of reducing operating expenses (costs) by at least 10% in the reporting period. The updated Programme was approved by the Resolution of PJSC Aeroflot’s Management Board dated 17 October 2016 (Minutes No. 26). To improve the Group’s operational efficiency, the Programme provided for low-cost/quick-win initiatives. The Programme was implemented in full. With the cost reduction target of RUB 12.1 billion, the actual cost savings amounted to RUB 14.3 billion.

Management Incentive Programme

was approved by the Board of Directors of PJSC Aeroflot on 25 September 2014 (Minutes No. 5) and amended by the Resolution of the Board of Directors of PJSC Aeroflot on 2 December 2014 (Minutes No. 8). 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 profit target and depends on the amount allocated by PJSC Aeroflot’s General Meeting of Shareholders for this purpose out of the total net profit. 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.

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.

Innovative Development Programme

2020 was adopted by PJSC Aeroflot’s Board of Directors on 24 June 2011 (Minutes No. 16) 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.