27 May 2020
Key highlights: Online press briefing: ‘Take-off clearance or extended grounding: Outlook for the global aviation industry’, hosted by Artem Yamschikov, Equity Analyst for Transportation Sector
  • On sector consolidation: The Russian domestic market (73mn PAX in 2019), apart from Aeroflot’s (AFLT) dominant position (c. 46% share), remains fragmented (the second-largest airline, S7 Group (not listed), had a domestic market share of 18% in 2019). Not all players will be capable of relaunching their operations and this could be followed by natural consolidation of the market, including airlines, airports and leasing companies. The weakest players are likely to be too insolvent to relaunch their operations post the grounding period and we could see the first bankruptcy announcements in the coming summer months.
  • On traffic recovery: Domestic markets are likely to be the primary drivers of the recovery in 3Q20, unless we see a second wave of COVID-19, which is likely to throw the industry back to the 2Q20 standstill. We note that the corporate segment is likely to be the laggard in overall recovery, both in international and domestic travel.
  • On financial health: Airlines’ cash balances and leverage ahead of 2Q20 are the key metrics to watch in order to identify the financial sustainability of a specific player in the market. The ability to reduce fixed costs will be also critical in 2Q20 when international traffic is paralysed and revenue streams are close to zero. Financially sound players are even likely to strengthen their market foothold, and we see that the banks are ready to extend loans to carriers with strong balance sheets.
  • On low-cost carriers: Low-cost carriers could be more successful in adapting to a new world post the ‘global grounding’ period when airlines’ operations are relaunched, given their agile business models, strict cost control and prudent cash management. In addition, consumers are very likely to become more price-sensitive and switch to budget offers. Many low-cost carriers are currently discussing aggressive growth plans: Pobeda already announced its intention to resume domestic flights in June with average rates 3x as low as last summer.
  • On regional airlines: Regional carriers find themselves in strained circumstances due to their focus being mainly on domestic flights, many of which, unlike international travel, are loss-making and need to be subsidised. Given that almost all region-based carriers are controlled by local governments, their medium-term prospects are very much dependent on the efforts, involvement and support of their major shareholders.
  • On Aeroflot outlook: We expect AFLT to suffer considerable financial losses this year, with the current level of state support likely to be insufficient. We believe AFLT could significantly increase its debt burden over the coming months, which would have a protracted negative impact on the company’s financials. However, the flagship carrier should be entitled to government support in any scenario. In addition, as some players will be leaving the market, AFLT is very likely to get the most attractive routes and win additional market share.
  • On Aeroflot’s core competitor: Russian carriers’ PAX traffic and RPKs declined by around 92% and 93% YoY in April, respectively. Aeroflot’s Russian Airlines PAX traffic was down 95% to c. 148k, while its main competitor, S7 Airlines, outperformed AFLT for the first time in its history and carried 214k PAX in April (down 79% YoY), as it continued to operate flights from its regional hub at Novosibirsk, with a significant number of regional narrow-body aircrafts in its fleet.