Improving the dynamics of key indicators and the implementation of new development strategy. In 2018, income rates (the ratio of revenue to passenger turnover) on regular flights increased from 3.63 to 3.81 (+ 5% y/y), including increase by 8.2% on international destinations and by 0.9% on domestic. The main factors for the growth of income rates were the partial transfer of fuel cost to income due to the adjustment of fuel surcharges and the decrease of RUB against EUR on international destinations. Aeroflot also aims to transfer 90-100 mn passengers in 2023, increase international transit passenger traffic from 4.8 mn to 10-15 mn passengers in 2023, open regional bases throughout the Russian Federation, increase the fleet of domestically produced aircraft and increase digitalization.
Low-cost airline company Pobeda - key driver of growth. An additional factor is the acceleration of development of the low-cost airline Pobeda, which ensured the profitability of transportation for the Group due to its low unit costs. Airline Pobeda is aimed at the segment of budget transportation, which, due to its high operating efficiency, offers low fares, making flights more affordable. Pobeda actively expanded its network and accelerated growth rates: in 2018 passenger traffic increased by 56.8% to 7.2 mn passengers.
Operating expenses optimization program. The Group launched a large-scale cost reduction program due to a significant increase in the cost of jet fuel in 2018. Costs per Available Seat Kilometre (CASK), excluding the cost of jet fuel, increased by only 0.7% y/y. Considering the weakening of RUB against USD and EUR in 2018, as well as the fact that operational leasing, maintenance and repair costs, airport fees are denominated in the foreign currencies, we believe that the Group has started to effectively implement this program.
Support for seasonal factors. Low demand in the winter season and a significant increase in the cost of Brent oil in 2018 negatively affected the Group's financial results. As a result of currency and fuel factors, EBITDAR (EBITDA, including operating lease expenses) and EBITDA margin decreased by 2.9 pp and 5 pp, amounting to 20% and 5.5%, respectively. Given the high demand for air transportation services in the 2nd-3rd quarter of 2019, we expect the Group’s results to improve.
Recommendation to Buy with 12М TP 125 RUB/share. We expect a moderate increase in jet fuel prices in 2019 and improvement in the dynamics of unit revenue per seat-kilometre (2019: RASK + 1.3%) while decreasing unit cost per seat-kilometre (2019: CASK -14%).
