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. Last Updated: 07/27/2016

S&P Test Flies Governance Rating on Aeroflot

In its first-ever corporate governance rating for emerging markets, Standard&Poor's gave top Russian airline Aeroflot a score of 5.3 on a scale of one to 10, both companies announced Tuesday.

Although the rating itself is not high, it sends out a positive signal that the carrier is becoming more investor-friendly, S&P said.

The rating was done on Aeroflot's initiative and it was the first company picked by S&P for the new product, which reflects the extent to which a company's governance process serves the interests of its financial shareholders.

S&P analysis was based on four components: ownership structure and influence; shareholder relations; financial transparency and information disclosure; and board and management structure and process.

Aeroflot scored highest in the shareholder relations category at 6.8 and lowest for board and management structure with 3.8. Aeroflot's ownership structure and influence was rated at 4.5 and the transparency factor scored 6.2.

Yulia Kochetygova, S&P's Russia-based corporate governance director, said in a telephone interview Tuesday that although the score is low it would not reflect negatively on Aeroflot's image.

"Aeroflot's initiative by itself is a very positive sign that the company is taking [corporate governance] seriously and it's to the management's credit that they opened up and decided to have the results published," she said.

Aeroflot's general director Valery Okulov said before the rating was published that it would help the company attract capital and improve its relationship with investors.

Among other things, the report praises the airline for introducing internal audits, financial control facilities and an external investor relations service.

One of the company's biggest drawbacks, according to S&P, is that its biggest shareholder is the state (with 51.17 percent), whose interests can be both consistent with and detrimental to management's business goals, making the airline's governance practices subject to a potential conflict of interest.

One example of this problem is "the inability of management to suspend the acquisition of Russian-made aircraft even though there is clear evidence that such airplanes do not meet the same efficiency as foreign airplanes," S&P wrote.

Another problem that kept the corporate governance score low is the lack of transparency regarding the ownership of nearly 31 percent of outstanding shares held by nominee and shell companies.

Agreeing to publish the rating is part of Aeroflot's drive to overhaul its image along recommendations made by international consultant McKinsey & Co.

A major part of this profit-oriented strategy is restructuring its flight schedule, route structure and fleet utilization.

On Tuesday, for example, Aeroflot said that starting Saturday, it is suspending flights to Pakistan, Sri Lanka, Malaysia and Peru.

The frequency of flights to Europe will be increased, especially London and Paris, as well as top tourist destinations such as Antalya, Istanbul, Madrid and Sochi.

The company also plans to fly 231 domestic flights a week, up from 156 last year.

In all, Aeroflot will fly to 74 countries and plans to perform 680 flights a week on 67 aircraft.

The airline also planned to have direct flights between Moscow and Chicago and Washington but it has yet to receive a new long-range craft, an Ilyushin Il-96-300, forcing that project to be put on hold.