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. Last Updated: 07/27/2016

Aeroflot Eyes Plan to Scoop Up Rivals

Itar-TassAn Aeroflot Airbus 321 sitting in the hangar at Moscow's International Sheremetyevo Airport in November 2004.
Aeroflot is considering expanding operations by snapping up rival state-controlled airlines, a senior company official said Tuesday, but denied reports that the move was part of a government plan to turn the flagship carrier into a state-run behemoth that would control most of the market.

State-controlled Aeroflot, the country's No. 1 carrier, is mulling a plan to acquire government stakes in other airlines in exchange for newly issued shares, said Lev Koshlyakov, deputy chief executive officer at Aeroflot. The decision on the emission of new shares has been included on the agenda of Aeroflot's shareholders meeting scheduled for June 17, he said.

Koshlyakov said the new shares were being issued "in order to expand the company's activities," but denied a Vedomosti report on Tuesday that the scheme would be used to bring all of the government's airline assets under the company's roof, introducing something approaching a monopoly.

"The formation of some kind of monopoly is not on the agenda," he said.

Koshlyakov declined to elaborate on which assets Aeroflot was considering acquiring.

The Vedomosti report, which cited an unidentified Aeroflot board member, said that the company was proposing that state-owned airlines Pulkovo, Rossia and Dalavia be folded into the flag-carrier, along with the government's controlling 51 percent stakes in KrasAir and Vladivostokavia and its blocking stake of 25 percent in No. 2 operator Sibir.

Such acquisitions could leave Aeroflot with over 50 percent of the Russian airline market, Sergei Suverov, head of research at Gazprombank, said Tuesday. Aeroflot currently controls around one-fifth of the market.

Billionaire Aeroflot shareholder Alexander Lebedev told Bloomberg on Tuesday that the government was putting pressure on the airline to facilitate the consolidation of the industry.

"The board has been discussing acquisitions for months, and now it seems some bureaucrats want to move ahead with it," said Lebedev, who owns 31 percent of Aeroflot, the largest stake after the government's controlling 51 percent.

The move comes on the heels of President Vladimir Putin's decision last month to sign off on the creation of a government-controlled holding company that will unite the country's main aircraft makers.

The state has recently also moved to tighten its grip on the automotive and energy sectors.

Suverov said that a dramatic move by Aeroflot might be in the offing to make up for slumping profits and the possible loss of indirect subsidies from foreign airlines flying over Russia, which are at risk due to the country's prospective entry to the World Trade Organization.

"They need some kind of radical decision" to avert a crisis, he said. Large-scale consolidation might be Aeroflot's answer to the growth in fuel costs and the possible loss of overflight royalties, he said.

Aeroflot announced on Friday that its net profits had fallen by 50 percent to 3.052 billion rubles ($109 million), according to provisional estimates, Interfax reported. The company's income increased by 10 percent, while costs grew 14.9 percent, deputy general director for finance and planning Mikhail Poluboyarinov told the news agency.

Yelena Sakhnova, an analyst with UFG, said that Aeroflot investors would welcome consolidation of the industry. "The industry has very low margins, and the effective companies will be those that work on a large scale."

Aeroflot's shares climbed 8.8 percent following the publication of the Vedomosti story, Bloomberg reported Tuesday.

There are currently over 185 airlines operating in Russia, but they are increasingly struggling to turn a profit. Like their counterparts in the West, the carriers have been unable to pass on the cost of soaring fuel prices to their customers, analysts say, a situation exacerbated by the poor fuel efficiency of many Russian-built aircraft.

Cumulative net profits of the country's carriers have dropped by half from a year ago, Alexander Yurchuk, head of the Federal Air Transportation Agency, said Monday, Interfax reported.