Aeroflot in no hurry to privatize



The Russian flagship carrier may be privatized slower than it was proposed in a Federal Property Management Agency plan. A presentation made by the airline states that a rapid withdrawal of the state from its capital will turn Aeroflot into nothing but a regional player.

New timelines for the privatization of Aeroflot were highlighted in a presentation that the airline’s officials made for experts, looking at the “road map” of the carrier’s privatization. Withdrawal of the state from Aeroflot’s capital would be carried out in two stages.

In the first stage (2013–2015), it is necessary to complete the integration of the regional Rostec companies into the Aeroflot Group, create a low cost carrier and so on. Then it will be possible to reducethe government's stake in the airline from 51.17 to 50 percent plus 1 share, and an increase in the number of publically traded shares to 40 percent, by placing an additional 10.55 percent of the shares (3.55 percent from Rostech, treasury shares – 4.66 percent and an additional issue – 2.34 percent).

Yesterday on the Moscow Stock Exchange, 10.55 percent of Aeroflot was worth 6.48 billion roubles. ($203 million at current exchange rates). The state's interest dropping to 25 percent plus 1 share is proposed only for the second stage – in 2016–2020. The decision on the form and timing of the second stage should be taken in 2015. According to the privatization plan forecast, published by the Federal Property Management Agency, the state's share in Aeroflot must be reduced to the slightest majority by 2016.

The representative of Aeroflot assured us that the “road map” has been approved by the Federal Property Management Agency.

“There is a feeling that [the CEO of Aeroflot Vitaly] Savelyev categorically does not want privatization at this time. It seemed to me that [the head of the Federal Property Agency Olga] Dergunova supports him,” one of the participants in the hearings shared his impressions.

“Mr. Savelyev managed to negotiate with the Federal Property Management agency and banks that were advising on the privatization issue, and his position has been accepted by all parties,” says a source close to Aeroflot.  “Mr. Savelyev believes that the shares should be sold only when the company is at the peak of capitalization, and now Aeroflot is undervalued by 30–50 percent,. It would be wrong, if the bonus from a further increase of capitalization was obtained by the buyer, and not the state, as the current owner,” the source says.

Aeroflot backs up its position with an analysis of international experience. The international airline companies, sticking to the “national carrier” strategy, are characterized by “a global presence, turbo-growth and management of several brands.” These carriers form the “rules of the game,” and Aeroflot says these are Air France, Lufthansa, British Airways and others. Carriers who “obey the rules of the game,” develop as “regional airlines”: for example, Austrian, Swiss (both part of the Lufthansa Group), LOT, Malev and others. These were quickly privatized and are now engaged only in “supplying global players with passengers” – they ended up playing this role because of the “destructive arrogance [of their governments] towards the liberalization of the market,” “support of internal competition,” and “poor attention to the full development of hubs.” “An overly liberal attitude towards the development of national aviation leads to the fact that a country is forced to take secondary positions in the global market with its inefficient national carrier,” emphasizes the presentation. If Aeroflot follows this path, “the risk of losing air transport self-reliance by Russia would sharply increase.”

The chief analyst of the Aviaport Agency, Oleg Panteleyev, agrees that Aeroflot is now undervalued by about 40 percent: “Regardless of the timing of the privatization of Aeroflot, the possible benefits from measures that the government may take to improve its capitalization (adjustment of the legislation towards a low-cost carrier, increased international presence) are enormous.” It is possible to achieve capitalization growth without major investments into the airline, notes Mr. Panteleyev: “It is a huge advantage for the Federal Property Management Agency not to invest a dime and be able to obtain capitalization growth of 40 percent.”

According to the director of UTair Airlines, Andrey Martirosov, Aeroflot has changed: “The company has a different business philosophy now, the state now does not create special conditions for it, and if changing the rules of the game for Aeroflot, it changes the rules for all the other airlines. However, if the state allows a bias towards support of Aeroflot, to the detriment of the other airlines, investors will leave the industry, and this would be wrong. It would be better to nationalize all airlines then.”

Read the original in Russian

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