OREANDA-NEWS. Fitch Ratings has affirmed JSC Aeroflot's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-'. The Outlook is Stable.

Aeroflot's strong domestic market and hub position, exposure to a growth market, fairly diversified route structure and competitive cost base support its solid business profile, which we assess as being commensurate with the mid-BB rating category. However, this is mitigated by a weak financial profile, resulting in a standalone 'B+' rating. Despite forecast deterioration of the group's credit metrics in 2014, primarily due to a slowdown of the Russian economy, we expect a gradual recovery of financial performance over the medium-term. The ratings benefit from a single-notch uplift from Aeroflot's standalone rating for state support.

Aeroflot reported stronger 2013 financial results than we had forecast, due to successful integration of Rostechnologii assets, which achieved an operating profit on an aggregate basis, and slower fuel price inflation. Reduced costs per available seat-kilometre (CASK) and a modest increase in passenger revenue per available seat-kilometre (PRASK) and yields also contributed to the firmer 2013 performance. While Aeroflot's yield and PRASK are lower than those of European legacy carriers, its fairly low CASK enables it to maintain healthy margins.

However, we expect some deterioration of the group's credit metrics in 2014, driven by Russia's slower GDP growth (Fitch forecast: 0.9%) and currency devaluation, which is likely to adversely affect the yield and passenger traffic growth as well as partly offset the positive impact of the winter Olympic games. The impact of flights interruptions to Ukraine is likely to be limited. We forecast funds from operations (FFO) gross adjusted leverage to exceed 5x and FFO fixed charge cover to decline to below 2x in 2014, from 4.9x and 2.2x, respectively, in 2013.

Aeroflot's share of passengers carried in the Russian aviation market was 30% in 2013 (including foreign carriers) and is considered by Fitch to be strong in a fragmented but consolidating market. In contrast to European legacy carriers that are facing fierce competition on the domestic market and are therefore targeting long haul routes as well as transit traffic, Aeroflot leverages against its reasonably well-positioned hub and strong domestic market position and has lower dependence on transit traffic. It is also implementing more conservative, targeted international expansion. The diversity of the group's route network is reflected in its EBITDA generation, which is largely equally split between North America/ Europe, the domestic market and Asia/Middle East & Africa/CIS outside Russia.

Aeroflot's rating of 'BB-' continues to incorporate a single-notch uplift from its standalone 'B+' rating for state support. Fitch considers the strategic, operational and, to a lesser extent, legal ties between Aeroflot and its parent, the Russian Federation (51.2% direct ownership and 9.48% indirect ownership) as fairly strong, in accordance with Fitch's Parent and Subsidiary Rating Linkage methodology.

There are no tangible legal ties, such as guarantees or cross default provisions, but Aeroflot remains on the government's list of strategic enterprises. Its operational and financial strategies are overseen by the government and Aeroflot is viewed by the state as a means of promoting and developing Russia's aviation market. We would expect tangible financial support to be forthcoming if the need arises. We incorporate into our projections of the company's standalone financial profile airline revenue agreements that consist primarily of bilateral pool agreements with other airlines and also intergovernmental agreements on the basis that they are unlikely to be removed.

Positive: Future developments that could lead to positive rating actions include:
-Evidence of stronger state support
-Improvement of the financial profile (eg FFO gross adjusted leverage below 4.0x and FFO fixed charge cover above 2.0x on a sustained basis) due to, among other things, material increases in profitability, moderation of investments in the fleet and/or drop in fuel prices, which would be positive for the standalone rating.

Negative: Future developments that could lead to negative rating action include:
-A material deterioration of the credit metrics (eg FFO gross adjusted leverage above 5.0x and FFO fixed charge cover below 1.5x on a sustained basis) due to, among other things, a weaker-than- expected Russian economy, acquisitions, overly ambitious fleet expansion and/or high fuel prices would be negative for the standalone rating.
-Weakening of state support