ANNUAL REPORT 2006 THE RUSSIAN SKIES — NEW ROUTES, NEW CHALLENGES, NEW SOLUTIONS ANNUAL REPORT 2006 Key Figures   Contents KEY FIGURES*

Key Figures ...... 5 Business Performance Unit 2006 2005 CEO’s Address to Shareholders ...... 6 Main Events in 2006 ...... 10 Passengers carried millions 8 .7 8 .1 1. Implementing Company Strategy: Results of the year 2006 and Priority Tasks for 2007 ...... 15 Cargo and mail carried thousands 151 .8 151 .5 Strengthening Aeroflot’s position on the domestic air traffic market ...... 15 Construction of the Sheremetyevo-3 terminal ...... 16 Revenue passenger kilometers billions 24 .3 22 .5 Implementing the IOSA International Standards for Operational Safety ...... 16 Renewal the fleet with modern ...... 16 Revenue ton kilometers billions 3 .0 2 .9 Joining and working with the SkyTeam alliance ...... 17 Increasing the competitiveness of our product ...... 17 Passenger load factor % 69 .7 68 .4 IT development ...... 18 Cargo load factor % 57 .9 58 .1 Priority tasks for 2007 ...... 19 2. Overview of the Air Traffic Market ...... 23 Available ton kilometer per employee thousands 302 .5 292 .8 Global air traffic market ...... 23 Russian industry ...... 23 Personnel in airline sector (average) person 17,503 17,064 Russian : main events in 2006 ...... 25 Aeroflot Group’s position on the civil market ...... 26 Number of aircraft in the fleet at the end of the year units 128 118 3. Business Results in 2006 ...... 31 Passenger traffic ...... 31 Financial Statistics Cargo traffic ...... 34 Safety and security ...... 37 Route network ...... 39 Traffic revenue USD millions 2,474 .3 2,079 .9 Aircraft fleet ...... 42 Product and brand development ...... 45 Total revenue USD millions 2,982 .7 2,526 .3 Passenger ticket sales ...... 50 IT development ...... 53 Operating income USD millions 377 .0 242 .1 Quality management ...... 55 SkyTeam alliance ...... 56 Net income USD millions 258 .1 189 .8 Sheremetyevo-3 complex ...... 58 Shareholders’ equity (as of December 31) USD millions 784 .6 558 .6 Business of Aeroflot subsidiaries ...... 59 4. Main risks and Risk Management ...... 67 Capital expenditures USD millions 534 .1 204 .1 Risk management ...... 67 Industry risks ...... 67 Preventative measures for risk management ...... 69 Capital Market Figures Insurance programs ...... 69 Financial risks ...... 71 5. Social Development ...... 77 Earnings per share US cents 24 .3 17 .9 Personnel ...... 77 Development of the corporate philosophy ...... 79 P/E ratio (as of December 31) 9 .3 8 .3 Professional training and raising the qualifications of employees ...... 79 Labor safety ...... 80 Market capitalization (as of December 31) USD millions 2,418 1,566 Social responsibility ...... 81 Social and charity activities ...... 82 Environmental protection ...... 85 6. Corporate Governance ...... 89 * Consolidated key figures of JSC Aeroflot and its subsidiaries . Governing bodies ...... 89 Financial and business control ...... 96 Information disclosure ...... 98 7. Shareholders and Investors ...... 103 Shareholders capital ...... 103 Securities ...... 104 Dividend history ...... 106 Important events since December 31, 2006 ...... 107 8. Financial Report ...... 111 Statement of management’s responsibilities for the preparation and approval of the consolidated financial statements for the year ended december 31, 2006 ...... 111 Financial results ...... 112 Independent auditors’ report ...... 120 Consolidated statement of income ...... 122 Consolidated balance sheet ...... 123 Consolidated statement of cash flows ...... 124 Consolidated statement of changes in equity ...... 126 Notes to the consolidated financial statements ...... 127 Appendixes ...... 164 Overview of major deals and interested party transactions ...... 164 Glossary of terms and abbreviations ...... 165 Operational statistics ...... 166 Aeroflot Group representative offices ...... 170 Route network of the Aeroflot Group ...... 176 General information ...... 178 AEROFLOT ANNUAL REPORT 2006 CEO’s ADDRESS TO SHAREHOLDERS  

CEO’s ADDRESS position as the flagship of the Russian air fleet has required painstaking work, effective cooperation between the thousands of people in our company, astute policy manage- TO SHAREHOLDERS ment, as well as thorough study and strategic analysis of the market .

Today, there is no doubt that we successfully improved and expanded our business in 2006 . As a result, Aeroflot has earned the right to be counted among the leading Russian companies demonstrating impressive financial figures . We have consider- ably strengthened our position on the domestic and international markets, as well as earning a profit of USD 258 1. million . This figure should be especially welcomed by shareholders, who profited from the appreciable increase of the company’s capital . According to the results of last year, the market capitalization of Aeroflot grew by 54%, topping off at USD 2 .4 billion . Furthermore, the credit portfolio of the airline is minimal: in other words, Aeroflot can use its own resources to finance its expen- ditures and endeavors, including the realization of a number of major investment projects .

Not all of Aeroflot’s achievements can be expressed in dry accounting figures . Last year was rich with events that are not of immediate importance for the company, but which will play a fundamental role in its development for many years to come . The most noteworthy of these events was Aeroflot’s inclusion in the international SkyTeam on April 14, 2006 . As one of 10 full members of the alliance, we entered into new and vital strategic level . Our participation in SkyTeam allows Aeroflot’s passen- gers to fly anywhere in the SkyTeam network of flights between 728 destinations in 149 countries, as well as to use reward points from the bonus programs of other air- lines in the alliance . Passengers may also enjoy the SkyTeam’s common airport waiting rooms . Overall, the prospects are endless, and we plan to use the synergy of this global Dear Shareholders, partnership to achieve the goals of our company .

I am happy to say that after a period of regression in the global airline industry fol- Another landmark event this year was Aeroflot’s registration as an accredited operator lowing September 11, 2001, has entered a period of stable development . by the IATA Operational Safety Audit (IOSA) Program . This not only confirms the high According to data from the International Air Transport Association (IATA), the airline level of reliability and quality of our services, but also proves that we regularly observe industry has shown a slow but steady growth in the last year . the strict international requirements for operational safety .

The economic upswing and revival of business activity in our country have stimulated However, our goal to comply with the highest international safety standards is not an the growth of the airline industry . In 2006, the volume of passenger traffic in the Rus- end in itself . The civil airline industry is the global industry, and Aeroflot works in a sian civil aviation industry grew by 8 .3% . In total, the Russian airline companies car- highly competitive environment . We face serious competitors, especially from interna- ried more than 38 million people, while the total passenger turnover grew by 9 .5%, tional companies, who are more actively expanding into the Russian market with each reaching 94 billion passenger kilometers . passing year . We fully realize that under such conditions, the struggle to excel cannot be successful without cutting-edge innovation and technological advancement . We have every reason to be proud of the contribution that Aeroflot has made in ob- taining these achievements . Last year, the company’s services were used by 7 .29 mil- One of our continual priorities is to update and reconstruct our aircraft fleet . As one of lion passengers, while together with its subsidiaries, Aeroflot transported 8 7. million the youngest in , our fleet stands to become even more modern and functional, people, or 23% of the total number of passengers who flew on Russian airlines . especially with the continued use of Airbus A320s . Just this year alone, nine A320s were replenished into Aeroflot’s fleet, while by 2010, the total number of A320s in the These figures are clear indicators that our airline remains the undisputable leader in fleet should exceed 50 . It is important to note that Aeroflot also stringently maintains the market, which is further substantiated by the fact that we are the Russian national a flight airworthiness and adheres to the daily allowance of flight hours for a given type carrier . of plane . We work to both replace any outdated systems from our services and enable the development of the Russian airline industry . I remind you that our company is the However, this status has not been earned simply by grace of the fact that Aeroflot was first buyer of the new generation of short-haul SuperJet-100 planes, the first of conceived as the national carrier of the Soviet Union . Rather, the preservation of our which should be delivered to us by the end of 2008 . AEROFLOT ANNUAL REPORT 2006 CEO’s ADDRESS TO SHAREHOLDERS  

Aeroflot is also putting high stakes into new information technologies . For example, the We recognize that there is only one key to our success — professional and intensive company has changed to the Sabre reservation system, which allows for the develop- work . Aeroflot, from year to year, has confirmed that it is capable of working success- ment of internet sales through online reservation and billing . Passenger self-registra- fully under any weather conditions . And so it is without a doubt that this tradition will tion desks have also been placed in airport terminals . However, most importantly, we continue throughout 2007 . As such, I will continue to rely upon the professionalism and have begun selling e-tickets . persistent work of our airline, as well as the support of shareholders .

Also in 2006, important decisions were made about the development of Aeroflot’s flight network, which stretches across the whole world . However, I would like to stress that above all, we are a Russian airline and our main priority is the domestic aviation mar- Sincerely Yours, ket . Aeroflot’s total passenger traffic grew by 9 .4% in 2006, while this figure was 16 .6% Valery Okulov for the domestic market . Furthermore, in 2007, we plan to increase domestic passen- ger traffic by approximately 20% .

When assessing our progress, we focus not just on the financial figures, but also on the development of our corporate philosophy . We believe that Aeroflot, as the future leader of Russian airlines, holds a certain responsibility for the Russian people, and that it is obliged to promote in every way possible the integration of the country’s transport, as well as its general social and economic prosperity . As such, our company works to consolidate Russian civil aviation in order to strengthen its competitive position on the global market .

Thus, Aeroflot purposely focuses on ’s eastern regions, which have huge poten- tial but are deprived of the necessary transport communications with other regions of Russia and foreign countries . We are working on a project to create an affiliated com- pany in Russia’s Far East, and we believe that the realization of this project will benefit Aeroflot, the Far East, and the country as a whole . Aeroflot already has first-hand ex- perience creating successful affiliated companies in the regions, such as Aeroflot-Don, Aeroflot-Nord, and Aeroflot-Cargo .

The most profitable international market for us remains the European one, and as such, we hope to strengthen our position in it . At the same time, Aeroflot has special plans for the dynamically developing Asian-Pacific region and continues to promote the strate- gic development of transit from Europe to .

I want to assure our shareholders that our goals are realistic and economically feasible . Our progress on the development of our route networks will allow us to carry around 9 .9 million passengers in 2007, which will be a 13 .8% increase from the previous year . We plan is to reach 27 .4 billion passenger kilometers (up 12 .8% from 2006) . AEROFLOT ANNUAL REPORT 2006 Main Events in 2006 10 11

Main Events in 2006

January As a result of the transfer of Aeroflot’s -Paris flights to terminal 2C at Charles de Gaulle Airport, the quality of ser- June Aeroflot concluded a sales-purchase agreement with Vneshtorgbank and Vnesheconombank for sale of vice offered to passengers significantly improved . shares of OSJC Terminal, according to which Vneshtorgbank obtained 25%+1 of shares and Vnesheconom- Also this month, Aeroflot initiated a new transfer service for passengers flying from Moscow to one of the Austrian or Ger- bank obtained 20%-2 of shares . man ski resort via Munich . The airline can arrange for such passengers the transfer between the airport and the resorts in A credit agreement was concluded according to wich Vneshtorgbank and Vnesheconombank opened a credit comfortable Mercedes minivans . line to Terminal for a sum of USD 475 million for a period of 13 years . The credit line is to finance the con- Aeroflot also presented a new program for lovers . Together with Alfa-Bank and MasterCard, the airline offers struction of the Sheremetyevo-3 terminal . a charge card for credit card holders, particularly those with Gold and Platinum cards . The card can be used to make An Aeroflot subsidiary opened in St . Petersburg . purchases, which earns the card holder additional miles for the airline’s bonus program . July Regular passenger flights began running along the Moscow — Yuzhno-Sakhalinsk — Moscow route and the Mos- February In February, Aeroflot won the nomination for the Best Social Programs at the 5th All-Russian Competition of Russian Orga- cow––Moscow route . nization for High Social Effectiveness . A representative office of Aeroflot opened in Magadan . Aeroflot flights delivered the Russian Olympic team, members of the official delegation, guests, and tourists to the Winter Aeroflot and CSA began running a joint operation of flights between locations in Ireland, Great Olympics Games in Turin, . The airline’s planes also transported large-sized sports equipment and other difficult luggage Britain, the Czech Republic and Russia . to Italy . August The Ministry of Transport of the Russian Federation awarded Aeroflot team with an honorary degree “For the high March A registration kiosk with check-in was installed at Moscow’s new Savelovsky train station for passengers departing level of professionalism shown when evacuating citizens of the Russian Federation from a zone of armed conflict on domestic flight from Sheremetyevo-1 . in the Middle East ”. Aeroflot was included on the register of IOSA operators (IATA Operational Safety Audit) . The Human Resources Management department at Aeroflot won the second annual competition for the Best Rus- The Company concluded a code-sharing agreement with Air Baltic for the joint operation of the Moscow-Riga-Mos- sian HR Department — 2006 . cow route . Aeroflot opened representative offices in and Yuzhno-Sakhalinsk . September Regular flights begun running along the Moscow––Moscow route, making Hanover the seventh city in to which Aeroflot provides service . April On April 10, an extraordinary meeting of shareholders was held by an absentee ballot . Approval was given for An independent jury in Brussels acknowledged the joint project between Aeroflot and Alfa-Bank as being one of the purchase and sales contract of common shares of OJSC Terminal, which is realizing the construction of the the most successful among European partners of the MasterCard co-branding payment system for 2006 . . Sheremetyevo-3 air terminal complex, between Aeroflot and OJSC Sheremetyevo , Vnesh- torgbank, and Vnesheconombank . Aeroflot officially became one of ten members in the SkyTeam alliance, which was voted the Best Aviation Alliance October Aeroflot’s fleet grew with the addition of a new Airbus A321s and A320s . In line with tradition of naming planes of this in 2005 and 2006 by readers of Global Traveler Magazine . series after eminent Russian painters, the two new planes were named i . Repin and v . Vasnetsov . Valery Okulov, general director of OJSC Aeroflot, was elected chairman of the Russian side of the Russian-Emir- Aeroflot along with Natexis Banques Populares, Calyon and ABN Amro Bank (London Branch), which are all consid- ates Business Council . ered the leading European finance banks for the purchase of aircraft, signed an agreement for the financial leasing Aeroflot began operating regular flights on the Moscow-Krasnoyarsk-Moscow route . of seven Airbus A321s, with delivery slated for 2006-2007 . Based on a poll of 450 thousand passengers across the world, the Aeroflot Bonus Program received the presti- At the annual national competition “Brand of the Year/EFFIE 2006,” which recognizes the most successful brands on gious Freddie Award for the category of Best Website, beating out all competing airlines in Europe, , the Russian market, Aeroflot won the grand prize for the best New Image . and Africa . November The rating agency AK&M awarded Aeroflot with an A+ credit rating, thereby ranking the Company among the class borrow- May For the sixth year in a row, Aeroflot continued its tradition of helping World War II veterans meet their comrades ers with the highest level of credibility . in arms across the former USSR and other countries . Former soldiers, POWs and those who endured the Siege of Aeroflot was awarded the prize of Company of the Year in “Transport” nomination . Leningrad traveled free of charge on regular Aeroflot flights to any part of the Russian Federation and Europe . In As part of a financial leasing deal, the Company obtained an A321 aircraft . The new addition to the fleet was named i . Krams- 2006, more than 3,000 veterans received free air tickets from Aeroflot . koy . On May 16, an extraordinary general meeting of shareholders of the company was held and by absentee vote, Aeroflot and made a decision to join efforts in creating a major competitive air carrier in the Far East Federal Region, approved the acquisition of 30 new jet-engine regional Sukhoi Superjet aircraft . which will provide service to regional and long-haul destinations on a modern fleet of aircraft . A code-sharing agreement was concluded with the Pulkovo airlines, by which Aeroflot received the right to use its Aeroflot began operating regular flights along the Moscow — Mineralye Vody — Jeddah route . code on Pulkovo flights between St . Petersburg and cities in Germany . A credit agreement was signed with the leading French banks Natexis Transport Finance and Calyon for financing of the advanced payments for seven Airbus A320 aircraft, obtained by Aeroflot . The credit is in the sum of USD December Aeroflot began operating self service check-in desks at the Sheremetyevo airport . 50 million . Aeroflot launched a simulator facility center for emergency/rescue training of flight crews known as “Water-Land,” Aeroflot established regular flights along the Moscow-Carlsbad-Moscow route . which is based in the Company’s Training Center for Aviation Personnel (TCAP) . As part of a financial leasing deal, the Company obtained another A321 aircraft, which was given the name i . shishkin . June Valery Okulov, general director of Aeroflot, was chosen to be a member of the IATA Board of Directors for A presentation was given about the new work uniforms for Aeroflot ground crews and the new requirements for the fourth time . the uniforms of flight and cabin crews . Aeroflot received the National Award for “The Best Taxpayer of the Year,” founded by the Interregional Orga- Aeroflot’s subsidiary , Aeroflot-Cargo, successfully completed its first flight under its own flag . nization of Employers with support of the Accounts Chamber of the Russian Federation and the Committee Aeroflot increased its ownership interest in the subsidiary airline Aeroflot-Don from 51% to 100% following a deal on Budget and Taxes of the State Duma of the Russian Federation . in which the Aeroflot obtained 49% of the subsidiary’s shares . The system of online-payment was installed on the Aeroflot website — www .aeroflot .aero . Passengers now can reserve and pay for air tickets online with a credit card . The Annual general meeting of shareholders was held June 17 . Moscow 15

Implementing Company Strategy: Results of the year 2006 1 and Priority Tasks for 2007

The strategy of Aeroflot focuses on creating a company of the highest interna- tional standard that is a formidable competitor on the global aviation market . One of Aeroflot’s main priorities is to realize the transit potential of Russia, as is defined in the Transport Development Strategy of Russia until 2020 . According to the ap- proved company strategy, the fundamental areas for development in 2006 were as follows: • strengthening position on the domestic airline market; • constructing of the Sheremetyevo-3 airport terminal; • introducing the IOSA-IATA international standards for operational safety (IATA Op- erational Safety Audit); • expanding the fleet of modern aircraft; • entering the SkyTeam alliance; • increasing the competitive edge of the airline, which includes offering passengers a higher level of service; • developing information technology, including e-tickets .

Strengthening Aeroflot’s Position on the Domestic Air Traffic Market In 2006, Aeroflot Group carried 3 .6 million passengers on the domestic market, to- taling 7 .2 billion passenger kilometers . The number of carried passengers on the do- mestic market grew by 13%, while the market itself grew by 8 1%. . Passenger turnover increased by 15 .8% and 7 .5%, respectfully . New regular flights began to run to Kras- noyarsk, Yuzhno-Sakhalinsk, and Magadan . In addition, the number of flights to , , , Perm, Volgograd, St . Petersburg, , and other cities was increased .

The prospects for developing Aeroflot’s domestic passenger traffic depend on the for- mation of a network between several major regional transportation centers, which will serve as national and regional hubs that work together to strengthen the strategic posi- tion of Russia’s airline industry . The meeting with the regional partners and directors of the subsidiaries will be held in time approved by the In line with the program to consolidate the airline industry and create major trans- head office of the Company . portation hubs in the Far East, Aeroflot plans to create it own base in . Please confirm your arrival . The consolidation of the airlines in the Far East involves the merger of the major Far East airlines, namely Dalavia, Sakhalin Airlines, and Vladivostokavia . Regards, M . i . Alekseev . AEROFLOT ANNUAL REPORT 2006 Implementing Company Strategy: Results of the year 2006 and Priority Tasks for 2007 16 17

The establishment of one consolidated airline company in the Far East will give Russia row-bodied planes, the A320s offer the most modern design and the most spacious and an entrance to the dynamically growing airline markets in Southeastern Asia, thereby comfortable interior . They are also cost efficient and do not require highly cost mainte- expanding the transport potential of Russia . The project also includes the establish- nance . As such, the use of the narrow-bodied A320s will allow for considerable funds ment of an Aeroflot subsidiary in Magadan . to be saved . Lease contracts were also signed for three MD-11 cargo aircraft, which will be used by Aeroflot-Cargo . Another noteworthy event in 2006 was the opening of an subsidiary airline in St . Pe- tersburg . The influence of the “northern capital” as a political and cultural center and the increasing demand for international and national flight out of St . Petersburg has encouraged Aeroflot to further develop the city’s air base . Joining and Working with the SkyTeam Alliance

A major event in 2006 was Aeroflot’s joining the SkyTeam alliance . The company became one of ten members of the alliance, with AeroMexico, Air , , Continental Construction of the Sheremetyevo-3 Airport Terminal Airlines, CSA — Czech Airlines, Delta Airlines, KLM — Royal Dutch Airlines, , and acting as the other partners . A key factor for strengthening Aeroflot’s competitive position is the creation of a new ter- minal complex at the Sheremetyevo International Airport . The new addition is designed Since the Company’s joining the alliance, the total passenger traffic of the SkyTeam airlines to increase the capacity of the airport, provide easier transfers for transit passengers, as grew to 373 million passengers, flying on 15 thousand routes to 728 locations across 149 well as offer a higher level of airport service quality . countries . Aeroflot’s participation in the alliance has created the preconditions for im- provement of the airline’s operational efficiency and passenger service quality . The terminal will process both domestic flights and a large part of the regular inter- national flights for Aeroflot, its subsidiaries, and partners . The construction of the new Aeroflot also concluded a bilateral agreement with all nine airlines who are the mem- terminal is being realized according the schedule of the hired contractor . bers of the SkyTeam alliance . Aeroflot’s frequent passengers now have the possibility to use bonus miles from any of the nine SkyTeam members as part of the Aeroflot Bonus program . Implementing the IOSA International Standards for Operational Safety Increasing the Competitiveness of Our Product In 2006, Aeroflot became the first Russian airline company to undergo a safety audit by IATA, after which the company was accredited as an IOSA operator (IATA Operational In 2006, Aeroflot continued to run campaigns in order to increase the competitive edge Safety Audit) . The audit sets the safety standards for the global aviation industry . of the company’s product . The following tasks were determined to be most important: • implementing the Management Quality System in line with ISO 9000 standards; Aeroflot’s adherence to international safety requirements was acknowledged when the • installation additional reservation desks and self-registration desks in terminals at company was admitted into the international aviation alliance, SkyTeam, in April of Sheremetyevo; 2006 .

As such, Aeroflot has become a leader for operational safety standards in Russia and has affirmed the solvency of the country’s civil aviation industry by using both foreign- made and Russian-made aircraft . renewal the Fleet with Modern Aircraft

In 2006, Aeroflot obtained seven new Airbus aircraft, against signed contracts, com- prising three A320s and four A321s . In addition, a number of contracts were signed in order to reconstruct and unify the inventory of aircraft . For example, letters of intent were signed with the company AerCap for the delivery of six A320s between 2008–2009 on the basis of operational leasing, while the company GECAS will deliver 13 A319/A320s by 2007–2009, also on the basis of operational leasing . Among nar- AEROFLOT ANNUAL REPORT 2006 Implementing Company Strategy: Results of the year 2006 and Priority Tasks for 2007 18 19

• completely new the on-board menu; • prepared for the introduction of more modern technical features, which will allow • installing a system to monitor and control the quality of services, known as the “mys- for passengers to be more quickly processed at (such as self-registration terious passenger” technique; desks); • creating a central telephone number for information and reservations — +7 (495) • installed the SAP R/3 system in order to automate book keeping . 223-5555, and for calls from the Russian regions — 8-800-333-5555 .

The following classes of services are now included in Aeroflot flights: • President — a qualitatively new with higher levels of comfort for pas- Priority Tasks for 2007 sengers traveling on trans-Atlantic flights or to Asia; • Premier — an improved business class for passengers traveling to European centers The airline’s main tasks in 2007 are as follows: and a number of other locations within medium range . • an intensive growth of passenger traffic, the development of a passenger network of flights within Russia, and the establishment of regional bases; • consolidation of the Russian airline industry; Aeroflot Bonus program • the modernization and further unification of the aircraft fleet; • the completion of construction and opening of the Sheremetyevo-3 airport terminal Aeroflot is developing its rewards program for frequent flyers called Aeroflot Bonus, complex; which is integrated with the similar programs of the other SkyTeam members, as well as • improvement in the quality of products to a level that corresponds to the leading is associated with various banks, hotels, and tourist businesses . In 2006, information Western European services; services for the Aeroflot Bonus program were consolidated into a centralized informa- • the cost optimization and the promotion of effective business functions; tion and booking center, including the automatic delivery of personal account informa- • the immediate installation of a system for web-reservations and internet sales with tion and news to project participants via e-mail . In 2006, the number of Aeroflot Bonus e-tickets; participants increased by 198 404, now totaling 677 165 members . • an improved system of effective corporate management, as indicated by key perfor- mance indicator .

IT development

In line with the IATA emergency system, a development program has been approved for the purpose of reducing the airline’s expenses for the distribution of passenger ser- vices, simplifying business transactions, as well as introducing paper-free technology .

According to the given program, the following five basic projects have been deter- mined: • E-ticketing — electronic passenger tickets; • Bar code (BCBP) — luggage labels and passes with bar codes; • CUSS — self-service registration desks; • RFID — radio-equipped luggage labels; • E-freight — electronic cargo registration . .

The installation of these features is required by IATA for the transfer in 2008 to e-tick- eting, as well as by the SkyTeam .

In 2006, Aeroflot successfully met the following requirements for IATA and SkyTeam: • successfully tested the e-ticketing feature and prepared an internal document base for the use of e-tickets; • integrated the information systems of the SkyTeam partners with that of Aeroflot; • achieved significant progress on the fully-functioning internet sales service with the purpose of improving the service quality and increasing direct sales; • expanded the functional capabilities of the company’s Sabre program; St . Petersburg 23

2 Overview of the Air Traffic Market

Global Air Traffic Market

The financial results of 2006 indicate that the global airline industry has finally recov- ered from the crisis that followed in the wake of the terrorist attacks on September 11, 2001 . According to IATA estimates, airline companies lost more than USD 40 billion during this period .

In 2006, the total loss of airline companies registered in the IATA, which account for 94% of regular passenger traffic, dropped to USD 500 million (while this figure was 6 billion in 2005) . The significant improvement of the situation is due in part to the im- proved operating efficiency of airlines and the growth in passenger demand . In 2006, 2 .2 billion passengers and 39 .2 million tons of cargo were carried throughout the world . The growth of total passenger traffic last year totaled 5 .9%, while cargo traffic jumped by 4 .6% . The seat occupancy rate grew by 0 .9%, reaching 76% .

However, the vitality of the airline industry continues to be jeopardized by the high price of jet fuel . In 2003, the total cost of jet fuel for airlines equaled USD 44 billion, while in 2006, this number jumped to around USD 115 billion . Jet fuel for direct op- erational costs in 2006 represented 26% of the total expenditures, as compared to 14% in 2003 .

One of the hardest hit regions in 2006 was North America, with a USD 3 7. billion loss, while the particularly lucrative regions were Europe and the Asian Pacific region, with profits of USD 1 .8 billion and USD 1 7. billion, respectively .

In 2007, the net profit of the companies is expected to achieve USD 2 .5 billion follow- ing the stabilization of the price of jet fuel . However, this will be possible only through the preservation of stability and the absence of escalading local conflict in the regions of the Middle East, especially Iraq and the areas around .

Russian Airline Industry Dear Mom and Dad! Everything here is fine, and my studies are In 2006, Russian airlines carried 38 .01 million people (an 8 .3% growth from 2005) . going well . All the boys really The air passenger turnover grew by 9 .5%, topping off at 93 .91 billion passenger kilo- liked the honey you brought from meters . Cargo traffic amounted to 640 .3 thousand tons of cargo and mail (represent- Altai . See you soon! ing a 1 .8% growth) . AEROFLOT ANNUAL REPORT 2006 Overview of the Air Traffic Market 24 25

In terms of the figures for air passenger traffic in 2005, the number of carried pas- increase in prices for passengers, the growth of demand for domestic service stopped, sengers increased by 3 .9%, and the executed passenger turnover increased by 3 .4%, with figures even dropping for the first eight months of the year . The problem with which is more than two times lower than the same figures for 2006 . fuel price was further aggravated by the fact that airlines have no choice but to use old planes with low fuel efficiency for domestic routes . The cost of jet fuel represents In 2006, for the first time in six years, the overall rate of growth for the regular air traf- 40–50% of the total operational expenses for the majority of Russian airlines, while the fic of Russian airlines (a growth of 10 .2% in executed passenger turnover) surpassed worldwide average is 25% (for Aeroflot, this figure is 35 7%). . As a result, the growth of growth rates for non-regular flights (a 7 .3% growth) . Non-regular flights mainly pro- tariffs has taken a heavy toll on the price sensitive domestic air traffic market . vided service to popular international tourist destinations in countries, for which the passenger traffic growth equaled only 5 .9% . From 2003 to 2005, the average annual Nevertheless, the domestic passenger traffic market still possesses major potential for growth rate of non-regular flights to tourist destinations equaled 18 .9% . growth, the realization of which is one of the priority tasks for Russia’s civil aviation industry . In order to ensure their competitive edge and impede the expansion of interna- In 2006, international airlines increased the number of their passenger traffic in and tional carriers on the market, Russian airlines must implement a series of complicated out of Russia by 13 .8%, while Russian airlines increased their passenger traffic on measures, such as modernization their fleets with more fuel-efficient planes and install- international routes by 8 7%. . ing the latest technologies for passengers and cargo service, both of which can help to cut expenses . There is also an acute need for the complete modernization of ground The strongest international player on the Russian airline market is the German carrier infrastructure at Russian airports, as well as more efficient use of Russian airspace . . In 2006, the company announced that they would increase their passenger traffic to Russia and CIS countries up to 1 .3 million people (a 20% growth) . Lufthansa In 2006, Russia’s leading airlines intensively worked to upgrade their fleets with mod- has a wide-reaching network of routes in the Russian regions, providing service to ern aircraft, as well as implemented programs to decrease their operational costs . As Nizhniy Novgorod, Perm, Rostov-on-Don, , St . Petersburg, and Yekaterin- a result, they were able to halt the growth in ticket prices, and in 2006, the domestic burg . In 2006, Lufthansa carried more than 5 .8 thousand flights to Russia, including market demonstrated a stable growth . 2 .6 thousand flights to Moscow .

Likewise, increased their available seats to Moscow by over 30%, while Air and raised this figure by 78% . In addition, Austrian Air Russian Airlines: Main Events in 2006 increased service to Moscow by 20%, as did the low cost airlines Germania and Ger- manwings, who raised this figure by 43% . Furthermore, in 2006, Airlines, Aeroflot’s management considers the most significant events of 2006 to be Aeroflot’s one of the world’s biggest airlines, started offering service to Russia . joining in the international alliance SkyTeam and the completion of the consolidation the state-owned airline Rossia and Pulkovo . In 2006, the growth rates for the number of passengers carried by Russian airlines on either international or domestic routes were comparable (a 8 7%. and 8 .0% growth, The amalgamation of these two airlines resulted in a major new airline, Rossia, with the respectively) . In 2005, due to the sharp growth in jet fuel costs and the subsequent third largest total of passenger traffic in the industry, possessing two base airports — Vnukovo in Moscow and Pulkovo in St . Petersburg . The united Rossia airline has been in operation under its own flag since October 29, 2006, with headquarters located in St . Petersburg . The Moscow affiliate of the airline is entrusted with the coordination Growth of passenger of air transport for the President and senior state officials of the Russian Federation . Growthtraffic in of 2006 passenger Aeroflot favours the union, regarding it as a step forward in the process of consolidat- traffic in 2006 ing Russia’s aviation industry, which is necessary for strengthening the competitive edge of Russian airlines . 9 .4% 8 .3% In light of the growing price of jet fuel, leading Russian airlines have speed up the pace at which they are replacing outdated and fuel-inefficient aircraft . Due to the lack of a more competitive offer from domestic aircraft manufactures, Russian airlines supple- mented 53 foreign-made long-haul passenger planes into their fleets in 2006 . At the

es end of year, the total number of foreign-made long-haul passenger planes possessed by lin

ir the 17 airlines of Russia reached 134 units, of which 39 belong to Aeroflot . a an ssi Out of the ten leading Russian airlines in terms of passenger traffic, the largest growth ot ru fl in total passenger volume was demonstrated by Sibir (16 .4%), (28 1%),. ero otal

t A (35 .9%) and Atlant-Soyuz (in 1 .6 times) . In 2006, Sibir airlines intensively developed AEROFLOT ANNUAL REPORT 2006 Overview of the Air Traffic Market 26 27

their international service (27% growth), including non-regular international flights among domestic carriers, ahead of 2005’s leader Sibir Airlines (16 .3%) and the AiRUn- (38 .9% growth), while UTair increased domestic service and Transaero developed ion alliance (16 .6%) . The difference between the numbers of carried passengers on the its international service (a 43 .2% growth), resulting in practically equivalent rates domestic market is even more appreciable: Aeroflot Group’s share equals 17 .2%, while of growth for regular and non-regular flights . About 95% of traffic on the airline Atlant- this figure is 14 .2% for Sibir Airlines and 10 .5% for AiRUnion alliance . Soyuz was non-regular, thereby increasing the non-regular market segment . Total pas- senger traffic on the newly incorporated Rossiya airline lowered by 5 .2% . In 2006, Aeroflot alone carried more than 145 .3 thousand tons of cargo and mail, or 151 .8 thousand tons when including the Aeroflot’s subsidiary airlines (representing The growth rate of Aeroflot Group’s passenger traffic in 2006 outpaced the industry 23 7%. of the industry figures) . When comparing the total volume of cargo traffic of all average . Due to the reduction of the number of international non-regular flights below Russian airlines in 2006, Aeroflot takes second place behind Volga-Dnepr, which in- industry average, companies included in the AiRUnion alliance experienced a 4 .8% creased its cargo traffic one-and-a-half times in 2006, topping off at 155 1. thousand growth in the total volume of passenger traffic . tons . Sibir Airlines takes third place with 28 .9 thousand tons (4 .5%) .

Aeroflot Group’s Position on the Civil Aviation Market

In 2006, Aeroflot Group carried 8 7. million passengers, which was a 8 .5% increase from 2005, outstripping the industry average growth rate of 8 .3% . Aeroflot Group’s passenger traffic in 2006 represented 23% of the total number of passengers carried on the Russian market, as well as 25 .9% of the market’s passenger turnover .

As leader on the Russian market for regular international flights (in 2006, Aeroflot car- ried 56 .5% of total passenger turnover in Russia, while the second in line, Sibir Airlines, carried 9 .3%), Aeroflot has significantly strengthened its presence on the strategically important domestic market, increasing its passenger turnover on it by 17 .8%, which is considerably higher than the average growth in the industry (7 .5%) . As a result, Aero- flot’s share of the total domestic passenger traffic rose from 12% to 13 1%. .

In terms of Aeroflot Group’s subsidiary companies, Aeroflot-Don and Aeroflot-Nord carried 16 7%. of total domestic passenger turnover in 2006, rising to first place

Domestic passenger traffic Domestic passenger traffic International passenger traffic International passenger traffic by Russian airlines by Russian airlines by Russian airlines by Russian airlines (share of of passengers passengers traffic*), traffic*), % (%) (share of passengerpassenger turnover*),turnover*), %% (share of passenger passenger traffic*), traffic*), % % (share of passenger passenger turnover*), turnover*), % % 17 .2 30 .0 33 .7

14 .2 16 .7 16 .6 16 .3

10 .5 10 .5

7 .6 11 .3 12 .3 10 .4 7 .3 10 .8 p up up up up

8 .5 ou 5 .4 z s ro ro ro 4 .6 6 .8 6 .6 ro 7 .5 6 .6 gr 6 .5 ne oyu

2 .9 a t g ero ero rli a ot g ot g s ot g o vi ia ia ia ia fl fl fl sa fl vi sa r r ai nt r r r r ss ss ss ai ss la ai al la an an bi bi mA bi ero ero ero A si Airunion ut ru ur A si tr ru Airunion At Aero Airunion sibi ut ru da A tr si ru Airunion vi

* Including scheduled and non-scheduled traffic * Including scheduled and non-scheduled traffic NOVGOROD 31

3 Business Results in 2006

Passenger Traffic

The total and structure of Aeroflot Group passenger traffic in 2006 are as follows . The Group aircraft carried 8 7. million passengers, with 24 .3 billion passenger kilometers . Prac- tically all international and domestic traffic was on regular flights .

Group’s operating data

2006 2005 Change International traffic Passengers carried thousands 5,176 4,906 + 5 .5% Revenue passenger kilometers millions 17,152 16,319 +5 .1% Available seat kilometers millions 24,821 23,917 +3 .8% Passenger load factor % 69 .1 68 .2 +0 .9 Weight load factor % 56 .6 56 .9 –0 .3 Share of regular traffic* % 97 .6 97 .8 –0 .2 Domestic traffic Passengers carried thousands 3,579 3,166 +13 .0% Revenue passenger kilometers millions 7,173 6,195 +15 .8% Available seat kilometers millions 10,073 8,989 +12 .1% Passenger load factor % 71 .2 68 .9 +2 .3 Weight load factor % 62 .1 62 .2 –0 .1 Share of regular traffic * % 99 .6 99 .4 +0 .2 Total Passengers carried thousands 8,755 8,072 +8 .5% Revenue passenger kilometers millions 24,325 22,514 +8 .0% Available seat kilometers millions 34,894 32,906 +6 .0% Passenger load factor % 69 .7 68 .4 +1 .3 Weight load factor % 57 .9 58 .1 –0 .2 Share of regular traffic * % 98 .4 98 .3 +0 .1

* In total number of passenger carried .

Hello sister! Do you remember how we looked at those pictures in our school books and imagined life in ancient Novgorod, when people journeyed far to attend the assemblies? Now, it’s easy to make any trip! When are you coming? Do you know that Aeroflot will soon offer a special tariff? See you! AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 32 33

Passenger load factor, % Aeroflot is currently the undisputable leader of the Russian aviation industry . The Passenger load factor, % strengthening of its leading position is a result of the airline’s goal-oriented policy, which allows to confidently compete on the market . The 2006 budget was calculated taking into account the entry of new serious competitors on the Russian airline market, 72 72 .5 71 .2 as well as the monopolies of natural services and the steadily rising price of fuel . 69 68 .9 69 .1 67 .7 67 .9 68 .2 For the realization of a production target and achievement of positive financial results, 67 .1 Aeroflot has undertaken a number of measures . international routes

To begin with, the frequency of flights to popular and profitable destinations in Russia domestic routes has been increased . This includes flights to Irkutsk, Novosibirsk, Yekaterinburg, Perm, Volgograd, St . Petersburg, Sochi, etc . In addition, regular flights have begun to Kras- noyarsk, Yuzhno-Sakhalinsk, and Magadan . 2002 2003 2004 2005 2006 Secondly, in order to strengthen its already-stable position among international air- lines, Aeroflot increased the frequency of its flights to Paris, London, Milan, Rome, Bel- grade, Warsaw, Prague, , , , Ulaan Baator, , Simferopol, and . Flights also now run to Hannover .

Lastly, new A320 planes were obtained and put into use as part of the plan to restruc- Flight Hours ture the aircraft fleet . Total operational flight hours in 2006 surpassed last year’s level by 6 .3% (+18,745 hours) . To ensure the dynamic growth of the company’s route network, as well as restructuring of its air- craft fleet, Aeroflot leased extra planes from the airlines , , and VASO Airways, with the flight hours on the acquired planes totaling 9,657 hours .

Traffic Structure

Daily average flight hours per active Срrollед aircraft*несуточный налет часов на один списочный самолет International and domestic air traffic, per thousand passengersScheduled and charter traffic, per thousand passengers thousand passengers thousand passengers 8 .2 7 .6 7 .0 7 .3 6 .4 3,579 140 3,166 8,614

4,906 5,176 137 7,935 domestic flights Charter flights

international flights scheduled flights 2002 2003 2004 2005 2006

2005 2006 2005 2006 * JSC Aeroflot only . AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 34 35

Cargo Traffic Group’s operating data

On October 26, 2005, the Board of Directors of Aeroflot decided to reconstruct the 2006 2005 Change cargo business and create an affiliate airline — Aeroflot-Cargo . International traffic In 2006, Aeroflot Cargo was registered in the Common Legal Register of the Russian Cargo and mail, tons carried thousands 120 .1 122 .4 –1 .8% Federation and received a License of Operation, No . 500, dated October 18, 2006 . Cargo ton kilometers millions 746 .9 762 .5 –2 .0% Aeroflot-Cargo is fully a subsidiary company of Aeroflot . Revenue ton kilometers millions 2,291 2,231 +2 .7% Cargo traffic was separated from the basic functions of Aeroflot in order to improve the Available ton kilometers millions 4,046 3,916 +3 .3% efficiency and profitability of cargo transport, lower expenses, increase entrepreneur- Weight load factor % 56 .6 56 .9 –0 .3 ial initiatives, and subsequently increase Aeroflot’s capitalization . Domestic traffic Aeroflot-Cargo was formed based on Aeroflot’s former cargo traffic department and Cargo and mail tons carried thousands 31 .7 29 .1 +8 .9% has inherited a great wealth of resources from its parent company, including the com- Cargo ton kilometers millions 129 .8 114 .6 +13 .3% pany logo, the DC-10-40 aircraft fleet, a qualified work force, and a tradition of high Revenue ton kilometers millions 775 .3 672 .1 +15 .4% standards for quality and safety . Available ton kilometers millions 1,248 1,081 +15 .4% In addition to cargo transport on separate international flights to Germany, , Weight load factor % 62 .1 62 .2 –0 .1 , South , and China, Aeroflot-Cargo also takes the opportunity to transport Total cargo in compartments on all Aeroflot passenger flights . Cargo and mail tons carried thousands 151 .8 151 .5 –0 .2% On December 19, 2006, the DC-10-40F plane, after having been transferred to Aero- Cargo ton kilometers millions 876 .7 877 .1 –0 .05% flot-Cargo from Aeroflot, successfully made its first flight under the flag of the subsid- iary company . The transfer of DC-10-40F planes will conclude in 2007, and by summer Revenue ton kilometers millions 3,066 2,903 +5 .6% 2007, the company plans to begin using the new MD-11F models . Available ton kilometers millions 5,294 4,996 +5 .9% Weight load factor % 57 .9 58 .1 –0 .2% The development strategy for freight cargo is as follows: • strengthen Aeroflot-Cargo’s presence in the freight market from Europe to Tokyo, , Share of regular traffic * % 97 .4 95 .4 +2 .0 Beijing, Shanghai, Hong Kong, as well as include the following destinations in the route network: Novosibirsk, Khabarovsk, New York, Paris, Milan, Istanbul, , Mumbai, * In total cargo and mail carried . and Amsterdam; • open and develop regional hubs in Khabarovsk and Novosibirsk; • haul 330 thousand tons of cargo in 2010 . Traffic Structure

The favorable geographical location of Russia, the developed network of regular flights International and domestic traffic, thousand tons Scheduled and charteredcharter traffic, traffic, thousand tons and office representations, commercial rights, a qualified personnel, and the rich expe- thousand tons thousand tons riences and traditions that Aeroflot has collected over the years all work together give the company its strategic advantage . 29 .1 31 .7 7 .0 4 .0 144 .5 151 .8 Aeroflot Groups total freight and mail cargo in 2006 equaled 151 .8 thousand tons, 122 .4 120 .1 which was little change in comparison to the previous year’s level . The total volume of mail cargo grew by 9 .8%, reached 5 .6 thousand tons, while the freight cargo totaled 146 .2 thousand tons .

In 2006, the cargo turnover of the company amounted to 876 .7 million ton kilome- domestic flights Charter flights ters, which corresponds with the 2005 figure . The share of domestic transporta- tion has also increased, comprising 21% of the total amount of freight and mail international flights scheduled flights transport . 2005 2006 2005 2006 AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 36 37

Weight load factor, % Weight load factor, % The package of commercial rights given by Aeroflot to its subsidiary allows Aeroflot- Cargo to create an optimistic long-term plan for the expansion of its route network and 63 .7 the augmentation of its aircraft fleet . 62 62 .2 62 .1 60 .9

international routes Safety and Security 57 .1 56 .9 56 .6 55 .5 55 .4 domestic routes Flight Safety

Aeroflot’s daily operations and long-term strategic goals largely revolve around the objective to successfully meet the raising flight safety requirements . The Company 2002 2003 2004 2005 2006 strives to create a modern, international airline, maintaining the best traditions of Russian civil aviation while improving the engineering and technical quality of aircraft and adhering to Russian and European official regulations for the flight suitability of aircraft . In 2006, 66 .2 thousand tons of cargo were carried on Aeroflot cargo planes (compared to 67 .8 thousand tons in 2005, 2 .4% higher) . The weight load factor increased from The flight safety in 2006 reached 99 .965%, which was higher than the average figures 69 .4% in 2005 to 72 .6% in 2006 . for both 2005 (99 .96%) and 2004 (99 .95%) . This improvement testifies to the fact that the airline continues to improve its flight safety system, update its fleet with new Flight hours totaled 14,262 .8 hours 4 .5% down from 15,140 .8 hours in 2005) . The total modern aircraft, and advance the training of its in-flight personnel . volume of carried cargo per kilometer in 2006 was 509,961 .0 thousand kilometer-tons (compared to 517,498 .2 thousand kilometer-tons in 2005, 1 .5% higher) . The priority areas for the improvement of flight safety are: • raising the quality of technical maintenance and reliability of the aviation equip- In 2006, Aeroflot Group’s passenger aircraft carried 86 .5 thousand tons of cargo and ment; mail 3 .3% higher from 83 7. thousand tons in 2005 . • eliminating errors by personnel that influence the level of flight safety (minimalizing the human factor) .

In 2006, more attention was given to the process of updating the fleet and tracking Route Network the condition of the aircraft . As such, in accordance with the ICAO regulations for all Tu-154s, shoulder harnesses were installed in the seats for flight attendants, flight engi- Aeroflot traditionally exploited DC-10-40s for its international transit cargo along the neers and navigators, and an early Ground Proximity Warning System (GPWS) . Smoke Europe-Asia-Europe routes . The delivery of cargo on this type of aircraft is mainly done detectors were installed in the toilet compartments of all IL-96s, as were the GPWS sys- on a “point-to-point” basis, i .e . without transfer on a passenger network . tems . A radio receptor system with a frequency of 406 Hz was installed on all types of planes . Active commercial work has allowed for the modernization of route networks for the purpose of cutting costs and increasing the volume of air traffic and revenues . In 2006, the Company’s Aviation Technical Center (ATC) continued work on improving flight safety and maintenance, drawing upon the experiences of Russian and interna- To ensure sales and the proper loading of cargo onto planes, Aeroflot continues to tional airlines that have successfully followed the regulations of the Russian work with major shipping companies in the world, namely Schenker, Nippon Express, Federation and the recommendations of auditors . Pan Alpina and Danzas . Through the collaborative work between the ATC and Aeroflot Training Center for Avia- Aeroflot-Cargo also continues to work with the major European freight hub Hahn . tion Personnel (TCAP), the Company trained 50 flights pilots for Tu-154s and 24 pilots For the first half of 2006, the freight traffic through the Frankfurt Hahn Airport grew by 20%, for Tu-134s . In 2006, Aeroflot’s system of continuous professional training (computer with Aeroflot as one of the top airlines in terms of cargo planes processed at the airport . training programs) for flight crew of aircraft A319/320/321, Boeing 767, DC-10, IL-96- 300, and Тu-154 was approved by the Federal Agensy for Transport Supervision . The Along with its usual commercial activity, Aeroflot-Cargo continues its socially impor- transition to this system will allow for the significant reduction of training time without tant programs by providing socially essential cargo service to the Far East and North- affecting the quality . ern Russia . AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 38 39

Thus, with the participation of the Civil Aviation Academy, the Company developed To increase the operating efficiency of flight crew when interacting with passengers a training plan for civil aviation pilots, which is to be used in higher training institutes in who violate in-flight rules, Aeroflot instituted a training program for personnel under Russia, as well as a strategy for attracting young specialist-pilots to Aeroflot . the title “Unruly Passengers ”. The program, which began in September 2006, is a new direction for Russian civil aviation and should enable flight crew to better restrain the In December 2006, Aeroflot launched a simulator facility center for emergency/rescue actions of disruptive passengers . training of flight crews known as “Water-Land,” which is based in the Company’s TCAp . The training center of such a scale is so far the first of its kind in the CIS, and its open- In 2006, work also continued on improving the other existing goals of the security pro- ing was a major event not only for Aeroflot, but also for Russia’s civil aviation industry gram, including baggage checks for every passenger, the presence of security staff on as a whole . high-risk flights, and a complex system of security checks at Aeroflot facilities .

The modern facility complies with all the requirements set forth by international and intergovernmental aviation authorities for flight and cabin crew training, as well as the training standards for Aeroflot and other airlines in Russia, CIS, and abroad . Route network

The complex has a mobile simulator, supplied with exits, ladders, and equipment in the In 2006, Aeroflot served flights along 93 routes with an average flight frequency of 7 9. passenger cabin, which is used to train both cabin crew and pilots in the emergency land- flights a week per route . Including the joint operations with partner airlines, Aeroflot of- ing and escape procedure for IL-96 airplanes . The training modules simulate emergency fered passengers 128 routes with an average flight frequency of 8 .6 flights per week . conditions most similar to those that may occur in reality . The Center is also equipped with fully operational training modules of emergency escapes for IL-96-300, Tu-154, On the domestic market, Aeroflot carried its own flights to 26 destinations with an A320 and Boeing 767 airplanes . A pool and rescue floating facilities corresponding to average flight frequency of 11 flights per weeks . As such, flights to ten destinations all types of domestic and foreign made airplanes are available to ensure that employees operated a minimum of once per day, while flights to six various destinations operated receive full-scale training and excellent skills for emergency landing on water surfaces . two or more times per day . The simulator is also equipped with all necessary means to create a real fire in order to train crew in fire-fighting . There are 51 international routes that are considered mid-haul, with an average flight frequency of 8 flights per week . In 2006, the Company worked to have its operational license prolongation . Two inspec- tions of the company’s subdivisions were conducted by an inspection commission, and Another 16 international routes are considered long-haul, with an average flight fre- Aeroflot was subsequently permitted to extend the validity period of its operational li- quency of 4 .4 flights per week . cense No . 001 until November 9, 2008 . The number of connecting flights on Aeroflot’s own flights increased by 30 .6% in 2006, while the factor of transfer flights rose by 20 .2%, totaling 8 .3 transfers per flight .

Aviation Safety Structure of carrying on regular routes in 2006–2005

Aeroflot continually works to ensure that all aspects of are upheld and Passengers Revenue passenger Available seat Passenger that the lives and welfare of passengers and crew are protected from any acts of illegal carried kilometers kilometers load factor interference or attempts to inflict physical or economic damage . Region (thousands) (millions) (millions) (%) 2006 2005 2006 2005 2006 2005 2006 2005 In 2006, Aeroflot’s flight security service conducted audits to ensure that all aviation security requirements are being met for the ground maintenance of Aeroflot flights America 306 .9 318 .5 2,671 .5 2,749 .6 3,685 .6 3,770 .6 72 .5 72 .9 at airports in Barnaul, Mineralye Vody (Russia), Ulaan Baator (Mongolia) and Nico- Middle East sia (), as well as audited the local Aeroflot representative offices in these cit- & Africa 575 .3 588 .2 1,458 .0 1,465 .8 2,121 .8 2,203 .2 68 .7 66 .5 ies . The Company also monitored representative offices in Baku () and Kiev Asia (include . () to assess whether regulations for security, personnel, and accounting are Japan) 895 .6 852 .6 5,751 .0 5,402 .8 7,842 .4 7,628 .0 73 .3 70 .8 being properly observed . Europe 2,596 .8 2,429 .6 5,698 .9 5,321 .7 8,943 .2 8,305 .6 63 .7 64 .1 Russia 3,562 .4 3,145 .8 7,151 .1 6,164 .7 10,027 .3 8,935 .5 71 .3 68 .8 Beginning five years ago, Aeroflot established a patrol dog department of the aviation security service in order to improve security in light of the heightened threat of ter- CIS 732 .3 664 .5 1,331 .8 1,181 .0 1,894 .2 1,736 .8 70 .3 68 .0 rorist attacks . Security dogs are trained to find explosives on the planes, passenger Total 8,669.3 7,999.2 24,062.3 22,285.6 34,514.5 32,579.7 69.7 68.4 terminals, public zones, and service zones for luggage and cargo . AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 40 41

Domestic Traffic necting flights and raise the volume of transfer traffic, especially from the Russian regions . In fact, the percentage of transfer passengers from the Russian regions In 2006, Aeroflot continued to increase the number of domestic destinations and the grew by 5 .9% in 2006, thereby comprising 30 .6% of the total volume of Aeroflot flight frequency of domestic routes . transfer traffic .

In order to build up potentially lucrative routes that currently have low yields, Aeroflot Compared to the previous year, the total number of transfer passengers grew by 5 .4%, furthered its collaboration with the airlines Aeroflot-Don, Aeroflot-Nord, Dalavia, State topping 1 .9 million people, which represents 26 11%. of the total volume of Aeroflot’s Transportation Company Rossia, and Tatarstan . The cooperation between the airlines passenger traffic . enables the coordination of route networks and schedules, code-sharing and the use of partners’ fleet in the Aeroflot route network . Cooperation with Partner Airlines

International Traffic In 2006, Aeroflot held codesharing agreements with 29 other airlines . As a result, com- pared to 2005, the number of passenger carried on the jointly-operated flights grew by The development of Aeroflot’s international route network is designed to most effec- 15 .8%, equaling 790 5. thousand people . tively use Russia’s geographical position, realize the transit potential of the country, as well as increase the Company’s traffic on highly remunerative markets . As of the beginning of 2007, Aeroflot has codesharing agreements with 34 interna- tional and Russian airlines, which are the following: The development of the route network mainly entails increasing the number of destina- • 20 agreements in which Aeroflot acts as both partner-operator and marketing part- tions and the frequency of flights, both on the Company’s fleet and the fleet of partner ner with: CSA, LOT, , KLM, SAS, Маlev, , Austrian, Bulgaria Air, airlines . It is also vital to increase the network of connecting flights to better serve the Cyprus Airways, Korean Air, Аlitalia, JAT, АeroMexico, Continental Airlines, NWA, flows of transit passengers coming in from the Russian regions and flying abroad, as Delta, Air Baltic, Dalavia, and Rossia; well as those passengers flying from Asia to Europe or America and back . • 5 agreements in which Aeroflot acts as only the partner-operator with: Tarom, Cu- bana, Iran Air, , and Air ; In 2006, Aeroflot began operating regular flights in Carlsbad (Czech Republic), Hanover • 9 agreements in which Aeroflot acts as only the marketing partner with: Slovak (Germany), and Jidda (Saudi Arabia), as well as reestablished regular flights to Hanoi . The Airlines, Аdria, Estonian Air, Lithuanian Airlines, Aeroflot-Don, Aeroflot-Nord, Air frequency of flights to a number of various other destinations was also increased . Malta, Belavia, and Tatarstan .

The expansion of the network of international routes and the increase of flight The Russian regions provided the base of Aeroflot’s passenger traffic for codeshar- frequency has enabled the Company to substantially increase the number of con- ing flights .

Share of transfer passenger turnover Share of passenger traffic on codesharing Breakdown of passenger turnover by region in 2006 flights out of Aeroflot’s total traffic on codesharing flights by region, 2006 Share of transfer passenger turnover Sharevolume of passenger in 2006 traffic Regional Distribution of Aeroflot Passenger by region in 2006 on codeshare flights out of Aeroflot’s Turnover on Сodesharing Flights total traffic volume in 2006 4.8% 2.1% 0.9% 0.9% 9.8% 13.3% 12.9% 30.6%

60.7% 19.2% 24.2% 90.2% 30.5%

Russia CIS Jointly operated flights Russia MidEast and Africa Europe America Aeroflot only flights Europe Asia Asia MidEast and Africa CIS and Baltics AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 42 43

Fuel efficiency of the aircraft fleet, gram/kkm Development Plan for Route Network in 2007 Топливная эффективность парка воздушных судов, грамм/ккм 40 In order to increase the efficiency of route network in 2007, the Company plans to fur- 38 38 38 37 37 ther expand the geographical coverage of flights, increase flight frequencies on highly- remunerative markets that offer considerable passenger traffic, and develop domestic 29 air traffic .

The main focus will be on the development of medium-haul routes network . The signifi- cant expansion of the long-haul traffic segment will not be planned until new long-haul aircraft are delivered to the fleet at the end of 2008 .

Aircraft Fleet 2001 2002 2003 2004 2005 2006 2010

Fleet Development Strategy From the period between 2001 until 2006, while restructuring the aircraft fleet with modern models, the Company managed to save nearly USD 200 million due to the high- The development program for Aeroflot’s aircraft fleet aims to accommodate the com- er jet fuel efficiency of the updated models . pany’s increasing airline traffic, which is expected to grow to 12 million passengers a year by 2010 . Aeroflot introduced an integrated program aimed at increasing the aircraft utilization and fuel savings . As part of this program, structural changes are being made to amelio- The development objectives for the aircraft fleet through 2010 include replacing the rate the Tu-154 model, such as redesigning the wing and replacing the wooden floors fleet of Tu-134s and Tu-154s, withdrawing the IL-86s, expanding the capacity of the of the cabin with more modern and light composite materials . medium-haul Airbus family of A320s, acquiring the long-haul Airbus A330-200s and IL-96s, and the Sukhoi SuperJet (SSJ) regional planes .

Unification of the aircraft Structure of the Aircraft Fleet in 2006

2001 2005 2010 2016 As of December 31, 2006, the aircraft fleet totaled 93 airplanes, including 39 foreign- made and 54 Russian-made (of which 53 are owned and 40 are leased) .

Short-haul Tu -134 В737 Tu -134 SSJ SSJ In the course of the year, the number of aircraft in the fleet grew by 8 units .

Withdrawals were as follows: • one Tu-134 with business-lounge interior was returned due to the expiration of its Medium-haul Tu -154 IL-86 Tu -154 IL-86 А320 А320 А320 lease from Stroitransgaz; • one DC-10 was transferred to Aeroflot-Cargo;

Additions were as follows: IL-96 В767 IL-96 IL-96 IL-96 • one IL-86 was returned after having been leased to ; • two B767s, three A320s, and four A321s . Long-haul IL-62 A310 A330 B767 A350 B777 В767

9 models, of 6 models, 5 models, of 4 models, of which 4 are of which which 3 are which 2 are foreign-made 2 are foreign-made foreign-made foreign-made Total Total Total Total ( > 150 (101aircraft) (81 aircraft) (117 aircraft) aircraft) AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 44 45

Total In In Average between 2008 and 2010. Aeroflot has chosen this particular aircraft model as the interim (changes in Owned by operating financial Average daily flight solution to updating its fleet until the new A350s are delivered between 2014 and 2017. Model 2006) Aeroflot lease lease age hours Long-haul Boeing B767 11 (+2) – 11 – 9 14.1 Product and Brand Development IL-62М 2(+1) 1 1 – 28 0 In line with its strategy to develop the Aeroflot product, the Company continued through- IL-96-300 6 6 – – 13 10.2 out 2006 to devise new ways to increase the competitive edge of their product offering. Medium-haul The main objectives were to meet the requirements of passenger service regulations at an 85% level (the performance level required for airlines in the SkyTeam alliance, Airbus A319 8 – 4 4 3 10.2 who are all leaders in the field of customer satisfaction) and to increase the quality of Airbus A320 10 (+3) – 9 1 2 11.5 Aeroflot’s product offering, matching it to the quality of European industry leaders. Airbus A321 7 (+4) – – 7 1 11.5 According to results of the Company’s research, the most influential factor for the over- Tu-154М 27(+2) 25 2 – 19 7.3 all value of an airline’s product is the in-flight service. IL-86* 9 (+1) 9 – – 19 1.9 Short-haul (regional) As a result, Aeroflot has concentrated its efforts on strengthening the competitive edge of its product offering for passengers in the higher classes, as well as stabilizing the Tu-134 13 (–1) 12 1 – 27 4.9 product for passengers of all classes. Cargo planes: DC10-40F 3 (–1) – 3 – 28 9.9 Aeroflot flights now offer completely new classes of service for passengers in the pre- mium segment, which are as follows: TOTAL: 96 53 31 12 8.2/10.9** • President class — a qualitatively new business class with higher comfort for passengers traveling on long-haul flights (over 6 hours), trans-Atlantic flights (to USA and ) * Starting November 15, 2006, Aeroflot ceased operating IL-86 aircraft. and Asia flights (to Tokyo, Bangkok, Shanghai, Hong Kong), available on Boeing 767 ** The average daily utilization for one aircraft on balance is 8.2 hrs; the average for one aircraft in service is 10.9 hrs. aircraft; • Premier class — an improved business class on Airbus A319, A320, and A321 aircraft, designed for passengers traveling to priority European destinations and several other Plans for 2007 destinations within mid-distance (flights from 2 to 5 hours).

After the withdrawal of IL-86s in November of 2006, the company plans to gradually These classes are positioned as “the modern way to fly, with an unmatched level of replace its Tu-134 fleet. All 13 Tu-134 aircraft are scheduled to be taken out of opera- comfort, care, and individual service from the heart of the new Russia.” Completely new tion by January 1, 2008. menus have also been made available for these two higher classes.

By 2010, Aeroflot plans to replace the outdated Tu-154 planes with modern models. In The Company’s successful in-flight entertainment program for business class passen- place of the Tu-134s and Tu-154s will come the new generation of aircraft — the short- gers, Video on Demand, was expanded in 2006 with the purchase of more DigEplayers haul SSJ-100s, developed by the Russian company CJSC Sukhoi Civil Aircraft, and the (750 units), which is a portable device allowing real-time choice between feature films middle-haul A320s family aircraft. Delivery of the SSJ-100s should begin at the end of (Hollywood blockbusters and Russian films), short films, cartoons, audio programs, 2008. and a channel for kids. The program is updated once every two months with new inter- national and domestic films. In 2007, three Airbus A319s, three A320s, and three A321s are scheduled to join the fleet. By the end of 2007, the total number of aircraft from this aircraft family will In 2006, the Kommersant class was tested out on flights to Geneva, Nice, and Helsinki. amount to 34 units. The Kommersant class is an improved economic class on the new fleet of Airbus A319, A320, and A321 aircraft, available for passengers flying to priority destinations in Eu- In the coming year, there will be no changes made to the inventory of IL-96-300s, Boe- rope. The Company positions this class as “travel fit for business professionals.” ing 767s, and Tu-154s, which will continue to fly long-haul and medium-haul routes. In the last year, the in-flight entertainment program was reintroduced for economic- In the long term, Aeroflot plans to gradually replace the Boeing 767s with the long-haul class passengers on flights longer than 6 hours (B767s). The programs are updated A330s, which will be a new model in Aeroflot’s fleet. The leasing of these aircraft will occur monthly. AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 46 47

Likewise, in order to further develop the Aeroflot product, the Company determined Aeroflot Bonus Program for Frequent Flyers several important objectives for ground service, including creating a single call hotline for information and bookings (+7(495) 223-5555) and another number for free calls In the process of joining the global SkyTeam alliance, Aeroflot concluded contracts from the Russian regions (8-800-333-5555) . The Company’s existing representative with all SkyTeam member airlines regarding their partnership in the Aeroflot Bonus call centers in Germany and Ukraine have a total sales volume of over USD 10 million program . This in turn raised the program to an international level, making its loyalty per year . Now, with just one call, clients can receive all necessary information, reserve incentives more attractive and competitive on both the domestic and global markets . tickets, find questions about the Aeroflot Bonus program, leave their opinion about the service quality, and receive consultation about Internet sales and many other topics . In the past year, Aeroflot Bonus significantly broadened its network by forming new partnerships with the Oreanda Hotel (Riga), Grand Palace (Svetlogorsk), Palace Berlin In the last year, significant steps have been taking to strengthen passenger service at (Berlin), Zarya, Irbis, and Golden Apple Hotel (Moscow), the AviaCollection Internet airports, including the following: store, the company Service VIP (Moscow), and the company EF Education (Moscow) . • developing the technology for registering Aeroflot passengers with electronic tickets; In cooperation with its partners, Aeroflot Bonus has created a variety of special offers • installing self-registration desks for passengers at Sheremetyevo terminals; and schemes for program participants, the most successful of which have been the • introducing express registration at Sheremetyevo for connecting flights to the fol- Visa-Aeroflot credit card, offered in cooperation with Sberbank, and the special offers lowing destinations: London, Zürich, Geneva, Los Angeles, New York, Delhi, Nice, from the company R-Club and the RIXOS hotel chain . Belgrade, Damascus, Hamburg, Helsinki, Milan, Berlin, Venice, Mumbai, Bucharest, Budapest, Hanoi, Havana, Sofia, Larnaca, Ulaan-Baator, Beirut, Düsseldorf, Riga, Aeroflot’s joint project with Alfa Bank for the issuing of the Alfa-Bank Aeroflot Mas- Rome, Tehran, Zagreb, Istanbul, Cairo, Amsterdam, Brussels, Paris, Kiev, Munich, terCard Card was initiated in December 2005 and had been widely praised among its Prague, Kaliningrad, , Volgograd, Yekaterinburg, and Baku; participants . The card is offered in Standard, Gold and Platinum formats with a varied • installing automated service stations at exits for passengers arriving in terminal 2 points reward structure on all MasterCard expenditures . Within a year of the project’s at Sheremetyevo; launch, around 50 thousand Alfa-Bank Aeroflot MasterCard Cards were issued . The • equipping storage areas in terminal 2 at Sheremetyevo airport with a system for project was also highly appraised by the MasterCard payment system and was named local announcements; one of the winners among the European partners of MasterCard payment system for • setting up tape dividers to regulate lines while passengers check-in and board . co-branding for 2006 . The project also won the nomination for Best Program Launch 2005/2006 . Since March 2006, passengers flying out of Sheremetyevo have had access to a new ser- vice; now, passengers can register for flights at the Savelovsky train station in Moscow In addition, the Aeroflot Bonus program has earned several well-known, international and reach the airport on comfortable electric trains . The use of public transportation accolades, including the following highly regarded Freddie Awards: instead of private cars reduces pollution levels and facilitate traffic on the highways . • 1st place for the Best Website; • 2nd place for the Program of the Year; Aeroflot successfully implemented the SkyTeam standards for passenger and baggage • 2nd place for the Best Member Communications; control, which included redefining the parameters for the acceptable amount of lug- • 3rd place for the Best Customer Service gage and adjusting the definition of carry-on luggage and unregistered luggage to cor- respond with international standards .

Furthermore, special services are available to passengers with disabilities and unaccom- Number of participants of Aeroflot Bonus program panied children . Improvement has also been done on passenger handling during emer- Количество участников программы “Аэрофлот Бонус” gency situations, as well as procedures for passenger service during the cancellation/de- lay of fights or changing components of the aircraft (Denied Boarding Compensation) . In 677,165 order to provide a maximum level of comfort and service, passengers who have Aeroflot Bonus gold cards and passengers who are participants of the SkyTeam loyalty program, Elite Plus, are welcome to use the business class waiting rooms at the airport . 478,761

In addition, to improvement the control over service quality, a monitoring system was 325,958 launched with the use of “undercover passengers,” and the ISO 9000 Quality Manage- 242,633 ment System was also introduced . 175,626 110,080 Development will continue in 2007 on the program to introduce new classes of service 65,698 14,394 (Premier, President, Kommersant), as well as on the plan to achieve an average rating that is not below the airline’s rating in 2006 (80-82%) . 1999 2000 2001 2002 2003 2004 2005 2006 AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 48 49

In 2006, Aeroflot Bonus also worked to expand its list of services available on program’s • Idea: Aeroflot is a member of international SkyTeam alliance . Slogan: “Travel with us website and to introduce various automated services for participants . To accomplish over the whole world”; this, the Company plans to update the website with new information about the SkyTeam, • Idea: Aeroflot cares about passengers’ comfort and safety and is replacing its fleet launch a new service for emailing information about personal accounts to participants, with new aircraft . Slogan: “We strive to be accommodating and reliable ”. as well as work with the Sabre Company in order to fulfill SkyTeam requirements . All aspects of the creative concept focus on the passengers as the main concern of To improve the quality of the Aeroflot Bonus loyalty program, the Company transferred the company . This direction of campaigning is the logical progression from previous all information services to a single customer service center for information and book- image campaigns . ings . The regional service centers are also becoming increasingly popular among pro- gram participants, with centers currently located in New York, Frankfurt, , Another step in developing the Aeroflot Brand is the AviaCollection project, which allows Novosibirsk, and Khabarovsk . members of the Aeroflot bonus program to exchange miles for AviaCollection products through the online store . The catalogue of international top brands, exclusive Aeroflot prod- In the upcoming year, the Aeroflot Bonus will strive to improve its service quality with- ucts and fascinating Russian designer items can be found at www .aviacollection com. . out slowing the program’s growth . New regional service centers are scheduled to be opened, while the functions of the existing centers will be expanded . The program also Awards for Brand Quality plans to improve information services, develop technical support program, introduce new Internet services, attract new partners, as well as create more special offers . In 2006, the Aeroflot brand received the Grand Prize in the nomination of New Im- age at the Brand of the Year/EFFIE Competition, becoming the first Russian airline to receive such a high rating . In addition, Aeroflot was named “Superbrand-2006” in the categories of business-to-business (B2B) and business-to-consumer (B2C) . This award, Our favorite Aeroflot Brand which is granted by independent experts from the Superbrands International, recog- nizes the results of the airline’s notable performance and aggressive branding cam- In the past year, the Company worked to improve in-flight service levels, refine other paign in consumer and inter-corporate business in Russia . available services, and update the company’s style in order to reach out to both target groups and the macro media in general . Positive responses from passengers and Aeroflot’s work was also commended during the competition for Company of the Year, favorable comments in the mass media confirm that Aeroflot’s efforts have been well- which has an excellent reputation in Russian business circles . The airline won the noted and approved by the public . award for transportation services and received the title of “Best Airline of 2006 ”.

From June 1 to July 31, 2006, the Company conducted a joint product advertisement Furthermore, the organizers of the international tourism exhibit, “Relaxation 2006,” campaign for the Visa-Aeroflot Card, issued by Sberbank . The purpose of the advertise- presented Aeroflot with an award in recognition of its “Reliable and stable work ”. ment campaign is: to attract new participants to the Aeroflot Bonus program and en- courage them to use their cards to collect bonus miles; to strengthen Aeroflot’s image The Company also received an award as Official Carrier of the 2006 Kremlin Cup, as an airline that offers quality service and satisfies the needs of the modern traveler, an annual tennis tournament held in Moscow . making personal, business, and tourists trips around Russia and abroad .

In November 2006, the Company began a new image campaign featuring the slogan “Making your world crystal clear!” Previous campaigns had been devoted to building the company’s image as a national airline with international standards: Aeroflot — the people’s company, open and friendly, who loves its passengers and cares about them, staying true to the company’s slogan — “Sincerely Yours!”

The purpose of the current image campaign is to assure that Aeroflot is regarded as a re- liable, stable, and constantly improving airline . The campaign is also designed to provide reasons why Aeroflot is a good choice of airline . The Company recently launched a new marketing concept — “Globes” — that is being promoted through television commercials, such as “International destinations,” “All Russia,” and “Trust and Comfort with Aeroflot ”.

The creative concept for the Aeroflot brand encompasses the following ideas and slogans: • Idea: Aeroflot is constantly expanding the geographical coverage of its flights across the country . Slogan: “Travel throughout Russia with pleasure and comfort”; AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 50 51

Passenger Ticket Sales The opening of new representative offices and branches should allow the company to develop its regional network and secure a steady flow of transit traffic through On the territory of the Russian Federation, passenger ticket sales are carried out by: Moscow . The Company’s joining in the SkyTeam alliance has allowed Aeroflot’s sales • the Company’s representative offices in the regions; offices across Russia to rise to a qualitatively new level of service . • agencies in Moscow and the region; • the Company’s own sales offices in Moscow . Aeroflot also participates in regional tourism exhibitions in order to better promote its services on the local markets in Yekaterinburg, Novosibirsk, Khabarovsk, St . Peters- The largest share of proceeds in Russia comes from the Moscow agencies, which are burg, Volgograd, Astrakhan, Samara, and . As part of the exhibitions, rep- able to cater to all consumer groups, while the largest share of regional proceeds comes resentatives and employees from the Aeroflot sales departments gave presentations from the regions of Siberia and the Far East . to regional agencies in order to endorse Aeroflot’s new product and new level of passenger services . Sales breakdown of regular flights in 2006* The increased revenues in tickets sales can be attributed to the following: Growth of Growth • increased number of corporate clients; Earnings, earnings, of revenues, • the establishment of the new Sabre Sonic reservation system and its integration Sales location USD mln USD mln % with the finance management system AirMax, which has allowed for more effective Moscow agencies (including sales through control over seat occupancy, thereby increasing this factor to 70 1%. in 2006 (from the Transport Clearing Chamber) 896 .44 + 199 .23 + 28 6. 69 .0% in 2005) . The new technology has also enabled the Company to exceed its forecasted revenue from passenger traffic by UDS 111 .8 million (+7 1%). . Earnings Regional representative offices and supervised regional agencies 278 .27 + 73 86. + 36 1. per seat/kilometer were 4 .8% higher than planned . • improvements to the automized management system to properly loading of planes, The Company’s own sales offices in Moscow 176 .61 + 43 47. + 32 6. catering to the growing market demand in the economic classes and maximizing the Total: 1,351.32 +316.56 +30.6 capacity of the business and segments; • development and diversification of sales and information support at the information and reservation center by: *JSC Aeroflot only . – putting into operation a telephone number for taking calls from Aeroflot passen- gers in Germany; In order to accelerate the development of Russian regions in 2006, Aeroflot opened – transferring calls for the Aeroflot Bonus program to 10 specially-designated op- representative offices in Krasnoyarsk, Yuzhno-Sakhalinsk, Magadan, as well as a erators at the information and reservation center; branch in St . Petersburg . In addition, Aeroflot’s Board of Directors approved the deci- – putting into operation free telephone numbers in 13 regions of the world; sion to open other branch in Magadan . – organizing a special group of operators who provide round-the-clock consultation for question concerning online payment and reservation services . The following initiatives allowed the information and reservation center to increase Scheduled passenger revenue Scheduled cargo revenue Sales breakdown in Russia* Sales breakdown of regional representative breakdown by regions, 2006 breakdown by region, 2006 Passenger revenue breakdown by sales offices in RussiaPassengeroffices* revenue breakdown by regions of Russian Federation 2.2% 1.6% 7.4% 0.2% 6.5% 8.4% 6% 11% 18.5% 21.4% 29% 66.3% 20.6% 42.2% 38.4% 15% 13.1% 29% 24.2%

16% 23% Europe from/to Moscow Asia from/to Moscow Domestic flights Europe from/to Moscow Moscow agencies Siberia Urals Asia from/to Moscow Domestic flights Regional agencies Far East Krasnodar North America from/to Moscow Other international flights Company’s own offices North West Volga region Other international flights North America from/to Moscow Other international flights from/to Moscow Other international flights from/to Moscow *JSC Aeroflot only . AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 52 53

their total earnings to USD 42 .64 million . Lanka . According to the year’s figures, earnings from tickets sales though this chan- nel grew by 15 .6% . • selling discount tickets through promotional campaigns, such as “Spring 2006,” “Second World War Battlefields,” and “Fall 2006,” which helped to attract an ad- The Company also reconsidered its terms of cooperation with 263 official agents . ditional 34,51 thousand passengers; As compared to 2005, the total earnings from official agents grew by 9 .0% . At the • the development of sales through the Internet, which has allowed for a tenfold in- same time, the agents’ commission fees were cut down, so that the base level of crease in the number of tickets reserved on the website throughout the financial commission fees lowered from 7 .4% in 2005 to 7 .0% in 2006 . year, with the price of the web segment lowered by 2 .5 times, while the share of online payments for increased to 50% of ticket sales . For the accounting period, Internet sales were introduced in 2006, thereby creating and effective and mo- around 40 thousand tickets totaling USD 4 .5 million were sold through the website, bile sales instrument that is available 24 hours, 7 days a week . Online ticket pay- including USD 3 million just from November-December . The website is available in ment (using a credit card on the website) provided 40% of the earnings from online six European and two Asian languages; additional services include hotel and car sales . rental reservations across the whole world . The implementation of an Internet book- ings system has enabled both a growth in passenger ticket sales and a decrease in Aeroflot’s joining the global SkyTeam alliance and the increased standards of ser- operational costs . vice quality has attracted a new sector of passengers . As such, the growth of earn- ings from passenger tickets sales on the flights of SkyTeam partners was 108% up Ticket sales abroad were carried out in the following ways: from 2005 . • directly in the representative offices of the airline; • through the BSP/ARC system of neutral agents; • by official agents and firms having direct agreement with Aeroflot; • thought the Internet . IT Development

In 2006, the total revenue from ticket sales abroad increased by 12 .7%, as com- Effective business in such a high-technology industry as the airline business would pared to 2005 . be inconceivable without modern IT solutions . Accordingly, in 2006, Aeroflot worked together with the consulting company Accenture to develop an IT Develop- The Company’s own ticket sales on international markets are conducted by the Com- ment Strategy for the Company in 2006–2008 . pany’s 73 representative offices . In order to increase its presence on the international market, Aeroflot opened a new representative office in Hannover (Germany) in 2006 . The most important objective for developing this area is preparing the Company for the introduction of online ticketing technology . In 2006, the technical and regula- In 2006, Aeroflot continues its work to activate ticket sales through the Billing and tory preparations were completed for the issuance and complete functional use of Settlement Plan/Airline Reporting Corporation System (BSP/ARC), which allows for e-tickets . In January 2007, legislative acts permitting the use of e-tickets in Russia coordinated bookkeeping between agents and airlines . Aeroflot joined the BSP in came into force, and in March 2007, Aeroflot began to issue e-tickets, beginning Ukraine and is currently working on joining the BSP in , , and Sri- sales abroad through interline partners .

A major landmark in the company’s technological development was the introduc- tion of the Sabre automated booking system . Thanks to the program, the yields of SalesPassenger breakdown revenue on breakdowninternational Aeroflot ticket sales offices appreciably increased in 2005 (by more than 30%) . marketgenerarated by sales offices Moreover, on account of the automatic management system, the Company managed to receive an additional profit of USD 20 million . 18% One of the conditions for Aeroflot’s entrance in SkyTeam was the integration of its IT-system with the systems of other SkyTeam members . As such, throughout 2006, the Company installed the required functions, including a function to allow 29% 53% SkyTeam members to see each other’s bookings in the Sabre reservation system, as well as a function to convert the bonus points of various SkyTeam partners’ frequent flyers .

BSP/ARC In 2006, significant work was made on establishing a fully functional service for Official agents online ticket sales . The Company initiated its online reservation and payment ser- Representative offices AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 54 55

vice for countries in Europe, North America, and , with the website arations being made to increase the system’s functions by introducing new SAP R/3 available in Russian, English, Spanish, Japanese, German, French, and Italian . modules . Likewise, the first stage of the project to create an integrated corporate sys- tem application, built with IBM Websphere, has also been completed . As a result of the website, around 40 thousand tickets for a total of USD 16 .8 million were sold in the financial year, with the following results obtained: • the number of reservations through the Company’s website increase tenfold through- out the year; Quality Management • there was a steady growth rate (5% per week) of the number of paid online reservations; • by the end of the year, the number of tickets purchased online represented 50% of all One of Aeroflot’s main priority in 2006 was to continue the Company’s compliance tickets sold through the Internet (in June 2006, it was a mere 22%) . with IOSA standards (IATA Operational Safety Audit — an international operational safety audit), as well as introduce a Quality Management System (QMS) throughout the Considering the achieved level of sales and the growing number of paid online reserva- company’s subdivisions . tions, the Company is confident that this type of sales will continue to grow in 2007 . After undergoing a certification audit and eliminating any detections of discrepancy Aeroflot continues to actively introduce modern technologies that can help reduce the in March 2006, Aeroflot became the first Russian airline to be included on the IOSA check-in time for passengers at the airport . Since 2006, six passenger self-registration register . Adherence to the required international standards for operational safety is the desks have been operating in terminals 1 and 2 at Sheremetyevo airport, allowing passen- most important criteria for guaranteeing the quality and security of Aeroflot’s services . gers to independently register, chose their seats, and print their own tickets . However, at this early stage, the desks may only be used by passengers who are not checking luggage Aeroflot had to successfully pass the IOSA audit in order to join the SkyTeam alliance and and by passengers traveling to countries where it is not required to register on the APIS attract new partners for the code-sharing agreements . (Advance Passenger Information System — a system with additional information about passengers to be used by customs and services in the country of arrival) . The benefits of implementing the IOSA standards are as follows: • the airline’s reputation as a safe and reliable carrier on the international market is The company also began to install automatic registration systems for Aeroflot flights in enhanced; airports of the Russian Federation . In 2006, the automatic registration system was in- • Aeroflot’s adherence to IOSA regulations is taken into account during the complex troduced in airports in the following 10 cities: , Barnaul, Vladivostok, Volgograd, process of appraising risks and calculating insurance premiums for the next policy Yekaterinburg, Irkutsk, Kaliningrad, Kemerovo, Omsk, and . In 2007, this list period, which thereby results in lowered insurance premiums for the Company; will grow to include airports in St . Petersburg, Astrakhan, Perm, Krasnoyarsk, Krasno- • the number of audits conducted by partner companies is reduced, thereby lower- dar, Tyumen, Mineralye Vody, and Ufa . ing the amount paid for auditing services, as well as curbing the level of distraction faced by personnel during audits . As a result, for just external audits alone in 2006, The SAP R/3 accounting software system has also been put into operation, with prep- the Company saved around 100 thousand euro .

Growth performance of online bookings and ticket sales in 2006, per one ticket per one ticket

air ticket 12,502 booking 8,081 7,116 10,541 4,695 3,133 7,107 3,346 2,350 2,514 5,425 1,961 1,994 1,909 468 3,735 2,313 1,699 2,224 156 987 1,128 1,057 1,362

January February March April May June July August septemberOctober november december

in september, the “days of happy tickets” promotional deal was offered . in november, there was a sale for tickets “only through the internet” . AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 56 57

In 2006, Aeroflot continued its work on installation of a quality management system in the subdivisions of the Company’s marketing segment . In June 2006, these divisions underwent QMS audits and received certificates of compliance with ISO 9001–2000 standards, which were issued by TUV CERT certification agency .

During the same period, all subdivisions of Aeroflot’s production segment successfully underwent an observation audit, which confirmed the validity of the certificates and the production segment’s compliance to ISO-9001-2000 standards . Overall, these cer- tificates help bolster the competitive advantage of Aeroflot during tenders for services rendered by outside companies . • easy flights transfers; • the project “Global Meetings,” designed to attract participants of major internation- Since training personnel in the ways of quality service needs systematic improve- al events; ment, an educational program was developed under the title “Quality Management • SkyTeam’s global corporate contracts; System and ISO-9000 Standards .” The program is held at Aeroflot’s personnel train- • shared accommodations in airports, which allows airlines to significantly lower op- ing base . erational expenses at the major airports in the world . The first agreement has al- ready been signed between the SkyTeam and (London), according The main priorities for 2007 are as follow: to which SkyTeam air traffic will be placed all together in terminal 4 in 2008–2009 . • ensuring that the production activities of Aeroflot comply with the requirements for the second edition of IOSA standards . An audit should be conducted to confirm The system of cooperation through code-sharing agreements is planned to be broad- the airline’s adherence to IOSA standards and make certain that Aeroflot main- ened in the near future, and in 2007, Aeroflot’s code should appear on the flights of the tains its place on the register of IOSA-approved operators, as these also are nec- following airlines: essary requirements for Aeroflot’s membership in the IATA and SkyTeam: • Alitalia: from Rome/Milan to destinations in Italy, Africa, North and South America; • preparing the airline’s subdivisions for an international quality certification audit • AirFrance: from Paris to destinations in France, Europe, Africa, and South America; to prove compliance to IS0 9001-2000 requirements and obtain a single certifi- • Delta, Continental, NorthWest, KLM: from New York and several European points to vari- cate for Aeroflot . ous destinations within the USA .

Participation in the Safety, Security & Quality Functional Executives SkyTeam Alliance (SSQ FE Council)

After fulfilling all the SkyTeam admission requirements and successfully passing the The cooperation and coordinated work between SkyTeam members is made possible Alliance’s commercial audit on April 14, 2006, Aeroflot became the tenth full-fledged only by members’ participation in the semi-annual meetings of the SkyTeam’s Safety, Se- member of SkyTeam . Throughout the year, all divisions of the airline worked to become curity & Quality Functional Executives (SSQ FE) Council, as well as monthly telephone better integrated and prepared to uphold the SkyTeam standards . conferences . In the period between general sessions, SSQ FE Council members actively exchange information through individual telephone conferences . The following agreements were concluded with the SkyTeam airlines: • bilateral agreements for joint operation (code-sharing); On September 2006 in Montreal, Aeroflot participated in a session of the SSQ FE Council • agreements for the mutual acceptance of tickets, including e-tickets (interline); for the first time . • bilateral agreements for the frequent flyer programs (FFP) . The SSQ FE Council’s main areas of focus and the functions of its subgroups are as follows: The Company now participates in the following joint initiatives of the SkyTeam: • Operational Safety Functional Expert Group (OSFE): • electronic services offered through self-registration desks and on the airlines’ websites; – appraising operational risks; • overall services quality development; – implementing a strategy of risk management; • creating a database to track passengers’ miles for the frequent flyer program; – monitoring the Safety Management System (SMS) for flight safety; • cancellation in the event of a delay, or over-booking of a flight, offering compensa- – observing the five priorities of flight safety; tion that can be used on any SkyTeam airline; • Aviation Security Functional Expert Group (ASFE): • the “Ambassador” program, a special training for personnel who work directly with – monitoring the Security Management System (SMS) for aviation security; passengers (front-line personnel), while maintaining SkyTeam standards; – standardizing aviation security regulations; • 2D barcodes on boarding passes; – conducting risk analysis; AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 58 59

– exchanging intelligence information; Iimplement its strategic development plan, which aims to attract more transit flow and – establishing responsive measures in the event of security threat or terrorist act; increase the service quality for passengers . • Emergency Response Functional Expert Group (ERFE): – organizing mutual aid in the event of an emergency; The future terminal complex will include: – organizing line stations for general use; • the terminal building, built to serve 9 million passenger per year, with the possibility – periodic trainings to prepare for emergency situations (LERAP); of increasing passenger flow to 12 million passengers per year; • Operational Review Functional Expert Group (ORFE): • a multi-level parking garage with 2,800 spaces, as well as an opening parking lot – maintaining an order and process of supervision in accordance with IOSA standards; for 560 automobiles; – ensuring that all SkyTeam members are currently registered under the IOSA and • internal networks and extranets; they successfully complete all IOSA audits and registration requirements; • road system; – monitoring the IOSA registration status of SkyTeam members and their partners; • ramp and taxiways, calculated to hold 32 parked aircraft . – cooperating with the supervising council of the IOSA (IOC) . Construction is scheduled to be completed at the end of 2007 . According to a resolution by the ICAO, beginning in 2008, all airlines are required to introduce a Safety Management System (SMS) for flight operation . As a result of this More than 50% of building and over 40% of the parking areas are ready, while the decision, SSQ FE Council commissioned a group of experts in the field of operational outfitting of the interior spaces of the terminal is beginning . The main architectural flight safety to study the materials about the SMS that have been published by the ICAO, feature of the complex is a 17-meter wide dome . IATA, FAA USA, and other authorities . The experts are also to prepare recommenda- tions for the SkyTeam’s members on how to implement the SMS system in a way that The project also includes the installation of an advanced baggage-processing sys- will satisfy future global requirements . The preparations of materials and recommen- tem, which is being installed by one of the world’s leading manufactures, who has dations should be completed by mid-2007 . experience installing such systems in 16 airports around the world .

In the future, terminal 2 and 3 at Sheremetyevo airport will be connected to the cen- ter of Moscow by a railway line . Sheremetyevo-3 Airport Terminal Complex The builder of the project is OJSC Terminal . In June 2006, Aeroflot concluded a A key factor in strengthening the competitive position of Aeroflot is the creation of a sales agreement for the shares of Terminal to Vneshtorgbank and the Vnesheconom- new transport-transfer zone at the Sheremetyevo airport . The new terminal will provide bank (see Appendix, List of Major Transaction and Deals with Interested Parties) . easy flight transfers and high standards of service . This project will help the Company In addition, in accordance with the existing agreement, Vneshtorgbank and the Vnesheconombank will open a credit line to Terminal for a sum of USD 475 million dollars for a period of 13 years . According to this agreement, Vneshtorgbank will provide USD 264 million and the Vnesheconombank will provide 211 USD million .

Business of Aeroflot Subsidiaries

As of the end of 2006, Aeroflot was a member of 29 commercial and non-commer- cial organizations .

Overall, the year 2006 is characterized by the growth of the net assets of the ma- jority of Aeroflot Group enterprises, particularly OJSC Terminal (builder of the Sheremetyevo-3 airport terminal complex) .

In 2006, Aeroflot approved the strategic goals for cooperation with its subsidiary compa- nies, the most important of which is the collective effort to develop air traffic in Russia . AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 60 61

The strategy for cooperation with subsidiary companies is aimed at the following: Hotel Operations • increasing the capitalization of the group; • decreasing certain expenditures; Novotel-Sheremetyevo-2, the hotel owned by CJSC Sherotel and managed by the • increasing return on investment . French firm Accor, kept its leadership of the Moscow hotel market in 2006 with 92 .02% occupancy rate .

Air Traffic The biggest share in profits from room rental at the hotel is from individuals (26%), followed by non-Aeroflot air crew (22%), Aeroflot air crew (14%), tour groups (16%), Subsidiaries providing air carrying services are Aeroflot-Don, Aeroflot-Nord, Aeroflot- corporate customers (11%), seminars (7%), tourist agencies (2%), and delayed flights Plus and Aeroflot-Cargo . The main volume of services is provided by Aeroflot-Don and and transit (1%) . Aeroflot-Nord . Revenue from hotel business in 2006 was USD 22 .0 million, which is 14% more than in Aeroflot-Nord carried 875,300 passengers in 2006, of which 65,500 on international 2005 . Operating profit of USD 7 .2 million in 2006 was 36% higher than in 2005 . flights and 809,800 on domestic flights . Principal company routes included: Arkhan- gelsk-Moscow; Moscow-St .petersburg; Moscow-Simferopol; Moscow-Samara; Mos- cow-Ekaterinburg; Moscow-Chelyabinsk, and others . In addition, regular flights have begun to Krasnodar, Magnitogorsk and Perm . New regular flights began to run to Mos- Principle Subsidiaries of Aeroflot Group and the Nature of Their Business cow-Naryan-Mar, Petrozavodsk-Solovki . The number of flights to Moscow-Murmansk was increased . Airlines OJSC Aeroflot-Don (passenger traffic)

The flight network, offered by Aeroflot-Don did not change significantly in 2006, CJSC Aeroflot-Nord (passenger traffic) and included the following main routes: Rostov-on-Don-Moscow; Moscow-Murman- CJSC Aeroflot-Cargo (cargo traffic) sk; Moscow-Sochi; Moscow-Dnepropetrovsk; Rostov-on-Don-Frankfurt; Rostov-on- Don-Tashkent, and others . The company carried 588,200 passengers in the course CJSC Aeroflot-Plus (business traffic) of the year, of which 170,200 on international flights and 418,000 on domestic Providers of air OJSC Terminal (Sheremetyevo-3) flights . and ground-based services rendered to passengers CJSC Aeromar (catering) Aeroflot-Plus offers VIP charter flights . LLC Airport Moscow (cargo handling)

Revenue from this segment in 2006 was USD 2 .944 billion, which is 17 .9% more than CJSC AeroMASH (aviation security) in 2005 . Operating costs increased by 14 1%. to USD 2 .579 million . As a result operat- CJSC TZK Sheremetyevo (fuel trading company) ing profit increased by 53 .3% to USD 364 .9 million . CJSC Aerofirst (duty free retail) CJSC Sherotel (hotel) In-flight Catering CJSC ZAO DATE (business-class facility)

The Aeroflot subsidiary, Aeromar, specializes in preparation and sale of in-flight meals for Transnautic Aero GMBH (cargo agent) airlines . LSG Sky Chefs, the global leader in airline catering, is an Aeromar stake holder . Financial, telecommunications, OJSC Moscow Insurance Company (insurance) Aeromar controls 90% of the market for in-flight meals at Sheremetyevo Airport . logistics, and personnel training providers for Aeroflot Non-state pension fund Social Partner (pensions) Aeromar made 9 .9 million in-flight meals during 2006, which is 6 .4% more than in Aviabusiness (flight crew training) 2005, and served 60,908 flights (11 7%. more than the year before) . LLC Avia-leasing (leasing company) Revenue in 2006 from in-flight catering was USD 58 .8 million, which is 42% more than s .i .t .A . (telecommunications provider) in 2005 . Operating costs increased by 6 .2% to USD 49 .9 million . Operating profit was USD 8 .9 million . CJSC TKP (clearing) LLC EMS Garantpost (express mail) AEROFLOT ANNUAL REPORT 2006 Business Results in 2006 62 63

Priority Projects with the Companies of Aeroflot Group in 2006 OJsC dalavia Merger of Airlines of the Far East Region on the Basis OJsC vladivostok Avia Aeroflot has increased its ownership to 100% OJsC Aeroflotdon of Aeroflot of stock capital OJsC sakhalin Airlines

Business operations running since 01.11.2006 CJsC AeroflotCargo Program underway to update aircraft fleet

increasing the authorized capital stock of JsC Aeroflot Decision made to obtain a license for the operation CJsC Aeroflotplus Mechanisms and development of VIP air traffic business of Consolidation exchange of state funds of the airlines of the Far east for newly issued shares of Aeroflot

OJsC terminal

CJsC Aeromar to increase the availability of air transport for the population

Agreements being prepared concerning the joint use CJsC AeroMAsh of space in the future Terminal 3 at Sheremetyevo airport to create a competitive transportation hub in the Far east and to attract international transit traffic CJsC sheremetyevo Airport

to ensure effective air transport communications CJsC ZAO dAte Project goals in the region, the employment of highlyqualified staff, and the protection of the social stability in the region

CJsC sherotel Construction underway on a new modern hotel building to increase the tax returns into the budget on all levels

A project to reorganize the pension funds is underway npF social partner in order to consolidate assets and strengthen clients’ to simplify the management of government assets protection under pensions and increase their value

The development strategy for the Aeroflot Group in the upcoming year mainly entails de- In 2006, Aeroflot’s Board of Directors approved a project to consolidate the various en- veloping the market of domestic passenger traffic and attracting a greater flow of trans- terprises of Russian civil aviation . The first stage of the project is to integrate the airlines fer passengers . of the Far Eastern Federal Region in order to make them into one big competitive airline . The project is scheduled to be completed by 2009 . Kamchatka 67

4 main RISKS AND RISK MANAGEMENT

Risk management

As the largest competitor on the Russian aviation market, Aeroflot is subject to all the risks inherent to the industry . The main risks that had a particularly significant impact in 2006 are as follows: • severe competition; • increase in prices of resources and services required by airlines; • seasonality of the business; • national and regional risks; • legal risks; • increased operational risk for transport .

Industry Risks

The competitive situation on the Russian aviation market is characterized by two features: reduction of presence of Russian airlines and increase in the amount of foreign airlines, whose activity on the Russian market has distinctly risen up . That’s why Aeroflot is focusing on the quality of its services, expansion and efficiency of route networks, cooperation with reliable partners and agents, as well as a rebrand- ing program .

There was a visible growth of prices of airline resources and services in 2006 . First of all it’s connected with the rise of prices of services from natural monopolies such as jet fuel providers, aircraft repair facilities, air navigation systems, and airports . Accordingly air ticket prices increased, which forced Aeroflot to raise the fuel, air- port and air navigation components of its prices .

The seasonal nature of the airline business comes from dependence on the amount of potential passengers throughout the year . Aeroflot adapts its route network to seasonal market trends in the best possible way and holds a flexible tariff policy .

National and regional risks, which appear mainly when dealing with international flights, include local armed conflicts, political instability, and natural disasters . Aero- flot considers the analysis of such factors to be of great importance . In the event of a safety threat, responsive measures are as follows: suspension of flights to some countries, changing routes, providing higher safety measures, and stricter sanitary and epidemic control . AEROFLOT ANNUAL REPORT 2006 RISKS AND RISK MANAGEMENT 68 69

Among the potential legal risks are severe changes in Russian and international avia- Preventative Measures in Operational Risk Control tion regulations, tax and currency legislation, and licensing requirements . At pres- ent several international conventions regulating air transport activities are being ICAO regulations and IATA standards require that airlines take a systemic approach amended, while Russian legislation is constantly changing . to providing flight safety and aviation security . Aeroflot has developed a risk manage- ment system with the following goals: Aeroflot plays an active role in improving the Russian Federation legislation . Thus • determine the Company’s risks in relation to flight safety; in 2006 following the initiative of the Company, several changes were made in the • assume corrective measures to maintain an acceptable level of flight safety; federal law entitled “On Currency Regulations and Control .” Representatives of the • continually monitor and regularly assess the level of flight safety; airline also participated in the development of the project to amend the Air Code of • take measures aimed at constant improving the overall level of flight safety . the Russian Federation, focusing on the clauses that concern the responsibility and insurance of air carriers . Special attention is paid to the influence of the human factor on flight safety . The basic factors for reduction of this risk include: The increased operational risks in the transport industry are mainly connected with • creation of a system for training different categories of specialists on how to reduce flight safety, aviation security, operational reliability of equipment, and the qualifica- the influence that the human factor has on the execution of official duties; tions of personnel . Aeroflot pays close attention to creating of a complex system to • development of a personnel motivation system and perfection of personnel training; monitor operational risks . • maintaining the professional aptitude and high level of efficiency of personnel .

The success of the Company’s work in creating a risk management system to guarantee flight safety and aviation security was confirmed by independent auditors, who ap- praised Aeroflot for the IOSA certification in 2006 .

Operational Risk Control Program for Aeroflot Insurance Programs Operational Risk on Air Transport Insurance, as one of the risk management instruments, allows to transfer a part of Aeroflot’s risks to external financing . The complex system of insurance coverage can be divided in to two components: aviation and non-aviation . Prevention Reducing Financial Consequences

Flight safety insurance standards risk management and requirements

Aviation security Aircraft hull risk management and liability insurance

human factor posing a claim risk management to a guilty party

Aircraft maintenance sharing risk risk management among partners

Aircraft ground handling risk management Crisis management AEROFLOT ANNUAL REPORT 2006 RISKS AND RISK MANAGEMENT 70 71

Aviation Insurance

As leading international air carriers, Aeroflot considers a reliable passengers and air- line insurance protection one of the Company’s main obligations . Non-Aviation Insurance Aviation insurance includes Aircraft Hull Insurance and Third Party, Passenger, Cargo, Baggage and Mail Legal Liability Insurance . These types of insurance are not only a Aeroflot insures its real estate, hull and legal liability risks for auto transport, and has will of the airline to minimize its risks, but also are requirements of civil aviation au- other types of insurance to secure the company’s business activities . thorities, Aeroflot partners and counterparties, both in Russia and abroad . More than that in terms of insurance for personnel, the company offers social guaran- Aeroflot’s positioning on the international aviation insurance market and the creation tees, as well as protection and operating safety for its employees . In the total insurance of a positive Company image allow to gain steady lowering of Aircraft Hull and Legal packet, there is voluntary medical insurance for Aeroflot employees and their families, Liability Insurance rates . professional disablement and accident insurance for flight crew and technical main- tenance staff, and insurance for employees flying on business trips abroad . There are Reduction of Aviation Insurance Premiums by Policy Periods* also medical insurance programs for Aeroflot representatives and their families who are located abroad . Type of Insurance Policy Period

2004-2005 2005-2006 in 2006-2007 in in comparison comparison with comparison with Financial Risks with 2003-2004 2004-2005 2005-2006

Aircraft Hull insurance for foreign made The financial risks that airlines face can be divided into two categories: price risks and aircraft (including IL-96s and spares) –24 .8% –21 .7% –25 .8% credit risks . Aeroflot singles out three basic types of price risks that are induced by market price and interest rate fluctuations: Third Party, Passenger, Cargo, Baggage • changes in aviation fuel prices, which account for the largest part of the airline’s and Mail Legal Liability Insurance –11 .5% –0 9%. –11 .9% budget; • changes in exchange rates; * Aeroflot’s policy period begins July 2 of the current year and is valid for a year . • changes in interest rates .

In the last four years, the Aircraft Hull Insurance rate for foreign made aircraft and In 2006, Aeroflot continued its efforts to hedge risks associated with the purchase of IL-96s reduced by 2 16. times . Legal Liability Insurance rate decreased by 1 .4 times aviation fuel . The company concluded non-deliverable option contracts for aviation for international flights and by 1 .3 times for domestic flights . The total reduction of kerosene on the St . Petersburg Stock Exchanges in order to enable a better financial aviation insurance costs in last four years comes to 39 .2%, while the overall industry and budgetary planning . figures, which determine insurance costs, grew during this period .

Aeroflot operates flights to 47 countries, securing Third Party, Passenger, Cargo, Baggage and Mail Legal Liability Insurance as required by the aviation authorities of foreign governments, as well as by the SkyTeam and codesharing partner airlines .

Aeroflot’s combined single limit for liability insurance is USD 900 million . It’s is the

maximum sum that will be paid to passengers, third parties, cargo/baggage/mail Insurance Expenses Aeroflot in 2006 owners if an incident occurs .

1.2% Aeroflot has voluntarily set the combined single limit for passengers, third parties, 1.5% cargo/baggage/mail owners for domestic flights higher than it is required by Russian 4.2% Aviation insurance Auto transport insurance legislation . Medical insurance Other types of insurance 72.1% Aeroflot’s aviation insurance is provided by OJSC Moscow Insurance Company . The 21% Professional disability re-insuring of risks is provided by the leading insurance companies in Great Britain, and accident insurance France, Germany, and , that are all world leaders in aviation insurance, with a high reliability ratings . AEROFLOT ANNUAL REPORT 2006 RISKS AND RISK MANAGEMENT 72 73

Liquidity, currency and interest rate risks are most relevant to airlines as regards the The Company’s financial risk was substantially reduced by the introduction to the new ratio between currencies used for company accounting purposes, payment/revenue Sabre reservation and sales system, new paperless technologies for tickets sales, such currencies; currencies, in which cash moves between company bank accounts, and as online ticket sales . The Company will be able to improve developing e-ticket sales currencies, in which sales are made and bills are presented . Risks are inevitable in view operations and thereby reduce financial risk once the Russian legislation concerning of a large number of Aeroflot representative offices abroad . The Company was able to e-ticketing is amended in 2007 . achieve a balance in its currency position due to the new methodology for calculating that position and the introduction of an internal exchange rate within the company for Aeroflot maintains its efforts to properly share responsibility and obligations between ticket sales inside Russia . the Company and partner airlines in regards to accident and third-party risk insurance and civil liability . These efforts are aimed to reducing the likelihood of non-fulfillment Credit and leasing agreements present the main interest rate risks for the airline, as or inadequate fulfillment of obligations under bilateral commercial agreements with such agreements use a variable interest rate that is adjusted according to changes partner airlines . So, along with the existing standards for third-party risk insurance in LIBOR rates (London Interbank Offered Rate) . In view of the individuality of each and civil liability of subsidiary companies, similar standards were determined and ap- contract (agreement), the standard stock instruments for hedging interest rate risk proved in 2006 for Aeroflot’s partner airlines . do not satisfy the requirements of the airline . According to the decision of the Finan- cial Committee, Aeroflot is currently reviewing the possibility of concluding a general agreement to use derivative instruments on the OTC (over-the-counter) market, which will satisfy the Company’s requirement for non-standard hedging instruments for each individual agreement . At present, new leasing agreements for aircraft allow the floating exchange rate to be fixed .

In order to reduce credit risk for the organization of passenger ticket sales and non-ful- fillment of transactional obligations to the Company by debtors/counterparties, Aero- flot sets minimum deposits for ticket blanks, uses standardized bank guarantees, and sets different limits for different credit organizations as regards to bank guarantees issued to customers of those banks who are ticket agents for Aeroflot . Volga 77

5 SOCIAL DEVELOPMENT

Aeroflot’s business imparts certain social obligations on the Company . In 2006, Aeroflot Group carried 8 .7 million people to various points on the planet, with Com- pany planes operating more than 100 routes . With a global scope of work, the airline fully realizes how interconnected and interdependent the modern world is and how important it is to build a responsible business in it .

Personnel

The formation of an effective system of cooperation within the airline, which contrib- utes to the company’s competitive edge, is currently one of the main goals of Aeroflot’s corporate policy .

The conception of the airline’s company and social policy focuses on the following three factors: • encouraging efficiency in the workplace; • personnel training and development; • an effective social policy .

The increasing role of the human factor in the modern business world has demanded a new approach to personnel management . Accordingly, the airline’s management con- siders the following to be the most important measures in this regard: • personnel development; • training to give employees a full understanding of the company’s priority tasks, mis- sion, goals, and role in the Russian and international economic arena .

The directors of all divisions of the airline integrate their activities in a general system of company management . This system is focused on individual work, the development of incentives, and other factors that influence an employee’s relationship to his/her work . The system also provides for the continual professional growth of employees and notice- ably improves the quality of employee services and social benefits, including retirement pension plans .

The Company widely uses both material and non-material types of incentives . In 2006, for example, several hundred employees were selected to receive awards . As such, 166 people received the medal for Best employee of Aeroflot; 421 received the Aeroflot Certificate of Honor, and another 12 people were entered in the Aeroflot Book of Honor .

My dear friend! I am happy that we will soon embrace again and remember the days of our youth in battle . By the way, in honor of Victory Day, Aeroflot is granting veterans free passage! AEROFLOT ANNUAL REPORT 2006 SOCIAL DEVELOPMENT 78 79

In the financial year, Aeroflot’s human resources management, for the second year in a Development of Corporate Philosophy row, was a winner at the 2nd All-Russian Competition for the Best Russian Human Re- sours Service — 2006 . The following tasks were implemented in 2006 to develop Aeroflot’s corporate philosophy: • a work group was created, comprising of consultants, SkyTeam ‘ambassadors,’ Number of Aeroflot Group Personnel brand supervisors as well as the people in charge of implementing the Care Quality Management and Training Program; 2006 2005 • a platform for discussing the corporate philosophy within the company was created Airline 17,503 17,064 on the basis of the Aeroflot Corporate Club; • training in the corporate philosophy was provided for employees from 11 divisions including (more than 140 people), as well as for the company’s senior staff; JSC Aeroflot 14,717 14,871 • a corporate film, conveying the value of the Aeroflot brand, was produced . OJSC Aeroflot-Don 1,072 1,137 The company’s upcoming plans for the development of the corporate philosophy in- CJSC Aeroflot-Nord 1,427 1,056 clude: CJSC Aeroflot-Cargo 287 – • the publication of a dictionary of aviation terms and information materials for new and existing company employees; Catering (CJSC Aeromar) 1,084 1,060 • improvement on the system of personnel incentives and certifications; Hotel (CJSC Sherotel) 316 323 • the inclusion into the professional training programs of personnel who work directly Others 93 62 with the corporate philosophy . Total 18,996 18,509

Professional Training and Raising the Qualifications The average monthly salary of Aeroflot personnel in 2006 totaled 34 thousand rubles, of Employees while the average age of employees is 42 . The professional training and development of personnel in 2006 was carried out in two programs: • professional training programs for flight and technical staff, cabin crew, and ground control personnel; • improving the qualification and certification levels of personnel .

Average salary, thousand rubles Средняя заработная плата (тыс. руб.)

34 .0 30 .1 25 .4 22 .4 19 .4 16 .3

2001 2002 2003 2004 2005 2006 AEROFLOT ANNUAL REPORT 2006 SOCIAL DEVELOPMENT 80 81

In 2006, the Aeroflot Training Center for Aviation Personnel (TCAP) organized and Throughout the financial year, this Service conducted scheduled tests of work spaces conducted 983 training events to raise the qualifications, re-train and orientate per- and equipment, evaluating their compliance with the requirements and norms for labor sonnel, including: protection . The Service monitors the condition of ventilation and sanitary systems, ap- • 126 — for flight staff; pliances, machinery, and the mechanisms for protecting employees, both individually • 263 — for engineering-technical personnel; and collectively . • 291 — for cabin crew; • 212 — for ground control personnel; The Service also supervises the observance of federal and other regulations for labor • 91 — language training . protection, such as instruction in the work place to protect employees, both according to their profession and type of performed work . The Service also ensures that equipment, Aeroflot’s transition to the Sabre booking and sales system required that personnel to machinery, and other mechanism are routinely serviced and inspected . Furthermore, receive additional training . In 2006, 267 company employees underwent the training great attention is given to the training and testing of employees who occupy high-risk programs “Reservations and ticket-printing in the Sabre system” and “Registration of jobs (crane operators, riggers, electricians, machine drivers, and others) . electronic airline tickets in the Sabre system ”. The training programs were conducted at TCAP, instead of at an outside center . This decision allowed the company to lower In correspondence with the Program for manufacturing Control, planned medical, their expenditures on training and forced them to raise their in-house training program sanitary, and hygienic checks were conducted . Periodic medical examinations are con- to a higher level . ducted at Aeroflot’s base medical center .

To further perfect Aeroflot’s quality service, a training program “System Management In December 2006, Aeroflot presented a new form of work clothes for employees of of ISO Series 9000 Quality and Standards” was organized for 131 company employees . ground services, as well as new designs for the uniforms of flight and cabin crews, cre- The program was also conducted at TCAp . ated by the prominent Russian designer Viktoria Andreyanova . The Company regards the new uniforms not only as an important element of the Company’s brand and image, In 2006, to further train and improve their qualifications, Aeroflot employees actively but also as functional clothing that needs to be practical and suitable for the particular attended outside educational institutes . The selection of civil aviation institutes for work environment . For this reason, modern, thermo-insulated material was used, mak- employee training is largely determined by flight safety requirements . These training ing the new uniform comfortable, but at the same time durable and warm . bases were presented by: • Center for Further Training of Air Transport Personnel at the Moscow Civil Aviation Institute, where 15 company employees were trained; • Institute for Senior Staff and Specialists at the St Petersburg Civil Aviation Institute, Social responsibility where 19 company employees were trained . Aeroflot is traditionally recognized for having outstanding social programs for its Following Aeroflot’s admission into the SkyTeam, company personnel underwent train- personnel . The company’s efforts in this respect were officially recognized when the ing on how to use the alliance’s various programs and uphold the SkyTeam standards . company won the All-Russian Competition for Efficient Corporate Social Policy in the As such, 117 Aeroflot employees had studied the program “Service oriented on the nomination for “Best Implementation of Social Programs ”. brand,” 290 employees had studied the program “Assisting with ticketing operations,” and 87 airline employees were trained in foreign languages, with 50 studying Chinese In 2006, the following measures were taken to develop the company’s social programs: and Korean and 37 studying English . • Resort facilities for the health and wellness of employees and their children: 1,857 Aeroflot employees were treated at sanatorium facilities, while 648 children of air- IATA study courses were organized for 3 Aeroflot employees (at the IATA Training and line employees were treated at pediatric sanitary-health centers . Development Institute), while another 9 people had studied economics and advanced • Housing Assistance: The Company provided special-purpose interest-free loans to manufacturing sciences at the Center for Modern Technologies and Standards in Avia- 22 employees for a total sum of 14 .2 million rubles; other material help in the total tion at the Moscow branch of the IATA Studies Center . In addition, 36 senior staff mem- sum of 2 million rubles was granted to 57 employees who requested it . bers and specialists at Aeroflot had studied at Air France Consulting . • Private pension schemes: 461 individual contracts for private pension schemes were concluded; 372 applications from former workers of the Company were re- viewed, with 358 applicants receiving private pensions; pension plans were recal- culated for 39 employees . Labor SAFETy • Transport and other privileges: the company provides employees’ transportation to work on 22 buses, making 97 trips a day, which helps to relieve the strain on the In 2006, the company’s labor and environment protection services were reorganized, city’s transport infrastructure and the toll on the environment; company workers the supervision of the test laboratory that is responsible for supervising the work space receive discounted rates for children’s preschools; food services for company em- was changed, and a special Service for Production Control was created . ployees were organized . AEROFLOT ANNUAL REPORT 2006 SOCIAL DEVELOPMENT 82 83

• Recreational and sporting events: Aeroflot representatives have competed in the Children in need of advanced medical assistance were flown to Moscow for treatment Ski Racing World Cup (Italy), Orienteering World Cup (Austria), World Hockey Tour- at the Bakulev Scientific Center for Cardio-Vascular Surgery . The Children’s Hearts nament (Bangkok), the international football tournament between the world’s airline Charity Foundation also contributed to the development of the project . companies (Prague), the International Issyk-Kul Sports Games, the major football tournament Delovaya Rossiya, and a major volleyball tournament (Zelenograd); The Company also participated in a program to support non-relative bone marrow Aeroflot’s council for physical training and sport successful organized a football fes- transplants for children with oncological conditions . Aeroflot provided hematologists tival at the Aeroflot Cup, two tennis tournaments held on the Aeroflot Day, as well as with tickets to Europe for purposes of obtaining and transporting back to Russia bone a New Years tennis tournament . marrow to be used for the treatment of children with severe leukemia . • Meeting with veterans: meetings were arranged between veterans and youth during the anniversary of the Battle of Moscow during World War II; veterans of the battle The Chance program is another Aeroflot’s unique contribution to saving sick children’s received material aid in the amount of 10 thousand rubles . lives by providing them with tickets to go abroad for medical treatment .

Social and charity activities Support of the Art and Culture

Aeroflot does not shy away from the problems faced by both employees and those in Aeroflot has always made the support of Russian art and culture one of it main priorities of needs . The company consistently engages in social and charitable works and oversees its social works . In particular, the airline has focused on promulgating Russian classical arts the implementation of several integrated social programs . in both Russia and abroad by supporting major performing and fine art events .

As a result of Aeroflot’s five-year collaboration with the Moscow State Tchaikovsky Con- servatory, many Russian musicians have had the opportunity to participate in prestigious Moscow-Kaliningrad Air Bridge international competitions, festivals, and symposia, as the Company has provided transport for the artists to destinations in Europe and the USA . The objective of the Moscow-Kaliningrad Air Bridge program is to create an “air bridge” between Kaliningrad region and the rest of Russia (the Baltic region of Ka- Aeroflot was also chosen as the official carrier for the Benua de la Dance award ceremony, liningrad has been an enclave, without land connection to Russia, since break-up also knows as the Ballet Oscars . of the USSR) . The program helps to ensure that every Russian citizen has the right to the freedom of movement . Aeroflot provides transport to and from Kaliningrad Since 2002, the Company’s partnership with the Moscow International House of Music has at affordable prices for needy passengers as part of the program . produced some of the most memorial classical music concerts in the city . The successful collaboration of the airline and music hall continued throughout 2006 .

Thanks to Aeroflot’s services, organizers of last year’s V Elena Obraztsova Young Opera Support to Vulnerable Social Groups Singers’ Competition were able to assemble an outstaying panel of judges, which included leading musicians and singers from the world’s top opera stages . Comrades in Arms In May 2006, the airline continued its charitable work by transporting the family archives The Comrades in Arms program provides veterans of World War II with free seats on of the Russian philosopher Ivan Ilin from New York to Moscow . The archives are valuable regular Aeroflot flights to any destination in the Russian Federation or Europe, includ- relics of Russian history, and their return to Russia will replenish the country’s archives and ing the CIS and Baltic countries . Since 2005, this service has been fully available to strengthen its sense national identity and heritage . WWII veterans and invalids, living in the CIS and Baltic countries . Also in 2006, the airline transported around 3 thousand Russian Muslim pilgrims out of In six years, the Comrades in Arms program has provided free tickets to more than Jordan, where they had gone to participate in the Hadji . 24,000 veterans . In 2006 alone, over 3,000 former front-line soldiers, prisoners of war, and survivors of the Leningrad blockade participated in the program . Aeroflot also was the official carrier for the two thousand participants of the 59th World Newspaper Congress and the 13th International Editors’ Forum, which were held in Moscow Helping Sick Children and Invalids under the aegis of the World Association of Newspapers (WAN) .

In 2006, Aeroflot continued to support the “Wings of Hope” program, which renders assistance to children in the Russian regions suffering from cardiovascular diseases . AEROFLOT ANNUAL REPORT 2006 SOCIAL DEVELOPMENT 84 85

Sports Support Program Environmental Protection

For the fifth year, the company hosted the Aeroflot Open International Chess Tourna- Aeroflot’s work to minimalize impact on the environment can be divided into two ment with USD 175 thousand of available prize money . The Company acts as both the categories: current work on a daily basis and longer-term strategic work . The first organizer and financial sponsor of the tournament, which is jointly hosted together one is conducted systematically and regularly in accordance with the environmen- with the Association of Chess Federations and the Tourist Bureau of the Moscow Gov- tal regulations of the Russian Federation and other countries in which the company ernment . In 2006, around 600 players from 57 countries participated, including 130 operates . The company’s strategic work aims to qualitatively change the toll that the international grand masters . industry takes on the environment .

Aeroflot traditionally acts as a part of the Olympics Committee of the Russian Founda- One of the Company’s major strategic tasks for environmental protection is updating tion . In 2006, Aeroflot flights delivered the Russian Olympic team, members of the the aircraft fleet with more fuel-efficient planes . As such, Aeroflot’s new aircraft ad- official delegation, guests, and tourists to the Winter Olympics Games in Turin, Italy . here to the strictest ecological standards in terms of noise, emission of contaminants, The airline’s planes also transferred large-sized sports equipment and other complex and other pollutions . luggage to Italy . Aeroflot systemically supervises all company divisions to insure that the ecologi- The Company pays particular attention to supporting children and youth sports, as well cal protection standards are being observed, including the temporary storage and as helping handicapped athlets . Since 2005, Aeroflot has supported the Russian Foot- disposal of production waste . Aeroflot also maintains an inventory of the stationary ball Union, carrying the Russian national team and national youth team to international source emissions and contaminants, as well as continually monitors and adjusts all and national competitions . fuel systems, maintaining a level of gas and contaminant discharge within the accept- able limits .

Program in Support of Science and Education

For the sixth year, Aeroflot assumed all costs for the transport of gold and silver gradu- ates from schools all across Russia to Moscow for exams and interviews to enter higher education institutions in the Russian capital . In 2006, the program extended its frame- work to include new participants — school children who won the all-Russian and the International Olympiad in General Education . The company’s planes carried 250 med- alists to their places of future study . Caucasus 89

6 CORPORATE GOVERNANCE

Governing Bodies

Shareholders’ meeting Audit Committee Revision Committee Board Strategy of Directors Committee

Personnel and Incentives Committee

Internal General Executive Auditing Service Director Board

Shareholders’ Meeting

In 2006, three general meetings of Aeroflot shareholder’s were held .

An EGM of shareholders was held in absentee vote on April 10, 2006 to approve the following transactions with interested parties: • purchase-sales agreement 9,490,001 of the common shares of OJSC Terminal be- tween JSC Aeroflot (seller) and OJSC Sheremetyevo International Airport; • purchase-sales agreement 9,490,001 of the common shares of OJSC Terminal be- tween JSC Aeroflot (seller) and the Vneshtorgbank; • purchase-sales agreement 7,591,998 of the common shares of OJSC Terminal be- tween Aeroflot (seller) and Vnesheconombank .

Owners of 44 92%. of voting shares in the Company, who were also not interested parties in the deal, had the right to vote . 70% of shareholders actually voted, with the EGM deciding to approve the deals (Minutes No . 18 from April 10, 2006) .

On May 16, 2006, the Meeting met to approve Aeroflot’s deal with interest from an inves- tor for the acquisition of 30 new jet-engine planes of the regional class from CJSC Sukhoi I booked a ticket Civil Aircraft . for you to come on my birthday! It is beautiful here, like a fairy tale! AEROFLOT ANNUAL REPORT 2006 CORPORATE GOVERNANCE 90 91

Owners of 48 .81% of voting shares in the Company, who were also not interested parties The structure of the Board of Directors as of December 31, 2006 is as follows: in the deal, had the right to vote . 31 07%. of shareholders actually voted, with the EGM decid- ing to approve the deal (Minutes No . 19 from May 16, 2006) . Viktor Petrovich Ivanov — Born in 1950, graduated from the Bonch-Bruevich Leningrad Electrotechnical Chairman of the Board of Telecommunications Institute . The annual general meeting of shareholders was held June 17, 2006, upon which the Directors, Advisor to the 2000–2004 — Deputy Head of the Russian Presidential Administration . following was approved (Minutes No . 20 from June 17, 2006): President of Russia . • the Company’s annual report for 2005; Does not have ownership in Aeroflot share capital . • the annual financial report, including the report of profits and losses of Aeroflot for the 2005 accounting year; Vladimir Nikolaevich Born in 1953, graduated from the Moscow Railway Engineering Institute • Aeroflot allocation of profit (including payment of (declareds) dividend), which ac- Antonov — 1995–2002 — Deputy CEO of Aeroflot for Economic and Aviation Security, Deputy cording to results of the 2005 financial year,amounted to 0 .82 rubles per one share First Deputy CEO of Aeroflot for CEO for Aviation Security, Deputy CEO for Aviation and Operating Security . in pecuniary form; Business Operators . Ownership in Aeroflot share capital — 0 .000425% . • new compositions of the Aeroflot Board of Directors and Revision committee; • the auditor for 2006 the auditing firm HLB Vneshaudit; • changes and annexes to sections 8 .3 and 8 .4 of article 8 and section 19 .2 of article Anatoly Antonovich Born in 1952, graduated from the Moscow State Institute for International 19 of the Aeroflot Charter, including the increased number of declared shares of the Danilitskiy Relations . Company to 250 million . General Director of National 2001–2004 — deputy, first deputy of general director at National Reserve Bank . Reserve Corporation Independent non-executive director, member of the HR and Remuneration Further information about the decisions of AGM can be found in the “Shareholder and Committee and the Strategy Committee of the Board of Directors . Investors” section of the Aeroflot website — www .aeroflot .ru . Does not have ownership in Aeroflot share capital .

Leonid Alekseevich Born in 1960, graduated from Moscow Financial Institute . Board of Directors Dushatin — 1996–2002 — Vice President and Head of the Fuel and Energy Section, Deputy First Deputy CEO of National Executive Chairman, Member of the Executive Board of the National Reserve Bank . The Board of Directors of Aeroflot is comprised of 11 people, three of which are non-execu- Reserve Corporation . Independent non-executive director, Chairman of the Audit Committee for the tive independent directors . Board of Directors . Does not have ownership in Aeroflot share capital . Members prior Members elected Year Elected to the AG M by the AGM (17.06.2006) to Board of Directors Ivanov v . p . Ivanov v . p . 2004 Mikhail Yurievich Kopeikin — Born in 1954, graduated from the Ordzhonikidze Management Institute in Moscow . Antonov v . n . Antonov v . n . 2003 Deputy Head of the Cabinet 1996–2003 — Head of Economics Department, Head of Economics and Property Office of the Government Management at the Cabinet Office of the Government of the Russian Federation . Butrin M . r . Danilitskiy A . A . 2006 of the Russian Federation . Chairman of the HR and Remuneration Committee of the Board of Directors . Grechukhin i . n . Dushatin l . A . 2003 Does not have ownership in Aeroflot share capital . Dushatin l . A . Kopeikin М . Yu 2004 Kopeikin М . Yu . Nikitin g . s . 2006 Gleb Sergeevich Nikitin — Born in 1977, graduated from St . Petersburg University of Economics and Finance Okulov v . M . Okulov v . M . 1997 Head of the Federal Agency for and the St . Petersburg State University . Federal Property Management . 1999–2004 — senior specialist, head of department, Head of the Federal Property Tikhonov A . v . Tikhonov A . v . 2005 Management Committee, St . Petersburg . Uvarov A . K . Shablin v . n . 2003 Chairman of the Strategy Committee, member of the Audit Committee of the Board Fedorov A . v . . Sharonov A . v . 2006 of Directors . Does not have ownership in Aeroflot share capital . Shablin v . n . Yurchik A . A . 2006 AEROFLOT ANNUAL REPORT 2006 CORPORATE GOVERNANCE 92 93

Changes in the structure of the Board of Directors in 2006 Valery Mikhailovich Born in 1952, graduated from the Civil Aviation Academy . Okulov — 1996–1997 — first deputy CEO of Aeroflot for Operations and Administration . At the Annual general meeting of shareholders on June 17, 2006, the following mem- CEO of Aeroflot . Ownership in Aeroflot share capital — 0 .002528% . bers of the previous Board of Directors were re-elected to the new Board of Directors: v . n . Antonov, l . A . Dushatin, v . p . Ivanov, M . Yu . Kopeikin, v . M . Okulov, A . v . Tikhonov, and v . n . Shablin . Alexander Vasilievich Born in 1957, graduated from the Kiev Higher Naval Political College . Tikhonov — From 2000–2004 — Deputy Head of Department, Head of Department of the The new chosen members of the Board of Directors are: A . A . Danilitskiy, g . s . Nikitin, Director of Department Ministry of Transport of the Russian Federation; Head of the Federal Agency for A . v . Sharonov, and A . A . Yurchik . of the Ministry of Transport Management of Federal Property . of the Russian Federation . Member of the Audit Committee of the Board of Directors . Does not have ownership in Aeroflot share capital . Report of the Board of Directors The activities of the Board of Directors in 2006 were compiled in accordance with Vladimir Nikolaevich Born in 1951, graduated from the Leningrad Makarov Naval Engineering College the requirements of the Federal Law on Joint-Stock Companies, the Aeroflot Company Shablin — and the Financial Academy attached to the Russian Government . Charter, and the Company regulations concerning the Board of Directors . Senior Vice President 2000–2003 — Deputy CEO of Unicom Management Services (Limassol, Cyprus) . Issues that were considered at the meetings of the Board and the lengths of their ex- of National Reserve Bank . Non-executive director, member of the HR and Remuneration Committee of the Board of Directors . amination were determined in the Board of Directors Action Plan for the period from June 2005 to June 2006 and from June 2006 to June 2007 . Does not have ownership in Aeroflot share capital . In 2006, the Board of Directors held 15 official meetings . Around 100 questions were examined at these meetings, with 220 decisions made on the most pressing questions Andrey Vladimirovich Born in 1964, graduated from the Ufa Aviation Academy, Russian Academy of State of current activity and long-term development plans . Sharonov — Service . Secretary of State — Deputy 2000–2003 and 2004–2005 — Deputy Minister of Economic Development and Particular attention was given to the following issues: Minister of Economic Trade of the Russian Federation . • flight safety; Development and Trade of the 2003–2004 — Chief Deputy Minister . • the implementation of the Aeroflot strategic development concept up to 2010; Russian Federation . Member of the Audit Committee of the Board of Directors . • increasing the quality of passenger service; Does not have ownership in Aeroflot share capital . • consolidation of airlines in the sector; • reconstruction of the aircraft fleet; • IT development; Alexander Alekseevich Born in 1957, graduated from the Leningrad Military Academy of Rear Services and • running the business of the Company subsidiary, Terminal, and work on construc- Yurchik — Transport at the Ordzhonikidze State Management Institute . tion of the Sheremetyevo-3 terminal complex; Assistant Minister of Transport 1974–2004 — served in the Armed Service, since 1989, served on the Committee • financial and commercial activity . of the Russian Federation . of Military Communication for Aviation for the regional level and industrial civil aviation unions . As in previous years, remuneration and/or compensation to members of the Board of 2004–2007 — Deputy Director, Director of the Federal Agency of Air Transport . Directors were not paid in 2005 . Member of the HR and Remuneration Committee and Strategic Committee of the Board of Directors . The Aeroflot Board of Directors provisionally approved the Annual Report for 2006 Does not have ownership in Aeroflot share capital . (Minutes No . 13 from May 17, 2007) . AEROFLOT ANNUAL REPORT 2006 CORPORATE GOVERNANCE 94 95

Executive Board Vladimir Vladimirovich Smirnov — Born in 1959, graduated from the Civil Aviation Academy . The structure of the Executive Board as of December 31, 2006 is as follows: Deputy CEO, Director of Aeroflot Ground Ownership in Aeroflot share capital — 0 .002623% . Control . Valery Mikhailovich Okulov — Born in 1952, graduated from the Civil Aviation Academy . Executive Board Chairman, Ownership in Aeroflot share capital — 0 .002528% . Stanislav Georgievich Tulsky — Born in 1947, graduated from the Civil Aviation Academy . CEO of Aeroflot . Deputy CEO for Flight Operations, Ownership in Aeroflot share capital — 0 .002528% . Director of Flight Section . Vasily Nikolaevich Avilov — Born in 1952, graduated from the Dzerzhinsky Higher Head of Aeroflot Administration . Naval Engineering College . Ownership in Aeroflot share capital — 0 .0000002% . Changes in the Executive Board By decision of the Board of Directors (minutes No . 15 from May 22, 2006), Executive Vladimir Nikolaevich Antonov — Born in 1953, graduated from the Moscow Railway Board member e . v . Bachurin was relieved of his duties following his transfer to the First Deputy CEO Engineering Institute . Federal Air Transport Agency . for Business Operations . Ownership in Aeroflot share capital — 0 .000425% . Report of the Work of the Executive Board in 2006 Yury Ilyich Belykh — Born in 1941, graduated from the Moscow Aviation Technical Director and Head of Aviation Technology Institute . In 2006, the Executive Board held 46 meetings, during which 128 issues were exam- and Technical Section . Ownership in Aeroflot share capital — 0 .000004% . ined . Matters discussed included: • flight safety; Anatoly Ivanovich Volymerets — Graduated from the Civil Aviation Academy . • financial state of the Company; Director of Aeroflot’s Ilyushin IL-96/IL-86 Ownership in Aeroflot share capital — 0 .002623% . • restructuring of the aircraft fleet; Flight Team . • reconfiguration of the aircraft fleet; • construction of the new terminal, Sheremetyevo-3; • installation of new IT solutions; Vladimir Vladislavovich Born in 1957, graduated from Lomonosov • passenger services; Gerasimov — Moscow State University . • management of companies in which Aeroflot has stakes; Deputy CEO for Material and Technology Ownership in Aeroflot share capital — 0 .002528% . • social issues; Procurement . • insurance .

Boris Petrovich Eliseev — Born in 1957, graduated from the State University Remuneration to Executive Board Members Deputy CEO, Director of the Aeroflot Legal of the Far East . Department . Ownership in Aeroflot share capital — 0 .0000002% . In accordance with Article 5 .8 of the Statute on the Services and Remuneration of Aeroflot Executive Board Members, including benefits and social guarantees, mem- Alexander Alexandrovich Born in 1952, graduated from the Civil Aviation Academy . bers’ remuneration and bonuses shall be specified in accordance with the positions they hold, statutory legal acts of the Russian Federation and of the Company, which Koldunov — Ownership in Aeroflot share capital — 0 .002528% . Deputy CEO, Head of Flight Safety regulate conditions of payment for employees, definition and amount of benefits and Inspectorate . social guarantees for Company employees, as well as the staff list, and will be laid down in employment contracts signed between Executive Board members and the Company . The amount of remuneration and bonuses payable to Executive Board members shall Mikhail Igorevich Poluboyarinov — Born in 1966, graduated from the Moscow Financial be specified by the Company’s Board of Directors . Deputy CEO for Finance and Planning . Institute . Ownership in Aeroflot share capital — 0 .000425% . As specified by the standard contract, which was approved by the Aeroflot Board of Directors, a monthly remuneration equal to RUR 10,000 (ten thousand rubles) is paid Aleksey Albertovich Sidorov — Born in 1952, graduated from the Moscow Institute of to each member of the Executive Board in addition to the salary paid for official duties Commercial Director . Engineering and Economics . in their primary positions . Ownership in Aeroflot share capital — 0 .002528% . AEROFLOT ANNUAL REPORT 2006 CORPORATE GOVERNANCE 96 97

Financial and Business Control Changes in the Revision Committe

Revision Committee At the annual metting of shareholders on June 17, 2006, one member of the previous Revision Committee, v . g . Mironova, was re-elected to the new Revision Committee . Dmitriy Galkin, Tatyana Gorbachik, Andrey Khvostunkov, and Irina Svyatova were also elected to the new Revision Committee . Andrey Nikolaevich Born in 1962, graduated from the Moscow Engineering Institute Khvostunkov — of Civil Aviation, Russian Academy of State Service . Chairman of the Aeroflot Revision 1999–2002 — Chief of Department, Deputy Director of the Anti- Revision Committee Activity Committee, Deputy Head of Federal Monopoly Ministry of Russia Tariff Service . 2002–2004 — Deputy Director of Department, Head of In the previous year, the Revision Committee conducted four meetings, at which mem- Department at the Federal Energy Commission of Russia . bers analyzed the extent to which the Company’s planned tasks had been implemented, Does not have ownership in Aeroflot share capital . as well as participated in a special working group that was created to investigate the terms of the financial leasing agreement for IL-96-300 planes . The issues reviewed are as follows: Dmitriy Yuryevich Galkin — Born in 1963, graduated from the Ordzhonikidze Management • analyzing the series of tenders that were conducted with international companies, Head of the Internal Auditing Service Institute in Moscow . firms, and interested organizations for rendering of services for the purchase of at Aeroflot . 1988–2002 — Economist, Chief Economist, Head of goods (executed work); Department, Deputy Chief of the Control-Inspection Service at • reviewing accounts receivable and accounts payable; Aeroflot . • checking the expenditures on aeronavigation service . Ownership in Aeroflot share capital — 0 .0000034% .

Remunerations to Member of the Revision Committee Tatyana Vladimirovna Born in 1970, graduated from the Moscow Technical Institute of Gorbachik — Light Industry . No salaries or other material reward for members of the Audit Commission were envis- Director of the Finance Department 1993–2004 — Chief Expert, Senior Treasurer, Head Treasurer, aged for payment or actually paid during 2005 . at the Ministry of Transport of the Deputy Department Chief, Head of Department in the Central Russian Federation . Administration of the Federal Treasury of the Ministry of Finance of Russia . Does not have ownership in Aeroflot share capital . Internal Audit

The internal audit of the Company is conducted by the Company’s Internal Audit Service Vera Grigorievna Mironova — Born in 1950, graduated from the All-Union Correspondence in accordance with the Aeroflot Internal Audit Regulations established by the Board of Head of the Finance and Economics Institute of the Food Industry . Directors . The main tasks of the Internal Audit Service are: Section of the Federal Air Transport 2000–2004 — Deputy Head of Department at the Ministry of • to ensure that internal control mechanisms are efficient and correspond to the size Agency . Transport of the Russian Federation . and character of the Company’s activities; Does not have ownership in Aeroflot share capital . • to analyze and audit the efficiency of operational, commercial, financial and other processes (procedures); • to ensure that the activities of Company’s divisions, representations, and subsidiar- Irina Nikolaevna Svyatova — Born in 1950, graduated from the Moscow Railway Engineering ies are efficient and comply with the Company Charter . worked as Deputy Director of Institute At the end of 2006, the service had a total of 21 members . the Department of Finance and Does not have ownership in Aeroflot share capital . Consolidated Financial Reports at the The Internal Audit Service conduct its work based on a quarterly plan, as established Federal Agency of Air Transportation by the general director . Throughout 2006, the Service carried out more than 40 checks until November 25, 2005 . of the various accounts of the Company and its divisions . The results of the checks were summarized in official documents, which served as the basis of any further investiga- tion of any financial violations . AEROFLOT ANNUAL REPORT 2006 CORPORATE GOVERNANCE 98 99

External Audit Compliance with the Code of Corporate Conduct

Audit of Aeroflot’s financial statements for 2006 was conducted by: In all its business activities, Aeroflot adheres to the recommendation of the Corporate • CJSC HLB Vneshaudit, in accordance with Russian Accounting Standards . Code of Governance the FSFM (Federal Commission for the Securities Market of Russia) . • CJSC Deloitte & Touche CIS, in accordance with International Financial Reporting . The Code of Corporate Governance of Aeroflot, as was approved by the Company’s Board of Directors in 2004 . It is designed to strengthen the confidence of interested parties, ensure the accountability of the Company before its shareholders, as well as Information Disclosure develop and support the effective cooperation with parties interested in the Company’s activities . Aeroflot continually works to ensure that its business operations are transparent and that information about its activities is properly disclosed . The Company pays particular attention to communications with company shareholders . In order to op- timize information exchange and interactive communication, Aeroflot, in keeping with the latest trends, has created a special division for shareholder and investor relations . The service is responsible for creating and maintaining direct contacts with Russian and holders of Aeroflot international shares or depository receipts .

Aeroflot discloses information about its business in compliance with Russian law, main- taining a corporate information policy that is in line with the best international practice in the sphere of information disclosure . The main principles of the information policy are as follows: • regular and timely supply of information; • access to all shareholders and other interested parties; • accuracy and completeness; • maintenance of a proper balance between transparancey and confidentiality to en- sure the protection of the Company’s business interests .

Accordingly, Aeroflot has implemented an optimal communications policy, which en- tails issuing press releases, hosting press conferences, briefings and investors meet- ings with senior Company officers and representatives at which information about the current business status of the Company is disclosed .

Further information about Aeroflot is available on the Company’s official websites www .aeroflot .ru . Information about JSC Aeroflot may also be found on www .skrin .ru and www .db .com . Sochi 103

7 SHAREHOLDERS AND INVESTORS

Shareholders Capital

Aeroflot’s share capital did not change in 2006, remaining at 1,110,616,299 rubles divided into 1,110,616,299 common shares with a par value of 1 ruble .

As of December 29, 2006, the number of shareholders of Aeroflot was 11,377 .

Structure of Share Capital (Major Holders of Aeroflot Stock as of 29.12.2006)

Total number Share of of shares stock capi- Holders Status (per unit) tal, % Total legal entities — 31, including: 1,018,712,441 92 .08 Russian Federation (as the Federal Agency for Federal Property Man- agement) Holder 568,335,339 51 .17 CJSC Depository Clearing Company Nominal holder 394,688,578 35 .54 National Depository Center Nominal holder 18,612,561 1 .68 LLC Deutsche Bank Nominal holder 16,875,900 1 .52 ING Bank (Eurasia), CJSC Nominal holder 7,403,121 0 .6 J .p . Morgan International Bank Nominal holder 5,903,243 0 .53 CJSC Raiffeisen Austria Nominal holder 4,710,450 0 .42 CJSC Citybank Nominal holder 3,984,900 0 .36 Joint-stock commercial bank Ros- bank Nominal holder 1,474,200 0 .13 CJSC UBS NOMINEES Nominal holder 464,200 0 .04 Total individual — 11,346 7 .92

On June 17, 2006, amendments to the Aeroflot Corporate Charter concerning the set number of common shares were approved at the Shareholders AGM . As such, in addi- tion to the shares outstanding, the Company has the right to issue 250,000,000 (two- hundred fifty million) common shares with a par value of 1 (one) ruble each (authorized shares) . Group arrives from Frankfurt . Flight number SU104 (Frankfurt — Sochi) . AEROFLOT ANNUAL REPORT 2006 SHAREHOLDERS AND INVESTORS 104 105

Securities Main share indicators

Information about Securities 2002 2003 2004 2005 2006

Number of shares Par value of Share price, USD Max 0 .42 0 .69 1 .23 1 .73 2 .35 State registration num- outstanding one share Min 0 .27 0 .33 0 .69 1 .13 1 .44 ber, date of registration Type, category (per unit) (rubles) P/E 4 .3 6 .0 7 .9 8 .3 9 .3 73-1 p-5142, Common, registered, Earnings per share, US cents 8 .0 11 .4 15 .9 17 .9 24 .3 22 .06 .1995 non-documentary 3,164,149 1 Market capitalization, USD millions 383 1,368 1,368 1,566 2,418

1-02-00010-А, Common, registered, 05 .04 .1999 non-documentary 1,107,452,150 1

1-01-00010-А, 23 .01 .2004 Total Trade Volumes (these share issues were Common, registered, combined) non-documentary 1,110,616,299 1 Weekly averages* Yearly total, USD Total transactions

RTS 112,579 5,628,936 146

The main stock exchanges at which Aeroflot shares are traded: MICEX** 5,071,576 253,578,799 87,861 • The Russian Trading System (RTS), quote list A2, where Aeroflot shares have the trading code AFLT and AFLTG — www .rts .ru; Total 5,184,155 259,207,735 88,007 • Moscow Interbank Currency Exchange (MICEX), quote list A2, where Aeroflot shares have the trading code AFLT — www .micex .ru . * 50 weeks . ** The average nominal exchange rate in 2006 was 27 18. rubles per one US dollar . The common shares of Aeroflot are included in the RTS and MICEX indexes .

Performance of quoted shares of Aeroflot in comparison with the RTS index and the indexes of the aviation industry (graph title) Aeroflot stock performance compared to the RTS index and the indexes of aviation industry 250 $2 .5

Structure of Share Capital Aeroflot market capitalization, USD millions 200 $2 .0 Structure of Share Capital Aeroflot market capitalization, USD millions 2,418 150 $1 .5

8% 100 $1 .0 1,566 50 $0 .5 1,368 51% 0 $ 766 02 .01 02 .02 02 .03 02 .04 02 .05 02 .06 02 .07 02 .08 02 .09 02 .10 02 .11 02 .12 41% AFltAvrg rt si/10 BeuAirl index 383 BwAirl index xAl index px last Russian Federation Legal entities AFltAvrg — average quote for Aeroflot in the rts rtsi/10 — rts index Individual 2002 2003 2004 2005 2006 BeuAirl — Bloomberg index of the leading european airlines BwAirl — Bloomberg index of the leading international airlines xAl — us airline stock index AEROFLOT ANNUAL REPORT 2006 SHAREHOLDERS AND INVESTORS 106 107

In order to attract investments and facilitate purchase of company’s securities by inter- Important Events since December 31, 2006 national investors in 2000, Aeroflot initiated a depository receipts program .

In December 2000, Aeroflot and Bankers Trust Company signed a depository agree- January Aeroflot’s Board of Directors approved the Plan for Consolidation of Airlines in the Far East, which stipulates ment, according to which level-1 global depository receipts (GDR) are to be issued for the integration of the Far Eastern major airlines — Dalavia, Sakhalin Airlines, and Vladivostok Avia . The next Aeroflot shares . phase of the plan calls for the addition of several other regional airlines .

Under Aeroflot’s GRD program, shares are converted into depository receipts and vice February On February 6, Aeroflot began operating regular flights along the Sochi-Frankfurt-Sochi route . As a quickly de- versa, based on the ratio of 100 common shares to one gdr . The issuance of GDRs is veloping resort destination, Sochi stands to greatly benefit from the opening of air service to a major European implemented according to Rule 144A/Regulation S for circulation in Europe and USA . transport hub, especially in terms of strengthening its chances to win the bid for the 2014 Winter Olympic and The receipts are traded on level one of the Frankfurt Stock Exchange (as part of the Paralympic Games . Deutsche Borse Group) . On February 15, Aeroflot’s Board of Directors approved the program to gradually replace Tu-134 aircraft . All 13 Tu-134s currently in the Aeroflot fleet will be taken out of operation by January 1, 2008 . Aeroflot participated in the XII International Forum “Security and Safety Technologies 2007 .” At the exhibition, Deutsche Bank is a depository bank for this program, which in turn has the shares the airline demonstrated the work of its patrol dogs department, which uses trained dogs to find explosives . registered through a special Aeroflot registrar — NRC . The Company also participated in the competitive program for “The Best Technological Innovations for Security 2007,” winning the award for “Protection of People’s Vital Function,” and also received an award and medal for According to a special depository agreement, up to 20% of Aeroflot’s voting shares can the “Mobile Patrol Dogs Complex .” be converted into GDRs . March On March 10 and March 14, Aeroflot received two new A320s under an operational lease contract . The new aircraft were named in honor of two great Russian painters — K . Bryullov and v . Surikov . On March 15, Aeroflot approved a new program for the use of interline-tickets with the SkyTeam partners: Aeromexico, Continental, Korean Air, KLM, and Delta . Dividend History On March 20-21, the SkyTeam’s Council for Flight Safety and Aviation Security and Quality held a regular meeting in . On March 22, Aeroflot signed a protocol of intent with Airbus for the acquisition of 22 long-haul A350 XWB Total accrued Number of shares Dividend per one planes . The delivery of the aircraft will occur throughout the period from 2014 to 2017 . Dividend period amount (USD) at cut-off date share (US cents) On March 26, the Aeroflot brand name celebrated its 75th year anniversary . The Aeroflot trademark is one of 1999 441,339 37. 1,110,616,299 0 .040 the classic symbols of Russia and the most famous commercial brand in the country . On March 29, Aeroflot signed a protocol of intent with the leasing company AerCap (AER) for the operational 2000 1,183,184 .98 1,110,616,299 0 .107 lease of ten new long-haul A330-200 planes . The first two A330-200s will be delivered to Aeroflot in 2008, 2001 2,210,914 .99 1,110,616,299 0 .199 with 5 more in 2009 and 3 more in 2010 . On March 30, Aeroflot and the United Aircraft Building Corporation (UABC) signed a protocol of intent for 2002 10,133,210 .02 1,110,460,578 1 0 .913 the financial lease of six new wide-body IL-96-400T cargo planes, to be delivered throughout the period from 2003 16,476,837 .00 1,110,616,299 1 .5 2008-2010 . 2004 28,016,858 .70 1,110,579,386 2 2 .5 April On April 3, the Board of Directors approved a decision to create an Aeroflot branch office in Sochi in order to 2005 31,650,213 .86 1,110,616,299 2 .9 strengthen the airline’s presence in one of the most dynamically growing regional aviation markets . On April 4, Aeroflot won the national award “Wings of Russia — 2006” in two top nominations — Russia’s best 1 As of the ex-dividend date, 155,721 shares were on the issuer’s client account and dividends on these shares were passenger carrier on domestic and international routes (among major airlines) . not accrued 2 As of the ex-dividend date, 36,913 shares were on the issuer’s client account and dividends on these shares were May Aeroflot began operating regular passenger flights along the Moscow--Moscow route . not accrued . On May 22, Aeroflot and CJSC Sukhoi Civil Aircraft announced the signing of an Agreement, according to which Sukhoi will deliver to Aeroflot 15 aircraft from the new line of . In compliance with the Agreement, the airline will obtain the fifteen SSJ100/95s in a basic configuration . The deliveries are sched- uled to begin May 2011 .

June On June 1, Aeroflot began issuing electronic tickets on the territory of the Russian Federation . On June 23, the Aeroflot shareholders annual general meeting was held . Krasnoyarsk region 111

8 FINANCIAL REPORT

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006

The following statement, which should be read in conjunction with the independent auditors’ re- sponsibilities stated in the independent auditors’ report set out on pages 120–121, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the consolidated financial statements of Open Joint Stock Company “Aero- flot – Russian Airlines” and its subsidiaries (the “Group”) .

Management is responsible for the preparation of the consolidated financial statements that present fairly the consolidated financial position of the Group as of December 31, 2006, and the consolidated results of its operations, cash flows and changes in equity for the year then ended, in compliance with International Financial Reporting Standards (“IFRS”) .

In preparing the consolidated financial statements, management is responsible for: • selecting suitable accounting principles and applying them consistently; • making judgments and estimates that are reasonable and prudent; • stating whether IFRS have been followed, subject to any material departures disclosed and ex- plained in the consolidated financial statements; and • preparing the consolidated financial statements on a going concern basis, unless it is inappropri- ate to presume that the Group will continue in business for the foreseeable future .

Management is also responsible for: • designing, implementing and maintaining an effective system of internal controls, throughout the Group; • maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; • maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions in which the Group operates; • taking such steps as are reasonably available to them to safeguard the assets of the Group; and • preventing and detecting fraud and other irregularities .

The consolidated financial statements for the year ended December 31, 2006 were approved on

May 29, 2007 by: Business Trip Things to do before leaving: General Director v . M . Okulov – buy some Siberian nuts for the kids – buy mom and mother-in-law Deputy General Director Beresta hats Finance and Planning M . i . Poluboyarinov – take pictures along the Yenisei river AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 112 113

Passenger yield (USc/RPK) Financial Results Passenger yield (USc/RPK)

In 2006, Aeroflot earned revenues of USD 2,982 7. million, representing an 18 1%. increase 9 2. 8 .9 compared with 2005 level . Operating costs rose 14 1%. from 2005, totaling USD 2,605 7. 8 .2 8 .0 7 .3 million . Operating income was USD 377 0. million, which is 55 7%. more than in 2005 . 6 .9 6 .4 6 .4 Income before taxes grew by 39 1%. in 2006 to USD 387 9. million . The net income of Aero- 5 .4 5 1. scheduled flot Group increased by 36 0%,. totaling USD 258 1. million . international flights

Headline financial results (USD millions) scheduled domestic flights 2006 2005 %

Revenue 2,982 .7 2,526 .3* 18 .1 2002 2003 2004 2005 2006 Operating costs (2,605 7). (2,284 .2)* 14 .1 the 2005 level . The growth was achieved due to the increase in the passenger traffic Operating income 377 .0 242 .1 55 .7 volumes and the higher passenger yield .

Non-operating income (loss), net (9 .5) 62 .2 Revenues from domestic passenger traffic grew by 28 .3%, totaling USD 636 .0 million . The growth was achieved owing to higher passenger yield . Income before taxation and minority interest 387 .9 278 .8 39 .1

Taxation (129 .8) (89 0). Cargo Revenue

Minority interest (2 .7) (5 .6) Revenues from cargo and mail traffic grew by 6 .6% in 2006, totaling USD 264 .4 mil- lion . Most of the cargo revenues (84 .2%) were earned from traffic on international Net Income 258 .1 189 .8 36 .0 routes . The growth in revenues was due to higher yields .

* A certain reclassification has been made to the financial statements for the year ended December 31, 2005 to bring it in line with current year presentation . Such reclassifications do not affect retained earnings . Cargo yield* (USc/CTK) Cargo yield (USc/CTK)

30 .2 Revenue Components 28 .3

In 2006, Aeroflot generated 74 1%. of revenue from passenger traffic, 8 .9% from car- 23 21 .8 go and mail traffic, 13 .3% from commercial agreements with foreign airlines on joint 20 .5 route operations, and 3 7%. from other business .

Passenger Traffic Revenue

Passenger traffic revenue rose by 20 7%. in 2006 to USD 2,209 .9 million . This growth is the results of the Company’s optimization of route networks, effective tariff policy, and the improvement of the commercial operations of the Group . 2002 2003 2004 2005 2006 Revenues from scheduled international passenger traffic totaled USD 1,573 .9 million, which represents 71 .2% of the total volume of revenues and a 17 .8% increase from *Scheduled flights . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 114 115

Revenue from Agreements with Airlines Operating costs breakdown, 2006 Revenues from commercial agreements with foreign airlines on joint operation of routes totaled USD 396 1. million, which represents at 11% growth from the 2005 level . The increase in revenues was due to increase in flight frequency and carrying Aircraft fuel volumes . 35.3% 7.0% Staff costs 1.8% Aircraft and traffic servicing Other Revenue 2.9% Maintenance 3.7% Sales and marketing Profits from other activities includes revenue from ground services at Sheremetye- 5.2% Operating lease expenses vo airport, from refueling aircraft of other airlines, and other services . Revenue in Administration and general expenses 6.4% 15.7% 2006 from other business totaled USD 112 .3 million, representing an increase of Passenger services 24 .8% from 2005 . 6.9% Communication expenses 15.1% Other expenses Revenue (USD millions)

2006 2005 % Aeroflot Group’s expenditures on jet fuel increased by 24 .2% in 2006, topping off at USD 179 1. million . Compared to the same period last year, fuel price went up 18 .4%, Passenger revenue 2,209 .9 1,831 .2 20 .7 totaling USD 96 7. per ton . The increase of flight hours in the financial period also influ- enced the growth of expenditures on jet fuel . incl . international* 1,573 .9 1,335 .6 17 .8 The Company’s expenses for grew by USD 46 .2 million, a 13 .3% domestic 636 .0 495 .6 28 .3 jump from 2005 . The increase is mainly due to higher prices for airport and air naviga- tion services, as well as increased flight hours . Cargo revenue 264 .4 248 .1 6 .6 Expenses for employee wages grew by USD 66 .9 million, a 19 .6% increase from the Airline revenue agreements 396 .1 357 .0 11 .0 previous year . This growth is due to raises in employee salaries, a 6 .5% increase in Other revenue 112 .3 90 .0 24 .8 flight hours, as well as the additional personnel needed for subsidiary companies on account of the increased volume of work . Total revenue 2,982.7 2,526.3 18.1 Expenses for the technical maintenance of aircraft decreased by USD 22 .5 million, an 11 1%. drop . The reduced expenditures can mainly be attributed to the Company’s ef- * All charter passengers are included in the international segment . forts to update the aircraft fleet and regularly repair aircraft in the reporting period, as well as the decreased costs for repairing Russian-made aircraft .

Operating Costs Unit costs (USc/RTK) Unit costs (USc/RTK) Aeroflot’s operating costs in 2006 totaled USD 2,605 7. million, which represents 85 (+7 .5%) a 14 1%. growth from 2005 . 79 .1 69 .8 68 .4 30 In 2006 operating costs are dominated by three groups of expenses, which are: 63 .4 25 .5 13 .6 17 .7 (+17 .6%) • fuel (35 .3%); 12 .4 • aircraft service (15 1%);. • employee wages (15 7%);. aircraft fuel • technical service (6 .9%) . other expenses 51 54 .8 52 .1 53 .6 55 The biggest impact on change in the structure of costs in 2005 was from growth of (+2 .6%) aircraft fuel, of prices for airport and air navigation services, and from increase of flight hours . 2002 2003 2004 2005 2006 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 116 117

Expenses for the operational lease of aircraft grew by USD 6 .0 million in 2006 (a 4 7%. The decrease of other non-operating income this year compared to the last year is increase), which is due to the acquisition of new aircraft under operational lease, in- explained by non-operating income items that are non-existent for this year, i .e . tax cluding three A320s and two B767s . restructuring charges, changes in accounting of VAT on cargo transportation services outside of Russia, and income on fuel option . Expenses for sales and marketing activities grew by USD 23 .9 million in 2006 (a 16 .8% increase), which is mainly due to increases in agents’ commissions in light of the Group’s growing profits . Capital Expenditures The Company’s other types of expenses lowered by USD 19 .0 million, or 13 .2% . The main reasons for this decrease are as follows: In 2006, the capital expenditures totaled USD 534 1. million . The biggest expenses were related to the acquisition and modernization of aircraft and equipment for them • less costs for insurance; (67 .02%), construction and renovation of buildings and facilities (27 .87%), and the • a decrease in accrued reserves (for bad debt, depreciation of investment, etc .) acquisition of vehicles and transportation equipment, computer equipment, and other operating and commercial inventory (4 .02%) . Operating costs (USD millions) In line with the Company’s program to modernize the aircraft fleet, four Airbus A-321s 2006 2005 % and five Boeing 737-500s were obtained under financial lease contracts in the ac- counting year . Advances were also given for the acquisition of three Airbus A-321s and Aircraft fuel 920 .3 741 .2 24 .2 30 RRJ95B aircraft . Aircraft and traffic servicing 392 .6 346 .4 13 .3 Staff costs 409 .2 342 .3 19 .5 In 2006, construction continued on the new “Water-Land” training system for the emergency rescue training of flight and cabin crew . The purpose of the new facility, Maintenance 179 .9 202 .4 (11 1). which opened 28 12. .2006, is to create an Aeroflot training base that complies with the Sales and marketing 166 .3 142 .4 16 .8 European JAP OPS standards and ICAO recommendations . Work was also carried out to modernize existing training systems . Operating lease expenses 134 .5 128 .5 4 .7 Administration and general expenses 96 .6 92 .6 4 .3 As part of the Company’s work to guarantee flight safety, Aeroflot replaced depreciated Depreciation 97 .2 80 .0 21 .5 equipment for the ground servicing of aircraft at Sheremetyevo Airport (Elephant and VTS machines, lifts, etc), and machinery used for technical servicing of aircraft . Communication expenses 48 .0 41 .8 14 .8 Other expenses* 161 .1 166 .6 (3 .3) Over the course of the year, Aeroflot made investments in the development of corporate information technologies (such as the acquisition and modernization of computing and Total operating costs 2,605.7 2,284.2 14.1 business equipment) in order to raise the overall level of automation in the Company, keep IT systems up to date, and introduce electronic systems for reservations and pas- senger registration, as well as internet sales . Non-Operating Income The largest share of capex in 2006 was invested in the construction of the new termi- Non-operating income (loss) (USD millions) nal complex Sheremetyevo-3, the construction of a new office building for the Com- pany, as well as the acquisition of office space for the airline’s representative offices in 2006 2005 Astrakhan, Vladivostok, St . Petersburg, Yekaterinburg, Perm, and Sochi . Interest expense (30 7). (25 3). The most significant types of other capital expenses include the acquisition of new uniforms, special clothing, and catering equipment . Interest income 4 .0 6 .9 Share of result of equity accounted investments 8 .4 5 .7 Foreign exchange and translation gain, net 38 .7 (12 8). Borrowings Other non-operating (expenses)/ income, net (9 .5) 62 .2 The structure of the Company’s credit portfolio changed significantly in 2006, as there Total 10.9 34.6 was an pre-term redemption of all long-term borrowings (a syndicated credit of USD 150 million and a unsecured credit of USD 30 million, provided by the bank WestBL AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 118 119

Vostok), as well as the early redemption of the 5-year project loan from ATB bank to fi- Segment information nance the acquisition of Tu-154s . The optimization of short-term borrowing terms with bank agents, in particular Sberbank Russia, offered a revolving credit line, with a fixed Financial data (USD millions) rate and unsecured (previously aircraft were pledged); borrowing from other credit banks under the agreement in structuring bank margins in accordance with credit Years ended December 31 2006 2005 % terms; a 2 .5 year syndicated credit loan was given for USD 33 1. million at the rate of LIBOR+1 75%. for the advanced payment for seven Airbus A321-200 aircraft to the Airline: company Airbus s .A .s . The deal was organized by Calyon, Natexis Transport Finance, External sales 2,943 .5 2,497 .4 17 .9 and Natexis Banques Populaires . Inter-segment sales – – – In 2006, OJSC Terminal was credited by Vnesheconombank for a total of USD 99 .2 mil- Total revenue 2,943 .5 2,497 .4 17 .9 lion towards the construction of the Sheremetyevo-3 airport terminal complex . Operating costs (2,578 .6) (2,259 .4) 14 .1 Operating income 364 .9 238 .0 53 .3 Group’s total interest expenses in 2006 amounted to USD 10 7. million, as compared to USD 11 .5 million in 2005 . Catering:

In order to optimize debt expenses, Aeroflot achieved the reduction of bank margins External sales 16 .3 13 .7 19 .0 on credit facilities . Reduction of the average weighted bank margin of debt portfolio Inter-segment sales 42 .5 27 .8 52 .9 from 2 .41% in 2005 to 2 11%. in 2006 (during which the average margin for short- Total revenue 58 .8 41 .5 41 .7 term borrowings reduced from 2 .33% in 2005 to 1 .49% in 2006, while the margin for Operating costs (49 .9) (47 .0) 6 .2 long-term credit lowered from 2 .5% to 2 15%). was achieved through detailed analysis of the current state of the corporate debt market, which resulted in a savings of USD Operating income 8 .9 (5 5). 261 .8 233 thousand in absolute terms . Hotels: Cash flows (USD millions) External Sales 17 .1 14 .2 20 .4 Inter-segment sales 4 .9 5 .1 (3 .9) 2006 2005 Total revenue 22 .0 19 .3 14 .0 Net cash provided by operating activities 371 .7 211 .9 Operating costs (14 .8) (14 .0) 5 .7 Net cash used in investing activities (279 .7) (190 .6) Operating income 7 .2 5 .3 35 .8 Net cash (used in) provided by financing activities (21 5). 23 .3 Other businesses: Net increase in cash and cash equivalents 70 .5 44 .6 External Sales 5 .8 1 .0 480 .0 Effect of exchange rate change 1 .3 (0 .3) Inter-segment sales 2 .1 1 .1 90 .9 Cash and cash equivalents at the end of the year 181.3 109.5 Total revenue 7 .9 2 .1 276 .2 Operating costs (11 .4) (0 7). 1 528 .6 Short-term and long-term loans (USD millions) Operating income (3 5). 1 .4 (350 0).

2006 2005 Intercompany eliminations: Inter-segment sales – – Loans and credit lines in USD 22 .5 60 .6 Operating costs (49 .5) (34 .5) (43 .5) Loans and credit lines in Russian rubles 206 .3 40 .3 Consolidated: Short-term loans 228.8 100.9 Total revenue 2 .982 .7 2,526 .3 18 .1 Long-term loans in USD 5.7 76.0 Operating costs (2,605 .7) (2,284 .2) 14 .1 Total 234.5 176.9 Operating income 377.0 242.1 55.7 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 120 121

independent auditors’ report Opinion

To the Shareholders of Open Joint Stock Company “Aeroflot — Russian Airlines”: In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2006 and its con- solidated financial performance and its cash flows for the year then ended in accor- dance with International Financial Reporting Standards . Report on the financial statements

We have audited the accompanying consolidated financial statements of Open Joint Stock Company “Aeroflot — Russian Airlines” and its subsidiaries (the “Group”), which comprise of the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of income, cash flows and changes in equity May 29, 2007 for the year then ended, and a summary of significant accounting policies and other explanatory notes .

Management’s responsibility

Management is responsible for the preparation and fair presentation of these con- solidated financial statements in accordance with International Financial Report- ing Standards . This responsibility includes: designing, implementing and maintain- ing internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances .

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit . We conducted our audit in accordance with International Stan- dards on Auditing . Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement .

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements . The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error . In making those risk assessments, the auditor considers internal control relevant to the entity’s prepa- ration and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control . An audit also includes evaluating the appropriateness of accounting policies used and the rea- sonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements .

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 122 123

OJSC “AEROFLOT — RUSSIAN AIRLINES” OJSC “AEROFLOT — RUSSIAN AIRLINES” CONSOLIDATED statement of income CONSOLIDATED BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 2006 As of DECEMBER 31, 2006 (Amounts in millions of US Dollars, except shares and earnings per share amounts) (Amounts in millions of US Dollars)

Notes 2006 2005 Notes 2006 2005 Traffic revenue 6 2,474 .3 2,079 .3 ASSETS Other revenue 7 508 .4 447 .0 Current assets Revenue 2,982.7 2,526.3 Cash and cash equivalents 13 181 .3 109 .5 Short-term investments 14 44 .9 30 .5 Operating costs 8 (2,099 3). (1,861 9). Accounts receivable and prepayments, net 15 701 .3 574 .9 Short-term aircraft lease deposits – 4 .4 Staff costs 9 (409 .2) (342 .3) Expendable spare parts and inventories 16 79 .0 61 .6 Depreciation 20 (97 2). (80 0). 1,006.5 780.9 Non-current assets Operating costs (2,605.7) (2,284.2) Equity accounted investments 17 21 .5 14 .1 Operating income 377.0 242.1 Long-term investments 18 18 .9 16 .8 Aircraft lease deposits 4 .7 4 .4 Interest expense 10 (30 7). (25 3). Deferred tax assets 12 7 .1 5 .0 Interest income 4 .0 6 .9 Other non-current assets 19 119 .9 6 .7 Property, plant and equipment 20 1,227 .5 794 .3 Share of result of equity accounted investments 17 8 .4 5 .7 1,399.6 841.3 Foreign exchange and translation gain/(loss), net 38 .7 (12 8). TOTAL ASSETS 2,406.1 1,622.2

Other non-operating (expenses)/income, net 11 (9 .5) 62 .2 LIABILITIES AND EQUITY Profit before income tax 387.9 278.8 Current liabilities Income tax 12 (129 .8) (89 0). Accounts payable and accrued liabilities 21 485 .4 333 .2 Unearned transportation revenue 123 .6 99 .6 Profit for the year 258.1 189.8 Short-term borrowings 24 228 .8 100 .9 Attributable to: Provisions 22 7 .2 7 .2 Current portion of finance lease payable 26 52 .2 26 .1 Equity holders of the parent 255 .4 184 .2 897.2 567.0 Minority interest 2 .7 5 .6 Non-current liabilities 258.1 189.8 Long-term borrowings 25 5 .7 76 .0 Finance lease payable 26 453 .0 281 .3 Earnings per share, basic and diluted (US cents) 24.3 17.9 Provisions 22 76 .1 81 .4 Deferred tax liabilities 12 32 .5 36 .5 Weighted average number of shares outstanding (millions) 27 1,060 1,060 Other non-current liabilities 23 152 .7 12 .5 720.0 487.7 The accompanying notes form an integral part of these consolidated financial statements . Capital and reserves The Independent Auditors’ Report is presented on pages 120–121 . Share capital 27 51 .6 51 .6 Treasury stock 27 (33 .5) (32 .9) Investments revaluation reserve 11 .0 8 .8 Cumulative translation reserve 2 .7 0 .3 Retained earnings 28 752 .7 530 .8

Equity attributable to equity holders of the parent 784 .6 558 .6 Minority interest 4 .3 8 .9 788.9 567.5 TOTAL LIABILITIES AND EQUITY 2,406.1 1,622.2

The accompanying notes form an integral part of these consolidated financial statements . The Independent Auditors’ Report is presented on pages 120–121 . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 124 125

OJSC “AEROFLOT — RUSSIAN AIRLINES” OJSC “AEROFLOT — RUSSIAN AIRLINES” CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2006 FOR THE YEAR ENDED DECEMBER 31, 2006 (CONTINUED) (Amounts in millions of US Dollars) (Amounts in millions of US Dollars)

2006 2005 2006 2005 Cash flows from operating activities: Cash flows from financing activities: Profit before income tax 387.9 278.8 Repayment of capital element of finance lease (46.5) (25.9) Adjustments to reconcile income before taxation to net cash Dividends paid (34 .2) (31 .5) provided by operating activities: Purchases of treasury stock (1 0). (1 .9) Depreciation of property, plant and equipment (Note 20) 97 .6 80 .0 Sale of treasury stock 0 .1 3 .5 Loss / (gain) on disposal of property, plant and equipment (Note 8) 7 .5 (3 .4) Proceeds from borrowings, net 57 .2 82 .4 Share of result in equity accounted investments (Note 17) (8 .4) (5 .7) Restricted cash movements 2 .9 (3 .3) Loss on impairment of property, plant and equipment (Note 9) 1 .5 5 .5 Net cash (used in) provided by financing activities (21.5) 23.3 (Decrease) / increase in provisions and assets impairment (4 .8) 14 .8 Net increase in cash and cash equivalents 70.5 44.6 Reversal of payable no longer due (2 .5) – Cash and cash equivalents at the beginning of the year (Note 13) 109 .5 65 .2 Gain from restructuring and settlements of tax penalties (Note 11) – (8 .6) Effect of exchange rate change 1 .3 (0 .3) Unrecoverable VAT (Note 11) 18 .8 1 .0 Cash and cash equivalents at the end of the year (Note 13) 181.3 109.5 Other non-cash loss / (income) 6 .8 (2 .5) Supplemental cash flow information: Operating profit before working capital changes 504.0 359.9 Interest paid 29 .8 (25 .6) Increase in accounts receivable and prepayments (112 .2) (120 .1) Interest received 4 .0 8 .8 (Increase) / decrease in expendables and inventory (17 4). 2 .9 Increase in accounts payable and accrued liabilities 115 .0 (6 .3) Non-cash investing and financing activities: Increase in unearned transportation revenue 24 .0 1 .0 Property, plant and equipment acquired under finance lease 287 .9 2 .8 513.4 237.4 Gain from early termination of finance lease – 7 .5 Income tax paid (141 .7) (25 5). The accompanying notes form an integral part of these consolidated financial statements . Net cash provided by operating activities 371.7 211.9 The Independent Auditors’ Report is presented on pages 120–121 . Cash flows from investing activities: Purchases of property, plant and equipment and intangible assets (261 .5) (182 .5) Proceeds from sale of property, plant and equipment 3 .6 1 .1 Investments in aircraft lease deposits (1 .9) (4 .9) Purchases of investments (43 6). (36 2). Proceeds from sale of investments 29 .3 30 .1 Acquisition of minority interests (6 .6) – Dividends received 1 .0 1 .8 Net cash used in investing activities (279.7) (190.6) AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 126 127

OJSC “AEROFLOT — RUSSIAN AIRLINES” OJSC “AEROFLOT — RUSSIAN AIRLINES” CONSOLIDATED STATEMENT OF ChANGES IN EQUITY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 FOR THE YEAR ENDED DECEMBER 31, 2006 (Amounts in millions of US Dollars) (Amounts in millions of US Dollars)

Invest­ Attributable ments Cumulative to equity Share Treasury revaluation translation Retained holders of Minority capital stock reserve reserve earnings the parent interest Total 1 . NATURE OF THE BUSINESS As of December OJSC “Aeroflot — Russian Airlines” (the “Company” or “Aeroflot”) was formed as a joint 31, 2004 51.6 (35.4) 12.0 1.2 373.5 402.9 8.6 411.5 stock company following a government decree in 1992 . The 1992 decree conferred all Profit for the year – – – – 184 .2 184 .2 5 .6 189 .8 the rights and obligations of “Aeroflot‑Soviet Airlines” and its structural units, exclud- Purchase ing its operations in Russia and Sheremetyevo Airport, upon the Company, including of treasury stock – (1 .9) – – – (1 .9) – (1 9). inter-governmental bilateral agreements and agreements signed with foreign airlines Sale of treasury and enterprises in the field of civil aviation . stock – 0 .6 – – – 0 .6 – 0 .6 The principal activity of the Company is the provision of passenger and cargo air transpor- Gain on disposal of treasury stock – 2 .9 – – – 2 .9 – 2 .9 tation services, both domestically and internationally, and other aviation services from its base at Moscow Sheremetyevo Airport . The Company and its subsidiaries (the “Group”) Loss on investments also conduct activities comprising airline catering, operation of a hotel, and construc- available-for-sale – – (3 .2) – – (3 .2) – (3 2). tion of Shremetyevo-3 Terminal . Associated undertakings mainly comprise cargo-han- Foreign currency dling services, fuelling services and duty-free retail businesses . translation for the year – 0 .9 – (0 .9) – – (0 .6) (0 6). As of December 31, 2006 and 2005, the Government of the Russian Federation Dividends – – – – (26 9). (26 9). (4 .7) (31 .6) owned 51% of the Company . The Company’s headquarters are located in Moscow at As of December 37 Leningradsky Prospect . 31, 2005 51.6 (32.9) 8.8 0.3 530.8 558.6 8.9 567.5 Profit for the year – – – – 255 .4 255 .4 2 .7 258 .1 The principal subsidiary undertakings are: Purchase Percentage Percentage of treasury stock – (1 .0) – – – (1 .0) – (1 0). Place of incor- held as of held as of Sale of treasury poration December December stock – 0 .1 – – – 0 .1 – 0 .1 Company name and operation Activity 31, 2006 31, 2005 Gain on disposal of treasury stock – 0 .3 – – – 0 .3 – 0 .3 CJSC “Sherotel” Moscow region Hotel 100 .0% 100 .0% Gain OJSC “Terminal” Moscow region Project on investments Sheremetyevo-3 100 .0% 100 .0% available-for-sale – – 2 .2 – – 2 .2 – 2 .2 CJSC “Aeroflot Plus” Moscow region Airline 100 .0% 100 .0% Purchase OJSC “Insurance Moscow Captive insurance of minority interests – – – – (2 .8) (2 .8) (4 .2) (7 0). company “Moscow” services 100 .0% 100 .0% Foreign currency CJSC “Aeromar” Moscow region Catering 51 .0% 51 .0% translation – – – 2 .4 – 2 .4 0 .5 2 .9 Dividends – – – – (30 7). (30 7). (3 .5) (34 .2) OJSC “Aeroflot-Don” Rostov-on-Don Airline 100 .0% 51 .0% As of December CJSC “Aeroflot-Nord” Arkhangelsk Airline 51 .0% 51 .0% 31, 2006 51.6 (33.5) 11.0 2.7 752.7 784.5 4.4 788.9 CJSC “Aeroflot-Cargo” Moscow Cargo transportation services 100 .0% – The accompanying notes form an integral part of these consolidated financial statements . The Independent Auditors’ Report is presented on pages 120–121 . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 128 129

In 2006 the Company increased its share in OJSC “Aeroflot-Don” up to 100% by purchas- 2 . Presentation of financial statements ing of minority interests for a total cash consideration of approximately USD 6 .6 million . Also during 2006 a new wholly owned entity CJSC “Aeroflot-Cargo” was created . During Basis of presentation — The consolidated financial statements of the Group have 2006 all of the cargo operations and the related assets were transferred to this entity . been prepared in accordance with International Financial Reporting Standards (“IFRS”) . The consolidated financial statements are presented in millions of US Dollars, The significant entities in which the Group holds more than 20% but less than 50% except where it specifically noted otherwise . of equity are: All significant subsidiaries directly or indirectly controlled by the Company are includ- Place of in- Percentage Percentage ed in the consolidated financial statements . A listing of the Group’s principal subsidiary corporation held as of held as of undertakings is set out in Note 1 . and opera- December December Company name tion Activity 31, 2006 31, 2005 The Group maintains its accounting records in Russian rubles and in accordance with LLC “Airport Moscow” Moscow region Cargo handling 50 .0% 50 .0% Russian accounting legislation and regulations . The accompanying consolidated finan- CJSC “Aerofirst” Moscow region Trading 33 .3% 33 .3% cial statements are based on the underlying accounting records, appropriately adjust- CJSC “TZK Sheremetyevo” Moscow region Fuel trading company 31 .0% 31 .0% ed and reclassified for fair presentation in accordance with the standards prescribed by the International Accounting Standards Board . CJSC “AeroMASH — AB” Moscow region Aviation security 45 .0% 45 .0% Functional and presentation currency — The functional and presentation cur- All the companies listed above are incorporated in the Russian Federation . rency of the Company is US Dollars . Transactions and balances not already measured in US Dollars have been remeasured to US Dollars in accordance with International The table below provides information on the Group’s aircraft fleet as of December 31, 2006: Accounting Standard (“IAS”) 21 “The Effect of Changes in Foreign Exchange Rates” .

Aeroflot — Any conversion of amounts to US Dollars should not be considered Russian Aeroflot- Aeroflot- Aeroflot- Group as a representation that Russian ruble amounts have been, could be or will be in Airlines Don Nord Cargo total the future, converted into US dollars at the exchange rate shown or at any other Type of aircraft Ownership (number) (number) (number) (number) (number) exchange rate . Ilyushin IL-96-300 Owned 6 – – – 6 Ilyushin IL-62M Owned 1 – – – 1 The assets and liabilities, both monetary and non-monetary, of the subsidiaries of the Ilyushin IL-86 Owned 9 – – – 9 Company with functional currencies other than US dollar have been translated at the Tupolev Tu-154 Owned 25 8 1 – 34 closing rate at the date of each balance sheet presented; income and expense items for Tupolev Tu-134 Owned 12 2 4 – 18 all periods presented have been translated at the exchange rates existing at the dates Antonov An-24 Owned – – 2 – 2 of the transactions or a rate that approximates the actual exchange rates . All exchange Antonov An-26 Owned – – 1 – 1 differences resulting from translation have been classified as equity and transferred to Tupolev Tu-134 Finance lease – – 3 – 3 the Group’s translation reserve . Airbus A-319 Finance lease 4 – – – 4 Airbus A-320 Finance lease 1 – – – 1 The following table summarizes the exchange rate of the Russian ruble to 1 US Dollar: Airbus A-321 Finance lease 7 – – – 7 Exchange rate Boeing 737-500 Finance lease – 2 3 – 5 Tupolev Tu-134 Operating lease 1 1 – – 2 December 31, 2006 26 .33 Tupolev Tu-154 Operating lease 2 – 2 – 4 Average rate for 2006 27 .19 Ilyushin IL-62M Operating lease 1 – – – 1 Antonov An-24 Operating lease – – 1 – 1 December 31, 2005 28 .78 Antonov An-26 Operating lease – – 1 – 1 Airbus A-319 Operating lease 4 – – – 4 Average rate for 2005 28 .29 Airbus A-320 Operating lease 9 – – – 9 December 31, 2004 27 .75 Boeing 767-300ER Operating lease 11 – – – 11 McDonnell Douglas DC10-40F Operating lease 3 – – 1 4 96 13 18 1 128 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 130 131

3 . new and revised international financial reporting • IFRIC 9 “Reassessment of Embedded Derivatives” effective for annual periods standards beginning on or after June 1, 2006 . Management believes that this interpretation should not have a significant impact on the Group’s operations . Certain new standards and interpretations became effective for the Group from Janu- • IFRIC 11 “IFRS 2 — Group and treasury share transactions” effective for annual ary 1, 2006 . Their adoption has not resulted in any significant changes to the Group’s periods beginning on or after March 1, 2007 . Management believes that this inter- accounting policies . The standards and interpretations that became effective from pretation should not have a significant impact on the Group’s operations . January 1, 2006 are: • IFRIC 12 “Service concession arrangements” effective for the annual periods be- • Amendment to IAS 19 “Actuarial gains and losses, group plans and disclosures” ef- ginning on or after January 1, 2008 . Management believes that this interpretation fective for annual periods beginning on or after January 1, 2006 . should not have a significant impact on the Group’s operations . • Amendments to IAS 39 “The fair value option”, “Cash flow hedge accounting of forecast intragroup transactions” and “Financial guarantee contracts” (including related amendment to IFRS 4) effective for annual periods beginning on or after 4 . PRINCIPAL ACCOUNTING POLICIES January 1, 2006 . • Amendment to IAS 21 “Net investment in a foreign operation” effective for annual The cosolidated financial statements have been prepared on the historic cost basis periods beginning on or after January 1, 2006 . except for the revaluation of certain non-current assets and financial instruments . The • Amendment to IFRS 1 “First-time adoption of International Financial Reporting principal accounting policies adopted in the preparation of these consolidated finan- Standards” effective for annual periods beginning on or after January 1, 2006 . cial statements are set out below . • IFRS 6 “Exploration for and evaluation of mineral resources”, including related sub- sequent amendment to IFRS 6 and to IFRS 1, effective for annual periods beginning Consolidation — The consolidated financial statements incorporate the financial on or after January 1, 2006 . statements of the Company and entities controlled by the Company (its subsidiaries) • IFRIC 4 “Determining whether an arrangement contains a lease” effective for an- prepared through December 31 each year . Subsidiaries comprise entities in which the nual periods beginning on or after January 1, 2006 . Company, directly or indirectly, has an interest of more than one half of the voting rights • IFRIC 5 “Rights to interests arising from decommissioning, restoration and envi- or otherwise has power to exercise control over their operations . Control is achieved ronmental rehabilitation funds” effective for annual periods beginning on or after where the Company has the power to govern the financial and operating policies of an January 1, 2006 . investee entity so as to obtain benefits from its activities . • IFRIC 6 “Liabilities arising from participating in a specific market — waste electri- cal and electronic equipment” effective for annual periods beginning on or after Subsidiaries are consolidated from the date on which effective control is obtained by December 1, 2005 . the Group and are no longer consolidated from the date of disposal or loss of control .

Certain new standards and interpretations have been published that are mandatory for All intra-group transactions, balances and unrealized surpluses and deficits on the Group’s accounting periods beginning on or after January 1, 2007 or later periods transactions between Group companies are eliminated on consolidation . Minor- and which the entity has not early adopted: ity interests in the net assets of consolidated subsidiaries are identified separately • IAS 23 (revised) “Borrowing costs” effective for annual periods beginning on or af- from the Group’s equity therein . The interest of minority shareholders is stated at ter January 1, 2009 . The Group has significant capitalizable borrowing costs and is the minority’s proportion of the fair values of the assets and liabilities acquired ad- currently evaluating the potential impact of IAS 23 (revised) on the financial state- justed by subsequent changes in the carrying value of net assets of those entities . ment presentation . Currently the Group treats the borrowing costs as expense when Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s incurred . equity are allocated against the interests of the Group except to the extent that the • IFRS 7 “Financial instruments: Disclosures” effective for annual periods beginning minority has a binding obligation and is able to make an additional investment to cover on or after January 1, 2007 and a complementary Amendment to IAS 1 “Presen- the losses . tation of Financial Statements — Capital Disclosures” effective for annual periods beginning on or after January 1, 2007 . The Group expects that the adoption of IFRS Business combinations — The acquisition of subsidiaries is accounted for using the 7 will result in significant additional disclosures for the Group . purchase method . The cost of the acquisition is measured at the aggregate of the fair • IFRS 8 “Operating segments” effective for annual periods beginning on or after Jan- values, at the date of exchange, of assets given, liabilities incurred or assumed, and eq- uary 1, 2009 . The Group is currently evaluating the potential impact of IFRS 8 on the uity instruments issued by the Group in exchange for control of the acquiree, plus any presentation of segmental information . costs directly attributable to the business combination . The acquirer’s identifiable as- • IFRIC 7 “Applying the Restatement Approach under IAS 29” effective for annual sets, liabilities and contingent liabilities that meet the conditions for recognition under periods beginning on or after March 1, 2006 . Management does not expect the in- IFRS 3 “Business Combinations” are recognized at their fair values at the acquisition terpretation to be relevant for the Group . date, except for non-current assets (or disposal groups) that are classified as held for • IFRIC 8 “Scope of IFRS 2” effective for annual periods beginning on or after May 1, sale in accordance with IFRS 5 “Non-Current Assets Held for Sale and Discontinued 2006 . Management does not expect the interpretation to be relevant for the Group . Operations”, which are recognized and measured at fair value less costs to sell . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 132 133

The results of subsidiaries acquired or disposed of during the year are included in the received or receivable and represents amounts receivable for goods and services pro- consolidated income statement from the effective date of acquisition or up to the ef- vided in the normal course of business, net of sales related taxes . fective date of disposal, as appropriate . Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with Passenger revenue: Ticket sales are reported as traffic revenue when the transporta- those used by other members of the Group . tion service has been provided . The value of tickets sold and still valid but not used by the balance sheet date is reported as unearned transportation revenue . This item is Purchases of minority interests — The difference between the cost of acquisition reduced either when the Group completes the transportation service or when the pas- and the carrying value of minority interests is recognized as adjustment to equity . senger requests a refund . Sales representing the value of tickets that have been issued, but which will never be used, are recognized as operating income at the date the tickets Investments in associates — Associates in which the Group has significant influ- are issued based on analysis of historic patterns of actual sales data . Commissions ence but not a controlling interest are accounted for using the equity method of ac- which are payable to the sales agents are recognized as the commercial and marketing counting . Significant influence is usually demonstrated by the Group’s owning, directly expenses at the same time as revenue from the air transportation to which they relate . or indirectly, between 20 percent and 50 percent of the voting share capital or by ex- erting significant influence through other means . Passenger revenue includes revenue from code-share agreements with certain other airlines . Under these agreements, the Group sells seats on these airlines’ flights and Under the equity method, investments in associates are carried in the consolidated bal- those other airlines sell seats on the Group’s flights . Revenue from the sale of code- ance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the share seats on other airlines are recorded net in Group’s passenger revenue in the net assets of the associate, less any impairment in the value of individual investments . consolidated income statement . The revenue from other airlines’ sale of code-share The Group’s share of the net income or losses of associates is included in the con- seats on our flights is recorded in passenger revenue in the Group’s consolidated in- solidated income statement . An assessment of investments in associates is performed come statement . when there is an indication that the asset has been impaired or that the impairment losses recognized in prior years no longer exist . Losses of an associate in excess of the Cargo revenue: Group’s cargo transport services are recognized as revenue when the Group’s interest in that associate (which includes any long-term interests that, in sub- air transportation is provided . Cargo sales for which transportation service has not yet stance, form part of the Group’s net investment in the associate) are not recognized . been provided are shown as unearned transportation revenue .

Where a group entity transacts with an associate of the Group, profits and losses are Catering revenue: Revenue is recognized when meal packages are delivered to the air- eliminated to the extent of the Group’s interest in the relevant associate . A listing of the craft, as this is the date when the risks and rewards of ownership are transferred to the Group’s principal associated undertakings is shown in Note 1 . customers .

Foreign currency translation — Transactions in currencies other than the func- Other revenue: Revenue from bilateral airline agreements is recognized when earned tional currency are initially recorded at the rates of exchange prevailing on the dates with reference to the terms of each agreement . Sales of hotel accommodation are rec- of the transactions . Monetary assets and liabilities denominated in such currencies at ognized when the services are provided . Sales of goods and other services are recog- the balance sheet date are translated into the functional currency at the year-end ex- nized as revenue when the goods are delivered or the service carried out . change rate . Exchange differences arising from such translation are included into the consolidated income statement . Borrowing costs — All borrowing costs are recognized as an expense in the period in which they are incurred . Non-current assets and disposal groups held for sale — Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recov- Segment reporting — For the purposes of segment disclosure the Group has identi- ered through a sale transaction rather than through continuing use . This condition is fied the following segments: regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition . Management must be commit- (a) Business segments ted to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification . The principal business segments are airline operations, airline catering, hotel op- erations and other . Business segment assets comprise all assets used directly in Any liabilities related to non-current assets to be sold are also presented on a separate the business area’s operations . Income tax assets are excluded from segment as- line in liabilities on the balance sheet . Non-current assets (and disposal groups) classi- sets . Equity interests in affiliated companies are presented separately . Business fied as held for sale are measured at the lower of the assets’ previous carrying amount segment liabilities and provisions comprise all commitments that are directly at- and fair value less costs to sell . tributable to the business segment’s operations .

Revenue recognition — Revenue is measured at the fair value of the consideration AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 134 135

(b) geographic segments Capitalized costs of aircraft checks and major modernization and improve- ments projects are depreciated on a straight-line basis to the projected date of The operations of all segments are based in the Russian Federation . With respect the next check or based on estimates of their useful lives . Ordinary repair and to scheduled passenger and cargo activities, the following geographic analysis is maintenance costs are expensed as incurred . provided: (iv) Depreciation — The Group depreciates fleet assets owned or held under fi- (i) Geographic analysis of revenue from flights — The analysis of revenue from nance leases on a straight-line basis to the end of their estimated useful life . The scheduled flights is based upon the geographic location of the place of flight airframe, engines and interior of an aircraft are depreciated separately over origin; their respective estimated useful lives . Salvage value for airframes of the for- eign fleet is estimated as 5% of historic cost, while salvage value for Russian (ii) Geographic analysis of net assets — The major revenue-earning assets of the aircraft is zero . Engines are depreciated on a straight-line basis to the end of Company are comprised of its aircraft fleet . Since the Company’s aircraft fleet the useful life of the related type of aircraft . is employed flexibly across its worldwide route network, there is no suitable basis for allocating such assets and liabilities to geographic segments . Useful lives of the Group’s fleet assets are as follows:

Property, plant and equipment — Property, plant and equipment are stated at cost, or appraised value, as described below . Depreciation is calculated in order to amortize the cost or appraised value (less estimated salvage value where applicable) over the Airframes of foreign aircraft 20 years remaining useful lives of the assets . Airframes of Russian aircraft 25–32 years

(a) Fleet Engines of foreign aircraft 8 years Engines of Russian aircraft 8–10 years (i) Owned aircraft and engines — Aircraft and engines owned by the Group as of December 31, 1995 were stated at depreciated replacement cost based upon Interiors 5 years external valuations denominated in US Dollars . Subsequent purchases are re- corded at cost Airclaims, an international firm of aircraft appraisers, conduct- ed the valuation . The Group has chosen not to revalue these assets subsequent (v) Capitalized leasehold improvements — capitalized costs that relate to the rented to 1995 . fleet are depreciated over the shorter of their useful life and the lease term .

(ii) Finance leased aircraft and engines — Where assets are financed through fi- (b) land and buildings, plant and equipment nance leases, under which substantially all the risks and rewards of ownership are transferred to the Group, the assets are treated as if they had been pur- Property, plant and equipment are stated at historical US Dollar cost . Provision is chased outright . The Group recognizes finance leases as assets and liabilities made for the depreciation of property, plant and equipment based upon expected in the balance sheet as amounts equal at the inception of the lease to the fair useful lives or, in the case of leasehold properties, over the duration of the leases value of the leased property or, if lower, at the present value of the minimum using a straight-line basis . These useful lives range from 10 to 20 years . Land ar- lease payments . The corresponding obligation, reduced by the capital portion eas are not depreciated . of lease payments made, is included in payables . Custom duties, legal fees and other initial direct costs are added to the amount recognized as an asset . The (c) Capital expenditure interest element of lease payments made is included in interest expense in the income statement . Capital expenditures comprise costs directly related to the construction of proper- ty, plant and equipment including an appropriate allocation of directly attributable (iii) Capitalized maintenance costs — The valuation of aircraft and engines as of variable overheads that are incurred in construction as well as costs of purchase December 31, 1995 reflected their maintenance condition, as measured on the of other assets that require installation or preparation for their use . Depreciation basis of previous expenditure on major overhauls and estimated usage since of these assets, on the same basis as for other property assets, commences when the previous major overhaul . Expenditure of modernization and improvements the assets are put into operation . Capital expenditures are reviewed regularly to projects that are significant in size (mainly aircraft modifications involving in- determine whether their carrying value is fairly stated and whether appropriate stallation of replacement parts) subsequently are separately capitalized in the provision for impairment is made . balance sheet . The carrying amount of those parts that are replaced is derec- ognized from the balance sheet and included in gain or loss on disposals of property, plan and equipment in the Group’s consolidated income statement . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 136 137

(d) gain or loss on disposal Financial instruments are classified as liabilities or equity in accordance with the sub- stance of the contractual arrangement . Interest, dividends, and gains and losses relat- The gain or loss arising on the disposal or retirement of an asset is determined as ing to a financial instrument classified as a liability are reported as expense or income . the difference between the sales proceeds and the carrying amount of the asset Distributions to holders of financial instruments classified as equity are charged directly and is recognized in the consolidated income statement . to equity . Financial instruments are offset when the Group has a legally enforceable right to offset and intends to settle either on a net basis or to realize the asset and settle Impairment of non-current assets — At each balance sheet date, the Group reviews the liability simultaneously . The result from the realization of the financial instruments the carrying amounts of its non-current assets to determine whether there is any indi- is determined based on the FIFO method . cation that those assets have suffered an impairment loss . If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the (a) Credit risks impairment loss (if any) . Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generat- The sale of passenger and freight transportation is largely processed through ing unit to which the asset belongs . agencies that are normally linked to country-specific clearing systems for the set- tlement of passenger and freight sales . Clearing centers check individual agents Recoverable amount is the higher of fair value less costs to sell and value in use . In operating outside of the Russian Federation . Individual agents operating within assessing value in use, the estimated future cash flows are discounted to their present the Russian Federation are checked in-house . value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset . Receivables and liabilities between major airlines, unless otherwise stipulated in the respective agreements, are settled on a bilateral basis or by settlement through If the recoverable amount of an asset (or cash-generating unit) is estimated to be less a clearinghouse of the International Air Transport Association (IATA) . than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount . An impairment loss is recognized immediately in (b) Fair value the consolidated income statement . The fair value of financial instruments is determined by reference to various mar- Where an impairment loss subsequently reverses, the carrying amount of the asset ket information and other valuation methods as considered appropriate . At the (cash-generating unit) is increased to the revised estimate of its recoverable amount, balance-sheet date, the fair values of the financial instruments held by the Group but so that the increased carrying amount does not exceed the carrying amount that did not materially differ from their recorded book values . would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years . (c) Foreign exchange risk

Lease deposits — Lease deposits represent amounts paid to the lessors of for- The significant portion of the Group’s sales and purchases are linked directly or indi- eign aircraft, which are held as security deposits by lessors in accordance with rectly to US Dollars or a combination of US Dollars and other major currencies and the provisions of finance and operating lease agreements; these deposits are re- hence the foreign exchange risk to the Group is partially compensated . The Group’s turned back to the Group at the end of the lease period . Lease deposits relating finance lease liabilities and some other borrowings are denominated in US Dollars, to the operating lease agreements are presented as assets on the balance sheet . A part thus further reducing foreign currency exposure in US Dollar terms . In 2006 the of these deposits is interest-free . Interest-free deposits have been recorded at amor- Group did not manage foreign exchange risk through the use of hedging instru- tized cost using an average market yield of 6 .3% percent . Lease deposits that are part ments but rather aimed to broadly match its assets and liabilities in the different cur- of finance lease arrangements are presented net as part of finance lease liability . rencies to limit exposure . The Group monitors changes in foreign exchange rates to minimize the level of foreign currency exposure and to identify need for hedging Operating leases — Payments under operating leases are charged to the consoli- activities . dated income statement in equal annual installments over the period of the lease . Re- lated direct expenses including custom duties for leased aircraft are amortized using (d) interest rate risk a straight-line method over the life of lease agreement . The Group’s main exposure to interest-rate risk is from its finance lease liabilities Financial instruments — Financial assets and financial liabilities carried on the bal- and short-term borrowings . In 2006 the Group did not use financial hedging in- ance sheet include cash and cash equivalents, marketable securities, investments, de- struments to hedge its exposure to the changes in interest rates, as they are not rivative financial instruments, trade and other accounts receivable, trade and other ac- generally available on the Russian market . The Group constantly monitors changes counts payable, borrowings and notes payable . The accounting policies on recognition in interest rates to minimize the level of its exposure and to identify need for hedg- and measurement of these items are disclosed below in this Note . ing activities . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 138 139

(e) non-financial risks — fuel hedging activities es . The Group did not designate any such derivatives as hedging instruments for IAS 39 purposes . Results of Group’s operations can be significantly impacted by changes in the price of aircraft fuel . The Group periodically purchases derivatives such as jet fuel op- Derivative instruments are accounted for as held for trading with related gains or tions in order to hedge its exposure from future price fluctuations in jet fuel . The losses from remeasurement to fair value included in the current period consolidated Group does not use derivatives instruments for speculative purposes . income statement as other non-operating gains or losses .

Cash and cash equivalents — Cash and cash equivalents consist of cash on hand, The Group assesses on each closing date whether there is any objective evidence that balances with banks and short-term interest-bearing accounts which are used in the the value of a financial asset item or group of items has been impaired . If there is ob- day-to-day financing of the Group’s airline activities . jective evidence that an impairment loss has arisen for loans and other receivables entered at allocated acquisition cost in the balance sheet or for held-to-maturity invest- Investments — The Group’s financial assets have been classified according to IAS ments, the size of the loss is determined as the difference of the book value of the asset 39 (amended 2004) “Financial Instruments: Recognition and Measurement” into the item and the present value of expected future cash flows of the said financial asset item following categories: trading securities, held-to-maturity investments, loans and other discounted at the original effective interest rate . The loss is recognized in the consoli- receivables, and available-for-sale investments . Investments with fixed or determin- dated income statement . able payments and fixed maturity, which the Group has the positive intent and ability to hold to maturity, other than loans and receivables, are classified as held-to-maturity Loans and receivables — Loans and receivables are non-derivative financial assets investments . Derivative financial instruments and investments acquired principally for with fixed or determinable payments that are not quoted in an active market . Loans the purpose of generating a profit from short-term fluctuations in price are classified and receivables are measured at initial recognition at fair value, and are subsequent- as trading . All other investments, other than loans and receivables, are classified as ly measured at amortized cost using the effective interest rate method . Because the available-for-sale . expected term of an account receivable is short, the value is typically stated at the nominal amount without discounting, which corresponds with fair value . Uncertain ac- Investments are recognized and derecognized on a trade date basis where the pur- counts receivable are assessed individually and any impairment losses are stated in chase or sale of an investment is under a contract whose terms require delivery of the non-operating expenses . investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs . Accounts payable — Trade payables are initially measured at fair value, and are sub- sequently measured at amortized cost, because the expected term of accounts payable Held-to-maturity investments are financial assets excluding derivative contracts which is short, the value is stated at the nominal amount without discounting, which corre- mature on a specified date and which a company has the firm intent and ability to hold sponds with fair value . to maturity . They are valued at allocated acquisition cost and they are included in long- term assets . Short-term borrowings — Short-term borrowings comprise the short-term portion of interest-bearing long-term borrowings, i .e . the portion of the loans that is amortized Investments other than held-to-maturity debt securities are classified as either invest- in the coming year, as well as other current interest-bearing liabilities with a term short- ments held for trading or as available-for-sale, and are measured at subsequent report- er than one year . These liabilities are measured at amortized cost and reported on the ing dates at fair value . Investments in equity instruments of other companies that do not settlement date . have a quoted market price are stated at cost less impairment loss, as it is not practica- ble to determine the fair value of such investments . For derivatives and other financial Long-term borrowings — Long-term borrowings, i .e ., liabilities with a term longer instruments classified as held for trading gains and losses arising from changes in fair than one year, consist of interest-bearing loans which are initially measured at fair val- value are included in profit or loss for the period . For available-for-sale investments, ue, and are subsequently measured at amortized cost, using the effective interest rate gains and losses arising from changes in fair value are recognized directly in equity, method, as of the settlement date . until the security is disposed of or is determined to be impaired, at which time the cumu- lative gain or loss previously recognized in equity is included in the profit or loss for the Expendable spare parts and inventories — Inventories, including aircraft expend- period . Impairment losses recognized in profit or loss for equity investments classified ables, are valued at cost as determined by the “first-in, first-out” method (“FIFO”) or as available-for-sale are not subsequently reversed through profit or loss . Impairment net realizable value, whichever is lower . Inventories are reported net of provisions for losses recognized in profit or loss for debt instruments classified as available-for-sale slow-moving or obsolete items . are subsequently reversed if an increase in the fair value of the instrument can be ob- jectively related to an event occurring after the recognition of the impairment loss . Value added taxes — Value added tax (“VAT”) related to sales is payable to the tax au- thorities on an accrual basis . For sales of passenger tickets this is when the tickets are During the year ended December 31, 2006 and 2005, the Group did not have any registered for a flight by the customers . Domestic flights are subject to VAT at 18% rate trading securities other than derivatives acquired specifically for hedging fuel pric- and international flights are subject to VAT at 0% rate . Input VAT invoiced by domestic AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 140 141

suppliers as well as VAT paid in respect of imported aircraft and spare parts may be re- cember 31, 2006 and 2005, deferred tax assets and liabilities have been measured based covered, subject to certain restrictions, against output VAt . The recovery of input VAT on tax rates applicable to the Group’s companies range from 20% to 24% . It is charged or relating 0% rate VAT sales is typically delayed by up to 6 months and sometimes lon- credited to the consolidated income statement, except when it relates to items credited or ger due to compulsory tax audit requirements and other administrative matters . Input charged directly to equity, in which case the deferred tax is also dealt with in equity . VAT claimed for recovery as of the balance sheet date is presented net of output VAT liability . Recoverable input VAT that is not claimed for recovery in the current period is Employee benefits — The Company makes certain payments to employees on retire- recorded on the balance sheet as VAT receivable . VAT receivable that is not expected to ment, or when they otherwise leave the employment of the Company . These obligations, be recovered within the twelve months from the balance sheet date is classified as long- which are unfunded, represent obligations under a defined benefit pension plan . For such term asset . VAT balances are not discounted . Where provision has been made against plans, the pension accounting costs are assessed using the projected unit credit method . uncollectible receivables, the bad debt expense is recorded at the gross amount of the Under this method, the cost of providing pensions is charged to the income statement account receivable, including VAt . in order to spread the regular cost over the average service lives of employees . Actu- arial gains and losses are recognized in the income statement immediately . The pension Frequent flyer program — The Company records an estimated liability for the in- payments may be increased upon the retirement of an employee based on the decision cremental costs associated with providing free transportation under the “Aeroflot Bo- of management . The pension liability for non-retired employees is calculated based on nus” program (see also Note 21) when a free air ticket or upgrade of service class are a minimum annual pension payment and do not include increases, if any, to be made by earned . Principal incremental costs include aircraft fuel costs and third-party passen- management in the future . Where such post-employment employee benefits fall due more ger services (such as catering services and airport charges) . The liability is included in than 12 months after the balance sheet date, they are discounted using a discount rate accounts payable and accrued liabilities, and is adjusted periodically based on awards determined by reference to the average market yields at the balance sheet date . earned, awards redeemed and changes to the “Aeroflot Bonus” program . The costs are included in sales and marketing expenses in the consolidated income statement . The Company also participates in a defined contribution plan, under which the Compa- ny has committed to contribute a certain percentage (15% to 20% in 2006) of the con- Provisions — Provisions are recognized when, and only when, the Group has a pres- tribution made by employees choosing to participate in the plan . Contributions made ent obligation (legal or constructive) as a result of a past event, and it is probable (i .e . by the Company on defined contribution plans are charged to expenses when incurred . more likely than not) that an outflow of resources embodying economic benefits will be Contributions are additionally made to the Government’s Pension fund at the statutory required to settle the obligation, and a reliable estimate can be made of the amount of rates in force during the year . Such contributions are expensed as incurred . the obligation . Provisions are reviewed at each balance sheet date and adjusted to re- flect the current best estimate . Where expecting timing of cash flows can be estimated Treasury shares — The Company’s shares, which are held in treasury stock or belong and the effect of the time value of money is significant, the amount of a provision is the to the Company’s subsidiaries, are reflected as a reduction of the Group’s equity . The present value of the expenditures required to settle the obligation . disposal of such shares does not impact net income of the current year and is recog- nized as a change in shareholders’ equity of the Group . Dividends distributions by the Income tax — The nominal income tax rate for industrial enterprises in Russia in Company are recorded net of the dividends related to treasury shares . 2006 and 2005 was 24% . The nominal tax rate is subject to regional reductions by up to 4% . The average nominal tax rate of the Group was lower than 24% as the tax rate Dividends — Dividends are recognized at the date they are declared by the sharehold- applicable to different entities within the Group varied from 20% to 24% . ers at a general meeting .

Deferred income taxes — Deferred tax assets and liabilities are calculated in respect Retained earnings legally distributable by the Company are based on the amounts of temporary differences in accordance with IAS 12 “Income Taxes” . IAS 12 requires available for distribution in accordance with applicable legislation and reflected in the use of the balance-sheet liability method for financial reporting and accounting for the statutory financial statements . These amounts may differ significantly from the deferred income taxes . Deferred income taxes are provided for all temporary differ- amounts calculated on the basis of IFrs . ences arising between the tax basis of assets and liabilities and their carrying values for financial reporting purposes . Deferred tax liabilities are generally recognized for all Earnings per share — Earnings per share are calculated by dividing the income for taxable temporary differences and deferred tax assets are recorded only to the extent the period attributable to ordinary shareholders by the weighted average number of or- that it is probable that taxable profit will be available against which the deductible tem- dinary shares outstanding during the period . The Group does not have any potentially porary differences can be utilized . Deferred tax assets and liabilities are offset when dilutive equity instruments . they relate to income taxes levied by the same taxation authority and the Group intends to settle its tax assets and liabilities on a net basis . Contingencies — Contingent liabilities are not recognized in the financial statements unless they arise as a result of a business combination . They are disclosed unless the Deferred tax assets and liabilities are measured at the tax rates that are expected to apply possibility of an outflow of resources embodying economic benefits is remote . Contin- during the period when the asset is to be realized or the liability settled, based on tax rates gent assets are not recognized in the financial statements but are disclosed when an that have been enacted or substantively enacted as at the balance-sheet date . As of De- inflow of economic benefits is probable . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 142 143

5 . SIGNIFICANT ESTIMATES 8 . OPERATING COSTS

The key assumptions concerning the future, and other key sources of estimation un- 2006 2005 certainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial Aircraft fuel 920 .3 741 .2 year, are discussed below . Aircraft and traffic servicing 392 .6 346 .4 Maintenance 179 .9 202 .4 Provisions — Provisions are made when any probable and quantifiable risk of loss attributable to disputes is judged to exist . Sales and marketing 166 .3 142 .4 Operating lease expenses 134 .5 128 .5 Depreciable lives of property, plant and equipment — In reporting intangible as- sets and tangible fixed assets, an assessment is made of the useful economic life and an Administration and general expenses 96 .6 92 .6 assessment is made at least once a year to determine whether impairment exists . Passenger services 76 .1 67 .3 Communication expenses 48 .0 41 .8 Compliance with tax legislation — As discussed further in Note 34 compliance with tax legislation, particularly in the Russian Federation, is subject to significant degree of Cost of sales 35 .4 24 .1 interpretation and can be routinely challenged by the tax authorities . The management Insurance expenses 20 .3 22 .3 records a provision in respect of its best estimate of likely additional tax payments and Bank charges 9 .2 9 .1 related penalties which may be payable if the Group’s tax compliance is challenged by the relevant tax authorities . Taxes other than income tax 7 .0 17 .4 Loss/(gain) on disposal of property, plant and equipment, net 7 .5 (3 .4) Pilot’s certification and trainings 6 .9 6 .2 6 . TRAFFIC REVENUE Increase of provision for impairment of fixed assets (Note 20) 1 .5 5 .5 Change in provisions (Note 22) (5 3). 21 .3 2006 2005 Other expenses / (income) 2 .5 (3 .2) Scheduled flights: Total operating costs, net 2,099.3 1,861.9 Passengers 2,190 .3 1,815 .9 Cargo 159 .9 155 .5 Charter flights: 9 . STAFF COSTS Passengers 19 .6 15 .3 Cargo 104 .5 92 .6 2006 2005 2,474.3 2,079.3 Wages and salaries 346 .9 291 .8 Social security costs 17 .2 14 .1 7 . other revenue Pension costs 45 .1 36 .4 409.2 342.3 2006 2005

Airline revenue agreements 396 .1 357 .0 The Company continued its participation in a non-government pension fund to provide Ground handling and maintenance 16 .3 22 .7 additional pensions to certain of its employees upon their retirement . The pension fund Catering services 14 .3 13 .7 requires contributions from both employees and the Company, and is a defined contri- Hotel revenue 17 .0 14 .2 bution pension plan for the employer . Refueling services 30 .3 21 .2 Other revenue 34 .4 18 .2 Furthermore, the Company makes payments, upon retirement, to employees participat- 508.4 447.0 ing in the plan with one or more years’ service . These obligations, which are unfunded, represent obligations under a defined benefit pension plan . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 144 145

Pension costs also include compulsory payments to the Pension fund of the Russian (ii) in 2006 the Group purchased jet fuel options to hedge aircraft fuel prices . Due Federation (“RF”), contributions to a non-government pension fund and an increase in to decrease of fuel prices the option lapsed unexecuted . Total expense relating to the net present value of the future benefits the Company expects to pay to its employ- purchased fuel options during the year ended December 31, 2006 was approxi- ees upon their retirement under a defined benefit pension plan, as follows: mately USD 1 5. million . In 2005 the Group purchased and exercised two jet fuel options resulting in recognition of gain of USD 11 1. million .

2006 2005 (iii) restructuring and settlement of tax penalties amounting to USD 8 .6 million in Payments to the Pension Fund of the RF 43 .7 34 .4 2005 represents a waver received in respect of tax penalties relating to pay- ments of income tax, which were accrued for the period from 1997 to 2001 . Defined benefit pension plan 1 .1 1 .7 Defined contribution pension plan 0 .3 0 .3 (iv) usd 15 1. million represents VAT paid on amounts received from customers for passenger tickets which were not used, of which USD 6 .4 million relates to 45.1 36.4 the year ended December 31, 2005 . In 2006 the management determined that these amounts may no longer be recoverable . 10 . INTEREST EXPENSE

2006 2005 12 . Income tax

Finance leases 20 .0 13 .8 2006 2005 Short-term and long-term borrowings 10 .7 11 .5 Current income tax charge (136 .0) (58 .4) 30.7 25.3 Deferred income tax benefit / (expense) 6 .2 (30 .6) (129.8) (89.0) 11 . other NON-OPERATING (Expenses) / INCOME, NET Income before taxation for financial reporting purposes is reconciled to taxation as 2006 2005 follows:

Recovery of VAT paid in prior years (i) – 29 .0 Fines and penalties received from suppliers 17 .1 11 .9 2006 2005 (Loss)/gain on derivatives (ii) (1 .5) 11 .1 Restructuring and settlement of tax penalties (iii) – 8 .6 Profit before income tax 387.9 278.8 Insurance compensation 0 .8 3 .4 Theoretical tax at statutory rate (24%) (93 .1) (66 .9) (Loss)/gain from disposal of investments, net (0 .9) 3 .7 Tax effect of items which are not deductible or Reversal of payables no longer due 2 .5 – assessable for taxation purposes: Non-recoverable VAT (iv) (18 8). (1 .0) Effect of lower tax rates applied 8 .9 8 .9 Other expenses (7 .7) (4 .5) Non-deductible expenses (35 .6) (30 .4) (9.5) 62.2 Non-taxable income 6 .7 8 .3 Other permanent differences – 1 .1

(i) in 2005 the Company recorded a gain from recovery of VAT paid in prior years Prior period current tax adjustments (16 .7) (10 .0) in the amount of USD 29 .0 million relating to change in accounting for VAT on Income tax (129.8) (89.0) export cargo transportation services provided in 2003, 2004 and in the first half of 2005 based on adjusted tax returns for the respective previous periods filed with the tax authorities . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 146 147

Differences between IFRS and Russian statutory taxation regulations give rise to 14 . Short-term investments certain temporary differences between the carrying values of certain assets and li- abilities for financial reporting purposes and their values for profits tax purpos- 2006 2005 es . The tax effect of the movement on these temporary differences is recorded at Available-for-sale investments the tax rates applicable to the Group’s companies and range from 20% to 24% for Corporate and government bonds 2 .2 0 .6 the years ended December 31, 2006 and 2005 . Corporate shares 7 .8 1 .2 10.0 1.8 Movement Movement 2006 for year 2005 for year 2004 Other short-term investments Promissory notes from third parties 4 .8 3 .3 Tax effects of temporary differences: Bank deposits with original maturities exceeding 90 days 7 .5 21 .7 Property, plant and equipment 5 .2 3 .3 1 .9 (1 .2) 3 .1 Other short-term investments 23 .1 3 .7 Reserve for ST investments (0 5). – Borrowings 1 .5 (1 .6) 3 .1 – 3 .1 34 .9 28 .7 Accounts receivable 0 .2 0 .2 – – – 44.9 30.5

Accounts payable 0 .2 0 .2 – (0 .2) 0 .2 Corporate and government bonds represent bonds denominated in Russian rubles is- sued by the Government of the Russian Federation and major Russian companies with Deferred tax assets, net 7.1 5.0 6.4 maturity dates from 2007 to 2010 and yield to maturity of 8 .4–12 .98 percent per an- num as of December 31, 2006 . Property, plant and equipment (70 .2) (34 1). (36 1). (9 .8) (26 3). Corporate shares are publicly traded shares of Russian companies with readily avail- Long-term investments (10 .6) 3 .0 (13 6). 0 .3 (13 9). able market prices . Accounts receivable (16 .5) (15 6). (0 .9) 1 .9 (2 .8) In the consolidated financial statements of the Group investments in bonds and shares Accounts payable 64 .8 50 .7 14 .1 (0 .7) 14 .8 are reflected at period-end market value based on last traded prices obtained from the Moscow Interbank Currency Exchange (“MICEX”) . Deferred revenue – – – (20 0). 20 .0 As of December 31, 2006 interest rate on bank deposits denominated in Russian Deferred tax liabilities, net (32.5) (36.5) (8.2) roubles with original maturities exceeding 90 days bore interest between 5 75. and 9 .5 percent per annum . In 2005 the Company placed bank deposit denominated in 6.1 (29.7) Russia roubles at the interest rates of 7 .5 percent per annum and US dollars denomi- nated deposit at 7 .5 percent per annum . 13 . CASH AND CASH EQUIVALENTS

2006 2005 15 . ACCOUNTS RECEIVABLE AND PREPAYMENTS, NET

Ruble denominated bank accounts 54 .2 34 .3 2006 2005

Bank accounts denominated in USD 101 .4 17 .4 Trade receivables 191 .7 232 .7 Bank accounts denominated in Euros 8 .2 3 .4 Prepayments and accrued income 76 .6 49 .7 Other receivables 47 .9 90 .0 Bank accounts denominated in other currencies 13 .3 5 .6 Provision for bad and doubtful accounts (18 .2) (18 .3) Bank deposits 2 .4 43 .8 298 .0 354 .1 Income tax prepaid 14 .8 4 .8 Cash in transit and other 1 .8 5 .0 VAT and other taxes recoverable, other than income tax 388 .5 216 .0 181.3 109.6 701.3 574.9 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 148 149

16 . expendable spare parts and INVENTORIES 18 . LONG-term investments

2006 2005 2006 2005 Available-for-sale investments Expendable spare parts 39 .7 25 .6 Fuel 19 .9 18 .0 SITA Investment Certificates 0 .7 0 .8 Other inventory 19 .4 18 .0 Shares in France Telecom 14 .1 12 .8 79.0 61.6 Mutual investment funds 0 .9 1 .9 15 .7 15 .5 Other long-term investments 17 . Equity accounted investments Loans and promissory notes from related parties – 0 .4 Loans and promissory notes from third parties 0 .7 0 .6 2006 2005 Other 2 .5 0 .3 Voting power Carrying value Voting power Carrying value 3 .2 1 .3 CJSC “Aerofirst” 33 .3% 4 .8 33 .3% 4 .4 18.9 16.8 CJSC “TZK Sheremetyevo” 31% 5 .8 31% 3 .6 CJSC “AeroMASH — AB” 45% 1 .5 45% 1 .1 LLC “Aeroimp” 25% 3 .3 25% – 19 . other non-current assets LLC “Airport Moscow” 50% 3 .8 50% 2 .9 Other non-current assets as of December 31, 2006 are VAT recoverable of approximately Other Various 2 .3 Various 2 .1 USD 78 .3 million relating to finance and operating leases of aircraft and capitalized 21.5 14.1 amount of custom duties of approximately USD 41 .6 million relating to operating leas- es of aircraft .

Summarized financial information in respect of the Group’s affiliates accounted by using equity method based on their respective financial statements prepared for the years ended December 31, 2006 and 2005 is set out below:

2006 2005

Total assets 131 .6 100 .6 Total liabilities (71 5). (52 2). Net assets 60 .1 48 .4

Impairment provision – (3 .5) Group’s share in net assets of equity accounted investments 21 .5 17 .6 21.5 14.1 Revenue 724 .7 578 .8 Profit for the year 10 .0 11 .7 Group’s share of result of equity accounted investments or the year 8.4 5.7 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 150 151

20 . PROPERTY, PLANT AND EQUIPMENT As of December 31, 2006 and 2005, fixed assets, principally Russian aircraft and en- gines, with a net book value of USD 4 .9 million and USD 14 .0 million, respectively, were Owned Leased Land Plant, Capital pledged as collateral under loan agreements . aircraft aircraft and equipment expendi- and engines and engines buildings and other ture (i) Total (i) Assets under construction include capital expenditures made by the Company on the construction of the new Sheremetyevo-3 terminal . Capital expenditures Cost as of December 31, 2006 and 2005 amount to USD 209 .3 million and USD 67 .6 December 31, 2004 482 .6 446 .8 179 .2 189 .2 54 .3 1,352 .1 million, respectively . Also capital expenditures as of December 31, 2006 include prepayment for delivery of three Airbus A-321 aircraft, which will be acquired by Foreign currency translation (0 .8) (0 .1) (0 .4) (0 .5) (1 .4) (3 .2) the Company on finance leases terms, for the amount of USD 31 .0 million . Additions 29 .3 1 .5 3 .3 16 .9 112 .3 163 .3 (ii) in 2006 the Group acquired four Airbus A-321 aircraft, five Boeing 737-500 Capitalized overhaul costs 24 .0 16 .8 – – – 40 .8 aircraft and three Tupolev Tu-134 under finance leases for the amount of USD Transfers 10 .5 5 .2 – 3 .6 (19 3). – 227 .3 million, USD 51 .9 million and USD 4 .6 million, respectively . As of Decem- ber 31, 2005 the amount of USD 27 .8 million for the four Airbus A-321 have Disposals (53 .6) (80 7). (0 .3) (13 9). (11 0). (159 .5) been included in capital expenditures . December 31, 2005 492 .0 389 .5 181 .8 195 .3 134 .9 1,393 .5 (iii) in 2006, the Company’s subsidiaries OJSC “Aeroflot-Don” and CJSC “Aeroflot- Foreign currency translation 2 .1 2 .1 1 .0 1 .1 9 .9 16 .2 Nord” sold aircraft owned by the Group: one Tupolev Tu-154 aircraft for the Additions (ii) 30 .1 263 .7 1 .5 15 .1 206 .0 516 .4 amount of USD 0 1. million, five Tupolev Tu-134 aircraft and two Antonov An-24 aircraft for the amount of USD 3 1. million Also one aircraft Tupolev Tu-134 was Capitalized overhaul costs (iv) 15 .8 – – – – 15 .8 sold for the amount of USD 0 .3 million . Transfers 1 .7 27 .8 0 .4 14 .9 (44 8). – (iv) Of the total costs of USD 45 9. million capitalized during 2006 in respect of owned Disposals (iii) (40 .8) – (0 .2) (9 .2) (2 .7) (52 .9) aircraft and engines USD 28 .8 million related to regular checks and moderniza- December 31, 2006 500 .9 683 .1 184 .5 217 .2 303 .3 1,889 .0 tion of engines and USD 15 .8 million related to the aircraft overhauls . In 2006 the Company has continued the program of modernization of the interiors of Boeing Accumulated depreciation 767-300 aircraft held under operating leases and finished the modernization of nine aircraft . Total capitalized expenses incurred as a result of this modernization December 31, 2004 (363 .1) (70 5). (60 5). (140 .6) – (634 .7) as of December 31, 2006 amounted to USD 40 7. million, including USD 1 .8 mil- Foreign currency translation 0 .2 – 0 .1 0 .4 – 0 .7 lion capitalized in 2005 and partly shown as transfer from capital expenditure . Impairment reserve (4 .9) – – 0 .5 (1 .1) (5 .5) Charge for the year (35 .7) (22 2). (9 .1) (13 0). – (80 .0) 21 . ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Disposals 49 .3 60 .3 0 .1 10 .6 – 120 .3 2006 2005 December 31, 2005 (354 .2) (32 4). (69 4). (142 .1) (1 .1) (599 .2) Trade payables and accruals 243 .4 186 .6 Foreign currency translation (1 .1) (0 .1) (0 .4) (1 .1) – (2 .7) Income tax payable 1 .7 42 .0 Impairment reserve 0 .6 – – (2 .1) – (1 .5) Wages and social contributions payable 50 .2 40 .3 Other payables 137 .4 16 .6 Charge for the year (34 .6) (39 8). (9 .2) (14 0). – (97 .6) Advances received (other than unearned transportation revenue) 19 .2 11 .3 Disposals 32 .2 – – 7 .3 – 39 .5 Taxes payable (other than income tax) 4 .2 9 .6 December 31, 2006 (357 .1) (72 3). (79 0). (152 .0) (1 .1) (661 .5) Merchandise credits 7 .4 8 .5 Frequent flyer program liability 12 .6 7 .8 Net book value Other accrued expenses 7 .0 5 .8 Dividends payable 2 .3 2 .7 December 31, 2005 137.8 357.1 112.4 53.2 133.8 794.3 Notes payable – 2 .0 December 31, 2006 143.8 610.8 105.5 65.2 302.2 1,227.5 485.4 333.2 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 152 153

The Group introduced the “Aeroflot Bonus” frequent flyer program in 1999 . As of Decem- vices in 1997-1998 to be void, as this contradicted Russian legislation and invoiced the ber 31, 2006 and 2005 approximately 676 thousand and 442 thousand passengers, Company for approximately USD 7 .2 million for underpaid amounts relating to 1997–1998 respectively, participated in the program . Frequent flyer program liability as of Decem- and interest accrued as of December 31, 2004 . This amount is included in provisions as ber 31, 2006 and 2005 represents incremental costs, which are included in sales and of December 31, 2006 and 2005 in full and is presented as a current liability as of De- marketing expenses, associated with providing free transportation under “Aeroflot Bo- cember 31, 2006 . The liability was settled in March 2007 . nus” program .

23 . OTHER NON-CURRENT LIABILITIES 22 . PROVISIONS 2006 2005 2006 2005 Defined benefit pension obligation — non-current portion 11 .5 10 .5 Beginning of the year 88 .6 67 .3 VAT payable on leased aircraft 74 .1 – Additional provision in the year 23 .6 42 .9 Custom duties payable on leased aircraft 67 .1 – Release of provision (28 9). (21 6). Other non-current liabilities – 2 .0 End of the year 83.3 88.6 152.7 12.5 Analyzed as: Current liabilities 7 .2 7 .2 Other non-current liabilities represent long-term portion of VAT and customs duties relating to imported leased aircraft assets payable in equal monthly installments over Non-current liabilities 76 .1 81 .4 34 month period from the date these assets were cleared through customs . Amounts 83.3 88.6 payable related to custom duties have been discounted using discount rate of 8 .05 per- cent with a related gain from discounting included in the amount of related assets .

The Group is a defendant in various legal actions . Provisions represent management’s best estimate of the Group’s probable losses relating to various actual and potential legal claims . Additionally, the Group provides against tax contingencies and the related inter- 24 . SHORT-TERM BORROWINGS est and penalties based on management’s estimate of the amount of the additional taxes that may be due . However, the range of potential exposures has not been disclosed to 2006 2005 avoid prejudicing the Group’s position . Loans and credit lines in USD The Company is a defendant in a claim by the owner of a cargo plane, which crashed in West LB AG (Germany) (i) – 60 .2 Italy in October 1996, whilst on charter to the Group . The basis of the claim concerns li- NATEXIS BANQUES POPULAIRES (ii) 10 .8 – ability for the loss of the aircraft and the responsibilities of the parties at the time of the crash . According to a report prepared by Airclaims, compensation relating to crashed ABN Amro Bank (iii) 10 .0 – aircraft ranges from USD 11 .8 million to USD 15 .3 million . Management had made their Other short-term bank loans 1 .7 – best assessment of the likely outcome associated with this issue and recorded a provision Amsterdam Trading Bank — current portion (Note 25) – 0 .4 amounting to USD 12 .0 million as of December 31, 2003 . In April 2005, the Arbitration court has decided in favor of the claimant regarding compensation and awarded dam- Loans in Russian rubles ages amounting to USD 35 .0 million, accordingly the reserve was increased to USD 35 .0 Vnesheconombank (iv) 99 .2 – million . The provision amounted to USD 35 .0 million has been included in consolidated Sberbank of the Russian Federation (v) 45 .0 – financial statements as of December 31, 2006 and 2005 . Currently, there is uncertainty TransCreditBank (vi) 5 .3 5 .4 regarding final resolution . At the present time execution of the court decision is suspend- ed and the Company has filed an appeal . Final adjustments (if any) to this uncertainty will Alfa-bank (vii) 8 .3 – be made in the financial statements when the outcome of the issue is known . Vneshtorgbank (vi) 39 .3 34 .0 Other short-term bank loans 9 .2 0 .9 In 2001 Federal Unitary Entity, Goscorporation OVD claimed the agreement with Fed- 228.8 100.9 eral Aviation Service on application of a 50 percent discount on aeronavigation ser- AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 154 155

(i) the balance as of December 31, 2005 represented short-term portion of a credit (i) the balance as of December 31, 2005 consists of a credit line amounting to USD line amounting to USD 60 .2 million and bears interest of LIBOR + 2 .3 percent 30 .0 million and bears interest of LIBOR + 1 .9 percent per annum . The credit per annum . The effective average interest rate for 2006 was 5 7. percent per was obtained to finance its current activities . The effective average interest rate annum . During 2006 the loan was repaid in full . for 2006 was 6 .65 percent per annum . The loan was fully repaid by the Company in July 2006 before its contracted maturity dates . (ii) the balance as of December 31, 2006 represented short-term portion of a credit line amounting to USD 10 .8 million and bears interest of LIBOR + 1 75. percent (ii) the balance as of December 31, 2005 represented long-term portion of a credit per annum . The effective average interest rate for 2006 was 6 .99 percent per line amounting to USD 30 .0 million and bore interest of LIBOR + 2 .3 percent annum . per annum . The effective average interest rate for 2006 was 6 .97 percent per annum . The loan was fully repaid by the Company in May 2006 before its con- (iii) the balance as of December 31, 2006 represented short-term portion of tracted maturity date . a credit line amounting to USD 10 .0 million and bears interest of LIBOR + 1 .05 percent per annum . The effective average interest rate for 2006 was 6 .4 per- (iii) the loan amounting to USD 8 million bore interest of 8 .5 percent per annum and cent per annum . was payable by December 1, 2009 . The loan was obtained by the Company to finance the purchase of property, plant and equipment with a net book value of (iv) the credit line granted by the Vnesheconombank amounting to USD 99 .2 mil- USD 5 .2 million which were pledged as collateral under this agreement as of De- lion . Percentage rate for 2006 was 9 .0 percent per annum . Since December cember 31, 2006 . The effective average interest rate for 2006 was 8 .5 percent 25, 2006 interest rate was 9 .25 percent per annum . The effective average in- per annum . The loan was fully repaid by the Company in December 2006 . terest rate for 2006 was 9 .2 percent per annum . (iv) long-term portion of the loan amounting to USD 2 .6 million was payable by June (v) the credit line granted by the Sberbank of the Russian Federation amounting 8, 2009 and bore interest of 8 .0 percent per annum . The loan was obtained by to USD 45 .0 million . The credit was obtained to replenish the Group’s working the Company to finance the purchase of fixed assets . Fixed assets with a net assets and interest rate was 8 .5 percent per annum . The effective average in- book value of USD 3 1. million were pledged as collateral under this agreement terest rate for 2006 was 7 .0 percent per annum . as of December 31, 2006 . The effective average interest rate for 2006 was 8 .0 percent per annum . During 2006 the loan was repaid in full . (vi) the amounts represent the net balance due under a series of short-term secu- rity sale and repurchase agreements bearing interest rates of 6 .9 per cent . 2006 2005 (vii) The credit line granted by Alfa-bank amounting to USD 8 .3 million . Property, The borrowings are repayable as follows: plant and equipment with a net book value of USD 0 15. million are pledged as a collateral under this loan agreement . The effective average interest rate for On demand or within one year 228 .8 100 .9 2006 under this credit line was 10 .0 percent per annum . In two to five years – 70 .6 After five years 5 .7 5 .4 Total 234 .5 176 .9 25 . LONG-TERM BORROWINGS Less: amounts due to settlement within 12 months (228.8) (100.9)

2006 2005 Amounts due for settlement after 12 months 5.7 76.0 Loans in USD West LB Vostok (i) – 30 .0 West LB AG (Германия) (ii) – 30 .0 Amsterdam trading Bank (iii) – 8 .0 Amsterdam trading Bank (iv) – 2 .6 Accor 2 .6 2 .5 Other long-term bank loans 3 .1 2 .9 5.7 76.0 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 156 157

26 . FINANCE LEASE PAYABLE Ordinary shareholders are allowed one vote per share .

The Group leases aircraft under finance lease agreements . Leased assets are listed in During 2006 the number of treasury shares held by the Group increased by 184,327 . Note 1 above . The Company’s shares are listed on the Russian Trade System (“RTS”) and MICEX and 2006 2005 as of May 29, 2007 were traded at USD 2 .5 per share .

Total outstanding payments 612 .6 350 .1 The Company launched a Level 1 Global Depositary Receipts (GDR) program in De- Finance charge (107 .4) (42 7). cember 2000 . The Company signed a depositary agreement with Deutsche Bank Principal outstanding 505 .2 307 .4 Group, allowing the Company’s shareholders to swap their shares for GDR’s, which Representing: trade over-the-counter on US and European markets . The swap ratio was estab- Short-term lease payable 52.2 26.1 lished at 100 shares per gdr . Per depositary agreement the total volume of GDR of the Company cannot exceed 20 percent of the Company’s share capital . In 2001, Long-term lease payable 453.0 281.3 the Company’s GDR’s were listed on the NEWEX (New Europe Exchange) stock ex- Due for repayment (principal and finance charge): change in Vienna and after closing of this exchange the GDR’s were transferred to On demand or within one year 72 .1 33 .6 the third segment of the stock exchange in Frankfurt . In two to five years 261 .3 128 .0 After five years 279 .2 188 .5 612 .6 350 .1 28 . retained earnings, dividends

Interest unpaid as of December 31, 2006 and 2005 was approximately USD 2 .3 million The statutory accounting reports of the Group companies are the basis for profit dis- and USD 1 1. million, respectively, and has been included in accrued expenses . In 2006 tribution and other appropriations . For the years ended December 31, 2006 and 2005, and 2005 the effective interest rate on these leases approximated 5 .3 and 4 1. percent the statutory profits of the Company, as reported in the published annual statutory per annum, respectively . financial statements, were 7,981 million Russian rubles and 6,032 million Russian rubles, respectively . In 2006 the Group obtained four Airbus A-321s and five Boeing B-737-500 under fi- nance leases . The related short-term and long-term finance lease liabilities as of De- In respect of 2006, the Board of Directors recommended to approve dividends of RUR cember 31, 2006 amounted to USD 21 7. million and USD 194 .5 million, respectively . 1 .29 per share (approximately 5 US cents per share), which will be paid to shareholders between June 24 and August 22, 2007 . This dividend is subject to approval by share- In 2005 the Company returned to a lessor one Airbus A-310 which resulted in termina- holders at the annual shareholders’ meeting and has not been recognized as a liability tion of a related finance lease agreement . At the date of termination the net book value in these financial statements . of this aircraft was USD 19 .4 million . The short-term finance lease liability decreased by USD 26 .8 million, thus producing a gain of USD 7 .5 million included in gain on dis- posal of property, plant and equipment . 29 . SEGMENT INFORMATION The Company’s aircraft leases are subject to both positive and negative covenants . In accordance with those covenants, the Company maintains insurance coverage for its The Group is organized into three main segments: leased aircraft . • Airline — domestic and international passenger and cargo air transport and other airline services; • Catering — the preparation of food and beverages for ; 27 . SHARE CAPITAL • Hotels — the operation of hotels .

Number of shares Number of shares Number of shares All operations are based in the Russian Federation; therefore no geographical segment authorized and issued in treasury stock outstanding information is disclosed . Ordinary shares of one Russian ruble each: As of December 31, 2005 1,110,616,299 (50,198,379) 1,060,417,920 As of December 31, 2006 1,110,616,299 (50,382,706) 1,060,233,593 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 158 159

Details of the geographical breakdown of revenues from scheduled passenger and Reporting format — business segments cargo airline activities are as follows: Year ended December 31, 2006 Airline Catering Hotels Other Eliminations Total Group By region 2006 2005 External sales 2,943 .5 16 .3 17 .1 5 .8 – 2,982 .7 a) Scheduled passenger revenue Inter-segment sales – 42 .5 4 .9 2 .1 (49 .5) – International flights from Moscow to: Total revenue 2,943.5 58.8 22.0 7.9 (49.5) 2,982.7 Operating profit 364 .9 8 .9 7 .2 (3 5). (0 .5) 377 .0 Europe 463 .5 376 .8 Interest expense (30 .7) Asia 199 .1 171 .5 Interest income 4 .0 Share of income in associates 6 .4 – 1 .8 0 .2 – 8 .4 North America 72 .3 68 .8 Foreign exchange and translation Other 17 .5 13 .6 (loss) income, net 38 .7 Non-operating income (loss), net (9 .5) International flights to Moscow from: Income before taxation 387.9 Europe 461 .0 383 .3 Taxation (129 8). Asia 205 .7 182 .4 Net income – 258.1 Segment assets 2,307 .3 19 .4 25 .2 300 .1 (277 2). 2,374 .8 North America 69 .5 66 .0 Associates 21 .5 – – – – 21 .5 Other 17 .3 12 .7 Unallocated assets 9 .8 Consolidated total assets 2,406.1 Other international flights 48 .4 45 .2 Segment liabilities 572 .8 17 .6 19 .8 40 .6 (38 .9) 611 .9 Domestic flights 636 .0 495 .6 Unallocated liabilities 1,005 .3 Consolidated total liabilities 1,617.2 2,190.3 1,815.9 Capital expenditure 388 .6 0 .9 1 .4 143 .2 – 534 .1 Depreciation 93 .0 0 .9 3 .1 0 .2 – 97 .2 b) Scheduled cargo revenue Other non cash expenses (income) (2 5). (0 3). – – – (2 .8) International flights from Moscow to: Year ended December 31, 2005 Airline Catering Hotels Other Eliminations Total Group Europe 11 .6 10 .0 External sales 2,497 .4 13 .7 14 .2 1 .0 – 2,526 .3 Asia 4 .8 5 .3 Inter-segment sales – 27 .8 5 .1 1 .1 (34 .0) – North America 4 .6 4 .7 Total revenue 2,497.4 41.5 19.3 2.1 (34.0) 2,526.3 Operating profit 238 .0 (5 5). 5 .3 1 .4 2 .9 242 .1 Other 0 .1 0 .1 Interest expense (25 .3) International flights to Moscow from: Interest income 6 .9 Europe 28 .3 27 .7 Share of income in associates 5 .7 – – – – 5 .7 Foreign exchange and translation Asia 53 .9 54 .4 income, net (12 .8) North America 5 .3 6 .8 Non-operating loss, net 62 .2 Income before taxation 278.8 Other 0 .1 0 .2 Taxation (89 .0) Other international flights 9 .4 13 .1 Net income 189.8 Segment assets 1,636 .6 19 .5 25 .2 117 .5 (195 8). 1,603 .0 Domestic flights 41 .8 33 .2 Associates 14 .1 – – – – 14 .1 159.9 155.5 Unallocated assets 5 .1 Consolidated total assets 1,622 .2 Segment liabilities 499 .2 17 .7 4 .6 101 .2 (91 .3) 531 .4 Unallocated liabilities 523 .3 Consolidated total liabilities 1,054.7 Capital expenditure 144 .2 1 .0 0 .9 58 .0 – 204 .1 Depreciation 75 .6 1 .0 3 .4 – – 80 .0 Other non cash expenses 20 .8 – – – – 20 .8 AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 160 161

30 . RELATED PARTY TRANSACTIONS control and planning decisions of “Aeroflot”) consisted of short-term benefits includ- ing salary and bonuses as well as short-term compensation for serving on the manage- The ultimate controlling party of the Company is the government of the Russian Federation ment bodies of Group companies, and amounted to approximately USD 11 .6 million and and all companies controlled by the government of the Russian Federation are treated as USD 10 .2 million for the years ended December 31, 2006 and 2005, respectively . Such related parties of the Group for the purpose of these consolidated financial statements . amounts are stated before personal income tax but exclude unified social tax . According to Russian legislation, the Group makes contributions to the Russian State pension fund The financial statements of the Group include the following balances and transaction as part of unified social tax for all its employees including key management personnel . with related parties: Government officials, who are directors, do not receive remuneration from the Group .

2006 2005 In 2006 the definition of key management above has been expanded to include certain other key management outside the Company’s Board of Directors . Corresponding fig- Assets ure for the year ended December 31, 2005 has been adjusted for consistency . Cash balances 119 .8 28 .0 Accounts receivable 37 .7 28 .4 VAT recoverable on leased aircraft 78 .3 – 31 . COMMITMENTS UNDER OPERATING LEASES Liabilities Accounts payable and other liabilities 360 .0 63 .9 Future minimum lease payments under non-cancelable aircraft and other operating leas- VAT and custom duties payable on leased aircraft 141 .2 – es are as follows:

2006 2005 2006 2005 On demand or within one year 134 .6 114 .1 Sales 52 .4 77 .7 In two to five years 769 .0 428 .5 Purchases 728 .5 550 .3 After five years 800 .5 287 .1 Dividend income received 0 .6 0 .6 Total minimum payments 1,704.1 829.7 Purchases consist primarily of purchases of aircraft fuel as well as airnaviagation and airport services . The table above includes 19 Airbus A-320s and 4 A-319s for which the lease agree- ments were entered into in 2006 but which will commence during 2007–2009 . The summary of balances and charges relating to the taxes due to the government of the Rus- sian Federation for the years ended December 31, 2006 and 2005 is presented below: The amounts above represent base rent . Maintenance fees payable to the lessor based on actual flight hours and other usage variables are not included in the table . 2006 2005 For details of the fleet subject to operating leases refer to Note 1 . Account receivable from tax authorities 117 .2 188 .1 Account payable to tax authorities 8 .1 51 .6 Additionally, the Group leases land from the Moscow Region authorities under long- Income and other taxes paid 335 .7 396 .9 term operating lease agreements .

The amounts outstanding to and from related parties are unsecured and will be settled in cash . No guarantees have been given or received . No expense has been recognized in 32 . CAPITAL COMMITMENTS the period for bad or doubtful debts in respect of the amounts owed by related parties . The Group’s capital commitments related to acquisition of property, plant and equipment as of December 31, 2006 amounted to approximately USD 1,313 mil- Compensation of key management personnel lion . These commitments relate to purchases of thirty Sukhoi SuperJet-100 (SSJ) aircraft, three new A321-200 aircraft expected to be delivered during 2007, The remuneration of directors and other members of key management (the members contracts for modernization of interiors of leased Boeing 767-300 aircraft, of the Board of Directors and Management Committee as well as key managers of as well as contracts related to construction of Sheremetyevo-3 terminal and the new flight and ground personnel who have significant power and responsibilities on key office building for Company . AEROFLOT ANNUAL REPORT 2006 FINANCIAL REPORT 162 163

33 . change of classification for assets and liabilities rapidly . These changes are characterized by poor drafting, different interpretations previously classified as held for sale and arbitrary application by the authorities .

On December 30, 2005, the Company entered into a preliminary agreement to sell 70% Taxation — Russian tax legislation is subject to varying interpretations and constant of its shares in OJSC Terminal as follows: 25% plus one share to International Airport changes . Furthermore, the interpretation of the tax legislation by the tax authori- Sheremetyevo; 25% plus one share to Vneshtorgbank; and 20% minus two shares to ties, as applied to the transactions and activity of the Group, may not coincide with Vneshekonombank . The government of the Russian Federation is a controlling share- that of management . As a result, the tax authorities could challenge transactions and holder in all of the entities that are parties to this agreement . The assets and liabilities the Group could be assessed additional taxes, penalties and interest, which could of OJSC Terminal and other capitalized costs relating to the construction of the Sherem- be significant . Periods remain open to review by the tax authorities for three years . etyevo-3 terminal, which were expected to be sold within twelve months, were classified The Group’s management believes that it has adequately provided for tax liabilities as a disposal group held for sale and presented separately in the balance sheet for the in the consolidated financial statements; however the risk remains that the relevant year ended December 31, 2005 in the prior year financial statements of the Group . authorities could take up differing positions with regard to interpretative issues, and the effect could be significant . The major classes of assets and liabilities comprising the disposal group classified of December 31, 2005 as held for sale in the prior year financial statements were as follows: Legal action — Former members of the Group’s management and two Swiss non- bank financial companies that provided treasury and financial services to the Group, are currently under civil and criminal investigation by the Swiss and Russian authori- ties for potential misconduct related to funds managed under treasury and finan- Cash and cash equivalents 8 .5 cial services agreements, which were entered into by the former management of the VAT and other taxes recoverable 6 .2 Group . On November 16, 2006 the court in Moscow considered the Company’s claim against two former employees of the Group and an employee of Financial United Prepayments 0 .6 Corporation and awarded the total of approximately USD 8 .2 million in damages to Inventories 0 .3 the Group . The Group intends to pursue recovery of all losses to the fullest extent Property, plant and equipment 67 .6 possible . However, due to remaining uncertainties in collecting already awarded and Assets of a disposal group classified as held for sale 83.2 any possible additional amounts it has not recognized any assets in its consolidated financial statements . Trade payables and accruals (7 .4) Other non-current liabilities (2 .0) Liabilities associated with assets of a disposal group classified as held for sale (9.4) Net assets of disposal group 73.8 35 . SUBSEQUENT EVENTS

Electronic ticketing — As part of its agreement with SkyTeam alliance the Company Subsequent to December 31, 2006 the Group sold a total of 45% minus one share in has committed to introduce e-ticketing on all of its flights . Under the current Russian OJSC Terminal to Vneshtorgbank and Vneshekonombank (see also note 36 “Subse- legislation, tickets for passenger air carriage can only be issued in documentary form . quent events”) . However, the sale of 25% plus one share of OJSC Terminal to Interna- The Ministry of transportation of the Russian Federation signed an Order on November tional Airport Sheremetyevo is no longer considered to be highly probable in the near 8, 2006 which would allow the usage and regulate electronic ticketing in the civil avia- future . As a result, the management of the Group considers that the conditions for clas- tion which will become effective on February 13, 2007 . Introduction of e-ticketing ca- sification of assets and liabilities of OJSC Terminal and other capitalized costs relating pabilities will necessitate certain additional costs to the Group which at present cannot to the construction of the Sheremetyevo-3 terminal as disposal group in accordance be comprehensively estimated . However, in the longer-term it would allow the Company with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations” are no to achieve savings, while also increasing convenience for its customers . longer met . Accordingly, the Group has reclassified the balances classified as held for sale as of December 31, 2005 back into the appropriate balance sheet lines . Sale of equity in Terminal — In January 2007 the Company completed the sale of 25% plus one share in OJSC Terminal to Vneshtorgbank for approximately RUR 1,025 million in cash (USD 38 .9 million at December 31, 2006 exchange rate) . In March 2007 20% less two shares in Terminal were sold to Vneshekonombank for approximately 34 . CONTINGEncies RUR 774 million (USD 29 .4 million at December 31, 2006 exchange rate) .

Political environment — The government of the Russian Federation continues Airbus A330-200 — On April 2, 2007, the Group’s management agreed to enter into to reform the business and commercial infrastructure in its transition to a market a finance lease agreement for two new Airbus A330-200 aircraft . Deliveries of aircraft economy . As a result laws and regulations affecting businesses continue to change will begin in November and December 2008 . AEROFLOT ANNUAL REPORT 2006 Appendixes 164 165

Appendixes

Overview of Major Deals and Interested Party Transactions Glossary of terms and abbreviations On April 10, 2006, an a extraordinary general meeting of Aeroflot shareholders approved the following interested party transactions: AEA – Association of European Airlines . • The purchase and sales agreement for shares of OJSC Terminal between JSC Aeroflot Aeroflot Bonus – frequent flyer program . and OJSC Sheremetyevo International Airport, according to which Aeroflot releases to Aircraft departures – the number of landings or flight stages flown . Sheremetyevo International Airport the rights for 9,490,001 common registered shares Aircraft hours flown – the total number of revenue hours flown “block-to-block” . “Block-to- (par value of one share is 100 rubles), which equals 25%+1 of the total number of shares block“ time is defined as the total number of hours (and minutes) measured from the time the outstanding of Terminal, for a price of 1,024,920,108 rubles, based on the market price aircraft moves from the loading point until it stops at the unloading point . Aircraft kilometers flown – the sum of distances flown by all revenue flights . of 108 rubles for one share . Available seat kilometers (ASKs) – the total number of seats available for the transportation • The purchase and sales agreement for shares of OJSC Terminal between JSC Aeroflot of revenue passengers multiplied by the number of kilometers which those seats are flown . and OJSC Vneshtorgbank, according to which Aeroflot releases to Vneshtorgbank the Available ton kilometers (ATKs) – the total number of metric tons available for the trans- rights for 9,490,001 common registered shares (par value of one share is 100 rubles), portation of passengers and cargo multiplied by the number of kilometers which this capacity which equals 25%+1 of the total number of shares outstanding of Terminal, for a price of is flown . 1,024,920,108 rubles, based on the market price of 108 rubles for one share . Average stage distance – aircraft kilometers flown divided by the number of revenue land- ings . • The purchase and sales agreement for the shares of OJSC Terminal between JSC Aeroflot ATC – Aviation Technical Center . and OJSC Vnesheconombank according to which Aeroflot releases to Vnesheconombank BSP – Billing and Settlement Plan (clearing center for payments between agents and airlines) . the rights for 7,591,998 common registered shares (par value of one share is 100 rubles), Cargo tons carried – all cargo (freight and mail) counted on a point-to-point basis (in metric which equals 20%-2 of the total number of shares outstanding of Terminal, for a price of tons) covered by air waybills for which remuneration is received . 774,383,796 rubles, based on the market price of 102 rubles for one share . Cargo ton kilometers (CTKs) - one ton of revenue cargo transported one kilometer . CTK’s are computed by multiplying metric tons of cargo by the kilometers they are flown . ECAC – European Civil Aviation Conference . On May 16, 2006, the extraordinary general meeting of Aeroflot shareholders approved deals FSTS – Russian Federal Service for Transport Supervision . with interested parties for the delivery of RRJ planes between 2008 and 2011 *. The particularly Group – JSC Aeroflot and its subsidiaries . important terms of the deals are as follows: IATA – International Air Transport Association . • Modification of the RRJ95B planes: the delivery agreement includes the right to convert in- IOSA – IATA Operational Safety Audit . dividual planes into RRJ75Bs; ISO – International Organization for Standardization (organization based in Geneva, Switzer- land, bringing together national standardization institutes of 157 countries to set common inter- • Number of planes to be delivered is 30; national standards in all spheres of industry) . • Date of delivery of the planes is from November 2008 to April 2011; LIBOR – London Interbank Offered Rate (the rate at which banks borrow money from each other • Price (pecuniary valuation) of the delivered planes is no more than USD 630,000,000 as of on the London interbank market) . February 10, 2006; Market capitalization - total market value of the company’s shares . • Catalogue price of the planes is USD 26,200,000 . The final price is determined on the date of Marketing flights – flights where Aeroflot acts as marketing partner . delivery based on the discounts determined by the delivery contract . MICEX – Moscow Interbank Currency Exchange . Passengers carried – a passenger for whose transportation air carrier receives commercial • Sukhoi Civil Aircraft guarantees the following financial terms of the deal: remuneration . а) 20 planes are guaranteed to be leased for 12 years; Passenger load factor – revenue passenger kilometers expressed as a percentage of avail- b) 10 planes are financed based on the terms of the purchase agreement . able seat kilometers . • Size of advanced payments equals USD 524,480 for every plane . p.p. – percentage points . • The supplier guarantees the salvage value of the obtained planes in accordance with the Revenue passenger kilometers (RPKs) – one fare-paying passenger transported one kilo- meter . RPK’s are computed by multiplying the number of passengers by the kilometers they are agreement of the salvage value from December 7, 2005 . flown . Revenue ton kilometers (RTKs) – one ton of revenue traffic (passengers, baggage, and cargo) Further information on the AGM and EGM decisions can be found in the “Shareholder and Inves- transported one kilometer . Revenue ton kilometers are computed by multiplying metric tons of tors” section of the Aeroflot website — www .aeroflot .ru . revenue traffic by the kilometers which this traffic is flown . RF – Russian Federation . RTS - Russian Trading System . TCAP – Training Center for Aviation Personnel . RUR – Russian roubles . Utilization – average hours flown (“block-to-block” basis) per aircraft per day . VAT – value added tax . Weight load factor - Revenue ton kilometers expressed as a percentage of available ton kilo- meters .

* RRJ is currently SSJ . AEROFLOT ANNUAL REPORT 2006 Appendixes 166 167 Operational statistics Aeroflot

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Aircraft kilometers flown thousands International routes 144,801 1. 135,568 9. 147,823 0. 137,185 6. 133,287 .6 135,608 .8 121,925 .0 124,421 .9 138,982 .4 147,689 .8 156,187 .0 Domestic routes 6,780 3. 12,014 .7 25,758 .1 32,887 .0 37,074 .7 42,230 .4 39,752 .0 40,537 .7 41,343 .6 45,378 .9 55,684 Total 151,581.4 147,583.6 173,581.1 170,072.6 170,362.2 177,839.2 161,677.0 164,959.6 180,326.0 193,068.7 211,871.0 Aircraft departures International routes 47,670 45,649 49,265 45,474 44,275 45,777 41,952 42,282 46,261 49,786 52,516 Domestic routes 2,274 3,608 10,160 14,703 17,878 21,541 20,985 21,617 21,771 23,461 28,766 Total 49,944 49,257 59,425 60,177 62,153 67,318 62,937 63,899 68,032 73,247 81,282 Aircraft hours flown International routes 184,176 174,140 188,100 174,059 169,421 172,596 154,360 156,670 175,973 187,266 197,559 Domestic routes 8,547 15,260 33,619 43,730 49,983 57,639 54,643 54,845 56,102 61,085 74,347 Total 192,723 189,400 221,719 217,789 219,404 230,235 209,003 211,515 232,075 248,351 271,906 Passengers carried thousands International routes 3,738 8. 3,693 4. 3,738 0. 3,440 2. 3,704 .6 4,205 .1 3,885 .4 4,129 .8 4,647 .6 4,649 .7 4,939 .5 Domestic routes 73 .8 210 7. 712 7. 1,169 1. 1,396 .3 1,625 .5 1,603 .9 1,713 .8 1,942 .5 2,016 .8 2,350 .5 Total 3,812.6 3,904.1 4,450.7 4,609.3 5,100.9 5,830.6 5,489.3 5,843.5 6,590.1 6,666.5 7,290.4 Freight and mail tons carried thousands International routes 80 .8 84 .9 78 .1 80 .0 95 4. 86 8. 93 4. 95 7. 124 .9 121 .8 118 .8 Domestic routes 9 3. 7 3. 6 5. 9 5. 12 0. 14 8. 16 2. 18 5. 20 6. 23 .6 26 .5 Total 90.1 92.2 84.6 89.5 107.4 101.6 109.6 114.2 145.5 145.4 145.3 Available seat kilometers millions International routes 23,419 .4 22,584 .3 25,119 .3 23,366 .1 21,917 .7 23,522 .6 20,551 20,848 .0 23,728 .1 23,255 .7 24,257 .6 Domestic routes 616 8. 1,427 8. 3,321 7. 4,273 1. 4,632 .9 5,273 .5 5,251 .5 5,393 .1 6,253 .5 6,721 .7 7,688 .2 Total 24,036.2 24,012.1 28,441.0 27,639.2 26,550.6 28,796.1 25,802.5 26,241.1 29,981.6 29,977.4 31,945.8 Revenue passenger kilometers millions International routes 14,352 .1 13,717 .8 14,260 .9 13,240 .8 14,068 .1 15,110 .4 13,826 .3 14,163 .7 16,171 .5 15,897 .7 16,753 .7 Domestic routes 281 1. 893 1. 2,188 2. 3,164 6. 3,366 .1 3,833 .0 3,818 .9 4,038 .9 4,476 .7 4,797 .1 5,652 .8 Total 14,633.2 14,610.9 16,449.1 16,405.4 17,434.2 18,943.4 17,645.2 18,202.6 20,648.2 20,694.8 22,406.5 Passenger load factor % International routes 61 .3 60 .7 56 .8 56 .7 64 2. 64 2. 67 3. 67 9. 68 2. 68 .4 69 .1 Domestic routes 45 .6 62 .6 65 .9 74 .1 72 7. 72 7. 72 7. 74 9. 71 6. 71 .4 73 .5 Total 60.9 60.8 57.8 59.4 65.7 65.8 68.4 69.4 68.9 69.0 70.1 Cargo ton kilometers millions International routes 491 5. 503 1. 473 3. 530 8. 606 .0 462 .1 491 .3 530 .3 757 .1 761 .3 745 .9 Domestic routes 48 .1 42 .2 39 .7 53 .7 65 7. 91 8. 71 8. 84 1. 95 6. 107 .3 122 .2 Total 539.6 545.3 513.0 584.5 671.7 554.0 563.0 614.4 852.7 868.6 868.1 Revenue ton kilometers millions International routes 1,783 2. 1,737 7. 1,756 8. 1,722 5. 1,872 .2 1,822 .2 1,735 .6 1,805 .0 2,212 .5 2,192 .1 2,253 .8 Domestic routes 73 .4 122 6. 236 6. 338 5. 368 .6 436 .7 415 .6 447 .7 498,5 539 .0 630 .9 Total 1,856.6 1,860.3 1,993.4 2061 2,240.8 2,258.9 2,151.1 2,252.7 2,711.0 2,731.1 2,884.7 Available ton kilometers millions International routes 3,676 8. 3,460 1. 3,717 3. 3,479 0. 3,493 .8 3,534 .5 3,130 .1 3,258 .8 3,869 .4 3,849 .4 3,988 .4 Domestic routes 175 9. 260 3. 485 4. 581 1. 619 .6 690 .7 684 .1 692 .3 792,9 859 .9 1,012 .4 Total 3,852.7 3,720.4 4,202.7 4,060.1 4,113.4 4,225.2 3,814.2 3,951.1 4,662.3 4,709.3 5,000.8 Weight load factor % International routes 48 .5 50 .2 47 .3 49 .5 53 6. 51 6. 55 4. 55 4. 57 2. 56 .9 56 .5 Domestic routes 41 .7 47 .1 48 .7 58 .3 59 5. 63 2. 60 8. 64 7. 62 9. 62 .7 62 .3 Total 48.2 50.0 47.4 50.8 54.5 53.5 56.4 57.0 58.1 58.0 57.7 AEROFLOT ANNUAL REPORT 2006 Appendixes 168 169

Aeroflot-Don Aeroflot-Nord

2000* 2001 2002 2003 2004 2005 2006 2004* 2005 2006 Aircraft kilometers flown thousands Aircraft kilometers flown thousands International routes 1,630 2. 2,485 1. 2,623 0. 3,011 1. 4,192 3. 3,581 0. 3,493 .9 International routes 255 .1 2,039 .0 1,774 .5 Domestic routes 4,509 8. 7,718 5. 6,503 2. 7,648 1. 8,279 6. 7,851 7. 7,799 .0 Domestic routes 1,790 .4 14,719 .6 18,084 .6 Total 6,140.0 10,203.6 9,126.5 10,659.2 12,471.9 11,432.7 11,292.9 Total 2,045.5 16,758.6 19,859.1 Aircraft departures Aircraft departures International routes 855 1,276 1,373 1,833 2,622 2,268 2,199 International routes 188 1,384 1,522 Domestic routes 3,008 5,079 5,235 6,012 6,018 5,675 5,834 Domestic routes 1,727 .0 13,891 17,331 Total 3,863 6,355 6,608 7,845 8,640 7,943 8,033 Total 1,915 15,275 18,853 Aircraft hours flown Aircraft hours flown International routes 2,160 3,239 3,336 3,939 5,568 4,640 4,606 International routes 596 3,852 3,315 Domestic routes 6,097 10,523 9,208 10,661 11,179 10,513 10,576 Domestic routes 3,489 26,864 32,826 Total 8,257 13,762 12,544 14,600 16,747 15,153 15,182 Total 4,085 30,716 36,141 Passengers carried thousands Passengers carried thousands International routes 63 .2 86 .5 103 1. 129 9. 173 4. 180 1. 170 .2 International routes 9 .4 76,3 65 .5 Domestic routes 199 8. 313 5. 324 3. 376 9. 414 7. 419 5. 418 .0 Domestic routes 87 3. 729 .6 809 .8 Total 263.0 400.0 427.4 506.8 588.1 599.6 588.2 Total 96.7 805.9 875.2 Freight and mail tons carried thousands Freight and mail tons carried thousands International routes 0 4. 0 3. 0 6. 0 6. 0 6. 0 5. 0 5. International routes 0 .1 128 85 .4 Domestic routes 1 4. 1 9. 1 8. 2 0. 2 1. 2 1. 1 8. Domestic routes 0 .6 3,425 4,128 .6 Total 1.8 2.2 2.4 2.6 2.7 2.6 2.3 Total 0.7 3,553 4,214.0 Available seat kilometers millions Available seat kilometers millions International routes 189 4. 276 9. 352 7. 382 1. 513 3. 492 1. 410 .9 International routes 16 3. 169 152 .2 Domestic routes 582 1. 812 3. 674 3. 901 9. 1,090 1. 1,098 2. 957 .6 Domestic routes 132 .2 1,168 .7 1,426 .1 Total 771.5 1,089.2 1,027.0 1,284.0 1,603.4 1,590.3 1,368.5 Total 148.5 1,337.7 1,578.3 Revenue passenger kilometers millions Revenue passenger kilometers millions International routes 122 9. 171 1. 201 1. 216 6. 286 9. 305 7. 287 .5 International routes 11 1. 116 111 .1 Domestic routes 374 6. 527 4. 447 2. 527 4. 595 7. 606 5. 587 .0 Domestic routes 87 5. 791 .2 932 .7 Total 497.5 698.5 648.3 744.0 882.6 912.2 874.5 Total 98.6 907.2 1,043.8 Passenger load factor % Passenger load factor % International routes 64 .9 61 .7 57 .0 56 .6 55 .8 62 .1 70 .0 International routes 67 9. 68 6. 73 .0 Domestic routes 64 .4 65 .0 66 .3 58 .5 54 .6 55 .2 61 .3 Domestic routes 66 2. 67 7. 65 .4 Total 64.5 64.1 63.1 57.9 55.0 57.4 63.9 Total 66.4 67.8 66.1 Cargo ton kilometers millions Cargo ton kilometers millions International routes 0 8. 0 6. 1 2. 1 3. 1 3. 1 0. 0 8. International routes 0 .1 0 .2 0 .1 Domestic routes 3 9. 4 7. 3 4. 3 8. 3 7. 3 9. 3 4. Domestic routes 0 .5 3 .4 4 .3 Total 4.7 5.3 4.6 5.1 5.0 4.9 4.2 Total 0.6 3.6 4.4 Revenue ton kilometers millions Available ton kilometers millions International routes 11 .9 16 .0 19 .3 20 .8 27 .0 28 .5 26 .7 International routes 1 .5 16 1. 14 .1 Domestic routes 37 .6 52 .1 43 .7 51 .2 57 .3 58 .5 56 .2 Domestic routes 12 8. 115 .0 141 .4 Total 49.5 68.1 63.0 72.0 84.3 87.0 82.9 Total 14.3 131.1 155.5 Available ton kilometers millions Revenue ton kilometers millions International routes 17 .7 27 .4 34 .3 37 .8 52 .4 50 .0 43 .1 International routes 1 .1 10 6. 10 .1 Domestic routes 53 .7 83 .1 70 .5 90 .5 104 3. 105 8. 94 .6 Domestic routes 8 .4 74 6. 88 .2 Total 71.4 110.5 104.8 128.3 156.7 155.8 137.7 Total 9.5 85.2 98.3 Weight load factor % Weight load factor % International routes 67 .2 58 .3 56 .2 54 .7 52 .0 57 .0 61 .9 International routes 73 3. 65 8. 70 .9 Domestic routes 70 .0 62 .8 61 .8 56 .6 55 .0 55 .3 59 .4 Domestic routes 65 6. 64 8. 62 .4 Total 69.3 61.7 60.0 56.0 54.0 55.8 60.2 Total 66.4 65.0 63.2

* as of the date when the company joined the Group (April 13, 2000) * as of the date when the Company joined the Group ( October 8, 2004) AEROFLOT ANNUAL REPORT 2006 Appendixes 170 171

Aeroflot Group representative offices

Aeroflot Country/City Code Telephone Fax Address ANGOLA Country/City Code Telephone Fax Address LUANDA (2442) 22430682 22430599 Rua Coroner Aires de Ornelas No .1-A/В-r/c, RUSSIA Luanda, Angola 2450542 2464974 4, Frunzenskaya Embankment 2300727 2371067 Section 6, 7, Korovy Val Street YEREVAN (37410) 532131, 223580 538107, 22435 12, Amiryan Street, Yerevan, 375002 2300816 2300816 Section 7, 7, Korovy Val Street 9039271 6215131 21, Petrovka Street AUSTRALIA 6219293 6219293 Room 2, 3, Kuznetsky Most Street MOSCOW (495) SYDNEY (612) 92622233 92621821 National Mutual Building, 24th Level, 44 6285613 6284154 Room 3, 3, Kuznetsky Most Street Market Street, NSW, 2000 Sydney 5783124 — Sheremetyevo-1 AUSTRIA 5789435 7538023 Sheremetyevo-2 1862074 1862092 19, Yeniseyskaya Street VIENNA (431) 5121501, 5121502 5121501, 10, Parkring, 1010 Wien, Austria 9536673 9536673 37, Pyatnitskaya Street 5121578 ANAPA (86133) 32255 31566 170, Krymskaya Street, 353440 AZERBAIJAN ARKHANGELSK (8182) 651455 288082 88, Naberezhnaya Severnoy Dviny BAKU (99412) 4981167, 4981168 4981166 AZ1000, 23, Hajibeyov Street, Baku, 370000 ASTRAKHAN (8512) 445555, 394999 445555 3, Gubernator A . Guzhvin Prospect MINSK (37517) 2066976, 2272887, 2066979 Of . 1, 25, J . Kupala Street, Minsk, 220030 BARNAUL (3852) 380245, 369902 369902 8А, Dmitrov Street, 656049 2066895 CHELYABINSK (351) 2370496, 2370917 2370231 90, Svobody Street EKATERINBURG (343) 3565570, 3565571 3565570, 41, Belinsky Street, 620219 BRUSSELS (322) 5136066, 5053838 5122961 58, Rue des Colonies, 1000 Brussells 3565574 BULGARIA IRKUTSK (3952) 255780 211331 Of . 107, 27, s . Razin Street, 664000 SOFIA (3592) 9434489, 9434572 9461703 23, Oborishte Street, 1504 Sofia KALININGRAD (4012) 916455, 631516 956454 4, Pobedy Square, 236000 CANADA KEMEROVO (3842) 368018 349451 1, Kolomytseva Street, 650099 TORONTO (1416) 6421653, 6421654 6421658 1, Queen Street East, Suite 1908, p .O . Box 61, KHABAROVSK (4212) 783435, 327592 783456 50, Pushkin Street, 680000 Toronto, Ontario, M5C2C5 KRASNODAR (861) 2100010, 2100004 2100091, 43, Krasnaya Street, 350000 CHINA 2100092 BEIJING (8610) 65002412 65941869 N2 Chao Yang Men Bei Da Jie, Beijing 100027, KRASNOYARSK (3912) 206436 206437 37, Mira Rrospect, 660049 PR China MAGADAN (41322) 92241 92230 Of . Aeroflot, Airport, 685918 HONG KONG (852) 25372611 25372614 Suite 2918, 29 Floor, Shui on centre, 6-8 Harbour Road, Wanchai, Hong Kong (87922) 68744, 69920 68170 75, Marx Prospect, 357202 SHANGHAI (8621) 62798033 62798035 Suite 203A, Shanghai Centre, 1376, MURMANSK (8152) 421451, 428019 428019 7, Volodarskogo Street, 183038 Nanjingxilu, Shanghai,China, 200040 NIZHNEVARTOVSK (3466) 613396, 245555 245555 11, Omskaya Street, 628606 CROATIA NIZHNIY NOVGOROD (8312) 344040 344188 6, Gorky Square, 603950 ZAGREB (3851) 4872055/076 4872051 13, Varšavska, 10000 Zagreb (3919) 460769, 461206 460769 Of . 167, 17, Lenin Prospect, 663300 NOVOSIBIRSK (383) 2230589, 2179693 2179698 28, Krasny Prospect, 630091 HAVANA (537) 2043200, 2043759 2045593 5ta ave ., Esq .76, Edif . Barcelona, Oficina 208, Miramar Playa, La Habana Cuba OMSK (3812) 251322, 251798 247955 14, Ordzhonikidze Street, 644099 CYPRUS PERM (342) 2203004, 2349593 2349535 21, Popov Street, 614600 NICOSIA (35722) 669071, 677072 678484 32, B&C, Homer Avenue, p .O . Box 22039, PETROPAVLOVSK-K . (4152) 411830, 411786 411722 7A, Zvezdnaya Street, Elizovo, 684010 1097 Nicosia SAMARA (846) 2760277 2760280 141, Leninskaya Street, 443041 CZECH REPUBLIC SOCHI (8622) 644511, 645675 645675 61А, Rose Street, 354000 PRAGUE (4202) 27020100 24812683 5, Truhlárská, 11000 Praha 1 st .-PETERSBURG (812) 4385572, 4385583 5724310 1/43, Rubenstein Street, 191025 TYUMEN (3452) 499871, 499872 395165 84/1, Malygina Street, 625026 COPENHAGEN (45) 33126338 33112127 1 .1 Vester Farimagsgade, Room 1255 DK- 1606, Copenhagen VLADIVOSTOK (4232) 226647 209041 143, Svetlanovskaya Street, 690053 VOLGOGRAD (8442) 385479 385480 15, Lenin Prospect, 400131 CAIRO (202) 3900429, 3900407 18, El Boustan Street, El Boustan Commercial UFA (3472) 516343 516343 5/3, Lenin Street, 450000 3937409 Centre YUZHNO-SAKHALINSK (4242) 788555, 788655 788655 Of . Aeroflot, Airport, 693014 AEROFLOT ANNUAL REPORT 2006 Appendixes 172 173

Country/City Code Telephone Fax Address Country/City Code Telephone Fax Address FINLAND HELSINKI (3589) 663203 661021 00100 Manner-Heimintie, 5 Helsinki, Finland (3272) 915597 915416 42, Begalina Street, 50010 Almaty FRANCE NICE (334) 93214482 93214544 Aéroport Côte d’Azur, Terminal 1, 06281 Nice (996312) 667300, 667400 667800 64/1, Bul . Erkindik, Bishkek, Kirgizia, 720040 Cedex DEM. PEOPLE’S REPUBLIC OF KOREA PARIS (331) 42254381, 42253192 42560480 33, Avenue des Champs Elysées, 75008 PYONGYANG (8502) 3817309 3817296 11-Dong Munsu-3 Dong Taedonggang District GERMANY REPUBLIC OF KOREA BERLIN (4930) 22698130 22698136 51, Unter den Linden, 10117 Berlin SEOUL (822) 5693271, 5693272, 5693276 RM 404, City Air Terminal Building, 159-6, DUSSELDORF (49211) 8644300, 8644312 320928 26, Berliner Allee, 40212 Düsseldorf 5693273 5510327 Samsung-Dong, Kangnam-ku, Seoul FRANKFURT/ M (4969) 27300612, 27300629 41, Wilhelm-Leuschner Strasse, 60329 27300615 Frankfurt am Main HANNOVER (49511) 7217816 9772064 Flughafen Hannover-Langenhagen Terminal RIGA (371) 7780770, 7780772 7780771 9, ul .scolas, Riga, Latvia LV-1010 C Zimmer 311, Postfach 420251, 30662 LEBANON Hannover BEIRUT (9611) 739596 739597 Verdun Str ., Selim Saab Bld . 2-Floor HAMBURG (4940) 3742885 3742888 60, Admiralitätstrasse, 20459 Hamburg HAHN (496543) 5882313, 5882314 5882325 27 Emmeransstrasse, Mainz, Germany 55166 VILNIUS (370) 52124189, 52127550 52124189 8/2, Pylimo Street, 2001 Vilnius MUNICH (4989) 288261 2805366 2, Isartorplatz, 80331 Munich MALAYSIA GEORGIA TBILISI (99532) 943896, 943927 6 -А, Pekina Avenue, Block #1, 0160, Tbilisi, KUALA LUMPUR (603) 2141600 21416946 Lot 2 33,. 2nd floor, Bangunan Angkasa Raya, Jalan Ampang, 50450 Kuala Lumpur 943897 Georgia MONGOLIA ATHENS (30210) 3220986, 3236375 14, Xenofontos Street, Syntagma — GR 105 ULAAN BAATAR (976-11) 319286 — 15, Seul Street, Ulaan Baatar, 210644 3221022 57, Athens, Greece HUNGARY AMSTERDAM (3120) 6245715, 6270561 6259161 26-3, Weteringschans, 1017 SG, Amsterdam BUDAPEST (361) 3185892, 3185955 3171734 4, Vaci Ut ., Hungary 1051 Budapest INDIA OSLO (47) 23356210 22332880 6, Øvre Slottsgt, 0157 Oslo DELHI (9111) 23312843, 23723245, 15-17, Tolstoy House, Tolstoy Marg, 110001 PANAMA 23313785 23316414 New Delhi PANAMA (507) 2250497, 2250622 Unicentro Bella Vista, Avenue Justo MUMBAI (9122) 22025780, 2871942 Room 18-B, 1-st Floor, Nariman Bhavan, Block Arosemena y Calle 42, p .O . Box 2642, 111, Nariman Point, Mumbai 400021 2250587 22821682 Balboa Ancon, Panama IRAN TEHRAN (9821) 88910888 88808672 23, Ostad Nejatollahi Street, Tehran WARSAW (4822) 6281710, 6211611 6282557 29, Alleje Jerozolimskie, 00-508 Warszawa IRELAND ROMANIA DUBLIN (3531) 8446166 8446349 Link Building, Level 2, Airport, Dublin BUCHAREST (4021) 3150314, 2128684 3125152 Sector 1, 29, Strada Biserica Amzei, Bucuresti ITALY SAUDI ARABIA MILAN (3902) 66986985, 66984632 19, Via Vittor Pisani, 20124 Milano 66986987, JIDDA (9662) 6041027 6440823 Shaker Center, Hail Street p .O . box 40700, 66987538 Jeddah 21511 ROME (3906) 420385 42904923 76, Via Bissolati, 00187 Roma SLOVAKIA VENICE (39041) 2698484, 2698447 Aeroport Marco Polo, Tessera, Venezia BRATISLAVA (4212) 43426896 43337581 Aeroport M .p .shtefanika, Bratislava, 82311, 2698488 Luigi Broglio street 8, 30030 Slovak Republic JAPAN SERBIA AND MONTENEGRO TOKYO (813) 55328781 55328821/22 Toranomon Kotohira Tower 16F, 1-2-8 BELGRADE (38111) 3286071, 3286064 3286083 21, Brace Jugovica, 11000 Belgrade Toranomon, Minato-ku, Tokyo, Japan 105-0001 AEROFLOT ANNUAL REPORT 2006 Appendixes 174 175

Country/City Code Telephone Fax Address Aeroflot-Don SPAIN Country/City Code Telephone Fax Address BARCELONA (3493) 4305880, 4308741 4199551 41, Calle Mallorca, 08029 Barcelona RUSSIA MADRID (3491) 4313706, 4318098 Of . 3A, 52, Paseo de la Castellana, 28046, GROZNY (928) 1875816 — 4314107 Madrid MOSCOW (495) 4367753, 4367691, 4367691, Of . 238, Airways Terminal, Vnukovo Airport, 2314723 2314723 Room 2 .167, Sheremetyevo-1 (Arrivals) STOCKHOLM (468) 50565300, 217185 31, Sveavägen, 2 tr, Box 3075, 10361 50565320 Stockholm MURMANSK (8152) 428019, 281241 — 7, Volodarskogo Street, 183038 SWITZERLAND NERUNGRI (41147) 32444 — 6, Lenin Street, Nerungri, Republic of Sakha, 678960 GENEVA (4122) 9092767 7388312 16, Place Cornavin, 1201 Genève ROSTOV-ON-DON (863) 2001829 — Of . 6, Air Terminal Building ZURICH (4143) 3446200 3446216 41, Talacker, 8001 Zürich st .-PETERSBURG (812) 4385583, 5724310 4385583 1/43, Rubenstein Street, Of . 3094, Pulkovo-1, SYRIA Air Terminal DAMASCUS (96311) 2317956 2317952 29, May Street, Damascus SOCHI (8622) 411164 — Of . 223, Sochi Airport THAILAND BANGKOK (662) 2510617, 2553138 Mezzanine Floor, Regent House, 183, Rajdamri ISTANBUL (90212) 6389106, 6389107 6389112 291/293, Ordu Gaddesi Laleli Is Merkezi, Istanbul 2510618 Road, 10330 Bangkok UKRAINE TURKEY DNEPROPETROVSK (38056) 7784938 7784937 72-A, Karl Marx Prospect ANTALYA (90242) 3303106 3303477 Bayindir Airport, Blok A/N 241, 07030 Antalya ISTANBUL (90212) 2966725, 2966726 2966737 Cumhuriyet Caddesi 141 d .1 Elmadag, Istanbul TASHKENT (99871) 1521836 — 83a, Nukusskaya Street, Mirabadsky District, U.A. EMIRATES Tashkent, 700015 DUBAI (9714) 2222245 2227771 p .O . Box 1020, Al Maktoum Street, Dubai UKRAINE DNEPROPETROVSK (38056) 7784938 7784937 72-A, Karl Marx Prospect, Dnepropetrovsk Aeroflot-Nord KIEV (38044) 2454359 2454881 112-A, Saksagansky Street, 252032 Kiev SIMFEROPOL (380652) 511516 511517 2a, Pavlenko Street, 95006 Simferopol Country/City Code Telephone Fax Address RUSSIA LONDON (4420) 73552233 73552323 70, Piccadilly, London, W1J 8HP, UK ARKHANGELSK (8182) 631323, 218857 — Air Terminal Building, Arkhangelsk Airport USA MOSCOW (495) 2313215, 5787712, — Ticket window 14, Sheremetyevo-1 5789096 LOS ANGELES (1310) 2815305, 2815306, 2815308 9100 Wilshire Blvd . Suite 616, Beverly Hills, 2815307 CA 90212 st .-PETERSBURG (812) 7035375, 1238776, — Of . 3088, Pulkovo-1 Terminal 151, Moskovsky 3807636 Prospekt NEW YORK (1212) 9442300 9445200, 1384, Broadway, 22 Floor, 10018, New York, 3918577 New York MURMANSK (8152) 449644 — 21, Polyarnye Zori Street SEATTLE (1206) 4641005 4640452 1411, 4th Avenue, Suite 420, 98101 Seattle, (0722) 341300 — 166, Bogdana Khmelnitskogo Street Washington KIROVSK (81531) 541111, 50005 — 13, Yubileinaya Street WASHINGTON (1202), 3474304 3474305 1634, Eye Street, n .w, . Suite 200, 20006 NARYAN-MAR (81853) 43838, 49280 — 25, Smidovitch Street (1888) Washington, d .C . MONCHEGORSK (81536) 76161 — 25B, Komsomolskaya Street UZBEKISTAN MEZEN (81848) 91945, 43199 — Mezen Air Terminal TASHKENT (99871) 1523018 1448472 1-A Kodyri Street, 700128, Tashkent SOCHI (8622) 442989 — Sochi Air Terminal NORWAY HANOI (8404) 7718742, 7718718 7718522 Daeha Business Center, 360 Kim Ma, str, Ba Dinh distr ., Hanoi TROMSO (81047) 95143587 — Tromso Air Terminal AEROFLOT ANNUAL REPORT 2006 Appendixes 176 177

Route network of the Aeroflot Group including marketing flights*

NORTh AMERICA

Amderma 2 Norilsk Tromso Amderma Murmansk Novy Urengoy Apatity Mezen Pechora Solovki Leshukonskoe Petrozavodsk kotlas Arkhangel’sk Nizhnevartovsk Magadan St.Petersburg Toronto Nizhniy Novgorod Tyumen Moscow Novosibirsk New York Perm Ekaterinburg krasnoyarsk Neryungri Washington Ufa Omsk kemerovo kaliningrad Petropavlovskk. Chelyabinsk Barnaul Samara Irkutsk Los Angeles

Volgograd khabarovsk RostovonDon Ulaan Baatar Astrakhan krasnodar YuzhnoSakhalinsk Anapa Mineralnye Vody Vladivostok havana Sochi Bishkek Gyumri Tbilisi Tashkent Beijing Yerevan Baku Bodrum Tokyo Dalaman Seoul EUROPE Tehran Beirut Damascus Oslo helsinki Shanghai Stockholm Cairo Delhi Moscow Riga Sherm el Sheikh Copenhagen Dubai hamburg Minsk hurgada hanoi hong kong Amsterdam Berlin Jidda London hannover Warsaw Mumbai Brussels Dusseldorf Prague kiev karlovy Vary Frankfurt/m Vienna Dnepropetrovsk Paris Bangkok Munich Budapest Zurich Zagreb Varna Geneva Belgrade Simferopol Milan Venice Bucharest Forli Nice Sofia Rome Barcelona Istanbul Madrid Athens Aeroflot Antalya Aeroflot – Don Luanda Aeroflot – Nord Larnaca

* • Moscow – Naryan-Mar • Moscow – Amman • Moscow – Arkhangelsk – Naryan-Mar • Moscow – Arkhangelsk • Moscow – Belgorod • St . Petersburg – Hannover • St . Petersburg – Munich • Moscow – Bratislava • Moscow – Novokuznetsk • Moscow – Ankara • Moscow – Vilnius • Moscow – Murmansk • Moscow – Palanga • Moscow – Rostov • Moscow – Tallinn • Prague – Dublin • Prague – Cork • Moscow – • Moscow – Ljubljana • Moscow – Magnitogorsk • Moscow – Malta • Prague – Manchester • Prague – Edinburgh • Prague – Montreal • Rostov – St . Petersburg • Rostov – Tashkent • Rostov – Frankfurt • Samara – Prague • St . Petersburg – Hamburg • Rostov – Baku • Rostov – Dibai • Rostov – Dusseldorf • St . Petersburg – Berlin • St . Petersburg – Dusseldorf AEROFLOT ANNUAL REPORT 2006 178

General Information Full name — Open Joint Stock Company “Aeroflot — Russian Airlines” Short name — JSC “Aeroflot” Evidence of state registration — issued on 22 .08 .2003, No . 1027700092661 . Aeroflot was included in the Register of Strategic Companies and Strategic Joint-Stock Companies, as established by the Order of the President of the Russian Federation from 04 .08 .2004, No . 1009 . Tax payer identification number — 7712040126 Legal address — Building 9, 37 Leningradsky prospect, Moscow, Russia Postal address: Building 9, 37 Leningradsky prospect, 125167, Moscow Website — www .aeroflot .ru Contact information:

Shareholders and Investors: Tel/fax: (495) 258-0686, 258-0684/fax, 258-0650/fax E-mail: dmatyuschenko@aeroflot .ru, ngoncharova@aeroflot .ru

Press Service: Tel .: (495) 752-9071 E-mail: presscentr@aeroflot .ru

Aeroflot Bonus program: Tel .: (495) 223-5555 www .aeroflotbonus .ru E-mail: bonus@aeroflot .ru

Information and reservation center (round-the-clock): Tel .: (495) 223-5555 (for Moscow) Tel .: (812) 718-5555 (for St . Petersburg) Tel .: 8-800-333-5555 (for cities of the RF, free of charge, including for mobile phones) Online reservations: www .aeroflot .ru, callcenter@aeroflot .ru

Open line: Tel .: (495) 223-5555 E-mail: openline@aeroflot .ru

Share register: CJSC National Registry Company Address: 6, Veresaeva street, 121357, Moscow Tel: (495) 440-31-04

Auditors: CJSC HLB Vneshaudit Legal address: 25-27/2, Bolshaya Yakimanka street, Moscow, Russia Postal address: Office 701, Entrance 3, 12 Krasnopresnenskaya Naberezhnaya, 123610, Moscow Tel .: (495) 258-1991 . Fax: (495) 967-0497 E-mail: info@vneshaudit .ru License No . 000548, issued 25 .06 .2002 by the Minister of Finance of the Russian Federation, valid until 25 .06 .2007 ress P CJSC Deloitte and Touche CIS ussian Airlines

Legal address: 4/7, Vozdvizhenka street, Entrance 2, Moscow, Russia C DEX - Postal Address: 4/7, Vozdvizhenka street, Entrance 2 (Mokhovaya Business Center), 125009, Moscow S Tel .: (495) 787-0600 Fax: (495) 787-0601 E-mail: moscow@deloitte .ru C Aeroflot — R

License No . 002417, issued 06 11. .2002 by the Minister of Finance of the Russian Federation, valid until 06 11. .2007 S

Notice of future development esign, pre-press — J ext — J . D This annual report apart from real data contains opinions, assumptions and forecasts of the company’s management based on currently available . T information . Due to changes in external factors, such as fluctuating demand for air transportation, price changes, implementation of new technologies, changes in legal environment, fluctuations in exchange rates, to name but a few, the company’s actual performance in the future could differ from forecasts © 2007 represented in this report . © 2007