Annual Report 2012 Top-league player CONTENTS Letter from the Chairman of the Board of Directors ........... 4 Letter from the Chief Executive Officer .............................. 6 02. 01. THE AIR TRANSPORT MaRKET. ABOUT THE COMPANY INDUSTRY POSITION OF THE COMPANY AND GROUP 1.1. Aeroflot today .......................................................... 10 2.1. The International Market .......................................... 26 1.2. Key indicators in 2012 .............................................. 12 2.2. The Russian Market ................................................. 28 1.3. Main events ............................................................. 14 2.3. The Air Cargo Market .............................................. 31 1.4. Aircraft fleet and route network of Aeroflot Group .. 18 1.5. Acclaim for the Company from passengers and professionals ............................................................22 03. 04. DEVELOPMENT STRATEGY BUSINESS OVERVIEW 3.1. Strategic goals and directions 4.1. Group structure ........................................................ 42 for development.......................................................34 4.2. Operating results .....................................................43 3.2. The multi-brand platform 4.3. Operations by airline subsidiaries of Aeroflot Group .....................................................38 and affiliates .............................................................48 4.4. Safety ....................................................................... 52 4.5. Route network .........................................................53 4.6. Aircraft fleet ............................................................. 57 4.7. Servicing and repairs ...............................................59 4.8. Brand development and service quality improvement ...................................60 4.9. Information technologies, innovation and R&D .................................................64 4.10. Marketing and sales .................................................66 05. 06. CORPORATE GOVERNANCE SECURITIES 5.1. Corporate governance principles ............................. 70 6.1. Share capital ............................................................96 5.2. Meetings of Shareholders in 2012 ........................... 72 6.2. Bonds ..................................................................... 100 5.3. Board of Directors ....................................................73 6.3. Dividend policy ...................................................... 101 5.4. Committees of the Board of Directors .................... 79 5.5. Executive Board .......................................................82 5.6. Committees of the Executive Board .......................89 5.7. Revision Committee ................................................ 91 5.8. Information disclosure .............................................93 08. 07. CORPORATE SOCIAL RISK MANAGEMENT RESPONSIBILITY 8.1 HR Policy ............................................................... 114 8.2. Charity and social programmes ............................. 118 8.3. Environment ........................................................... 120 09. 10. FINANCIAL REPORT APPENDIXES 9.1. Statement of Management Responsibility for 10.1. Information on execution in 2012 of instructions the Preparation and Approval of the Consolidated from the President and Government Financial Statements as at and for the year ended of the Russian Federation ......................................184 31 December 2012 ................................................ 126 10.2. Information on large transactions and 9.2. Letter from the Deputy CEO for related party transactions ...................................... 188 Commerce and Finance ......................................... 127 10.3. Information on observance 9.3. Independent Auditors` Report ............................... 128 of the Code of Corporate Conduct ........................ 192 9.4. Overview of financial results ................................. 130 10.4. Information on stakes in charter capital held by 9.5. Consolidated Financial Statements ....................... 135 members of governing bodies ............................... 198 10.5. Operating statistics of Aeroflot Group airlines ....... 199 10.6. Terms and abbreviations used in this Annual Report .............................................202 10.7. List of Aeroflot offices ...........................................204 10.8. Contact Information ...............................................209 LETTER FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS ownership structure, Aeroflot, as the leading Russian airline, will keep its status as the backbone of the Russian air transport sector and as the national flag carrier. Aeroflot is carrying out the largest consolidation project in the Russian civil aviation sector. The level of efficiency and integration of Aeroflot Group rose substantially during 2012, and the Group is moving resolutely towards its target status as one of the biggest carriers in Europe and the world, confirming and strengthening Russia’s standing among the leading air transport nations. Several important milestones along that road have already been attained: Aeroflot is now one of the Top 5 airlines in Europe by a number of main indicators measuring opera- tions and product quality, and the Company’s financial ratings are among the best in the airline sector worldwide (a large number of other airlines are still in crisis, and several of them are on the verge of bankruptcy). Aeroflot strengthened its competitive positions in service quality last year, and this was particularly visible in Euro- Kirill Androsov pean operations. The Company became more up-to-date, Chairman of the Board of Directors expanding its use of new technologies in all areas of the JSC Aeroflot business. Business success is not the only yardstick for measuring Dear Shareholders, the importance of a corporation in its home country. Aeroflot is also a company with strong traditions of social Last year Aeroflot confirmed its reputation as a company, responsibility. During 2012 we took an active part in which is not only efficient and profitable but also of Russian government programmes of subsidized passenger strategic importance for Russia. transport, and pursued projects to help children, people with disabilities and war veterans. Aeroflot was also The figures in this Annual Report present a detailed picture thanked by the Association of Managers for its part in of our Company’s successes, in terms of both operations dealing with the natural disaster in Krasnodar Territory. We and financial results – successes of which we are justifiably view these actions as a valuable asset, which encourages proud. Our business represents millions of passengers Russian society to view Aeroflot as “its own” company – to transported, billions of roubles of profit obtained and tens be relied on in any situation. By helping people we also of billions of passenger-kilometers flown. But Aeroflot also help ourselves, expanding our potential customer base. carries out functions, which are of criticial importance for Russia’s social and economic development and for the During the reporting year Aeroflot concentrated the resourc- protection of its national interests. es, which it will need in order to achieve the ambitious targets, which the Russian Government and society have set Aeroflot approached its 90th anniversary with a range of for the country’s transport sector in the future. impressive new achievements, and the improvement of main results last year strengthened our position as a key Russian civil aviation is increasing its passenger numbers national asset. This position is not merely a function of our at rates, which are two times higher than the international ownership by the Russian government, which remains the average: preliminary estimates suggest that passenger largest shareholder of Aeroflot. Regardless of our growth in Russia will remain at 15% this year. There are Aeroflot Group | Annual Report 2012 4 also signs of a qualitative breakthrough in Russia’s airline Major challenges and major opportunities lie ahead. I am sector, supported by design of a Government programme certain that we will rise to them by working together, for development of the transport system in 2013-2020 and taking bold but well-judged decisions, taking full account of strong support for the national aerospace industry. A national interests, and working closely with Government. I “roadmap” has been prepared for development of the count on your active support in carrying out projects, which domestic route network and work on draft laws for reform will earn Aeroflot a place among the leaders of the world of civil aviation regulation has been in hand since last year. air transport industry. Aeroflot is taking an active part in these initiatives, since the success of our corporate strategy depends on the Chairman of the Board of Directors existence of a strong legislative base. JSC Aeroflot For a company to be successful, its management must Kirill Androsov think and proceed proactively and boldly, anticipating events. The challenge is not only to take due account of the current environment, but to create that environment and, thereby, to create the future. There principles were taken by Aeroflot managers as a guide for action in 2012. Strategic decisions were made for the creation of a united Far East carrier within Aeroflot Group and also for creation