Risk Management

Risk management system

Aeroflot Group’s risk management policy is aimed at building up a comprehensive system that helps promptly identify risks that affect the Company, assess their materiality, and take measures to minimise both the likelihood of risks being realised and losses they can lead to.

Aeroflot Group’s risk management procedures are governed by the Regulations on Aeroflot Group’s Risk Management System approved in 2015 and updated in 2017.

The document lays down the framework for a unified risk assessment and management methodology: goals, tasks, principles of organisation and operation of the corporate risk management system (CRMS), and approaches to, and principles of, the distribution of rights, obligations and responsibilities of participants of the risk management system at PJSC Aeroflot and its controlled entities.

Risk management is applied across all management levels and functional and project areas. The respective functions are distributed among the Board of Directors, the Audit Committee of the Board of Directors, the Management Board, and business units of PJSC Aeroflot. A standalone unit (Risk Management Department) has been set up in the Company to:

  • generally coordinate risk management processes
  • develop guidelines to govern risk management processes
  • arrange personnel training in risk management and internal control
  • review the risk portfolio and develop proposals on response strategy and reallocation of resources to manage respective risks
  • prepare consolidated risk reports
  • perform day-to-day monitoring of the risk management process in the Company’s business units and in its controlled entities, as prescribed
  • prepare information and inform the Board of Directors and executive bodies as to the efficiency of the risk management process.

PJSC Aeroflot’s business units and the Risk Management Department make comprehensive efforts to identify and assess risks, as well as prepare the Risk Register and Risk Map. In 2017, PJSC Aeroflot’s CEO approved the Risk Management Standard to implement the concept of a unified risk management and internal control methodology. The Board of Directors of PJSC Aeroflot annually reviews and approves the Risk Register, Risk Map, and Risk Appetite Statement of Aeroflot Group.

Control over PJSC Aeroflot’s financial and business activities is exercised by the Audit Committee of the Board of Directors, Revision Committee, Internal Audit Department, and Risk Management Department. An independent auditor is engaged to audit PJSC Aeroflot’s accounting statements prepared under the Russian Accounting Standards (RAS) and the International Financial Reporting Standards (IFRS).

Officers responsible for interaction with PJSC Aeroflot on the implementation of the CRMS have been designated in controlled entities, with controlled entities taking measures to identify and assess risks.

Risk management flow chart

Risk management structure

Enhancement of the risk management system

Selected activities implemented in 2017 to enhance integrated risk management in PJSC Aeroflot:

  • The Board of Directors of PJSC Aeroflot approved the updated Aeroflot Group’s Risk Register and Risk Map prepared in line with the Risk Management Standard
  • The Board of Directors of PJSC Aeroflot approved the Risk Appetite Statement of Aeroflot Group
  • PJSC Aeroflot’s employees were trained in risk management and internal control
  • Implementation of the Risk Management Standard in controlled entities was launched

In order to improve risk management performance, Aeroflot Group carries out regular CRMS performance assessments both as part of day-to-day operations and in the form of in-house or independent third-party assessments. The management, Audit Committee of the Board of Directors, and Board of Directors receive regular reports on risk management and the CRMS performance across Aeroflot Group.

Principal risks and mitigation measures


Impact of key financial risks realised in 2017

Aeroflot Group’s key financial risks are associated with changes in foreign exchange rates (EUR/RUB, USD/RUB, EUR/USD), jet fuel prices (in the Russian and international markets), and market interest rates (primarily LIBOR). These risk factors are interlinked, most notably changes in the EUR/RUB and USD/RUB exchange rates and jet fuel prices affected by oil prices.

Effect of changes in FX rates and other macroeconomic factors on EBITDA of Aeroflot Group


Significant changes in the above risk factors had a major impact on the Group’s performance in 2017 primarily due to sharp changes in FX rates and fuel prices.

In 2017, the average RUB/USD exchange rate appreciated by 13.1% year-on-year. The rouble rose by 11.2% against the euro, and the average EUR/USD exchange rate appreciated by 2.1%. These factors put pressure on Aeroflot’s FX-denominated revenue but changes in USD/EUR exchange rate had a positive impact on the Company with its foreign currency expenses mostly denominated in USD and FX revenues mostly denominated in EUR.

Global oil prices showed a strong growth in 2017, with the year-average price of Brent crude benchmark rising by 21.3% while the rouble appreciated against the US dollar only by 13.1%, as mentioned earlier. Thus, rouble oil prices grew by 5.6%, pushing jet fuel prices by 7.6%.

Currency and price risks

Aeroflot Group’s exposure to currency risk results from the vast share of the Company’s income and expenses being affected by changes in the EUR/RUB and USD/RUB exchange rates:

  • Sales revenue from international flight tickets is collected in foreign currency (in foreign markets or from transit passengers), or in roubles based on euro prices, with fares across the Group’s core markets priced mostly in euros
  • Fuel costs, lease payments, and maintenance costs (key foreign currency expenses accounting for 24.9%, 13.4%, and 7.4% of the Group’s operating costs, respectively) are denominated in US dollars with some operating expenses denominated in euros and roubles

Our currency risk management primarily focuses on reducing the Group’s exposure to currency risk factors. Aeroflot Group pursues a policy of balancing out revenues and liabilities in each currency.

USD/RUB, EUR/RUB, and EUR/USD dynamics in 2017

Oil price and USD/RUB rate dynamics in 2017

Aeroflot Group’s price risk arises from fuel purchase contracts, as the contractual pricing formula is linked to global oil prices. The Group traditionally uses hedging instruments to manage price risks. In 2016–2017, no such transactions were executed, and no risks for 2018 were hedged as at 31 December 2017.

Interest rate risk

The Group’s exposure to interest rate risk results from changes in the debt market interest rates affecting the costs of borrowings and loans, and driving operating lease costs escalation. Specifically, costs under lease agreements of Aeroflot Group are linked to LIBOR 6M and 3M market interest rates. In 2017, the 6M rate went up from 1.31% to 1.83%, while the 3M rate increased from 1.00% to 1.69% year-on-year (as at 31 December).

Interest rate swaps are a common instrument to mitigate interest rate risk. This risk factor has a limited materiality for the Group, and no transactions to convert the floating rates into fixed rates were undertaken.

LIBOR rate dynamics

Insurance against operational risks

Aeroflot Group uses insurance as an effective tool to manage risks. Aeroflot Group’s underlying approach is to take out, whenever practically possible, full coverage for all types of risks.

The Group’s key operational risks are insured, with coverage for aviation risks, such as actual or constructive total loss, disappearance or damage of aircraft, its components and/or units, risks of airline/operator liability for injury, death, or property damage to passengers or third parties, and war risks accounting for 60% of the total insurance costs.

As part of its efforts to provide insurance protection, PJSC Aeroflot has signed an agreement for liability insurance of PJSC Aeroflot, its directors and officers with a liability limit of USD 100 million.

Aeroflot Group also uses various insurance programmes covering a wide range of non-aviation operational risks of support operations, including all types of compulsory and most types of voluntary civil liability insurance, motor insurance, property insurance (real estate, flight simulators, IT equipment), personal insurance (voluntary medical insurance for employees, their families, and retired employees of Aeroflot Group, accident insurance, disability insurance for flight crews, and travel insurance).

In 2017, all insurance contracts were renewed as scheduled. Given that all insurance policies are purchased as part of the consolidated procurement process, insurance rates and premiums of the Group companies were reduced for many types of policies.

Subsidiary airlines of PJSC Aeroflot were included in consolidated reinsurance coverage, which helped reduce the aviation risk insurance rates by 10%. Thus, despite the growing fleet, the overall aviation risk insurance premium remained almost flat versus the previous insurance period.

Outlook and plans for 2018

Aeroflot group consistently improves its corporate risk management. As part of efforts to enhance the corporate risk management system and improve its performance, special focus will be placed in 2018 on improving approaches to quantitative risk assessment, roll-out of key risk indicator system, and streamlining information flows, infrastructure, and communication channels enabling early risk identification, analysis, and mitigation follow-up.