Aeroflot Backs Away From S7 Merger Talk

Aeroflot is not considering a merger with S7, Aeroflot chief financial officer Mikhail Poluboyarinov said Monday as he reported that the airline's profit for the first nine months of 2008 had dropped 57 percent. "We have analyzed the financial condition of S7 and determined that there is nothing to merge with," Poluboyarinov said at a news conference, Interfax reported. The state-controlled airline made its interest in S7 public at the end of October, when Aeroflot head Valery Okulov sent a letter to the Transportation Ministry asking the government to transfer its 25.5 percent stake in S7 to Aeroflot as a first step in a merger in the interest of "consolidating domestic flights." The debt being carried by S7 and asset transfers with subsidiary Globus Airlines likely played a part in Aeroflot's decision to step back. Short-term loans taken out by the company worth 2.4 billion rubles ($84.7 million) come due in December and January, said Dmitry Baranov, an analyst with Finam Management. "It makes no sense for Aeroflot to pick up more debt right now," Baranov said. National Reserve Corporation, which is owned by Alexander Lebedev, holder of a blocking stake in Aeroflot, got a margin call from Deutsche Bank on Friday on a loan backed by shares in the airline. On Saturday, Lebedev said the blocking stake was safe. While Aeroflot's interest in an S7 merger appears to have faded, the company is still open to the possibility of acting as a management company for Malev, which is Hungary's flagship airline. Vneshekonombank is currently examining the airline's financial viability, Poluboyarinov said, adding that Aeroflot was "interested in helping the Russian bank" if it ended up with a stake in the Hungarian carrier. Malev was sold last year to AirBridge, a company owned in part by Boris Abramovich. The Russian businessman purchased 99.5 percent of Malev, with VEB providing up to 102 million euros over 10 years to finance the deal. Reports in the Hungarian media earlier this month said Abramovich was considering selling a 49 percent stake. A VEB spokeswoman confirmed Monday that the bank is taking a look at Malev, but said that any potential deal will involve a minority stake of less than 49 percent, declining to comment on the possibility of any Aeroflot role. "It's too early to say whether the bank will keep financing [Abramovich] according to the arrangement, or choose not to prolong that deal, and thus become the owner," said Natalia Sorokina, an analyst with Uralsib. "If they do the latter, they may look for a managing company, as an airline is not a core asset." The nine-month results posted by Aeroflot on Monday were less than stellar, with net profit falling by $199.5 million, or 56.8 percent, from the same period last year. With the sharp increases in aviation fuel prices this summer, these results were to be expected, said Finam's Baranov. Aeroflot is planning to sign 2.7 billion rubles in loan agreements with Gazprombank and Sberbank this week, Poluboyarinov said.