AEROFLOT ANNUAL REPORT

Transcription

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2 AEROFLOT ANNUAL REPORT 2010 QUALITY GROWTH EFFICIENCY Moscow

3 Contents Contents I. About the Company About the Company Key numbers Route map and aircraft fleet Key events Letter from the Chairman of the Board of Directors Letter from the CEO 21 II. Review of business State of the industry Development strategy Operations 40 Safety and security 40 Transport operations 41 Route network 44 Aircraft fleet 47 Maintenance and repair 49 Brand and service quality development 50 Information technology 52 Marketing and sales 53 Subsidiaries and affiliates Risk and risk management Human Resources 59 HR policy 59 Study and Training center Social responsibility 63 Environment 63 Charity and social work 64 III. Corporate governance and securities Corporate governance principles Meetings of Shareholders in Board of Directors Committees of the Board of Directors Executive Board Revision Commission Information disclosure Securities and Charter Capital 85 IV. Financial Reporting Statement of Management s Responsibilities for the Preparation and Approval of the Consolidated Financial Statements as at and for the year ended 31 December Letter from the Chief Financial Officer Independent Auditors` Report Overview of financial results Consolidated Financial Statements 103 V. Appendixes Large transactions and related party transactions approved by the Board of Directors and the General Meeting of Shareholders Information on observance of the code of corporate conduct Amendments to internal documents of the Company in Operating statistics Energy consumption in Terms and abbreviations used in this Annual Report List of offices and representative offices 170 List of the Company s own sales offices, representative offices and branches in the Russian Federation 170 List of representative offices abroad Contact Information

4 I. ABOUT THE COMPANY 4 5

5 1.1. About the Company 1.1. About the Company Aeroflot is the leading airline in Russia and the CIS and one of the 25 biggest airline companies in the world (measured by Air Transport World). In 2010 the Company took 23.7% of the Russian air transportation market by passenger turnover (26.7% including subsidiaries). Aeroflot Group carried 14.1 million passengers and 170,600 tonnes of cargo and mail in the reporting year. Aeroflot took first place in 2010 for the first time by passenger numbers on domestic routes, carrying 4.16 million passengers inside Russia, more than any other operator on the Russian market. Aeroflot Group s route network is the biggest in the region, with 167 destinations in 48 countries of the world. Aeroflot is a member of the SkyTeam global airline alliance. The combined network of the alliance includes 898 destinations in 169 countries, giving the passengers of alliance members almost unlimited travel possibilities. The Group s fleet consist of 143 aircraft, 29 of them operated by Nordavia and 14 planes operated by Donavia subsidiary. Aeroflot s aircraft fleet without subsidiaries is among the youngest in Europe, and numbered 100 aircraft at the start of Aeroflot is based in Moscow, at Sheremetyevo International Airport. A new terminal, Terminal D, was brought into operation at Aeroflot s home Airport at the end of 2009, and most flights by Aeroflot and its partners were transferred there in the course of Aeroflot s development strategy targets further transformation of the Company into a global network carrier and one of the world leaders in air transport. The Russian Government has decided that Aeroflot will be the basis for consolidation of the six airline companies belonging to the state corporation Russian Technologies (Rossiya Airlines, Kavminvodyavia, Orenburg Airlines, Vladivostok Avia, Saratov Airlines and Sakhalin Airlines). Aeroflot was included in the list of Russia s strategic enterprises and strategic joint-stock companies by Decree 1009 of the President of the Russian Federation, dated August 4,

6 1.2. Key numbers 1.2. Key numbers USD 4,319.3 million Revenue of Aeroflot Group in 2010 was USD 4,319.3 million, which is 29.1% more than in 2009 USD 253 million The Group increased its net profit by 2.95 times in the reporting year in comparison with 2009 Market capitalization of Aeroflot grew by 49% in the reporting year to USD 2.89 billion 14.1million passengers thousand tonnes of cargo and mail transported by the Group in 2010 new airliners The Group started operations with 7 new airliners in 2010 Aeroflot Group carries more passengers than any other airline in its region by a wide margin. Passenger traffic increased by 27.2% in 2010 Main operating indicators* Change Passengers carried, millions 14,070 11, % Cargo and mail carried, thousand tonnes % Revenue passenger kilometers, million RPK 39,172 29, % Revenue tonne kilometers, million RTK 4,488 3, % Passenger load factor, % p.p. Revenue load factor, % p.p. Average headcount 20,541 19, % Main financial indicators **, USD millions Revenue 4,319 3, % Traffic revenue 3,700 2, % Operating costs 3,820 3, % Profit before income tax % Net profit % EBITDA** % EBITDA margin, % p.p. EBITDAR*** 1, % EBITDAR margin, % p.p. Net debt/ebitda ratio % Share price indicators Earnings per share, US cents times Market capitalization at the end of the year, USD billions 2,895 1, % Price/Earnings ratio % * Consolidated figures for Aeroflot Group ** EBITDA=Operating income + Amortization + Custom duties expenses *** EBITDAR= EBITDA+Operating lease expenses 8 9

7 1.3. Route map and aircraft fleet 1.3. Route map and aircraft fleet» 10 The passenger fleet of Aeroflot (without subsidiaries) is one of the youngest in Europe. The Company operates 68 medium-haul and 26 long-haul passenger aircraft, and average age of aircraft is 5 years»» The most extensive route network among Russian and CIS airlines 167 destinations in 48 countries Aeroflot Group operated 143 modern aircraft (140 passenger airliners and 3 cargo aircraft) at the end of

8 1.4. Key events 1.4. Key events» The most important event of 2010 was the decision by the Russian Government on transfer to Aeroflot of six airline operators belonging to the state corporation Russian Technologies. Fleet modernization and expansion Aeroflot added new aircraft to its fleet. A 9th Airbus A330 and a 33rd A320 were received in January; the 10th A330 arrived in April; the 34th A320 and 17th A321 in October; the 35th A320 in November; and the 18th A321 in December. In November the Aeroflot Board of Directors gave the go-ahead for creation of the Aeroflot Aviation School, a nonstate education establishment based on the Company s Air Personnel Training Department and the Aviabusiness school of business. Service improvements In April the mobile phone company MegaFon signed a contract with Aeroflot to install base stations on board Aeroflot aircraft and in December Aeroflot became the first Russian air carrier to offer passengers inflight mobile telephony. The Company s in-flight magazine received a thorough makeover in June From July Aeroflot began to offer checkin by mobile phone for its flights, and in November Aeroflot was the first Russian airline to offer the service outside Russia (at London s Heathrow airport). Market research shows that passengers trust Aeroflot. Customer loyalty was measured in July by the international strategic consultancy Bain & Company using Net Promoter Score (a specialized index). Aeroflot had an NPS index of 44%, which puts it ahead of many competitors in the industry. The survey found that a large share of Aeroflot customers would recommend Company services to their friends. Aeroflot works continuously to improve the quality and range of its passenger services. A new business and economy-class in-flight menu was introduced in March. A joint programme with Wimm-Bill-Dann Foods, Healthy Eating in the Air and on the Ground, was launched in June. In November Aeroflot opened its newgeneration central ticket office in Moscow. The new office uses electronic queue management and maximizes customer options to ensure efficient, high-quality passenger service. Systems at the office recognize privileged status of members of the Aeroflot Bonus programme. Development of the route network The long-haul route network was expanded for the winter schedule 2010/2011. New regular flights started to Goa (India), Phuket (Thailand), Punta Cana (Dominican Republic) and regular flights resumed to Male (Maldives) and Denpasar (Indonesia). The network was further expanded to include Moscow Tel Aviv Moscow in August and Moscow Kazan Moscow in September. Aeroflot is developing cooperation under current codesharing agreements with Russian and foreign airlines. Aeroflot and Air France decided to broaden commercial cooperation in March. Aeroflot and Czech Airlines began sharing the Prague Krakow Prague route in May. In July dozens of new flights (to Irkutsk, Murmansk, Ekaterinburg, Nizhnevartovsk, Tyumen, Chelyabinsk, Barnaul, Novosibirsk and Krasnoyarsk) were added to those previously operated (from Moscow to Kaliningrad and cities in Germany) in conjunction with Rossiya Airlines. The Company is developing its freight and mail network. In April Aeroflot became the first Russian airline to carry mail for the French post office. Information technology The first stage of Aeroflot s Payment Gateway was introduced in In February Aeroflot and Sberbank of Russia held the first open electronic auction of blocks of seats for tour companies ahead of the 2010 summer season. Block auctions were also held in August for the 2010/2011 winter schedule. Aeroflot s Electronic Marketplace for tenders of goods and services was inaugurated in July Alfa Bank has handled Internet payments by plastic card for Aeroflot since August Now payments for air tickets booked online are processed by Alfa Bank s system exclusively, without use of intermediaries. In December Aeroflot made its debut on the social networks Facebook, In Contact (a Russian analogue of Facebook), and the microblogging site Twitter. The Company CEO Vitaly Saveliev has started a personal blog on LiveJournal and tweets on Twitter

9 1.4 Key events The Company in capital markets Social responsibility In March Aeroflot took part, for the fourth time, in the Train of Hope national charity event, organized by Radio Russia as part of the Children s Question social project. Following the eruption of the Eyjafjallajökull volcano in Iceland in April, Aeroflot laid on additional flights on European routes and accepted all passengers with valid tickets who had been unable to depart from airports, which were closed down, but managed to reach others still in operation. Aeroflot ran its Comrades in Arms programme from May 3 to 27, in honor of the 65th anniversary of victory in the Great Patriotic War, offering specially discounted flights to veterans. In September 2010 Aeroflot, in cooperation with the Give Life charity, held Achievements and awards Aeroflot won two of the main categories in the national Wings of Russia prizes for 2010: Airline of the Year Domestic Passenger Carrier Group I (for high-volume carriers), and Airline of the Year International Scheduled Carrier. Aeroflot was the first Russian company to be included in the list of the world s 25 largest airlines, published by Air Transport World. Aeroflot was awarded the Russian transport industry s national prize, the Golden Chariot, in the category Best Transport Company in the Crisis Period. In March the credit ratings agency Fitch rated Aeroflot BB+, with stable outlook. In April 2010 the Company entered the bond market and made two successful bond issues for a total of RUR 12 billion with threeyear maturity. The securities were listed on MICEX Quote List A1 and also included in the Lombard List of the Central Bank of Russia. an auction of paintings by children receiving assistance from Give Life programmes. All proceeds were used to enable children with health problems to travel for medical treatment. Aeroflot has taken a lead among Russian companies by providing social transport under a 2010 government programme designed to widen access to air travel between the Russian Far East and European Russia. About 95,000 passengers benefited from discounted fares between April 1 and October 31, 2010 representing an increase of 3.5 times compared with the same period of In February Aeroflot was the official carrier of the Russian ice hockey team to the world championships in Vancouver. The Airline was a prizewinner in Russia s first professional awards for business tourism the Russian Business Travel & MICE Award, winning the nomination for Outstanding Contribution to Development of Civil Aviation. Aeroflot was the most punctual Russian carrier according to FlightStats. Vitaly Saveliev, Aeroflot Executive Board Chairman and CEO, received the Company of the Year prize in the category Personal Contribution to the Development of the Transport Industry in Russia. Aeroflot was judged to be the Quietest Airline in Prague Airport s annual awards. A survey by the Russian Public Opinion Research Center (VTsIOM) found that Aeroflot is the most popular airline among foreign passengers flying to Russia. Aeroflot was awarded the national business prize Company of the Year 2010 in the Transport category. Aeroflot is among the top ten most recognized and trusted Russian brands, according to surveys by the ROMIR Holding. Swiss courts returned CHF 53.5 million, which were taken from the Company by fraud more than 10 years ago and had been frozen in Switzerland. Key events after the reporting period Aeroflot s 36 th Airbus A320 aircraft entered service. The new craft was given the name V. Glushko in honor of Valentin Glushko, the outstanding Soviet scientist who created liquid fuel technologies for rocket engines. Aeroflot placed an order with Boeing Corporation for delivery of eight Boeing 777 aircraft. The Aeroflot annual report for 2009 won the Transport Industry Best Annual Report award at the 13th Annual Report and Website Competition organized by Securities Market magazine and the MICEX Stock Exchange. The Aeroflot website won an award for Best Corporate Website of 2010 at the 4th St. Petersburg Corporate Website and Annual Report Competition. The Aeroflot investor relations group entered the top-five Russian IR services, as judged by IR magazine Russia & CIS Awards in the category Leading IR Service of Small and Medium-Cap Companies. Aeroflot decided to sell 100% of its subsidiary airline, Nordavia, as part of actions to optimize Group structure. The next Annual General Meeting was scheduled for June 29,

10 1.5. Letter from the Chairman of the Board of Directors 1.5. Letter from the Chairman of the Board of Directors Dear Colleagues, The airline industry experienced a transformation in 2010, reversing decline and establishing a confident growth trend. This much-awaited and gratifying turnaround opens up new horizons for Aeroflot. We can now pursue innovative development in order to capitalize on our potential and achieve a breakthrough in quality of our business. Air passenger numbers in Russia grew at record rates in Russian airlines carried about 57 million passengers, which is the highest-ever number in the post-soviet period and represents an increase of 26% on The rate of growth was three times above the world average. Aeroflot s rate of growth was even higher, making the national flag carrier the locomotive of world-beating performance by Russian airlines. Aeroflot Group accounts for around a quarter of all air transport services by Russian operators. Incorporation of airline assets of the state corporation Russian Technologies will raise Aeroflot Group s share of the Russian market to about 40%. Growth of the airline business has been helped by positive developments in the Russian economy, including revival of manufacturing, increase of real incomes, and the Government s determination to support and develop the transport industry. Investment in the Russian transport sector was about RUR 1 trillion last year, representing an increase of 8% on 2009 in real terms. Development of innovative solutions has become an absolute priority in transport, as all sectors of the Russian economy

11 1.5. Letter from the Chairman of the Board of Directors A favorable situation in the economy is a necessary condition for business success, but that success will not be achieved unless a company can turn its opportunities to good advantage. The management team, which has led Aeroflot for the last two years, has amply demonstrated its ability to do that. Financial analysts have noted that the national carrier is carrying more cargo and more passengers, improving its profitability and maintaining tight control over costs. These achievements have improved Aeroflot s credit rating and attractiveness to investors, paving the way for dynamic growth of market capitalization. Aeroflot s position as the Russian flag carrier remains as strong as ever. The Company contributes a large part of total industry performance and is the source of efficiency-boosting innovation. The Company operates successfully in the interest of its shareholders, including the largest shareholder, the Russian Government. Aeroflot is the cornerstone of the airline industry in Russia, both shaping the future of airline business in the country and stimulating development of many other parts of the economy. One of the key modernization tasks facing the country that of increasing people s mobility would not be possible without Aeroflot. The Airline has therefore made leadership on the domestic air transport market into a strategy priority. This is being achieved without detriment to Aeroflot s position as a top player on international routes, enhanced by membership of the SkyTeam global alliance. Aeroflot s status as the national carrier is more than an honorary title. It entails serious major responsibilities to Russia and its people, and our future tasks include consolidation of the Russian airline sector, increasing its efficiency and raising its authority and competitiveness on the world market. Russia s leading airline is well placed to achieve its strategic objectives, thanks to Europe s youngest aircraft fleet, an extensive route network, a broad client base, high standards of service and up-to-date technology and business methods. Aeroflot can also continue to count on the support of Government in all matters of importance in the future. The Company s main asset is its staff who are a close-knit team, highly qualified, motivated and infinitely devoted to what they do. Aeroflot has much potential to attain new heights in 2011, both inside Russia and on key foreign markets. I am confident that, with the active support of its shareholders, our Company will realize that potential. Minister of Transport of the Russian Federation Igor Levitin 18 19

12 1.6. Letter from the CEO 1.6. Letter from the CEO Dear Shareholders, Aeroflot achieved record results in 2010, offering an excellent basis for future development of both our Company and the entire Russian civil aviation industry. We proved our resilience by putting the crisis of 2009 behind us and we showed our true worth as industry leaders by achieving growth rates without precedent in recent years. Our Company carried 11.3 million passengers in 2010, which is more than ever before. We were the biggest carrier on domestic flights for the first time in our history, and we achieved record levels of carrying in the summer period when passenger numbers were in excess of one million per month. Aeroflot Group of companies transported over 14 million people in total during 2010, representing about one quarter of all carrying by Russian airlines, and we achieved this result during a period of rapid industry growth. Not only are we in profit, but our profits are growing steadily. The bottom line of Aeroflot Group in 2010 was USD million, which is almost three times the level in Revenue increased by 29% to USD 4,319.3 million, outpacing operating costs, which rose by 24.5% to USD 3,819.9 million. The influential international journal Air Transport World places our company among the world s 25 leading airlines by levels of operating and net profit. The best interests of shareholders are the touchstone of our business, so I am particularly glad to note a 49% rise in our market capitalization during 2010 to a level of USD 2.89 billion by the end of the year. Fitch international rating agency gave our Company a BB+ rating with stable outlook and Aeroflot shares offered one of the best yields among Russian stocks in 2010 (measured by trading on the MICEX Stock Exchange). Aeroflot shares still have much growth potential: investment analysts suggest that our and your company remains 30% undervalued

13 1.6. Letter from the CEO We intend to realize our potential by keeping our position at the forefront of the global aviation industry. We are consistently implementing new technology and business methods in all spheres, making us an innovation company as well as a transport company. In 2010 we became the first Russian air carrier to offer mobile telephony and Internet access on board our aircraft, our passengers can check in by mobile phone, and our corporate website has been rated the best in Russia. Aeroflot is also becoming increasingly interactive by expanding its presence on social networks. We have inaugurated electronic auctions for sale of blocks of seats, and the Aeroflot Electronic Marketplace has been brought into operation for competitive tendering of goods and services. Aeroflot s aircraft fleet is already the youngest in Europe and is becoming even younger and more efficient. Our policy is to achieve an optimum combination of top-quality, Western-built aircraft with advanced Russian aerospace technology. We place particular hopes on an innovative Russian design the Sukhoi SuperJet-100, which will be a worthy addition to our already strong and modern fleet of aircraft. Aeroflot is a European leader by standards of on-board customer service, as confirmed by authoritative industry surveys. According to the British airline portal, Skyscanner, our Company is 4th in the world for quality of in-flight meals and Aeroflot s cabin crew uniform ranked in the top-10 for style. In 2010 we were the first Russian airline to obtain a customer loyalty rating, achieving an NPS score of 44%, which is better than most European carriers and in line with the best Asian and American airlines. A survey by the leading Russian opinion-poll company, VTsIOM, found that Aeroflot was the most popular carrier for foreign travelers to Russia in We are proud to note that our achievements in 2010 were recognized by twenty awards. These included: - winner of the Transport Section in Russia s Company of the Year awards; - winner in two categories of the Wings of Russia prize: Best Domestic Passenger Carrier and Best International Passenger Carrier; - acknowledgement as Best Transport Company in the Crisis Period as part of the Golden Chariot national prizes for the Russian transport industry. In 2010 a study by the leading Russian market researcher, ROMIR, showed that Aeroflot is now one of the top-10 most recognized and trusted Russian brands. The British consultancy, Brand Finance, calculates that the Aeroflot brand is worth over USD 1 billion, making it one of the top-20 most valuable airline names in the world. Our company your company is the mainstay of Russia s aviation industry and associated sectors of the national economy. Thanks to our progressive development, Russian airport infrastructure is improving, new runways are being built, and Russian aircraft manufacturers are obtaining new orders. We have achieved much, and we look forward to achieving more. Aeroflot intends to become a global airline, capable of matching and outperforming the best in the world. With Russia now on the threshold of WTO membership, an internationally competitive flag carrier is more important than ever. Our main goal is to enter the top-5 carriers in Europe and top-20 in the world by passenger numbers before 2025, setting a target of 70 million passengers a year. This goal determines our other strategic objectives up to Development of domestic carrying is a special priority, as we recognize the importance of enabling Russians to be more mobile and make better use of transit capacity. Our targets for international routes are also ambitious. We believe that all these targets are absolutely realistic, particular in view of our project backed by the Russian Government to consolidate the Russian airline industry. Integration of six regional airlines, which we are obtaining from their current owner, Russian Technologies, will strengthen our position as the standard-bearer for Russian aviation, increasing our share of the Russian air travel market and our presence abroad. Such is our and your Company. Aeroflot a Company to be proud of. Vitaly Saveliev 22 23

14 II. REVIEW OF BUSINESS 24 25

15 2.1. State of the industry 2.1. State of the industry The global market for air transport Main international market trends are towards consolidation and further development of airline alliances The global airline industry developed well in 2010 Favorable current indicators for the industry in 2010 coincided with events, which give a clearer picture of how the global aviation system will be shaped in the future. National carriers, having survived a temporary reversal of their fortunes due to the global financial crisis, continued to move towards a global model by increasing their presence in various geographic markets and diversifying the services, which they offer. According to International Air Transport Association (IATA) data, published in June 2011, total world passenger volumes in 2010 were up by 8.1% over 2009 at 2. 7 billion. IATA predicts that the air travel market will expand to 3.3 billion passengers by 2014, with most of the growth caused by rise of the Asia-Pacific region economies, led by China. According to IATA, total industry passenger revenues in 2010 were USD 425 billion, which is 14% more than in However, the average one-way air fare has not yet regained its pre-crisis level of Medium-term trends in passenger numbers billion passengers Data: IATA. Processes of consolidation and development of global airline alliances continued apace in These processes are leading to emergence in the not-too-distant future of transnational airline groups, which will be among the world s top-100 companies in terms of turnover. In 2010 consolidation focused on airlines in South and North America, Western Europe and the CIS. In the USA the largest market players continued to come together to create new giants. The merger of Delta and NWA was followed by that of United Airlines and Continental. The Latin American airline industry also continued to consolidate and generate new large players, capable of becoming global companies in due course. The Latin American market experienced its biggestever event with the creation of a new player, LATAM Airlines Group, from the merger of two leading and rapidly growing operators LAN Airlines and TAM of Brazil. Europe continued to set up joint business projects with American companies to operate on transatlantic routes. One such joint project between British Airways, Iberia and American Airlines started operations in A further wave of mergers and takeovers is expected in the coming year, resulting primarily from the changing situation in northern Europe and British Airways intention to acquire a number of regional companies in different parts of the world. Consolidation also affected the CIS as mergers took place in both Russia and Ukraine. The largest consolidation project in Russia was the start of takeover by Aeroflot of the assets of the state corporation Russian Technologies. Favorable geographical location of Moscow on the shortest route between East Asia and Europe gives Russia s largest airline excellent chances of becoming one of the big players in the emerging world air travel market. In Ukraine, local airlines continued to coalesce around Ukrainian Aviation Group, which today controls around 60% of the local air industry. The new long-haul market architecture is dominated by airlines with above-average service standards, reflecting increasing demand worldwide for premium (business and economy-plus) travel. Growth across regional markets is uneven, and is led by countries of the Middle East, Asia-Pacific and Latin America Leading aircraft manufacturers and carriers have begun to investigate the potential of biofuels, signaling an important innovative trend in the global airline market World passenger traffic grew by 8.2% in 2010 but the growth was unevenly distributed across different regions. The leading region was the Middle East (+17.8% against +11.2% in 2009), which was predictable given that the region specializes in transit traffic. Asia-Pacific countries (+9%), Latin America (+8.2%) and North America (+7.4%) had results close to the global average. The European market showed growth of 5.1%, which is below the industry average. Total cargo in 2010, according to provisional IATA figures, was 45.8 million tonnes, which is 12% more than in 2009 and 1% more than Cargo revenue grew by USD 18 billion from 2009, but by only USD 3 billion in comparison with Total revenue cargo kilometers increased by 20.6% in comparison with Leading airlines are progressing from a theoretical interest in biofuels to practical steps for use of such fuels. The pioneers in this direction have been Lufthansa and British Airways. Lufthansa announced opening of the world s first commercial flights using mixed fuel, to be operated from spring 2011 on the Hamburg Frankfurt route by an Airbus A321. British Airways and the American company Solena have launched a joint project to build a biofuel plant near London, which will supply British Airways flights from At present the main function of flights using biofuel is as an image tactic. But experts expect new technology to emerge, which will make biofuels much less expensive by

16 2.1. State of the industry The Russian air transport market 25» The Russian air transport market showed strong growth in 2010, far exceeding growth of the world market. Trends in passenger numbers on Russian airlines Million passengers International Domestic Average flight distance of Russian airlines km International Domestic Most of the growth was due to increasing demand for international flights on popular tourist routes. Industry consolidation and integration continues, leading to the emergence in Russia of major global market players. The Russian air transport market grew steadily in According to Transport Clearing House (TCH) data, Russian airlines carried almost 57 million passengers last year. That is 26.2% more than in 2009, Passengers carried by Russian airlines, million passengers when passengers carried by Russian airlines numbered 45.1 million. Total passenger traffic on Russian airlines increased by 30% to billion RPK in Passenger turnover of Russian airlines, billion RPK International Domestic Source: TCH. Russian airlines carried a total of 22.7 million passengers on international routes in 2010, which is 30% more than in 2009 and 17% more than in Average flight distance increased from 2960 to 3150 km. According to TCH, 13.5 million passengers entered Russia on international routes with foreign airlines, which is 17% more than in Moscow and St. Petersburg accounted for 87% of the passenger flow. Scheduled flights to CIS countries represented only a small proportion (13%) of the market, but grew by 23% from 2009 to 3.5 million passengers.» Total passenger numbers on domestic routes were 29.2 million in 2010, which is 23% more than in 2009 and 11% more than However, average flight distance was unchanged at 2000 km, showing that structure of the domestic route network, unlike that of the international network, did not undergo any major changes. Passenger numbers on regional airlines grew by 14% compared with 2009 to 1.5 million passengers. However, this market segment failed to regain pre-crisis levels of The reverse of 2009 proved short-lived. Recovery from the crisis of the 1990s has resumed and the industry has set about creation of a large national carrier to represent Russia in the global market Source: TCH. Most growth in 2010 came from international routes, mainly as a result of increasing demand for flights to popular tourist destinations. International travel accounted for 49% of carrying by Russian airlines in 2010, following a long period at around 47-47%. The reporting year saw further processes of consolidation and infrastructure modernization, as well as long-awaited growth of interest in development of regional flights. The centerpiece of consolidation in the reporting year was the Russian Government s decision to transfer six Russian airlines belonging to the state corporation Russian Technologies to management by Aeroflot. In Russian regions there were tentative signs in 2010 of some decentralization of Russian passenger traffic. But these processes remain weak at present, and Moscow routes are expected to keep their domination for a considerable time to come. Inter-regional flights, unlike other market segments, failed to regain pre-crisis levels in Regular domestic routes outside Moscow accounted for only 22% of all regular domestic flights, whereas in 2008 the figure was 27%. Air transport decentralization and creation of regional hubs will occur proportionally to creation of fully-fledged inter-regional centers of business activity across Russia

17 2.1. State of the industry Russian airline companies» Conditions on the Russian airline market in 2010 were favorable overall. But not all carriers were able to take full advantage of this Structure of the Russian air transport market (international passenger numbers) 29.0% 28.5% 18.7% 19.2% 6.5% 7.6% 6.6% 5.4% 5.7% 4.5% Aeroflot Group has traditionally led the Russian airline market in terms of total passenger traffic and passenger numbers on international and domestic routes. Including subsidiaries Donavia and Nordavia, the Group s total passenger turnover in 2010 was 39.2 billion RPK and 14.1 million passengers were carried. These figures reflect growth of 31% and 27%, respectively. Aeroflot Group accounted for 26.7% of passenger turnover of all Russian airlines in 2010 (26.6% in 2009) and 24.8% of passenger numbers (24.6% in 2009). Share of passenger turnover on domestic routes increased by 1.4 percentage points to 23.5%, and Aeroflot s share on international routes fell slightly (by 1.2 points) to 28.9% Not including its subsidiaries, Aeroflot carried 14.3% of Russian domestic passengers in 2010 and held 25.7% of the entire market by passenger numbers. Aeroflot Group Transaero Orenburg Airlines Rossiya Airlines WIM-Avia Structure of the Russian air transport market (domestic passenger numbers) 20.6% 21.2% 17.5% 15.3% 13.7% 13.1% Share of Aeroflot Group on the Russian airline market by passenger numbers Share of Aeroflot Group on the Russian airline market by passenger turnover (RPK) 6.6% 5.4% 4.5% 4.6% Aeroflot Group UTair S7 Airlines Rossiya Airlines Transaero Structure of the Russian air transport market (international RPK) Total International Domestic Total International Domestic 30.1% 28.9% 22.0% 23.4% Russian air transport market structure (passenger numbers) Russian air transport market structure (RPK) 7.2% 7.7% 6.2% 4.6% 4.9% 4.4% Others 39.9% Aeroflot Group 24.8% Others 36.4% Aeroflot Group 26.7% Aeroflot Group Transaero Orenburg Airlines Rossiya Airlines WIM-Avia Rossiya Airlines 5.4% UTair 7.8% S7 Airlines 10.4% Transaero 11.7% Orenburg Airlines 4.9% UTair 5.4% S7 Airlines 8.9% Transaero 17.9% Structure of the Russian air transport market (domestic RPK) 22.1% 23.5% 18.9% 15.7% Transaero was in second place by passenger numbers with 6.65 million, showing passenger turnover of 26.3 billion RPK. S7 Airlines were in third place with 5.9 million passengers and 13 billion RPK. UTair had 4.42 million passengers and 7.98 billion RPK in The fifth largest player was Orenburg Airlines with 7.16 billion RPK and 2.4 million passengers. 11.0% 11.0% 9.8% 9.9% 4.5% 3.8% Aeroflot Group S7 Airlines UTair Transaero Rossiya Airlines 30 31

18 2.2. Development strategy» The Russian air transport sector, which was the first to feel effects of the global crisis on the airline market, returned to its long-term growth trajectory in Development strategy Cargo and mail carried by Russian airlines, thousand tonnes Structure of the Russian air cargo market Aviastar TU 2% Transaero 4% S7 Airlines 5% Others 22% Polet 5% Aeroflot Group 19% Volga-Dnepr Group of Companies 43% Russian airlines carried some 926,400 tonnes of cargo in 2010, which is 30.1% more than in 2009 and 19% more than Cargo turnover increased by 32.4% to million CTK in There was increasing differentiation between international and domestic business in Growth of 36% in international carrying exceeded even the best pre-crisis rates, but the domestic market barely returned to pre-crisis levels. Russian airlines carried some 661,700 tonnes of cargo on international routes, which is 16% more than in Domestic cargo was 28% of the total. Stability of domestic cargo business, which is relatively independent of macroeconomic fluctuations, reflects traditional northern deliveries (air cargoes of supplies to isolated settlements in northern Russia), which make up the bulk of domestic cargo traffic. The leading Russian cargo carrier in 2010 was AirBridgeCargo (part of Volga-Dnepr Group of Companies). Aeroflot was in second place, with a substantial increase due to returning cargo business. The Group s total cargo traffic in 2010 was million CTK, an increase of 15%, and the total volume of cargo was up 14.6% to 170,600 tonnes. Leader in global and transit markets Market leader in quality Strategic goal Transformation into a global network airline Well developed long-haul network Moscow Sheremetyevo developed into a major international hub Leader in the domestic airline market Aeroflot s strategic goal is to create a global network airline, which is among the best in the world for service and innovation, and a leader on the international airline market. The basis for innovative growth will be advanced technology as a means of increasing efficiency, reducing costs and improving services. Advanced technologies and innovation will be used to improve every aspect of the Company s business and safeguard flight safety. Incorporation of six Russian airlines, further development of cooperation in the SkyTeam alliance and successful implementation of the Company s fleet programme will ensure improving results for Aeroflot in the near term, preparing the Airline for the next stage of its ambitious plans to transform itself into a global player

19 2.2. Development strategy Implementation of key tasks in 2010: Airline consolidation strengthening Aeroflot s positions on the domestic market Following the Russian Government decision to transfer aviation assets of Russian Technologies to Aeroflot, a management committee has been established to oversee Aeroflot s incorporation of the airlines, which are as follows: OJSC Vladivostok Avia; OJSC Saratov Airlines; OJSC Sakhalin Airlines; Rossiya Airlines; Orenburg Airlines; Kavminvodyavia. The committee includes managers of both Aeroflot and of the airlines concerned. Mobile phone check-in and on-board Internet Mobile check-in Mobile check-in has been introduced at Sheremetyevo Terminal D (Moscow), Pulkovo (St. Petersburg), and London Heathrow. Aeroflot is the first Russian airline to launch a mobile check-in service abroad. Online check-in Aeroflot passengers can now check in online in more cities, including Vienna, Dusseldorf, Hamburg, Madrid, Hanover, Munich and Hong Kong (a total of 48 cities in Russia and worldwide). On-board Internet and mobile telephony MegaFon mobile phone base stations are now installed on board five Aeroflot aircraft. Expansion of services to business and economyclass passengers, personalized services and improvement of quality: New on-board catering From summer 2010 passengers on regular flights are being offered new catering, with new ingredients in snacks and main courses. New in-flight magazines Passengers are being offered a range of in-flight magazines, Aeroflot, Aeroflot Premium and Aeroflot Style. New tariffs Tariff rules have been simplified and new tariff plans have been produced for the whole Group. All published tariffs are now grouped into two service classes: business class ( status and comfort grades) and economy ( status, comfort, budget and promo ). Simplified passport control procedures A separate passport control channel for international business-class passengers is now available at Terminal D. Development of the route network Creating an efficient, modern aircraft fleet Flights have begun on seven new international and two new domestic Russian routes. The number of passengers on SkyTeam alliance partner flights grew by 7.6% compared with 2009 to 170,000. Aeroflot has signed a contract for delivery of 11 Airbus A aircraft in 2011 and An agreement has been signed with Boeing Corporation for delivery of eight Boeing 777 aircraft in in order to develop long-haul routes and increase capacity

20 2.2. Development strategy Improvements to the frequent flyer programme Aeroflot s frequent flyer programme, Aeroflot Bonus, has been harmonized with programmes of its SkyTeam partners. Generate and maintain passenger feedback Aeroflot has entered the social networks and Facebook and In Contact, as well as the microblogging site, Twitter. The CEO, Vitaly Saveliev, has also started a personal blog on LiveJournal and his tweets appear on Twitter. Boosting direct sales Aeroflot has opened a new dedicated central ticket office in Moscow (at 10 Arbat Street). The office will be able to handle 60% more customers than conventional sales offices by using electronic queue management and will offer customers the greatest possible range of options to improve service efficiency and quality. Office systems recognize privileged status of members of the Aeroflot Bonus frequent flyer programme. Promote the brand and increase domestic sales Aeroflot won the Russian national prize for Business of the Year 2010 in the Transport section. Aeroflot s website won the prize for Best Corporate Website of 2010 at the 4th St. Petersburg Competition for Corporate Websites and Annual Reports. Aeroflot won the two main sections of the national prize Wings of Russia 2010, being acclaimed Airline of the Year among both domestic high-volume carriers and international scheduled carriers. Electronic tendering for block sales Blocks of seats for the winter 2010/2011 season have been sold to tour companies via open electronic auctions. The auctions were held using Sberbank s Automated Trading System (an electronic marketplace, approved by the Russian Government). ISO certification The company s quality management system successfully passed a re-certification audit of compliance with the ISO 9001:2008 international standard. Confirmation of Aeroflot s ISO 9001 certification demonstrates the Company s ability to maintain consistently high levels of service

21 2.2. Development strategy Strategic goals and objectives of Aeroflot Group» The Strategic objectives: strategic goal of Aeroflot Group is to transform itself into a global network airline. However, its primary goal is to reinforce its position in the Russian domestic and CIS market. become a world airline market leader in major regional segments (routes from Russia and the CIS to Europe and Asia) and global transit markets (Europe-Asia); establish Moscow Sheremetyevo as a major international hub and encourage the creation of appropriate infrastructure; maintain and consolidate dominance of the domestic airline market; create a well developed long-haul network linking major global air transport markets; become a market leader in quality. an extensive and high-frequency route network; effective and harmonious sales cooperation with other members of the SkyTeam alliance in the European and North American markets; modern, fuel-efficient aircraft; consistently high-quality service, equivalent to that of leading European companies; an effective customer loyalty programme and client relations system; a strong, recognizable brand; highly qualified, highly motivated staff; a stable financial position. Market objectives of Aeroflot Group Domestic market: maintain and increase domestic market share. International flights: maintain a leading position in the key market of flights to Europe and greatly improve Aeroflot s position in the market for air transport to Asia. Global transit market: significantly increase Aeroflot s presence in the key transit market between Europe and Asia. Non-scheduled segment: attain a dominant position in the market for tourist flights to Europe, Asia and the Middle East. The strategic aim of becoming a global carrier also requires diversification over several market segments long haul, charter and budget and consequent product differentiation. The Company is working to create the internal and external conditions necessary to achieve a sustainable competitive advantage: well developed hub infrastructure; dominant positions in key segments of the domestic market (the Moscow Air Cluster, St. Petersburg and the Far East); Key tasks in 2011 focus on core business and increase efficiency of cooperation between Group subdivisions; expand market presence, principally by incorporation of assets of Russian Technologies and development of partner relations with other members of the SkyTeam alliance; offer a wide range of Aeroflot Group products across all consumer segments; improve product quality and make innovations, including mobile check-in and on-board Internet and mobile telephone services; ensure an efficient procurement system for equipment and goods; expand the aircraft fleet to enable marketbeating growth of traffic volumes in the medium and long term; start operations with Russian-made SSJ regional-class aircraft; meet Company needs for qualified flight crews using the Company s own training capacities (the Aeroflot Aviation School); ensure business continuity and crisis resilience of Aeroflot Group companies

22 2.3. Operations 2.3. Operations» Flight safety is ensured by an efficient modern fleet of aircraft, highly qualified crews and an effective flight safety department» An innovative approach to development is of decisive importance for Aeroflot today, and management views innovation as a key competitive strength The Company is taking a fresh look at all aspects of its business, developing and introducing new innovative approaches to passenger service quality, business efficiency, manageability and economy of resources. In 2010 Aeroflot set up an innovative development committee under the Executive Board of Management and designed a programme concept for innovative development. The concept addresses the medium term (five to seven years) against the background of priorities set by state policy for science, technology and innovation. It contains a set of measures to develop and introduce original, world-class technologies, products and services. It is integrated with the airline s development strategy Safety and security» and designed to improve performance, measured by key criteria, through drastic reduction of the cost of air transport without detriment to the customer experience, saving energy, increasing productivity and making operations more environmentally friendly. Special attention in design of the innovative development concept was given to creation of suitable corporate mechanisms and structures. The concept also envisages collaboration with leading universities and scientific organizations in Russia and elsewhere. The Board of Directors has approved the Aeroflot work plan for innovation and R&D during and granted R&D funding in the amount of RUR 128 million for Flight safety and aviation security have absolute priority for Aeroflot The Company has an established and effective system for detecting and guarding against all safety risks. Aeroflot s compliance with the highest standards of flight safety and aviation security has been demonstrated by a number of inspections: IATA operational safety audit (IOSA) certificate and IOSA Operator status extended to 2011 (audit conducted in 2009). Internal audit of compliance with the requirements of the Operational Safety section of IOSA. IATA Safety Audit of Ground Operations (ISAGO) of Aeroflot conducted in 2009; certificate extended to Aeroflot s ISO 9001 certification confirmed. In 2010 a commission of the Russian Federal Air Transport Agency (Rosaviatsia) confirmed the operator s ability to operate passenger flights safely and to a high level of quality. Rosaviatsia s inspection of the compliance of Aeroflot s aviation security measures with the certification requirements of the Rosaviatsia Transport Safety Division resulted in Aeroflot s aviation safety certificate (number FAVT A dated July 2, 2010) being extended for a further two years. Aeroflot operates under a wide range of Russian and international requirements and recommendations relating to flight safety. In 2010 Rosaviatsia and the civil aviation operator certification center made inspections of compliance with certification requirements with a view to extension of Aeroflot s air operator certificate. Having passed all its inspections, Aeroflot had its air operator certificate, number 001, extended to September 9, 2012.» Flight safety meets the stringent requirements applicable to all members of the SkyTeam alliance Aeroflot representatives are actively involved in the work of the Aviation Security Functional Experts (ASFE) group of the SkyTeam alliance, which is responsible to SkyTeam s core management for the three priority areas: Safety, Security and Quality (SSQ). Aeroflot representatives participated in the annual ASFE meeting held on May 20-21, 2010 in Mexico. Work by the ASFE is carried out at both strategic and operational levels: shared situation awareness at common destinations; common methodology of route network risk assessment and management; common positions on core issues of cooperation with the authorities in various countries; consolidated cooperation with all national and international organizations. The IATA-recommended Security Transport operations» Aeroflot Aeroflot improved its performance by all main indicators in 2010 as the recovery from the financial crisis continued and demand The Safety Assessment of Foreign Aircraft (SAFA) Programme has been running at airports in European Civil Aviation Conference (ECAC) member states since Inspections carried out in 2010 showed that Aeroflot s aircraft are entirely compliant with flight safety rules. Analysis of safety margins of Russian airlines shows that Aeroflot is the leading Russian operator in terms of flight safety. Management System (SeMS), creatively adapted for each airline, is used as common basis for ensuring protection of the operations of SkyTeam members against acts of unlawful interference. In 2010 the Company continued to work on application and further improvement of the existing system for management of risks associated with acts of unlawful interference in its activities. A new system has been introduced to share aviation security information across the route network based on technology used by SkyTeam. In the interests of airport security the Company maintains its own sniffer-dog section. It has 40 adult animals of a unique jackal-dog hybrid breed and expert handlers. The Aeroflot sniffer-dog section works to protect the Company s own sites and aircraft and its home airport of Sheremetyevo. Group s 2010 results show positive trends for all main performance indicators increased on international and domestic routes

23 2.3. Operations Passenger numbers (million passengers) International 4.3 Domestic Passenger turnover (billion RPK) and passenger load factor 68.4% 69.7% 70.2% % 70.2% % International Domestic Passenger load factor A total of 14,070,000 passengers and 170,600 tonnes of freight and mail were carried during the reporting period. Total revenue passenger kilometers were 39,172 million and total revenue tonne kilometers were 4,488 million. The passenger load factor grew by 6.9» Passenger traffic on domestic flights increased by 26.6% percentage points to a Group record of 77.1%. Passenger capacity increased by 19.2% in comparison with The revenue load factor was 63.3%, which is an increase of 5.4 points over the previous year, while available tonne kilometers increased by 16.3%. Operating indicators, International Change Passengers carried, thousand 7,875 6, % Revenue passenger kilometers, million RPK 25,206 19, % Available seat kilometers, million ASK 32,919 27, % Passenger load factor, % p.p. Scheduled traffic factor, % p.p. Freight and mail carried, thousand tonnes % Cargo tonne kilometers, million CTK % Revenue tonne kilometers, million RTK 3,007 2, % Available tonne kilometers, million ATK 4,817 4, % Revenue load factor, % p.p. In 2010 passenger traffic on domestic routes continued to increase rapidly and accounted for 44% of all passenger traffic. Some 6,195,000 passengers were carried in the year, which is 26.6% more than in As» Passenger numbers on international flights increased by 27.6% In 2010 some 7,875,000 passengers were carried on international routes, which is 27.6% more than in International passengers represented 56% total passengers carried during the year and accounted for 64% of capacity increased by 20.5%, the passenger load factor went up by 5.1 points to 78.1%. Revenue passenger kilometers rose by 28.9%. revenue passenger kilometers. The bulk of carrying (94.2%) was on scheduled flights. Use of capacity improved: while available seat kilometers rose by 18.5%, passenger load factor went up 7.9 points to 76.6% Domestic Passengers carried, thousand 6,195 4, % Revenue passenger kilometers, million RPK 13,967 10, % Available seat kilometers, million ASK 17,884 14, % Passenger load factor, % p.p. Scheduled traffic factor, % p.p. Freight and mail carried, thousand tonnes % Cargo tonne kilometers, million CTK % Revenue tonne kilometers, million RTK 1,481 1, % Available tonne kilometers, million ATK 2,270 1, % Revenue load factor, % p.p. Total Region Passengers carried (thousand) Revenue passenger kilometers (million RPK) Available seat kilometers (million ASK) Passenger load factor (%) America , , , , ME and Africa 1, , , , , Asia (including Japan) 1, , , , , Europe 3, , , , , , Russia 6, , , , , , CIS , , , , Total 13, , , , , , Passengers carried, thousand 14,070 11, % Revenue passenger kilometers, million RPK 39,172 29, % Available seat kilometers, million ASK 50,803 42, % Passenger load factor, % p.p. Scheduled traffic factor, % p.p. Freight and mail carried, thousand tonnes % Cargo tonne kilometers, million CTK % Revenue tonne kilometers, million RTK 4,488 3, % Available tonne kilometers, million ATK 7,087 6, % Revenue load factor, % p.p. Aeroflot began independent cargo flights in Efficient MD-11 cargo aircraft, a streamlined route network and direct contracts with freight forwarders enabled the Company to increase cargo traffic by 15% in comparison with 2009 to million CTK. In all, some 170,600 tonnes of cargo were carried in the year, which is 14.6% more than in Some 10,100 tonnes of mail was carried, representing an increase of 28% over the previous year. The Company s cargo aircraft carried some 59,900 tonnes of cargo and achieved million RTK. Freight and mail is carried in the baggage compartments of passenger aircraft as well as by the Company s dedicated cargo aircraft

24 2.3. Operations» Some 49,100 tonnes of freight and mail were carried on domestic routes, representing an increase of 18.3% over Total cargo turnover was million CTK, up» Cargo and mail increased by 18.3% in 2010 by 26.78% from the previous year. While capacity increased by 23.6%, the load factor rose by 2.5 percentage points to 65.2%. Cargo on international routes increased by 13% in 2010 Scheduled flights began on the following routes: Moscow Denpasar, Indonesia Moscow Gelendzhik, Russia Moscow Phuket, Thailand Moscow Kazan, Russia Moscow Punta Cana, Dominican Republic Moscow Tel Aviv, Israel (regular charter) Charter flights began on the routes: Service frequency was increased on the most popular routes: Moscow St Petersburg Moscow from 7 8 to flights a day Moscow Larnaca Moscow from 7 to 12 flights a week Moscow Omsk Moscow from 7 to 12 flights a week Moscow Beijing Moscow from 7 to 11 flights a week Two scheduled routes were withdrawn: Revenue tonne kilometres (billion RTK) and revenue load factor Cargo and mail volumes (thousand tonnes) Moscow Olbia, Italy Moscow Chambery, France Moscow Norilsk, Russia Moscow Surgut, Russia 58.1% 57.9% 57.9% 57.9% 57.9% 63.3% » Major improvements to route network efficiency International Domestic Revenue load factor International freight and mail accounted for 71% of total cargo volume and 77% of total revenue tonne kilometers. Some 121,500 tonnes of freight and mail was carried on international routes, 13% more than in the International Domestic previous year. Overall revenue load factor was 63.3%, representing an increase of 5.4 percentage points over By optimizing schedules and structuring landing and take-off patterns, Aeroflot has managed to increase flight frequencies and improve and raise the number of connections at Sheremetyevo. As a result the connection coefficient on Aeroflot s own services increased by 32.4% to 8.75, compared with Number of routes and average frequencies, flights per week* 6.61 in 2009, and transit passenger volumes on the Aeroflot network grew by 71.3% to 4.3 million passengers (33.8% of total passengers carried). The Company has made its network more efficient by concentrating resources on routes, which yield maximum income and profit. Number of routes Average frequency, flights per week Route network» Aeroflot s route network is one of the largest in the region Change Change Total % % Scheduled % % Charter % % Scheduled international % % Scheduled domestic % % In 2010 Aeroflot operated its own scheduled flights on 110 routes serving 48 countries. Most carrying by the Company (99.5%) was on scheduled flights. Medium-haul % % Long-haul % % * Aeroflot only (not counting Donavia and Nordavia) 44 45

25 2.3. Operations Number of flights per week (percentage change since 2009) Europe 1.7%» Optimization of the cargo network: the hub principle»» North America CIS Russia Middle East Asia-Pacific Central America Africa Passengers carried under codesharing agreements increased by 37.3% in 2010 At the start of 2011 Aeroflot had codesharing agreements with 28 foreign and Russian airlines and interline agreements with 196 airlines, 6 of them Russian and 12 from CIS countries. In the past year (2010) Aeroflot carried almost 1.6 million passengers on marketing flights under codeshare agreements, which is 37.3% more than in Of these, 78% were flights inside Russia and 22% were international flights. Aeroflot s biggest codesharing partners last year were Czech Airlines, Air France, Belavia, Alitalia and KLM (among foreign airlines), and Nordavia, Donavia and Rossiya (among Russian airlines). Codeshare arrangements enabled Aeroflot to increase flight frequencies, access restricted markets, expand the route network and make more effective use of its own fleet. Membership of the SkyTeam alliance broadens passenger choice and ensures international standards of quality Aeroflot membership of the global SkyTeam alliance enables Company passengers to plan journeys throughout the alliance s network, spanning 898 destinations in 169 countries. SkyTeam expects to strengthen its positions in the Asia-Pacific region, Latin America and the Middle East in the near future. China Airlines (Taiwan), Garuda Indonesia, Aerolineas Argentinas and Saudi Arabian Airlines have declared their intention to join the SkyTeam alliance. Expected membership 4.5% 10.7% 15.4% 20.7% 22.9% 33.8% 178.2% by China Eastern from 2011 will make SkyTeam a major force in the Chinese market. The new members will give the alliance hubs in Shanghai, Jakarta, Buenos Aires, Jeddah and Riyadh. The overall number of Aeroflot marketing passengers on alliance partner flights rose by some 13,900 (10.1%) over 2009 to 151,200. Total revenue in 2010 from Aeroflot s marketing activities within the alliance was USD 38.3 million. Cargo traffic was optimized in Flight frequency on the most profitable routes to Shanghai and Beijing was increased from three or four to four or five flights a week (depending on season). Flights to Mumbai were discontinued. Principal routes in 2010: Frankfurt Sheremetyevo Pudong (China) Tolmachevo Frankfurt Frankfurt Sheremetyevo Beijing Sheremetyevo Frankfurt Frankfurt Tolmachevo Narita (Japan) Seoul Sheremetyevo Frankfurt Frankfurt Sheremetyevo Hong Kong Karaganda (Kazakhstan) Sheremetyevo Frankfurt The base airport for Aeroflot s MD-11 aircraft remains Frankfurt-Hahn in Germany. As the holder of a bonded carrier license, Aeroflot can offer customers an exclusive delivery service under customs supervision from abroad to destinations in the Russian Federation. Aircraft fleet» The Aeroflot s cargo route network is built on a hub-and-spoke principle, with most consignments passing via network node airports (the hubs). In 2010 the network hubs were: Sheremetyevo International (Moscow, Russia) Frankfurt-Hahn (Frankfurt, Germany) Narita International (Narita, Japan) Incheon International (Seoul, South Korea) Beijing Capital International (Beijing, China) Pudong International (Shanghai, China) Hong Kong International (Hong Kong) Aeroflot s services are used by renowned global couriers such as DHL, TNT, DPD (Armadillo) and Pony Express. Transit consignments are regularly sent on behalf of the Russian aerospace manufacturer, Sukhoi. Aeroflot fleet is one of the youngest in Europe Aeroflot consistently renews, modernizes and standardizes its fleet of aircraft. As of December 31, 2010 the fleet of Aeroflot Group comprised 143 aircraft, of which 140 passenger airliners and three cargo aircraft. Aeroflot without subsidiaries had 100 aircraft at the end of 2010, of which 94 were passenger aircraft in service, including 68 medium-haul Airbus A320s and 26 longhaul aircraft (10 Airbus A330s, 10 Boeing 767s and 6 Il-96s). The number of aircraft in service was increased by commissioning of three new A320s, two A321s and two A330s. One Boeing 767 was returned, as planned, when its lease expired. A total of 21 Tu- 154s and one Tu-134 aircraft were officially retired during the reporting period, although operations with these aircraft had ceased before The average age of passenger aircraft operated by Aeroflot is five years. The average age of medium-haul aircraft, which make up the greater part (72%) of the fleet, is 3.5 years. By using mainly new aircraft with good fuel efficiency and environmental features, Aeroflot achieves high levels of flight safety and reduces its operating and ownership costs

26 2.3. Operations Composition of Aeroflot Group fleet as of December 31, 2010 Type of aircraft Aeroflot - Russian Donavia Nordavia Group total Airlines Owned Ilyushin Il Ilyushin Il Tupolev Tu Tupolev Tu Antonov An Total owned Financial lease Airbus A Airbus A Airbus A Boeing Total finance lease Operating lease Antonov An Antonov An Ilyushin Il Airbus A Airbus A Airbus A Boeing B Boeing B McDonnell Douglas MD Total operating lease Total fleet » Fuel efficiency of the fleet is steadily improving Fleet renewal and modernization in 2010 meant that Aeroflot was able to improve fuel efficiency. Specific fuel consumption was Specific fuel consumption, grammes/tkm 313 grammes per tonne-kilometer, which is 79 grammes less than in Average daily flying hours by aircraft type Il» Aeroflot will continue to receive new aircraft in 2011 Aeroflot will continue to develop its aircraft fleet in 2011 by taking delivery of new aircraft, both medium-haul A320s and longhaul A330s. The latter will replace Boeing ERs now coming to the end of their lease terms, with the result that average age of the fleet will be further reduced. All of the Maintenance and repair» Safety Maintenance and repair of the Aeroflot fleet is designed to ensure flight safety and maintain high levels of reliability and regularity. The Company strives to optimize costs by expanding the range and raising the quality of work, which it carries out itself. In 2010 this work had to be done while new foreign-made aircraft were being added to the fleet, so learning new ways of working and advanced maintenance methods to service foreign aircraft was a priority. For the first time Aeroflot independently carried out a labor-intensive 6Y-check on eight aircraft of the A320 family. In anticipation of planned arrival of the new Sukhoi Superjet 100s, the Company has developed a comprehensive plan for their commissioning and for organization Enhanced maintenance and repair capability Further expansion of the Company s aircraft component inspection and repair facilities is planned for 2011, including capabilities for refilling of portable oxygen bottles, in-house servicing and repair of emergency escape slides, life rafts, A320/A330 avionics made by Zodiac Aerospace, A320/A330 inertial and radio-frequency equipment by Honeywell International, the Teledyne Controls WGL» Aeroflot Airbus craft will be delivered new from the Airbus factory in Toulouse. In 2011 Aeroflot plans to acquire the first Russian-made Sukhoi Superjet 100 aircraft. They will both add a new regional class to the Company s fleet and boost development of domestic air transport. and efficiency are the main priorities of independent maintenance by Aeroflot. Company representatives have checked the state of completion of the aircraft at Sukhoi s manufacturing plant at Komsomolskon-Amur (KnAAPO) and take an active part in working groups and the industry coordinating committee, which are devising basic requirements for maintenance programmes. Cost reduction programmes have led to increase in the amount of maintenance, which Aeroflot carries out itself and reduction of outsourcing. Current contracts with suppliers were revised in 2010, which has also reduced costs. Total effect of these initiatives was USD million in the reporting year. wireless data transmission system and A330 in-flight entertainment systems by Panasonic Avionics. The Company also plans to introduce an automated material resource planning system for maintenance, based on SAP ERP, and pre-design work began in 2011 on a new and modern maintenance hangar to be built at Sheremetyevo airport. maintains aircraft of other carriers as well as its own fleet In 2010 Aeroflot provided maintenance services to 27 airlines and 20 other enterprises in the aerospace maintenance business. Aeroflot plans to expand these capacities, increasing sale of aircraft maintenance services to other Russian airlines in

27 2.3. Operations Brand and service quality development» Service quality is a priority Aeroflot strives to maintain the highest international standards of passenger service. A customer loyalty survey begun in early 2010 jointly with the American company Bain (using the Net Promoter Score system) found that Aeroflot customer loyalty was 44%, which is significantly higher than that of leading European and US carriers. Aeroflot has renewed its secret passenger project designed to research how well Compliance with SkyTeam standards It is a basic requirement of SkyTeam alliance members that they provide the same level of service on all flights. In 2010 Aeroflot ran a number of programmes to harmonize services with leading companies of the alliance and helped to write a new version of the requirements. For example, from September 15, 2010 Aeroflot has been using the Passenger Information List (PIL) to give personal onboard welcomes to Elite and Elite Plus passengers and alliance bonus programme members in all classes. The SkyTeam Sky Priority project, begun in November 2010, creates a range of services at departure and arrival airports allowing passengers to pass Development of on-board services On-board services are constantly enhanced by improved catering, comfort items, equipment and entertainment systems. In 2010 Aeroflot offered new travel kits to business-class passengers on medium-haul and long-haul flights. There are proposals to vary the on-board catering to match flight duration and time of day. Interior design concepts have been devised for new aircraft. Client relations Procedures for handling customer messages to the Company (received by post, , ticket offices, local branches) have been organized according to subject matter, enabling complaints to be dealt with much customer service standards are implemented. The results show a positive trend, with the Company s overall score rising from 82% to 88% and one aspect of operations the call center scoring 94%. Aeroflot also carried out large-scale customer satisfaction and loyalty surveys during 2010 in cooperation with other organizations, including IATA, the European company EPSI, and the international SkyTeam alliance. through all airport formalities quickly and save time on departure. These services will be offered to passengers travelling in C class (business), or Y class (economy) if they are in the Elite Plus category. Aeroflot plans to continue implementation in In November 2010 work began on the Lounge Preposition project, which assesses lounges used by C class passengers of SkyTeam members, categorizes business lounges and will enable a Team Lounge Model to be implemented. The project assesses lounges at Sheremetyevo Terminal D against a range of criteria. Evaluation of lounges at airports elsewhere in Russia is planned for Economy-class passengers are now served wine in addition to the existing beverage range. Specific product ranges have been devised for the six airlines new to Aeroflot. The on-board entertainment package has been expanded and improved to include a wider choice of films, music programmes, in-flight publications, and newspapers and magazines. more quickly. Aeroflot has expanded the types and amounts of compensation available at the Company s discretion for inconvenience suffered by travelers on its flights. Quality management improvements The quality management system of Aeroflot and its subsidiary airlines aims to ensure that passengers arrive at their destinations in safety and comfort and with guaranteed regularity. In the past year Aeroflot has continued the process of applying the Company s established high quality requirements to services provided by subsidiaries. In October 2010 Aeroflot successfully carried out an audit of compliance of its quality Brand development Major advertising campaigns in Russia and abroad are planned for 2011 to increase Aeroflot s brand recognition and customer The Aeroflot Bonus frequent flyer reward scheme In 2010 Aeroflot carried out a series of measures designed to improve services and develop and promote its loyalty scheme for frequent flyers. By the end of the year the scheme had almost 2.4 million members. Over 400,000 new members joined in A number of changes to the rules of the Aeroflot Bonus programme were made in order to improve the financial effect of the programme, attract new members and increase customer loyalty. They included: Harmonization of the terms of Aeroflot s bonus programmes with equivalent programmes of SkyTeam global alliance partners. Offering one-way flights as a new type of Aeroflot Bonus reward. New members may now earn points for flights taken up to six months before joining the scheme, instead of one month. To prevent inappropriate or commercial use of reward tickets, the number of reward flights that may be taken is now limited to 10 a year. Access to reward flights has been improved by simplifying the application procedure. The Company website now contains handy new gadgets, including an online reward calculator for working out the number of miles needed for the next reward and a management system with the latest version of the international ISO 9001:2008 standard and obtained the relevant internationally recognized certificate. The fact that Aeroflot is ISO 9001:2008 compliant shows maturity of its management system and ability of the Company to maintain high-quality service provision. The new standard achieves increasing integration of quality management with general business management. trust, the aim being to promote passenger loyalty and attract new customers. distance calculator, which automatically takes account of the tariff paid by the traveler and his/her membership level. Design and functionality of the membership area and forum on the Company website have been improved. A number of joint advertising campaigns were run during the year, which allowed members to collect extra miles, promoted partner services and stimulated Aeroflot sales. They involved major partners of the scheme including Alfa Bank and Uralsib, Visa, the mobile operator Travelling Connect, Sixt car rentals, Swissotel Hotels & Resorts and the Balchug Kempinski Hotel Moscow. A new partnership was launched with the company Simple. Scheme members were invited to spend their miles not only on air travel rewards (tickets or upgrades) but also on goods and services from partners. There were special actions directed at privileged members allowing them to achieve or retain privileged membership more easily: the qualifying requirements were lowered to 40/20,000 miles/sectors to maintain the level of membership. A special action, Around the World with Aeroflot, was carried out for members who fly mainly business class and a meeting of Company management with the top-300 super-elite gold-level members of the Aeroflot Bonus scheme was held on September 23,

28 2.3. Operations Information technology In particular the Payment Gateway includes an option for Aeroflot Bonus frequent flyer miles to be spent on goods and services from programme partners. On-board mobile telephony Electronic Marketplace The project for providing Internet connection on-board Aeroflot aircraft enables passengers to access the Internet from their laptop computers and mobile phones during flights. SMS and MMS messaging is also available. The ability to use mobile phones during flights is a first, both for Russian airline passengers and for Russian mobile telephone operators. Aeroflot and the Russian cellular operator, MegaFon, signed the contract to install MegaFon base stations on Aeroflot aircraft in April By December passengers were able to use mobile phones on board the Airbus A321 (Mstislav Keldysh) en route to cities in Russia and Europe. Similarly equipment for the whole Aeroflot fleet is a strategic aim of the Company, and installation on 11 new Airbus A330s will be provided in July 2010 saw the opening of Aeroflot s Electronic Marketplace for tenders of goods and services. As at the end of 2010, 350 contractors had registered and about 750 auctions had been held. Total value of the Marketing and sales best offers submitted was RUR million and the potential savings, calculated as the difference between the best and average prices offered, amounted to RUR 9.62 million. Self check-in In 2010 Aeroflot started its own Web checkin service at 29 destinations (of which 24 in Europe). The number of passengers using the service rose more than four times from 10,600 in December 2009 to 42,800 in December Mobile check-in was introduced in four locations (Moscow, St Petersburg, London and Prague). In all, internet check-in New call-center services Aeroflot s call center carried out a number of innovative projects in 2010, enabling passengers to be dealt with more efficiently and costs to be saved on passenger information and customer feedback. The services offered include automatic voice notification of changes to flight dates or times, changes of terminal or cancellations, the ability to receive automated Aeroflot Website redesign In 2010 Aeroflot s website received a substantial redesign. New online services were added to the airline s corporate site including a reward calculator and mobile SAP ERP To increase management efficiency Aeroflot is adopting an Enterprise Resource Planning Payment Gateway The first stage of the Aeroflot Payment Gateway was implemented in The system was launched with an initial capability became available at 59 sales points, mobile phone check-in at 4 points and self-service check-in kiosks at 3 points. Self check-in is to be introduced at another 22 key locations on the route network in 2011, making Internet check-in generally available, developing mobile phone check-in, and installing new self-service kiosks. schedule information without speaking to an operator, speech recognition and automatic call routing to different call center departments. In 2011 the list of services will be expanded to include automated bookings in Russian and English and self-service flight status information. Flight movement information will also be available by SMS. check-in. The new-look website attracted more visits (up 15% per quarter) and increased the volume of Internet sales. (ERP) system based on SAP software. allowing banks, kiosks, payment terminals and electronic funds transfer systems to connect to the Payment Gateway. Aeroflot amended its passenger tariff structure in 2010 in line with market trends. All of the Company s published tariffs were grouped into two service classes: business class with status and optimum grades; and economy class with status, optimum, budget and promo grades. Each tariff group is subject to certain common rules on change of reservation, refund conditions, minimum and maximum stay at destination, etc. The new tariff structure simplifies the application of tariffs and makes it easier for passengers to select the right fare, saving time at the point of sale and improving service quality. Aeroflot is actively pursuing ways of boosting sales Special campaigns were run in 2010 allowing passengers to book discounted flights to the Far East, Scandinavia, Novosibirsk, and other destinations. Special fares were offered for» Revenue Total earnings from domestic passenger traffic in the Russian Federation grew in 2010 by 34% compared with 2009 to USD 2, million. Agency sales increased by limited periods on routes including Moscow Tel Aviv Moscow, Moscow Kazan Moscow and Moscow Male Moscow. from domestic passenger traffic grew by 34% Passenger revenue structure by mode of sale inside Russia Internet sales Direct sales TCH BSP Official agents one percentage point to 73% and Internet sales by two points while direct sales fell by three points, in line with the cost reduction and sales structure optimization strategy. Passenger revenue structure by region Urals 13% South 9% North-West 17% Volga 8% Siberia 18% Far East 35% 52 53

29 2.3. Operations Strengthening of Company positions on long-haul routes received special attention in A coordinated set of measures enabled increase of long-haul revenue from both Russian domestic and international routes.» Foreign The system of incentives to agents in Russia made sales more transparent and maintained a high level of agency sales in the face of stiff competition. revenue from passenger traffic rose by 41% Aeroflot s total foreign revenue from passenger traffic rose by 41% in 2010 to around USD 1,075 million. Most of the revenue from foreign sales came from neutral agents in IATA s Billing and Settlement Plan (BSP), whose share of Aeroflot s total sales increased in 2010 by three percentage points to 67%. In line with the sales structure optimization programme, official agent and direct sales fell by two points and Internet sales rose. Aeroflot Group Structure Passenger revenue structure by mode of sale abroad Passenger revenue structure by region America 11% Eastrn Europe 7% Western Europe 39% Group streamlining Internet sales Direct sales Official agents BSP/ARC SIC, Baltics 18% Subsidiaries and affiliates Africa, Middle East, SE Asia 25% In the past year, in accordance with decisions of the Board of Directors, efforts have been made to streamline the subsidiaries and affiliates of the Aeroflot Group in the following ways: Two enterprises not directly involved in Aeroflot s core business, under poor corporate control and yielding low returns, OJSC Insurance Company Moscow (100%) and CJSC Sheremetyevo Refueling Complex (31%), were sold off. The sale of shares in the companies was finalized in February 2011 at prices substantially higher than market value. Aeroflot also sold a block of shares (51%) in CJSC Aeroflot Plus, which was subsequently renamed CJSC Jetalliance-Vostok. Aeroflot increased its share in enterprises, in whose business it is intimately involved or which yield high returns. In particular, 33.33% of the shares of CJSC Aerofirst were acquired in December Aerofirst is a high-yielding long-term asset (the new acquisition brings Aeroflot s share holding to 66.66% of the company). Creation of a global airline network The aim in establishing and developing subsidiary and affiliated companies is to further the development of Aeroflot as a global network airline. The main priority in this area in 2010 was to strengthen the Company s standing in the domestic market by incorporating assets of Russian Technologies into Aeroflot Group and improving the effectiveness of Aeroflot s base at Sheremetyevo. Aeroflot s corporate management strategy for subsidiaries aims for maximum transparency and openness. The priority is to make sure that boards of directors are accountable to shareholders, management is answerable to the board of directors and airlines are responsive to passengers. In its management of subsidiaries Aeroflot aims to achieve optimum value for money from the services offered and to operate aircraft as economically as possible. An important area of Aeroflot s business is the development of subsidiaries as entities distinct from the parent company, serving different market segments and exploiting the advantages of regional bases. Key current projects Alongside work to streamline the Group, a number of projects are being implemented that specifically focus on subsidiaries, affiliates and non-commercial organizations belonging to Aeroflot: In 2010 Aeroflot set up the Aeroflot Aviation School on the basis of the Company s Aviabusiness business school. The enterprise was renamed with new founding documents, management was replaced, new training programmes were registered and new proposals drawn up to provide the School with flight simulators and other equipment. The Aeroflot Aviation School was opened on March 11, Work continued on the project to build a new Sherotel hotel building. The pre-design and design phases were completed and the design was submitted for approval in Construction work on the new hotel building is scheduled to start in Q2 or Q Priorities for further development of subsidiaries and affiliates Streamlining of Aeroflot Group will continue in Aeroflot management aims to improve service quality of Group airlines to meet the growing expectations of customers and increase passenger numbers

30 2.4. Risk and risk management 2.4. Risk and risk management Every airline company is subject both to general risks of a financial and business nature, and to risks that are specific to the airline industry. Aeroflot is large Russian company, operating aircraft and providing passenger and freight transport by air both inside Russia and on international routes. The Company s risk management policy uses an integrated system to identify risks in a timely manner, assess their level of seriousness, Core business risks Seasonality of demand for air travel The airline business is subject to seasonality. Demand is traditionally greatest during holiday periods, when capacity load on domestic and international routes is greatest. Aeroflot is improving its capacity indicators by expanding its flight network to countries, which are attractive as tourist destinations all year around. The Company boosts capacity use in the winter months by offering tickets a discount prices. In addition, Aeroflot flights traditionally have attractive arrival and departure times, which helps to achieve satisfactory passenger volumes even during periods when air transport demand is at a low level. Competition Aeroflot faces a high level of competition on international routes from other Russian operators and from international airlines. The Company is adaptable to market conditions, offering high quality services at excellent value. Start of operations at the new terminal (Terminal D) at Sheremetyevo Airport, has enabled Aeroflot to offer more convenient and quicker connections between domestic and international flights, ensuring that waiting time for transfer passengers is reduced to a minimum. Aeroflot is developing cooperation under code-sharing agreements with its partners in the SkyTeam alliance. This enables the Company to broaden the geography of its flights, making more destinations available to Company passengers. Aeroflot achieves high levels of customer satisfaction by ensuring that aviation security remains tight, by offering high-quality service and a broad route network, and by developing its loyalty programme. These factors together entail long-term competitive advantages for the Company. and take measures to minimize probability of their occurrence and their potential adverse impact. In case any of the risks described below become imminent, Aeroflot will use all reasonable means to avert them, and if this proves impossible the Company will take measures to reduce their possible adverse consequences. Operating risks: ensuring flight safety and aviation security The Company gives priority to ensuring that standards of flight safety and aviation security are met. Main priorities in management of operating risks are as follows: reducing the number of aviation incidents; making equipment more reliable; raising qualifications of personnel; ensuring that rules for proper use of equipment are observed. The Company ensures airport security by deployment of its own sniffer-dog unit, consisting of 40 specially bred dogs (a jackal-hound hybrid), with expert handlers. Aeroflot s sniffer-dog unit serves premises at the Company s airport hub at Sheremetyevo, as well as other ground facilities and aircraft. Reputational risks Aeroflot values its reputation as a provider of high-quality and safe air transport services, and as a dependable business partner. The Company therefore does everything necessary to protect its reputation and brand. The Company carried out a special reputational action following interruptions to flights from Sheremetyevo Airport between December 25 and 29, 2010, caused by adverse weather conditions. Passengers, whose flights were delayed for more than eight hours received vouchers, which could be used for purchase of air tickets at Aeroflot sales offices and representative offices or to pay for extra baggage allowances up to December 31, More than 1500 vouchers were issued as part of the action, and six cash payouts were made in compliance with acting legislation. Aeroflot has carried out an analysis of these events and will design a set of rules to help deal with any recurrence, as well as creating an up-to-date crisis center to improve quality of airport service. Company management is constantly attentive to issues of service improvement and adoption of new passenger service technologies. The Airline uses the services of contractors to gauge aspects of customer loyalty: a study carried out by the international consulting agency, Bain & Company, was used to design a programme for service improvements, including menu changes for in-flight meals. Legal regulation, country risk Rules governing air transport and requirements for airlines are subject to constant scrutiny by government authorities in the Russian Federation and in countries, to which Aeroflot operates flights, as well as by international regulatory bodies. Aeroflot constantly monitors all changes to aviation statutes and takes an active part in the work of international organizations, making its own proposals for development of the legal and regulatory framework. The company is also attentive to specific country risks, and uses appropriate measures as suitable (suspension of flights, changes to routes, reinforcement of aviation security, and healthy and hygiene control, etc.). Personnel Aeroflot has a considered and flexible HR policy, aimed at hiring and retaining the bestqualified personnel. The Company also has a very well developed social programme. The Airline continues to ensure that it employs the most highly qualified pilots. Specialists, who already have experience flying foreign aircraft when they come to work at Aeroflot, are eligible for special bonuses. Work on Financial risks Currency risk Currency risk arises for Aeroflot due to its extensive route network, which includes destinations in many countries around the globe, and entails impact on Company business from fluctuation of currency exchange rates. Aeroflot s policy is to achieve a balance between revenues and liabilities in each currency. Aeroflot s tariffs in Russia for international carrying are denominated in foreign currency. Interest rate risk Constantly changing rates of interest on Russian and international financial markets expose Aeroflot to risk from increases in the cost of serving its current and future financial liabilities. Rise in interest rates may limit access to foreign borrowing. In order to reduce exposure to such risk associated with borrowings on foreign markets at rates creation of the Company s own flying school was completed during the reporting year, and Aeroflot recruits the best graduates from aviation institutes. Environment Aeroflot does all it can to minimize negative environmental impacts, expanding and modernizing its fleet by acquisition of aircraft of the latest generation, which offer excellent fuel efficiency and reduce harmful atmospheric emissions. The Company has designed and approved guidelines for environmental management, which comply with ISO international standards. In 2010 Aeroflot carried out all of the actions, which were declared necessary by ЕС Directive 2008/101/ЕС for participation by the airline industry in CO2 emissions trading. A system for monitoring of CO2 emissions and analysis of required data, and also for preparation of reports on emissions and tonne-kilometers, has been designed and operated in test mode. The Company is also developing guidelines for accounting and control of greenhouse gas emissions and tonne-kilometers. Risks associated with consolidation Integration of assets from the state corporation Russian Technologies may worsen fuel efficiency of the Aeroflot fleet and increase the Company s debt burden. However, previous success of the managerial team in improving the efficiency of Aeroflot s business, managing the existing group of Company subsidiaries, and organizing the recent move to Terminal D at Sheremetyevo Airport suggests that risks associated with the new asset consolidation are not substantial. linked to LIBOR (the London-Interbank Offered Rate), the Company made an issue in 2010 of ruble bonds to the value of RUR 12 billion with annualized coupon of 7.75%. In May 2010 Aeroflot converted its liabilities on the rouble bonds into liabilities in euros, by making swap agreements with banks for a period of three years. These agreements provide for Aeroflot to receive rouble sums from the banks in order to make semi-annual coupon payments on the bonds in exchange for a commitment by the Company to pay the respective sum in euros to the banks. Thanks to this agreement, the effective borrowing rate in euros has been reduced to an unprecedentedly low rate of 3.89% annualized. Also, euro liabilities under the agreement are financed from the Company s revenues in that same currency, enabling management of currency risk. More 56 57

31 2.5. Human Resources information about this transaction can be viewed in the Securities and Share Capital section of the present Report. Liquidity risk Aeroflot reduces risk of loss of liquidity by its financial departments through a carefully planned schedule of incoming and outgoing cash flows in order to identify any possible shortfall and resolve it through short-term borrowing from the Company s partner banks. Use of current assets has been placed under stricter control in order to ensure that liquidity is maintained at a satisfactory level. Risk due to growth in prices for aircraft fuel and lubricants Aeroflot is taking various steps to improve its system of fuel acquisition. Direct contracts are made for into-plane refuelling supplies, and holding of competitions to select supplies helps to keep prices down at Sheremetyevo Airport. The Airline is also implementing a tankering programme, which offers significant savings and is an important component of the Company s overall programme for reducing production costs. The Company also entered a transaction in December 2010 to reduce negative impacts from growth in fuel prices. Under the transaction terms, Aeroflot will receive payments from a bank if oil prices go above an agreed corridor. If prices fall below the corridor, the Company will have to make payments to the bank. The agreement is for three years, with payments being made once every six months. The purpose of the transaction is to manage risk of changes in fuel and lubricant prices: in case of oil price growth, Aeroflot will receive Insurance Structure of insurance spending Accident and incapacity insurance 3.80% Medical insurance 25.53% Vehicle insurance 1.38% Other types of insurance 0.37% Aviation insurance 68.92% some compensation for its extra spending on fuel and lubricants (prices for which are correlated with those for oil). If oil prices, and therefore also prices for aircraft fuel and lubricants, decline, then Aeroflot can make the bank payments using money, which it will save as a result of the decline. It is important that the transaction did not involve any preliminary costs, i.e. it has not involved Aeroflot in any additional spending. Credit risk Credit risk is risk that a counterparty will be unable to meet its financial obligations to the Company. Aeroflot constantly monitors the financial situation of counterparties in passenger transport sales in order to minimize levels of such risk. The Company: sets per-agent limits for volumes of ticket sales; calculates and imposes levels of collateral in the form of deposits, provision of standardized bank guarantees and other forms of financial security. These methods are applied across the whole of Aeroflot s agent network and may also be applied in respect of electronic ticket sales via agents, who are members of neutral sales systems (Transport Clearing Chamber, BSP), which carry out settlement on a bilateral basis or through the IATA clearing center. The financial situation of correspondent banks, which act as guarantors of counterparty liabilities, are monitored on a monthly basis (assessment is made by reference to financial reporting and observation by the banks of statutory financial ratios). Results of the analysis are used to set maximum credit limits in operations using the guarantees of each specific bank. Insurance is a risk-management instrument, which transfers risk of major financial losses to insurers. Aeroflot has various standard types of insurance (medicine, property, vehicle, etc), but its primary coverage is for aviation risk, which is traditionally grouped into four main areas: hull and liability insurance; hull insurance for war and allied perils; war, hijacking and other perils liability insurance; and hull deductible insurance. Aviation risk insurance contracts were renewed as usual on July 1, 2010 for the policy period. In contrast with the previous renewal period, when consequences of the financial crisis led to universal increases of insurance rates, renewals were in a context of market stabilization and strengthening of Company positions, which enabled significant reduction of insurance rates. Hull insurance rates for foreign-built aircraft were 12.77% lower, air carrier liability insurance As in previous years, the direct insurer was the Aeroflot subsidiary, Insurance Company Moscow, and the Airline was represented on Western insurance markets by the leading international aviation insurance broker, Willis Ltd. Aeroflot takes an active part in work to improve legislation in order to minimize legal risks, to which the Company is exposed. Aeroflot is Cost of liability insurance per one passenger, USD 2.5. Human Resources HR policy Professionalism of Company staff is vital for successful implementation of Aeroflot s business strategy. Company priorities in work with personnel include hiring the best qualified employees, ensuring attractive opportunities for professional development Headcount, Aeroflot and subsidiaries was 14% cheaper, armed conflict insurance came down by 6.8%, and the rate for hull deductible insurance was 19% less than in the previous year. a member of the Russian Association of Air Transport Operators and is actively involved in work by the Association committees. Work has been particularly intense in the aviation insurance committee, which is designing proposals and recommendations for drafts of federal laws, the Air Transport Code of the Russian Federation, federal aviation rules and regulatory documents. Cost of hull insurance per USD 1 million insured, USD and organizing an efficient social policy. HR work by managers at all levels of the Company is integrated into a system of personnel management, which is oriented to developing motivation and corporate culture Change, % JSC Aeroflot 14,319 13, OJSC Donavia 1,304 1, CJSC Nordavia 1,257 1, CJSC Sherotel CJSC Aeromar 2,134 1, OJSC Terminal CJSC Aerofirst Total 20,541 19,

32 2.5. Human Resources The main accent in Aeroflot work with personnel during 2011 will be on creation of flight teams to ensure that the Company attains its performance targets. We will also prioritize training of personnel to work on new aircraft types, and implementation of the HR module of the SAP enterprise management system, as well as making changes and additions to Aeroflot s collective agreement with its staff. Increase of headcount at Aeroflot by 7.7% Aeroflot personnel structure by categories in 2010 was mainly due to a greater number of pilots, stewards, and airport service employees, which reflects fleet expansion and launch of operations at the new Terminal D. At the same time, numbers of other flight operatives (flight engineers, navigators) were reduced due to retraining of Tu-154 flight teams for operations with foreign-built aircraft. Modest change in numbers of other personnel is due to ongoing reorganization in various Company departments. Period Headcount at end of of whom year unskilled skilled managers ,306 5,039 38% 6,750 51% 1,517 11% ,319 5,775 40% 6,984 49% 1,560 11% The majority of Aeroflot staff (62% of all employees) are in skilled or managerial positions. Health and safety Aeroflot has a health and safety system, which is designed to reduce injury rates, and to prevent and diagnose work-related illness. The Company s health and safety systems are certified, and have obtained a certificate Social policy Aeroflot provides its employees with social benefits and guarantees in order to encourage best possible performance in the workplace. The Company s social package in 2010 included additional social payments, medical provision and insurance, and non-state pensions. Aeroflot has a special programme to assist its flight crews in resolution of housing issues, and the Company also pays for kindergartens, organizes catering facilities for its staff, and provides transport and of compliance ( , dated November 14, 2008). The annual inspection of certified health and safety systems was carried out as usual in parking facilities for employee use. Cultural and sports events are held for Company staff on a regular basis. Free tickets are made available to employees, who can also obtain tickets of other airlines at discounted prices thanks to Aeroflot s membership since 2006 of ZED/MIBA FORUM, which is a nonprofit organization grouping more than 190 airlines and regulating terms for provision of special-rate air tickets to the staff of airlines, for both business and personal use. Personnel structure by age % % % % % % % % % % % % % % % % 60 and over 569 4% 598 4% Health cures and holidays for employees and their families A total of 1,759 Company employees and 230 of their children benefited from rest cures at resorts and sanatoria during 2010 thanks to Company support. An extra 200 spells at health and holiday facilities were paid for by the Company in August 2010 to Pension provision benefit employees who worked out of doors during the period of intense smoke pollution, caused by outbreaks of fires in the period of abnormally high temperatures in summer Average monthly wage levels of Aeroflot personnel, thousand RUR Professional retraining and further training About 9000 Aeroflot employees underwent courses of training, re-training and further training at 33 study centers during These activities included courses to familiarize navigators and flight engineers, who previously operated Russian-built Тu- 154 aircraft, with modern aircraft recently added to the Aeroflot fleet (Тu-154s have been withdrawn from service). Such retraining was in compliance with Decree 1011 of the Russian Government, dated December 9, Average age of Company personnel in 2010 was 40.7 years (41.5 years in 2009), showing a trend towards younger average age among employees. Increase of average wage levels was due to change in the system of remuneration to managers and administrators (introduction of key performance indicators), as well as salary increases for flight crew and ground staff Training was also provided to Aeroflot staff at the SAP CIS information and service center in connection with installation at Aeroflot of the SAP enterprise management system. Retraining of flight crew for work on other aircraft types was continued through the year. Retraining of staff involved in operating duties is carried out on a constant basis, as are general training programmes, and scheduled retraining and further training. In May 2010 Aeroflot approved a new pension programme at the Company in , intended to encourage more employees to pay into corporate pension arrangements. About 6,000 employees have joined the programme to date, and about 4,200 former employees are receiving payments in addition to their state pension as a result of the arrangements. As of December 31, 2010 average size of the non-state pension was RUR 1,032 per month. Aeroflot s Social Partner non-state pension fund was reorganized in 2010 and merged with the Sberbank non-state pension fund. The corporate system for non-state pension provision at the Company continues to develop. Residential mortgage help for flight crew Aeroflot designed a programme in 2010 for subsidization of interest rates on mortgage loans to help company personnel buy a home. Under the programme, the Company reimburses a part of interest payments on Average monthly corporate pension and average monthly pinsion contribution per employee Average monthly corporate pension paid (RUR) Average monthly pension contribution per employee (RUR) mortgage loans for a period of five years after the loan is obtained. A statutory basis for implementation of the program was designed in 2010 and a list of 40 flight crew, who will be the first beneficiaries, was prepared

33 2.6. Social responsibility Transport, parking rights and other benefits Provision of ground transport services to employees was extended in The number of bus journeys laid on by Aeroflot for its employees was increased to 101 per day, and Company personnel were carried to Terminal F at special rates on the Aeroexpress train service. Aeroflot reserves 1640 places each day at parking facilities at Sheremetyevo Airport for employees who travel to work in their own vehicles, and parking on special terms has been arranged at Terminal D for employees of production subsidiaries. Organization of social events, celebrations and sports Aviation School Much work was done in the reporting year to prepare for opening of Aeroflot s new Aviation School, which will serve both Company needs and the needs of Russian civil aviation as a whole. The new institution will have capacity for 120 trainee aviation specialists and will help to overcome the deficit of such specialists in Russia s air transport sector. The Aviation School will prepare pilots for work on specific types of aircraft. Initial programmes include training in use of the Airbus 320, and programmes for handling of other types of aircraft will be introduced subsequently, including the new Russian regional passenger carrier, the Sukhoi Superjet 100. In the medium term the School will makes its study capacities available to representatives of other airline companies, in addition to Aeroflot. Aeroflot sports teams took part in several Russian and international competitions and tournaments in 2010, including the 5th mini-football tournament (February), a volleyball tournament held for the 65th anniversary of VE Day (May), the Issyk-Kul Games (September), and a study and training seminar combined with a competition for ski-instructors (December). Aeroflot itself organized a football tournament in memory of V.V. Ponomarev, an outstanding former employee of the Company. Aeroflot also continued to purchase subscriptions to Study and Training center Aeroflot s aviation personnel training department pursued its programme for training, re-training and raising employees qualifications during A total of 881 trainings were organized throughout the Company; and 13,089 members of staff attended courses (for this statistic, attendance by one employee of, for example, two courses, is counted twice). The Company designed 20 new programmes for training, re-training and further training of flight crews, stewards and ground engineering and technical staff. All of these programmes were approved by Government civil aviation authorities. Specialists at several sub-divisions and services of Aeroflot, including Company offices outside Russia, are pursuing online study courses. A total of 3,985 notifications of connection to distance-learning courses were disseminated to Aeroflot sub-divisions during Aeroflot flight staff benefit from distance-learning instruction in the English language. A total of 7,968 Company employees received language tuition during fitness clubs on behalf of its employees. Celebrations were held to mark Aeroflot Day on February 12, 2010, when a performance was held at the Mayakovsky Theater in Moscow, specially for Company employees. Aeroflot organized a reception for 100 veterans of the Great Patriotic War (World War II) at the Novotel on May 4, 2010 in honor of Victory Day. And a New Year party was held on December 18, 2010 at the Forum Hall in Moscow, to which all Company employees and partners were invited. Training, re-training and raising the level of qualifications of employees New trainers and systems matching the latest requirements for staff instruction were installed in These included a fire-drill training suite, Mobile Cabin Crew Trainers, built by Kidde Fire Trainers GmbH and intended for instruction of flight crew in techniques for dealing with on-board fire incidents. The trainer underwent approvals by the Flight Standards Department of the Federal Air Transport Agency of the Russian Ministry of Transport (Rosaviatsia). A functional trainer, MTD 2D А320/330, was acquired, including software for preliminary training of engineering and technical staff in servicing of Airbus craft. Further steps will be taken in 2011 to improve quality control of training in use of new aviation equipment and new technologies. Aeroflot will also expand use of distance-learning as a technique for training of personnel. Priority will be given to modernization of existing trainers and acquisition of new ones, as well as integration and launch of operations with the SSJ 100 regional jet. 2.6 Social responsibility Environment Aeroflot acknowledges its responsibility to society and future generations for preservation of the natural environment and therefore attaches the greatest importance to issues of energy and environmental efficiency and minimizing negative impacts on the environment as a result of Company operations. Limiting atmospheric emissions In compliance with Decree 889 of the President of the Russian Federation, dated June 4, On measures for increasing energy and environmental efficiency of the Russian economy, Aeroflot has developed a Programme for Energy Saving and Environmental Efficiency up to The range of energy-saving measures, which are being put in place, should enable Aeroflot to reduce unit consumption of energy by 43.6% by 2020 in comparison with The Company continues to implement Aeroflot designed guidelines during the accounting year for accounting and control of greenhouse gas emissions and tonnekilometers. In order to comply with ЕС Directive 2008/101/ЕС concerning inclusion of the aviation industry in the system for trading A system of environmental management, installed at the Company in 2010, is designed to ensure environmental security and quality management in compliance with requirements of ISO standards and the Environmental Management Guidelines 17/I, dated January 30, programmes, which were approved earlier, for reducing fuel consumption and changeover to operations with more fuelefficient aircraft. All craft in the Aeroflot fleet comply with ICAO standards for noise levels and emission of atmospheric pollutants. The Company carries out regular instrumental control and regulation of secondary sources of pollution (mainly fuel systems of ground vehicles) to ensure that limits for emissions of smoke and toxic substances are observed. Participation by Aeroflot in the European CO 2 Emissions Trading System (ETS) of greenhouse gas (СО 2 ) emission quotas, Aeroflot collected and delivered necessary data to the emissions accounting department of the German Federal Environmental Agency (the DEHSt) in The Company carried out strict annual and quarterly accounting of CO 2 emissions and tonne-kilometers on flights to and from the ЕС during the year

34 2.6. Social responsibility Development of environmental responsibility Sub-divisions of Aeroflot collected data in 2010 on recycling and processing of production and consumption waste, and levels of use of gasoline and diesel fuel. These data were correlated with approved Company standards for emissions and waste storage in order to obtain quarterly figures on negative environmental impact, which Processing and recycling of production and consumption waste Aeroflot collects, stores and processes 44 types of waste, which are generated in the course of Company operations. In 2010 the Company entered an agreement with the company Provodokanal, which Charity and social work Social responsibility plays an important role in Aeroflot s business. Ever since its creation the Company has consistently pursued a socially oriented policy towards disadvantaged groups in society and other deserving causes. Ongoing programmes include discounted tickets for war veterans and survivors of the Siege of Leningrad, Support for vulnerable social groups Aeroflot has provided its Miles of Mercy charity action for a number of years in order to help children with serious illnesses. The action enables participants of the Aeroflot Bonus programme to contribute their bonus miles to accounts of the Give Life charitable fund, the Russian Assistance Fund operated by Kommersant Publishing House, and the Line of Life fund. The contributed miles are used to carry children with oncological illnesses, haematological conditions, conditions of the heart, nervous system, and vestibular system, innate brain and vascular conditions, and cerebral palsy. Passengers using the Aeroflot Bonus programme have donated about 57 million miles to the charitable funds since the action began in June 2008, and these miles have been used for issue of 1810 tickets to carry sick children and accompanying adults from remote locations in Russia for treatment at the best clinics in Moscow and European cities. At a regular meeting with participants of the Aeroflot Bonus scheme in September 2010 the Company carried out a charitable action in association with the Give Life fund, offering pictures for sale by children who are were submitted to the Central Interregional Territorial Division of Rostekhnadzor (the Russian governmental agency for technical standards), and from the third quarter of 2010 to the respective Territorial Division of Rosprirodnadzor (the Russian governmental agency for the environment). specializes in waste treatment for industry, to carry out removal and processing of de-icing fluid. Aeroflot is the only Russian air carrier, which collects and processes de-icing fluid after it has been used on aircraft. exceptionally talented children, children with special needs, and representatives of the arts. In 2010 the Company continued implementation of its social programmes, sponsorship of charitable organizations, and support for culture, the arts, science and sport. looked after by Give Life. Aeroflot customers attending the event gave 700,000 miles, all of which were used to organize transportation of children requiring treatment at locations far from home. In 2010 Aeroflot took part for the fourth time in the national charity action, Train of Hope, organized by radio Russia as part of its Child s Question social project. The purpose of the action was to draw the attention of society, business representatives, executive government and law-makers to the issue of children without parents, to provide assistance to such children and to organize meetings with potential adopters. Aeroflot also provided support in 2010 to a number of social and charity organizations, including: Mother s Rights; Club of Heroes of the USSR; the All-Russian Veterans Organization, Brothers in Arms; the Fakel All-Russian Social Organization for Invalids; the Homeland Health International Fund for Development of Medical, Social, Environmental and Humanitarian Programmes; and the Irkutsk regional branch of the Stellarium International Organization for Invalids. Special-rate tickets for specific social groups Aeroflot has traditionally offered tickets at preferential prices to certain domestic destinations, in order to make remote parts of the country more accessible and to make air transport more affordable and attractive for Russian citizens. Aeroflot takes part in the Government s subsidized travel programme benefiting residents of the Russian Far East. The Federal Agency for Air Transport allocated RUR million from the federal budget last year to compensate losses incurred by air carriers in transport of passengers between the Far Eastern and European parts of the country at special rates. Aeroflot carried more than 92,000 passengers as part of this programme during Also in 2010 Aeroflot carried residents of Kaliningrad and Kaliningrad Region on Moscow- Kaliningrad-Moscow routes at special tariffs. During the winter the scheme Support for culture, art and science Aeroflot pursued its partnership in 2010 with the Vladimir Spivakov International Charitable Fund. In the Wings of Music action, participants of the Aeroflot Bonus scheme were able to donate their air miles to be used for carrying talented Russian children to take part in competitions, festivals and concerts and to Moscow for tuition. Aeroflot continued its association of many years duration with the Moscow State Support for sport Aeroflot sponsors major international sports events as well as supporting the Company s own sports teams. In 2010 the Airline provided transport to the Winter Olympic Games in Vancouver, making nine journeys between Moscow and Vancouver. On February 11, 2010 the Russian national hockey team travelled from Moscow to Vancouver on a special Aeroflot flight. The Aeroflot-Open Chess Tournament has is extended to a number of cities in the Urals, and the Company also privileges direct flights between Siberia and the south of Russia. Aeroflot s Comrades in Arms action is carried out every year to mark VE Day and enables veterans of the Great Patriotic War, concentration camp survivors, and survivors of the Siege of Leningrad to travel to Europe and distant Russian cities to attend commemorative events and meet their former comrades. More than 2700 veterans benefited from the action in 2010 Aeroflot is always ready to assist Russian citizens who are at risk due to armed conflict and natural disasters in all corners of the world. In April 2010 Aeroflot was almost the only airline, which continued to make regular flights to Europe after closure of air space in these countries due to eruption of the Eyjafjallajokull volcano in Iceland. Conservatoire. Company support gives students and teachers at the Conservatoire additional opportunities to tour and pursue their studies at musical institutes in other countries. Aeroflot also provided assistance in 2010 to the Russian Academy of Sciences, the Golden Mask theatrical festival, the Lezginka musical ensemble, Yury Nikulin s Circus on Tsvetnoy Boulevard, and the Stars like Flowers photographic exhibition. become an annual tradition and was held for the ninth time in February The Airline acts as general carrier for Tournament participants and allocates money for the prize fund. Aeroflot also provided support in 2010 to the Russian Federation of Parachute Sport, the Russian Tourism and Sports Union, and the Children s and Young People s Football School

35 III. Corporate governance and securities 66 67

36 3.3. Board of Directors 3.1. Corporate governance principles The system of corporate governance at Aeroflot is designed to increase shareholder value of the Company by taking account of the interests of all concerned parties: shareholders, management, personnel, customers, counterparties and society at large. The Company has purposely committed itself to implementation of the highest international standards of corporate governance, and these standards are enshrined in Aeroflot s Code of Corporate Conduct. The Code brings together the principles, which are the basis for corporate conduct at Aeroflot, as regulated by the Company s internal documents: the Aeroflot Charter, Statute on the General Meeting of Shareholders, Statute on the Board of Directors, Statute on the Executive Board, and others. The Code is based on recommendations contained in OECD principles of corporate governance and the Code of Corporate conduct developed by the Russian Federal Securities Commission (information on observance by Aeroflot of the Commission Code is presented in Appendix 2). Aeroflot ensures equality in relationships with all its shareholders, mutual responsibility of all parties, and treats as inadmissible any privileging of the interests of certain shareholders over the interests of other shareholders. The supreme governing body of the Company is the General Meeting of Shareholders. General management of the Airline s business and supervision of management bodies between Shareholder Meetings is carried out by the Board of Directors. Current business of the Company is led by the Chief Executive Officer (singleperson executive body) and the Executive Board (collegiate executive body). Executive bodies are answerable to the Board of Directors and the General Meeting of Shareholders. The Company also has an Audit Commission, which is answerable only to the General Meeting of Shareholders, and specialized committees have been set up consisting of members of the Board of Directors. Additional information and the texts of internal documents are available on Aeroflot s corporate site in the Internet: Meetings of Shareholders in 2010 As required by Russian federal law, the General Meeting of Shareholders is held annually no earlier than three months and no later than six months after the end of the financial year (December 31). Extraordinary General Meetings are held as and when necessary. Three General Meetings of Shareholders of Aeroflot were held during 2010 (the Annual General Meeting and two Extraordinary General Meetings). The Annual General Meeting of Shareholders was held on June 19, 2010 and made the following approvals (Minutes 27, dated June 30, 2010): the annual report for 2009; annual financial reporting, including the profit & loss account for 2009; distribution of income from business in the 2009 financial year, including payment of dividends; new memberships of the Board of Directors and Audit Commission; payment of remuneration to former members of the Board of Directors; appointment of CJSC BDO as Company auditor for An Extraordinary Meeting of Shareholders, held on July 16, 2010 by absentee voting approved related party transactions (Minutes 28, dated July 16, 2010), as follows: 1) provision by Aeroflot of a guarantee to OJSC VTB Bank on behalf of Rossiya Airlines; 2) transactions between Aeroflot and its subsidiaries and affiliates, which may be carried out in the future in the course of Aeroflot s ordinary business (these subsidiaries and affiliates are: OJSC Donavia, CJSC Nordavia, CJSC Aerofirst, OJSC Insurance Company Moscow, CJSC TZK-Sheremetyevo, CJSC Sherotel, CJSC Aeroflot-Plus, CJSC Aeromar, CJSC AeroMASh-AB, and OJSC Terminal). The list and terms of these transactions are presented in Appendix 1. The Extraordinary Meeting of Shareholders on December 20, 2010, which was also 3.3. Board of Directors The Board of Directors carries out general management of the Airline s business and supervision of management bodies during periods between Shareholder Meetings. The Board of Directors consists of 11 members and is elected by the General Meeting of Shareholders by cumulative voting for the period until the next General Meeting of Shareholders. Any shareholder or shareholders owning at least 2% of voting shares of the Company has the right to propose candidates for election to the Board of Directors. Candidates must be proposed Report of the Board of Directors The Board of Directors held 16 meetings in the reporting year, at which 122 items were considered and 340 decisions were taken. Implementation of decisions by the Board of Directors enabled priority objectives of the Company to be achieved: safety and regularity of flights; definition of business priorities, including development strategy for the Group s aircraft fleet and route network; fleet development: expansion and renewal through write-off of aircraft at the end of their service lives and acquisition of new, fuelefficient craft on leasing terms; cooperation with Russian Technologies on transfer of six airlines to management by Aeroflot; improvement in levels of service to passengers at airports and in the air, increase in the number and improvement in quality of services provided (use of electronic tickets, sale of tickets through the Internet, etc.); deploying new forms and improved techniques in operating, financial and marketing business through modernization, use of advanced technologies, and study of the experience of the world s leading airlines; development of a modern and innovative carried out by absentee voting, approved amendments to the Charter and the Statute on the Board of Directors, broadening the authority of the Board in decisions on acquisition and divestment of holdings in subsidiaries and affiliates and also in other organizations (Minutes 29, dated December 20, 2010). The Meeting also approved participation by the Company in the national employers federation, the Russian Union of Industrialists and Entrepreneurs. no later than 50 days after the end of the financial year. In compliance with best corporate governance practice and criteria for inclusion of Aeroflot stock in А1 lists on stock markets, the Board of Directors of Aeroflot includes more than three directors who meet requirements for boards of directors contained in the Statute on Measures for Organization of Trading on the Securities Market (approved by Decree of the Federal Service for Financial Markets on October 9, 2007). programme to achieve significant improvement of main indicators and greater efficiency in operations, leading to greater competitiveness of Aeroflot on Russian and international air transport markets; greater efficiency in work by Company branches and offices in Russia and abroad; improvement and development of information technologies; cooperation with Russian and foreign airline partners in the SkyTeam alliance, and use of participation in the alliance to develop the route network and raise financial efficiency of international carrying; encouraging best possible performance by company personnel, particularly flight crew; completion of the project for creation of the Aeroflot Aviation School; raising business efficiency of enterprises, in which the Company has ownership stakes, and optimizing structure of non-core assets; design of new internal documents and improvements to existing documents by introduction of amendments; participation by Aeroflot in preparations for the 22nd Winter Olympic Games, which are to be held in 2014 in Sochi, and assisting the Russian Olympic Committee in its work

37 3.3. Board of Directors Remuneration to members of the Board of Directors The procedure for setting levels of remuneration to the Board of Directors is established by the Statute on the Procedure for Remuneration and Compensation of Expenses of the members of the Aeroflot Board of Directors, which was designed to comply with provisions of the Federal Law Membership of the Board of Directors on Joint-Stock Companies, other legal acts of the Russian Federation, and Company internal documents, and was approved by the Board of Directors on December 24, It was decided at the Annual General Meeting of Shareholders of Aeroflot on June 19, 2010 to pay total remuneration of RUR 6,650,000 to members of the Board of Directors for Biographies of members of the Board of Directors (elected at the Annual General Meeting on June 19, 2010) Igor Evgenievich LEVITIN Minister of Transport of the Russian Federation, Chairman of the Board of Directors of JSC Aeroflot. Born in Graduated in 1973 from the Leningrad Higher Command Institute of Military Railway Communications and in 1983 from the Military Logistics and Transport Academy. Does not own shares of Aeroflot. Prior to the Annual General Meeting of Shareholders Elected by the Annual general Meeting of Shareholders Year of first election to the Board of Directors 1 I.E. Levitin I.E. Levitin S.V. Aleksashenko S.V. Aleksashenko K.G. Androsov K.G. Androsov V.N. Antonov V.N. Antonov V.A. Dmitriev V.A. Dmitriev L.A. Dushatin L.A. Dushatin A.E. Lebedev K.Yu. Levin G.S. Nikitin G.S. Nikitin V.G. Saveliev V.G. Saveliev A.V. Stolyarov A.V. Stolyarov A.E. Tarasov P.M. Teplukhin 2010 Sergey Vladimirovich ALEKSASHENKO Independent Expert. Director of Macroeconomic Studies at the State University Higher School of Economics. Born in Graduated from the Economics Faculty of Moscow State University. Chairman of the Strategy Committee and Member of the Audit Committee of the Board of Directors. Acquired 2,277 (two thousand two hundred and seventy seven) Company shares, representing % of Charter Capital. Date of transaction: October 6, Kirill Gennadievich ANDROSOV Independent Expert Born in Graduated from the St. Petersburg Maritime Engineering University. Chairman of the Board of Directors Committee for Personnel and Remuneration. Does not own shares of Aeroflot

38 3.3. Board of Directors Vladimir Nikolaevich ANTONOV First Deputy CEO of Aeroflot for Aviation Security. Born in 1953, graduated from the Moscow Railway Engineering Institute. Owns % of Aeroflot charter capital. Kirill Yurievich LEVIN Independent Expert. Born in 1968, graduated from the Ordzhonikidze Aviation Institute (Moscow). Member of Committees of the Board of Directors for Personnel and Remuneration and for Strategy. Does not own shares in Aeroflot. Vladimir Aleksandrovich DMITRIEV Chairman of the State Corporation, Bank for Development and External Economic Activity (Vneshekonombank). Born in Graduated from the Moscow Financial Institute. Does not own shares of Aeroflot. Gleb Sergeyevich NIKITIN Deputy Head of the Federal Agency for Management of Federal Property. Born in Graduated from St. Petersburg University of Economics and Finance and St. Petersburg State University. Member of the Board of Directors Committee for Personnel and Remuneration. Does not own shares in Aeroflot. Leonid Alekseyevich DUSHATIN Vitaly Gennadievich SAVELIEV Independent Expert. Deputy CEO of CJSC National Reserve Corporation. Born in Graduated from the Moscow Financial Institute. Chairman of the Audit Committee and Member of the Strategy Committee of the Board of Directors. Does not own shares in Aeroflot. CEO of Aeroflot. Born in 1954, graduated from Leningrad Polytechnical Institute and the Palmiro Togliatti Engineering and Economics Institute. Does not own shares in Aeroflot

39 3.4. Committees of the Board of Directors Andrey Viktorovich STOLYAROV Independent Expert. Born in 1970, graduated from Moscow State Pedagogical University and Moscow State Aviation Institute. Member of the Audit Committee of the Board of Directors. Does not own shares in Aeroflot. 3.4 Committees of the Board of Directors The Board of Directors has set up three specialized committees for Audit, Strategy, and Personnel and Remuneration. The Committees function in accordance with respective statutes, texts of which can be viewed on the Company s Internet site. A total of 17 meetings were held by the Committees in 2010, as which Company business issues were examined in detail and recommendations were given for the Board of Directors. The recommendations of the Committees were used to make considered and objective decisions on key matters relating to operating, financial and marketing business, development strategy, improvement of the Company s organizational structure and management mechanisms. The Board of Directors appointed the following Committee memberships at a meeting on July 5, 2010: Pavel Mikhailovich TEPLUKHIN Independent Expert. Born in 1964, graduated from the Economics Faculty of Moscow State University. Member of Committees of the Board of Directors for Audit and for Strategy. Does not own shares in Aeroflot. Audit Committee: Personnel and Remuneration Committee: Strategy Committee Leonid Dushatin (Chairman), Sergey Aleksashenko, Andrey Stolyarov, Pavel Teplukhin. Kirill Androsov (Chairman), Kirill Levin, Gleb Nikitin. The Committee includes members of the Board of Directors: Sergey Aleksashenko (Chairman), Leonid Dushatin, Kirill Levin, Pavel Teplukhin. The Committee also includes other members: Vyacheslav Brychev (Head of Department of the State Property Fund); S.Petrova (Assistant to the Minister of Transport of the Russian Federation); Alexander Tikhonov, Department Director at the Minister of Transport of the Russian Federation); Andrey Kalmykov, Deputy CEO for Marketing; Shamil Kurmashov (Deputy CEO for Finance and Investment); Dmitry Saprykin (Deputy CEO for Legal and Property Issues)

40 3.5. Executive Board 3.5. Executive Board Membership of the Executive Board (as of December 31, 2010) The Company s executive bodies the CEO and the Executive Board are subordinate to the Board of Directors and the General Meeting of Shareholders. Number of members and specific members of the Executive Board are approved by the Board of Directors on the basis of recommendations by the CEO. The Executive Board held 33 meetings in 2010, of which 29 were in the form of joint presence and 4 were by absentee voting. Main items considered by the Executive Board meetings were as follows: strategic planning of work by Aeroflot; flight safety; developing the aircraft fleet and route network; management of Aeroflot property outside Russia; management of subsidiary companies, and companies, which are being merged with Aeroflot; development of in-flight Internet, and of ticket sales; development of the Aeroflot Aviation School; inventory procurement for Aeroflot; charity activities; marketing business. In order to encourage innovation within the Company the Executive Board has set up a Committee for Innovative Development and a draft concept has been designed for an Aeroflot Programme of Innovative Development. The concept is for the medium term (5-7 years) and takes account of R&D and innovation policy priorities of the Russian Government. It includes various measures for design and implementation of new technologies, and innovative products and services to the best international standards. The concept is integrated with the Airline s business strategy and targets improvement of main operating efficiency indicators, including substantial reduction in costs of air carrying without detriment to quality, energy saving, labour productivity, and environmental aspects. Concept design gave much attention to formation of corporate mechanisms and structures, which can assist development and implementation of innovative technologies. The concept also envisages measures to ensure efficient interaction with leading higher education establishments and scientific organizations in Russia and other countries. Chairman of the Executive Board and Chief Executive Officer of Aeroflot Vitaly Gennadievich SAVELIEV CEO of Aeroflot since April 10, From 2007 until 2009: First Vice President of Sistema Corporation. From 2004 until 2007: Deputy Minister for Economic and Trade in the Government of the Russian Federation. Previously held posts as Deputy Executive Chairman of OJSC Gazprom, and Chairman of the Executive Boards of the banks MENATEP Saint-Petersburg and Rossiya. In various years Mr Saveiliev has served as Chairman of the Boards of Directors of OJSC All-Russian Exhibition Center, OJSC Russian Development Bank, OJSC MTS, OJSC COMSTAR, OJSC Sistema Mass Media, CJSC Sky Link, the Indian company Shyam Telelink, and others. Born in Graduated from the Mechanical and Machine-building Faculty of Leningrad Polytechnical Institute (now St. Petersburg Polytechnical University); also graduated from the Industrial Organization Faculty of Leningrad Engineering and Economics Institute (now St. Petersburg State Engineering and Economics University). Mr. Saveliev has studied abroad and is a Candidate of Economic Science. Awards include a Certificate of Merit of the Government of the Russian Federation, Medal of Honour, and various other medals. Does not own shares in Aeroflot. Vladimir Nikolaevich ANTONOV In present post since January 27, From 1995 until 2010: Deputy CEO of Aeroflot for Economic and Aviation Security, Deputy CEO for Aviation Security, Deputy CEO for Aviation and Operating Security, First Deputy CEO for Operations. Born in Graduated from the Moscow Railway Engineering Institute, majoring in railway transport electrification. Awarded state prizes. Owns % of Aeroflot share capital. First Deputy CEO for Aviation Security 76 77

41 3.5. Правление Vasily Nikolaevich AVILOV Konstantin Mikhailovich BUSHLANOV Executive Director In present post since November 3, From 2009 until 2010: Director of the Department of General Affairs. From 1997: Head of Administration of Aeroflot Previously worked in the Ministry of External Economic Relations of the USSR, and the Office of the Security Council of the Russian Federation. Born in Graduated from Dzerzhinsky Higher Naval Engineering College. Captain (1st class), State Councillor of the Russian Federation (3rd class). Awarded state prizes. Owns % of Aeroflot share capital. Deputy CEO for Human Resources In present post since 2009 Mr. Bushlanov has worked at JSC Aeroflot since 1986, and has progressed to his present position from posts as Expert, Head of the Protocol Department, and Company Representative. Born in Graduated from Ordzhonikidze Aviation Institute (Moscow), majoring in radio-electronic devices. Awarded state prizes. Owns % of Aeroflot share capital. Kirill Igorevich BOGDANOV Dmitry Yurievich GALKIN Deputy General Director for Information Technology In present post since April 27, From 2007 until 2009: Director of the Development and Control Department of the Telecommunications Business Unit at Sistema Corporation. From 2004 until 2007: Executive Director of CJSC Ramaks International. Previously held posts as Advisor to the Vice-President of GROS LLC, and Head of the Automation, IT and Telecommunications Department of OJSC Gazprom. Born in Graduated from Leningrad Polytechnical Institute, majoring in automation and telemechanics. Holds 27 IT design patents. Does not own shares in Aeroflot. Director of the Internal Audit Department In present post since Mr. Galkin has worked at Aeroflot since December His previous positions include Economist, Department Head, and Deputy Head of the Control and Audit Service. Since 2002, he has managed the Internal Audit Service. Born in Graduated from the Ordzhonikidze Institute of Management (now the State University of Management), majoring in transport organization. Owns % of Aeroflot share capital

42 3.5. Правление Vadim Yakovlevich ZINGMAN Alexander Alexandrovich KOLDUNOV Deputy CEO for Customer Relations In present post since July Previously worked as: Director of the Government Relations Department of Sistema Corporation; Deputy Director of the Department for Government Regulation of Foreign Trade Activity at the Ministry of Economic Development and Trade of the Russian Federation; Executive Chairman of OJSC Baltonexim Bank; President of Inter-regional Clearing Bank LLC; Vice-President of OJSC Inkombank; and Teacher/ Consultant at the Intersectoral Institute for Raising Qualifications and Re-profiling of Management Personnel. Born in Graduated from St. Petersburg University of Economics and Finance, majoring in labour economics. Candidate of Economic Science, awarded a Certificate of Merit of the Government of the Russian Federation. Does not own shares in Aeroflot. Director of the Flight Safety Department In present post since August Mr. Koldunov has worked at Aeroflot since He has progressed from second pilot to commander, and then flight instructor before assuming the post as Head of Flight Safety. Born in Graduated from the Academy of Civil Aviation, majoring in air transport operations. Distinguished Pilot of the Russian Federation, acts as flight instructor on Il-96 and Boeing-767 craft. Flying time of 15,000 hours. Awarded state prizes. Owns % of Aeroflot share capital. Andrey Yurievich KALMYKOV Shamil Ravilievich KURMASHOV Deputy CEO for Commerce In present post since April From December 2008 until April 2010: Assistant to the Minister of Transport of the Russian Federation. From November 1998 until November 2008: Sales Director, CEO, Chairman of the Board of Directors of Sunrise Tour group of companies. From April 1996: Sales Director of the Institute of Business LLC. Born in Graduated in 1996 from Moscow State Institute of Radio Technology, Electronics and Automation. Does not own shares in Aeroflot. Deputy CEO for Finance and Investment (Chief Financial Officer) In present post since June From 2007 until 2009: Director of the Investment Department, Deputy Head of the Finance and Investment Division of Sistema Corporation. From 2004 until 2007: Deputy CEO for Finance and Investment at CJSC Sistema Telecom. Previously Head of the Risk Department at OJSC Norilsk Nickel. Born in Graduated from the Moscow State Institute of International Relations, majoring in international economic relations. Has a PhD in Economics. Does not own shares in Aeroflot

43 3.5. Правление Dmitry Petrovich SAPRYKIN Igor Petrovich CHALIK Deputy CEO for Legal and Property Affairs In present post since July Previously worked as Director of the Department of Mergers & Acquisitions and Capital Markets at OJSC MTS, Deputy CEO of CJSC Sky Link, CEO of OJSC MSS, Deputy Head of the Legal Division, Director of the Department for Transaction Support at Sistema Corporation. Born in Graduated from Moscow State Legal Academy and the Financial Academy of the Government of the Russian Federation, majoring in financial management. Also graduated from Cornell Law School as Master of Law (LL.M) with an MBA and SJD. Does not own shares in Aeroflot. Director of the Department for Flight Operations In present post since October From 2008 until 2010 Head of the А330 Flight Section. From 2008: Served as А330 pilot From 2003 until 2008: Head of the А320 Flight Section of the Aeroflot Flight Division. From 1983: Work in the Central Department for International Flights (now Aeroflot). Served as pilot of Tu-134, Il-86, А310, А320 aircraft. Total flying time of 14,000 hours. Distinguished pilot of the Russian Federation, awarded a medal in commemoration of the 850th Anniversary of the foundation of Moscow, and in commemoration of 85 years of civil aviation. Born in Graduated in 1979 from the Aktyubinsk Higher Civil Aviation Flying School. Owns % of Aeroflot share capital. More detailed biographical information on members of the Aeroflot Executive Board can be found at Deputy CEO for Procurement Vladimir Vladimirovich SMIRNOV From December 2009 until January 2011: Deputy General Director of Aeroflot for Procurement. From 1996: Director of Ground Support From 1995: Work for Aeroflot From 1989 until 1995: Deputy Head of Operations of Sheremyevo-2 Air Terminal, Deputy Head of the Central Department for International Flights at Sheremetyevo-2. Born in Graduated from the Civil Aviation Academy, majoring in air transport operations. Owns % of Aeroflot share capital. The following changes in membership of the Executive Board occurred during 2010: Sergey Gennadievich Obryvalin served as Board member until April 19; Anatoly Petrovich Yakimchuk served as Board member until October 11. Criteria for level and structure of remuneration to members of the Executive Board Incentive payments to executives and senior managers in 2010 were in compliance with the system of performance-related bonuses, tied to key efficiency criteria, as regulated by the Statute on Bonus Payments to Managers and Specialists of Aeroflot (approved in September 2010). In accordance with the Statute, the incentive component of salary payment to Executive Board members is determined on the basis of results achieved during the reporting period. The key efficiency indicators used to calculate bonuses relate to overall financial and economic efficiency of Company business (ROIC, EBITDAR, net income, etc.), as well as to various aspects of operations (security, punctuality), quality indicators, etc. Weight of bonues related to ROIC, EBITDAR and net income in remuneration of all Executive Board members is between 30% and 50%, which creates motivation for members of the Executive Board to make efficient managerial decisions. Success of managers in meeting performance indicators is measured at the end of each quarter and for the year as a whole. Total remuneration (including salary and bonuses) paid to members of the Executive Board in 2010 was RUR 291,534,800. Financial and economic oversight Financial and economic oversight at the Company is carried out by Board of Directors and its Audit Committee, the Revision Commission, the Internal Audit Department, and other audit organizations inside the Company

44 3.7. Information disclosure 3.6. Revision Commission The Revision Commission exercises control over the financial activity of the Company, its subdivisions and services, affiliates, and representative offices. The Commission is subordinate to the General Meeting of Shareholders. New membership of the Revision Committee elected at the General Meeting of Shareholders on June 19, 2010, was as follows: Nikolai Galimov, Deputy Director of the Finance Departments of the Ministry of Transportation of the Russian Federation; Dmitry Galkin, Head of the Internal Audit Department of Aeroflot; Mikhail Golosov, Deputy Head of the Finance, Accounting and Reporting Department of the Federal Agency for Air Transport; Elena Mikheyeva, Deputy Head of the Department of State Policy for Civil Aviation at the Ministry of Transport; Sergey Tsyganov, Departmental Section Head at the Ministry of Economic Development. Meetings of the Revision Commission in the reporting period analyzed the results of checks and revisions, which were carried out during 2010, and implementation of action plans and recommendations arising from checks, which were carried out by Government supervisory agencies during the reporting period. In accordance with the Statute on the Revision Commission, an audit was undertaken of the annual financial accounts, the profit and loss account, and other documents that are presented to the annual General Meeting of Shareholders. The Commission prepared an a opinion as a result of its work, which was approved at a meeting held in April 2011 The opinion contains an analysis of the Company balance sheet and financial accounts. Recommendations were made on the basis of the analysis and will be used to raise business efficiency of the Company. The opinion is positive and the Revision Commission stated its confidence that Company reporting is accurate in principal and that the Commission has no material reasons for refusing to approve the data, which are contained in the balance sheet and profit & loss account of Aeroflot as of December 31, Remuneration to members of the Revision Commission No salary or other kind of material remuneration was envisaged or paid to members of the Revision Commission during Internal audit A structural sub-division with the function of internal audit was created in November 1999 by decision of the Board of Directors of Aeroflot. This sub-division operated as a service within the Company until August 2009, when it was transformed into a department. The Internal Audit Department operates on the basis of a Statute, which has been approved by the Company CEO. To ensure its impartiality, the Department is directly subordinate to the CEO of Aeroflot. Work by the Department is based on quarterly plans, which are approved by the Company CEO, and is focused on existing aspects of Company business and the business of various Aeroflot subsidiaries. The Department carried out 53 checks (audits) during 2010, as a result of which written acts were drafted and opinions were prepared for submission to Aeroflot management. Based on the audits a total of 70 recommendations were made for elimination of violations, problems and shortcomings, which had been identified. The most important of these recommendations target improvements to business efficiency of Aeroflot s sub-divisions and offices, and to efficiency of the Company as a whole, as well as making contributions to protection of the rights of Company shareholders. The number of audit checks carried out and of recommendations made are the key performance indicators for work by the Audit Department in Audit of operational, marketing, and financial processes and procedures was also carried out for the purpose of making improvements to the system of internal audit. External audit Audit of financial reporting by Aeroflot for 2010 was carried out: to Russian Accounting Standards by the auditing firm CJSC BDO; to international standards of financial reporting by CJSC KPMG. The Audit Committee of the Board of Directors carries out preliminary assessment of the contract bids of auditing firms, taking account of previous work, and of professional, business and ethical reputations of the candidates. Recommendations by the Committee are then presented to the Board of Directors, which asks the General Meeting of Shareholders to approve a candidate for role of external auditor (of financial accounts to Russian Accounting Standards) Information disclosure Greater informational transparency is a constant priority in Aeroflot s business. The Company has approved a Statute on Corporate Information Policy, enshrining priorities and standards in this field and setting out a list of information that is subject to disclosure and the channels and schedules for its disclosure. Aeroflot s corporate information policy is based on the following principles: consistency, promptness, objectivity and completeness, efficiency, accessibility, manageability and unity, comparable temporality of data, observation of confidentiality, and control over proper use of inside information. In 2010 Aeroflot began publication of audited IFRS interim reports (for six and nine months). In December 2010 Company management held Aeroflot s first-ever road-show for investors. More than 40 individual and group meetings There are no factors, which could prejudice independence of the auditor, nor are there any material interests, which associate the auditor (or officials employed by the auditor) with the issuer (or officials employed by the issuer). with investors were also carried out in In order to improve their understanding of Aeroflot s business, representatives of the investment community were invited to visit the Company s main operating sites for an open-day on October 5, Aeroflot s corporate site in the Internet was acclaimed the best Russian corporate site of 2010 at the 4th St. Petersburg Annual Competition for Annual Reports and Corporate Sites. The Company s annual report for 2009 won the nomination Best Annual Report in the Transport Sector at the 13th Annual Federal Competition for Annual Reports and Sites, organized by the magazine Securities Market and the MIXEX Stock Exchange. Aeroflot s Investor Relations Group was ranked among the five best Russian IR services at the IR magazine Russia & CIS Awards in the category Leading IR Services at Small and Medium-Cap Companies Securities and Charter Capital Aeroflot Charter capital as of December 31 amounted to RUR 1,110,616,299, consisting of 1,110,616,299 common shares with par value of 1 rouble. The number of authorized shares specified in the Charter is 250 million. The Company did not place any new issues of shares in State registration numbers of common shares of Aeroflot are: 73-1p-5142 (dated June, 1995); А (dated February, 1999); and А (dated January 23, 2004). The first two issues have been united. The Company does not have preferred shares. Structure of share capital Legal entities 41.66% Individuals 7.17% Russian Federation 51.17% 84 85

45 3.8. Securities and Charter Capital The total number of shareholders of Aeroflot at the end of the period was 11,092 (of whom 29 legal entities and 11,063 individuals). There was further diminution in overall holdings of physical persons, by 0.28 p.p. in the reporting period to 7.17% of charter capital at the end of the year. Aeroflot s shareholder register is maintained by CJSC List of main shareholders of JSC Aeroflot Owner Status * Legal persons of which: Russian Federation (through the Federal Agency for State Property Management) NPO National Settlement Center (formerly: NPO National Depository Center) CJSC Depository Clearing Company Computershare Registrar, information on which can be found in the Contacts section of the present report. According to data of the MICEX Stock Exchange, capitalization of Aeroflot in 2010 increased by 49% from USD 1.94 billion to 2.89 billion. As of December 31, 2009 As of December 31, 2010 Change of stake Number of shares Stake in share capital, % Number of shares Stake in share capital, % in share capital, percentage points 1,027,861, ,031,036, Owner 568,335, ,335, Nominee 205,007, ,975, Nominee 173,503, ,923, Aeroflot-Finance LLC Owner 11,000, ,041, CJSC ING Bank (Eurasia) Nominee 10,902, ,899, GDR details Programme type Ticker ISIN number 114A AERAY US Reg S AERZF US Maximum and minimum share prices (MICEX data) Market price per share, RUR Maximum Minimum Volume of trading in Aeroflot shares on the MICEX Exchange, RUR billions Change in airline share prices during 2010 Aeroflot share price vs. MICEX Index in 2010 Deutsche Bank LLC Nominee 22,057, ,497, CJSC Citibank Nominee 5,137, ,126, J.P Morgan Bank International LLC Raising liquidity of Aeroflot shares and depository receipts Company shares are traded on the following stock exchanges in Russia: CJSC MICEX Stock Exchange (А1 quote list, with the AFLT ticker); OJSC RTS Stock Exchange (included in the listing section Securities admitted for trading without listing procedure, with the tickers AFLT and AFLTG). The Company s ordinary shares are used for calculation of both share indexes on the MICEX: the MICEX Index and the MICEX Standard Capitalization Index. They are also included in both RTS indexes: the RTS-1 and RTS-2. Average daily turnover of Aeroflot shares on the MICEX more than doubled during 2010, causing major increase in Nominee 30,103, ,071, Rosbank Nominee 1,439, ,439, Individuals 82,754, ,579, annual turnover. This shows increasing liquidity of Aeroflot securities, reflecting growth of interest from market participants, which is a sign of attractiveness of the shares as an investment instrument. Outside the Russian Federation shares of Aeroflot are traded as Level-1 Global Depositary Receipts (GDRs) on the Frankfurt Stock Exchange (OTC market). One GDR represents 100 common shares. Depositorybanking functions are provided by Deutsche Bank Trust Company Americas and custody banking is provided by Deutsche Bank LLC. As of December 31, 2010, a total of 19,497,800 shares were converted into GDRs, representing 1.76% of charter capital ```` 20 January-10 February-10 Source: Bloоmberg. March-10 April-10 May-10 MICEX Index Stock exchange prices for shares of Aeroflot increased by 49% during 2010, which is the largest gain for stocks of leading airline companies in the Association of June-10 July-10 AFLT August-10 September-10 October-10 November-10 December % + 23% European Airlines (AEA). Aeroflot shares also outperformed the MICEX Index, which gained 16.8% in the reporting year

46 3.8. Securities and Charter Capital Aeroflot share price performance in 2010 in comparison with Bloomberg Airline Indexes Share of net profit paid out as dividends + 49% + 28% + 22% ```` January-10 February-10 March-10 Dividend history April-10 May-10 June-10 July-10 AFLT BEUAIRL BWAIRL BWAIRL Bloomberg Index of World Airlines BEUAIRL Bloomberg Index of European Airlines. AFLT Aeroflot share price on the MICEX. Source: Bloоmberg. August-10 September-10 October-10 November-10 December-10 Bonds: The Company entered the bond market in April 2010, successfully placing two issues of bonds to the value of RUR 12 billion for a period of three years. The securities are traded on the A1 quote list at the MICEX Exchange, and are also included on the Lombard List of the Russian Central Bank, i.e. in the list of securities, which are acceptable as collateral in direct repo contracts. The initial target range for the coupon was %, but high demand at the book closure enabled Aeroflot to lower the coupon rate to 7.75%. This was partly due to statements by leading investment banks, which recommended investors to take part in the bond placement. Positive factors cited by investors included: favorable structure of Company debt; low debt refinancing risk; profitability above the sector average; government support for the Company. The Annual General Meeting of Shareholders in June 2010 approved the decision to pay dividends of RUR per share in cash for the 2009 financial year in the period from June 20 until August 18, Dividends of RUR 198, were paid to the federal budget on shares, which are in Government ownership. Dividend period Total accrued dividends, RUR Number of shares at cut-off date Dividends per share, RUR ,796, ,164, ,107, ,110,616, ,106, ,110,616, ,318, ,110,616, ,636, ,110,616, ,033, ,110,460, ,316, ,110,616, ,431, ,110,579, ,893, ,110,616, ,429,363, ,110,616, ,518,212, ,110,616, ,910, ,099,616, ,382, ,110,616, ,205,129, ,110,616, In 2011, the Annual General Meeting of Shareholders approved the Board of Directors, recommendation to pay share holders at least 10% of RAS net profit for 2010 in dividends, equalling RUR billion* (USD 39.7 million)**, or RUR per share (USD )**. * Aeroflot pays dividends on the basis of its financial results prepared according to Russian Accounting Standards. ** Based on the Central Bank, s average exchange rate for 2010 of USD 1=RUR Series now outstanding Instrument Exchangetraded bonds Exchangetraded bonds Name of issue Number of bonds issued Face value, RUR Coupon, % Maturity date Put option Fitch credit rating Aeroflot BO-01 6,000,000 1, BB+ Aeroflot BO-02 6,000,000 1, BB+ The purpose of the bond placement was to refinance a credit taken for buy-back of the Company s own shares. The shares were needed for an exchange, by which Aeroflot obtained the assets of six airlines under management of the state corporation Russian Technologies. The bond placement enabled the Company to settle an expensive credit and reduce its interest expenses, thus improving the structure of its loan capital. Aeroflot obtained a credit rating from the international rating agency, Fitch, in 2010 in order to confirm its status a reliable borrower and lower the cost of its credit portfolio. The rating was issued on March 15, 2010 at BB+, with stable outlook. The rating level matches those of other Russian companies such as MegaFon, MTS (mobile telephony) RusHydro (hydro generating), Transcontainer (transport), and NLMK (steelmaking) and is only two levels below the rating of the Russian Federation. Aeroflot further optimized its borrowing costs by carrying out swap agreements (exchanges of foreign currency payments) with banks. The Company converted its liabilities on the rouble bonds, which it issued, into payment liabilities in euros. The agreements provide for Aeroflot to receive rouble sums from the banks to finance future payments on the bonds (payment of semi-annual coupons) in exchange for Aeroflot assuming a liability to pay respective sums to the banks in euros. These transactions have enabled the Company to obtain an unprecedentedly low effective rate in euros of 3.89%, which would be almost impossible for Aeroflot or any other large Russian company to achieve on the Eurobond market ,721 shares were held on account by the issuer at the time of register closure and dividends were not accrued for these shares 2 36,913 shares were held on account by the issuer at the time of register closure and dividends were not accrued for these shares 3 11,000,000 shares were held on account by the issuer at the time of register closure and dividends were not accrued for these shares 88 89

47 IV. Financial Reporting 90 91

48 4.2. Letter from the Chief Financial Officer 4.1. Statement of Management s Responsibilities for the Preparation and Approval of the Consolidated Financial Statements as at and for the year ended 31 December 2010 The following statement, which should be read in conjunction with the independent auditors responsibilities stated in the independent auditors report set out on pages 96 and 97, 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 Aeroflot Russian Airlines and its subsidiaries (the Group ). Management is responsible for the preparation of consolidated financial statements that present fairly the consolidated financial position of the Group as at 31 December 2010, 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 complied with, subject to any material departures being disclosed and explained in the consolidated financial statements; and preparing the consolidated financial statements on a going concern basis, unless it is inappropriate 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 as at and for the year ended 31 December 2010 were approved on 20 May 2011 by: 4.2. Letter from the Chief Financial Officer» Aeroflot s main indicators for liquidity, financial sustainability and levels of business reflected positive operating and financial results achieved by Aeroflot in the reporting year. Aeroflot has shown greater sustainability than other European airlines, despite difficulties due to aftermath of the international financial and economic crisis. Aeroflot has shown steady improvement of its key financial indicators over the last six years thanks to both organic growth and expansion of the business through acquisitions. The Company continues to show positive profitability indicators despite the crisis, which affected the global air transport» Recovery of demand for air transport has coincided with a return of the pre-crisis trend of steady growth in fuel prices, and once again this is forcing management of Russian and foreign airlines to look for new ways of reducing expenses to make their business more profitable. We at Aeroflot are continuing to implement a strategic programme of fleet modernization, to invest in modern and highly-efficient sales and business management technologies, and are industry in The Group achieved revenue of USD 4,319 million in 2010, which is 29% more than in EBITDA increased by 58% to USD 727 million, and net profit grew by 2.9 times to USD 253 million. The following factors had decisive impact on financial results of Aeroflot Group in 2010: recovery of demand for air transport on Russian and international markets; and growth of prices for aircraft fuel due to higher international prices for crude oil. implementing a SAP ERP programme. These actions are helping us to keep our profitability and financial sustainability indicators at a high level. In addition to growth of fuel costs, Aeroflot had to deal in 2010 with increase of costs directly associated with higher volumes of air carrying, and with the fleet renewal programme, by which the Company continued to obtain up-to-date foreign-made aircraft on financial and operating lease terms. Vitaly G. Saveliev General Director Shamil R. Kurmashov Deputy General Director Finance and Investment 92 93

49 4.2. Обращение заместителя генерального директора по финансам и инвестициям The Company also had to reckon with growth of payroll for flight personnel due both to increase of flight hours and training and retraining of flight teams to prepare them for operations with the new aircraft. Nevertheless, we succeeded in keeping costs under control, so that revenue growth was faster than growth of operating costs. Traffic revenue in 2010 increased by 31.3% compared to Operating profit grew by 79.8% compared with 2009, while operating costs were only 24.5% higher.» Aeroflot makes full use of capital markets. Company shares grew in value throughout the year and our bond placements were successful.» Aeroflot uses financial hedging instruments in order to minimize risk associated with higher prices for oil and aircraft fuel. In December 2010 the Company entered a three-year agreement to protect against the effects of growth in oil prices. According to the agreement terms, Aeroflot will receive a specific compensation for its additional spending on aviation fuel in case of growth of» Implemented at Aeroflot program for fleet optimization and fuel consumption reduction program let us to save RUR 1,207.9 million in 2010 thanks to increase in the number of fuel-efficient aircraft in the Company fleet and measures to reduce fuel consumption. oil prices, while in case of decline of oil prices and resulting decline in prices for fuel, the Company will be obliged to use the money, which it saves, in order to make payments under the agreement. An important aspect of the transaction is that it does not involve any preliminary payments, so it does not involve the Company in any additional expenses. Capital expenditures at Aeroflot Group in 2010 were USD 233,3 million, a substantial part of which (USD million) consisted of investments in acquisition, leading and modernization of aircraft., while the rest amount of the spending was on modernization of buildings and facilities, and investments in IT infrastructure and software. Stock exchange prices for shares of Aeroflot increased by 49% during 2010, outpacing gains by stocks of other leading airline companies in the Association of European Airlines (AEA). Aeroflot shares also outperformed the MICEX Index, which measures average price growth by shares of major Russian issuers, and which gained 16.8% in the reporting year. The Company entered the bond market in April 2010, successfully placing two issues of bonds to the value of RUR 12 billion for a period of three years. The initial target range for the coupon was %, but» The Russian Government has decided that Aeroflot will be the basis for consolidation of six airlines belonging to the state corporation, Russian Technologies. The merger should lead to increase in Aeroflot s passenger flows and to significant growth of the Company s financial indicators. However, there is an important task ahead as regards financial management of these processes, particularly in order to minimize impact of the consolidated companies high demand enabled Aeroflot to lower the coupon rate to 7.75% at the book closure. The money raised was used to improve the Company s debt structure. In May 2010 the Company converted its liabilities on the rouble bonds into payment liabilities in euros by entering into currencyand-interest swaps with banks for a period of three years. These transactions have enabled the Company to obtain an unprecedentedly low effective interest rate in euros of 3.89%, which would be almost impossible for Aeroflot or any other large Russian company to achieve on the Eurobond market. Aeroflot led consolidation processes on the domestic market, matching the trend towards consolidation on the global air transport market. This proess was supported by the Russian Government. on profitability indicators of the united Company. Much will also need to be done for restructuring and management of debt. The work, which we are already carrying out at these companies, and the accrued experience of Aeroflot managers in enhancing business efficiency and managing the business of subsidiaries make us confident that the forthcoming consolidation will produce positive results and a powerful synergy effect. Shamil R. Kurmashov 94 95

50 4.3. Independent Auditors,`Report 4.3. Independent Auditors, Report 96 97

51 4.4. Overview of financial results 4.4. Overview of financial results 7% 2% 5% Aeroflot Group Revenue breakdown Scheduled passenger flights 77% USD millions Change, % Revenue 4, , Operating costs 3, , Operating profit Profit before tax Tax Income non controlling Interest Net profit EBITDA EBITDA margin, % p.p. EBITDAR EBITDAR margin, % p.p. Net debt/ebitda ratio % Agreements with other airlines 9% Cargo 7% Charter passenger flights 2% Other 5% 77% USD millions Change, % Scheduled passenger flights 3, , Cargo Passenger charter flights Revenue from agreements with other airlines Other revenue Total 4, , Revenue growth in 2010 was driven by substantial growth of demand for air transport in 2010 and increase in carrying volumes on flights by Aeroflot Group. Carrying by the Group grew faster than the overall Russian civil aviation market in Revenue Revenue from passenger carrying Revenue from passenger carrying Cargo revenue Revenue as a result of agreements with other airlines Other revenue Net profit of Aeroflot in 2010 was USD million, which is about three times more than in Thanks to management efforts, revenue grew faster than operating costs in the reporting year. represented 79% of total Group revenue in The share of revenue from codesharing agreements was 9%, and the share from cargo business was 7%. was USD 3,414.4 million in 2010, which is 31% more than in the previous year. The Group carried in excess of 14 million passengers in 2010, which is a record figure. was USD million, representing growth of 35% compared with 2009, thanks to increase of demand for freight carrying in was USD million, which is 4% more than in was USD 215 million, which is 55% more than in the previous year. Other revenue includes payments for refueling, ground maintenance, hotel business, sale of in-flight meals, etc. Operating costs Group operating costs in 2010 were USD 3,819.9 million, which is 24.5% more than in The growth was due mainly to larger carrying volumes in 2010, as well as growth of prices for fuel. However, unit consumption of fuel was reduced by 20% to 312 grammes per tonne-kilometer. Labour productivity indicators showed improvement in 2010 both for Aeroflot alone and for the whole of Aeroflot Group. Revenue per employee rose by 34% to USD 225,000. Increase of headcount in 2010 was mainly due to increase of flight personnel and Aeroflot Group operating costs breakdown personnel working in airport service subdivisions. The greater part of operating costs consist of three items: Aircraft fuel (25%) Payroll (18%) Aircraft servicing (15%) Customs payments on imported aircraft increased by 16.2% in comparison with the previous year, and sales and marketing costs were 43.3% higher. 2% 1% 1% 3% Staff costs 18% Aircraft fuel 25% 4% Aircraft and traffic servicing 15% 4% 5% 5% 8% 9% 25% 18% Operating lease expenses 9% Maintenance 8% Depreciation and amortization 5% Sales and marketing 5% Passenger services 4% Administrative and general expenses 4% Telecommunication expenses 2% Customs duties 1% 15% Insurance expenses 1% Other costs 3% 98 99

52 4.4. Overview of financial results USD millions Change, % Aircraft fuel % Personnel costs % Aircraft and traffic servicing % Operating lease expenses % Maintenance % Sales and marketing % Depreciation and amortization % Administrative and general expenses % Passenger services % Telecommunication expenses % Customs duties % Insurance expenses % Other costs % Total operating costs 3, , % EBITDA EBITDA performance of the Group improved by 58% in comparison with the previous year to USD 727 million. EBITDA margin rose from 14% in 2009 to 17% in 2010, which Financial income and expenses Financial income of the Group grew by more than seven times to USD 20.8 million in The growth was mainly due to increase of interest income from bank deposits. confirms efficiency of steps by management to optimize operations in a context of rapid increase of fuel prices at the end of Financial expenses grew to USD million, mainly due to higher cost of servicing short- and long-term loans Change, % FINANCIAL INCOME Interest income on bank deposits % Net gain from disposal of investments % Financial income % FINANCIAL EXPENSES Interest expenses on customs duty discounting % Interest expenses on short- and long-term borrowings % Foreign exchange loss % Interest expenses on finance lease liabilities % Financial expenses % Net profit Net profit of the Group increased by 2.9 times to USD million. Substantial growth of the bottom line shows success of measures by the Group to optimize Yields operating business. Income per share was USD 0.27 (up from USD in 2009). Increase in average distance of flights led to a slight decline of yields on international routes. Passenger yields, US /RPK Debt profile USD millions Change Loans and borrowings 1, % Financial leasing % Pension liabilities % Customs duties % Total debt 2,152 1,907 13% Cash and short-term investments % Total net debt 1,486 1,775-16% Total debt of the Group increased by 13% in Short-term borrowings held by Aeroflot in the reporting year were provided by Vneshtorgbank, Vneshekonombank, Gazprombank, Promsvyazbank, Alfa Bank and MBRR, and the Group also had bonds outstanding. The total amount of short-term debt as of December 31, 2010 was USD 62.4 million, of which USD 35.5 million was denominated in US dollars and the remainder in Russian roubles. Most of the lending was for replenishment of working capital and was extended at both fixed and floating rates. Long-term borrowing amounted to USD 1,250.8 million as of December 31, Long-term loans include a USD Cargo yield, US /CTK Scheduled and charter international flights Scheduled domestic flights million credit from Vneshekonombank, and credit lines of USD million from Vneshtorgbank and USD million from Vneshekonombank. These borrowings were taken to finance construction work on the Sheremetyevo-3 terminal complex. The Group s long-term borrowing also includes a bond issue of USD million. Interest expenses on short- and long-term borrowing amounted to USD million in Interest expenses in discounting of customs duties were USD 12.9 million, which is 22% less than in the previous year. Interest expenses on financial leases were USD 11.7 million in

53 4.5. Consolidated Financial Statements Effective rate Non-operating liabilities: Loans in USD 8.9% Loans in RUR 9.2% Bonds 7.4% Financial lease liabilities 1.5% Customs duties 8.0% Liquidity The Group has a sustainable level of liquidity. Cash and equivalents amounted to USD 666 million at the end of 2010, which is 405% of their level at the end of Cash flow from operations was USD million, Dividends The Board of Directors of Aeroflot decided on April 28, 2011 to recommend dividends of 3.57 US cents (RUR ) per common share. Total dividends announced for 2010 were USD 39.7 million, up from USD Capital expenditures compared with USD million in Net debt/ebitda declined by 95% to 2.0x from 3.9x in 2009, and the current ratio in 2010 was million in The Annual General Meeting of Shareholders on June 29, 2011 gave its approval to recommended dividend payments for USD millions Construction in progress 40.2 Leasing of aircraft and engines Acquisition and modernization of aircraft and engines 12.9 Acquisition of plant, equipment and other 27.4 Acquisition and repairs of land and buildings 26.0 Total Capital expenditures in 2010 amounted to USD million. The 2010 additions mainly relate to addition of two new Аirbus-321 aircraft with a carrying value of USD million received under finance lease agreements Consolidated Financial Statements Consolidated Statement of Income for the year ended 31 December 2010 (All amounts in millions of US dollars) Notes Traffic revenue 5 3, ,818.7 Other revenue Revenue 4, ,345.9 Operating costs 7 (2,949.1) (2,383.9) Staff costs 8 (686.5) (538.9) Depreciation and amortisation 22, 23 (184.3) (145.3) Operating costs (3,819.9) (3,068.1) Operating profit Finance income Finance costs 9 (159.5) (53.1) Share of results of equity accounted investments Other non-operating expenses, net 10 (18.3) (28.6) Profit before income tax Income tax 11 (100.3) (120.0) Profit for the year Attributable to: Shareholders of the Company Non-controlling interest (25.2) (3.4) Earnings per share, basic and diluted (US cents) Weighted average number of shares outstanding (millions) 1, ,094.5 Vitaly G. Saveliev General Director Shamil R. Kurmashov Deputy General Director Finance and Investment The consolidated statement of income should be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 109 to

54 4.5. Consolidated Financial Statements Consolidated Statement of Comprehensive Income for the year ended 31 December 2010 (All amounts in millions of US dollars) Note Profit for the year Other comprehensive income: Net change in fair value of available for-sales financial assets transferred to profit and loss (8.1) (2.3) Deferred tax related to the net change in fair value of available for-sales financial assets transferred to profit and loss Exchange differences on translating to presentation currency (10.7) (24.3) Loss on hedge instrument 24 (6.7) - Deferred tax related to the loss on hedge instrument Other comprehensive income for the year (21.4) (26.2) Total comprehensive income for the year Total comprehensive income attributable to: Shareholders of the Company Non-controlling interest (25.8) (5.1) The consolidated statement of comprehensive income should be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 109 to 147. Consolidated Statement of Financial Position as at 31 December 2010 (All amounts in millions of US dollars) Notes ASSETS Current assets Cash and cash equivalents Short-term investments Accounts receivable and prepayments Aircraft lease deposits Expendable spare parts and inventories Assets of disposal group classified as held for sale , ,172.6 Non-current assets Equity accounted investments Long-term investments Aircraft lease deposits Deferred tax assets Other non-current assets Notes Prepayments for aircraft Property, plant and equipment 22 2, ,167.8 Intangible assets Goodwill , ,812.7 TOTAL ASSETS 4, ,985.3 LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued liabilities Unearned transportation revenue Deferred revenue related to frequent flyer programme, current Provisions Short-term borrowings Finance lease liabilities Liabilities associated with assets of a disposal group classified as held for sale , ,138.0 Non-current liabilities Long-term borrowings 31 1, Finance lease liabilities Provisions Deferred tax liabilities Deferred revenue related to frequent flyer programme, non-current Derivative instruments Other non-current liabilities , ,841.5 Equity Share capital Treasury stock 33 (107.1) (14.6) Accumulated gain on disposal of treasury shares Investment revaluation reserve Cumulative translation reserve (155.8) (145.7) Hedge reserve 24 (4.3) - Share based payment reserve Retained earnings 1, ,037.0 Equity attributable to shareholders of the Company 1, Non-controlling interest Total equity 1, ,005.8 TOTAL LIABILITIES AND EQUITY 4, ,985.3 The consolidated statement of financial position should be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 109 to

55 4.5. Consolidated Financial Statements Consolidated Statement of Cash Flows for the year ended 31 December 2010 (All amounts in millions of US dollars) Consolidated Statement of Cash Flows for the year ended 31 December 2010 (All amounts in millions of US dollars) Notes Cash flows from operating activities: Profit before income tax Adjustments to reconcile profit before taxation to net cash provided by operating activities: Depreciation and amortisation 22, Change in impairment allowance for bad and doubtful debts Accounts receivable write off Impairment allowance for obsolete inventory 15 (3.2) (3.2) Impairment of property, plant and equipment (0.8) (7.4) Loss on disposal of property, plant and equipment Change in other provisions and other assets impairments Accounts payable write off 10 (0.3) (0.7) Share of results in equity accounted investments 18 (11.1) (6.9) Gain on disposal of investments 9 (6.6) (0.1) Change in provisions (21.5) Impairment expense on assets held for sale Loss on disposal of assets held for sale Interest expense Unrealised foreign exchange loss VAT write off Other non-cash income (4.7) (1.2) Share based payment reserve Operating profit before working capital changes Change in accounts receivable and prepayments and other non-current assets (10.1) (217.4) Change in expendable spare parts and inventories (5.7) 5.7 Change in accounts payable and accrued liabilities (28.9) Income tax paid (20.1) (9.4) Income tax received Net cash flows from operating activities Note Cash flows from financing activities: Proceeds from borrowings 1, Sale of treasury stock Purchases of treasury stock (93.7) - Repayment of borrowing (738.7) (399.3) Repayment of the principal element of finance lease liabilities (113.4) (101.5) Interest paid (135.6) (107.8) Dividends paid (15.6) (8.9) Derivative instruments Net cash flows from financing activities Effect of exchange rate fluctuations (7.0) (3.2) Net increase/(decrease) in cash and cash equivalents (25.7) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year * Supplemental cash flow information: Interest received Non-cash investing and financing activities: Property, plant and equipment acquired under finance leases * Includes USD 13.4 million related to assets classified as held for sale (Note 17). The consolidated statement of cash flows should be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 109 to 147. Cash flows from investing activities: Proceeds from sale of investments Proceeds from sale of property, plant and equipment Return of aircraft advances Dividends received Decrease in aircraft lease deposits (0.5) (1.4) Purchases of investments (28.9) (23.3) Purchase of subsidiary company, net (12.9) - Lease prepayments (95.3) - Purchases of property, plant and equipment and intangible assets (117.3) (383.2) Net cash flows to investing activities (193.5) (299.3) The consolidated statement of cash flows should be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 109 to

56 4.5. Consolidated Financial Statements Consolidated Statement of Changes in Equity for the year ended 31 December 2010 (All amounts in millions of US dollars) Share capital Treasury stock Investment revaluation reserve Cumulative translation reserve Hedge reserve Retained earnings Share based payment reserve Attributable to shareholders of the Company Noncontrolling interest 1 January (9.1) 8.3 (123.1) Profit/(loss) for the year (3.4) 85.8 Foreign currency translation for the year (22.6) (22.6) (1.7) (24.3) Loss on investments available-forsale - - (1.9) (1.9) - (1.9) Total comprehensive income 64.7 (5.1) 59.6 Gain on disposal of treasury stock - (4.0) (4.0) - (4.0) Sale of treasury stock Dividends (8.8) (8.8) (4.7) (13.5) 31 December (145.7) - - 1, , January (145.7) - - 1, ,005.8 Profit/(loss) for the year (25.2) Foreign currency translation for the year (10.1) (10.1) (0.6) (10.7) Loss on investments available-forsale - - (6.4) (6.4) - (6.4) Loss on hedging instrument (4.3) - - (4.3) - (4.3) Total comprehensive income (25.8) Acquisition of subsidiary Share based compensation Gain on disposal of treasury stock Purchases of treasury stock - (92.5) (92.5) - (92.5) Dividends (12.9) (12.9) - (12.9) 31 December (79.1) - (155.8) (4.3) , , ,154.9 The consolidated statement of changes in equity should be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 109 to 147. Total Notes to the Consolidated Financial Statements as at and for the year ended 31 December 2010 (All amounts in millions of US dollars) 1. Nature of the business JSC Aeroflot Russian Airlines (the Company or Aeroflot ) was formed as a joint stock company following a government decree in The 1992 decree conferred all the rights and obligations of Aeroflot Soviet Airlines and its structural units, excluding its operations in Russia and Sheremetyevo Airport, upon the Company, including inter-governmental bilateral agreements and agreements signed with foreign airlines and enterprises in the field of civil aviation. The principal activities of the Company are the provision of passenger and The principal subsidiary companies are: Place of incorporation Company name and operation Activity cargo air transportation services, both domestically and internationally, and other aviation services from its base at Moscow Sheremetyevo Airport. The Company and its subsidiaries (the Group ) also conduct activities comprising airline catering, hotel operations, and the construction and operating of the Sheremetyevo-3 terminal. Associated entities mainly comprise cargohandling and fuelling services businesses. As at 31 December 2010 and 2009 the Government of the Russian Federation owned 51% of the Company. The Company s headquarters are located in Moscow at 10 Arbat Street. 31 December December 2009 CJSC Sherotel Moscow region Hotel % % OJSC Insurance company Moscow Moscow Captive insurance services % % OJSC Donavia Rostov-on-Don Airline % % CJSC Aeroflot- Cargo Moscow Cargo transportation services % % CJSC Nordavia Arkhangelsk Airline % 51.00% LLC Aeroflot- Finance Moscow Finance services % - OJSC Terminal Moscow region Airport business 52.82% 52.82% CJSC Aeromar Moscow region Catering 51.00% 51.00% CJSC Aerofirst Moscow region Trading 66.67% 33.33% The significant entities in which the Group holds more than 20% but less than 50% of the equity are: Place of Company name incorporation and operation Activity 31 December December 2009 LLC Airport Moscow Moscow region Cargo handling 50.00% 50.00% CJSC AeroMASH AB Moscow region Aviation security 45.00% 45.00% CJSC TZK Sheremetyevo Moscow region Fuel trading company 31.00% 31.00% CJSC Jetalliance East* Moscow Airline 49.00% % * Previously CJSC Aeroflot Plus All the companies listed above are incorporated in the Russian Federation

57 4.5. Consolidated Financial Statements The table below provides information on the Group s aircraft fleet as at 31 December 2010: Type of aircraft Ownership Aeroflot- Russian Airlines (number) Donavia (number) Nordavia* (number) Group total (number) Ilyushin Il Owned Ilyushin Il-86 Owned Tupolev Tu-154 Owned Tupolev Tu-134 Owned Antonov An-24 Owned Total owned Airbus A-319 Finance lease Airbus A-320 Finance lease Airbus A-321 Finance lease Boeing 737 Finance lease Total finance lease Antonov An-24 Operating lease Antonov An-26 Operating lease Ilyushin Il-86 Operating lease Airbus A-319 Operating lease Airbus A-320 Operating lease Airbus A-330 Operating lease Boeing B-737 Operating lease Boeing B-767 Operating lease McDonnell Douglas MD-11 Operating lease Total operating lease Total fleet * As at 31 December 2010 CJSC Nordavia classified as assets held for sale (Note 17). 2. Basis of preparation and summary of significant accounting policies Basis of presentation The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards ( IFRS ). The consolidated financial statements are presented in millions of US dollars ( USD ), except where specifically noted otherwise. All significant subsidiaries directly or indirectly controlled by the Group are included in the consolidated financial Functional and presentation currency Since 1 January 2007 the functional currency of the Company is the Russian rouble. These consolidated statements. A listing of the Group s principal subsidiary companies is set out in Note 1. The Group maintains its accounting records in Russian roubles ( RUB ) and in accordance with Russian accounting legislation and regulations. The accompanying consolidated financial statements are based on the underlying accounting records, appropriately adjusted and reclassified for fair presentation in accordance with IFRS. financial statements are presented in US dollar for the convenience of foreign users, including the major lessors. The assets and liabilities, both monetary and non-monetary, have been translated at the closing rate at the date of each consolidated statement of financial position presented in accordance with International Accounting Standard ( IAS ) 21 The Effect of Changes in Foreign Exchange Rates. Income and expense items for all periods presented have been translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates. All exchange differences resulting from translation have been classified as other comprehensive income and transferred to the Group s translation reserve. Any conversion of Russian rouble amounts to US dollars should not be considered as a representation that Russian rouble amounts have been, could be or will be in the future, converted into US dollars at the exchange rate shown or at any other exchange rate. The assets and liabilities, both monetary and non-monetary, of the subsidiaries of the Company with functional currencies other than the Russian rouble have been translated at the closing rate at the date of each consolidated statement of financial position presented; income and expense items for all periods presented have been translated at the exchange rates existing at the dates of the transactions or a rate that approximates the actual exchange rates. All exchange differences resulting from translation have been classified as equity and transferred to the Group s translation reserve. The following table details the exchange rates used to translate Russian roubles to US dollars: Exchange rate As at 31 December Average rate in As at 31 December Average rate in As at 31 December The consolidated financial statements have been prepared on the historical cost basis except for the revaluation of certain non-current assets and financial instruments. The principal accounting Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Subsidiaries comprise entities in which the Company, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over their operations. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Subsidiaries are consolidated from the date on which effective control is obtained by the Group and are no longer consolidated from the date of disposal or loss of control. Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is policies adopted in the preparation of these consolidated financial statements are set out below. There have been no significant changes to accounting policies. All intra-group transactions, balances and unrealised surpluses and deficits on transactions between Group companies are eliminated on consolidation. Noncontrolling interests in the net assets of consolidated subsidiaries are identified separately from the Group s equity therein. The interest of non-controlling shareholders is stated at the noncontrolling proportion of the fair values of the assets and liabilities acquired adjusted by subsequent changes in the carrying value of net assets of those entities. Losses applicable to the non-controlling interest in a subsidiary are allocated to the noncontrolling interest even if doing so causes the non-controlling interests to have a deficit balance. the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that

58 4.5. Consolidated Financial Statements currently are exercisable. The Group measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus the recognised amount of any noncontrolling interests in the acquiree; plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Purchases of non-controlling interests From 1 January 2010 the Group has applied IAS 27 Consolidated and Separate Financial Statements (2008) in accounting for acquisitions of noncontrolling interest. Under the new accounting policy, acquisition of non-controlling interests is Investments in associates Associates in which the Group has significant influence but not a controlling interest are accounted for using the equity method of accounting. Significant influence is usually demonstrated by the Group s owning, directly or indirectly, between 20% and 50% of the voting share capital or by exerting significant influence through other means. Under the equity method, investments in associates are carried in the consolidated statement of financial position at cost as adjusted for post-acquisition changes in the Group s share of the net assets of the associate, less any impairment in the value of individual investments. The Group s share of the net income or losses of associates is included in the consolidated Foreign currency translation Transactions in currencies other than the functional currency are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in 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 Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination, are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. accounted for as transactions with owners in their capacity, as owners and therefore no goodwill is recognised as a result of such transaction. The adjustments to non-controlling interest are based on a proportionate amount of the net assets of the subsidiary. statement of income. An assessment of investments in associates is performed when there is an indication that the asset has been impaired or that the impairment losses recognised in prior years no longer exist. Losses of an associate in excess of the Group s interest in that associate (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate) are not recognised. Where a group entity enters into a transaction with an associate of the Group, profits and losses are eliminated to the extent of the Group s interest in the relevant associate. A listing of the Group s principal associated entities is included in Note 1. such currencies at the reporting date are translated into the functional currency at the year end exchange rate. Exchange differences arising from such translation are included in the consolidated statement of income. be recovered through a sale transaction rather than through continuing use. This condition is regarded as being 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 committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Any liabilities related to non-current assets Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of sales related taxes. Passenger revenue: Ticket sales are reported as traffic revenue when the transportation service has been provided. The value of tickets sold and still valid but not used by the reporting date is reported as unearned transportation revenue. This item is reduced either when the Group completes the transportation service or when the passenger requests a refund. Sales representing the value of tickets that have been issued, but which will never be used, are recognised as traffic revenue at the date the tickets are issued based on an analysis of historical patterns of actual sales data. Commissions, which are payable to the sales agents are recognised as sales and marketing expenses at the same time as revenue from the air transportation to which they relate. Passenger revenue includes revenue from code-share agreements with certain other airlines. Under these agreements, the Group sells seats on these airlines flights and those other airlines sell seats on the Group s flights. Revenue from the sale of code-share seats on other airlines Borrowing costs All borrowing costs that are directly attributable to the acquisition, construction and production of a qualifying asset form part of the cost Operating segments The Group determines and present operating segments based on the information that internally is provided to the General Director, who is the Group s chief operating decision maker. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components. to be sold are also presented separately as liabilities in the consolidated statement of financial position. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of the assets previous carrying amount and fair value less costs to sell. are recorded net in Group s passenger revenue in the consolidated statement of income. The revenue from other airlines sales of code-share seats on the Group s flights is recorded in passenger revenue in the Group s consolidated statement of income. Cargo revenue: The Group s cargo transport services are recognised as revenue when the air transportation is provided. Cargo sales for which the transportation service has not yet been provided are shown as unearned transportation revenue. Catering revenue: Revenue is recognised when meal packages are delivered to the aircraft, as this is the date when the risks and rewards of ownership are transferred to customers. Other revenue: Revenue from bilateral airline agreements is recognised when earned with reference to the terms of each agreement. Hotel accommodation revenue is recognised when the services are provided. Sales of goods and other services are recognised as revenue when the goods are delivered or the service is rendered. Revenue from airport and traffic services is recognised in profit and loss when services are rendered to customers in accordance with the relevant service agreements. of that asset. All other borrowings costs are recognised as an expense in the consolidated statement of income. An operating segment s operating results are reviewed regularly by the General Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the General Director include items directly attributable to a segment as well as those that can be allocated on a reasonable basis

59 4.5. Consolidated Financial Statements Property, plant and equipment Property, plant and equipment is stated at cost, or appraised value, as described below. Depreciation is calculated in order (a) Fleet (i) Owned aircraft and engines Aircraft and engines owned by the Group as at 31 December 1995 were stated at depreciated replacement cost based upon external valuations denominated in US dollars. Airclaims, an international (ii) Finance leased aircraft and engines Where assets are financed through finance 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 purchased outright. The Group recognises finance leases as assets and liabilities in the consolidated statement of financial position at amounts equal to the fair to amortise the cost or appraised value (less estimated salvage value where applicable) over the remaining useful lives of the assets. firm of aircraft appraisers, conducted the valuation. The Group has chosen not to revalue these assets subsequent to Subsequent purchases are recorded at cost. value of the leased property at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding obligation, reduced by the capital portion of lease payments made, is included in payables. Custom duties, legal fees and other initial direct costs are added to the amount recognised as an asset. The interest element of lease payments made is included in interest expense in the consolidated statement of income. (b) Land and buildings, plant and equipment Property, plant and equipment is stated at the historical US dollar cost recalculated at the exchange rate on 1 January 2007, the date of the change of the functional currency of the Company from the US dollar to the Russian rouble. Provision is made for the depreciation of property, (c) Capital expenditure Capital expenditures comprise costs directly related to the construction of property, plant and equipment including an appropriate allocation of directly attributable variable overheads that are incurred in construction as well as costs of purchase of other assets that require installation or preparation for (d) Gain or loss on disposal The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds plant and equipment based upon expected useful lives or, in the case of leasehold properties, over the duration of the leases using a straight-line basis. These useful lives range from 3 to 50 years. Land is not depreciated. their use. Depreciation of these assets, on the same basis as for other property assets, commences when the assets are put into operation. Capital expenditures are reviewed regularly to determine whether their carrying value is fairly stated and whether appropriate provision for impairment is made. and the carrying amount of the asset and is recognised in the consolidated statement of income. (iii) Capitalised maintenance costs The valuation of aircraft and engines as at 31 December 1995 reflected their maintenance condition, as measured on the basis of previous expenditure on major overhauls and estimated usage since the previous major overhaul. Subsequent expenditure incurred on modernisation and improvements projects that are significant in size (mainly aircraft modifications involving installation of replacement parts) are separately capitalised in the consolidated statement of financial (iv) Depreciation The Group depreciates fleet assets owned or held under finance leases on a straight-line basis to the end of their estimated useful life. The airframe, engines and interior of an aircraft are depreciated separately over their respective estimated useful Useful lives of the Group s fleet assets are as follows: AIRFRAMES OF FOREIGN AIRCRAFT Airframes of Russian aircraft Engines of foreign aircraft Engines of Russian aircraft Interiors (v) Capitalised leasehold improvements capitalised costs that relate to the rented fleet are depreciated over the position. The carrying amount of those parts that are replaced is derecognised from the consolidated statement of financial position and included in gain or loss on disposals of property, plant and equipment in the Group s consolidated statement of income. Capitalised costs of aircraft checks and major modernisation and improvements projects are depreciated on a straightline basis to the projected date of the next check or based on estimates of their useful lives. Ordinary repair and maintenance costs are expensed as incurred. lives. The salvage value for airframes of the foreign fleet is estimated at 5% of historical cost, while the salvage value for Russian aircraft is zero. Engines are depreciated on a straight-line basis to the end of the useful life of the related type of aircraft. 20 YEARS years 8 years 8-10 years 5 years shorter of their useful life and the lease term. Impairment of non-current assets At each reporting date the Group reviews the carrying amounts of its non-current assets to determine whether there is any indication of impairment of those assets. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the 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-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the Lease deposits Lease deposits represent amounts paid to the lessors of foreign aircraft, which are held as security deposits by lessors in accordance with the provisions of finance and operating lease agreements. These deposits are returned to the Group at the end of the lease period. Lease deposits relating to operating lease agreements are presented as assets in Operating leases Payments under operating leases are charged to the consolidated statement of income in equal annual instalments over the period of the Financial instruments Financial assets and financial liabilities carried in the balance sheet include cash and cash equivalents, marketable securities, time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the consolidated statement of income. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. the consolidated statement of financial position. A portion of these deposits is interestfree. Interest-free deposits are recorded at amortised cost using an average market yield of 5.3%. Lease deposits that are part of finance lease arrangements are presented net as part of the finance lease liability. lease. Related direct expenses including custom duties for leased aircraft are amortised using a straight-line method over the term of lease agreement. investments, derivative financial instruments, trade and other accounts receivable, trade and other accounts payable, borrowings and notes payable

60 4.5. Consolidated Financial Statements The accounting policies on recognition and measurement of these items are disclosed below. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, and gains and losses relating to a financial instrument classified as a liability are reported as expense or income. Distributions to holders of (a) Credit risks The sale of passenger and freight transportation is largely processed through agencies that are normally linked to country specific clearing systems for the settlement of passenger and freight sales. Clearing centres check individual agents operating outside of the Russian Federation. Individual agents operating (b) Fair value The fair value of financial instruments is determined by reference to various market information and other valuation methods as considered appropriate. At (c) Foreign exchange risk In 2010 the Group mostly managed its foreign exchange risk by matching its assets and liabilities in the different currencies to limit exposure. However, a (d) Interest rate risk The Group s main exposure to interest rate risk is from its finance lease liabilities and short-term borrowings. In 2010 the Group did not use financial hedging instruments to hedge its exposure to the changes in interest rates, as they are not (e) Non-financial risks fuel hedging activities The results of Group s operations can be significantly impacted by changes in the price of aircraft fuel. In 2010 the Group engaged in fuel hedging activities to hedge Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balances with banks and short-term financial instruments classified as equity are charged directly 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 realise the asset and settle the liability simultaneously. The result from the realisation of the financial instruments is determined on the FIFO basis. within the Russian Federation are checked in-house. Receivables and liabilities between major airlines, unless otherwise stipulated in the respective agreements, are settled on a bilateral basis or by settlement through an International Air Transport Association ( IATA ) clearing house. the reporting date the fair values of the financial instruments held by the Group did not materially differ from their recorded book values. portion of its foreign exchange risk was managed through the use of hedging instruments (Note 24). generally available on the Russian market. The Group constantly monitors changes in interest rates to minimise the level of its exposure and to identify any need for hedging activities. a portion of its non-financial risk related to fuel (Note 24). The Group does not use derivative instruments for speculative purposes. interest-bearing accounts which are used in the day to day financing of the Group s airline activities. assets excluding derivative contracts which mature on a specified date and which a company has the firm intent and ability to hold to maturity. They are valued at allocated acquisition cost and they are included in long-term assets. Investments other than held-to-maturity debt securities are classified as either investments held for trading or as available-for-sale, loans and receivables, and are measured at subsequent reporting dates at fair value. Investments in equity instruments of other companies that do not have a quoted market price are stated at cost less impairment loss, as it is not practicable to determine the fair value of such investments. For derivatives and other financial instruments classified as held for trading, gains and losses arising from changes in fair value are included in the consolidated statement of income for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in other comprehensive income, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the consolidated statement of income for the period. Impairment losses recognised in the consolidated statement of income for equity investments classified as availablefor-sale are not subsequently reversed Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are individually recognised at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Accounts payable Trade payables are initially measured at fair value and are subsequently measured at amortised cost and because the expected term of through the consolidated statement of income. Impairment losses recognised in the consolidated statement of income for debt instruments classified as availablefor-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. In 2010 the Group held corporate and Government financial instruments primarily comprising shares and bonds. These are disclosed as held-for-trading investments in Note 13. Gains and losses arising from changes in fair value of heldfor-trading investments are recognised in the consolidated statement of income. The Group assesses on each closing date whether there is any objective evidence that the value of a financial asset item or group of items has been impaired. If there is objective evidence that an impairment loss has arisen for loans and other receivables entered at allocated acquisition cost in the consolidated statement of financial position or for held-to-maturity investments, the size of the loss is determined as the difference between the book value of the asset item and the present value of expected future cash flows of the said financial asset item discounted at the original effective interest rate. The loss is recognised in the consolidated statement of income. Because the expected term of an account receivable is short, the value is typically stated at the nominal amount without discounting, which corresponds with the fair value. Uncertain accounts receivable balances are assessed individually and any impairment losses are included in non-operating expenses. accounts payable is short the value is stated at the nominal amount without discounting, which corresponds with the fair value. Investments The Group s financial assets have been classified according to IAS 39 Financial Instruments: Recognition and Measurement into the following categories: securities held for trading, held-to-maturity investments, loans and other receivables, and available-for-sale investments. Investments with fixed or determinable 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-tomaturity investments. Derivative financial instruments and investments acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading securities. All other investments, other than loans and receivables, are classified as available-forsale. Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, plus directly attributable transaction costs. Held-to-maturity investments are financial Short-term borrowings Short-term borrowings comprise: Interest bearing borrowings with a term shorter than one year; Current portion of interest-bearing Long-term borrowings Long-term borrowings (i.e. liabilities with a term longer than one year) consist of interest-bearing loans, which are initially measured at fair Expendable spare parts and inventories Inventories, including aircraft expendable spare parts, are valued at cost or net realisable value, whichever long-term borrowings. These liabilities are measured at amortised cost and reported based on the settlement date. value, and are subsequently measured at amortised cost using the effective interest rate method as at the settlement date. is lower. The costs are determined on the first-in, first-out ( FIFO ) basis. Inventories are reported net of provisions for slowmoving or obsolete items

61 4.5. Consolidated Financial Statements Value added taxes Value added tax ( VAT ) related to sales is payable to the tax authorities on an accruals basis. For sales of passenger tickets this is when the tickets are registered for a flight by the customers. Domestic flights are subject to VAT at 18% and international flights are not subject to VAT. Input VAT invoiced by domestic suppliers as well as VAT paid in respect of imported aircraft and spare parts may be recovered, subject to certain restrictions, against output VAT. The recovery of input VAT is typically delayed by up to six months and sometimes longer due to compulsory tax audit requirements and other administrative matters. Input VAT claimed for recovery as at the reporting Frequent flyer programme Since 1999 the Group operates a frequent flyer programme referred to as Aeroflot Bonus. Subject to the programme s terms and condition, the miles earned entitle members to a number of benefits such as free flights and flight class upgrades. In accordance with IFRIC 13 Customer Loyalty Programmes accumulated but as yet unused bonus miles are deferred using Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. date is presented net of the output VAT liability. Recoverable input VAT that is not claimed for recovery in the current period is recorded in the consolidated statement of financial position as VAT receivable. VAT receivables that are not expected to be recovered within the twelve months from the reporting date are classified as long-term assets. VAT balances are not discounted. Where provision has been made for uncollectible receivables, the bad debt expense is recorded at the gross amount of the account receivable, including VAT. The provision for non-recoverable VAT is charged to the consolidated statement of income as a non-operating expense. the deferred revenue method to the extent that they are likely to be used on flights of Aeroflot Group. The fair value of miles accumulated on the Group s own flights is recognised under deferred revenue (Note 27) and the miles collected from third parties as well as promotional miles are recognised under other liabilities (Note 25 and Note 32). Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Where the expected timing of cash flows can be estimated and the effect of the time value of money is significant, the amount of a provision is stated at the present value of the expenditures required to settle the obligation. pension plan. For such plans the pension accounting costs are assessed using the projected unit credit method. Under this method the cost of providing pensions is charged to the consolidated statement of income in order to spread the regular cost over the average service lives of employees. Actuarial gains and losses are recognised in the consolidated statement of income immediately. The pension payments may be increased upon the retirement of an employee based on the decision of management. The pension liability for nonretired employees is calculated based on a minimum annual pension payment and do not include increases, if any, to be made by management in the future. Where such post-employment employee benefits fall Share-based payment transactions The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are Treasury shares The Company s shares, which are held as treasury stock or belong to the Company s subsidiaries, are reflected as a reduction of the Group s equity. The disposal of such shares does not impact net income for the current due more than twenty months after the reporting date they are discounted using a discount rate determined by reference to the average government bond yields at the reporting date. The Group also participates in a defined contribution plan, under which the Group has committed to contribute a certain percentage (15% to 20% in 2010) of the contribution made by employees choosing to participate in the plan. Contributions made by the Group on defined contribution plans are charged to expenses when incurred. Contributions are also made to the Government Pension fund at the statutory rates in force during the year. Such contributions are expensed as incurred. expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grantdate fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. year and is recognised as a change in the shareholders equity of the Group. Dividend distributions by the Company are recorded net of the dividends related to treasury shares. Income tax The income tax rate for industrial enterprises in Russia is 20%. Deferred income taxes Deferred tax assets and liabilities are calculated in respect of temporary differences in accordance with IAS 12 Income Taxes. IAS 12 requires the application of the balance sheet liability method for financial reporting and accounting for deferred income taxes. Deferred income taxes are provided for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are offset when 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. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply during the period when the asset is to be realised or the liability settled, based on tax rates that have been enacted or substantively enacted as at the reporting date. As at 31 December 2010 deferred tax assets and liabilities have been measured at 20%. Deferred tax is charged or credited to the consolidated statement of income, except when it relates to items credited or charged directly to other comprehensive income, in which case the deferred tax is dealt with in equity. Dividends Dividends are recognised at the date they are declared by the shareholders at a general meeting. Retained earnings legally distributable by the Company are based on the amounts Earnings per share Earnings per share are calculated by dividing the profit for the period attributable to ordinary shareholders by the weighted average Contingencies Contingent liabilities are not recognised in the consolidated financial statements unless they arise as a result of a business combination. They are disclosed unless the possibility of an outflow of resources embodying economic available for distribution in accordance with applicable legislation and reflected in the statutory financial statements. These amounts may differ significantly from the amounts presented in accordance with IFRS. number of ordinary shares outstanding during the period. The Group does not have any potentially dilutive equity instruments. benefits is remote. Contingent assets are not recognised in the consolidated financial statements but are disclosed when an inflow of economic benefits is probable. Employee benefits The Group makes certain payments to employees on retirement or when they otherwise leave the employment of the Group. These obligations, which are unfunded, represent obligations under a defined benefit

62 4.5. Consolidated Financial Statements 3. Significant estimates The key assumptions concerning the future, and other key sources of estimation uncertainties at the reporting date, that have a significant risk of causing Provisions Provisions are made when any probable and quantifiable risk of loss Useful lives of property, plant and equipment In reporting property, plant and equipment and intangible assets Frequent flyer programme The Group has estimated the liability pertaining to air miles earned by Aeroflot Bonus programme (Note 2) members. The estimate has been made based on Compliance with tax legislation As discussed further in Note 40 compliance with tax legislation, particularly in the Russian Federation, is subject to a significant degree of interpretation and can be routinely challenged by the tax a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. attributable to disputes is judged to exist. an assessment of the useful economic life is made at least once a year. the statistical information available to the Group and reflects the expected air mile utilisation pattern after the reporting date multiplied by their assessed fair value. authorities. The management records a provision in respect of its best estimate of likely additional tax payments and related penalties which may be payable if the Group s tax compliance is challenged by the relevant tax authorities. Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding classification and measurement of financial liabilities was published in October The remaining parts of the standard are expected to be issued during the first half of The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group s consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early. Amendment to IAS 12 Income taxes Deferred Tax: Recovery of Underlying Assets. The amendment introduces an exception to the current measurement principles for deferred tax assets and liabilities arising from investment property measured using the fair value model in accordance with IAS 40 Investment Property. The exception also applies to investment property acquired in a business combination accounted for in accordance with IFRS 3 Business Combinations provided the acquirer subsequently measures the assets using the fair value model. In these specified circumstances the measurement of deferred tax liabilities and deferred tax assets should reflect a rebuttable presumption that the carrying amount of the underlying asset will be recovered entirely by sale unless the asset is depreciated or the business model is to consume substantially all the asset. The amendment is effective for periods beginning on or after 1 January 2012 and is applied retrospectively. Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January The Group has not yet analysed the likely impact of the improvements on its financial position or performance. 4. Adoption of new or revised standards and interpretations A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2010, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group s operations. The Group plans to adopt these pronouncements when they become effective. Revised IAS 24 Related Party Disclosures (2010) introduces an exemption from the basic disclosure requirements in relation to related party disclosures and outstanding balances, including commitments, for governmentrelated entities. Additionally, the standard has been revised to simplify some of the presentation guidance that was previously non-reciprocal. The revised standard is to be applied retrospectively for annual periods beginning on or after 1 January The Group has not yet determined the potential effect of the amendment. Amendment to IAS 32 Financial Instruments: Presentation Classification of Rights Issues clarifies that rights, options or warrants to acquire a fixed number of an entity s own equity instruments for a fixed amount are classified as equity instruments even if the fixed amount is determined in foreign currency. A fixed amount can be determined in any currency provided that entity offers these instruments pro rata to all of the existing owners of the same class of its own non-derivative equity instruments. The amendment is applicable for annual periods beginning on or after 1 February The amendment is expected to have no impact on the Group s consolidated financial statements. Amended IFRS 7 Disclosures Transfers of Financial Assets introduces additional disclosure requirements for transfers of financial assets in situations where assets are not derecognised in their entirety or where the assets are derecognised in their entirety but a continuing involvement in the transferred assets is retained. The new disclosure requirements are designated to enable the users of financial statements to better understand the nature of the risks and rewards associated with these assets. The amendment is effective for annual periods beginning on or after 1 July IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January The new standard is to be issued in phases and is intended ultimately to replace International Financial Reporting 5. Traffic revenue Scheduled passenger flights 3, ,512.4 Cargo Charter passenger flights , , Other revenue Airline revenue agreements Refuelling services Ground handling and maintenance Hotel revenue Catering services Other revenue

63 4.5. Consolidated Financial Statements 7. Operating costs Aircraft and traffic servicing Operating lease expenses Maintenance Sales and marketing Administration and general expenses Passenger services Communication expenses Customs duties Insurance expenses Other expenses Operating cost excluding aircraft fuel 2, ,658.5 Aircraft fuel Staff costs 2, , Wages and salaries Pension costs Social security costs Pension costs include compulsory payments to the Russian Federation Pension Fund ( RFPF ), contributions to a non-government pension fund under a defined contribution plan, and an increase in the net present value of the future benefits which the Group expects to pay to its employees upon their retirement under a defined benefit pension plan, as follows: Payments to the RFPF Defined contribution pension plan Defined benefit pension plan Finance income and costs Finance income: Interest income on bank deposits Gain on disposal of investments Finance income Finance costs: Interest expense on customs duty discounting (12.9) (16.6) Interest expense on short and long-term (115.2) (15.6) borrowings Foreign exchange loss (19.7) (12.0) Interest expense on finance lease liabilities (11.7) (8.9) Finance costs (159.5) (53.1) 10. Other non-operating expenses, net Fines and penalties received from suppliers Accounts payable write-off Insurance compensation received Other income/(expense) 0.9 (14.1) Accounts receivable write-off (7.5) (2.4) Loss on disposal of assets held for sale (Note 17) (16.8) - Non-recoverable VAT write-off (63.3) (21.4) (18.3) (28.6) 11. Income tax Current income tax charge Deferred income tax (benefit)/expense (8.6) Income before taxation for financial reporting purposes is reconciled to taxation as follows: Profit before income tax Tax rate 20% 20% Theoretical tax at rate applicable for each jurisdiction (70.7) (41.2) Tax effect of items which are not deductible or assessable for taxation purposes: Non-taxable income Non-deductible expenses (68.4) (70.4) Unrecognised current year tax losses (11.1) (7.8) Over/(under) provided in prior years 39.2 (7.8) (100.3) (120.0) The Group did not recognise deferred tax assets of USD 31.1 million (2009: USD 28.5 million) related to CJSC Aeroflot Cargo s tax losses as the subsidiary is not expected to earn sufficient taxable profits in the foreseeable future against which the unused tax losses can be utilised by the Group. These tax losses expire between 2017 to During the year the Group revised the deductibility of certain expenses related to the three-year period ended 31 December Consequently, the resulting tax saving has been used to reduce the current year s tax liability

64 4.5. Consolidated Financial Statements 2010 Movement for year 2009 Movement for year 2008 Tax effects of temporary differences: Tax loss carry-forwards (i) Accounts receivable 1.3 (2.9) 4.2 (0.2) 4.4 Property, plant and equipment 1.8 (1.1) 2.9 (0.1) 3.0 Accounts payable (11.6) 26.5 Financial instrument Deferred tax assets before tax set off Tax set off (57.8) (9.3) (48.5) (2.9) (45.6) Deferred tax assets after tax set off Property, plant and equipment (72.4) (3.6) (68.8) (14.0) (54.8) Customs duties related to aircraft operation leases (29.0) (8.1) (20.9) (10.3) (10.6) Long-term investments (5.2) (1.2) (4.0) 0.1 (4.1) Accounts receivable (4.8) (0.3) (4.5) (4.5) - Accounts payable (0.4) (0.1) (0.3) 0.5 (0.8) Deferred tax liabilities before tax set off (111.8) (13.3) (98.5) (28.2) (70.3) Tax set off Deferred tax liabilities after tax set off (54.0) (4.0) (50.0) (25.3) (24.7) 2010 Movement for year 2009 Movement for year 2008 Movement for the year, net 9.3 (21.0) Less: Deferred tax recognised directly in equity (ii) (iii) 4.1 (0.4) Assets classified as held for sale (iv) (4.2) - Effect of translation to presentation currency (0.6) 0.6 Deferred tax benefit/(expense) for the year 8.6 (20.8) (i) Tax losses carried forward expire between 2017 to 2020; (ii) The Group sold shares in France Telecom, which were classified as long-term investments available-for-sale. Gains and losses arising from changes in fair value of the France Telecom shares were recognised directly in the consolidated statement of other comprehensive income, net of deferred tax of USD 1.7 million; (iii) Deferred tax asset in respect of the change in the fair value of the hedge of USD 2.4 million has been recognised in these consolidated financial statements; (iv) In 2010 the Group decided to sell subsidiaries OJSC Insurance Company Moscow and CJSC Nordavia (Note 17). In 2010 deferred tax expense related to these subsidiaries amounted to USD 4.2 million; A deferred tax liability in relation to temporary differences of USD 21.3 million (31 December 2009: deferred tax assets of USD 21.4 million) relating to investments in subsidiaries has not been recognised in 12. Cash and cash equivalents the consolidated financial statements as the Group is able to control the timing of reversal of the difference, and reversal is not expected in the foreseeable future Bank deposits denominated in Russian roubles Bank deposits denominated in US dollars Bank deposits denominated in Euros Bank accounts denominated in Russian roubles Bank accounts denominated in US dollars Bank accounts denominated in Euros Bank accounts denominated in other currencies Cash in transit The Group s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note 36. Most of the funds are held at state owned Russian banks such as Sberbank of the Russian Federation, Vneshtogbank 13. Short-term investments and Vnesheconombank and well known multinational banks such as the Royal Bank of Scotland, JP Morgan, BSGV, Natixis Bank. All funds are accessible by the Group Held-for-trading investments: Corporate and government bonds Corporate shares Other short-term investments: Bank deposits with original maturities exceeding 90 days Promissory notes from third parties Other short-term investments Corporate and government bonds represent bonds denominated in Russian roubles issued by the Government of the Russian Federation and major Russian companies with yield to maturity rates of 5.5% to 16.4% per annum as at 31 December The Group s investments in bonds and shares are reflected at market values at the end of the period based on the last traded prices obtained from the Moscow Interbank Currency Exchange ( MICEX ). Corporate shares are publicly traded shares of Russian companies with readily available market prices. As at 31 December 2010 the interest rates on bank deposits denominated in Russian roubles, with original maturities exceeding 90 days, were from 2.0% to 3.8% per annum (31 December 2009: from 3.1% to 14.0%% per annum)

65 4.5. Consolidated Financial Statements 14. Accounts receivable and prepayments Trade accounts receivable VAT and other taxes recoverable Prepayments to suppliers Income tax prepaid Deferred customs duties related to aircraft operating leases Other receivables Accounts receivable and prepayments, gross Impairment allowance for bad and doubtful accounts (36.3) (26.5) Deferred customs duties of USD 38.8 million (31 December 2009: USD 44.5 million) relate to the current portion of customs duties incurred on importation of aircraft under operating leases. These customs duties are expensed in the consolidated statement of income over the term of the operating lease. The noncurrent portion of the deferred customs duties is disclosed in Note 20. As at 31 December 2010 sufficient impairment allowance has been made against accounts receivable and prepayments. The movement in the Group s impairment allowance for bad and doubtful debts is as follows: Impairment allowance As at 1 January Increase in impairment allowance for bad and doubtful accounts 7.1 Accounts receivable written off during the year as uncollectible (2.4) Foreign currency translation (0.9) As at 31 December Increase in impairment allowance for bad and doubtful accounts 13.0 Accounts receivable written off during the year as uncollectible (7.5) Foreign currency translation 4.3 As at 31 December Expendable spare parts and inventories Expendable spare parts Fuel Other inventories Expendable spare parts and inventories, gross Impairment allowance for obsolete inventories (0.3) (3.5) Business combination On 31 December 2010 the Company acquired an additional 33.33% ownership interest in CJSC Aerofirst, a duty-free goods retailer, for a total cash consideration of approximately USD 16.4 million increasing its total ownership interest to 66.67%. If the acquisition had occurred on 1 January 2010, management estimates that consolidated revenue would have been USD 4,403.2 million, and consolidated profit for the year would have been USD million. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1 January The identifiable assets acquired and the liabilities assumed on the date of acquisition were as follows: 2010 Cash and cash equivalents 3.5 Trade receivables 1.6 Other receivables 0.5 Inventories 16.1 Property, plant and equipment 19.0 Total assets 40.7 Trade payables 9.1 Other payables and accruals 1.5 Deferred tax liability 0.2 Total liabilities 10.8 Net fair value of identifiable assets 29.9 This acquisition was accounted using the purchase method in accordance with IFRS 3 Business Combinations. The fair value of the acquired property, plant and equipment was determined based on the Goodwill Goodwill was recognised as a result of the acquisition as follows: results of an independent valuation by professional appraisers. The acquired business contribution to the Group s consolidated income during the year ended 31 December 2010 is negligible Total consideration transferred 16.4 Fair value of interest in acquiree before acquisition 10.0 Less: Fair value of % share identifiable net assets (19.9) Goodwill 6.5 The remeasurement to fair value of the Group s existing 33.33% ownership interest in the acquiree resulted in a gain of USD 4.4 million (USD 10.0 million less USD 5.6 million carrying value of equityaccounted investment at acquisition date), which has been recognised as finance income in the consolidated statement of income. The goodwill is attributable mainly to the synergies expected to be achieved from integrating the company into the Group s existing business. None of the goodwill recognised is expected to be deductible for income tax purposes

66 4.5. Consolidated Financial Statements 17. Assets and liabilities classified as held for sale CJSC Nordavia OJSC Insurance Company Moscow Total Tupolev fleet Property, plant and equipment 14.3* Inventory Foreign currency translation related to reserve Accounts receivable and prepayments Aircraft lease deposits Deferred tax assets Other assets Total assets of disposal group held for sale Accounts payable and accrued liabilities (31.6) (17.7) (49.3) - Unearned transportation revenue (22.9) - (22.9) - Borrowings (34.1) - (34.1) - Other liabilities (6.3) - (6.3) - Total liabilities of disposal group held for sale (94.9) (17.7) (112.6) - Net assets/(liabilities) of disposal group held for sale (49.6) 8.5 (41.1) 27.3 * Includes Tupolev fleet of CJSC Nordavia of USD 1.3 million. As at 31 December 2009 the Group made a decision to discontinue operating the majority of its Tu-134 and Tu-154 aircraft fleet. In 2010 these assets were sold for USD 9.0 million, resulting in a loss on disposal of USD 16.8 million (comprising loss on disposal of assets USD 27.6 million and release of impairment reserve USD 10.8 million made for this assets in previous years), recognised in the 18. Equity accounted investments Voting rights consolidated statement of income (Note 10). In 2010 the Group s management decided to sell two subsidiaries CJSC Nordavia and OJSC Insurance Company Moscow and classified them as a disposal group held for sale. These are presented separately in the consolidated statement of financial position Carrying value Voting rights Carrying value LLC Airport Moscow 50.0% % 4.3 CJSC Jetalliance East 49.0% % - CJSC AeroMASH AB 45.0% % 1.6 CJSC Aerofirst % 4.8 CJSC TZK Sheremetyevo 31.0% % 13.3 Other Various 0.1 Various The summarised financial information in respect of the Group s affiliates accounted for by using the equity method based on their respective financial statements prepared for the years ended 31 December 2010 and 2009 is set out below: Total assets Total liabilities (110.5) (98.9) Net assets Group s carrying amount of equity accounted investments Revenue Profit for the year Group s share of profits for the year in equity accounted investments Long-term investments Available-for-sale investments: Shares in France Telecom Mutual investment funds SITA Investment Certificates Other long-term investments: Loans issued and promissory notes from related parties Loans issued and promissory notes from third parties Other Other non-current assets Deferred customs duties related to aircraft operating leases VAT recoverable Other VAT recoverable includes USD 74.5 million (31 December 2009: USD million) related to the acquisition of aircraft

67 4.5. Consolidated Financial Statements 21. Prepayments for aircraft Prepayments for aircraft relate to cash advances made in relation to twenty-two Boeing B-787 (delivery: ), twenty-two Airbus A-350 (delivery: ), twenty Sukhoi Superjet-100 (SSJ) (delivery: ) aircraft which are expected to be used under operating 22. Property, plant and equipment Owned aircraft and engines Leased aircraft and engines lease agreements and eight Airbus A-321 (delivery: ), eight Airbus A-330 (delivery 2012), eight Boeing B-777 (delivery: ) aircraft which are expected to be used under finance lease agreements. Land and buildings Plant, equipment and other Construction in progress (i) Total Cost 1 January ,566.0 Additions Capitalised overhaul costs Disposals (241.6) - (0.1) (15.5) (172.6) (429.8) Transfers (118.7) - Transfers from leased assets to owned assets 3.3 (3.3) Foreign currency translation (24.7) (8.0) (1.4) (2.3) (21.2) (57.6) 31 December , ,851.2 Additions (ii) Capitalised overhaul costs Disposals (iii) (58.4) - (0.5) (15.2) 0.2 (73.9) Transfers (iv) (873.2) - Transfers from leased assets to owned assets 0.1 (0.1) Transfers to assets held for sale (v) (3.6) (19.9) (5.1) (3.8) (0.4) (32.8) Foreign currency translation (2.1) (8.6) (5.0) (3.4) (5.3) (24.4) 31 December , ,956.4 Owned aircraft and engines Leased aircraft and engines Land and buildings Plant, equipment and other Construction in progress (i) Accumulated depreciation 1 January 2009 (334.9) (191.3) (88.1) (152.9) (24.5) (791.7) Charge for the year (50.4) (60.4) (9.1) (22.3) - (142.2) Impairment Disposals Foreign currency translation December 2009 (175.8) (248.8) (94.8) (160.0) (4.0) (683.4) Charge for the year (22.7) (85.3) (27.5) (42.9) - (178.4) Impairment Disposals (iii) 55.7 (0.2) Transfers to assets held for sale (v) Foreign currency translation December 2010 (137.6) (319.1) (120.1) (187.6) (4.0) (768.4) Net book value 31 December ,167.8 Total 31 December ,188.0 (i) Construction in progress mainly includes capital expenditure incurred in relation to the construction of the new Sheremetyevo-3 terminal of USD 25.0 million (2009: USD million); (ii) The 2010 additions mainly relate to addition of two Airbus A-321 aircraft with a carrying value of USD million received under finance lease agreements; (iii) The 2010 disposals mainly relate to a disposal of capitalised engine overhauls with a carrying value of USD 0.3 million comprising USD 47 million of historical cost less USD 46.7 million of accumulated depreciation; (iv) Transfer from construction in progress mainly includes capital expenditures of USD million related to the new Sheremetyevo-3 terminal; (v) Transfer to assets held for sale relates to property, plant and equipment of USD 13.2 million of CJSC Nordavia and OJSC Insurance Company Moscow comprising USD 32.8 million of historical cost less USD 19.6 million of accumulated depreciation (Note 17). The total amount of interest capitalised in 2010 amounted to USD 2.5 million (2009: USD 64.8 million)

68 4.5. Consolidated Financial Statements 23. Intangible assets Software Licences Development in progress Cost 1 January Additions Transfers (2.5) - Foreign currency translation 0.1 (0.1) December Additions Disposal (0.7) - - (0.7) Transfers (0.7) - Foreign currency translation (0.2) - (0.1) (0.3) 31 December Accumulated amortisation 1 January 2009 (1.7) - - (1.7) Charge for the year (2.5) (0.6) - (3.1) Foreign currency translation (0.2) - - (0.2) 31 December 2009 (4.4) (0.6) - (5.0) Charge for the year (5.3) (0.6) - (5.9) Foreign currency translation December 2010 (9.6) (1.2) - (10.8) Net book value 31 December December Derivative instruments The Group has entered into crosscurrency fixed-to-fixed interest rate swap agreements with two major banks operating in Russia to hedge a portion of its euro denominated revenues from potential future RUB/EUR exchange rate fluctuations. The hedge instrument has been assessed as being effective for IAS 39 purposes. The change in the fair value of the hedge instrument amounted to a loss of USD 6.7 million and has been reported in other comprehensive income. A corresponding deferred tax assets of USD 2.4 million has been recognised in these consolidated financial statements and reported in other comprehensive income. Total The fair value has been determined using a valuation model with market observable parameters (level 2). In December 2010 the Group entered into an agreement with a Russian bank to hedge a portion of its fuel costs (less than 15%) from potential future price increases. In accordance with the terms of the agreement the Group will be compensated by the bank for the excess between the actual price and the ceiling price specified in the agreement, whilst the Group has agreed to compensate the bank the shortfall between the actual prices and the floor price specified in the agreement. 25. Accounts payable and accrued liabilities Trade accounts payable VAT payable on leased aircraft Staff related liabilities Customs duties payable on leased aircraft Advances received (other than unearned transportation revenue) Other taxes payable Other liabilities related to frequent flyer programme (Note 27) Income tax payable Merchandise credits Dividends payable Other payables As at 31 December 2010 accounts payable and accrued liabilities include the short-term portion of VAT of USD million (31 December 2009: USD million) and customs duties of USD 57.7 million (31 December 2009: USD 89.8 million) relating to imported leased aircraft, which are payable in equal monthly instalments over a thirty-fourmonth period from the date these assets were cleared through customs. The longterm portion of VAT payable and customs duties of USD 71.4 million (31 December 2009: USD million) and USD 32.9 million (31 December 2009: USD 97.6 million), respectively, relating to the leased aircraft are disclosed in Note 32. Staff related payables primarily include salaries and social contribution liabilities of USD 50.5 million (31 December 2009: USD 29.4 million) and the unused vacation accrual of USD 42.1 million (31 December 2009: USD 35.1 million). The Group s exposure to currency and liquidity risk related to accounts payable and accrued liabilities is disclosed in Note Unearned transportation revenue As at 31 December 2010 unearned transportation revenue of USD million (31 December 2009: USD million) and cargo transportation revenue million (31 December 2009: USD of USD 1.2 million (31 December 2009: million) comprised passenger nil). transportation revenue of USD Deferred revenue related to frequent flyer programme Deferred revenue related to Aeroflot Bonus as at 31 December 2010 has been assessed in accordance with IFRIC 13 Customer Loyalty Programmes. The amount represents the number of points earned but unused by the Aeroflot Bonus programme members estimated at fair value (Note 3) Deferred revenue related to frequent flyer programme, current Deferred revenue related to frequent flyer programme, non-current Other current liabilities related to frequent flyer programme (Note 25) Other non-current liabilities related to frequent flyer programme (Note 32)

69 4.5. Consolidated Financial Statements 28. Provisions As at 1 January Additional provision Release of provision - (21.5) Foreign exchange loss, net (0.1) (1.3) As at 31 December Analysed as: Current liabilities Non-current liabilities The effective annualised interest rate on the total outstanding balance in 2010 equalled to 12.5% per annum. The loans are secured by a property, plant, equipment and inventory with a carrying value of USD 3.1 million and are from a related party (Note 37); (iv) The balance as at 31 December 2010 represents loans of USD 6.1 million issued at interest rates of between 7.25% to 8.6% per annum. The effective annualised interest rate related to these loans in 2010 was 7.5 % per annum. The loans are unsecured and are from a related party (Note 37); (v) The balance as at 31 December 2010 represents a loan of USD 4.6 million issued at an interest rate of 10.0% per annum. The loan is unsecured; (vi) The balance as at 31 December 2010 represents a loan of USD 4.5 million issued at an interest rate of 10.0% per annum. The loan is unsecured; (vii) The balance as at 31 December 2010 represents loans of USD 3.8 million issued at an interest rate of 10.0% per annum. The loan is unsecured; (viii) The balance as at 31 December 2010 represents a loan which is recognised as liabilities associated with assets held for sale (Note 17). The loan has been issued at an interest rate of MosPrime plus 5% per annum. The loan has been borrowed to finance the Group s working capital requirements. The effective annualised interest rate in 2010 was equal to 15.1% per annum. The loan is unsecured. The Group is a defendant in various legal actions. The provision represents management s best estimate of the Group s probable losses relating to various actual and potential legal claims. The Group also provides against tax contingencies and the related interest and penalties based on management s estimate of the amount of the additional taxes that may become due. 30. Finance lease liabilities The Group leases aircraft under finance lease agreements. Leased aircraft are listed in Note 1 above: 29. Short-term borrowing Loans denominated in US dollars: Vneshtorgbank - short term portion (Note 31) Vnesheconombank - short term portion (Note 31) Natixis (i) Other short-term bank loans Bonds denominated in Russian roubles, short-term portion (Note 31) Loans denominated in Russian roubles: Sberbank of the Russian Federation (ii) Sberbank of the Russian Federation (iii) (Note 17) Gazprombank (iv) Promsvyazbank (v) Alfa-bank (vi) MBRR (vii) Raiffeisenbank (viii) (Note 17) Other short-term bank loans (i) The balance as at 31 December 2009 represented a loan of USD 15.0 million issued at an interest rate of LIBOR plus 5.0% per annum. The effective annualised interest rate related to this credit in 2010 was equal to 5.3% per annum. During 2010 this credit line was repaid in full. The loan was unsecured; (ii) The balance as at 31 December 2009 represented a credit line of USD 66.3 million issued at an interest rate of 11.5% per annum. The effective annualised interest rate related to this credit line in 2010 was equal to 11.7% per annum. During 2010 this credit line was repaid in full. The loan was unsecured and was from a related party (Note 37); (iii) The balance as at 31 December 2010 represents loans which are recognised as liabilities associated with assets held for sale (Note 17). The loans have been issued at interest rates of 11.0% to 12.75% per annum Total outstanding payments Finance charges (47.5) (49.5) Principal outstanding Representing: Current lease liabilities Non-current lease liabilities Due for repayment: On demand or within one year In two to five years After five years Principal Finance changes Interest unpaid as at 31 December 2010 amounted to approximately USD 3.0 million (31 December 2009: USD 3.2 million) and is included in other payables (Note 25). In 2010 the effective interest rate on these leases was approximately 1.5% per annum (2009: 1.1% per annum). The Group s aircraft leases are subject to both positive and negative covenants. Total payments Principal Finance changes Total payments In accordance with those covenants, the Group maintains insurance coverage for its leased aircraft. The Group s aircraft leased under finance lease agreements are subject to a registered debenture to secure liabilities in relation to their lease. The Group is in compliance with such financial covenants as at 31 December

70 4.5. Consolidated Financial Statements 31. Long-term borrowings Loans denominated in US dollars: Vnesheconombank (i) Vneshtorgbank (ii) Vnesheconombank (iii) Accor Other long-term loans Bonds denominated in Russian roubles, long-term portion (Note 29) (iv) Loans denominated in Russian roubles: Other long-term loans , (i) The balance as at 31 December 2010 relates to a loan of USD million borrowed at an interest rate of 9.0% per annum. The agreed interest rate will be effective until 20 August 2018 after which the interest rate will be LIBOR plus 4% per annum. The amount was borrowed in order to finance the construction of the new Sheremetyevo-3 terminal. The sublease of the land is pledged as collateral under a primary loan agreement. The loan is from a related party (Note 37); (ii) The balance as at 31 December 2010 represents an outstanding amount of USD million on a credit line issued by Vneshtorgbank at a fixed interest rate of 7.75% per annum. The amount was borrowed in order to finance the construction of the new Sheremetyevo-3 terminal. Property, plant and equipment with a carrying value of USD million and the sublease of land are pledged as collateral. The loan is from a related party (Note 37); (iii) The balance as at 31 December 2010 represents an outstanding balance of USD million on a credit line issued by Vnesheconombank at a fixed interest rate of 10.56% per annum. The amount was borrowed in order to finance the construction of the new Sheremetyevo-3 terminal. Property, plant and equipment with a carrying value of USD million and the sublease of land are pledged as collateral. The loan is from a related party (Note 37); (iv) The balance as at 31 December 2010 relates to debenture bonds of USD million borrowed at an interest rate of 7.75% per annum. Yield to maturity as at the year end is 7.44 %. The debenture bonds are unsecured. The borrowings are repayable as follows: On demand or within one year In two to five years After five years , Less: amounts due for settlement within 12 months (43.4) (30.2) Amounts due for settlement after 12 months 1, Other non-current liabilities VAT payable on leased aircraft Custom duties payable on leased aircraft Other liabilities related to frequent flyer programme (Note 27) Defined benefit pension obligation, non-current portion Other non-current liabilities As at 31 December 2010 other noncurrent liabilities include the long-term portion of VAT of USD 71.4 million (31 December 2009: USD million) and customs duties of USD 32.9 million (31 December 2009: USD 97.6 million) relating to imported leased aircraft, which are payable in equal monthly instalments over a thirty-four-month period from the date these assets are cleared through customs. 33. Share capital Number of shares authorised and issued Customs duties payable on leased aircraft have been discounted using a discount rate between 9.0% and 15.0%. The short-term portion of the VAT payable and the customs duties of USD million (31 December 2009: USD million) and USD 57.7 million (31 December 2009: USD 89.8 million), respectively, relating to the imported leased aircraft are disclosed in Note 25. Number of treasury shares Number of shares outstanding Ordinary shares of one Russian rouble each: As at 31 December ,110,616,299 (11,040,970) 1,099,575,329 As at 31 December ,110,616,299 (81,070,997) 1,029,545,302 Ordinary shareholders are entitled to one vote per share. During 2010 the number of treasury shares held by the Group increased by 70,030,027. The Company s shares are listed on the Russian Trade System ( RTS ) and the Moscow Interbank Currency Exchange ( MICEX ) and on 31 December 2010 were traded at USD 2.61 per share. On 16 May 2011 were traded at USD 2.43 per share. The Company launched a Level 1 Global Depositary Receipts (GDR s) programme in December The Company signed a depositary agreement with Deutsche Bank Group, allowing the Company s shareholders to swap their shares for GDR s, which trade over-the-counter on US and European markets. The swap ratio was established at 100 shares per GDR. In accordance with the depositary agreement the total volume of the GDR s of the Company cannot exceed 20% of the Company s share capital. In 2001 the Company s GDR s were listed on the New Europe Exchange ( NEWEX ) in Vienna and after closing of this stock exchange the GDR s were transferred to the third segment of the stock exchange in Frankfurt. On 31 December 2010 and 16 May 2011 the GDR s were trading at USD and USD each, respectively. During 2010, the Group initiated a share option programme for its key executives and employees. The program will run for three years and will be exercised in three tranches granted over the three-year period from 1 January 2011 through to 31 December The vesting requirement of the share option programme is the continuous employment of participants during the vesting period. The fair value of services received in return for the share option granted is measured by reference to the fair value of the share option granted. The estimate of the fair value of the services received is determined using the Black-Scholes model. The following

71 4.5. Consolidated Financial Statements variables have been used in the model: the share price at the grant date of USD 1.9, the expected volatility of 40% and a risk free interest rate of 5%. 33,245,889 of ordinary paid-in shares have been allocated to the programme. In Dividends At the annual shareholders meeting held in 19 June 2010 the shareholders approved dividends in respect of 2009 in the amount of Russian roubles per ordinary share (1.1 US cent). The 35. Operating segments The Group has four reportable segments, as described below, which are the Group s strategic business units. The strategic business units offer different products and services, and are managed separately because they require different technology and marketing strategies. For each of the strategic business units, the Group s General Director reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group s reportable segments: Airline domestic and international passenger and cargo air transport and other airline services; Catering includes preparation of food and beverages for air travel; Hotels includes operating a hotel; Airport terminal includes operating the Sheremetyevo-3 terminal. expenses related to the programme amounted to USD 12.7 million. These have been recognised as wages and salaries in the consolidated statement of income (Note 8). outstanding balance of the dividends payable will be transferred as soon as the relevant shareholders bank details are collected. There are also other operating segments. However, none of these segments meet any of the quantitative thresholds for determining reportable segments in 2010 and Information regarding the results of each reportable segment is included below. Performance is measured based on segment sales revenue and operating profit, as included in the internal management reports that are reviewed by the Group s General Director. Segment sales revenue and operating profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Intersegment pricing is determined on an arm s length basis. Total Group Airline Catering Hotels Terminal Other 2010 External sales 4, ,319.3 Inter-segment sales (204.9) - Total revenue 4, (204.9) 4,319.3 Operating profit/(loss) (13.0) Finance income 20.8 Finance costs (159.5) Share of income in associates Non-operating expenses, net (18.3) Profit before income tax Income tax (100.3) Profit for the year Airline Catering Hotels Terminal Other Eliminations Eliminations Total Group As at 31 December 2010 Segment assets 3, (730.5) 4,411.8 Associates Unallocated assets 89.2 Consolidated total assets 4,525.9 Segment liabilities (90.7) Unallocated liabilities 2,465.1 Consolidated total liabilities 3,371.0 Capital expenditure (Note 22) Depreciation and amortisation Non-recoverable VAT (Note 10) External sales 3, ,345.9 Inter-segment sales (84.4) - Total revenue 3, (84.4) 3,345.9 Operating profit/ (loss) (18.0) (1.2) 1, Financial income 2.8 Financial expenses (53.1) Share of income in associates Non-operating expenses, net (28.6) Profit before income tax Income tax (120.0) Profit for the year 85.8 As at 31 December 2009 Segment assets 3, (277.3) 3,926.9 Associates Unallocated assets 40.9 Consolidated total assets 3,

72 4.5. Consolidated Financial Statements Airline Catering Hotels Terminal Other Total Group Eliminations Segment liabilities (53.2) Unallocated liabilities 2,313.8 Consolidated total liabilities 2,979.5 Capital expenditure (Note 21) Depreciation and amortisation Nonrecoverable VAT (Note 10) Scheduled passenger revenue: International flights from Moscow to: Europe Asia North America Other International flights to Moscow from: Europe Asia North America Other Domestic flights 1, Other international flights , ,512.4 Cargo revenue: International flights from Moscow to: Europe Asia North America Other International flights to Moscow from: Europe Asia North America Other Other international flights Domestic flights Risk connected with financial instruments Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group s approach to managing liquidity is to ensure that, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. The Group entities utilise a detailed budgeting and cash forecasting process to ensure their liquidity is maintained at the appropriate level. The Group has entered into various agreements with a number of banks in Russia whereby the banks have issued facilities to guarantee the repayment of the Group s commitments related to the existing aircraft lease agreements. As at 31 December 2010 the total value of the guarantees issued amounted to USD million (31 December 2009: USD million). The following are the contractual maturities of financial liabilities, excluding estimated interest payments and the impact of netting agreements: Average interest rate Contractual Effective 31 December 2010 Non-derivative financial liabilities: 0-12 months 1-2 years 2-5 years Over 5 years Total Loans in US dollars 8.9% 8.9% Loans in Russian roubles 9.2% 9.2% Bonds 7.8% 7.4% Finance lease liabilities 1.5% 1.5% Customs duties 0% 8.0% Trade and other payables (excluding customs duties) 0% 0% , December 2009 Non-derivative financial liabilities: Loans in US dollars 8.8% 8.8% Loans in Russian roubles 13.2% 13.2% Finance lease liabilities 1.1% 1.1% Customs duties 0% 9.9% Trade and other payables (excluding customs duties) 0% 0% ,

73 4.5. Consolidated Financial Statements Guarantees are disclosed in Note 37. Customs duties represent discounted liabilities on custom duties regarding finance and operation leases of aircraft. The effective annualised interest rate is impacted by the date of adding a new Currency risk The Group is exposed to currency risk in relation to sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of aircraft to the fleet of the Group. As at 31 December 2010 the Group had USD 86.4 million (31 December 2009: USD 81.7 million) available in relation to lines of credit granted to the Group by various lending institutions. the Group entities, which are primarily the Russian roubles. The currencies in which these transactions are primarily denominated are Euro and USD. The Group s exposure to foreign currency risk was as follows based on notional amounts: In millions of USD USD EUR Other Total USD EUR Other Total Cash and cash equivalents Accounts receivable and prepayments, net Other noncurrent assets , Accounts payable and accrued liabilities Finance lease liabilities (current portion) Finance lease liabilities (non-current portion) Short-term borrowings Long-term borrowings Other noncurrent liabilities , , , ,792.0 Net assets/ (liabilities) (823.2) (720.6) (1,252.1) (1,166.1) In addition, payments of approximately USD 8.0 million, USD 8.0 million, USD 8.0 million, USD 8.0 million and USD million denominated in euro are expected to be take place in April 2011, October 2011, April 2012, October 2012 and April 2013, respectively, in relation to the hedge instrument described in Note 24. A 20% strengthening or weakening of the Russian rouble against the following currencies as at 31 December 2010 and 31 December 2009, respectively, would have increased/(decreased) profit before income tax by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant Effect on profit before income tax Percent against RUB Effect on profit before income tax Percent In millions of USD against RUB Increase in the rate of exchange to rouble USD 20% (164.6) 20% (250.4) Euro 20% % 4.4 Other currencies 20% % 12.8 Decrease in rate of exchange to rouble USD 20% % Euro 20% (4.4) 20% (4.4) Other currencies 20% (16.1) 20% (12.8) Interest rate risk Changes in interest rates impact primarily loans and borrowings by changing either their value (fixed rate debt) or their future cash flows (variable rate debt). At the time of raising new loans or borrowings management uses judgment to decide whether it believes that a fixed or variable interest rate would be more favourable to the Group over the expected period until maturity. As at 31 December 2010 and 31 December 2009 the interest rate profiles of the Group s interest-bearing financial instruments were: Carrying amount Fixed rate instruments Financial assets Financial liabilities (1,334.9) (977.9) (824.6) (963.8) Variable rate instruments Financial assets Financial liabilities (712.2) (733.0) (711.7) (732.4) During the year some of the Group s loans bore variable interest rates (Note 29 and Note 31). If the variable interest rates on borrowings in 2010 were 30% greater or lower than the actual interest rates for the year, with all other variables held constant, interest expense would not have changed significantly (2009: USD 0.9 million). The interest component of the Group s finance leases primarily accrues at variable interest rates. If in 2010 those rates were 30% greater or lower than what they actually were, with all other variables held constant, interest expense on finance leases for the year would have been different by USD 0.7 million (2009: USD 1.1 million)

74 4.5. Consolidated Financial Statements Fuel risk The results of the Group s operations can be significantly impacted by changes in the price of aircraft fuel. In Capital management Management s policy is to have a strong capital base as to maintain investor, creditor and market confidence and to sustain future development of the business. Management monitors the return on capital and the level of dividends to ordinary shareholders. Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from customers and investment securities. The Group conducts transactions with the following major types of counterparties: i. The Group has credit risk associated with travel agents and industry settlement organisations. A significant share of the Group s sales takes place via travel agencies. Due to the fact that receivables from agents are diversified the overall credit risk related to agencies is assessed by management as low. ii. Receivables from other airlines are carried out through the IATA clearing 2010 the Group engaged in fuel hedging activities to hedge a portion of its nonfinancial risk related to fuel (Note 24). There were no changes in the Group s approach to capital management during the year. Neither the Group nor any of its subsidiaries are subject to externally imposed capital requirements. house. Regular settlements ensure that the exposure to credit risk is mitigated to the greatest extent possible. iii. Aircraft suppliers require that security deposits are paid by the Group in relation to the future aircraft deliveries. The Group mitigates this credit risk by performing extensive background checks on suppliers. Only well known and reputable companies are contracted with. iv. The Group limits its exposure to credit risk associated with investments by only investing in liquid securities. Management actively monitors the performance and given that the Group only has invested in securities with high credit ratings, management does not expect any counterparty to fail to meet its obligations. The maximum exposure to the credit risk net of impairment allowance is set out in the table below: Cash and cash equivalents Trade accounts receivable Prepayments for aircraft Short-term investments Long-term investments , Guarantees are disclosed in Note 37. Aging of past due but not impaired trade receivables: Current days years Over 2 years Related party transactions The ultimate controlling party of the Company is the Government of the Russian Federation and all companies controlled by the Government of the Russian Federation are treated as related parties of the Group for the purpose of these consolidated financial statements. The consolidated financial statements of the Group include the following balances and transactions with related parties: Assets Russian Government and companies controlled by the Government VAT and customs duties capitalised on leased aircraft Cash and cash equivalents Trade and accounts receivable Bank deposits with maturities less than 90 days Bank deposits with maturity date not exceeding 90 days Associates Trade and accounts receivable Liabilities Russian Government and companies controlled by the Government Long-term borrowings VAT and customs duties payable on leased aircraft Short-term borrowings Trade and other accounts payable , ,476.0 Associates Trade and other accounts payable , , Sales to Government and companies controlled by the Government Sales to associates Purchases from associates Purchases from Government and companies controlled by the Government Dividend income received Purchases consist primarily of purchases of aircraft fuel as well as air navigation and airport services. In 2010 and 2009 most of the transactions between the Group and its related parties were based on market prices. The summary of balances and charges relating to the taxes due to the Government of the Russian Federation for the years 2010 and 2009 is presented below:

75 4.5. Consolidated Financial Statements Accounts receivable from tax authorities Accounts payable to tax authorities Tax refunds received during the year Total amount of taxes settled with tax authorities during the year The amounts outstanding to and from related parties mainly will be settled in cash. Tax receivable and tax payable might be offset according to Russian tax legislation. As at 31 December 2010 the total amount of guarantees issued by the Compensation of key management personnel The remuneration of directors and other members of key management (the members of the Board of Directors and Management Committee as well as key managers of flight and ground personnel who have significant power and responsibilities on key control and planning decisions of the Group) consist of short-term benefits including salary and bonuses as well as short- and midterm compensation for serving on the management bodies of Group companies of 2010 amounted to approximately USD 16.6 million (2009: USD 13.8 million). In addition, during 2010, the Group initiated Company amounts to USD million (31 December 2009: USD 1.1 million). As at 31 December 2010 the total amount of guarantees received by the Company amounts to USD 0.4 million (31 December 2009: USD 0.3 million). a share option programme for its key executives and employees. Expenses related to the programme have been recognised as wages and salaries in the consolidated statement of income (Note 33). Such 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 as part of unified social tax for all its employees, including key management personnel. Government officials, who are directors, do not receive remuneration from the Group. 40. Contingencies Political environment The Government of the Russian Federation continues to reform the business and commercial infrastructure in its transition to a market economy. As a result laws and Business environment The Group s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes Taxation The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive regulations affecting businesses continue to change rapidly. These changes are characterised by poor drafting, different interpretations and arbitrary application by the authorities. which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The consolidated financial statements reflect management s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management s assessment. and substance-based position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. 38. Commitments under operating leases Future minimum lease payments under non-cancellable aircraft and other operating leases are as follows: On demand or within one year In two to five years 1, ,409.7 After five years 1, ,487.0 Total minimum payments 2, ,255.3 The amounts above represent base rentals payable. Maintenance fees payable to the lessor, based on actual flight hours, and other usage variables are not included in the figures. 39. Capital commitments The Group s capital commitments in relation to the acquisition of property, plant and equipment and other services as at 31 December 2010 amounted to approximately USD 2,402.6 million (31 For details of the fleet subject to operating leases refer to Note 1. December 2009: USD million). These commitments mainly relate to the finance leases of eight Airbus A , eleven Airbus A-330 aircraft. Subsequent events The Group is considering a possibility of acquiring a number of Russian regional airlines currently controlled by Rostechnologii. In January 2011 the Group disposed of its 100% ownership interest in OJSC Insurance Company Moscow (Note 17). In February 2011 the Group disposed of its 31% ownership interest in CJSC TZK Sheremetyevo. In March 2011 the Group disposed of its 50% ownership interest in CJSC DATE. In March 2011 the Group signed an agreement to dispose of its 100% ownership interest in CJSC Nordavia. The approval of the Federal Antimonopoly Service of the Russian Federation is currently pending. Six Airbus A-320 aircraft were delivered to the Group during the period from 1 January 2011 to 20 May All aircraft will be operated under operating lease agreements. In February 2011 and May 2011 the Group signed two contracts for the delivery of a total of sixteen new Boeing-777 aircraft. On 28 April 2011 the Board of Directors made a decision to recommend a dividend of 3.57 US cents per ordinary share (RUB ). The total amount of dividends to be paid for 2010 amounts to USD 39.7 million and is subject to the shareholders approval at the annual shareholders meeting to be held on 29 June

76 5.1. Large transactions and related party transactions approved by the Board of Directors and the General Meeting of Shareholders V. Appendixes 5.1. Large transactions and related party transactions approved by the Board of Directors and the General Meeting of Shareholders Related-party transactions: 1. Parties in the transaction: JSC Aeroflot and OJSC Terminal. Object and material terms of the transaction: Lease and sub-lease of fibreoptic and telephone lines. Information about the person, who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of OJSC Terminal. Approved by decision of the Board of Directors on , Minutes Parties in the transaction: JSC Aeroflot and OJSC Insurance company Moscow. Object and material terms of the transaction: Voluntary medical insurance for Information about the person, who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of OJSC Insurance company Moscow. Money value of the transaction: No more than USD 1,126,000 (one million one hundred and twenty six thousand) (at the Russian Central Bank exchange rate on the day of payment). Approved by decision of the Board of Directors , Minutes Parties in the transaction: JSC Aeroflot and OJSC DONAVIA. Object and material terms of the transaction: code sharing/block booking; supply of fuel and refuelling services; lease of a Тu-154М aircraft RA (without management and technical servicing); technical servicing of aircraft making flights to and from Sheremetyevo Airport, according to the central schedule, code sharing and TsSKA programme; provision of representative, coordinating and control function at airports in the Russian Federation and CIS; representative services in St. Petersburg; access to the distancelearning system; provision of information services; provision of services using the ACSI passenger management system at airports; lease of Il-86 aircraft; lease of aircraft engines; assistance in maintenance of aircraft; flight services; provision of information services and Jeppesen air navigation information products; lease of premises; provision of medical services). Information about the person, who is a related party in the transaction under Russian law (surname and initials): Kalmykov A.Yu., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Kalmykov A.Yu. is a member of the Board of Directors of OJSC DONAVIA. Money value of the transaction: RUR 3,105,000,000 (three billion one hundred and five million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Nordavia Object and material terms of the transaction: code sharing/block booking; supply of fuel and refuelling services; agreement on special cargo pro-rates; services for processing and storage of customs cargo at the customs complex of JSC Aeroflot; interline agreement; provision of representative, coordinating and control functions at airports in the Russian Federation and CIS; assistance in maintenance of aircraft. Information about the person, who is a related party in the transaction under Russian law (surname and initials): Antonov V.N., member of the Board of Directors of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Antonov V.N. is a member of the Board of Directors of CJSC Nordavia. Money value of the transaction: RUR 3,485,000,000 (three billion four hundred and eighty five million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Aerofirst. Object and material terms of the transaction: provision of in-flight trading rights on domestic flights; provision of inflight trading rights on international flights, provision of services. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Antonov V.N., member of the Board of Directors and member of the Executive Board of JSC Aeroflot; Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Antonov V.N. is a member of Board of Directors of CJSC Aerofirst; Saprykin D.P. is a member of the Board of Directors of CJSC Aerofirst. Money value of the transaction: RUR 275,000,000 (two hundred and seventy five million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and OJSC Insurance company Moscow. Object and material terms of the transaction: third-party liability insurance, not associated with flight operations (servicing and repair of aircraft). Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of OJSC Insurance company Moscow. Money value of the transaction: RUR 510,000,000 (five hundred and ten million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders , Minutes Parties in the transaction: JSC Aeroflot and CJSC TZK- Sheremetyevo Object and material terms of the transaction: Aircraft refueling services; fuel storage services. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of CJSC TZK- Sheremetyevo. Money value of the transaction: RUR 3,510,000,000 (three billion, five hundred and ten million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Sherotel Object and material terms of the transaction: provision of rooms to accommodate Aeroflot crews; provision of services on a mutual basis; provision of hotel services to Aeroflot

77 5.1. Large transactions and related party transactions approved by the Board of Directors and the General Meeting of Shareholders passengers; provision of hotel services in exceptional circumstances; partnership in the Aeroflot Bonus programme). Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of CJSC Sherotel. Money value of the transaction: RUR 333,000,000 (three hundred and thirty three million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Aeroflot-Plus Object and material terms of the transaction: organizing air navigation flight services, supplies of fuel and refuelling services, ground and technical servicing of aircraft. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of CJSC Aeroflot- Plus Money value of the transaction: RUR 132,000,000 (one hundred and thirty two million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Aeromar Object and material terms of the transaction: supply of in-flight meals and provision of services; internal fit-out of aircraft; providing internal fittings and service equipment for aircraft. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Zingman V.Ya., member of the Executive Board of JSC Aeroflot; Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Zingman V.Ya. and Saprykin D.P. are members of the Board of Directors of CJSC Aeromar. Money value of the transaction: RUR 3,555,000,000 (three billion, five hundred and fifty five million) (not including VAT) inclusively or an equivalent sum. Value of the transaction as a percentage of balance-sheet value of assets of the issuer at the end of the last reporting period prior to the transaction: 385%. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC AeroMASh-AB Object and material terms of the transaction: Servicing of aircraft at Sheremetyevo Airport with respect to ensuring aviation security of flights by JSC Aeroflot; seat reservations in company vehicles; provision of medical and prophylactic services. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Antonov V.N., member of the Board of Directors and member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Antonov V.N. is a member of the Board of Directors of CJSC AeroMASh- AB. Money value of the transaction: RUR 836,000,000 (eight hundred and thirty six million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Aeroflot-Cargo. Object and material terms of the transaction: Sale and purchase of property. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Antonov V.N., member of the Board of Directors and member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Antonov V.N. is a member of the Board of Directors of CJSC Aeroflot- Cargo. Money value of the transaction: RUR 50,000,0000 (fifty million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and OJSC Terminal Object and material terms of the transaction: additional agreement to the contract on ground servicing; cash loans for specific purposes; access to a video surveillance system; lease of premises; sale and purchase of a stake in ownership of heat delivery systems; lease of cable piping for laying of electric and telecom cables; HelpDesk services; information services; provision to JSC Aeroflot of fiberoptic and copper wire telecom connections between Sherermetyevo-2 (Terminal-F) and Sheremetyevo-3 (Terminal-D), and between Sheremetyevo-3 (Terminal-D) and the Melkisarovo office complex; trunk radio communication services; design of reverse interfaces for data transmission from the AODB/BHS/BRS systems of OJSC Terminal to Aeroflot systems, including integration of the BRS system with a commercial load module; installation of local tannoy systems at bus exits, the transfer desk and at Lost&Found; installation of additional video surveillance cameras and organization of an archive of video and audio recordings. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Saprykin D.P. is a member of the Board of Directors of OJSC Terminal. Money value of the transaction: RUR 9,523,000,000 (nine billion, five hundred and twenty three million) (not including VAT) inclusively or an equivalent sum. Approved by decision of the Extraordinary General Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and OJSC VTB Bank Object and material terms of the transaction: guarantee by JSC Aeroflot (the Guarantor ) of fulfilment of obligations by Rossiya Airlines (the Borrower ) under a credit agreement with OJSC VTB Bank (the Creditor ). Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Saveliev V.G., member of the Board of Directors and member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction : Saveliev V.G. is a member of the Supervisory Board of OJSC VTB Bank. Money value of the transaction: RUR 2,500,000,000 (two billion, five hundred million) plus interest, and also plus the sum of any other expenses/commissions, associated with exercise by the Borrower of its liabilities under the credit agreement. Approved by decision of the Extraordinary Meeting of Shareholders on , Minutes Parties in the transaction: JSC Aeroflot and OJSC Donavia. Object and material terms of the transaction: accomplishment by OJSC Donavia for JSC Aeroflot of charter flights for CJSC TsSKA FC using an Тu-154М aircraft (number RА85637) as part of a sponsorship agreement between JSC Aeroflot and CJSC TsSKA FC. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Kalmykov A.Yu., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction : Kalmykov A.Yu. is a member of the Board of Directors of OJSC Donavia. Money value of the transaction: RUR 38,646,357 (not including VAT). Obligations under the transaction are to be executed and notification of their execution is to be provided by January 31, Approved by the Board of Directors on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Aeromar Object and material terms of the transaction: CJSC Aeromar provides various services to JSC Aeroflot for cleaning and fitting-out aircraft cabins, as well as providing comfort items, fittings and servicing equipments, and JSC Aeroflot receives and pays for the services, which are provided by CJSC Aeromar. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Zingman V.Ya., member of the Executive Board of JSC Aeroflot; Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Zingman V.Ya. and Saprykin D.P. are members of the Board of Directors of CJSC Aeromar. Money value of the transaction: RUR 800,000,000 (eight hundred million). Obligations under the transaction are to be executed and notification of their execution

78 5.1. Large transactions and related party transactions approved by the Board of Directors and the General Meeting of Shareholders is to be provided by December 31, Approved by the Board of Directors on , Minutes Parties in the transaction: JSC Aeroflot and CJSC Aeromar Object and material terms of the transaction: Representing the interests of JSC Aeroflot as agent and carrying out factual and legal actions associated with purchase from foreign producers of alcoholic products (including making of contracts for supply of alcoholic products) to be used exclusively for service of passengers in higher classes on international flights of JSC Aeroflot, and also declaration of alcoholic products, which are transported across the customs border of the Russian Federation on aircraft of JSC Aeroflot, in accordance with the customs regime for transportation of stores. Provision on JSC Aeroflot flights of service equipment (buffet and cooking equipment, and buffet and cooking inventory), including delivery, loading and allocation of service Large transactions 1. Type and object of the transaction: Financial leasing of two Airbus A321 airliners. Content of the transaction, including civil rights and liabilities, which the transaction is intended to establish, amend or terminate: acquisition by JSC Aeroflot on financial lease terms of two Airbus A321 airliners with engines manufactured by CFM International S.A.: Schedule for execution of transaction obligations: Delivery period: October- November 2010 (the period may be delayed or extended); the financial lease period for each aircraft is up to 12 years. Parties to the transaction: 1. JOINT STOCK COMPANY AEROFLOT - RUSSIAN AIRLINES 2. NATIXIS 3. NATIXIS TRANSPORT FINANCE 4. NORDEA BANK AB (publ) 5. MISL DENMARK LIMITED APS 6. AIRBUS S.A.S. 7. CFM INTERNATIONAL, S.A. Money value of the transaction: up to USD 700 million. Currency: US dollars. Value of assets of the issuer at the end of the reporting period (quarter or year), which preceded the transaction (date when the agreement was made) and in respect equipment on board aircraft, and ensuring that sufficient quantities of service equipment for smooth in-flight service operations by JSC Aeroflot at its airport hub (Sheremetyevo) and at JSC Aeroflot offices. Information about the person (persons), who is a related party in the transaction under Russian law (surname and initials): Zingman V.Ya., member of the Executive Board of JSC Aeroflot; Saprykin D.P., member of the Executive Board of JSC Aeroflot. Reason (reasons), for which such a person is acknowledged to be a related-party in the given transaction: Zingman V.Ya. and Saprykin D.P. are members of the Board of Directors of CJSC Aeromar. Money value of the transaction: RUR 900,000,000 (nine hundred million). Obligations under the transaction are to be executed and notification of their execution is to be provided by December 31, Approved by the Board of Directors on , Minutes 16. of which financial accounts were prepared to Russian Accounting Standards: RUR 77,514,913,000 as of Size of the transaction relative to assets of the issuer: does not exceed 50% of balance sheet value of assets of JSC Aeroflot. Approved by the Board of Directors on , Minutes Type and object of the transaction: Purchase of 11 new Airbus A airliners Period of execution of transaction obligations: from 2Q 2011 to 1Q Parties and beneficiaries in the transaction: JSC Aeroflot (buyer) and Airbus S.A.S. (seller) Average price per Airbus А airliner (Airbus S.A.S. catalogue price): USD million as of January Date of transaction completion: July 7, Approved by the Board of Directors on , Minutes Parties to a large transaction (several connected transactions): JSC Aeroflot and banks proposing the best transaction terms (hereinafter, the Bank(s) ). Object of the large transaction (number of connected transactions): Currency and interest swap transactions, by which the Bank(s) and JSC Aeroflot periodically pay each other fixed sums, based on the nominal sums and fixed rates indicated below, which are established for Aeroflot and the Bank(s), and also at the end of the transactions make a mutual exchange of nominal sums, which are established for Aeroflot and the Bank(s). Nominal sums: the total nominal sum established for JSC Aeroflot is no more than the equivalent of RUR 12,000,000,000 (twelve billion) in USD or euros, calculated on the date of the transaction using a procedure established by the transactions. The total nominal sum established for the Bank(s) is no more than RUR 12,000,000,000 (twelve billion). Fixed rates of interest: the fixed rate established for JSC Aeroflot is no more than 5.5% annualized. The fixed rate of interest established for the Bank(s) is no more than 8% annualized. Payment dates: Dates of payment of the fixed sums, calculated in accordance with the procedure established by the transaction terms using the fixed rates and nominal sums, are decided by agreement between JSC Aeroflot and the respective Bank. Total value of the large transaction (several connected transactions): no more than USD 500,000,000 (five hundred million) (or an equivalent sum in euros) including interest paid by JSC Aeroflot to the Banks. The period of the large transaction (several connected transactions): no more than 3 years. Approved by the Board of Directors on , Minutes Transaction with Sabre Inc. on extension of a Framework Agreement on IT service provision (Information Technology Services Agreement ITSA), dated , on the following terms: 1. duration of the ITSA (except for Addenda 11, 14, 16, 19) is extended to March 22, 2015; 2. total cost of extension of the ITSA is no greater than USD 60,500,000 (sixty million, five hundred thousand) US dollars; 3. early termination on the initiative of JSC Aeroflot is possible no sooner than 4 years after the date when the Addendum on Extension comes into force (Addendum 44), on condition of prompt settlement to Sabre Inc. of all duties and payments (including all applicable payments and any debt) plus VAT, which would otherwise be payable to Sabre Inc. for the whole remaining period up to March 22, 2015; The CEO of JSC Aeroflot should be authorized to agree with Sabre Inc the respective Addendum to the ITSA on extension (Addendum 44), and this Addendum should unite previously agreed Addenda to the ITSA, associated with principal systems and systems for service of passenger flows (SabreSonic Reservation, SabreSonic Inventory, SabreSonic Pricing, SabreSonic Ticketing & e-ticketing, SabreSonic Web, SabreSonic ACSI, Sabre Traveler Loyalty System, Sabre Load Manager), with the exception of Addenda 11, 14, 16, 19 to the ITSA. The Executive Board of JSC Aeroflot arrange conduct of negotiations with Sabre Inc. to enable expansion of the geography of self-registration and Web-registration services for passengers, particularly at European airports. Approved by the Board of Directors on , Minutes On operation and maintenance of cargo aircraft MD-11, and on cargo business of JSC Aeroflot. Transactions of JSC Aeroflot with value up to (one hundred and twenty five million) euro, should be approved, as follows: Making of agreements for maintenance and repair of aircraft, engines and auxiliary power units on McDonnell Douglas MD-11 craft, between JSC Aeroflot and Finnair PLC with duration until Approval of amendments to a foursided agreement between JSC Aeroflot, CJSC Aeroflot-Cargo, Boeing Capital Leasing Limited and Finnair PLC on the procedure for payment of contributions to reserves for maintenance and repair of aircraft engines and auxiliary power units. 5. Approval of a trilateral agreement with duration until 2010 between JSC Aeroflot, Boeing Capital Leasing Limited and Finnair PLC for each of the aircraft regarding the procedure for payment of contributions to reserves for maintenance and repair of aircraft engines and auxiliary power units. The Executive Board of JSC Aeroflot should provide a report for consideration by the Board of Directors concerning implementation in 2010 of the business plan, which was submitted as part of materials relating to this agenda item. Approved by the Board of Directors on , Minutes

79 5.2. Information on observance of the code of corporate conduct 5.2. Information on observance of the code of corporate conduct* Provision of the Code of Corporate Conduct Observed or not observed General Meeting of Shareholders 1. Shareholders shall be notified of holding of the general meeting of shareholders at least 30 days before the date when it is scheduled to be held, regardless of the nature of business included on its agenda, unless a longer notification period is required by law. Observed 2. Shareholders shall be able to acquaint Observed themselves with the list of persons eligible to attend the general meeting of shareholders from the date when notice of the general meeting of shareholders is given and until the meeting is closed, or, in the case of a meeting in absentia, until the final date for acceptance of ballots. 3. Information (materials) that must be provided during the period of preparation for the general meeting of shareholders shall be available to shareholders via electronic communication facilities, including the Internet. 4. Any shareholder should be able to propose an item for inclusion in the agenda of a general meeting of shareholders or to request convening of a general meeting of shareholders without presentation of an excerpt from the shareholder register, if the shareholder s title to stocks is recorded in the system for maintaining the shareholder register. If the shareholder s title to stocks is recorded on a securities account, an excerpt from the securities account will be sufficient for exercise of the aforementioned title. Observed Observed Notes Clause 17.2 of the Company Charter. In accordance with clause of the Company Charter, the list of persons having the right to take part in the general meeting of shareholders is provided by the Company for purpose of acquaintance at the request of persons included in the list and owning at least one percent of votes. Obeyed in practice. The Company itself requests confirmation from the register of shareholders when accepting agenda proposals for the general meeting of shareholders. Provision of the Code of Corporate Conduct 5. The charter or corporate documents of the joint stock company should require presence of the CEO, executive board members, members of the board of directors, members of the internal audit commission, and the auditor of the company at the general meeting of shareholders. 6. Candidates should be present when the general meeting of shareholders elects members of the board of directors, the CEO, members of the executive board, and members of the internal audit commission, and also the when auditor of the joint-stock company is appointed. 7. Internal documents of the joint-stock company should contain a procedure for registration of persons attending the general meeting of shareholders. Observed or not observed Observed Observed in part Observed Notes Clause 11.3 of the Statute on the General Meeting of Shareholders. Article 7 of the Statute on the General Meeting of Shareholders. Board of Directors 8. The charter of the joint-stock company should include authority of the board of directors to approve financial and business plan of the joint-stock company on an annual basis. Observed Clause 19.2 of the Company Charter (sub-clauses 1 and 23). 9. A risk management procedure for the Observed General Guidelines for joint-stock company, approved by the Organization of Risk board of directors, should be in place. Management were approved by the Board of Directors in May The charter of the joint-stock company should include the right of the board of directors to suspend the authority of the CEO, who was appointed by the general meeting of shareholders. Observed Clause 19.2 of the Company Charter (sub-clause 8). 11. The charter of the joint-stock company should include the right of the board of directors to set requirements as to the level of qualifications and amount of remuneration payable to the CEO, members of the executive board, and managers of main structural divisions of the company. 12. The charter of the joint-stock company should include the right of the board of directors to approve terms and conditions of contracts with the CEO and members of the executive board. Observed in part Observed Clause 19.2 of the Company Charter (sub-clauses 10 and 12). Clause 19.2 of the Company Charter (sub-clause 10). * In the information, which follows, observance of the Code of Corporate Conduct means due account (observance) by the Company of recommendations of the federal body of executive power responsible for the securities market, and of requirements of the Charter and internal documents of the Company itself (valid at the time when this information was compiled), and of legal acts of the Russian Federation governing the activities of joint-stock companies, such as JSC Aeroflot

80 5.2. Information on observance of the code of corporate conduct Provision of the Code of Corporate Conduct 13. The charter or internal documents of the joint-stock company should require that board votes of the CEO (management organization, manager) and members of the executive board are not taken into account in voting to approve terms and conditions of contracts with the CEO and members of the executive board. 14. The board of directors of the jointstock company should include at least three independent directors who meet requirements of the Code of Corporate Conduct. 15. Persons should be disqualified from serving on the board of directors of the joint-stock company, if they were ever found guilty of any economic crime or crime against government, the interests of government or local authorities, or if they have been subject to any administrative penalties for violations in the sphere of business and finance, taxation, or the securities market. 16. Persons should be disqualified from serving on the board of directors of the joint-stock company if they are a shareholder, CEO (manager), member of any management body or employee of a legal entity, which is a competitor of the joint-stock company. 17. The charter of the joint-stock company should require the board of directors to be elected by cumulative voting. 18. Internal documents of the joint-stock company should require members of the board of directors to refrain from any actions that will or may potentially cause a conflict between their interests and interests of the company, and to disclose information to the board of directors concerning such a conflict, should it occur. 19. The internal documents of the joint-stock company should require members of the board of directors to notify the board in writing of their intention to close any transactions with securities of the company or of its subsidiaries (affiliates), and to disclose any information on transactions closed by them with such securities. 20. The internal documents of the joint-stock company should require the board of directors to hold meetings at least once every six weeks. Observed or not observed Notes Provision of the Code of Corporate Conduct 21. The board of directors of the joint-stock company should meet at least once every six weeks in any year, for which a company annual report is compiled. 22. The internal documents of the joint-stock company should contain procedures to be followed at meetings of the board of directors. Observed or not observed Notes Not observed Observed Observed Observed Observed Observed in part Observed Observed Clause 19.4 of the Company Charter. Clause 22.1 of the Company Charter; Article 8 of the Statute on the Board of Directors. The procedure for members of the Board of Directors to declare any interest in transactions by the Company is regulated by clause 22.7 of the Company Charter and by articles 81 and 82 of the Law on Joint- Stock Companies. Article 5 of the Statute on the Board of Directors. 23. Internal documents of the joint-stock company should stipulate that any transactions by the company with value in excess of 10 percent of company assets should be approved by the board of directors, except for transactions in the normal course of business. 24. Internal documents of the joint-stock company should include the right of members of the board of directors to receive information from executive bodies and managers of structural divisions of the company, which is necessary for them to discharge their functions, as well as sanctions for failure to provide such information. 25. There should be a committee of the board of directors in charge of strategic planning, or the function of such a committee should be vested in another committee (other than the audit committee and personnel and remuneration committee). 26. A committee of the board of directors in charge of audit (audit committee) should be created, which makes recommendations to the board of directors on choice of an auditor for the joint-stock company and liaises with the auditor and with the internal audit commission of the company. 27. The audit committee should include only independent and non-executive directors. 28. The audit committee should be headed by an independent director. 29. The internal documents of the jointstock company should stipulate right of access for all members of the audit committee to any company documents and information, on condition that they do not disclose confidential information. 30. A committee of the board of directors for personnel and remuneration should be created, with the functions of identifying criteria for selection of candidates to the board of directors and developing a remuneration policy. Observed Observed Observed Observed in part Observed Observed Observed Observed Observed Observed Article 5 of the Statute on the Board of Directors. Article 5 of the Statute on the Board of Directors. Regulations for Meetings of the Board of Directors of JSC Aeroflot. Clause 19.2 of the Company Charter (sub-clause 21). Article 7 of the Statute on the Board of Directors. Sub-clause 11.3 of article 11 of the Statute on the Board of Directors; Statute on the Audit Committee. Sub-clause 11.3 of article 11 of the Statute on the Board of Directors; Statute on the Audit Committee. Clauses 3.4 and 4.11 of the Statute on the Audit Committee. Sub-clause 11.3 of article 11 of the Statute on the Board of Directors; Statute on the Personnel and Remuneration Committee

81 5.2. Information on observance of the code of corporate conduct Provision of the Code of Corporate Conduct 31. The personnel and remuneration committee should be headed by an independent director. 32. No officers of the joint-stock company should serve on the personnel and remuneration committee. 33. A committee of the board of directors in charge of risk should be created or the functions of such a committee should be vested in another committee (other than the audit committee and the personnel and remunerations committee). 34. A committee of the board of directors should be created for settlement of corporate conflicts or the functions of such a committee should be vested in another committee (other than the audit committee and the personnel and remuneration committee). 35. No officers of the joint-stock company should serve on the committee for settlement of corporate conflicts. 36. The committee for settlement of corporate conflicts should be managed by an independent director. 37. There should be internal documents approved by the board of directors of the joint-stock company, setting out a procedure for creation and functioning of committees of the board of directors. 38. The charter of the joint-stock company should define a quorum of the board of directors in such a way that attendance of independent directors at meetings of the board of directors is required. Observed or not observed Observed Observed Notes Observed in part In accordance with subclause 11.1 of article 11 of the Statute on the Board of Directors, the Board of Directors can create permanent and temporary committees. Observed in part There have been no corporate conflicts since July 28, 1992 (the date of creation of JSC Aeroflot). If situations of conflict arise, the Board of Directors has the right to create a committee for resolution of corporate conflicts (subclause 11.1 of article 11 of the Statute on the Board of Directors). Not observed A committee of the Board of Directors for resolution of corporate conflicts has not been created. Not observed A committee of the Board of Directors for resolution of corporate conflicts has not been created. Observed Separate statutes for each committee of the Board of Directors. Not observed Executive Bodies 39. There should be a collegiate executive body (executive board) of the joint-stock company. Observed 40. The charter or internal documents of the Observed joint-stock company should require that any transactions with real estate and obtaining of loans by the company must be approved by the executive board, unless such transactions are classified as large transactions and treated as normal business of the company. Clause 21.1 of the Company Charter. Paragraph 2 of the Statute on the Executive Board; Clause 21.4 of article 21 of the Company Charter. Provision of the Code of Corporate Conduct 41. Internal documents of the joint-stock company should contain a procedure for approval of operations, which are beyond the bounds of the company s business plan. 42. Executive bodies should not include any person who is a shareholder, CEO (manager), member of any management body, or employee of a legal entity, which is a competitor of the joint-stock company. 43. Executive bodies of the joint-stock company should not include any person who has been found guilty of any economic crime or crime against government, the interests of government or local authorities, or if they have been subject to any administrative penalties for violations in the sphere of business and finance, taxation, or the securities market. If the office of the sole executive body is executed by a management organization or a manager, the CEO and executive board members of the management organization or the manager should meet the aforementioned requirements for the CEO and members of the executive board of the joint-stock company itself. 44. The Charter or internal documents of the joint-stock company should prohibit any management organization (manager) from exercising analogous functions in a competitor company or from being involved in any property relationships with the company, other than providing management services. 45. Internal documents of the joint-stock company should include the obligation of executive bodies to avoid any acts, which will or may cause a conflict between their interests and interests of the company, as well as the obligation to notify the Board of Directors should such a conflict arise. 46. The charter or internal documents of the joint-stock company should include criteria for selection of a management organization (a manager). 47. Executive bodies of the joint-stock company shall provide monthly reports on their work to the board of directors. 48. Agreements between the joint-stock company, on one hand, and the CEO (management organization, manager) and members of the executive board, on the other hand, should assign liability for violation of regulations concerning use of confidential and official information. Observed or not observed Observed Observed Observed Not observed Observed Not observed Observed in part Observed Notes Sub-clauses of clause 19.2 of article 19 of the Company Charter, and subclause 12 of clause 21.5 of article 21 of the Company Charter. In accordance with subclause 5.11 of the Statute on the Executive Board. The Company Charter does not envisage any statute on a managing organization or manager. Article 22 of the Company Charter; Sub-clauses 5.5 and of the Statute on the Executive Board. The Company Charter does not envisage any statute on a managing organization or manager. Sub-clause 11 of clause 2.3 of the CEO Employment Contract; Sub-clause 6.2 of the Standard Employment Contract

82 5.2. Information on observance of the code of corporate conduct Provision of the Code of Corporate Conduct Observed or not observed Company Secretary 49. The joint-stock company should have a special officer (company secretary), whose job is to ensure compliance of bodies and officers of the company with procedural requirements that guarantee exercise of rights and lawful interests of company shareholders. Observed 50. The charter or internal documents of the Observed joint-stock company should include a procedure for appointment (election) and specify responsibilities of the company secretary. 51. The charter of the joint-stock company Not observed should specify requirements for any candidate to the post of company secretary. Major Corporate Actions 52. The charter or internal documents of Not observed the joint-stock company should require approval of any major transaction prior to execution thereof. 53. It should be obligatory for the jointstock Observed company to hire an independent appraiser to assess the market value of property, which is the object of a major transaction. 54. The charter of the joint-stock company Not observed should prohibit any actions during the process of acquisition of large share stakes in the company (takeover), which aim to protect the interests of executive bodies (members thereof) and members of the board of directors, and should also prohibit any actions that tend to worsen the situation of shareholders. In particular, the board of directors should not be allowed to issue any additional stocks, securities convertible into stocks, or to purchase stocks or securities granting the right to purchase stocks of the company, until the proposed final date for acquisition of stocks or securities, even if the right to take such a decision is granted to the board by the charter. 55. The charter of the joint-stock company Not observed should require an independent appraiser to be hired for assessment of current market value of stocks and possible changes in their market value that may result from any merger. 56. The charter of the joint-stock company should not exempt the purchaser from the obligation to make an offer to shareholders to sell ordinary stocks of the company held by them (and securities convertible into ordinary stocks) in the case of a merger. Observed Notes Article 10 of the Statute on the Board of Directors; Clause 19.8 of the Company Charter. Clause 19.8 of the Company Charter. Provision of the Code of Corporate Conduct 57. The charter or internal documents of the joint stock company should include a requirement to engage an independent appraiser to determine the conversion rate of stocks in case of reorganization. Observed or not observed Not observed Information Disclosure 58. There should be an internal document approved by the board of directors that determines rules and approaches of the joint-stock company to disclosure of information (a statute on information policy). 59. Internal documents of the joint-stock company should require disclosure of information concerning the purpose of stock placements, persons intending to purchase the stocks, including large shareholdings, and information as to whether senior executive officers of the company will take part in acquisition of the stocks to be placed. 60. Internal documents of the joint-stock company should contain a list of information, documents, and materials, to be provided to shareholders for transaction of business included on the agenda of the general meeting of shareholders. 61. The joint-stock company should have a web site in the Internet and disclose information about itself on this site on a regular basis. 62. Internal documents of the joint-stock company should require disclosure of information on transactions by the company with persons who are, pursuant to the charter, senior executive officers of the company, as well as on transactions of the company with organizations, in which senior executive officers of the company directly or indirectly hold 20 or more percent of authorized capital or which can be otherwise significantly influenced by such persons. 63. Internal documents of the joint stock company should require disclosure of information on all transactions, which may affect the market value of stocks of the company. Notes Observed Statute on Corporate Information Policy. Observed in part Clause of the Statute on Corporate Information Policy. Observed Sub-clauses 5.5.1, 5.5.2, 5.5.3, of clause 5.5 of the Statute on the General Meeting of Shareholders. Observed Generally available corporate information and documents, which must be provided to all interested parties, are placed in open access on the corporate site, Observed in part Clause of the Statute on Corporate Information Policy. Observed in part Clause 3 of the Code of Corporate Conduct of JSC Aeroflot

83 5.2. Information on observance of the code of corporate conduct Provision of the Code of Corporate Conduct 64. There should be an internal document approved by the board of directors related to use of significant information on activities of the joint stock company, stocks, and other securities of the company and transactions therewith, if such information is not in the public domain and its disclosure may materially affect the market value of the company s stocks and other securities. Observed or not observed Observed Notes Control over Financial and Business Operations Observed 65. There should be procedures, approved by the board of directors. for internal control over financial and business activities of the joint-stock company. 66. There should be a special division of the joint-stock company (the internal control and audit service), which ensures that internal control procedures are complied with. 67. Internal documents of the joint-stock company should require the board of directors to define the structure and content of the company s internal control and audit service. 68. The internal control and audit service should not include any person who has been found guilty of any economic crime or crime against government, the interests of government or local authorities, or who has been subject to any administrative penalties for violations in the sphere of business and finance, taxation, or the securities market. 69. The internal control and audit service should not include any persons who serve on executive bodies of the jointstock company or persons who are shareholders, the CEO (manager), members of management bodies, or employees of a legal entity, which is a competitor of the company. 70. Internal documents of the joint-stock company should specify a time limit for presentation of documents and materials to the internal control and audit service for appraisal of any completed financial or business transaction, and should also specify liability of company officers and employees for failure to present such documents and materials within the prescribed time. Observed Observed Observed Observed Observed in part Clause of the Statute on Corporate Information Policy. Statute on the Internal Audit Department. Statute on the Internal Audit Department. Statute on the Internal Audit Department. Statute on the Revision Commission. Provision of the Code of Corporate Conduct 71. Internal documents of the joint-stock company should oblige the internal control and audit service to notify the audit committee of any violations that may be discovered and, if there is no such committee, to notify the board of directors. 72. The Charter of the joint-stock company should oblige the internal control and audit service to make a preliminary appraisal of advisedness of operations that were not foreseen in the financial and business plan of the joint-stock company (non-standard operations). 73. Internal documents of the joint-stock company should include a procedure for approval of any non-standard operation by the board of directors. 74. There should be an internal document approved by the board of directors defining the procedure for audit of financial and business activities of the joint-stock company by the internal audit commission. 75. The audit committee should give an assessment of the opinion of the auditor prior to its presentation to shareholders at the general meeting of shareholders. Observed or not observed Observed Not observed Observed in part Observed Observed Dividends 76. There should be an internal document Not observed approved by the board of directors, by which the board of directors is governed when making recommendations on the amount of dividends to be paid (statute on dividend policy). 77. The statute on dividend policy should include a procedure for determining a minimum share of net profit of the joint-stock company to be applied in payment of dividends, and should define the conditions, in which dividends on preference stocks, as prescribed in the company charter, are not paid or are paid only in part. Not observed 78. Information on dividend policy of the joint Not observed stock company and changes to it should be published in a periodical, indicated by the company charter for publishing of announcements of general meetings of shareholders, and should also be placed on the company web site in the Internet. Notes Statute on the Internal Audit Department. Part of authorities of the Board of Directors Clause 3.1 of article 3 of the Statute on the Revision Commission. Clause 24.4 of article 24 of the Company Charter; Clause 5.5 of the Statute on the Audit Committee. The Company Charter does not refer to preferred shares

84 5.4. Operating statistics 5.3. Amendments to internal documents of the Company in Operating statistics JSC Aeroflot Aircraft-kilometers, thousand km International routes 135, , , , , , , , , ,954.4 Domestic routes 42, , , , , , , , , ,767.3 Total 177, , , , , , , , , , Amendments were made to Appendix 1 of the Charter of JSC Aeroflot (decision of the Board of Directors, recorded in Minutes 3 dated September 13, 2010, and Minutes 4 dated October 11, 2010) The following representative offices were removed from the list of representative offices: Representative office of JSC Aeroflot in Sydney. Office location: Sydney, Australia. Representative office of JSC Aeroflot in Kuala-Lumpur. Office location: Kuala Lumpur, Malaysia. Representative office of JSC Aeroflot in Bratislava. Office location: Bratislava, Republic of Slovakia. Representative office of JSC Aeroflot in Panama. Office location: Panama City, Republic of Panama. Из перечня филиалов исключить: Branch of JSC Aeroflot in Magadan. Location: Magadan, Magadan Region, Russian Federation. 2. The following amendments were made to the Charter of JSC Aeroflot (Extraordinary General Meeting of Shareholders on December 20, 2010, Minutes 29): Sub-clause 18 of clause 19.2 of article 19 of the Charter of JSC Aeroflot shall read as follows: 18) a decision on participation and termination of participation by the Company in subsidiaries and affiliates, and in other organizations, with the exception of instances stated in sub-clause 18 of clause 1 of article 48 of the Federal Law on Joint-Stock Companies. 3. Amendments were made to Appendix 1 of the Charter of JSC Aeroflot (decision of the Board of Directors, recorded in Minutes 7, dated December 23, 2010). 4. The representative office of JSC Aeroflot in Vilnius is to be removed from the list of representative offices. Office location: Vilnius, Republic of Lithuania. Flight departures, units International routes 45,777 41,952 42,282 46,261 49,786 52,516 53,746 56,612 54,961 61,305 Domestic routes 21,541 20,985 21,617 21,771 23,461 28,766 33,619 38,200 31,629 36,411 Total 67,318 62,937 63,899 68,032 73,247 81,282 87,365 94,812 86,590 97,716 Hours flown, hours International routes 172, , , , , , , , , ,877 Domestic routes 57,639 54,643 54,845 56,102 61,085 74,346 87, ,722 90, ,177 Total 230, , , , , , , , , ,054 Passengers carried, thousands International routes 4, , , , , , , , , ,122.0 Domestic routes 1, , , , , , , , , ,163.8 Total 5, , , , , , , , , ,285.8 Cargo and mail carried, thousand tonnes International routes Domestic routes Total Passenger turnover, million RPK International routes 15, , , , , , , , , ,632.3 Domestic routes 3, , , , , , , , , ,144.8 Total 18, , , , , , , , , ,777.1 Passenger turnover capacity, million RPK International routes 23, , , , , , , , , ,060.8 Domestic routes 5, , , , , , , , , ,960.1 Total 28, , , , , , , , , ,020.9 Passenger load factor, % International routes Domestic routes Total Tonne-kilometers, million TKM International routes 1, , , , , , , , , ,864.8 Domestic routes ,217.3 Total 2, , , , , , , , , ,082.1 Tonne-kilometer capacity, million TKM International routes 3, , , , , , , , , ,622.8 Domestic routes , , , , ,836.1 Total 4, , , , , , , , , ,458.9 Revenue load factor, % International routes Domestic routes Total

85 5.4. Operating statistics OJSC Donavia 2000* Aircraft-kilometers, thousand km International routes 1, , , , , , , , , ,023.2, 8,545.2 Domestic routes 4, , , , , , , , , , ,869.5 Total 6, , , , , , , , , , ,414.7 Flight departures, units International routes 855 1,276 1,373 1,833 2,622 2,268 2,199 4,126 5,472 4,746 4,670 Domestic routes 3,008 5,079 5,235 6,012 6,018 5,675 5,834 6,157 8,019 7,604 9,359 Total 3,863 6,355 6,608 7,845 8,640 7,943 8,033 10,283 13,491 12,350 14,029 Hours flown, hours International routes 2,160 3,239 3,336 3,939 5,568 4,640 4,606 9,827 13,764 13,448 11,390 Domestic routes 6,097 10,523 9,208 10,661 11,179 10,513 10,576 12,005 16,593 15,179 18,233 Total 8,257 13,762 12,544 14,600 16,747 15,153 15,182 21,832 30,357 28,627 29,,623 Passengers carried, thousands International routes Domestic routes Total , , ,385.9 Cargo and mail carried, thousand tonnes International routes Domestic routes Total Passenger turnover, million RPK International routes , , , ,354.4 Domestic routes ,068.6 Total , , , ,423.0 Passenger turnover capacity, million RPK International routes , , , ,578.0 Domestic routes , , ,486.4 Total , , , , , , , , , ,064.3 Passenger load, % International routes Domestic routes Total Tonne-kilometers, million TKM International routes Domestic routes Total Tonne-kilometer capacity, million TKM International routes Domestic routes Total Revenue load factor, % International routes Domestic routes Total CJSC Nordavia 2004* Aircraft kilometers, thousand km International routes , , , , , ,493.0 Domestic routes 1, , , , , , ,500.0 Total 2, , , , , , ,992.0 Flight departures, units International routes 188 1,384 1,522 1,631 1,747 1,095 1,456 Domestic routes 1,727 13,891 17,331 18,760 17,696 16,840 17,568 Total 1,915 15,275 18,853 20,391 19,443 17,935 19,024 Hours flown, hours International routes 596 3,852 3,315 3,858 4,260 2,566 4,217 Domestic routes 3,489 26,864 32,826 40,741 36,988 36,390 38,784 Total 4,085 30,716 36,141 44,599 41,764 38,956 43,001 Passengers carried, thousands International routes Domestic routes , , ,301.1 Total , , , ,398.5 Cargo and mail carried, thousand tonnes International routes Domestic routes Total Passenger turnover, million RPK International routes Domestic routes , , , ,753.2 Total , , , , ,972.4 Passenger turnover capacity, million RPK International routes Domestic routes , , , ,437.5 Total , , , ,717.8 Passenger load, % International routes Domestic routes Total Tonne-kilometers, million TKM International routes Domestic routes Total Tonne-kilometer capacity, million TKM International routes Domestic routes Total Revenue load factor, % International routes Domestic routes Total * - October to December 2004 * - April to December

86 5.6. Terms and abbreviations used in this Annual Report 5.5. Energy consumption in 2010 Energy type Volumes consumed 5.6. Terms and abbreviations used in this Annual Report Aeroflot Group All of the companies (standalone legal entities), linked by financial and economic ties, carrying out coordinated business on the air transport market, of which Aeroflot is the head (parent) company and corporate center, based on its dominant or significant stakes in charter capital of the other companies. APIS (Advance Passenger Information System) A system for submitting lists with additional information about passengers to customs and border services in the country of arrival. Available passenger turnover Maximum possible volume of passenger transport operations, which an airline can provide, calculated by multiplying the number of available passenger seats on each flight stage by the length of the stage. Available tonne-kilometers Maximum possible transport operations, calculated by multiplying the total available load capacity (passengers, cargo and mail) on each flight stage by the length of the stage; measured in tonne-kilometers. Aviation security Protection of air traffic from illegal interference, all the measures and resources necessary for achieving such protection. BSP/ARC (Billing and Settlement Plan/ Airline Reporting Corporation) Systems for settlement between agents and airlines Aircraft fuel 1,289,100 tonnes 24,127,793.0 Heat energy 37, Gcal 46, Electrical energy 25,292,900 kilowatt-hours 66,323.0 Vehicle fuel 5,478, litres 102,854.0 Aviation lubricants 202, litres 97,823.0 Cost in RUR (not including VAT) BSP is an international settlement system between agents and airlines organized by IATA, which enables sales of air transport services on neutral forms (not assigned to any specific airline), helps airlines to expand their presence on the air transport sales market, minimizes financial risks, lowers expenses on maintenance of the sales system, and speeds up the accounting system by use of electronic technologies. The purpose of BSP is to raise the efficiency of interactions between airlines and agent networks. ARC is a system used in the USA, which is analogous to BSP. Cargo tonne kilometer (CTK) Transport of one tonne of cargo and mail over a distance of one kilometer. CJSC Closed Joint-Stock Company Code sharing An agreement on joint use of route codes, enabling one and the same route to be sold by two companies under their own brands and with a distinct route number for each company. Either of the airlines in the agreement can be the actual provider of transport service on the route. Electronic ticket (e-ticket) A way of documenting sale and control of air transport without compilation of details using a physical medium (strict accounting form). All information relating to transport of a specific passenger (route, fare, service class, sum paid, duties, etc.) is contained in an electronic ticket file, located in a data base of the relevant carrier. E-tickets are not necessarily associated with sale of transport services via the Internet, although it is simpler to sell electronic tickets than ordinary tickets via the Internet. Flight safety Capacity to provide air transport services without risk to people s life or health. Hub Term used to describe transport nexuses where there is a large share of transit passengers, including airports where the timetable of incoming and outgoing flights is organized such a way as to minimize transit time between any one flight and the maximum number of other flights. IATA (International Air Transportation Association) An international association created in 1945 for development of cooperation between airlines in order to ensure safety, reliability and cost efficiency of flights in the interests of consumers. Members of the association now include 270 airlines from 140 countries worldwide. The address of the IATA web site is: ICAO (International Civil Aviation Organization) Created as a result of the Chicago Convention on International Civil Aviation, signed in The ICAO is a specialized institution within the UN, responsible for development of international standards, recommended practice and rules in the technical, economic and legal realms of international civil aviation. The address of the ICAO web site is: IOSA (International Operational Safety Audit) An international audit of operational safety, which includes the following aspects of airline operations: company organization and management; flight operations; aircraft engineering and maintenance; ground handling; operational control and flight dispatch; cabin crew; aviation security; cargo operations and transport of hazardous cargos. ISO International Organization for Standardization. ISO 9000 A series of international standards for creation of a quality control system at an enterprise, consisting of a number of prescriptions for raising efficiency of business processes. LLC Limited Liability Company. Market capitalization Total market value of the shares of a company. OJSC Open Joint-Stock Company. Passenger kilometer Transport of one passenger over a distance of one kilometer. Passenger load factor Ratio of the number of revenue passenger kilometers flown to total available seat kilometers, expressed in percent. Passenger turnover Measure of the volume of passenger transport operations, calculated by multiplying the factual number of paying passengers carried on each stage of a flight by the distance of the flight stage; expressed in passenger kilometers. Revenue load factor Ratio of tonnekilometers flown to maximum tonnekilometer capacity, expressed in percent. Rosaviatsia the Russian Federal Air Transport Agency. RUR Russian roubles. Seat kilometers Measure of an airline s passenger carrying capacity, based on one seat flying a distance of one kilometer. SkyTeam An alliance of 11 airlines: Aeromexico, Air France - KLM, Alitalia, Сhina Southern Airlines, Continental Airlines, CSA- Czech Airlines, Delta Airlines, Korean Air and Northwest Airlines, and three associated companies, which are AirEuropa, Copa Airlines and Kenya Airways. The address of the SkyTeam web site is: TCC Transport and Clearing Chamber. The Company, the Airline JSC Aeroflot. Tonne-kilometer (TKM) Transport of one ton of paying load (passengers at 90kg per passenger, cargo and post) over a distance of one kilometer. USD US dollars

87 5.7. List of offices and representative offices 5.7. List of offices and representative offices List of the Company s own sales offices, representative offices and branches in the Russian Federation City Code Telephone Fax Address Branches Vladivostok , Svetlanskaya Street Kaliningrad , Pobedy Square Krasnoyarsk А, Karla Marxa Street St. Petersburg /43, Rubinsteina Street Sochi А, Roz Street Moscow 10 Arbat Street Own sales offices 20/1 Petrovka Street 7 Korovy Val Street 3 Kuznetsky Most Street 4 Frunzenskaya Embankment 19 Yeniseyskaya Street 37/19 Pyatnitskaya Street Sheremetyevo-D (3) Sheremetyevo-F (2) Representative offices +7 (495) (499) (495) (499) (495) (495) (499) (495) (495) (495) City Code Telephone Fax Address Anapa , Krymskaya Street Arkhangelsk , Naberezhnaya Severnoy Dviny Astrakhan , Gubernatora A. Guzhvina Prospect Barnaul А, Dmitrova Street Chelyabinsk , Svobody Street Ekaterinburg , Belinsky Street Irkutsk , Stepana Razina Street Khabarovsk , Pushkina Street Krasnodar , Krasnaya Street Mineralniye vody , Zheleznovodskaya Street Murmansk , Kirova Prospect Nizhnevartovsk , Omskaya Street Nizhny Novgorod , Gorky Square Novosibirsk , Krasny Prospect Omsk , Ordzhonikidze Street Perm , Lenina Street Petropavlovsk-k , Sovetskaya Street Samara , Leninskaya Street Ufa /3, Lenin Street Yuzhno- Sakhalinsk Khomutovo Airport List of representative offices abroad Country/City Code Telephone Fax Address Austria Vienna Angola Luanda Armenia Yerevan Azerbaijan Baku Belarus Minsk Belgium Brussels Bulgaria Sophia China Hong Kong Beijing PARKRING 10, 1010 WIEN, AUSTRIA RUA CORONEL AIRES de ORNELAS 1-А/В-R/C, LUANDA, ANGOLA 12 Amiryana Street, Yerevan, , Armenia U. HADJIBEKOV STR., 23, BAKU, AZERBAIDJAN, AZ 1000 Office 101, Ya.Kupaly Street, , Minsk Rue Des Colonies 58, 1000 Bruxelles, BELGIQUE 1407 SOFIA, BULGARIA, ZLATEN ROG STREET, 22, 1-st FLOOR, OFFICE 2B SUITE 2918, 29 FLOOR, SHUI ON CENTER, 6-8 HARBOUR ROAD, WANCHAI, HONG KONG CHAO YANG MEN BEI DA JIE, BEIJING , PR CHINA

88 5.7. List of offices and representative offices Country/City Code Telephone Fax Address Shanghai Cuba Havana Croatia Zagreb Cyprus Nikosia Czech Republic Prague Denmark Copenhagen Egypt Cairo Emirates Dubai Finland Helsinki France Nice Paris Germany Berlin Hamburg Hannover Suite 522, Shanghai Center, 1376, Nan Jing Xi Road, Shanghai, China PRC ta AVENIDA, ENTRE 76 Y 78, EDIFICIO BARCELONA, OFICINA 208, MIRAMAR TRADE CENTER, MIRAMAR, PLAYA, CIUDAD HABANA, CUBA CROATHIA, ZAGREB, TRG. NIKOLE SUBICA ZRINSKOG, 6 32 B & C, Homer Ave. P.O. BOX NICOSIA CYPRUS TRUHLARSKA, PRAGUE 1, 11000, CZEH REPUBLIC EL BOUSTAN St., 18, El Boustan Commecrial Center, CAIRO/EGIPT. CAIRO/EGYPT 18, El Boustan st. El Boustan Commercial Centre U.A.E., DUBAI, PO BOX 1020 AL MAKTOUM STREET, AL MAZROEI BLDG, DEIRA, DUDAI HELSINKI VANTAAN LENTOASEMA TERMINAALI, , VANTAA, FINLAND AEROPORT NICE-COT D'AZUR TERMINAL, , NICE CEDEX 127, AVENUE DES CHAMPS ELYSEES, 75008, PARIS UNTER DEN LINDEN 51, BERLIN, 10117, GERMANY ADMIRALITAET - STR , HAMBURG FLUGHAFENSTRASSE 6 TERMINAL C ZIMMER 3/014, 30855, LANGENHAGEN Country/City Code Telephone Fax Address Dusseldorf DUSSELDORF, BERLINER ALLEE, 26 Munich FRG/MUNICH, ISARTORPLATZ, , MUNICH Frankfurt Wilhelm-Leuschner- Str.41 d-60329, Frankfurt am Main Hahn (regional office for cargo transport in Europe) Great Britain London Greece Athens Hungary Budapest India Delhi Iran Theran Italy Venice Milan Rome Japan Tokyo Kazakhstan Almaty Republic of Korea Seoul Hahn Airport, Building 860, Germany 70 PICСADILLY LONDON, W1J 8HP, UK 14, XENOFONTOS STR. SYNTAGMA -GR , ATHENS HUNGARY 1050 BUDAPEST, JOZSEF ATTILA UTCA, 18 AEROFLOT, TOLSTOY HOUSE, 15-17, TOLSTOY MARG DELHI IRAN, THERAN, VALI ASR AVE., SADR STR, 62 Aeroport Marko Polo, Tessera, Venezia, Luigi Broglio street 8, MILANO - VIA MARINA, ROMA VIA L.BISSOLATI, 76 Toranomon Kotohira Tower 16F, 1-2-8, Toranomon, Minato-ku, Tokyo, Japan, Respublika KAZAKHSTAN, g. ALMATY, ul. BEGALINA, , CITY AIR TERMINAL Bldg, 159-6, SAMSUNG- DONG, KANGNAM- KU,SEOUL

89 5.7. List of offices and representative offices Country/City Code Telephone Fax Address Kyrgyzstan Bishkek Latvia Riga Lebanon Beirut Mongolia Ulan-Bator Netherlands Amsterdam Norway Oslo Poland Warsaw Romania Bucharest Serbia Belgrade Spain Barcelona Madrid Malaga Sweden Stockholm Switzerland Geneva Zurich bul. Erkindik, 64/1, Bishkek, Kirgyzstan, DZIRNAVU STR., 57A, RIGA, LATVIA LV-1010 LIBANON, BEIRUT, VERDUN STREET, SELIM SAAB BLD, 2 FLOOR MONGOLIA, ULAAN BAATOR, SEOUL STREET, 15 AEROFLOT WETERINGSCHANS 26-3, 1017 SG AMSTERDAM NORWAY 0157 OSLO OVRE SLOTTSGT 6 POLAND, WARSAW JEROZOLIMSKIE AL.29 ROMANIA, BUCHAREST, STR. GHEORGHE MANU, 5, SECTOR BELGRADE Kneza Mihajlova, 30 ESPANA, BARSELONA C/MALLORCA, 41 52, OFICINA 3 A, PASEO DE LA CASTELLANA, MADRID 28046, ESPANA AEROPUERTO DE MALAGA, MALAGA, ESPANA, Sveavagen 31, 2 tr Box 3075, , STOCKHOLM PlACE Cornavin, 16, 1201 Geneve, SUISSE TALACKER 41, CH-8001 ZURICH Country/City Code Telephone Fax Address Syria Damascus SYRIA DAMASK 29 MAY STREET Thailand Bangkok MEZZANINE FLOOR REGENT HOUSE, RAJDAМRI ROAD BANGKOK THAILAND Turkey Antalia ANTALYA INTERNATIONAL AIRPORT BLOCK A //N. 241 Istanbul Turkey, Istanbul, Elmadag, Cumhuriyet Cad N48 B USA Washington EYE STREET NW, SUITE 200 WASHINGTON DC Los Angeles USA LOS ANGELES, 9100 WILSHIRE BLVD. SUITE 616, BEVERLY HILLS, CA New York , 10 ROCKEFELLER PLAZA, SUITE 1015 NEW YORK, NY Ukraine Kiev А Sagsaganskogo Street, Kiev, Ukraine Simferopol A Pavlenko Street, 95006, Simferopol, Ukraine Uzbekistan Tashkent , BOBUR STREET, TASHKENT, UZBEKISTAN, Vietnam Hanoi DAEHA BUSINESS CENTER, 360 KIM MA ST., BA DINH, DIST., HANOI, VIETNAM

90 5.8. Contact Information Full name - Open Joint-stock Company Aeroflot Russian Airlines Short name - JSC Aeroflot Certificate of inclusion in the Unified State Register of Legal Entities - Issued by the Moscow Department of the Russian Tax Ministry ( issued on August 22, 2003) Tax payer identification number Location 10 Arbat Street, Moscow, Russian Federation Postal address , Moscow, Arbat Street, 10 Shareholders and Investors: Tel/fax: +7 (495) , (499) /Fax ir@aeroflot.ru Press Service: Tel.: +7 (499) presscentr@aeroflot.ru Aeroflot Bonus programme: Tel.: +7(495) , 0933-pay number for Russian regions Fax: +7(495) Working hours: from 9.00 to daily (Moscow time). bonus@aeroflot.ru Share Register: CJSC Computershare Registrator Address: 8 Ivana Franko Street, Moscow (Kuntsevskaya Metro). Tel. +7 (495) or Register branch: Room 107, 1 st Floor, Corpus 6 (Flight Personnel Training Center), Sheremetyevo-1. Tel.+7 (495) Notice concerning future development In addition to factual data, this Annual Report also contains opinions, assumptions and forecasts by Company management based on currently available information. Impact of external factors, such as fluctuating demand for air transportation, price changes, implementation of new technologies, changes in legal environment, fluctuations in exchange rates, etc., may cause actual performance by the Company in the future to differ from forecasts in this Report. 176

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