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Transaero and Aeroflot Part 1: The airlines have a 70% overlap but the government won't want cuts

Analysis

On 3-Sep-2015, Russia's leading airline Aeroflot agreed to an offer from Transaero Airlines' shareholders to sell it at least 75% plus one share of number two ranked Transaero. The price requested for control of the heavily indebted and loss-making airline, to be paid within 24 days, was "no more than" RUB1.

Aeroflot chairman Kirill Androsov hailed the deal's "transformational significance" for the Aeroflot Group, saying it was "fully in line" with its strategy". He added that it should help the group in its aims to carry 70 million passengers by 2025 (compared with 35 million in 2014, versus 13 million for Transaero) and be in Europe's top five and the world's top 20 airlines by revenue and passenger numbers.

Nevertheless, Mr Androsov may have been attempting a brave face. The decision was influenced by a government seeking to maintain market and employment stability and also requires tough negotiations with Transaero's creditors. Moreover, Aeroflot faces a difficult choice. Either it tries to maintain Transaero's unprofitable fleet and network, which overlaps significantly with its own, or it must attempt the politically more challenging closure of large chunks of Transaero's operations. Neither option looks easy.

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