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’s entities utilise a detailed budgeting and cash forecasting process to ensure their liquidity is maintained at 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.

The following are the contractual maturities of financial liabilities, excluding future interest:

Customs duties represent discounted liabilities on custom duties regarding finance and operation leases of aircrafts. The effective annualised interest rate is impacted by the date of adding a new aircraft to the fleet of the Group.

As at 31 December 2012 the Group had USD 959.6 million (31 December 2011: USD 632.4 million) available in relation to lines of credit granted to the Group by various lending institutions.

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 the Group entities, which are primarily the Russian rouble. 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 of financial instruments:

In addition, payment of approximately USD 411.3 million denominated in euro is expected to take place in April 2013 in relation to the hedge instrument described in Note 25.

In November and December 2012, the Group entered into agreements with three Russian banks to hedge the risk of negative changes in the exchange rates (Note 25).

A 20% strengthening or weakening of the Russian rouble against the following currencies as at 31 December 2012 and 31 December 2011, 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. The effect on the Group’s equity would be the same as that on the Group’s profit, excluding taxation.

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 2012 and 31 December 2011 the interest rate profiles of the Group’s interest-bearing financial instruments were:

During the year some of the Group’s loans bore variable interest rates (Note 31 and Note 32). If the variable interest rates on borrowings in 2012 were 30% greater or lower that the actual interest rates for the year, with all other variables held constant, interest expense would not have changed significantly (2011: no significant change).

The interest component of the Group’s finance leases primarily accrues at variable interest rates. Notable part of finance lease liabilities (USD 523 million) is a subject to an interest rate swap agreement (Note 25). If in 2011 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 not have been materially different (2011: no significant change).

Fuel risk — The results of the Group’s operations can be significantly impacted by changes in the price of aircraft fuel. In December 2010 and in September and October 2012 the Group entered into agreements with a Russian banks to hedge a portion of its fuel costs 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.

Capital management — The Group manages its capital to ensure its ability to continue as a going concern while maximizing the return to shareholders through the optimization of the debt and equity balance.

The Group monitors it’s capital in comparison with other companies in the airline industry on the basis of the following ratios:

• net debt to total capital,
• total debt to EBITDA,
• net debt to EBITDA.

Total debt mainly consists of borrowings, finance lease liabilities, custom duties payable on leased aircraft, defined benefit pension obligation. Net debt is defined as total debt less cash, cash equivalents and short term investments. Total capital consists of total equity and net debt. EBITDA is calculated as operating profit before depreciation, amortization and custom duties expenses.

The ratios are as follows:

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.

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:

• 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.
• Receivables from other airlines are carried out through the IATA clearing house. Regular settlements ensure that the exposure to credit risk is mitigated to the greatest extent possible.
• 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.
• 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:

  
	2012	2011
Cash and cash equivalents	496.2	393.1
Trade accounts receivable	530.7	475.1
Prepayments for aircraft	445.6	432.9
Short-term investments	4.8	21.0
Long-term investments	200.2	191.2
	1 677.5	1,513.3

Aging of past due but not impaired trade receivables:

	2012	2011
Current	521.0	469.0
0 — 90 days	9.5	5.7
90 — 2 years	0.2	0.4
Over 2 years	—	—
Long-term investments	530.7	475.1
	1 677.5	1,513.3
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