Mr Putin and Mr Savelyev also discussed providing people who have concessions from the Russian Far East and other remote regions with flights to the European part of Russia. Mr Savelyev said that the plan for concession flights is being fulfilled and the company is ready to expand it.

Mr Savelyev informed Mr Putin on the process of merging with air carriers that are in a difficult financial situation due to the economic crisis. The two men underscored the need for general consolidation of the aviation sector in Russia, which corresponds to international trends in the development of the air transport market.

The subject of upgrading the fleet of Aeroflot and its subsidiaries with both foreign and domestic aircraft was also reviewed. Mr Putin instructed Mr Savelyvev to work on increasing the share of domestic aircraft in the total planned purchases.

Transcript of the beginning of the meeting:

Vladimir Putin: Let's talk about last year's results. And what is your assessment of this year, at least the first five months? This is the first set of questions; I'll ask you others later.

Vitaly Savelyev: Thank you, Mr Putin. Last year really was a year of serious trials for Aeroflot because the global crisis affected the entire aviation industry and Aeroflot in particular. While the entire market of commercial aviation shrank 9.4%, Aeroflot was able to maintain a level of 5.6%. I want to tell you that we are one of the few companies, including global ones that were able to turn a profit. Aeroflot profits grew 350% according to international accounting standards. We will pay dividends for 2009 that are double what they were in 2008. The government is our main shareholder.

In addition, Aeroflot will pay 12 billion roubles in various taxes and customs fees in 2009. We were able to achieve a significant milestone: we took first place for passenger service in Economy and Business Class for short- and long-haul flights in the Sky Team Alliance for the first time in history.

Despite the crisis and falling passenger traffic, Aeroflot's capitalisation has doubled in the past year. In April 2009, Aeroflot was valued at $1.2 billion. In April 2010, it was already valued at $2.6 billion.

We were able to provide air transport for the planned number of persons who have concessions. You asked about the five months - we can say the following: starting in December, we saw the aviation sector emerge from the crisis. In December, we had an increase in traffic of six per cent. In the first five months of this year, our air passenger traffic grew 31%, which also significantly impacts the economy. Our profit also grew in these five months, even though the winter season was loss-making for us, as it was for all airlines.

Regarding the privileged persons, as I already said: last year, we provided 26,000 subsidised passenger flights, while already in the first five months of this year, we transported 68,000 passengers. We have applied to the Transport Ministry for additional funds for their flights. We think that we will be able to transport an additional number of passengers before October.

Vladimir Putin: The categories of passengers that have concessions - these are from the Russian Far East?

Vitaly Savelyev: From the Far East to Moscow.

Vladimir Putin: Norilsk, Kyzyl?

Vitaly Savelyev: And to St Petersburg. That's right. That was your directive during the crisis, when indeed, as you said, Aeroflot turned out to be the only airline that was flying during the volcano eruption. We did not declare a force-majeure and we transported 42,000 to and from Europe, Southeast Asia and Russia. We had practically no restrictions on anyone and we did not declare force-majeure. We refunded tickets for 4,000 passengers and put up 5,000 passengers in hotels at our expense. Of course, our costs went up, but we secured the passengers' loyalty. And the directive you issued to us as a company was to fly - and we flew.

Vladimir Putin: In other words, you assess the first four to five months of this year as positive.

Vitaly Savelyev: There are positive aspects. We can see that the sector is coming out of the crisis - not only we, but other airlines are also showing positive performance. Therefore, we think that there is every reason to hope that this year will be profitable for us and the aviation industry will finally come out of the crisis. Our passenger traffic is increasing.

Vladimir Putin: I have the following question. In 2009 particularly, and previously as well, smaller companies, especially regional ones, found themselves in a difficult financial situation and could not meet their obligations to passengers.  Aeroflot took some of these companies under its wing. How are relations with their personnel shaping up, and how are the associated mergers coming along?

Vitaly Savelyev: First of all, Mr Putin, we have a problem in the aviation sectors: the level of consolidation of airlines in Russia is low. There are around 160 airlines currently operating in Russia. That is too many for the Russian Federation. Many airlines have one or two planes, and of course they create certain confusion on the market and hinder the operations of normal airlines. Your decision to merge six Russian Technologies assets into Aeroflot is absolutely the right decision, in keeping with the spirit of the times. Because we see that there is consolidation of assets in Europe, and we see that Lufthansa and Austrian Airlines are working together, as are Air France and KLM, British Airways and Iberia... Therefore, this is a timely and absolutely reasonable decision.

We have signed three documents with Russian Technologies; three agreements. The first agreement concerns our relations in managing assets during the transition period. The second agreement we signed with Sergei Chemezov (CEO of the Russian Technologies corporation), and it concerns the way we will cooperate on purchases of new equipment through Russian Technologies. And now we have signed an agreement on the procedure for corporatisation of the six companies that we will now receive. Three of the companies are open joint-stock companies and three are federal unitary enterprises that we will first have to privatise and then corporatise them. But the work is in progress and now all companies are under our operational control. Under my supervision, we have created a committee for working with these companies. We have our own two subsidiaries, Donavia and Nordavia, plus these six companies. We meet regularly every two weeks. We have scheduled a meeting and will work on protecting current business plans for the companies to the end of 2010. I met with St Petersburg Governor Valentina Matviyenko regarding State Transport Company Rossiya. I think that we have productive and dynamic relations with the city of St Petersburg. We think that Federal State Unitary Enterprise State Transport Company Rossiya will be one of the first companies that we will be able to privatise and corporatise because the city is fully on our side. What is more, the company is entering...

Vladimir Putin: Reincorporated as a joint-stock company is the precise term.

Vitaly Savelyev: Yes, reincorporated as a joint-stock company. We have now helped the company and have assumed a number of strictly financial obligations to the tune of $200 million, and the company is now solvent. It is currently paying for its services at the airport and is fully covering all payments associated with refuelling.

Vladimir Putin: You mentioned business plans. I would like to draw your attention the fact that these business plans need to have people's livelihoods as their first priority. Under no circumstances should we forget about the social obligations to the workforces. If the company plans to conduct some kind of optimisation, then people shouldn't suffer. We need to think ahead about what will happen with each working member of the workforce.

Vitaly Savelyev: Mr Putin, that's absolutely the way it is. Again, if we return to the subject of STC Rossiya, the city has proposed that STC Rossiya... The company is "oversized," and its number of employees is more than standards prescribe, including international standards. What do we do? First of all, the city has organised a job fair. Second, many of the things that we are proposing to the city, many companies, among other things, we are proposing to outsource the medical centre - the company does not need one of that size. The city is ready to take it over on condition that our pilots, crews and engineers will be treated there.

Vladimir Putin: Only if the quality of service does not deteriorate.

Vitaly Savelyev: Mr Putin, I think that the city understands this very well, and we do as well. All the more so since St Petersburg will be one of the shareholders in the joint-stock company. Therefore, we hold that we have this issue under control and we will resolve it.

Vladimir Putin: This concerns not only STC Rossiya in St Petersburg, but other regions as well.

Vitaly Savelyev: All the companies.

Vladimir Putin: The next question is in regard to your cooperation with foreign partners. You just mentioned alliances: British Airways, KLM and Lufthansa have joined forces with other partners. What will Aeroflot do in this regard, and how do you intend to work on this in the future?

Vitaly Savelyev: Mr Putin, our main goal, our strategy is to become number one on the Russian market and assume a dominating position in our own country. Today, Aeroflot - together with its subsidiaries - has around 25% of Russia's airline market. If we take our real competitors: these are the "big three" - Air France, British Airways and Lufthansa - then, for example, Lufthansa and its subsidiaries control 60% of their domestic market. Alitalia controls around 60% of its domestic market. Air France has 50% of its domestic market. Therefore, our main strategic goal is to learn how to be the first in our own market, so that by the time Russia accedes to the WTO, we will indeed be competitors to global carriers, because being the top airline in Europe is impossible without first being the top airline in our own country. Therefore, our main goal is to secure this success and become number one in Russia.

Vladimir Putin: And now let's discuss upgrading the fleet.

Vitaly Savelyev: We at Aeroflot have been able to bring our air fleet up to standard. We have around 115 planes, six of which are our domestic Il-96's. The planes have undergone extensive repairs this winter, and we invested from 100 million to 200 roubles in each plane. We are using these very planes to transport passengers with concessions on Far Easter routes. These planes can be used without repairs for four or five years. Therefore, these planes are currently absolutely economically viable given current fuel prices. The rest of our fleet is imported. We have 11 Boeing 767's, 64 Airbus 320's and 10 planes are modern long-haul Airbus 330's. As of 2016, we expect to have 22 Dreamliner Boeing 787 and 22 planes in the will be Airbus 350's, which are in development. We have a contract with Sukhoi Superjet, and we are anxiously awaiting this plane. We have a contract for 30 planes, and we have already signed an agreement with the leasing company for 10 of them. We are following our programme to the letter.

As for the assets that will be merged with is, there are problems with their fleet. The fleet needs to be standardised because the fleets of many merger assets is very much out-of-date and need upgrades, modernisation and standardisation. We are now involved in this work full-bore. According to our memorandum with Russian Technologies, we will formulate a clear marketing strategy by November, and we will determine how many planes we need in order to standardise the fleet of the companies that will merge with us.

Vladimir Putin: When upgrading the fleet, you need to concentrate mostly on using Russian equipment.

Vitaly Savelyev: That is what we're doing. We will have, for example, a Sukhoi Superjet plus an Il-96 for another four to five years, and may acquire other planes. But we have already determined that STC Rossiya will have Аn-148's. Six such planes have been purchased and three planes are in full-time use. And we hope to obtain a next-generation Boeing 737-800 through Russian Technologies for STC Rossiya.

Vladimir Putin: And you know that there are other plans? And Tupolev has the MS-21 in the works...

Vitaly Savelyev: Mr Putin, we also have Vladivostok Avia and Sakhalin Airlines. We will use all of the planes in the fleet. This is mostly Russian equipment. It's cheaper. Russian equipment does not require customs payments; therefore it is efficient from an economic point of view. We think that we will use Russian equipment.

Vladimir Putin: Why don't you show me what you're going to do in the next few years. Maybe even not just yet. I want to understand how many Russian airplanes Aeroflot is going to buy. Otherwise the situation is that you want to dominate the domestic market, but don't want to buy domestic equipment. That won't fly.

Vitaly Savelyev: It's not enough?

Vladimir Putin: It's not enough.

Vitaly Savelyev: Alright, we will draft such a report. I will brief Styou.

Vladimir Putin: Good.