Daily analyst comments

On July 14 UTAir reported its operating results in 1H 2008. The company hauled 1.514 million passengers in the period, up 20.7% y-o-y. Passenger turnover rose by 19.7%. Total flying time of the helicopter division increased by 13.7% y-o-y to 31,700 hours.

We note that the company continues to demonstrate robust growth in its passenger numbers, with the pace of growth outpacing the average for the industry. For all that, we point out a gradual slowdown in the passenger flow via the airline. In 1Q 2008, the airline’s passenger numbers jumped by 28% y-o-y. Our estimates show that a surge in jet fuel prices was an important factor behind the slowdown. This is especially true since the company operates on domestic air routes, characterized by the highest fluctuations in prices for plane tickets. The growth posted by the helicopter segment is discouraging, given the company’s strong positions both at home and on external markets.

We remain upbeat about the company’s strategy to develop its regional route network. However, complicated conditions in the industry may prevent the air carrier from generating cash flows for its shareholders in the near future, despite the operating results achieved. The Anti-Monopoly Service is working on a package of measures to counter further growth in aviation kerosene prices. However, do not expect these measures to yield immediate results. We have put our target price for UTAir shares under review, with a ‘negative’ outlook for the shares. Growth of prices on jet fuel will eat into the company’s profit margins, at least in 2008.