Fortune 100500

Strategy development of Low cost carrier on Russian market

Fortune 100500 2

2025 2020 2015

80

160

0

-80

9%

91%

:

: , Fortune 100500 3

40

60

80

21

2015 2020 2025

100

5

10

34

CAGR 27%

26%

Fortune 100500 4

100% Max. 49%

✗ ✓ ✓ ✓

✗ ✓ ✓ ✓

✗ ✓ ✓ ✓

✗ ✓ ✓ ✓

✓ ✗ ✗ ✓

1 2

: team analysis, open sources

Fortune 100500 5

0

100

200

2015 2020 2025

1

2

Domodedovo 342 138

Sheremetyevo 204 214

Vnukovo 306 112

Ramenskoye 2016 200 108

Yermolino 186 100

Russia

Moscow

2018

200286

571

108155

236

-30%

-50%

: case data, team analysis, expert.ru

,

1 2

6

Factor

Distance ( < 6000 km)

Pass. traffic (target occupancy rate)

Profit

Market saturation

3

16800

16900

25000

47000

58600

60000

66500

61000

57000

58000

58000

60000

63000

,

: Fortune 100500

Fortune 100500

1

7

2

1. Ownership

2. Operational leasing

3. Financial leasing

First year investments, M$

Annual payment, M$

93,3

9,3

9,3

0

9

12

Fleet upgrade flexibility

Range, km

6.850

6.100

6.230

5.765

Capacity

156

180

149

189

Model

Airbus A319

Airbus A320

Boeing 737-700

Boeing 737-800

CASM, Cents$

7,1

6,5

7

6

Exists in Transavia

Fuel consumption, l/pass/100km

2,95

2,61

2,71

2,68

Max. take-off weight

75

78

70

79

Price, M$

85,8

93,9

78,3

93,3

Since May 2015 it will be restricted to include aircraft registered abroad into Air Operator Certificate

Additional limitations

*

: case data, open sources, tem analysis

3

0

20

40

60

80

100

4

54%

56% •

•

•

65%

20%

15%

70%

15%

15%

: ,

Sales costs, RUR/pass

56,5319,2

-82%

Offline Online

2

1

Fortune 100500 8

9

1

Ancillary revenue sources, %

2

Ancillary revenue share, %

: ideaworkscompany.com, Fortune 100500

Fortune 100500

•

•

4,45

6,55

4

5,55,56

0

2

4

6

8

Projected Transavia Aeroflot

9%

75%

1

2025 2020 2015

80

160

0

-80

16%

2

3

: 10

Actions 2015 16/18 19/21 22/25 Investments

Lau

nch

Negotiation with strat. partner n/a

Negotiation with hub operator n/a

Registration / certificate n/a

Airports negotiation n/a

Aircraft leasing prepayment € 23,4 mln / 3 jets

Staff hiring and training € 150 000

Marketing activities € 1,1-1,5 mln/year

IT infrastruct. setup and support € 600 000 / year

Op

era

tio

ns Domestic flights

Maintenance, Repair

IF airports negotiation

International flights

Sale

s o

rgan

iz. Website sales

Office sales

Metasearch

GDS and Mobile App sales

Fortune 100500 11

1

1

2

3

4

5

6

7

Emergence of new competitors

Development of High-speed railroads

Wellness decrease

Delay in law passing (3 aircraft for reg. flyer)

Delay in strategy realization by the partn.

Jet Fuel price fluctuation

Significant decrease in occupancy rate

Impact of Risk

Pro

bab

ility

of

Occ

urr

ence

Occupation of unique routes.

Focus on internal marketRoute optimization

Occupation of unique routesPrice war, first comer.

Operation as air charter

Hub creation in Vnukovo or Yermolino

Risk hedging

Route optimizationAdjustment of price policy

2

3

45

6

7

Ways of mitigationRisks

Fortune 100500 12

Fortune 100500

Attachments

All six destinations are served on daily basis is order to meet the demand and occupancy rate targets

Fortune 100500 15

Plane 1

6:00 – 10:00

Plane 2

Plane 3

10:00 – 14:00 14:00 – 18:00

Moscow

Moscow

Moscow

Krasnoyarsk Moscow

Omsk Moscow Chelyabinsk Moscow

Perm Moscow Anapa Moscow

6:00 8:00 10:00 12:00 14:00 16:00 18:00

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

Low-cost carrier project is realistic until 2025 due to cost-cutting in four main categories

Priority cost elements that can be decreased: Online sales development will allow LLC to cut sales costs by 82%

Airport service costs can be decreased by 30% by the year 2020 due to:

Sales costs, RUR/pass

Operating costs, %

61%

60000

80000

100000

Ост. РФ Москва

-20%

Avg. airport costs, RUR./flight*

1. Infrastructure development

2. Usage of low-cost airports in Moscow

since 2016

3. Usage of low-cost airports abroad

-35% -30%

Relative airport costs per flight

56,5319,2

-82%

Offline Online

30%

20%

17%

14%

10%4%3%2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Кейтеринг

Админ. расходы

Экипаж

Организация продаж

Лизинг и амортизация

ТО и ремонт

Аэропортовое обслуж.

Топливо

Leasing of modern homogeneous fleet will allow LLC to cut leasing and maintenance costs by 45% and 56% respectively

Costs for B737-800, $/flight time

72

100

2477

8

-45%

192

350

271

616

-56%

1 2

3

16

60%

80%

100%

40000

50000

60000

70000

80000

90000

Москва Раменское, Ермолино

Moscow Low-costairport

Moscow Russia AVG

Catering

Admin. costs

Crew

Sales

Leasing + depreciation

Maintenance

Airport

Fuel

Leasing Maintenance

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

Fortune 100500

Profitability of the destinations depends on the traffic, current average level of prices and costs

Everything in RUR/Flight

Profit is the main factor of deciding on the route map

Fortune 100500

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17

Novosibirsk

Kazan

Omsk

St. P

Krasnodar

Sochi

Yekaterinburg

(Passengers × Price + Additional revenue) – (Airport costs + Fuel + Staff + Leasing + Sales) = Profit

Direction Total revenue Airport

expendituresFuel Sales Staff

Leasing + Amortisation

Other Profit

St. Petersburg 377,592 124,859 109,213 9,077 16,028 122,696 114,562 -34,954Krasnodar 731,366 116,339 232,886 9,077 16,028 122,696 149,108 25,068

Sochi 639,001 142,336 281,822 9,077 16,028 122,696 171,588 -30,749Yekaterinburg 435,683 134,642 291,544 9,077 16,028 122,696 172,196 -91,324

Novosibirsk 871,366 149,804 540,784 9,077 16,028 122,696 251,517 -64,277Rostov-on-Don 551,865 120,951 179,533 9,077 16,028 122,696 134,486 -9,090

Mineralnye Vody 682,570 143,718 263,520 9,077 16,028 122,696 166,512 -11,465

Samara 551,865 120,392 169,638 9,077 16,028 122,696 131,349 -5,093

Ufa 435,683 111,011 219,430 9,077 16,028 122,696 143,473 -54,715Krasnoyarsk 1,423,230 126,331 646,651 9,077 16,028 122,696 276,235 66,533

Kazan 580,910 119,566 135,431 9,077 16,028 122,696 120,839 16,845

Kaliningrad 624,479 113,774 221,664 9,077 16,028 122,696 144,972 -1,097Chelyabinsk 813,275 146,790 286,669 9,077 16,028 122,696 174,378 16,952

Perm 842,320 109,265 233,984 9,077 16,028 122,696 147,315 59,986

Irkutsk 1,379,662 132,184 836,366 9,077 16,028 122,696 334,905 -21,057Omsk 1,132,775 165,658 434,949 9,077 16,028 122,696 224,522 47,013

Tyumen 464,728 148,043 342,918 9,077 16,028 122,696 191,629 -107,548Volgograd 464,728 112,103 165,103 9,077 16,028 122,696 127,502 -25,818

Anapa 871,366 114,923 254,182 9,077 16,028 122,696 155,072 58,643Surgut 943,979 186,523 466,238 9,077 16,028 122,696 240,169 -28,456

13%

30%17% 9%2% 30%20%

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

Major assumptions used in calculating profit model

Fortune 100500

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18

LLC/Legacy price ratio 80%

Additional revenue 13%

Occupancy rate 85%

RUR/EUR exchange rate 65

WACC 7.5%

Max flight hours per crew, h/month 100

Max flight hour per aircraft, h/day 12

Staff costs calculations 2

Total flight hours per month 300

Required numbers or crew 3

Captain wage, RUR/month 500,000

Second pilot wage, RUR/month 300,000

Flight attendant wage, RUR/month 60,000

Number of flight attendants 3

Total crew wage, RUR/month 2,940,000

Taxes and benefits, RUR/month 1,470,000

Total crew expenditure, RUR/month 4,410,000

Other costs calculations 3

Fuel cost = Fuel consumption [t/km] × Distance × Price [RUR/t]

Airport cost = MTW × AP(1,2) per MTW + Pass × AP(1,2) per pass

Sales = 56 RUR/passenger, in case of 100% online sales

Other cost account for 30% of total cost

All fixed costs are allocated per flight

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

Source: case data, team analysis, open sources

Organizational structure of the new LCC should be designed to leverage competitive advantages of parent company

19Source: team analysis, open sources

IT, Operations and Procurement should be centralized in Transavia CV to maintain low cost level and share know-how

1

Transavia CVCEO

COO IT developmentTransavia Rus

CEO

ProcurementEngineering

and maintenance

Not exclusive

Marketing and sales

HR

Legal

Finance and planning

Public relations

External relations

Operations Officer

IT implementation

Management control

Functional control

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

Fortune 100500

20Source: case data, open sources

Route “Paris-Aurillac” is operated by Air France’s branch Hop! and generates about 30% of average operational profit per flight within the company…

…however during previous 6 years the traffic has increased by 30% while the number of flights remained the same, that suggests operational profitability increase of the route.

Moreover, the fleet is based on ATR-42 500, which does not comply with selected strategy of LCC development in Russia

ATR-42 500 B737-700

Capacity, people 50 149

Range, km 1500 6230

CASM, U.S. cents 10 7

Cancellation of “Paris-Aurillac” is pointless due to increased operational profit of the route for Hop! (Air-France KLM) and incompliance of the fleet, operating on the route and projected for new Russian low-cost carrier.

1 2

3

327

1 143

-71%

Industrial average

Paris-Aurillac

26 60623 958

26 62026 585

21 89120 427

2011

2010

2009

2014

+5%

2013

2012

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

Fortune 100500

21Source: open sources

Breach between target audience of Nice and clients of low-cost carriers1

Relatively low traffic and its lowering dynamics2

There is a potential for growth and market penetration after 20183

Attachment 1 Attachment 2 Attachment 4 Attachment 5 Attachment 6Attachment 3 Attachment 7

400

200

Fortune 100500