LAUNCH STRATEGY

For a new Russian low-cost carrier until 2025

Case Flow
 Executive summary
Market Analysis
Launching strategy
Implementation

Case Flow // 2
 Executive summary
Executive summary Market analysis Launching strategy Implementation

Russian airline market is one of the most attractive to enter, despite the current economic crisis
LCC business model can succeed due to legislation changes in 2014
The best strategy is to enter the Russian domestic market in 2018 and launch international flights
in 2020
The company has to:
Attract a Russian investor, who would possess 51% share of the company ($100 mln)
Lease 8 Airbus 320 in 2018 and 8 in 2020-2025
Operate in 24 destinations (20 domestic + 4 international)
The revenue in 2018 will be at a level of $88,7 mln and in 2025 at $228,5 mln
Average EBITDA 15%

The financial result and impact on the AirFrance-KLM group by 2025

35,0% 100,0% 101,0%
2,5% 1,0%

62,0%

AirFrance KLM Transavia Group 2014 New LCC Group 2025

Case Flow // 3
Source: ICAO, annual reports, Mintrans, Air Industry legislation, CaseFlow analysis
 Executive summary
Market Analysis
Launching strategy
Implementation

Case Flow // 4
The Russian airline market is one of the most attractive
markets in the world
Executive summary Market analysis Launching strategy Implementation

The Russian airline market has been growing by 12% ... And it has one of the biggest
annually last 6 years growth rates in the world

PAX at Domestic and international flights, mln The average annual

passengers growth in passenger traffic, 2008-2014, %
International
CAGR India 15
Domestic +6% 200
Middle East 13
156
Russia 12
CAGR 130 126
121
+12% China 10
103 97
91
80 75 80
70 Australia/Asia 5
61 57 64
47 56
35 41 Lat. America 5
33 74
46 50 59
26 24 29 33 35 39
Africa 4
2008 2009 2010 2011 2012 2013 2014 2018F 2021F 2025F
Europe 1
LCC market share forecast, %
North America 1
<1 11,6 20,2 29,2

Case Flow // 5
Source: Rosstat, Mintrans, ATO, IATO
 The demand for air travel will steadily rise to 2025 due to the
economic growth and an air mobility increase
Executive summary Market analysis Launching strategy Implementation

Significant increase in air travel is expected in Russia with the

income growth in future
Air travel growth and GDP growth, 2014
10
USA UAE
Demand for air travel
Great Britain directly depends on the
The number of flights per capita

GDP per capita

Singapore

Brazil Russia 2025 With GDP growth, air

South
transportation will
Africa Chile increase
1
Japan
In 2025 GDP per capita
China Russia 2014 will be at the level of
$26,000 USD (+7%)
Belorussia
Number of flights per
India capita will increase
0,1
from 0.6 to 0.9 (+ 50%)
0 10 000 20 000 30 000 40 000 50 000
GDP per capita PPP $

Case Flow // 6
Source: ICAO, IATA, World Bank, IMF
 Executive summary
Market Analysis
Launching strategy
Implementation

Case Flow // 7
For launch of a new LCC in Russia, an effective strategy with
distinguishing features was developed
Executive summary Market analysis Launching strategy Implementation

Base at the Ramport (a Moscow hub for LCCs)

1 Airport In European destinations, only cheapest airports

2018 12 domestic destinations

2 Network 2020 12 domestic and 4 international destinations
2025 20 domestic and 4 international destinations

In 2018, 8 Airbus A320 should be leased for domestic

Fleet destinations
3
To 2025, total fleet has to consist of 16 Airbus A320

NEW RUSSIAN Positioning & Transavia brand may be employed

LOW-COST 4 Target audience millennials
distribution
CARRIER Only online distribution channels, mostly direct
STRATEGY
Organizational The organizational structure of the new LCC should
5
structure follow the best practices of the industry

EBITDA margin 15%

6 Finance Yield management practices

Case Flow // 8
Source: CaseFlow analysis
 The strategy has to be implement in 3 stages
Executive summary Market analysis Launching strategy Implementation

Stage 1 Stage 2 Stage 3

Flight preparation Take-off Sustainable flight
30
ASK, billions

4,2

0
Description

Attracting investments, registration Launch of domestic flights and Large-scale business

of a company, purchasing fleet an aggressive marketing development in the domestic
campaign destinations and launch of
international flights
Network

Detailed network planning Launching Domestic Launching International

Domestic Domestic + Int.

Purchasing 8 Airbus A320 Purchasing 2 Airbus A320 Purchasing 6 Airbus A320

Fleet

0-8 8-10 10-16

20152017 20182019 2020-2025

Case Flow
Source: CaseFlow analysis
1
The company should be based at the new Ramport Airport*
and start with the hub-and-spoke network model
Executive summary Market analysis Launching strategy Implementation

74% of domestic flights are made from Moscow The Ramport airport will provide tax and
airports operational advantages for a LCC
Domestic flights, % : Average turnaround time, minutes
55 55 55
~35-40
Regional flights

18%
Flights from
Airport service fee, $ per passenger
St-Petersburg 8%
3,69
214
2,38
138
1,93
112 ~1,59
74%
Flights from
Moscow

Take-off/landing fee, $ per ton MBM

5,90
342 5,28
306
3,60
209 ~3,48
202
Due to the Russian airlines network characteristics,
the company should be based at a Moscow airport
The company should adopt the Hub-and-spoke Domodedovo Vnukovo Sheremetevo Ramport
network model
1) Ramport is planned to be opened in 2016. For more details see appendix 4
Case Flow // 10
Source: Annual airline companies reports, Mintrans, Air Industry legislation, CaseFlow analysis
2
The network will cover the European part of Russia and the
European cities
Executive summary Market analysis Launching strategy Implementation

Domestic network at the launch of the European market expansion:

2018 2020
company will include 12 destinations launch of 4 new directions
Chosen destinations pattern Passenger traffic from Moscow in 2014, mln. PAX/year
(quadrant number of round-trip flights per day)

3 Paris 0,94
St.Petersburg
15%
Passenger traffic, mln PAX/year

II III Prague 0,7

2
Krasnodar Istanbul 0,6 85%
Rostov
Other cities
Ufa Berlin 0,5
Sochi

Kazan
Samara
I Min. Vody
II
Ekaterinburg
Chalyabinsk Global vision of the companys network: 2025
St.Petersburg Kaliningrad
0,5 - Kalinigrad About 24 directions (Russia + Europe)
5,5 7,0 8,5 About 66 flights per day
Profit per passenger, $ Hybrid Hub Model (with a sub-hub in Saint-
The biggest passenger traffic Petersburg)
Criteria Flight duration <3 hours 1) For more details see appendix 3
Few direct competitors 2) For the destination map see appendix 2
Case Flow // 11
Source: Rosstat, Case Materials, ATO, CaseFlow analysis
3
The company should buy 8 AC A320*
Executive summary Market analysis Launching strategy Implementation

Airbus A320* and Boeing 737-800 have the but AirFrance-KLM group may purchase
same operating efficiency Airbus A320 at the lower price
Operating cost, A320 price, Million $ per plane
$ per block hour per seat
34

-10-30%
32 93,9
93,9

~81
30 30

A320* B 737-800 B 737-700 A321

Seats 186 189 149 50 236

Distance,
6100 5665 6370 50 5950
km
Possible price
for the group Air Catalogue
With other equal conditions, it is better to focus on
France - KLM price
the A320*, since the AirFrance-KLM group will be
provided a significant discount

* - A320 with a Space Flex salon option with 186 seats. Available from 2015.
1) For more details see appendix
Case Flow // 12
Source: ICAO, aircraft producers web-sites, French press analysis, CaseFlow analysis
4
Transavia brand can succeed in Russian market, but the
name has to be changed
Executive summary Market analysis Launching strategy Implementation

Russian airline brands positioning is mostly national but the name of Transavia may be
1 2
and traditional, so the Transavia brand may stand out confused with a recognizable Russian
on the market airline brand Transaero1

Modern Transaero
New
LCC 67% match
Transavia

To support positioning as modern, rich

3
digital experience has to be provided,
which is attractive to the TA

Consumer pool
National International Age: 18-45 20
(Russian) Income: 600-1300 USD mln
12
Target Audience mln
Age: 20-30 (millennials)
Income: 600-862 USD

Communication & support in online & social

media,
Distribution via mobile app & online
Traditional channels.
1) Transaero is the second most recognizable Russian airline brand, which is evaluated at 115 mln USD. It shares 12% of the market.
Case Flow // 13
Source: PhoCusWright white papers, Aeroflot, MPP Consulting, press, airline companies websites, CaseFlow analysis
5
Company should employ both direct and indirect online
distribution channels, since they are most cost-efficient

1 The number of people booking flights online 3 Online distribution channels are the most
is steadily increasing cost-efficient
Type Type Channel Cost, %
People booking flights online in Russia, mln of price
Companys website 3-4
19,3 Direct
+13% Mobile app 3-4
11,2 Online
OTAs1 5-7
6,2 Indirect
2,9 Metasearches2: 5-7
Indirect Call centers, 7-13
2010 2014 2018 2025 Offline
&direct agencies, offices

2 Russian consumers, especially millennials, 4 To switch consumers to the direct online

actively use OTAs websites channels, the needs of the target audience
should be met
The main factors influencing the millennials
Millenials travelers Older travelers choice of booking website, %
37 42
28 24 Ease of use 57
Best prices 48
OTAs, Metaserchers Direct Online Brand trust 36
1) The biggest OTAs in Russia: OneTwoTrip, Biletix, AnyWayAnyDay, Ozon.Travel.
2) The biggest metasearches in Russia: Aviasales, Skyscanner, Yandex.Avia.
3) Monthly reach of the metasearches, not including mobile apps (mln people): Aviasales 4.5; SkyScanner 3.5; Yandex.Avia 1.2.
Case Flow // 14
Source: PhoCusWright, Data Insight, Marketing & Market Research Journal, press, OTAs websites and metasearches
5
The organizational structure of the new LCC should follow the
best practices of the industry
Executive summary Market analysis Launching strategy Implementation

The organizational structure of the new LCC will match ...and its efficiency will be comparable
European companies best practices with the European LCCs one

Organization structure benchmark, % New LCC, Passengers per employee, 2014

employees

Pilots/co-pilots 17% 36 8 599

Flight attendants 25% 53

6 715

Management 17% 36

1 325

Other 42% 89
4

New LCC 5 164

Total 100% 213

Case Flow // 15
Source: annual reports, companies websites, CaseFlow analysis
6
The company should apply the yield management practices
to maximize the revenue
Executive summary Market analysis Launching strategy Implementation

To maximize the revenue, 2 types of passengers Together, this 2 types of passengers form linear
have to be taken into account booking of the seats in an aircraft
Arrival curves by passenger type Combined booking pattern1
100% of Early Late P1, P2, Pn price buckets
seats Early Late
booked 180
Pn
150

Total seats booked

Early passengers 100
100
120 P2
100
100
90 100

Departure day
90 100
100
Booking starts

P1
100
8080
60 90
Late passengers 6565
30 45 45 55
55
25 25
05 25 10 25

Late passengers: 90
5
080 80
90 070 70
0 60 60
0 5050
0 4040 0 10
0 3030 20 10
20 10
0
0
Early passengers:
Tourists Businessmen
Days before the flight
Shift workers Urgent occasions

The following decisions should be implemented for every specific flight (destination, day and time):
Booking starts date (from 90 to 150 days)
Appropriate price buckets (P1, P2, Pn)
Adjust the system in real time if necessary
1) The diagram is for information has to be adapted for every flight
Case Flow // 16
Source: Press, Yield management in budget airlines Gerald L. Barlow, CaseFlow analysis
6
Launch of a new low-cost airline in Russia is financially
efficient
Executive summary Market analysis Launching strategy Implementation

In current conditions, launch of a new low-cost airline in Operational KPIs will be comparable with
Russia is cost-effective Russian FSCs
4,3
EBITDA margin, % Revenue, mln USD
220,9 228,5 3,7 0,6
199,9
178,6
159,0
96,4 140,4
21% 21% 22% 22%
88,7 8% 6%
12%
-53%

2018 19 20 21 22 23 24 2025 RASK CASK Margin

60 The operation efficiency of the new low-cost airline
40 FCFF, mln USD will meet the industry indicators

20
Russian FSC New Russian LCC
0
-20 RASK1 4,8 4,3
-40
2018 19 20 21 22 23 24 2025 Term.
per.
CASK1 4,4 3,7
NPV: 63 mln USD IRR- 35% DPBP 6 Y
* Aircraft acquired on lease at a rate of 4%, the term of the contract for 15 years, a down payment - 20% of the initial cost
Case Flow // 17
1. $ ents Source: ICAO, IATA, annual reports, CaseFlow analysis
 Executive summary
Market Analysis
Launching strategy
Implementation

Case Flow // 18
In order to successfully launch low-cost carrier in Russia the
company should focus on three main stages
Executive summary Market analysis Launching strategy Implementation
Actions 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Stage 1 Flight preparation

Creation of a working group

Detailed business model preparation

Attracting investments

Hiring administrative staff

Stage 2 Take off

Fleet purchasing & insurance

Crew hiring & training

Launching marketing campaign

Fleet state registration

Performing domestic flights Domestic flights launch

Stage 3 Sustainable flight

Additional Fleet purchasing & insurance

Crew hiring & training

Launching international
marketing campaign
Fleet state registration

Performing international flights International flights launch

Case Flow // 19
Source: ICAO, IATA, CaseFlow analysis
Thank you for your attention!

Case Flow // 20
Appendix

Case Flow // 22
Appendix 1: Legislation possibilities allow to launch low-cost
carriers in Russia effectively
Legal environment has been becoming more favorable for LCC since 2014, allowing to cut costs effectively
Description Possibilities

+ International pilots are allowed to be hired International pilots will be hired

Legislation

Catering must be provided only in 3+ hours flights Catering will be provided only in 3+ hours
flights
Price and amount of luggage are specified by airline
companies Luggage and food on board will be sold
Tickets may be non-refundable at additional prices
Positive
Infrastructure

In 2016, airport Ramport for low-cost carriers will be International pilots are allowed to be hired
constructed in Ramenskoye city (45 km from Moscow)
Catering must be provided only in 3+ hours
Reconstruction of airport in St. Petersburg for low-cost carriers flights
12 large Russian airports will be modernized, reconstructed or
developed for FIFA 2018

But there are still some unbeneficial limitations. Though, they may be overcome
Description Solution
8 new aircrafts have to be leased (at 20%
- At least 8 planes are required for regular flights
down payment +4% annual interest)
Legislation

Restrictions on attracting international investment: A Russian partner with potential share of

Negative the international company can posses maximum 51% (at least 80 $mln) has to be found
49% of the Russian companys share
Impossibility to carry international flights in the first First 2 year only domestic destinations may
two years of existence be covered

Case Flow // 23
Source: Air Industry legislation, CaseFlow analysis
Appendix 2: Ramport Airport information

The new airport Rapmport is under Ramport will be modern, fully The first flight is planned in 2016
construction in Ramenskoye equipped low-cost airport with and in 2021 the airport will
(Moscow region) developed aeronautic infrastructure reach its projected capacity
Sheremetyevo Mln. of passengers
14
12
10
8
Moscow 6
4
2 fully equipped modern terminal 2
with total surface 60 000 m3
Vnukovo Ramport 5,5 km runaway 0
Total surface of airport infrastructure 2016 2017 2018 2019 2020 2021
240 000 m3 Terminal 2
Domodedovo Announced as a Low-Cost airport Terminal 1

Along with the main airport activities the auxiliary infrastructure will be developed:
Sub-urban train Reconstruction of the high- Construction of 2 high-rise Construction of the
Aeroexpress from way M-5 Ural: extension parking-places modern hotel facilities
Kazansky station up to 4 lanes

Case Flow // 24
Source: Ramport airport website, press, CaseFlow analysis
Appendix 3: Route map development

Murmansk

2018
Kaliningrad Network at the company launch
St.-Peterburg
Arkhangelsk

Berlin
2020
Paris Europe network expanding
Moscow
Prague

Istanbul
Perm
2025
Kazan
Russian network expending
Ekaterinburg
Rostov- Saratov Samara
on-Don Ufa
Chelyabinsk
Krasnodar
Sochi
Astrakhan
Mineralnye-
Vody
Makhachkala
Main Hub Sub Hub Destination

Case Flow // 25
Source: FSSS, ATO, annual reports, CaseFlow analysis * - the proposed network in 2025Y is approximate, should be adjusted in real time
 Appendix 4: Low-Cost potential. Domestic market sizing in
Russia
LCC may potentially attract 23,4 million passengers that currently travel by FSC and railways

Total FSC domestic market, mln pass. Total railway market, mln pass.

39 108,6
in European part of Russia in 1st and 2nd class
Potential LCC
24,2 market structure 28,2
in economy class age of the passengers 18 45 years
21,7 24% 11,9
salary of the passengers from salary of the passengers from
35 000 RUR to 75 000 RUR 35 000 RUR to 75 000 RUR
19,5 76% 5,8
age of the passengers 18 45 years

17,6

Total potential domestic LCC market in Russia in 2015, mln. pass./year : 23,4

Case Flow // 26
Source: Rosstat, Case materials, CaseFlow analysis
Appendix 5: Potential to minimize the costs

Cost model Costs per ASK, $cents

Cost structure How can we save FSC Aeroflot LCC in Russia

1,25 -17%
Reduction of the overall fuel consumption is achieved 1,04
Fuel by increasing the number of seats in the cabin

Cost reduction due to the new LCC airports (Ramport) -10%

Airport taxes 0,82 0,74
Fast plane preparation between flights

Cost of the Reduction of the purchased aircrafts price due to Costs can be
aircraft and the possibility AirFrance-KLM group 0,51 -37% achieved by
0,32
insurance Discount due to the acquisition of similar aircrafts reducing airport
Cost reduction of repairs due to the aircraft charges and the
-3%
MRO unification and shorter period of use (max 8 years) 0,32 0,31 same type of fleet

Offering all services online such as customer To do this we

Sales and -25%
service, ticketing and sales 0,20 0,15 should base at
distribution avoid the agency commissions and GDS* fees
the airport
International pilots are allowed to be hired
0,72 0% 0,72
Ramenskoye, to
Salaries Keep the number of crew members at the legal
minimum
purchase the
same type of
International pilots are allowed to be hired
Catering must be provided only in 3+ hours flights -4% aircraft and sell
0,27 0,26
Administrative No overnight accommodation costs for crew members tickets online

On board costs Catering will be provided at additional price 0,19 -53%

0,09

TOTAL 4,28 3,63

Case Flow // 27
Source: ICAO, annual reports, Mintrans, Air Industry legislation, CaseFlow analysis
Appendix 6: Tree of the strategies

Enter the russian Low-Cost

Airline market
The goal

International lines Domestic lines

First fork: (Transavia route new LCC in Russia
IL or DL? development)

Second fork: Base in the Base in the other

Ramport or Ramport airport moscow airport
other airport ?

Strategy: S1 Basic S2

See the details of the strategies S1, S2, S3, S4 further in the appendix S1, S2, S3, S4
Case Flow // 28
Source: CaseFlow analysis
Appendix 7: List of potential investors

Cash available Requirements for Potential interest

Million USD cooperation Portfolio
Basic Element
Efficient investments Metallurgy
Energy and mining
Diversification Vertical diversification
~600 Engineering
Airport business

RENOVA Metallurgy
Efficient investments Energy and mining
~500 Engineering Vertical diversification
Diversification
Airport business

VEB Petrochemistry Development of

Pay back period > 5 national transport
~ 2 300 Engineering system
years
Metallurgy
Olympic Games

Case Flow // 29
Source: annual reports, companies web-sites, CaseFlow analysis
Appendix 8: The best time to enter the market is Mach/April -
to test the business model and be ready for the season

Load factor, % LF 2013-2014 LF 2012-2013

84,0
83,5
83,0
82,5
82,0
81,5
81,0
80,5
80,0
79,5
79,0
78,5
78,0
77,5
77,0

0,0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Case Flow // 30
Source: ICAO, annual reports, Mintrans, Air Industry legislation, CaseFlow analysis
 Appendix 9: Aircraft technical characteristics

Airbus Boeing

A319 A3201 A321 737-700 737-800 737-900

Fuel consumption, liters

per 100 kilometers per 2,95 2,61 2,5 2,71 2,68 2,32
person
Cruising speed, km/h 840 840 840 828 828 823
Max. flight distance, km 6850 6100 5950 6370 5665 6045
Max. capacity, people 156 186 236 149 189 220
Cost, mln. USD 85,8 93,9 110,1 78,3 93,3 99,0
Max. take-off weight,
75 78 93,5 70 79 85
tons
Empty weight of the
40 42 48 38 41 44
aircraft, tons
Max flight attendants,
3 3 4 3 3 4
people

1) Space Flex salon option, available from 2015

Case Flow // 31
Source: Airbus, Boeing websites, open sources
 Appendix 10: Information about routes
Market, price & competition
Potential
Target
Total Low-cost Min. Max. Price of Competiti
market1, From
Departure Arrival market, segment (+ price, price, the new on: FSC/
people Moscow
people trains), FSC, USD FSC, USD LCC, USD LCC2
people
Saint
Moscow 2 847 150 2 075 572 2 676 451 1:25 40 136 33 22
Petersburg
Moscow Krasnodar 1 804 860 1 315 743 1 334 781 2:10 65 145 39 12
Moscow Sochi 1 514 040 1 103 735 1 147 821 2:00 62 101 41 11/2
Yekaterinbu
Moscow 1 417 470 1 033 336 1 056 612 2:20 86 154 41 7/3
rg
Rostov-on-
Moscow 1 000 110 729 080 763 868 1:45 67 85 39 15
Don
Mineralnye
Moscow 913 530 665 963 693 477 2:20 84 90 40 15
Vody
Moscow Samara 876 900 639 260 702 637 1:35 66 99 29,5 10
Moscow Ufa 832 500 606 893 623 085 2:00 39 92 38,5 5/2

Moscow Kazan 705 960 514 645 585 485 1:30 70 163 32 7

Moscow Kaliningrad 701 520 511 408 529 877 1:55 80 95 38,5 9

Moscow Chelyabinsk 638 250 465 284 474 772 2:25 102 155 43,5 7
Saint
Kaliningrad 366 300 250 905 275 110 1:40 85 102 34,5 3
Petersburg

1) People aged 20-45 with an income 430 -1300 USD

2) Amount of offers of FCS and LCC companies on the metasearch SkyScanner. Search for flights on Monday in 2 weeks.
Case Flow // 32
Source: ATO