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Project was prepared for Air France-KLM23.03.2015
Working group:
Vitaly Pentegov (pentegovvit@gmail.com)Alexander Kulakov (alexander.d.kulakov@gmail.com)Marina Mikheeva (marinakik95@gmail.com)Pavel Rybalkin (rybalkinpavel93@gmail.com)
LLC market entry in Russia in 2017 could be organized with high and positive potential for the Air France-KLM company
| 2
1
2
3
4
5
LLC launching in Russia is more preferably in 2017The project implementation is possible due to the following aspects:
Executive summary of our proposal Net income from our proposals
Russian market predisposition and significant experience of Air France-KLM will allow to occupy a significant market share of air carriers
Focus on price-flexible passengers
Competition advantages due to cheaper tickets and more profitable route map
Usage of Air France-KLMcompany’s experience in launching LLCs
Minimizing risks due to implementation of cutting-age initiatives
Route map extension in West Europe and Asia
Optimization of aircraft park
Route map extension
Change in price policy (in comparison to the other carriers)
Better feedback system for ticket buyers
Total result of project implementation
• Lease of Boeing 737-800 aircrafts (26 pcs.)
• Transfer of 3 ATR 42-500 from HOP! LCC and further selling
• Introduction of route map of 41 directions, including destinations in Europe and Asia
• Low initial tickets price• Introduction of business-
like LLC
• Advertisement company implemented in tour agencies’ websites and airports
• Direct-sell specialization
15 bln. ₽
NPV of LLC launching project7.9bln. ₽
Implementation of proposed initiatives will allow the company to entry Russian LCC market successfully by 2025 with the route map extension in Europe and Asia
| 3¹ LCC – low cost carrier, FSC – full service carrier² RASK – abbr. Revenue per Available Seat Kilometer
Our strategy will lead to the following results by 2025 …
0.0%0.0%
1.5%4.2%
4.2%7.7%
8.0%8.2%8.5%9.0%
9.0%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Expected increase in market share of Russian air carriers (LCC, FSC)¹
Occupy a significant portion of Russian air carrier market share
Organize highly profitable LCC business and get the following results…
Expand the company’s route map along Russia and other nearby European
and Asian countries
Initial work on the project
Start of company’s operation activity
European and Asian markets entry
Conducting contracts for aircraft leases
Route map extension within Russia
Occupation of significant market share in Russia
LCC Russia
RASK = 18 rubles
95 daily flights in 41 directions
Basing in 4 biggest Russian airports
Leading positions in the Russian LCC market
Sources:
Nowadays, the Russian air carrier industry faces hard times due to the current financial crisis and regulatory policy
| 8| 4* 1.658 bln. ₽ - revenue of subsidiary Transaero-Finance and 130 mln. only if Transaero itselfSources: Investing.com, TASS.ru, aviaport.ru, FT.com, companies’ financial statements, Bloomberg, ATO.ru
Our analysis showed that the market entry during the next 2 years is very risky due to crisis in Russia
Current financial position of companies competitors is unstable in Russia21
Ruble devaluation in 2014
Results for 2014:
80%
2 Biggest Russia air carriers almost gone bankrupt
3-10% Expected decrease in passenger traffic in 2015
0%
10%
20%
30%
Credit rates in pre- and crisis time
9-11%
22-25%
Net income (bln. ₽)
-5.36%2.52%
-4% -2% 0% 2%
Profit margin
1.06
2013 2014 (Q3)
Net income (bln. ₽) *
0.38%-4% -2% 0% 2%
20132014
20132014 (Q3)
1.84-0.13%
2013 2014
Profit margin
13.57
2013 2014 (3Q)
EPS (₽)
-7.56
«The main barrier of Russian LCC market development – the problem of legislation» – S. Yakovlev (senior partner at McKinsey & Company – Alfa Bank Business forum, 2015)
Main financial indicators of key players in air carrier Russian market
Credits is a big problem today. It is very hard to exist with such interest
rates.– S. Skuratov(CEO, Ural Airlines)
8.02
-15,75
-2
-1
0
1
2
3
4
5
0%
5%
10%
15%
20%
25%
30%
2010 2011 2012 2013 2014
Динамика спроса
Динамика предложения кресел
Динамика PLF
Dynamics of main Russian air carriers indicators
221.11
2013 2014 (3Q)
Net income (mln. ₽)
9.21
17% Central Bank key rate
BB+ Current sovereign Russian rating
Demand dynamics
Seat supply dynamics
PLF dynamics
Sources:
Despite of the recent industry tendencies, there are internal and external factors that could bring positive financial results due to the rational choice of a strategy
| 8| 5¹ ROCE – return on capital employed, ² MKAD – Moscow Ring Automobile RoadSources: m24.ru, Centre of Aviation, отчетности Air France-KLM
We suggest that 2017 is the most optimal year to enter the market linked not only with the potential end of the crisis but with improvement of infrastructure (opening of 2 new international low-cost airports – Ermolino and Ramenskoye)
The Air France-KLM ‘PERFORM 2020’ planned strategy will bring positive financial results that will allow to use free operational cash flow in order to finance the market entry project1
3
However, for the initial basing of aircrafts we need just one airport (see below the comparison of two new LCC airports)
EBITDAR 8-10% per year
restructuring
developmentcost reduction
passengersector
cargoLCC maintenance
Moreover, it is rationally to give three ATR 42-500 aircrafts fromHop!, that could be involved in point-to-point destinations
The most rational choice of the base airport is Ramenskoye LCC airport, in addition, all the contracts about its project have already signed
67
Ermolino
Distance from MKAD (km.)
30
2500
Ermolino Ramenskoye
Capacity (PAX per hour)
3700
7.5
Ermolino Ramenskoye
Passenger flow (mln. PAX)
1.7by 2017 by 20163.5
10.8by 2021 by 2020
Ramenskoye
Ermolino Ramenskoye
The longest runway in EuropeAero express
Passenger flow 100 >100
ROCE ¹
Net Debt/EBITDAR
93.7%
2013 2017
< (- 2.2x)
1.6% 9-11%
4.7x<2.5x
+7.4 - 9.4%
At the same time, due to the increase in railway tariffs, the number of people using Russian railway transport has a tendency to reduce it
Thus, there is a great opportunity to displace the part of the small air carriers due to their high costs , heavy debts and unsustainable approach to business
Expected growth rates of air carrier market remain high1 2
3
Passenger traffic in Russia (mln. people)
The potential growth of passenger traffic in Russia remains high , which is a good prerequisite for entering a new market
| 6
In total:
-15%
-10%
-5%
0%
5%
10%
15%
20%
РЖД Локальные авиаперевозчики
16%
-9%
The market share of airlinesIn Russia , %
Others:
The target segmentof displacement
There is a potential growth on the market of air transportation in Russia , particularly in the segment of low-cost carriers
The consequences of the economic crisis, the high cost of KKM , financial problems will provide an opportunity to take a significant share on the Russian market of air carriers
There is an opportunity to attract and entice passengers using the services of railways
Sources: Center of Aviation (CAPA), Rosstat
The passenger demand for the railway and air transport services
RZD Local air carriers
Sources:
Analysis of the demand in the consumer sector has shown greater willingness of people to choose low-cost carriers
| 7
The growth in Internet traffic indicates the willingess to buy airline tickets on the websites - the main distribution channel for LCC
Passenger surveys showed that the majority of peoplewould prefer a budget carrier for their trip1 2
However, people don’t like the level of service of low-cost airlines and it doesn't match their expectations
Average distribution of passenger air traffic
0 20 40 60
FSC LCC
69.5
60.2
30.5
39.8
0 20 40 60 80
LCC
FSC
0 50 100
LCC
FSC
Would you like to fly by LCC again?
Did you use LCC¹ of FSC last year?
Which option would you prefer in case of a decrease in income?
¹ LCC – low-coast carrier, FSC – full service carriers – traditional airlines (Lufthansa, British Airways)
In addition, number of people who don’t want to pay much for the ticket is very high
Survey of passengers from biggest Russian cities The importance of factors for passengers (10-point scale)
1.7 2 2.3 2.73.2 3.7
4.35.1
5.96.9
8
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Average number of visitors on the websites, millions
0 2 4 6 8 10
General satisfaction Business Lounge Loyalty programs Safety Comfort Service onboard Flexibility of tickets Prices Frequency of flights Punctuality Quality of service
Would use LCC instead FSC
Would fly on business only
Reduce the frequency of
leisure flights
Young people(from 12 to 21)
People from regions(26 - 47 years old)
Middle segment (21 to 35 years)
Junior / middle managers (35 to 54)46%
15%
20%
19%
The existing low-cost airlines in Russia have a number of disadvantages that Air France-KLM can turn into its competitive advantage
| 8Sources: Rosaviation, Centre of Aviation, ATO.ru* The proposed name of the airline, due to the savings on the branding
There is a big choice of low-cost carriers, however, only couple of them cover Russian regions
1
26%
22%32%
18%
2%
Total costs of one-way flight: Passengers pay
for the flights and pay for all the services separately
The lack of informing customers
Average minimum cost of the ticket for the low-cost carrier with services – 3852 RUB ($75):
Premium rate offer passengers a set of additional services for a more comfortable flight Higher revenues
Services, included in premium rate
12
42 3 1
9
2 15
4 1
Thus, the range of services is limited. And the price of their
tickets cover the flights only. All the services are payable2
LCCs and number of their destinations in Russia
The introduction of a new customer-centric strategy willcreate the reputation of a reliable and conscientious carrierfor Transavia Russia*
2
Major Features ofTransavia Russia
Choice of seat AvailableMeal onboard Can be bookedWi-Fi onboard Free of chargeTicket return policy Flexible
Premium tickets Seats with extra legroom
Loyalty programs Save up to 10% being a member of loyalty program
Min cost of ticket
Taxes Cost of holding
baggageUsual and hand
luggage
of higher weight
More
comfortable
seats option
Fast check-in
and security checkFlexible conditions
of ticket purchase
SMS - alarming
Special
boarding
| 9* € cents for RPK, ** € cents зfor ASK Sources: Centre of Aviation, Air France-KLM, Diio Mi / Innovata
1 Transavia and Hop! Low-cost carriers are successfully operating in European market of air carriers having a relatively high market share, good credibility and show positive operating and financial results
European LCC market Traffic, revenue and operational results of Transavia
Capacity (ASK)
Traffic (RPK)
Factor (PLF)
93.7%
2013 2014
+8.3%
+6.0%93.7%
91.8%
¹ ASK – available seat kilometers, PLF – passenger load factor, RPK – revenue passenger kilometers
RevenueRPK* RASK**
Change397
.€427+7.6%
5.98 6.05+1.1%5.58 5.55- 0.6%
Air France-KLM big experience and good brand recognition in the world air carrier market including LLC industry will allow to entry the Russian LCC market successfully
49%
6%7%
6%3%
4%3%3%
19% RyanairTransaviaAirBerlinEasyJetHop!German WingsNorwegianVueling AirlinesOther
Competition advantages of HOP! LCC
Significantly low ticket price (from 55 €)
More than 100 directions and 30 routes
4 tariffs with different services includedwith loyalty to passengers
98 aircrafts with capacity of 48 up to 100 passengers
Revenue from passengers
Fact
Planned
171
2013 2014
193
162
2013 2014
181
+12.9%
+11.7%
Great
Good
Average
Bad
Hard to answer
32
47
12
6
3
23
53
14
6
3
22
55
15
6
3
18
49
16
7
10
61
12
8
16
3 Easy access to ticketsTransperancySafetyDestination connections, accessabilityService Quality
General satisfaction from Hop! and Transavia services
| 10Sources of information: SkyScanner, Russian Aviation, Russian statistics | * McKinsey & Co Research** The more detailed information could be sent via e-mail upon your request
1
2
LLC Air France KLM will link 10 Russian cities in 2017-2019
Route Map of Air France-KLM in Russia1. Central, Southern, North-Western,Primorsky, Uralsk federal regions –leaders in number of passengers in RF* LLC KLM will cover them all.2. Flights in and out from Moscow – is75% of all internal market.Direct flights to all the regional
centers.3. But also there is a passenger trafficsbetween 3 cities in SFR and 4 cities inPFR and UFR. 2 Point-to-Point areas:1) Sochi-Krasnodar-Rostov-on-Don2) Samara-Ufa-Yekaterinburg-Tyumen
The analysis backs on our decision on choosing the main routes:
At the beginning stage all the main regional routes will be covered by 34 flights employing 2 types of aircrafts
6 X
3 X
Boeing 737-800; 184 passenger seats;Direct flights from Moscow
ATR 42-500; 48 passenger seats;Point-to-Point flights
With such level of load every aircraft will spend 11h. in the airon a daily basis
This will diminish the costs
The number of passengers will be 3600 people each day
As a result, topline will achieve3 billion rubles per year
On the whole:Balanced diversification of flights
Yekaterinburg Kazan Krasnoyarsk Rostov-on-Don Samara Saint-Petersburg Sochi Tyumen Ufa
The most loaded routes are: **
Archangelsk ; 28
Belgorod; 32Volgograd; 42Krasnoyarsk; 49
Surgut; 280
50
100
150
200
250
300
Num
ber o
f flig
hts
per
one
wee
k
Sources:
1 In 2025 LCC route map will include not only in-Russia destinations but CIS and EU too
After the successful entry into Russian air transport market LCC Air France – KLM will continueto expand its route map within Russia, CIS and EU
Novosibirsk
Krasnoyarsk
NijnyNovgorod
Arkhangelsk
Tomsk
Kaliningrad
Bishkek
Murmansk
Tashkent
Alma-AtaIstanbul
Baku
Varna
Budapest
2
IrkutskAstrakhan
VolgogradSaratov
Chelyabinsk
Tbilisi
Sevastopol
Development of the route map will lead to a 46% (CAGR) growth of ticket sales
Russia (26)
CIS (5)
Europe (4)
Route Moscow-Nice won’t be popular among LCC consumers due to a huge difference in average salary
Diversified Flight Portfolio
Point-to-Point
2019-20202021-20222023-2025
3
Moscow
Nice
| 11Sources : SkyScanner, Russian Aviation
60 000
165 000
Пассажир Лоукостера
Пассажир Москва-Ницца
Средняя З/П, тыс. руб.
34
6676
96
2017-2018
2019-2020
2021-2022
2023-2025
Количество Рейсов в день
1.4
2.9 3.4
4.3
2017-2018
2019-2020
2021-2022
2023-2025
Количество Пассажиров, млн.
3.02
6.43 7.39
9.44
2017-2018
2019-2020
2021-2022
2023-2025
Годовая Выручка, млрд. руб.
CAG
R46
%
Dushanbe
Number of flights per day Number of passengers, mln. Revenue for the year, bln. rubAverage salary
LCCpassenger
Passenger on the flightMoscow - Nice
Sources:
The project value of LCC market entry in Russia is more effective and positive with the lease of aircrafts
| 8| 12Sources: outputs from the financial model
Our financial model of market entry with lease funding showed the following results:The most optimal source of aircraft funding is lease1 2
1 2 3 4 5 6 7 8 9 10
Годы реализации проекта
Лизинг самолетов
Покупка самолетов
40.2 bln. ₽
77.6bln. ₽
Лизинг самолетов
Покупка самолетов
Затраты на покупку самолетоввыше, а также связаны с
дополнительными расходами в виде страховки и уплаты налогов, в то время как стоимость лизинга
меньше. Кроме того, лизинг переносит дополнительные
расходы, связанные с эксплуатацией
на лизингодателя.
Scenario costs (for 10 years)
Moreover, lease of aircrafts is more preferable as CapEx and PBP ¹ is less, though NPV is bigger
Discounted cash flows (year-by-year, mln. rub.)
The project is financed by credit line of 75 mln. euro and by free cash flow from operations
-10%-5%0%5%10%15%20%25%30%35%40%45%
-5
0
5
10
15
20
25
2017 2018 2019 2020 2021 2022 2023 2024 2025
Total Revenue Total Costs Profit Profit Margin
Operational results
Project financials
NPV (bln. rub.) 7.9
IRR 34%
3210-1-2-3-4-5
Aircrafts lease
Aircrafts purchase
Project years
Lease
Purchase
Business plan developmentRoute map constructionDevelopment of tariff systemCreation and backing of new websiteStaff enrollment and educationWriting of technical documentationPartnership agreements conductionLease agreements conductionConduction of agreements with airportsInstallation of Wi-Fi equipmentExtension of the route mapLaunching of the loyalty programConsumer sector analysisConduction of competition analysisPrice optimizationAdditional aircraft lease and deliveryImplementation of cost-reductionOptimization of marketing strategyConduction of agreements with foreign airportsEntry to new marketsFurther route map extensionAdditional aircraft lease and deliverySelling of ATR aircrafts
Realization of the following steps will allow Air France-KLM to entry Russian LCC market successfully
| 13
Project road map
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Costs Revenue Net
-0.4-5
-22
-11
Prep
arat
ion
Deve
lopm
ent
Exte
nsio
n
Initiative
-0.4
0,8
-1-15
-0.95-4964
-11011-79-32
-4-1.2-1
-1.05-1.3
-11561-4-3-121
-6-2
-3303
67
18
261260
17379
21241
17379344721
1234
68
67
3,5
135
1513
1.0556 2966368451517
10,82
2.952.2
581825
14
05
179380.8
2016 2017 2018 2019 2020 2021 2022 2023 2024 20252015
Preparationperiod
Airports openings and
start of operations
Route mapextension
New marketsentry
Point-to-pointdevelopment
Route mapextensions
Initiatives
Market entry with lease of assets
Optimistic scenarioBase scenarioPessimistic scenario
Russian LCC market entry in 2017 is the most rational due to our analysis, it will lead to significant market share increase by 2025
| 14¹ Inv. – initial investments (bln. rub.)
1,451,451,45
Inv.¹ NPV IRR
Financials
56%23.67
Project development after launching of the initiatives (revenue growth)
Comparisons in 2017 and 2025:
7.9-8,7
34%-26%
Optimistic scenarioBase scenarioPessimistic scenario
1,451,451,45
24%5,61-1,69
-14,88-7%
-43%
NPV(bln. ₽)
revenue from advertisementrevenue from on-board servicesrevenue from selling of duty free goodsrevenue from premium tickets sellingrevenue from partnership contractsrevenue from tickets selling
Market entry with purchase of assets
2017 2025
Aircraft park, #
# of directions
Passenger flow, mln.
Revenue, bln. ₽
9 29
14 41
1.38 4.33
7.01 20.07+186%
+212%
Further steps of project development:
→ Selling of 3 aircrafts ATR 42-500;
→ Route map extension for far-east markets;
→ Purchase of long-haul aircrafts, entry into the long-haul LCC market
Index
CAGR14%
Sources:
Our team of professional consultants is capable to solve any problems efficiently and in time, offering unique solutions basing on deep knowledge and big experience
13
VITALY
PENTEGOV
MARINA
MIKHEEVA
Higher School of Economics, BSc math
Working experience: VTB, Google,Dialog Conducted business valuation Implemented anti-crisis strategies Implemented IT solutions for the
biggest international companies Organized corporate events
Case competitions participant from:McKinsey, Changellenge, Oliver Wyman, SAP, E&Y, Alfa Bank companies
| 15
NRU HSE, World Economics FacultyCo-founder of retail chain and IT start-upsConducted analytical review of the international financial institutions Prepared an overview of the
Russian and European investment climate as a result of sanctions
Developed Business models Case competitions participant:Changellenge Cup Moscow, Oliver Wyman Impact, Alfa Sparta
PAVEL
RYBALKIN
Finance University, Management, 4 year
Worked in RMG Securities Prepared analytical reports on
companies (markets: pharmacy, freight)
Searched Russian target-companies for European buy-sides
Observed Russian venture cap. marketParticipated in case-championships:Oliver Wyman, Changellenge, Alfa Sparta, M&A Case MSU IB club, SAP
ALEXANDER
KULAKOV
Finance University, management, 3 year
Worked in Sberbank CIB Was responsible for Fidelity road show
in Russia; Organized a meeting with Finnish
minister of Economy and Labor Author of several scientific research
works (theme: evaluation of production investment)
Participated in case-championships:Oliver Wyman, Changellenge, Alfa Bank
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