AirFrance-KLM project

Project was prepared for Air France-KLM23.03.2015

Working group:

Vitaly Pentegov ([email protected])Alexander Kulakov ([email protected])Marina Mikheeva ([email protected])Pavel Rybalkin ([email protected])

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 or 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