Vietnam Master in Management – HCMC dec 2003 Exercise Your team must start a new airline  Based in Vietnam  With the ambition to expand in Vietnam and South East Asia and eventually abroad You have to build the Business Plan  For the period Strategig Goals are  Sustainable growth  Long term value creation Results  Excel model  Powerpoint presentation Business Plan : The Exercise

Vietnam Master in Management – HCMC dec 2003 Exercise Basic Assumptions are given by the professor  Capex (cost and charachteristics of the planes)  Market (global evolution and for each market)  Network (possible network)  Other Costs Market reactions to your decisions  You decide on price, frequencies, quality spendings  Market reactions are calculated in a specific Excel Sheet Given by the professor Protected (formula are hidden)  Principles of the market reaction are explained  Details are not known Business Plan : The Exercise

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions The Planes Sole tangible capex : the planes Purchase price are given  Depreciation : 20 years linear Operating expenses  Fuel consumption per flight hour  Pilots : always 2 aboard  Stewards : number depends of aircraft size  Pilots and stewards maximum 800 flight hours / year  Maintenance (per month + per block-hour) Flight hours = « Block Hours »  Maximum : 10/day (short haul) & 14/day (long haul)

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions The Network and The Market Possible routes  From Saigon 5 routes in Vietnam 8 routes in SEA 2 long haul routes  From Hanoi 5 routes in Vietnam 8 routes in SEA 2 long haul routes Yearly growth ( )  For each route Competition  The number of competitors varies 1, 2 or 3 competitors

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions Advertising and Sale costs You need to advertise  You need to invest 1 MioUS$/year + 4% of turn-over to maintain market share  If you invest 1% more or less of your turnover your market share will win/loose 1% It is useless to invest more than 8% of the turnover Sale Channels  Agent : fee of 8% of sale price  Internet sale : cost of 1% of the sale price  To develop Internet sale capex are necessary if no capex : 0% To have 100% Internet Sale capex of 50 Mio US$ (once) You can invest progressively

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions Price, Service and Market Share If you make the same price as competitors you will get  10% of the market on the 1st year of operation on the route  15% of the market after If you decrease the price you can get  More market share Approximately 1% more if you reduce the price by 1%  A faster growth of the market Approximately 0,25% more growth each year if you reduce the price by 1% If you increase the number of daily flights you can get  More market share  A larger percentage of business customers

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions Personnel and Catering costs Wages : to be discussed with students  Pilot cost / year  Steward cost / year Fuel : 0,7 US$/gallon (increase by 2%/year) Catering  Short haul 4 US$/pax economy 12 US$/pax business  Long haul 20 US$/pax economy 60 US$/pax business

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions Other costs Quality  Quality spending is defined as a percentage of turnover  By investing more in quality you can increase market share  By investing more in quality you can increase percentage of business customers Overhead  Fixed 2 Mio US$ in Mio US$ after 2004  Variable 1 US$/pax short haul 3 US$/pax long haul Tax rate of 32% (Vietnam standard rate)

Vietnam Master in Management – HCMC dec 2003 Exercise Assumptions on routes and planes Excel Sheet gives all details

Vietnam Master in Management – HCMC dec 2003 Exercise Financial resources Equity  Commitment by the shareholders : Maximum 100 MioUS$  You don’t need to get all the capital immediately Debt  Commitment by the banks : Maximum 400 MioUS$  Interest rate Tranche 1 : up to 200 MioUS$ : 3,5% Tranche 2 : : 4% Tranche 3 : : 5%  If leverage D/E is higher than 3 interest rate is increased by 1%  If leverage D/E is higher than 4 interest rate is increased by 3%  D/E may not be higher than 5