Airline Business Plan [PDF]

Zitiervorschau

A Regional Airline

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Table of Contents

1.0 Executive Summary .................................................................................................................... 1 Chart: Highlights .......................................................................................................................... 3 1.1 Objectives.................................................................................................................................... 3 1.2 Mission .......................................................................................................................................... 4 1.3 Keys to Success ........................................................................................................................ 5 2.0 Company Summary ..................................................................................................................... 6 2.1 Company Ownership ............................................................................................................... 9 2.2 Start-up Summary ................................................................................................................. 10 Table: Start-up............................................................................................................................ 10 Table: Start-up Funding .......................................................................................................... 11 Chart: Start-up ........................................................................................................................... 12 2.3 Company Locations and Facilities .................................................................................... 12 3.0 Services .......................................................................................................................................... 14 3.1 Service Description ................................................................................................................ 14 3.2 Competitive Comparison ..................................................................................................... 14 3.3 Fulfillment.................................................................................................................................. 18 3.4 Technology ................................................................................................................................ 21 4.0 Market Analysis Summary ...................................................................................................... 23 4.1 Market Segmentation ........................................................................................................... 23 Chart: Market Analysis (Pie) .................................................................................................. 24 Table: Market Analysis ............................................................................................................. 24 4.2 Service Business Analysis ................................................................................................... 25 4.2.1 Main Competitors ........................................................................................................... 25 5.0 Strategy and Implementation Summary .......................................................................... 26 5.1 Marketing Strategy ................................................................................................................ 27 5.1.1 Pricing Strategy............................................................................................................... 27 5.1.2 Promotion Strategy ....................................................................................................... 29 5.2 Sales Strategy ......................................................................................................................... 30 5.2.1 Sales Forecast.................................................................................................................. 31 Chart: Sales Monthly ............................................................................................................ 31 Chart: Sales by Year ............................................................................................................. 31 Table: Sales Forecast ........................................................................................................... 32 5.3 Milestones.................................................................................................................................. 32 Table: Milestones ....................................................................................................................... 32 6.0 Management Summary ............................................................................................................ 33 6.1 Organizational Structure ..................................................................................................... 33 6.2 Management Team ................................................................................................................ 34 6.3 Management Team Gaps..................................................................................................... 34 6.4 Personnel Plan ......................................................................................................................... 34 Table: Personnel ......................................................................................................................... 37 7.0 Financial Plan ............................................................................................................................... 38 7.1 Important Assumptions ....................................................................................................... 39 Table: General Assumptions .................................................................................................. 43 7.2 Key Financial Indicators ....................................................................................................... 43 Page 1

Table of Contents

Chart: Benchmarks.................................................................................................................... 43 7.3 Break-even Analysis .............................................................................................................. 44 Chart: Break-even Analysis ................................................................................................... 44 Table: Break-even Analysis.................................................................................................... 44 7.4 Projected Profit and Loss ..................................................................................................... 45 Chart: Profit Monthly ................................................................................................................ 46 Chart: Profit Yearly .................................................................................................................... 46 Chart: Gross Margin Monthly................................................................................................. 47 Chart: Gross Margin Yearly .................................................................................................... 47 Table: Profit and Loss ............................................................................................................... 48 7.5 Projected Cash Flow .............................................................................................................. 49 Chart: Cash .................................................................................................................................. 49 Table: Cash Flow ........................................................................................................................ 50 7.6 Projected Balance Sheet ...................................................................................................... 51 Table: Balance Sheet ................................................................................................................ 51 7.7 Business Ratios ....................................................................................................................... 52 Table: Ratios ................................................................................................................................ 53 Table: Sales Forecast ......................................................................................................................... 1 Table: Personnel ................................................................................................................................... 2 Table: Personnel ................................................................................................................................... 2 Table: General Assumptions ............................................................................................................ 4 Table: General Assumptions ............................................................................................................ 4 Table: Profit and Loss ......................................................................................................................... 5 Table: Profit and Loss ......................................................................................................................... 5 Table: Cash Flow .................................................................................................................................. 7 Table: Cash Flow .................................................................................................................................. 7 Table: Balance Sheet .......................................................................................................................... 8

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Air Leo -- A New Regional Airline

1.0 Executive Summary Market factors favor inauguration of a new airline to meet the demand for additional, higherquality passenger and cargo service linking Western Europe with the rapidly expanding markets of Southeastern Europe and Turkey, and linking Southeastern European destinations, via Western European hubs, to trans-Atlantic and global destinations. This new airline will base its business and marketing strategies on achieving high, and profitable, load factors through absorption of unmet demand in three key air-traffic categories: unserved and under-served routes on which high unmet demand currently exists or can be readily developed; serving key niche markets where demand is either unmet or poorly served; and meeting peak traffic demands on certain key regional, seasonal, and variable routes where very high load factors can be predicted despite existing but lower-quality competition, or where competition cannot meet the demand. In addition, the proposed new airline will be designed around, and operated utilizing, the most up-to-date electronic, informational, and aviation technologies to ensure low operating and marketing costs, maximum efficiency in deployment of its resources, and a high level of customer service and convenience. And it is this final element - dedicating the airline, its staff, and its organization to providing a high level of customer service and convenience, and efficiently meeting the needs, wants, comfort, and safety of the passenger - that will assure the proposed airline's rapid acceptance in the marketplace and its long-term growth and success. Particularly in the post-09/11/01 environment, experience in Europe has shown that those carriers which can maintain a "mean-and-lean" operation while still meeting the needs and desires of the traveling public, with the right fares, will not only survive, but can prosper. The six key characteristics leading to the success and profitability of this new carrier will be: •

Provision of high-quality service on routes and in markets that currently are either unserved, poorly served, or under-subscribed by existing carriers, thereby setting both a new trend and a new pace in air service to and within the Southeastern European region.

•

Employment of cost-effective, up-to-date regional aircraft that will be sized right for the market and the route, leading to higher load factors, reduced costs, improved efficiency and flexibility, greater passenger comfort and satisfaction, and higher net profits. Outfitting these aircraft with the latest aviation technologies and navigational equipment will help ensure the highest level of reliability, punctuality, safety, and customer satisfaction.

•

Utilization of the latest electronic and informational technologies in sales and marketing; reservations, ticketing and check-in; scheduling and resource planning; cargo tracking; and operational oversight. Such techniques as internet marketing, reservations, and sales; electronic ticketing and check-in; online quality control, resource planning, operational oversight, cargo and baggage tracking, and customer service, all will reduce staffing requirements while offering ease-of-use and greatly enhanced access by, and convenience to, the customer.

•

Recognition that not everyone is geared for the electronic world, leading the proposed airline to provide a high level of non-electronic service as well, particularly to the many newer, less-experienced travelers - but future loyal customers - found in the region.

•

Ensuring a friendly, cooperative, enjoyable, yet highly professional face to the customer.

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Air Leo -- A New Regional Airline

•

Development and implementation of cooperations, associations, and partnerships with other larger, more established, and highly regarded airlines both within and beyond the region to provide an extensive range of connections, through fares, frequent-flyer mileage sharing, and other passenger and client advantages through interline arrangements, code shares, common hubbing, and so forth.

In short, the goal of this new airline is to be known to the passenger and the cargo customer by its proposed motto: "We've got a job to do, and we do it every day - for you!" Primary financial results anticipated during the first year of operations include: •

Average passenger load factors in the 60-80 percent range, depending on route and season, reached within the first year of flight operations, and increasing thereafter to the 75-90 percent range.

•

Revenues approaching [XYZ] million USD within the first six months of flight operations, exceeding [XYZ] million USD by the end of the first year, [XYZ] million USD in the second year of operations, and nearly [XYZ] million USD in the third.

•

A gross operating margin of close to [XYZ] percent achieved within the first year of operations, reaching close to double that by the third year, and with steady growth enabling rational expansion of the airline thereafter. Even in the first year of operations, a pre-tax profit of [XYZ] million USD is anticipated. This is applying a very conservative business model, and is achieved on an initial investment of less than [XYZ] million USD, yielding a return on equity of [XYZ] percent. The accompanying chart illustrates the growth and profit potential present.

A key element contributing to the success of this new carrier will be its organizational and management team. Leading this team is Balkan Consortium Holdings USA, Inc. (BalkConsort), a U.S. corporation that is regionally based in Southeast Europe and which knows the region and its business needs. BalkConsort, together with its partner companies and associations throughout the countries of Southeast Europe and beyond, identifies business and profit opportunities and develops projects and strategic partnerships to implement and benefit from them. As explained in the Company Summary that follows later in this business plan, BalkConsort USA's interest and ownership in the proposed airline will transfer first to a new off-shore holding company, BC Holdings International Ltd, and then to a daughter company registered in a member state of the European Union ("BalkConsort EU"), both of which will be established prior to the airline's start-up. Due to current European Union requirements that E.U. nationals hold the majority interest in an E.U.-flagged carrier, and the importance of an E.U. air operators certificate (AOC) to the new airline's overall business plan, a majority ownership stake in the new airline, either directly or through "BC Holdings EU," must be by E.U. nationals. Joining the BalkConsort USA/BC Holdings International team are aviation, finance, and marketing experts with long and successful track records, including extensive experience organizing and managing other start-up airlines of both a regional and global scope. This organizational and management team, which is described in greater detail in the section of the business plan dealing with the Management Team, will help reduce the risk and ensure the success of the proposed new carrier.

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Air Leo -- A New Regional Airline

Chart: Highlights

1.1 Objectives The proposed airline will have as its primary objectives the following elements: 1. To establish and operate a new regional airline aiming specifically at linking Western Europe with the rapidly expanding markets of Southeastern Europe and Turkey, and linking Southeastern European destinations, via Western European hubs, to trans-Atlantic and global destinations. 2. To provide service and absorb unmet demand in three key traffic categories: unserved and under-served routes on which high demand currently exists or can be developed; serving key niche markets where demand is either unmet or poorly served; and meeting peak traffic demands on certain key regional, seasonal, and variable routes where very high load factors can be predicted despite existing, but lower-quality, competition. 3. To implement an organizational and marketing strategy that will, beginning in the first year of flight operations, achieve average passenger load factors in the 65-85 percent range, depending on route and season, and increasing thereafter to the 75-90 percent range, thereby maximizing revenues and return on investment while minimizing risk. 4. To achieve revenues in excess of [XYZ] million USD per quarter within the first six months of flight operations, and exceeding [XYZ] million USD per quarter, by the end of the first year. 5. To achieve net operating profits in the [XYZ] percent range within the first 12 months of flight operations, an annualized return-on-investment of approximately [XYZ] percent by the end of the second year of operations, and steady growth enabling rational expansion of the airline thereafter.

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Air Leo -- A New Regional Airline

6. To achieve the projected results starting with three mid-to-large-size regional aircraft, growing to five by the end of the first year of operations, similar to the 99-passenger British Aerospace Avro RJ100 or 85 - 99-seat Avro RJ85 regional jet aircraft, obtained on either a drylease or purchase basis; supplementing those aircraft with larger, longer-range passenger aircraft and cargo liners on a charter or wet-lease basis to serve peak-demand and intermittent routes and periods, as well as cargo demands, as called for by the business plan; and incrementally expanding the fleet size and scope on a dry-lease or purchase basis to at least double its initial capacity by the beginning of the third year of operations to accommodate projected passenger and cargo growth in the business plan's out-years. 7. To gear operations, and present a professional, serious, growth-oriented image from the outset, that will set the stage for reasoned, planned expansion, mirroring growth rates projected for the first year of operations, and that will enable the airline to extend its regional scope and, in future years, to transition from its initial regional status into a larger continental and intercontinental carrier. 8. As an element critical to achieving the airline's other key objectives, to identify and develop key interline alliances, cooperations, associations, and partnerships with other larger, more established, and highly regarded airlines both within and beyond the target region that will enable the proposed airline to provide an extensive range of connections, through fares, frequent-flyer mileage sharing, and other passenger and client advantages through interline arrangements, code shares, common hubbing, and so forth. 1.2 Mission The proposed new airline's mission, simply stated, is to fill a niche in the growing air-travel and cargo markets linking Western Europe, and points beyond, to Southeastern Europe and Turkey; to achieve high, and profitable, load factors by identifying and serving key routes and city pairs currently unserved, under-served, or poorly served, and where significant unmet demand exists; and to set a new standard for air service and professionalism both within the target market region and beyond. By utilizing the latest aviation, electronic, and informational technologies, and by designing effective and efficient systems and building in quality control from the outset, we aim to ensure the highest level of service, operations, and safety, all based around the needs, wants, comfort, and convenience of the passenger and the cargo client. This combination of technology, service orientation, and quality oversight will help keep costs at a minimum and maximize profits to the airline and its investors. It also will help build the strong customer satisfaction and excellent reputation that will enable the airline to build solid, and crucially important, interline arrangements necessary to expand its scope and customer attraction in the early stages, and which will lead to continued long-term growth both within the target market area and, looking toward the future, beyond. In short, this airline wants to be known by its proposed guiding motto: "We've got a job to do, and we do it every day - for you!"

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Air Leo -- A New Regional Airline

1.3 Keys to Success In descending order of importance, the five critical keys to success for the proposed new regional airline are: •

Employing an experienced, highly professional management team that combines vision; realism; financial ability; solid knowledge of the aviation business; familiarity with, and belief in, the utilization and benefits of the latest aviation, electronic, and informational technologies; on-the-ground knowledge of the region and markets to be served; realization of the crucial importance of an organization's personnel to its success; and a total familiarity with, and commitment to, the overall mission and goals of the proposed new airline.

•

Intelligent, progressive, and aggressive marketing that identifies the airline as a different kind of player, one that is sharper and smarter, and with a higher level of professionalism and operational standard than is the norm in the target region. Concentration on safety, with highly trained, dedicated, and professional personnel, caring for the passenger and the passenger's needs and wants, the advantages offered by advanced technology, and straightforward, understandable, highly competitive tariffs and fare pricing, all will form key pillars of the marketing strategy.

•

Identification, through careful market research, of unserved or under-served routes and city pairs in the target market area with sufficient passenger demand to enable high load factors and profitable operations utilizing the category of aircraft envisaged.

•

Use of an all-jet fleet of newer, modern, Western-built regional aircraft that offer a high level of comfort, safety, and fuel and operational efficiency and flexibility, which meet all normal aviation standards, and which offer sufficient, but not excessive, passenger and cargo capacity on the envisaged routes.

•

Use of advanced electronic and information technology to reduce staffing and other operational costs; expand the potential market base; readily capture sales opportunities; simplify and speed passenger, baggage, and cargo handling; and enhance customer convenience and satisfaction.

Additional important, though less critical, keys to assuring the airline's success include the following: •

Identifying, negotiating, and entering into, in the pre-operational stage and early on, beneficial associations, cooperations, and partnerships with larger, more established, highly regarded carriers both within and beyond the target market region to offer interline arrangements, through fares, frequent-flyer mileage sharing, and convenient hubbing and long-distance onward connections to passengers. Successful execution of this element of the business plan is crucial to the overall success and growth of the airline, and must be kept in mind in the organizational plan and structuring of the airline.

•

Establishing a high level of operational oversight and quality control that will ensure that the airline always lives up to its marketing commitments and fulfills the promise of a high level of service, customer satisfaction, convenience, and safety, at a reasonable, highly competitive fare.

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Air Leo -- A New Regional Airline

•

Avoiding the temptation to go head-to-head with established carriers on routes that already are well-served, unless solid evidence exists of additional, significant pent-up demand, or widespread customer dissatisfaction with existing services.

•

Maintaining flexibility that enables the airline to always respond and adapt to changing market conditions and opportunities, without being erratic, and employing equipment, scheduling, and staffing on a basis that is sufficient to get the job done properly, efficiently, and at a high rate of return, without "overkill" or fielding costly excess capacity or, conversely, unduly cancelling scheduled flight operations.

•

Identifying, developing, and quickly and cost-effectively exploiting opportunities for new markets, new market concepts, and expanded sales potential.

•

Supplementing regularly scheduled passenger service with both regularly scheduled and also special cargo services when and where sufficient demand exists, and also with seasonal, peak-period, and other intermittent passenger services on certain key regional, seasonal, and variable routes where very high load factors can be predicted despite existing but lower-quality competition, or where competition cannot meet the demand. Larger, longer-range, or specialized aircraft may be employed on a charter or wet-lease basis to provide these supplemental, but potentially highly profitable, passenger and cargo services.

•

Looking to combine the core aviation business with ancillary marketing concepts and activities and ground-based operations that support, supplement, and complement the aviation elements of the business, including such activities as package-, group-, and charter-travel program offerings; value-added sales and customer services, both land- and Internet-based; construction and operation of enhanced passenger-, baggage-, and cargohandling facilities and services; and other logical business pursuits both within and outside the immediate aviation business.

•

Avoiding growth for growth's sake, and instead looking for solid niche-enlargement opportunities that will allow incremental, but always profitable, expansion.

2.0 Company Summary The plan for the envisaged new regional airline is an outgrowth of the market research and regional experience of Balkan Consortium Holdings USA, Inc. (BalkConsort), garnered over a nearly three-year period, beginning in mid-1999. BalkConsort, which is proposing to found the new airline, is a U.S. corporation registered in the State of Delaware and headquartered in Chicago, Illinois, with a Southeastern European regional headquarters located in Panorama, just outside Thessaloniki, Greece. BalkConsort, together with its partner companies and associations throughout the countries of Southeast Europe and beyond, identifies key business and profit opportunities and develops projects and strategic partnerships to implement and benefit from them. Early on following its establishment in the region in mid-1999, BalkConsort identified a growth opportunity in the aviation and travel sector in Southeast Europe. This opportunity is occasioned by growing economic, political, and social stability, and consequent significant business expansion, within and between most of the countries of the region; vastly expanded outside contact and support with and for the region, occasioned by the aftermath of the Bosnia and Kosovo conflicts; extensive UN, NATO, and other international-organization operations in the region; and such multilateral initiatives as the Stability Pact for Southeast Europe, the Southeast Europe Cooperative Initiative, and the Southern Balkan Initiative.

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Additionally, the company has determined that maximum potential from this growth opportunity can be obtained not only by linking certain key destinations within the Southeast European region, but by linking the region with carefully selected destinations in Western Europe and beyond. It further has identified significant unmet demand, and significant short-, medium-, and long-term growth potential, represented by Turkey and the rapid growth of the Turkish economy and its domestic and international air-travel market, particularly in light of Turkey's growing economic and political integration with the European Community and Europe as a whole. Ancillary Travel Services In response to the growing travel-market potential of the region, represented in particular by the large expatriate community living and working in parts of the region, including BosniaHerzegovina, Kosovo, the Former Yugoslav Republic of Macedonia, and Albania, BalkConsort established Hassle-Free Holidays, a package-travel wholesaler and retailer, in mid-2000. Both Hassle-Free Holidays and its partner organizations are expected to feed customers and traffic to the regional airline and utilize the airline's services when possible, and will act as additional low-cost outlets for marketing the airline through their planned electronic-commerce websites. Locally established retail travel agencies can serve as a base for the airline's sales and operations in the key niche market of Kosovo, and Hassle-Free Holidays already has established other close links with retail agencies in Skopje, Thessaloniki, and Athens, and is working on developing similar relationships with agencies in Istanbul, Ankara, Tirana, and elsewhere both within and outside the Southeast European region. Other related company activities of BalkConsort BalkConsort currently maintains strategic partnerships or associations with companies in the following functional and geographic areas, all of which can serve to support, augment, or supplement the proposed new airline's core aviation business: •

Construction, construction management, and construction technology (U.S., Greece, Turkey, Albania).

•

Environmental engineering, including water and waste water treatment and solid-waste management (U.S., Italy).

•

High-level security, demining, and explosive-ordnance removal (U.K.).

•

Aviation services and airport development (Albania).

•

Travel services and package travel development and marketing (Greece, FYRO Macedonia, Kosovo, global).

•

Free-trade zone development (U.S.).

The company owns 50 percent of a private U.S.-Albania joint venture limited-liability company, Rruget e Mira sh.p.k., founded in early 2001 and based in Tirana, Albania. The joint-venture company is set up to undertake primarily public road and street construction and reconstruction projects, as well as general construction and development projects, in Albania. It also is considering tendering, either on its own or more likely in conjunction with a major international engineering and construction firm, for the build-operate-transfer (BOT) concession the Government of Albania will let for the planned new passenger terminal for Rinas (Tirana) International Airport.

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In addition, BalkConsort also holds exclusive license rights to two advanced U.S.-developed construction technologies in the 10 countries of Southeast Europe, including Albania, BosniaHerzegovina, Bulgaria, Croatia, Greece, Macedonia, Slovenia, Romania, Turkey, and Yugoslavia (including Kosovo). These technologies, combined with other building technologies, products, and methodologies the company and associated companies represent, can offer significant advantages to the new airline should it pursue, either on its own or in conjunction with BalkConsort, development and construction of new passenger-, baggage-, and cargo-handling facilities and other related installations. Legal relationship and company status of the new airline BalkConsort intends to spin-off the proposed new airline operating company into a separate legal entity under the continued partial ownership and general oversight of BalkConsort, acting as a holding company. Investments in the new airline may be made either through BalkConsort, as a share of its total capital holdings, through an E.U.-based daughter company described later in this section that will be BalkConsort's proxy for its interests in the new airline company, or directly into the new airline operating company. To obtain maximum flexibility in terms of certification and flight and landing rights, it is important that the primary carrier operate under an air operator's certificate (AOC) granted by an European Union country. Since current E.U. requirements stipulate that European Union nationals (companies and individuals) hold the majority ownership interest in any E.U.-flagged carrier, it is critical that overall ownership in the new airline be structured in such a way that the majority interest is held by E.U. nationals. According to its overall organizational plan, BalkConsort anticipates reorganizing itself into an off-shore holding company (BC Holdings International Ltd), most likely registered in Anguilla, and transferring the current share ownership of Balkan Consortium Holdings USA, Inc. to the new off-shore holding company. BalkConsort USA will then become a daughter marketing company of BC Holdings International, with a majority of its shares owned by U.S. stockholders (necessary for it to fulfill its role as a U.S. marketing company capable of winning U.S. government contracts reserved for U.S.-owned companies), and a minority share owned by BC Holdings International as a holding company. The corporate organizational plan then calls for the establishment of a daughter marketing company in the E.U., similar to BalkConsort USA, to be held partly by BC Holdings International as minority shareholder and with a majority of ownership held by E.U. nationals. This daughter company (BalkConsort EU) may own all or part of the new airline operating company, provided that majority ownership in the airline meets E.U. requirements for an E.U.-flag carrier. BalkConsort (in its new identity as BC Holdings International and as "BalkConsort EU") anticipates maintaining or appointing positions on the new airline operating company's board of directors proportional to its direct or indirect ownership interest in the airline, with other board positions held or named by other investors in the airline proportional to their ownership interests. Additionally, some board positions will be held by non-equity members, nominated by BalkConsort and the other investors and strategically selected by the board, whose presence and guidance can serve to advance the new airline's operations, business interests, financial positioning, and expansion. It is anticipated that the new airline operating company will be established as a limited-liability company in one or more E.U. countries, the country or countries to be determined based on tax

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requirements and relative tax and business operating advantages, and other substantive considerations. For instance, registering and basing the company in Luxembourg may offer significant tax, as well as logistic, advantages to the new airline. Meanwhile, it may be necessary to register a subsidiary company in another country, such as Switzerland for example, to obtain necessary landing rights or slots in that country. Furthermore, if - as is being considered and is detailed elsewhere in this business plan - the airline acquires British-built aircraft, it may be advantageous from the perspective of obtaining British export financing to base the company outside the U.K. Additional AOCs may be obtained by subsidiary carrier companies established outside the E.U. for substantive reasons such as outlined above. The final company structure, including ownership arrangements, national company registrations and AOCs, and basing, will be determined based on consultation and negotiation between BalkConsort and prospective investors, and with the expert guidance of its project team of tax, business, and aviation advisors and consultants, and others as may be needed. 2.1 Company Ownership It is anticipated that a portion of the ownership in the new airline operating company will be held by BC Holdings International Ltd, most likely through an E.U.-registered daughter company, along with one or more strategic private investors. Investment in the new airline operating company may be made directly in the airline operating company or through investment in BC Holdings International or its E.U. daughter company as the holding company for the airline, with shares apportioned according to the equity investment involved. However, as previously stated, the majority ownership stake in the new airline must be held by E.U. nationals for the airline to qualify for an E.U. AOC, considered an essential element of the overall organizational plan. BalkConsort is prepared to discuss and negotiate specific ownership arrangements in detail with prospective investors. Equity requirements are discussed in the Start-up Summary that follows. For planning purposes, any subsidiary airline companies established by the parent airline operating company, as described in the previous section, shall be considered to be wholly owned subsidiaries of the parent airline operating company, although individual sub-ownership arrangements may be made in individual cases of such subsidiary companies, particularly in cases where local ownership interests might be required by prevailing law in the countries in question. Balkan Consortium Holdings USA, Inc., the current entity formulating this proposal, is a privately held Delaware (U.S.A.) corporation. As noted in the previous section, a new off-shore holding company, BC Holdings International, Ltd., will be set up, with stock ownership in BalkConsort USA transferring to the new entity. It is anticipated that subsequently BC Holdings Ltd. will set up an E.U. daughter company which would then hold a share of the new airline, based on its relative stake in the airline.

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2.2 Start-up Summary Most of the planned start-up costs are apportioned to the following six areas, in approximately declining value: 1. Dry leasing or purchasing three (followed by two more by the end of the first year of operations) mid-to-large-size regional jet aircraft, most likely the 99-seat British Aerospace Avro RJ100 (or the older predecessor to the RJ100, the BAe 146, which also offers a quickconvert passenger-cargo version), or the 85 - 99-seat Avro RJ85, or the next-generation follow-on versions of those two Avro jets, the RJX100 or RJX85. 2.

Provision of a sufficient cash reserve to assure timely payment of the leasing or finance payments and operating costs of the aircraft through at least the first six months of operations.

3. Marketing, advertising, and public relations costs, including costs of setting up a website capable of offering flight and fare information and making online sales and reservations, and related Internet marketing, as well as conventional print and broadcast advertising, and public relations activities. 4. Costs associated with recruiting, training, and certifying flight and ground operational crews. 5. A reserve to cover overall operating costs, aside from aircraft operating costs, over at least the first six months of operations. 6. Administrative and legal costs incurred in setting up the business and the airline operations. Assumptions governing start-up costs are shown in the following table and chart. Table: Start-up Start-up Requirements Start-up Expenses Legal and consulting Route and market study Office supplies, stationery etc. Brochures and marketing materials Design consultants Corporate insurance Office rent Software and systems development Expensed equipment and off. furniture Expensed vehicles (8) Public relations and advertising Crew, staff training and manuals Other Total Start-up Expenses

$200,000 $100,000 $10,000 $30,000 $60,000 $20,000 $50,000 $100,000 $150,000 $100,000 $80,000 $60,000 $30,000 $990,000

Start-up Assets Cash Required Start-up Inventory Other Current Assets Long-term Assets Total Assets

$10,400,000 $150,000 $50,000 $200,000 $10,800,000

Total Requirements

$11,790,000

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Table: Start-up Funding

Start-up Funding Start-up Expenses to Fund Start-up Assets to Fund Total Funding Required

$990,000 $10,800,000 $11,790,000

Assets Non-cash Assets from Start-up Cash Requirements from Start-up Additional Cash Raised Cash Balance on Starting Date Total Assets

$400,000 $10,400,000 $0 $10,400,000 $10,800,000

Liabilities and Capital Liabilities Current Borrowing Long-term Liabilities Accounts Payable (Outstanding Bills) Other Current Liabilities (interest-free) Total Liabilities

$600,000 $0 $390,000 $0 $990,000

Capital Planned Investment Private investment Other Additional Investment Requirement Total Planned Investment Loss at Start-up (Start-up Expenses) Total Capital

$10,800,000 $0 $0 $10,800,000 ($990,000) $9,810,000

Total Capital and Liabilities

$10,800,000

Total Funding

$11,790,000

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Chart: Start-up

2.3 Company Locations and Facilities Financial, traffic, and other studies currently are underway to determine the optimal prime basing location for the proposed new airline. Among the locations under study are the following eight: 1. 2. 3. 4. 5. 6. 7. 8.

Luxembourg, Luxembourg; Berlin, Germany; London City Airport, London, United Kingdom; Stanstead Airport, London, United Kingdom; EuroAirport, Basel/Mulhouse, Switzerland/France; Amsterdam, The Netherlands; Cologne/Bonn, Germany; Munich, Germany.

In selecting a location to base the new airline, the following 11 major considerations are being evaluated, in roughly descending order of relative weight: 1. The tax and business regime in place in the selected locale. A low profit tax rate and a regulatory and political climate supportive of business, and particularly foreign investment, are key considerations. 2. The availability of relatively low-cost facilities suitable for basing both the business and aircraft-support operations, as well as the aircraft, is another key consideration. 3. The availability of sufficient landing and parking slots and gate facilities to permit the desired level of service at the base airport.

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4. The ability to interconnect with one or more major carriers for onward interline arrangements both within Europe as well as to trans-Atlantic and global destinations. 5. A location that, given the maximum range of the selected aircraft, will enable non-stop flights to the most important destinations within the new airline's service area in Southeastern Europe and Turkey and, at most, one-stop service to more distant or secondary destinations. 6. The existence of relatively high-traffic volume between the base location and one or more key interchange points to provide sufficiently high load factors between the base location and onward destinations and points of origin. 7. The existence of a reasonably high level of cargo traffic, including opportunities for interline trans-shipment of both inbound and outbound cargo. 8. The support of a larger airline with which the proposed new airline can establish a particularly close working relationship. 9. The support of local airport and aviation authorities to facilitate establishment, certification, and ongoing operation of the airline and its aircraft. 10. A location outside of the U.K. to facilitate British trade finance on acquisition of the new aircraft, should decisions be made to acquire British-built Avro aircraft as previously noted, as well as to purchase, rather than lease, the aircraft. 11. A range of other factors, including the availability and cost of local skilled workers, the growth potential of the market selected, year-round climatic and weather conditions as they may affect flight operations, the "cache" of the locale for marketing purposes, the cost and convenience or difficulty involved in command and control of the airline involving key personnel, some of whom may be based at various other locations, and so forth. It is anticipated that most routine maintenance will be performed at the base location, with some more minor maintenance and repairs relegated to other locations in the route network. In both cases, most of this routine maintenance and repair work will be contracted out to established and experienced service providers, reducing the need for the new airline to maintain its own extensive maintenance and repair teams and facilities. The airline will, however, perform its own normal line maintenance at home base and will utilize locally available services away from home. Aircraft also may be based at key airline hub locations away from the home business base as well. With acquisition of British-built aircraft, major overhauls and heavy maintenance may be performed at British Aerospace's Woodford facility in the U.K. on a selective basis. In addition, it is anticipated that separate fixed-cost maintenance agreements will be entered into for both the airframes and the engines, or these elements will be included in any dry-leasing arrangements entered into. Estimates for total labor and spare parts costs have been calculated as a fixed per-hour cost and included in the portion of this business plan dealing with anticipated operating costs. Sufficient apron and hangar space for staging, parking, and storing, as needed on a short-term basis, up to the entire initial five-aircraft fleet will be required at the base location and any other hub locations selected.

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As the fleet expands over time, additional parking and storage space will be needed either at the main base location or at regional hubs in the airline route network. Additionally, sufficient office space, preferably in one central location at or near the base airport, will be required to house the airline's main administrative offices and its central reservations system. While the airline may consider establishing its own sales offices in key market locations, in general sales will be handled through a combination of Internet marketing utilizing the airline's own website as well as other Internet travel websites, designated general sales agents in given locales, and regular travel agencies everywhere. 3.0 Services As demonstrated throughout this business plan, it is clear that a strong growth potential exists for the future, and the airline will gear itself toward sensible, well-based growth and solid financial and business planning. The proposed new airline has the potential to become a strong, well-established, and - as the numbers indicate - extremely profitable carrier, starting from now. 3.1 Service Description In reviewing the planned services to be offered by the proposed new airline, this plan will divide services into two main categories: passenger services and cargo services. Within each category, the service strategy, as well as general services to be offered, are presented and reviewed. 3.2 Competitive Comparison In comparing the proposed new airline to its competitors, there are at least two levels of comparison that must be considered; the usually lower-standard airlines, both scheduled and charter, flying out of the Southeastern European region, and the higher-standard, more highly regarded airlines operating out of Western Europe. Beating the former source of competition is both a reasonable and an essential goal. But comparing favorably, and even standing notably above, the latter also is an important objective since these airlines will represent direct competition to the new airline on many of its projected key routes, despite efforts to avoid such competition to the extent feasible. Fortunately, several of the key distinguishing characteristics planned for the new carrier not only will enable it to fare extremely well in both levels of competitive comparison, but will actually be achievable at a savings in cost and resources. In other words, by being smart, the new airline can be significantly better than its competition while at the same time accruing lower overall costs, a remarkably good combination.

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In comparing the proposed new carrier to both its Southeastern European and its Western European competition, it is important to look at those factors that determine how most travelers choose an airline. They include the following (and the order of importance is different for each traveler and each situation, but the most important factors are listed): • • • • • • • • • • • • • • • • • • • • •

Safety, actual and perceived; Cost, and range of fares offered; Destinations served; Availability of seats; Availability of fares; Convenience of flight schedules, times of arrivals and departures; Frequency of flights; Connections, including reliability and convenience of connections; Nature of flights: non-stop, direct, number of stops, aircraft changes; Availability of different classes of service; Onboard comfort, service, meals, and amenities; Type of aircraft, including jet or non-jet, size, and speed; Age and condition of aircraft; Ease and efficiency of reservations and ticketing; Reliability and on-time departures and arrivals; Ground service; Reliability and quality of baggage handling; Friendly, competent service in reservations, check-in, and in the air; Overall reputation of airline; Nationality of carrier; Factors of personal preference.

While no airline probably can excel in every one of these areas, the closer an airline comes to "excellent," or at least "good," ratings in each of these key areas, the better it will fare in its competitive standing. Both in the overall design of the airline and its basic operational features, as well as in its management, quality control, and day-to-day operations, the proposed airline is expected to stand out positively in almost every regard. Competition with Southeastern European carriers While not all Southeastern European carriers fit the stereotype presented here, and several are in the process of privatization and ostensible upgrading, most do operate at a lower level of service than is customary in Western Europe. It is not uncommon for carriers in the region to operate older Soviet-built equipment (perceived to be less comfortable, less safe, and less reliable than its Western competition - perceptions that often are accurate). For instance, such competing airlines as Avioimpex of the Former Yugoslav Republic of Macedonia, Albanian Airlines (Albania's Kuwaiti-owned private carrier), ADA Air (a smaller private carrier in Albania with which BalkConsort has been partnered for certain purposes), Hemus Air and Bulgarian Airlines, both of Bulgaria, Tarom, Romania's state carrier, and even Malev, the Hungarian airline, still operate Soviet-era aircraft in their fleets. In some cases, these aircraft are turbo-prop powered, and not pure jet.

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While often it is relatively inexpensive to lease such aircraft, their operating costs tend to be significantly higher than newer, more fuel-efficient Western-built aircraft, and their safety, reliability, and noise factors are often poor, in some cases limiting their ability to operate in some markets. Service levels are poor in general, among both scheduled and charter carriers, which represent a significant part of the market, particularly in service to Kosovo and Turkey, the two niche markets identified for the new carrier. By utilizing modern, safe, reliable, and cost-effective Western-built regional jet aircraft, the proposed new airline will offer a far more attractive alternative to the traveler both from within and outside Southeast Europe, and will be able to operate with far lower fuel and maintenance costs than the competition. The comfort, reliability, speed, and safety of the new airline's aircraft all will enable it to be the airline of preference for virtually all business, government, and organizational travelers from both within and outside the target region when traveling to or within the region, and it also will be preferred by most leisure and personal travelers, including those from with the target region, as well. Greater reliability and punctuality of the aircraft, augmented by state-of-the-art navigational devices that permit operation under a wider range of weather and visibility conditions, will enable the airline to compete most favorably on those bases also, and will ensure the least likelihood of flight cancellations, postponements, and missed or late connections. On the basis of fares, the new airline will offer highly competitive fares which, in many cases, should be below those offered by its Southeastern European competition. Higher load factors, combined with greater efficiency both in operational costs as well as in reservations, ticketing, and check-in, will enable the new airline to be highly competitive from both a cost and a quality perspective, and will also enable it to retain a higher percentage of its revenues. In short, the local competition, except in a few cases (such as Aegean/Cronus Airlines, and to a lesser extent Olympic Airways, from Greece; Adria from Slovenia; in some cases Malev, from Hungary; and the Turkish carriers) will not represent very strong competition to the new airline, and particularly in attracting the primary market groups at which the new carrier will be aimed. Finally, the new carrier will be seeking out, as part of its business and marketing strategies, routes and city pairs that offer unserved or under-served demand. That strategy also will help reduce the threat from competition, and will enable the carrier to further establish itself as the carrier of choice in Southeast Europe. Competition with Western European carriers The competitive picture is somewhat different when Western European carriers represent the competition. Many of the new airline's competitive advantages relative to Southeastern European carriers are erased or at least minimized. In most cases, the new airline will be competing with other carriers operating aircraft of a similar nature. Safety, comfort, convenience, and reliability, as well as in many cases cost, all are on a similar footing. To stand out from the crowd, the airline must do things either differently or better, or both, than its competitors, and it is here that both the design and the management of the new airline must be at their sharpest.

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The competition in this region will include such well-established carriers as Swiss International, Austrian, Tyrolean, Lufthansa, KLM, British Airways, Air France, Alitalia, Sabena, and others of that nature. More recent, lower-cost, and "hipper" start-ups such as EasyJet, Go Fly, Bluebird, Virgin Express, and others like them will represent even more challenging competition in some cases. But unlike any of its competitors, which may employ one or two or several elements of the proposed new airline's marketing strategies, informational and electronic technologies, and management techniques, none of them - none - employ the full range of those elements that the proposed new airline will employ. Consequently, the proposed new airline will be the real equivalent of a whole new generation of airline (regional or beyond), and will represent the kind of revolution in the aviation world that Pan Am, Icelandic, Laker Air, PEOPLExpress, Virgin Air Atlantic, EasyJet, and Air Blue represented in their day (and in some cases, their "day" is still today). In that regard, the new airline might well be known as "TechnoAir" given its extensive deployment of state-of-the-art marketing, reservations, ticketing, check-in, baggage- and cargo-tracking, and operational and safety technologies. The advantages of these technologies include a net cost saving to the airline, greater convenience and ease for the passenger, and an image and reputation that will cause the new airline to stand out from the pack. Combined with a staff and management that will be carefully recruited, selected, trained, and motivated to be the best of the best, and to be the most customer-oriented in the business, the new airline also will soon become known by its motto: "I've got a job to do, and I do it every day - for you!" In other key areas - routes, schedules, and fares - the new airline also will be carefully designed to either compete highly effectively or, alternatively, to go where the competition is limited or non-existent. Requirements for interline arrangements In order for the new airline to be able to obtain the interline arrangements such as code-shares, interline fare agreements, frequent-flyer mileage sharing, and so forth, that will be so important to its competitive posture and overall success, it must: • • • •

Fly Western-built aircraft, preferably pure jet. Meet the standards to have a two-letter airline code. Meet the highest standards for safety, reliability, and service. Be accessible through normal reservations and ticketing systems.

Meeting these requirements, and negotiating the desired agreements, will be priorities from the outset in setting up the new airline. Additionally, partnering and interline arrangements will be carefully identified and sought that will offer the new airline strategic partnerships that will help give it the "cover" of larger, more established carriers, and also the status and service and growth potentials it will need to grow beyond its initial stage and to become a true presence in the aviation world.

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3.3 Fulfillment The primary issue regarding sourcing is the question of the type and source of aircraft to be employed in the new airline's fleet. Aircraft selection Several potential fleet aircraft and manufacturing sources are being considered and evaluated, including the following: • • • • • • • •

Airbus Industrie ATR72, A-300, A-310, A-320 Boeing 717, 737-500, 737-700 Bombardier Canadair Regional Jet CRJ British Aerospace BAe 146-300, BAe 146-200QC*, Avro RJ85, RJ100, RJX85, RJX100 Embraer ERJ-145 Fokker 100 Saab 2000 Also, in an all-freighter configuration, the BAe 146-200QT** and BAe 146-300QT**

* QC = "Quiet Convertible" version allowing quick-conversion from passenger to full-freighter configuration; only five of these - the complete production run - currently are in service worldwide. ** QT = "Quiet Trader" all freight version, of which in service there are 13 in the 200 version and 10 in the 300 version. With the exception of the turboprops ATR72 and the Saab 2000, all aircraft under consideration are pure jets. Given the strong "jet preference" among the flying public (for instance, Continental Express in the U.S. estimated that its load factors increased 33 - 50 percent when it switched from turboprops to jet aircraft, and similar results have been documented elsewhere, including in Europe), the overall greater speed and reliability, reasonably close operating costs (especially given the additional flights that can be operated daily), and the longer range offered by jets, the preferred aircraft type is a pure jet. It remains only to decide which is the "right" pure jet for the fleet. A number of key factors have mitigated toward the BAe Avro RJ family of regional jets rising toward the top of the list as the probable aircraft of choice for the new airline. Among those factors are the following: 1. Relatively low per-seat acquisition cost. 2. Relatively low per-passenger-mile costs, given their added capacity over smaller regional jets, and high reliability factors in the newer versions (for instance, Aegean/Cronus Airlines of Greece, which operates six RJ100s on a very active daily schedule, has averaged above 99.6 percent departure reliability with its RJ fleet). 3. Complete pilot and maintenance intercompatibility between the various members of the family (RJ70, RJ85, RJ100, and now the new RJX family as well), giving added flexibility in flight and maintenance operations and reducing training and simulator costs.

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4. Four-engine configuration which gives it an added safety factor (while also increasing operating costs, however). 5. Spacious, comfortable cabin interiors that offer the only seat, aisle, and overhead bin dimensions available in a regional jet that are equivalent to those on standard-size jets. 6. The option of flexible cabin and seating configurations that allow for varying the number of seats provided for various classes depending on demand, the number of seats abreast, types of seat coverings, the number of seats provided on a given flight, and so forth. 7. Availability of the aircraft from various sources on both lease and purchase bases. 8. The possible option of obtaining advantageous British export financing. 9. Ability to service the aircraft in many locations on the projected service network and the availability of major overhaul capabilities at the manufacturer's own facilities in the U.K. 10. Widespread passenger and industry acceptance of the Avro regional jets both within and outside Europe. Seating capacity is an important consideration both from the point-of-view of capacity, load factors, and per-passenger-mile costs, but also from the point-of-view of "scope clauses" in pilot union contracts. In Europe, any airliner with 100 or more seats falls under the far more highly compensated "mainline" airliner contracts in place in the industry. Planes with 99 and fewer seats are considered "regional airliners" for contract and union purposes, carrying more economical compensation packages. On the lower end of the spectrum, market conditions make it very difficult to run profitable operations in Europe with a 70-seat regional jet, which is considered suitable only for certain niche markets. Consequently, the core of the regional-jet segment in Europe falls in the range of 85-100 seats and, in fact, this segments comprises nearly half the airliners in use in Europe today. Either the RJ85/RJX85 or RJ100/RJX100 series (or older BAe 146) fall squarely into this size segment. Either the RJ85/RJX85 or RJ100/RJX100 (the fuselage and cabin configurations are the same for both series, with the major change being in the more advanced and more powerful Honeywell AS977 engineers on the RJX series) is able to offer seating up to 99 seats (the 100 can offer a maximum of 112 seats configured with optional six-abreast seating), although the 85 series requires six-abreast seating to reach the upper capacity limit. There are trade-offs with both series to consider: The 100 series offers greater capacity without the need to go to six-abreast seating and lower per-passenger-mile costs at higher capacities, but it also offers somewhat less range and requires a longer takeoff roll than the 85 series. On the other hand, it also has more cargo capacity. The 100 series also obviously costs more to acquire than the 85 series, but with planned high load factors this capital cost should be more than offset by greater revenue potential. Key operating parameters for both the current and new series of Avro jets (85 and 100) are given here:

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Aircraft type

RJ85

RJ100

RJX85

RJX100

Seating

85-100

99/100-112

85-100

99/100-112

Cargo Capacity (m3/ft3)

18.25/645

22.98/812

18.25/645

22.98/812

Range (km/nm)

2796/1510

2554/1379

3296/1780

3019/1630

Maximum Speed (kt)

MO.73/300 kt

MO.73/305 kt

MO.73/300 kt

MO.73/305 kt

Runway for 740 km (m/ft)

1157/3796

1314/4311

1105/3625

1275/4183

While any of the available configurations would be adequate to accommodate the range of most of the routes envisaged, the greater range of the RJX series gives added scope, and also enables service into airports with shorter runways and with "hot and high" takeoff conditions, such as may be encountered in Turkey and some other locations in the route network. Given that the RJX series is now in production with the first ones expected to enter service later this year, the RJX series is an option to consider. While acquiring older-generation BAe 146s also is being evaluated, a number of factors related to reliability, higher operating and maintenance costs, and the likely need for additional refurbishment, mitigate toward acquiring newer, or new, Avro RJs for the new airline's fleet, except possibly for air freighter use. Additionally, per month leasing costs can be two-to-three times higher, as a percentage of aircraft value, on older aircraft compared with newer aircraft, making their monthly leasing expense potentially higher than for new or newer aircraft. One approach worth considering is to commence operations with one generation of aircraft with an option to return those aircraft to the lessor or manufacturer without penalty in an "upward trade" to acquire the newer generation aircraft when they become available. Such options are commonly supported by manufacturers in their effort to market newer generation aircraft, and would enable the new airline to avoid any delays that might ensue from backups in the RJX build pipeline. Given the new airline's stress on technology and the comfort of the passenger, combined with the very real considerations of lower operating and maintenance costs and greater flexibility, consideration of the latest generation of aircraft should be evaluated carefully, along with limiting seating to five abreast, including in Value Class as described elsewhere in this plan. However, factors such as initial acquisition cost, refurbishing costs, operating and maintenance expenses, reliability, operating parameters, customer preference, and financing packages available for purchase or lease all must be considered. For purposes of the costing factors utilized in this business plan, acquisition and operating costs for dry-leasing new Avro RJ100 aircraft with a high-level of technical features and passenger amenities have been employed, with a cost comparison also made for purchasing the same aircraft. Adjustments would need to be made for other aircraft types or ages and acquisition methods.

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Aircraft acquisition Another issue still being evaluated and which will be decided is the question of how to acquire the aircraft. For a variety of reasons, including the ease with which the leases can be cancelled by the lessor and the lack of "ownership" of the aircraft, wet leasing has been ruled out except for short-term acquisition of aircraft that would be employed in meeting peak demand-type services as outlined elsewhere in this business plan. The two remaining options both need to be examined from cost, flexibility, and finance points of view: Dry leasing the aircraft (generally on a five-year lease), or outright purchase. Both provide long-term control over the aircraft, and while both options tend to restrict changes in the fleet that might be preferred after the initial years of operation, market conditions and high demand for aircraft indicate that it would be relatively easy to be released from the leases, or to sell or lease the aircraft to new owners or operators, or to return them to their sources. A number of leasing sources are available for the BAe Avro aircraft being considered, and some used aircraft also are available from time-to-time on the market from various sources. In addition, new aircraft can be acquired directly from the manufacturer on a variety of different plans and options, as well as used aircraft on occasion. Cost factors employed assume dry leasing of new Avro RJ100 aircraft in 99-seat configurations, with a comparison for purchasing. It is anticipated that finance guarantees up to 85 percent of the acquisition cost of the aircraft could be obtained from the Export Credit Guarantee Department of the United Kingdom (ECGD) for purchasing British-built aircraft exported from the UK. 3.4 Technology Flight may be based on aerodynamics, but the proposed airline will be based on technology, and lots of it. Efficiency and convenience through use of the most up-to-date informational and electronic technologies, in addition to modern aviation and navigational technologies, are guiding principals of the proposed new airline. Technology will also be a cornerstone of the new airline's marketing strategy. Among the technological features the new airline will offer are: •

Internet marketing and online reservations (e-reservations) and sales (e-sales) that will provide quick and easy access to airline schedules, flight availability, reservations, and ticketing to a wide range of customers worldwide. This eliminates payment of agency commissions and keeps costs low - savings that can be passed on to the customer.

•

Electronic ticketing (e-ticketing) which will enable passengers to obtain their tickets online and avoid the need to obtain paper tickets from airline offices, travel agencies, or at the airport. It also frees the airline from having to stock, track, and issue tickets and maintain paper trails of them. Again, more savings for both the airline and the customer.

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•

Electronic check-in (e-check-in) that will virtually eliminate waiting in line to check-in for e-ticketed passengers, enabling them to confirm their identities, obtain their boarding passes, and check-in their baggage (and even purchase tickets upon check-in) utilizing a user-friendly kiosk that eliminates those last-minute frustrating waits to get to the counter. And it also greatly reduces the airline's needs to staff check-in desks, control long lines, employ local contract ground staff, and expend money and resources on an antiquated system that only adds to the traveler's inconvenience and frustration. Another win-win situation for both airline and passenger.

•

Electronic baggage tracking (e-baggage tracking) which will enable the airline to track any piece of baggage from check-in to final pick-up and claim. If courier services can track parcels as they move around the world, and enable customers to track their parcels using tracking numbers and online tracking systems, then why can't the same system be used to assure that no passenger will ever again have to wonder where his or her baggage might be? There may still be contingencies (such as late check-in, lack of space, security restrictions, late connections, and so forth) that cause baggage not to be placed on a given aircraft, but at least both the airline and the customer can be assured that they both know exactly where the given item of baggage is at any moment, and when it might be expected to arrive at the destination. This could well be an exclusive feature of the proposed new airline since no other airline appears to be utilizing it at present.

•

Electronic cargo tracking (e-cargo tracking) is the same basic idea as e-baggage tracking, and will use the same basic system, only for tracking cargo and parcels.

•

Electronic quality control (e-QC) is another innovation that will enable technology to create a far better flying experience for the customer, give airline management and staff greater control over airline operations and performance, and save time, effort, money, and staff resources in the process. What is envisaged is a central electronic matrix that controls and monitors scheduling of aircraft, equipment, personnel, supplies, and support materiel, and responds to problems, excesses, and deficiencies.

It also will track all elements of a given passenger's or customer's transactions and interactions with the airline, from initial flight inquiry through reservations, ticketing, check-in, flight, connections, and final baggage pick-up, claim, and check-out, as well as any standing preferences, follow-up comments, inquiries, or problems. It also will monitor things like weather conditions, flight delays or projected delays, gate jam-ups, and other contingencies, and will automatically notify both appropriate airline personnel as well as passengers and customers of any advisories, warnings, or changes.

•

Electronic financial control (e-finance) will enable complete electronic financial control and monitoring of the airline's finances, clear advantages.

•

Additional technological features will be incorporated on-board the aircraft to provide flight crews with the latest navigational and communication technologies to assure the highest level of passenger safety and also airline reliability and punctuality. Included in this technology, in the case of the Avro aircraft, is all-digital ARINC 700 avionics with advanced Cat IIIb low weather-minimal landing capability to permit landings under the poorest permissible approach and visibility conditions.

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4.0 Market Analysis Summary Economic growth and the requirements of redevelopment, not to mention the impending entry of several countries in the region to the European Union, are creating increased demand for air services between Western Europe and the countries of Southeast Europe and Turkey. The market combines a variety of elements all of which demand a higher quality of air service than often currently available: 1. Business travelers requiring convenience, reliability, speed, and schedules built around business needs. 2. Government and international organization travelers, requiring the same elements. 3. Personal and leisure travelers from the Southeast Europe/Turkey region who have the money to travel by air and who increasingly demand a higher level of service and convenience, but at an economical cost. 4. The "Diaspora," Personal and leisure travelers originally from the Southeast Europe/Turkey region, but now living and working in sizable numbers in the countries of Western Europe, with the same demands. 5. Western European personal and leisure travelers, primarily traveling on the airline's routes between Western European points. 6. Seasonal (primarily summer, with some limited niche markets in the winter period) holiday travelers, primarily destined for Greece, Turkey, and the islands of the Mediterranean. Cost, reliability, convenience, and destination are their concerns. The proposed new airline will appeal to all these distinct groups by offering better quality service (and in some cases, offering service where none now exists), at a higher level of safety, comfort, and convenience, and at reasonable fares, than currently available. The new airline also will focus on the niche markets identified in the Service Description section of this plan, enabling it to better serve and to become identified as the carrier of choice for those markets. 4.1 Market Segmentation A complete market analysis and segmentation will require a specific passenger and destination survey, the cost of which is included in the Start-up Costs for the airline. Preliminary analysis (based on a variety of methods, including observation, interviews with travel- and airline-industry professionals, economic segmentation, future projections based on marketing plans, and experience with the region and market) for planning purposes, however, indicates the following approximate market segmentation overall (considerable variations, of course, would be anticipated depending on route, season, and other factors): • • • • • •

Business - 15% Government and International Organizations - 10% Regional Resident Personal and Leisure Travelers - 20% Diaspora Personal and Leisure Travelers - 10% Western European Personal and Leisure Travelers - 5% Seasonal Holiday Travelers - 10%*

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* The seasonal/holiday travel segment of the market to some degree distorts the overall market percentages, but might initially be anticipated for two reasons: first, it compensates for the drop in business and government travel that can be expected during the peak summer holiday travel season; second, a significant portion of this traffic is likely to be carried on flights employing specially chartered or wet-leased supplemental aircraft. The accompanying Market Analysis table and chart below show total potential markets based on estimated population in each segment, as well as potential growth rates in air travel in the new airline's target market region within those segments, but do not reflect the anticipated passenger demand from those markets. Overall make-up of the airline's anticipated passenger loads by market segment are presented above.

Chart: Market Analysis (Pie)

Table: Market Analysis

Market Analysis

Potential Customers

Growth

Reg Res Pers & Leis Business Government & IO Diaspora Pers & Leis Holiday Trav (seasonal) W Europe Pers & Leis Other Total

20% 15% 10% 10% 10% 5% 20% 10.82%

Year 1

Year 2

Year 3

Year 4

Year 5

130,000,000 5,000,000 1,500,000 10,000,000 20,000,000 260,000,000 5,000,000 431,500,000

156,000,000 5,750,000 1,650,000 11,000,000 22,000,000 273,000,000 6,000,000 475,400,000

187,200,000 6,612,500 1,815,000 12,100,000 24,200,000 286,650,000 7,200,000 525,777,500

224,640,000 7,604,375 1,996,500 13,310,000 26,620,000 300,982,500 8,640,000 583,793,375

269,568,000 8,745,031 2,196,150 14,641,000 29,282,000 316,031,625 10,368,000 650,831,806

CAGR 20.00% 15.00% 10.00% 10.00% 10.00% 5.00% 20.00% 10.82%

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4.2 Service Business Analysis The overall airline industry operating between Western Europe and Southeastern Europe and Turkey consists of four primary segments: 1. Established mainline European carriers (primarily Swiss International, Austrian, Lufthansa, Alitalia, Malev, Turkish) utilizing their Southeast European routes as spokes connecting to main hubs in Western Europe (or Budapest and Istanbul in the case of Malev and Turkish, respectively) and serving to feed traffic to their prime intra-European and trans-Atlantic routes (or domestic Turkish routes in the case of Turkish). 2. Smaller, but generally well-established regional airlines primarily from Western Europe or the upper level of Eastern European states (primarily Swiss International, Tyrolean, and Adria) that perform essentially the same function as the mainline carriers or, in the case of carriers like Adria, link destinations in Southeast Europe to their own national capitals. 3. Home-based Southeastern European carriers (such as ADA Air, Albanian Airlines, Avioimpex, Balkan Air, Hemus Air, JAT, and Tarom Airways) that often operate older, Soviet-built aircraft or turboprops, offer a generally lower level of service (though not always lower fares), and are often less highly regarded, including by travelers from Southeastern Europe. These airlines connect points within Southeast Europe, or they may connect Southeastern European destinations to major destinations in Western Europe. 4. There also is a fourth segment worth noting, and that is the fairly significant charter market that exists within certain niche or seasonal markets. This market includes charter flights between Pristina and destinations in Switzerland and Germany, as well as primarily summer charters from Southeast Europe to New York and other destinations in North America. These charters are often operated by individual travel agencies or airlines, and often are categorized by a low level of service and utilization of older, often Soviet-built, aircraft. There also are the vacation charters that operate from Western Europe to Greece, Turkey, Cyprus, and the other holiday spots of Southeastern Europe and the Mediterranean. It is anticipated that the proposed new airline would most closely fit into the second grouping above, but would compete effectively with all four main segments through a combination of a high level of safety and service, carefully selected routes, niche-market service, convenient schedules, reasonable and competitive fares, and modern, safe, comfortable aircraft. It also will offer service on under-served and unserved routes where little or no competition currently exists. 4.2.1 Main Competitors The new airline's main competitors will vary depending on market and route served, and the category of passenger. For the most part, competition can be expected as follows:

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Business and Government/IO segments to and from Southeastern Europe

For SE European Regional and Diaspora Personal and Leisure Travelers

For Western European Personal and Leisure Travelers, as well as Business and Government/IO Travelers between Western European destinations

For seasonal Holiday Travelers to Southeastern Europe and Turkey

Adria

ADA

Adria

Alitalia

Alitalia

Adria

Air France/Air Inter

Austrian

Austrian/Tyrolean

Albanian

Alitalia

Balkan/Hemus

Croatian

Alitalia

Austrian/Tyrolean

Britannia

Lufthansa

Avioimpex

British Airways/CityFlyer Express

British Airways

Malev

Balkan/Hemus

Croatian

British Midlands

Swiss International

Croatian

Deutsche Air BA

Cyprus

Turkish

JAT

KLM/KLM Cityhopper/KLM UK

Hapag Lloyd

-

Tarom

Lufthansa

Lufthansa

-

Turkish

Luxair

Maersk

-

-

Malev

Malev

-

-

Sabena

Olympic

-

-

Swiss International

SAS

-

-

Turkish

Swiss International

-

-

-

Turkish

The larger, more established carriers often suffer from a lack of flexibility, and a focus on feeding their main intra-European and trans-Atlantic routes. The smaller regional carriers often are focused almost exclusively on their own core regional service. The Southeastern European airlines often suffer from poor service and poor reputations. And the larger, more established charter operators are focused on the holiday charter and package market. Again, the extent of competition (and what is listed here is not comprehensive) dictates the importance of the new airline's three-prong strategy to seek out unserved and under-served routes and city pairs, key niche markets where it can effectively compete or create its own market, and meeting peak travel demands on key regional, seasonal, and intermittent routes. It also points out the importance of standing out from the crowd through offering a higher level of service and convenience, and utilizing technology and a service-oriented staff to achieve recognition and passenger preference right from the outset. 5.0 Strategy and Implementation Summary The airline's strategy has already been adequately explained elsewhere in this plan: target unserved and under-served markets, seek out niches and unmet demand, and offer a higher level of service and a higher standard than the competition. The airline will utilize technology to reduce costs and offer better service and greater convenience to the passenger. In this section we'll examine how the new airline will go about cutting out its niche through its marketing strategy.

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5.1 Marketing Strategy The proposed new airline intends to cut out new territory as it goes about marketing itself. While it will clearly serve the target markets of Southeastern Europe and Turkey, it will just as clearly be a different kind of player on the field, and will seek to be known not only as a Western airline, but at the cutting edge of the aviation business in Europe. The airline's emphasis on the latest information and electronic technology, and its stress on comfort, convenience, safety and customer service, will be cornerstones on which the marketing strategy will be built. The airline will utilize a combination of methods to achieve the recognition that it both desires and needs. A fairly large advertising budget is planned to buy the space and time to get its name and message in front of the largest possible group of potential customers that it can. Given the crowded field of European regional airlines, it is better to come on like a lion than a lamb, or you may be lost in the herd. The airline will also utilize public relations to good advantage to extend and supplement its advertising budget. There are a number of "hooks," aside simply from its newness, that the airline can utilize to get the media's attention. The airline is opening up new markets, and it also is transcending the technological barrier with the latest technology in the business in Europe, or anywhere. It has big ambitions, but knows that it needs to serve the customer first to realize them. And it wants to know and serve its markets better than anyone else. Everything about this airline, from its name to its colors, from the look of its planes to its airport kiosks, from its smart but informal crew uniforms to its advertisements and literature should set it apart. And it costs little more to do things freshly and smartly than the more ordinary way of doing things. An organization is new only once in its life, so the airline should grab that opportunity and get all the attention it can at the outset. And it needs to have both an adequate budget, as well as an outwardly directed management, to achieve that end. The new airline will become known as one where all the staff practice the motto, "We have a job to do, and we do it every day - for you!"" 5.1.1 Pricing Strategy Like everything else about it, the new airline's pricing strategy will also set it apart from the pack and will form a key aspect of its overall marketing strategy. It is almost a stock joke, the unwieldy and impenetrable forest of airline tariffs and fares and promotions (often available for something like three seats on a flight - and that is meant to win customers) common in the industry today. Few things have garnered the notoriety and degree of customer suspicion and dislike that airline pricing has, and yet there are few moves afoot to improve the situation. We intend to change that, and will not only make our business more predictable and "userfriendly" to the passenger, but also will help fill our planes and make our financial direction more predictable and clear to our management and our bankers as well.

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The game plan is simple enough, offer customers good service to places they want (or need) to go to, and at a fair and predictable price. Competition on the basis of price alone has spelled disaster for more than one carrier (start-up and veteran alike), and once down that slippery slope it is hard to turn back. And while price is clearly an important factor driving the marketplace, it is by no means the only one. It will not be our aim to be the lowest-priced competitor in the market (though we may be on occasion). Nor will we seek to be the highest priced, either. Fairness, clarity, and a rational fare basis, combined with better service and greater convenience than offered elsewhere, will be our guiding principles. Essentially, we will work from only two sets of fares (existing for market segmentation purposes) for our service: •

Weekday fares, in both Value and Premium (aimed primarily at business travelers who are willing to pay a higher price to be able to go and come back during the week).

•

Stay-over weekend fares, in both Value and Premium (aimed more at the personal or leisure traveler for whom price is more important than traveling mid-week).

The only variations on those fares (not new fare bases) will be these:

• •

Set, publicized discounts for early reservations and purchasing tickets in advance. Set, publicized discounts for reserving and ticketing online, electronically.

•

Seasonal and certain peak-period adjustments to the basic fares, or adjustments due to spikes in fuel prices and the like.

•

Infant and child discounts based on the original fare (up to free in the case of infants).

•

And possibly a stand-by fare (call it the "Gambler Fare") for people who are willing to take what's available at the last minute (helps us fill seats, helps them get on a nearly full flight, and it does not have to be radically discounted from the normal fare - probably no more than 5 percent discount - since the normal fare will be just that, a normal fare, and not some outrageously priced gouger).

Given our stress on electronic reservations and ticketing, most tickets will be paid for in advance of the departure date, which means the new airline - again, as part of its marketing strategy and offering a higher level of concern for the traveler - should avoid the common and much detested practice of overbooking. This also is where stand-bys can help fill any voids that may occur. In addition, fares for the most part should be based on some rational system that is calculated on distance and actual costs, and not simply what the market will bear. One must wonder how much legitimate business is lost to the industry simply because many passengers cannot and will not pay the near-equivalent of a round-the-world fare only to go between two neighboring countries in Europe.

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Here is an example of how this user-friendly fare system will work for the London-Berlin route: •

Value Fare is $XXX for weekday round-trip travel.

•

Value Fare is $XXX - 20 percent for Saturday stay over round-trip travel.

•

Value Fare one-way is one-half the round-trip cost of $XXX + 10 percent.

•

Premium Fare is Value Fare plus 30 percent (for any category. So you can stay over Saturday and travel Premium for only 10 percent more than the regular weekday Value fare - this will help fill Premium seats and get people used to the idea of traveling Premium during the rest of the week, too).

•

Reserve and pay for your ticket on the airline's website, and receive a 5 percent discount on whatever the fare is (a lot cheaper than paying a 9 or 10 percent commission plus reservation-system handling charges, and it gets the customer to be e-ticketed, other advantages for the airline as well as the customer. And it beats operations like EasyJet that only offer a flat 2.50-British pound sterling discount, regardless of the fare).

•

Reserve and buy your ticket up to 30 days in advance, and take another 15 percent discount. Or reserve and buy your ticket up to 14 days in advance, and take a 10 percent discount. Up to seven days in advance, and a 5 percent discount. So essentially, the maximum discount is 40 percent (20 percent for Saturday stay over, 15 percent 30-dayadvance purchase, and 5 percent online reservations and ticketing. Predictable for the traveller, predictable for the airline). Fly Premium weekends and reserve 30+ days in advance online, and you fly at 10 percent less than weekday Value fare - another marketing hook. And since the basic fare will be a "fair" one, the airline will not be staging loss-leaders even with the steepest discount. But no one is likely to complain about the fare, either.

•

Go non-stop, or make connections if you need to - no penalty if you don't disembark at the interconnect and if the fare to the interconnect point is equal to or less than the fare to the passenger's stated destination, as it would be in most cases. Otherwise the higher fare is charged to eliminate the argument (it's all in the computer's database).

•

And that's it. Unless there is an adjustment for seasonality or other special conditions. No impenetrable forest of fares. Few promotions needed (though they might be used from time-to-time). No reading the small print on the back of the ticket or trying to make out the "fare basis" (except maybe for those through tickets connecting to or from another carrier). How can the customer not love it? The only real danger is that it could set a new trend for the industry.

5.1.2 Promotion Strategy The overall concept and design of the airline sets the stage for its promotion. Marketing and promotion will stress the unique qualities of the airline and the points that set it apart. Strong public relations combined with well-placed, well-designed, distinctive advertising appealing directly to people who are the airline's prospective customers will help get the word out. Special effort must be made to develop and operate a highly functional, fast, rock-solid, and user-friendly website for online information, reservations, and e-ticketing. Internet marketing, combined with conventional non-Web marketing, will steer people to the website. The more customers use the website, the easier and more pleasant the experience will be for them, and the more economical and efficient, and predictable, will be the process for the airline.

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Special attention will be made at the outset to reach the trend-setters and opinion-leaders in our various target markets, even going so far as to arrange personal meetings between airline executives and marketing directors and those opinion leaders, particularly either in Southeast Europe and Turkey or who deal or otherwise have a close connection to the target region. While in general, special promotional fares and the like will be limited, the airline may consider launching with a special promotion simply to get known and to "get off the ground" with planes that are not mostly empty, as is often the case with new airlines. Overall, management and the sales and marketing department will coordinate closely and will employ outside consultants as need be to assure the most positive possible launch. 5.2 Sales Strategy The airline's sales strategy will flow from its overall concept and marketing approach. Mass marketing, but with a personal touch utilizing airline employees as spokesmen and women to explain that "I have a job to do, and I do it everyday - for you!", will aim to steer as many people as possible either to the airline's website, or to its telephone-based customer-service representatives. While clients are free to utilize their own travel agents, and the airline may also want to be accessible through general travel sites such as Travelocity, the more customers that can be encouraged to use the airline's own reservations and ticketing services, the less revenue will have to be shared in the form of expensive commissions. E-reservations and e-ticketing, combined with e-check-in, make the most sense for any customers who have online access, and also for the airline itself. But nonetheless, the airline must not lose sight of the fact that many people do not have access to the Internet, or do not care to use it to arrange their travel, or perhaps just prefer a more personal touch, and so other means of access must always be readily available. The regional and specialized sales and marketing managers, as explained in the section on Personnel, will concentrate their effort on targeting specific clients that have the potential to offer corporate or group travel (including contract arrangements), or who are potential aircargo customers. The airline will not have the resources to field a large sales team, and so these regional managers must target their efforts, and the airline must effectively utilize its mass marketing methods as well as the Internet to attract individual travelers who, once they experience the new airline, hopefully will feel a close affinity toward it and will become loyal and happy customers.

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5.2.1 Sales Forecast The following chart and table show the projected sales figures for Air Leo.

Chart: Sales Monthly

Chart: Sales by Year

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Air Leo -- A New Regional Airline

Table: Sales Forecast

Sales Forecast Year 1

Year 2

Year 3

Scheduled Passenger Revenues Scheduled Cargo Revenues Special Flights Passenger Revenues Special Flights Cargo Revenues Package trips Other Total Sales

$37,653,000 $2,282,000 $1,483,200 $34,560 $79,000 $0 $41,531,760

$88,642,656 $4,132,800 $2,013,600 $43,200 $270,000 $0 $95,102,256

$139,694,250 $5,473,300 $3,502,000 $72,000 $405,000 $0 $149,146,550

Direct Cost of Sales Scheduled Passenger Revenues Scheduled Cargo Revenues Special Flights Passenger Revenues Special Flights Cargo Revenues Package trips Other Subtotal Direct Cost of Sales

Year 1 $1,995,120 $0 $85,680 $0 $31,600 $0 $2,112,400

Year 2 $4,309,920 $0 $104,340 $0 $108,000 $0 $4,522,260

Year 3 $5,989,354 $0 $167,300 $0 $162,000 $0 $6,318,654

Sales

5.3 Milestones The accompanying chart gives some notional milestones for setting up the new airline, beginning recruitment, training, and operations, and also reaching profitability on a month-tomonth basis. The timetable is ambitious, and it is meant to be. The time for action is now, and once a decision is made to go forward there will be no time, or resources, to waste. Of course, once a final plan, team, organization, and financing is in place, a more refined timetable will be established and specific duties delegated to responsible team members. Table: Milestones

Milestones

Milestone Establish a firm financial plan Identify an anchor investor Commence leasing negotiations Set up new company Begin negotiating for offices Select core mngmnt team Commence co. operations Make initial aircraft lease pymnt Begin hiring key personnel Begin crew training Take delivery of aircraft Begin inaugural flights Operation turns profitable Take delivery of fourth aircraft Totals

Start Date 5/1/2002 5/15/2002 6/1/2002 6/5/2002 6/5/2002 6/10/2002 6/15/2002 6/30/2002 7/1/2002 8/1/2002 8/15/2002 9/5/2002 1/1/2003 4/15/2003

End Date 5/1/2002 5/15/2002 6/1/2002 6/5/2002 6/5/2002 6/10/2002 6/15/2002 6/30/2002 7/1/2002 8/1/2002 8/15/2002 9/5/2002 1/1/2003 4/15/2003

Budget $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Manager ABC ABC ABC ABC ABC ABC ABC ABC ABC ABC ABC ABC ABC ABC

Department Team Team Team Team Team Team Team Team Team Team Team Team Team Team

$0

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Air Leo -- A New Regional Airline

6.0 Management Summary BalkConsort is putting together what it expects will be a solid management team combining extensive aviation industry experience with significant experience in finance, accountancy, and management. An initial project team is in place. As more advanced planning continues on the airline and investment is in place, the full core management team will be finalized and its members brought on-board. More than in most businesses, management is critically important to an airline, and especially an airline envisaged as this one is. To reiterate a point made early in this plan, the right management team is seen as the first and foremost key to the success of the overall venture. We endeavor to have such a team. 6.1 Organizational Structure Reflecting the overall nature of the organization envisaged, there is very little hierarchy in the organizational plan for the airline. In an operation where safety and accountability are so much at issue, obviously someone has to be in charge, and there also have to be clear lines of authority (and expertise) in the operational aspects of the airline. But beyond that, the organization is designed around flexibility, a high level of personal accountability and responsibility, and common cross-training and sharing of responsibilities as need arises and circumstances permit. The levels of organization (reflected in the personnel and salary chart in the Personnel section of this plan) are as follows: • • • • • •

President and chief executive officer (who reports to the Board of Directors of the airline company). Vice president and general manager. Functional vice presidents for the core areas of commercial activities, finance, and operations. Directors covering sales and marketing, communications, human resources, flight safety, flight operations, ground operations, maintenance, and information systems. Managers in sales and marketing, as well as in station management functions. Professional, engineering, ground handling, service, and other support personnel.

On the flight side, which reports to the director of flight operations and also responds to the director of flight safety, there are only three levels of personnel: • • •

Captain; First officer; Flight attendant.

Salary scales and levels of authority have been simplified and based on a rational scale allowing for similar levels, though of different natures, of functional work to be compensated at the same pay levels. The overall objective is to foster an atmosphere of cooperation and shared responsibility to the overall mission, which is to provide the customer and client with the best possible, safest, and most satisfying experience with the airline. Cross-training and crossfunctioning are important parts of the organization plan, as explained in more detail elsewhere in this document.

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6.2 Management Team A complete management team, covering the elements of administration, aviation, and finance, is being assembled. This team brings together a wide range of skills and backgrounds covering the key areas needed to form, launch, and operate the airline, and from a range of national origins. 6.3 Management Team Gaps It is premature to speak of management team gaps until a core management team is named. The individuals who will play leading roles with the new airline will need to possess the widest possible range of the requisite skills. The current project team believes investors in the airline will want to play a key role in helping formulate core management. Once primary investment is established, that step can be undertaken, and it is anticipated that the core team will be finalized quickly. The new airline will need people with skill, experience, energy, and vision to head up and serve in such areas as information management, flight safety, aviation operations, aviation maintenance, ground operations, sales and marketing, communications, and human resources management. Also good pilots, co-pilots, cabin crew members, and ground staff, and administrative staff. BalkConsort anticipates putting together the best possible airline management team in the business, one that also shares the common vision of what this new airline truly can be and what it can become. 6.4 Personnel Plan Along with aircraft acquisition and operating costs, personnel costs represent one of the two largest cost factors faced by the new airline. Additionally, the airline's personnel will largely determine the success of the venture. Therefore, it is crucially important to develop and implement an effective personnel operations and compensation plan. The Personnel Plan for the new airline reflects the stress on the use of technology to reduce staffing and costs, and the concomitant stress on customer service. Consequently, staffing is heavier (with individual function directors) in such areas as information technology and oversight of such functions as human resources, flight safety, flight maintenance, and ground operations than might otherwise be the case with a smaller regional airline. On the other hand, functions such as sales and marketing, bookkeeping and finance, and personnel management are reduced, with the assumption being that the effective use of advanced, cost-efficient informational technologies in these areas will make up for the reduced staffing, resulting in significant cost savings while providing superior results at less effort. It is assumed, based on the experience of other regional airlines in Europe, that something on the order of 60-70 percent of all reservations and bookings will be made electronically, and such passengers will be ticketed and checked-in electronically using special electronic check-in kiosks such as those employed successfully by the U.S. carrier Continental Airlines, leading to major cost savings in areas such as sales, reservations, and ground check-in staffing, as well as in commissions paid out to outside travel agencies. Staffing in the sales and marketing area is aimed at targeted customer contact to generate corporate and group business, rather than individual sales, and to develop special marketing

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programs designed to generate significant increases in both passenger and cargo business. Responsibilities will be divided along both regional and functional lines, with three regional sales and marketing managers (notionally responsible for Western Europe North, Western Europe South, and Southeast Europe & Turkey) and two targeted, global sales and marketing managers (one responsible for special sales aimed specifically at the peak traffic/special flights/holiday travel/charters market, the other for air cargo sales), reporting to one director of sales and marketing. Additional personnel will answer customer inquiries and take reservations on the telephone at central headquarters, with phone calls forwarded to them from throughout the airline market area, and also will respond to e-mail/website-forwarded inquiries. All key functional positions throughout the airline, including in the sales and marketing area, are backed up by professional support personnel, most of whom will be cross-trained in different areas, so there will always be coverage of all key functional areas as well as back-up support when work demand requires it. In the ground-service area, the airline will utilize its own personnel to the extent practical in order to assure a more consistently positive experience for the passenger. All major destinations will be staffed by airline personnel, while at some smaller and more remote destinations, or where local practice or requirement dictates it, ground handling and service may be contracted out to local service providers. Even in such cases, efforts will be made to utilize spare flight crew personnel to assist with oversight of ground services and respond to customer needs, again stressing the airline's focus on cross-training. Finally, as revenues and passenger demand increases, the Personnel Plan can be expanded to provide additional ground service personnel at key locations and to expand the number of locations where the airline provides its own ground-service staffing. Again through the use of e-ticketing, e-check-in, and e-baggage tracking, ground-service staffing requirement will be very light compared with a more traditional organization. Particularly given the fairly light flight scheduling at most locations and the convenient size of the projected aircraft, check-ins should be quick and easy, with little waiting in line or fighting with crowds - major marketing advantages as well. Given the airline's motto, "We have a job to do, and we do it every day - for you!", crosstraining and cross-functioning will be core elements of the new airline's personnel-management approach. Everyone will be inculcated with the spirit that she or he is personally responsible for the passenger and the client having a positive experience when in contact with the new airline. Everyone, from the president on down, will be familiar with (and participate in) virtually every aspect of the work and customer-service process (a method employed successfully by the former PEOPLExpress and other "people-oriented" carriers and other successful service businesses). While no one will expect (nor want) a receptionist to fly the airplane, nor a sales manager to perform engine repairs, nor for that matter a pilot or flight attendant to tend to the bookkeeping, common customer-service functions like check-in, gate monitoring, baggage handling, and answering customer inquiries can and should be performed from time to time by any and all available personnel. This process also requires, however, that personnel receive actual training and experience in these various areas, so they do not become more of a hindrance than a help. Even the airline's uniforms will project an image of ordinary people doing extraordinary work to please and make the passenger feel comfortable. There will be a stress on informality, utilizing "non-uniform" uniforms to again stress the airline's work ethic and customer-service orientation, making both employee and client feel more at home. This approach also is in

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keeping with today's trend toward greater informality and equality in the work place, and away from the stilted authoritarian way of the past. Finally, the proposed hierarchy and salary structure is designed to be both economical as well as sufficiently attractive and competitive to enable the airline to recruit good, qualified personnel. At the same time, in keeping with the overall ambience of the airline, it also stresses relative equality and fairness in its structure. A good benefits package, consistent with, and perhaps better than, available elsewhere in the industry or related industries, and the more abstract benefits of being part of a well-respected, well-functioning, professional, winning team, also will be elements attracting good employees to the new airline and keeping them on the team. There are only about 10 pay grades provided for in the salary plan for the entire airline, including executive-level salaries, with jobs that may be markedly different in terms of function, but similar in terms of experience required, difficulty, and importance, sharing the same pay grade. Most subordinate grades within given functions are based on a set percentage of higher-level salaries within the same general function. In addition, the plan for pay increases is straightforward and fosters clarity and understanding, rather than anxiety and unhealthy competition, among employees. Everyone, across the board, from top to bottom in the organization, who performs satisfactorily will receive a 10 percent pay increase at the end of the first year of service (deemed to be the most difficult), and a 5 percent pay increase at the end of each subsequent year of service (with adjustments made only on the basis of specific across-the-board or localized issues like inflation, currency devaluations, and so forth). Unsatisfactory performance merits only one of two remedies: Dismissal, or placement on a limited probationary regime to determine if problems can be remedied and the employee brought up to standard within a given time limit. Otherwise, there is no room, and no cause, for protracted anxiety on the part of the satisfactory employee concerning such issues as pay raises and related issues. The only other issue is the possibility of promotion to a higher position within the organization, and the airline will endeavor to promote its best from within whenever possible. One other issue worth considering, though it is not included in the current plan, is the possibility of offering a bonus to all employees, as a specific percentage of their pay, when the airline shows a particularly profitable year to encourage additional "pride of ownership" and esprit de corps. A summary Personnel Plan for the first three years of operations follows in the table below, and a detailed monthly plan for the initial year is provided in the appendix.

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Air Leo -- A New Regional Airline

Table: Personnel

Personnel Plan Year 1

Year 2

Year 3

$585,000 $468,000 $526,500 $59,062 $0 $1,638,562

$1,018,500 $814,800 $916,650 $557,794 $0 $3,307,744

$1,448,175 $1,158,540 $1,303,360 $856,370 $0 $4,766,445

$60,000 $132,000 $40,000 $40,000 $97,500 $108,000 $0 $477,500

$66,000 $157,200 $52,400 $52,400 $117,600 $141,000 $0 $586,600

$69,300 $165,720 $55,240 $55,240 $124,515 $149,700 $0 $619,715

$180,000 $144,000 $126,000 $126,000 $126,000 $0 $702,000

$198,000 $158,400 $115,500 $115,500 $115,500 $0 $702,900

$207,900 $166,320 $121,275 $121,275 $121,275 $0 $738,045

$54,000 $54,000 $54,000 $54,000 $54,000 $54,000 $140,000 $315,000 $200,000 $64,000 $120,000 $68,000 $51,000 $40,000 $0 $1,322,000

$59,400 $59,400 $59,400 $59,400 $59,400 $59,400 $374,000 $837,925 $260,000 $78,400 $132,000 $78,800 $59,100 $52,000 $0 $2,228,625

$62,370 $62,370 $62,370 $62,370 $62,370 $62,370 $404,200 $909,450 $275,200 $81,920 $138,600 $82,960 $62,220 $55,040 $0 $2,383,810

84

90

94

$4,140,062

$6,825,869

$8,508,015

Production Personnel Captains (3 per aircraft) First Officers (3 per aircraft) Flight Attendants (9 per aircraft) Other Other Subtotal Sales and Marketing Personnel Director of Sales & Marketing Regional Sales & Marketing Mgrs (3) Special Sales & Marketing Manager Air Cargo Sales & Marketing Manager Sales & Marketing Assistants (6) Cust. Service/Reservations Assts (12) Other Subtotal General and Administrative Personnel President & CEO Vice President & General Manager Vice President Commercial Vice President Finance Vice President Operations Other Subtotal Other Personnel Director of Communications Director of Human Resources Director of Flight Safety Director of Flight Maintenance Director of Ground Operations Director of Information Systems Station Managers (1 per major station) Ground Service Pers (3 per maj station) Maintenance Engineers (8) Bookkeeping & Finance Personnel (3) Information Systems Personnel (5) Professional Support Personnel (3) Secretarial/Admin Asst Personnel (3) Customer Relations Personnel (2) Other Subtotal Total People Total Payroll

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Air Leo -- A New Regional Airline

7.0 Financial Plan This section of the plan offers the core elements for evaluating the financial viability of the proposed new airline. Both in text and in charts and tables, all the key elements are presented to offer a frank appraisal of the venture and the opportunity it presents. Of particular importance is the following section which presents the key "Important Assumptions" on the core cost and revenue aspects of the airline. These assumptions are based on cost factors involving the proposed Avro RJ100 aircraft, and assume dry leasing of new aircraft (a comparison is also given for a purchase option, although that option, as will be apparent from the numbers, demands a much larger up-front cash outlay, and does not necessarily lead to economies of operation, particularly in the short run). Among the assumptions made were that the airline will begin operating with just three 99passenger regional jets, with very low load factors, beneath 25 percent of capacity, and at fare levels that in all likelihood are lower than reasonably expected on the planned route network. These assumptions were taken to ensure a conservative approach to the financial planning, and to demonstrate that even with these constraints the proposed airline can be profitable as early as the first year of operations. It also was assumed that the aircraft will receive maximum utilization, up to six, seven, or more segments per day. A "wave" or "W" route pattern, and reciprocating or circular routes, was assumed, rather than simply a spoke-and-hub route pattern, to enable service to more destinations and to maximize use of the aircraft. A major feature of the route planning has been to enable business travelers to go and come back from destinations generally in the same day, and certainly in the same week. Crew requirements and hour restrictions also were considered in the planning. Again, it should be stressed that even with the considerable constraints employed in the calculations, the airline can be expected to carry upwards of 300,000 passengers in its first year, and possibly up to a half a million passengers, and to reach profitability within the first year of operations, with significant growth in both revenues and cash generated thereafter. The Important Assumptions section also includes information on the third prong of the proposed marketing strategy, which is to employ wet-leased or chartered aircraft to serve highdemand regional, seasonal, and peak-traffic markets as a supplement to the regular scheduled service of the airline. A conservative approach also was taken with this segment, and again it was shown to be a profitable area to pursue, although relatively modest particularly at the outset in terms of overall revenues. It is strongly suggested that the Important Assumptions section be reviewed carefully prior to more in-depth examination of the financials since it explains the premises on which the financials are based. It also should be noted that the aircraft costing section is based on a segment approach, with aircraft acquisition, operating and crew costs, and some direct sales costs, as well as revenues, apportioned on a "segment" basis. Note that some elements that go into the segment costing are based on hourly costs, extrapolated to the segment length, and others are strictly on a "per segment" basis. The number of aircraft employed are stated at the top, on a "full-time equivalent" (FTE) basis, allowing for variance in fleet size during the year as new aircraft are brought into the fleet.

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7.1 Important Assumptions In addition to the general financial and business assumptions presented in the following table, the key parameters presented on the next page also were included as Operating Assumptions in formulating the financial portions of this business plan. Every effort was made to be realistic in these Assumptions, and if anything they were formulated conservatively, particularly in calculating initial load factors and revenue yields which, in practice, should be considerably higher than offered here. Additionally, passenger and cargo fares were considered to be flat over the entire period covered by this plan to compensate for the possibility that additional competition could force fares to remain relatively constant over the period. However, the objective of this exercise was to show that the proposed operation will be profitable even with much lower revenues than would normally be expected, and the numbers do in fact confirm a profitable outcome. Additionally, expected net revenues from offering peak-demand special flights also are calculated. They are set apart separately from the scheduled-service revenues to show that both types of service - and particularly the more important scheduled service - are viable and the airline will be profitable even without these additional revenues. The assumptions utilized here are based on dry leasing new Avro RJ100s at a high level of outfitting and with necessary spares included. A separate set of figures is provided following the Operating Assumptions section which gives a cost comparison should the decision be made to purchase the aircraft new, utilizing ECGD export financing for 85 percent of the purchase price of the aircraft.

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Air Leo -- A New Regional Airline

Operating Assumptions

FY 2003

FY 2004

FY 2005

Aircraft in service (FTE)

2.83

5.33

7.33

Aircraft in service at end of FY

5

7

9

Cost per aircraft if purchased

$26,000,000

$26,000,000

$26,000,000

$3,120,000

$3,120,000

$3,120,000

Insurance rate % of aircraft cost

1.5%

1.5%

1.5%

Annual insurance cost per aircraft

$390,000

$390,000

$390,000

$60,000

$66,000

$69,300

First Officer's Salary % of Captain

80%

80%

80%

Flight Attendant's Salary % of Capt

30%

30%

30%

Salary Burden as percent of Salary

20%

20%

20%

Flght-2/Cab-3

Flght-2/Cab-3

Flght-2/Cab-3

Annual leasing cost per aircraft

Captain's Annual Salary

Crew members per flight Crew contingents per aircraft Total crew per aircraft (min.) Flight Hours/Month for Crew

3 Flght-6/Cab-9

3 Flght-6/Cab-9

3 Flght-6/Cab-9

80

80

80

$202.50

$222.75

$233.89

Total aircraft maint. cost/hour

$800

$800

$800

Fuel burn kg/hour

2,100

Average Total Salary Cost/Hour

2,100

2,100

Fuel cost per kg

$.35

$.35

$.35

Handling cost/segment (ave.)

$360

$400

$440

ATC cost/segment (ave.)

$120

$130

$140

Land/depart charge per seg. (ave.)

$150

$180

$210

Parking fee/aircraft/night

$190

$150

$170

In-flight items/pax -- Value

$6

$7

$8

In-flight items/pax -- Premium

$8

$9

$10

Percent/revenues commissionable

40%

35%

30%

Commission payable

9%

9%

9%

Ave. reservations cost/pax/seg

$2

$2

$2

Average segment (hours) Annual segments Ave. total capacity/segment (pax) Ave. Annual Load Factor (%)

1.25

1.30

1.35

6,520

11,808

15,638

99

99

99

50%

65%

75%

Ave. split Value/Premier

79/20

79/20

79/20

Average fare per Value pax/seg.

$110

$110

$110

Average fare per Premier pax/seg.

$143

$143

$143

700

700

700

Cargo per segment (kgs) Ave. cargo tariff per segment/kg.

$.50

$.50

$.50

Ave. cargo tariff per segment

$350

$350

$350

$5,775

$7,507

$8,933

Average pax revenues/segment Average cargo revenues/seg.

$350

$350

$350

Total ave. revenues/segment

$6,125

$7,857

$9,283

Total ave. costs/segment

$4,972

$5,449

$5,741

Total ave. net yield/segment

$1,153

$2,408

$3,542

Total revenues/year

$39,935,000

$92,775,456

$145,167,550

Total operating costs/year

$32,417,440

$64,341,792

$89,777,758

$7,517,560

$28,433,664

$55,389,792

Total net oper. revenues/year

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Air Leo -- A New Regional Airline

Peak-demand special flights on key regional/seasonal/intermittent routes The figures provided in this section represent a "best estimate" calculation of the costs and revenues expected to be derived from special peak-demand flights on key regional, seasonal, and intermittent routes. These figures, which also were approached conservatively, though realistically, supplement the figures derived from the assumptions concerning regular scheduled service. The following assumptions were applied for these special flights: FY 2003

FY 2004

FY 2005

Flight Segments

48

60

100

Average length of segment (hrs)

4.0

4.0

4.0

$4,000

$4,000

$4,000

$16,000

$16,000

$16,000

Handling cost/segment (ave.)

$360

$400

$440

ATC cost/segment (ave.)

$120

$130

$140

Land/depart charge per seg. (ave.)

$150

$180

$210

Parking fee/aircraft/night

$150

$170

$190

In-flight items/pax -- Value

$12

$14

$16

In-flight items/pax -- Premium

$16

$18

$20

Percent/revenues commissionable

50%

45%

40%

Commission payable

10%

10%

10%

$2

$2

$2

160

160

160

Ave. wet-leasing cost of aircraft/hr. Ave. cost per flight segment

Ave. reservations cost/pax/seg Ave. total capacity/segment (pax) Ave. annual load factor (%)

75%

80%

85%

Ave. split Value/Premier

90/10

90/10

90/10

Average fare per Value pax/seg

$250

$250

$250

Average fare per Premier pax/seg

$325

$325

$325

600

600

600

Ave. cargo tariff per segment/kg.

$1.20

$1.20

$1.20

Ave. cargo tariff per segment

$720

$720

$720

Average pax revenues/segment

$30,900

$33,560

$35,020

Average cargo revenues/segm.

$720

$720

$720

Total ave. revenues/segment

$31,620

$34,280

$35,740

Total ave. costs/segment

$20,053

$20,462

$20,883

Total ave. net yield/segment

$11,567

$13,818

$14,857

$1,517,760

$2,056,800

$3,574,000

Total costs/year

$962,544

$1,227,720

$2,088,300

Total net revenues/year

$555,216

$829,080

$1,485,700

Cargo per segment (kgs)

Total revenues/year

Page 41

Air Leo -- A New Regional Airline

Aircraft cost on a purchase basis If a decision is made to purchase the aircraft for the new airline rather than dry leasing them, then a considerably larger cash outlay will be required, even with export financing guarantees from the ECGD. For instance, here is a notional cost projection based on five new Avro RJ100s, well fitted with passenger amenities as well as the most up-to-date communication and navigation gear: Cost per aircraft

$26,000,000

Total cost, five aircraft

$130,000,000

Financing to be provided by Export Credit Guarantee Department of the UK

85%

Interest rate

7.5%

Insurance

1.5% on value of the aircraft

Cash outlay required for down payment

15%, or $19,500,000

Amount to be financed

$110,500,000

Insurance, per year

$1,950,000

Depreciation chargeable against revenues per year for 10 years

$13,000,000

Annual payments on five aircraft based on 120 payments (10 yrs) Total cost of aircraft w/ payments and interest

Approx. $12,000,000 $163,500,000

Residual value after 10 years

Approx. $65,000,000

Total real cost of five aircraft assuming sale at end of 10 years

Approx. $98,500,000

Based on these figures, comparative per-segment costs in the following years are shown: FY 2003

FY 2004

FY 2005

5

5

5

2,303

2,215

2,133

11,519

11,076

10,665

Total cost for down payment

$19,500,00

$0

$0

Total cost for insurance per year

$1,950,000

$1,950,000

$1,950,000

Aircraft in service (FTE) Segments per year per aircraft Total segments

Total cost for payments/year

$12,000,000 $12,000,000 $12,000,000

Total raw cost per year

$33,450,000 $13,950,000 $13,950,000

Total raw cost per segment

$2,904

$1,259

$1,308

Cost per segment w/ depreciation

$4,032

$2,433

$2,527

Cost/seg/yr w/ depr & recov value

$3,416

$1,846

$1,917

Comparative cost for five aircraft dry leased w/ insurance/year Cost per segment as above for dry-leased aircraft

$17,550,000 $17,550,000 $17,550,000 $1,524

$1,585

$1,646

Page 42

Air Leo -- A New Regional Airline

This comparison obviously does not examine the possible tax consequences and other factors in considering the comparative cost of dry leasing versus purchasing, but it does demonstrate that lower short-range acquisition costs result in an immediate lower segment cost for the aircraft as well as lower up-front cash requirements. Table: General Assumptions

General Assumptions

Plan Month Current Interest Rate Long-term Interest Rate Tax Rate Other

Year 1

Year 2

Year 3

1 9.00% 7.50% 34.58% 0

2 9.00% 7.50% 35.00% 0

3 9.00% 7.50% 34.58% 0

7.2 Key Financial Indicators The accompanying chart, which is based on the actual financial projections for the proposed airline, clearly shows a pattern of solid growth over the first three years of the operation (and which would continue into the future), which the financials consider in depth. There is a good balance between revenues and costs, yielding healthy gross margins, and in a predictable, steady pattern of growth. Financial turn-over also is in good balance and, as other tables and charts show, with careful planning of expenditures cash flow is maintained in good balance throughout the life of the plan.

Chart: Benchmarks

Page 43

Air Leo -- A New Regional Airline

7.3 Break-even Analysis As the accompanying chart demonstrates, the break-even point comes at a relatively modest monthly passenger load, under 22,000 passengers per month, which represents an average passenger load factor of only about 40 percent with a fleet of three RJ100s operating about six segments each per day. It is anticipated that this load will be reached fairly early in the new airline's life and, in practice, much higher loads - into the 65 - 75 percent range during the first year of operations - can be anticipated based on the overall business and marketing plans for the airline.

Chart: Break-even Analysis

Table: Break-even Analysis

Break-even Analysis

Monthly Revenue Break-even

$507,571

Assumptions: Average Percent Variable Cost Estimated Monthly Fixed Cost

5% $481,754

Page 44

Air Leo -- A New Regional Airline

7.4 Projected Profit and Loss As the accompanying Profit and Loss chart clearly demonstrates, the proposed airline has the potential to achieve profitability, on a month-by-month basis, by as early as the third month of operations, and to end the first year comfortably in the black - an indication of the strength of the market and the marketing plan for the venture, given the conservative nature with which the numbers were calculated. All cost items are covered in this Profit and Loss chart and, while the organization and salary and cost items presented are not lavish, they both cover the needed functions adequately and also allow some margin for movement. Given the business plan's stress on utilizing technology to control staffing and related support and marketing costs - big problems for many airlines the plan presented here should enable this airline to accomplish far more with less, and simultaneously to present less of a "command-and-control" problem to the management team. All flight and cabin crew salaries are included in the line designated "Operational" in the top section of the chart, with all non-salary aircraft operational costs included in the same section. All revenues, which derive almost entirely from airline operations (both scheduled and special flights) are also provided in the top area, along with a deduction for the direct cost of sales, such as reservations fees and commissions (an area that hopefully can be reduced even further through e-reservations and e-ticketing, though it probably cannot be eliminated altogether. Clearly the affect of these charges on the bottom line can be seen in this chart, even figuring that 60 percent and more of airline clients will utilize electronic means for ticketing). The rest of the chart is broken down by functional area, outside of direct flight operations (which also include aircraft acquisition costs). Finally, it is worth noting that a net operating profit of more than [XYZ] million USD (on an equity investment of under [XYZ] million USD) is projected for the first year, with a net profit of more than [XYZ] percent. Profits in the second and third years show substantial growth, with a combined net profit in excess of [XYZ] million USD projected for the third and fourth years, even given the limited size of the fleet (up to nine mid-sized jets by the end of the third year of operations) projected for the airline.

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Air Leo -- A New Regional Airline

Chart: Profit Monthly

Chart: Profit Yearly

Page 46

Air Leo -- A New Regional Airline

Chart: Gross Margin Monthly

Chart: Gross Margin Yearly

Page 47

Air Leo -- A New Regional Airline

Table: Profit and Loss Pro Forma Profit and Loss Year 1

Year 2

Year 3

$41,531,760 $2,112,400 $1,638,562 $29,642,941 $33,393,903

$95,102,256 $4,522,260 $3,307,744 $57,732,304 $65,562,308

$149,146,550 $6,318,654 $4,766,445 $80,052,471 $91,137,570

$8,137,857 19.59%

$29,539,948 31.06%

$58,008,980 38.89%

$477,500 $1,500,000 $32,000 $16,000 $66,000 $24,000 $2,115,500 5.09%

$586,600 $2,000,000 $54,750 $25,000 $72,000 $26,400 $2,764,750 2.91%

$619,715 $3,000,000 $82,125 $35,000 $80,000 $29,040 $3,845,880 2.58%

$702,000 $0 $120,000 $24,000 $32,600 $15,300 $10,000 $220,000 $98,000 $8,640 $56,000 $185,000 $44,000 $828,012 $0 $2,343,552 5.64%

$702,900 $0 $120,000 $30,000 $48,900 $18,000 $30,000 $220,000 $180,000 $8,640 $80,000 $150,000 $88,000 $1,365,174 $0 $3,041,614 3.20%

$738,045 $0 $120,000 $36,000 $73,350 $22,000 $35,000 $242,000 $198,000 $9,500 $120,000 $165,000 $95,000 $1,701,603 $0 $3,555,498 2.38%

Other Payroll Consultants Contract/Consultants Total Other Expenses Other %

$1,322,000 $0 $0 $1,322,000 3.18%

$2,228,625 $0 $0 $2,228,625 2.34%

$2,383,810 $0 $0 $2,383,810 1.60%

Total Operating Expenses

$5,781,052

$8,034,989

$9,785,188

Profit Before Interest and Taxes EBITDA Interest Expense Taxes Incurred

$2,356,805 $2,476,805 $45,536 $917,055

$21,504,959 $21,624,959 $27,837 $7,516,993

$48,223,792 $48,343,792 $9,369 $16,674,155

Net Profit Net Profit/Sales

$1,394,214 3.36%

$13,960,129 14.68%

$31,540,268 21.15%

Sales Direct Cost of Sales Production Payroll Non-Salary Aircraft Operational Costs Total Cost of Sales Gross Margin Gross Margin % Operating Expenses Sales and Marketing Expenses Sales and Marketing Payroll Advertising/Promotion Travel Public Relations Consultants/Activities LD toll-free reservations telephone serv Other Total Sales and Marketing Expenses Sales and Marketing % General and Administrative Expenses General and Administrative Payroll Sales and Marketing and Other Expenses Depreciation Leased Equipment Telephone Utilities Insurance (Non-Aviation) Headquarters Office Rent Field Office Rental Vehicle Operating Expenses Computer Hardware/Software Devlpmnt Cockpit/Cabin Crew Training/Simulator Crew/Staff Uniforms & Grooming Payroll Taxes Other General and Administrative Expenses Total General and Administrative Expenses General and Administrative % Other Expenses:

Page 48

Air Leo -- A New Regional Airline

7.5 Projected Cash Flow Cash flow is probably the factor that makes or breaks more businesses than any other, and it is even more critical to consider in a venture as capital-intensive as is an airline. As the accompanying chart and table readily show, with careful planning and control of resources and expenses, cash flow crises should not pose a threat to the new airline. Even allowing for a [XYZ] million USD up front deposit on aircraft leases (which would be charged against operational expenses as the airline begins flying) and other significant up-front costs, as shown in the accompanying illustrations, at no time does cash on-hand become a major issue during the first year, and even less so in the follow-on years. While an investment of about [XYZ] million USD is modest by regional airline standards, the financial and business planning done here should indicate that the venture is quite feasible in the market. Nevertheless, it would offer an extra cushion of safety to arrange for availability of additional credit facilities or cash reserves, or equity investment, to be called up only as needed in the short-run should cash demands out strap expectations, immediate revenues, and onhand cash on a temporary basis. It should be noted that a 30-day accounts payable repayment schedule is included in the planning for the financials. However, a majority of the airline's revenues will come from online sales, with payment by credit cards and generally rapid settlement, and also from ticket sales from travel agencies that are required to make payments usually in half the accounts payable schedule used in the assumptions for this plan. Given the large fluxes of cash, even these payment methods allow for significant amounts of funds to be receivable at any given time but, again, the financial calculations indicate that this should pose no significant problem to the airline's financial management or cash liquidity.

Chart: Cash

Page 49

Air Leo -- A New Regional Airline

Table: Cash Flow

Pro Forma Cash Flow Year 1

Year 2

Year 3

$26,995,644 $9,626,176 $36,621,820

$61,816,466 $26,952,615 $88,769,081

$96,945,258 $45,812,104 $142,757,362

$0 $0 $0 $0 $0 $0 $0 $36,621,820

$0 $0 $0 $0 $0 $0 $0 $88,769,081

$0 $0 $0 $0 $0 $0 $0 $142,757,362

Year 1

Year 2

Year 3

$4,140,062 $30,946,389 $35,086,451

$6,825,869 $74,284,142 $81,110,011

$8,508,015 $106,090,971 $114,598,986

Sales Tax, VAT, HST/GST Paid Out Principal Repayment of Current Borrowing Other Liabilities Principal Repayment Long-term Liabilities Principal Repayment Purchase Other Current Assets Purchase Long-term Assets Dividends Subtotal Cash Spent

$0 $188,100 $0 $0 $0 $0 $0 $35,274,551

$0 $205,200 $0 $0 $0 $0 $0 $81,315,211

$0 $205,200 $0 $0 $0 $0 $0 $114,804,186

Net Cash Flow Cash Balance

$1,347,269 $11,747,269

$7,453,870 $19,201,139

$27,953,176 $47,154,316

Cash Received

Cash from Operations Cash Sales Cash from Receivables Subtotal Cash from Operations Additional Cash Received Sales Tax, VAT, HST/GST Received New Current Borrowing New Other Liabilities (interest-free) New Long-term Liabilities Sales of Other Current Assets Sales of Long-term Assets New Investment Received Subtotal Cash Received Expenditures Expenditures from Operations Cash Spending Bill Payments Subtotal Spent on Operations Additional Cash Spent

Page 50

Air Leo -- A New Regional Airline

7.6 Projected Balance Sheet As the accompanying Balance Sheet indicates, the proposed venture will maintain a healthy position, even with limited hard assets other than cash and leased aircraft, and the company's net worth is projected to grow beginning from the end of the first year from about [XYZ] million USD to [XYZ] million USD by the end of the second year, and to more than [XYZ] million USD by the end of the third year, with continued growth at about the same remarkable rate beyond that. Table: Balance Sheet

Pro Forma Balance Sheet Year 1

Year 2

Year 3

$11,747,269 $4,909,940 $364,453 $50,000 $17,071,662

$19,201,139 $11,243,115 $1,073,380 $50,000 $31,567,634

$47,154,316 $17,632,303 $978,841 $50,000 $65,815,459

$200,000 $120,000 $80,000 $17,151,662

$200,000 $240,000 ($40,000) $31,527,634

$200,000 $360,000 ($160,000) $65,655,459

Year 1

Year 2

Year 3

Accounts Payable Current Borrowing Other Current Liabilities Subtotal Current Liabilities

$5,535,548 $411,900 $0 $5,947,448

$6,156,590 $206,700 $0 $6,363,290

$8,949,347 $1,500 $0 $8,950,847

Long-term Liabilities Total Liabilities

$0 $5,947,448

$0 $6,363,290

$0 $8,950,847

Paid-in Capital Retained Earnings Earnings Total Capital Total Liabilities and Capital

$10,800,000 ($990,000) $1,394,214 $11,204,214 $17,151,662

$10,800,000 $404,214 $13,960,129 $25,164,343 $31,527,634

$10,800,000 $14,364,343 $31,540,268 $56,704,612 $65,655,459

Net Worth

$11,204,214

$25,164,343

$56,704,612

Assets

Current Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Long-term Assets Long-term Assets Accumulated Depreciation Total Long-term Assets Total Assets Liabilities and Capital Current Liabilities

Page 51

Air Leo -- A New Regional Airline

7.7 Business Ratios The accompanying table offers key business ratios, based on the financial plan for the proposed airline. It is worth noting that even in the first year of operations, and with conservative planning, a profit, albeit relatively modest, is feasible - something unusual in the airline business. Even in the first year, the investor can expect a return on equity about [XYZ] percent, and then significant cash growth going into the second and third years, with ROE figures upwards of [XYZ] percent on a cumulative basis. Care must be taken to control costs, to plan routes, schedules, and capacities carefully, and to take on high-cost items with caution and with an eye to timing. But the basic elements for a solid business are evident in this plan's financials. Prudent, experienced management will regard these caveats carefully and, in so doing, will see the airline through its initial challenging launch into a period where growth will be both solid and sustained. A long-term (five-year) financial plan is included among the appendix.

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Air Leo -- A New Regional Airline

Table: Ratios Ratio Analysis Year 1 n.a.

Year 2 128.99%

Year 3 56.83%

Industry Profile 2.91%

28.63% 2.12% 0.29% 99.53% 0.47% 100.00%

35.66% 3.40% 0.16% 100.13% -0.13% 100.00%

26.86% 1.49% 0.08% 100.24% -0.24% 100.00%

21.79% 4.16% 36.78% 62.73% 37.27% 100.00%

34.68% 0.00% 34.68% 65.32%

20.18% 0.00% 20.18% 79.82%

13.63% 0.00% 13.63% 86.37%

32.64% 18.38% 51.02% 48.98%

100.00% 19.59% 15.98% 3.61% 5.67%

100.00% 31.06% 16.38% 2.10% 22.61%

100.00% 38.89% 17.88% 2.01% 32.33%

100.00% 55.97% 39.09% 0.59% 1.06%

Main Ratios Current Quick Total Debt to Total Assets Pre-tax Return on Net Worth Pre-tax Return on Assets

2.87 2.81 34.68% 20.63% 13.48%

4.96 4.79 20.18% 85.35% 68.12%

7.35 7.24 13.63% 85.03% 73.44%

1.57 1.01 58.53% 1.65% 3.99%

Additional Ratios Net Profit Margin Return on Equity

Year 1 3.36% 12.44%

Year 2 14.68% 55.48%

Year 3 21.15% 55.62%

n.a n.a

Activity Ratios Accounts Receivable Turnover Collection Days Inventory Turnover Accounts Payable Turnover Payment Days Total Asset Turnover

2.96 55 9.02 6.52 27 2.42

2.96 89 6.29 12.17 28 3.02

2.96 101 6.16 12.17 25 2.27

n.a n.a n.a n.a n.a n.a

Debt Ratios Debt to Net Worth Current Liab. to Liab.

0.53 1.00

0.25 1.00

0.16 1.00

n.a n.a

$11,124,214 51.76

$25,204,343 772.53

$56,864,612 5,147.17

n.a n.a

0.41 35% 1.98 3.71 0.00

0.33 20% 3.03 3.78 0.00

0.44 14% 5.27 2.63 0.00

n.a n.a n.a n.a n.a

Sales Growth Percent of Total Assets Accounts Receivable Inventory Other Current Assets Total Current Assets Long-term Assets Total Assets Current Liabilities Long-term Liabilities Total Liabilities Net Worth Percent of Sales Sales Gross Margin Selling, General & Administrative Expenses Advertising Expenses Profit Before Interest and Taxes

Liquidity Ratios Net Working Capital Interest Coverage Additional Ratios Assets to Sales Current Debt/Total Assets Acid Test Sales/Net Worth Dividend Payout

Page 53

Appendix Table: Sales Forecast

Sales Forecast Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

$0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0 $0

$866,250 $65,625 $0 $0 $0 $0

$1,299,375 $98,437 $0 $0 $0 $0

$2,601,625 $118,124 $0 $0 $0 $0

$5,155,920 $188,997 $247,200 $5,760 $9,975 $0

$3,866,940 $207,897 $123,600 $2,880 $10,973 $0

$5,255,920 $293,966 $185,400 $4,320 $12,070 $0

$5,881,619 $440,949 $309,000 $7,200 $13,277 $0

$6,180,451 $390,600 $309,000 $7,200 $14,605 $0

$6,544,900 $477,405 $309,000 $7,200 $18,100 $0

$0

$0

$0

$931,875

$1,397,812

$2,719,749

$5,607,852

$4,212,290

$5,751,676

$6,652,045

$6,901,856

$7,356,605

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Scheduled Passenger Revenues

$0

$0

$0

$53,900

$84,567

$142,345

$325,467

$221,980

$272,367

$289,810

$298,453

$306,231

Scheduled Cargo Revenues

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Special Flights Passenger Revenues

$0

$0

$0

$0

$0

$0

$14,280

$7,140

$10,710

$17,850

$17,850

$17,850

Special Flights Cargo Revenues

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Package trips

$0

$0

$0

$0

$0

$0

$3,990

$4,389

$4,828

$5,311

$5,842

$7,240

Other

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Subtotal Direct Cost of Sales

$0

$0

$0

$53,900

$84,567

$142,345

$343,737

$233,509

$287,905

$312,971

$322,145

$331,321

Sales Scheduled Passenger Revenues Scheduled Cargo Revenues Special Flights Passenger Revenues Special Flights Cargo Revenues Package trips Other Total Sales

Direct Cost of Sales

0% 0% 0% 0% 0% 0%

Page 1

Appendix Table: Personnel

Personnel Plan Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Captains (3 per aircraft)

$0

$0

$45,000

$45,000

$45,000

$60,000

$60,000

$60,000

$60,000

$60,000

$75,000

$75,000

First Officers (3 per aircraft)

$0

$0

$36,000

$36,000

$36,000

$48,000

$48,000

$48,000

$48,000

$48,000

$60,000

$60,000

Flight Attendants (9 per aircraft)

$0

$0

$40,500

$40,500

$40,500

$54,000

$54,000

$54,000

$54,000

$54,000

$67,500

$67,500

Other

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$19,687

$39,375

Other

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Subtotal

$0

$0

$121,500

$121,500

$121,500

$162,000

$162,000

$162,000

$162,000

$162,000

$222,187

$241,875

Director of Sales & Marketing

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

$5,000

Regional Sales & Marketing Mgrs (3)

$4,000

$8,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$0

$0

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

Production Personnel

Sales and Marketing Personnel

Special Sales & Marketing Manager Air Cargo Sales & Marketing Manager

$0

$0

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$3,000

$4,500

$9,000

$9,000

$9,000

$9,000

$9,000

$9,000

$9,000

$9,000

$9,000

$9,000

Cust. Service/Reservations Assts (12)

$0

$0

$6,000

$9,000

$9,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

Other

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$12,000

$17,500

$40,000

$43,000

$43,000

$46,000

$46,000

$46,000

$46,000

$46,000

$46,000

$46,000

President & CEO

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

Vice President & General Manager

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

$12,000

Vice President Commercial

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

Vice President Finance

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

Vice President Operations

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

$10,500

Sales & Marketing Assistants (6)

Subtotal

General and Administrative Personnel

Other

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

Director of Communications

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Director of Human Resources

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Director of Flight Safety

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Subtotal

Other Personnel

Page 2

Appendix Director of Flight Maintenance

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Director of Ground Operations

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Director of Information Systems

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

Station Managers (1 per major station)

$0

$0

$10,000

$10,000

$10,000

$14,000

$14,000

$14,000

$14,000

$14,000

$20,000

$20,000

Ground Service Pers (3 per maj station)

$0

$0

$22,500

$22,500

$22,500

$31,500

$31,500

$31,500

$31,500

$31,500

$45,000

$45,000

Maintenance Engineers (8)

$0

$0

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

Bookkeeping & Finance Personnel (3)

$2,000

$2,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

Information Systems Personnel (5)

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

Professional Support Personnel (3)

$4,000

$4,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

Secretarial/Admin Asst Personnel (3)

$3,000

$3,000

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$4,500

$0

$0

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

$4,000

Customer Relations Personnel (2) Other Subtotal

Total People

Total Payroll

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$46,000

$46,000

$110,000

$110,000

$110,000

$123,000

$123,000

$123,000

$123,000

$123,000

$142,500

$142,500

84

84

84

84

84

84

84

84

84

84

84

84

$116,500

$122,000

$330,000

$333,000

$333,000

$389,500

$389,500

$389,500

$389,500

$389,500

$469,187

$488,875

Page 3

Appendix Table: General Assumptions

General Assumptions Month 1 Plan Month Current Interest Rate Long-term Interest Rate Tax Rate Other

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

1

2

3

4

5

6

7

8

9

10

11

12

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

9.00%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

7.50%

30.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

35.00%

0

0

0

0

0

0

0

0

0

0

0

0

Page 4

Appendix Table: Profit and Loss

Pro Forma Profit and Loss Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Sales

$0

$0

$0

$931,875

$1,397,812

$2,719,749

$5,607,852

$4,212,290

$5,751,676

$6,652,045

$6,901,856

$7,356,605

Direct Cost of Sales

$0

$0

$0

$53,900

$84,567

$142,345

$343,737

$233,509

$287,905

$312,971

$322,145

$331,321

Production Payroll

$0

$0

$121,500

$121,500

$121,500

$162,000

$162,000

$162,000

$162,000

$162,000

$222,187

$241,875

Non-Salary Aircraft Operational Costs

$2,000,000

$0

$0

$2,308,350

$2,010,020

$2,179,945

$4,109,523

$3,093,544

$3,021,288

$3,465,698

$3,041,040

$4,413,533

Total Cost of Sales

$2,000,000

$0

$121,500

$2,483,750

$2,216,087

$2,484,290

$4,615,260

$3,489,053

$3,471,193

$3,940,669

$3,585,372

$4,986,729

($2,000,000)

$0

($121,500)

($1,551,875)

($818,275)

$235,459

$992,592

$723,237

$2,280,483

$2,711,376

$3,316,484

$2,369,876

0.00%

0.00%

0.00%

-166.53%

-58.54%

8.66%

17.70%

17.17%

39.65%

40.76%

48.05%

32.21%

$12,000

$17,500

$40,000

$43,000

$43,000

$46,000

$46,000

$46,000

$46,000

$46,000

$46,000

$46,000

$0

$0

$175,000

$225,000

$100,000

$150,000

$150,000

$100,000

$100,000

$150,000

$150,000

$200,000

Gross Margin Gross Margin %

Operating Expenses

Sales and Marketing Expenses Sales and Marketing Payroll Advertising/Promotion Travel

$500

$1,500

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

$3,000

Public Relations Consultants/Activities

$0

$0

$3,000

$3,000

$2,000

$2,000

$2,000

$2,000

$500

$500

$500

$500

LD toll-free reservations telephone serv

$0

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

Other Total Sales and Marketing Expenses Sales and Marketing %

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$14,500

$27,000

$229,000

$282,000

$156,000

$209,000

$209,000

$159,000

$157,500

$207,500

$207,500

$257,500

0.00%

0.00%

0.00%

30.26%

11.16%

7.68%

3.73%

3.77%

2.74%

3.12%

3.01%

3.50%

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$58,500

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

General and Administrative Expenses General and Administrative Payroll Sales and Marketing and Other Expenses Depreciation

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

$10,000

Leased Equipment

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

$2,000

Telephone

$1,500

$2,000

$2,300

$2,500

$3,000

$3,000

$3,300

$3,000

$3,000

$3,000

$3,000

$3,000

Utilities

$1,200

$1,500

$1,500

$1,200

$1,000

$1,200

$1,500

$1,500

$1,500

$1,200

$1,200

$800

Insurance (Non-Aviation)

$0

$0

$0

$0

$0

$0

$10,000

$0

$0

$0

$0

$0

Headquarters Office Rent

$0

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

$20,000

Field Office Rental

$0

$0

$15,000

$5,000

$5,000

$14,000

$8,000

$8,000

$8,000

$8,000

$17,000

$10,000

Page 5

Appendix Vehicle Operating Expenses

$720

$720

$720

$720

$720

$720

$720

$720

$720

$720

$720

$720

Computer Hardware/Software Devlpmnt

$0

$0

$0

$0

$0

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

$8,000

Cockpit/Cabin Crew Training/Simulator

$0

$0

$100,000

$0

$0

$35,000

$0

$0

$0

$0

$50,000

$0

Crew/Staff Uniforms & Grooming

$0

$24,000

$0

$0

$8,000

$0

$0

$0

$0

$12,000

$0

$0

$23,300

$24,400

$66,000

$66,600

$66,600

$77,900

$77,900

$77,900

$77,900

$77,900

$93,837

$97,775

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$97,220

$143,120

$276,020

$166,520

$174,820

$230,320

$199,920

$189,620

$189,620

$201,320

$264,257

$210,795

0.00%

0.00%

0.00%

17.87%

12.51%

8.47%

3.57%

4.50%

3.30%

3.03%

3.83%

2.87%

$46,000

$46,000

$110,000

$110,000

$110,000

$123,000

$123,000

$123,000

$123,000

$123,000

$142,500

$142,500

Consultants

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Contract/Consultants

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Total Other Expenses

$46,000

$46,000

$110,000

$110,000

$110,000

$123,000

$123,000

$123,000

$123,000

$123,000

$142,500

$142,500

0.00%

0.00%

0.00%

11.80%

7.87%

4.52%

2.19%

2.92%

2.14%

1.85%

2.06%

1.94%

$157,720

$216,120

$615,020

$558,520

$440,820

$562,320

$531,920

$471,620

$470,120

$531,820

$614,257

$610,795

Profit Before Interest and Taxes

($2,157,720)

($216,120)

($736,520)

($2,110,395)

($1,259,095)

($326,861)

$460,672

$251,617

$1,810,363

$2,179,556

$2,702,227

$1,759,081

EBITDA

($2,147,720)

($206,120)

($726,520)

($2,100,395)

($1,249,095)

($316,861)

$470,672

$261,617

$1,820,363

$2,189,556

$2,712,227

$1,769,081

$4,500

$4,372

$4,244

$4,115

$3,987

$3,859

$3,731

$3,602

$3,474

$3,346

$3,218

$3,089

($648,666)

($77,172)

($259,267)

($740,079)

($442,079)

($115,752)

$159,930

$86,805

$632,411

$761,674

$944,653

$614,597

($1,513,554)

($143,320)

($481,496)

($1,374,432)

($821,003)

($214,968)

$297,012

$161,210

$1,174,478

$1,414,537

$1,754,356

$1,141,395

0.00%

0.00%

0.00%

-147.49%

-58.73%

-7.90%

5.30%

3.83%

20.42%

21.26%

25.42%

15.52%

Payroll Taxes Other General and Administrative Expenses Total General and Administrative Expenses General and Administrative %

20%

Other Expenses: Other Payroll

Other %

Total Operating Expenses

Interest Expense Taxes Incurred

Net Profit Net Profit/Sales

Page 6

Appendix Table: Cash Flow

Pro Forma Cash Flow Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Cash Sales

$0

$0

$0

$605,719

$908,578

$1,767,837

$3,645,104

$2,737,989

$3,738,589

$4,323,829

$4,486,206

$4,781,793

Cash from Receivables

$0

$0

$0

$0

$10,872

$331,592

$504,657

$985,607

$1,946,467

$1,492,261

$2,023,591

$2,331,130

Subtotal Cash from Operations

$0

$0

$0

$605,719

$919,450

$2,099,429

$4,149,761

$3,723,595

$5,685,056

$5,816,090

$6,509,797

$7,112,923

Cash Received Cash from Operations

Additional Cash Received Sales Tax, VAT, HST/GST Received

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

New Current Borrowing

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

New Other Liabilities (interest-free)

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

New Long-term Liabilities

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Sales of Other Current Assets

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Sales of Long-term Assets

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

New Investment Received

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Subtotal Cash Received

$0

$0

$0

$605,719

$919,450

$2,099,429

$4,149,761

$3,723,595

$5,685,056

$5,816,090

$6,509,797

$7,112,923

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Expenditures

0.00%

Expenditures from Operations Cash Spending

$116,500

$122,000

$330,000

$333,000

$333,000

$389,500

$389,500

$389,500

$389,500

$389,500

$469,187

$488,875

Bill Payments

$436,235

$1,341,196

$15,659

$200,427

$1,908,184

$1,896,940

$2,683,243

$5,079,453

$3,553,903

$4,258,469

$4,859,342

$4,713,339

Subtotal Spent on Operations

$552,735

$1,463,196

$345,659

$533,427

$2,241,184

$2,286,440

$3,072,743

$5,468,953

$3,943,403

$4,647,969

$5,328,529

$5,202,214

Additional Cash Spent Sales Tax, VAT, HST/GST Paid Out

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Principal Repayment of Current Borrowing

$0

$17,100

$17,100

$17,100

$17,100

$17,100

$17,100

$17,100

$17,100

$17,100

$17,100

$17,100

Other Liabilities Principal Repayment

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Long-term Liabilities Principal Repayment

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Purchase Other Current Assets

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Purchase Long-term Assets

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

Dividends

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$0

$552,735

$1,480,296

$362,759

$550,527

$2,258,284

$2,303,540

$3,089,843

$5,486,053

$3,960,503

$4,665,069

$5,345,629

$5,219,314

Net Cash Flow

($552,735)

($1,480,296)

($362,759)

$55,192

($1,338,835)

($204,111)

$1,059,918

($1,762,458)

$1,724,553

$1,151,022

$1,164,169

$1,893,610

Cash Balance

$9,847,265

$8,366,969

$8,004,210

$8,059,402

$6,720,567

$6,516,456

$7,576,374

$5,813,916

$7,538,469

$8,689,491

$9,853,659

$11,747,269

Subtotal Cash Spent

Page 7

Appendix Table: Balance Sheet

Pro Forma Balance Sheet

Assets

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

$10,400,000 $0 $150,000 $50,000 $10,600,000

$9,847,265 $0 $150,000 $50,000 $10,047,265

$8,366,969 $0 $150,000 $50,000 $8,566,969

$8,004,210 $0 $150,000 $50,000 $8,204,210

$8,059,402 $326,156 $96,100 $50,000 $8,531,658

$6,720,567 $804,519 $93,024 $50,000 $7,668,109

$6,516,456 $1,424,839 $156,580 $50,000 $8,147,874

$7,576,374 $2,882,930 $378,111 $50,000 $10,887,415

$5,813,916 $3,371,625 $256,860 $50,000 $9,492,401

$7,538,469 $3,438,245 $316,696 $50,000 $11,343,409

$8,689,491 $4,274,199 $344,268 $50,000 $13,357,958

$9,853,659 $4,666,258 $354,360 $50,000 $14,924,277

$11,747,269 $4,909,940 $364,453 $50,000 $17,071,662

$200,000 $0 $200,000 $10,800,000

$200,000 $10,000 $190,000 $10,237,265

$200,000 $20,000 $180,000 $8,746,969

$200,000 $30,000 $170,000 $8,374,210

$200,000 $40,000 $160,000 $8,691,658

$200,000 $50,000 $150,000 $7,818,109

$200,000 $60,000 $140,000 $8,287,874

$200,000 $70,000 $130,000 $11,017,415

$200,000 $80,000 $120,000 $9,612,401

$200,000 $90,000 $110,000 $11,453,409

$200,000 $100,000 $100,000 $13,457,958

$200,000 $110,000 $90,000 $15,014,277

$200,000 $120,000 $80,000 $17,151,662

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Starting Balances

Current Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Long-term Assets Long-term Assets Accumulated Depreciation Total Long-term Assets Total Assets Liabilities and Capital

Current Liabilities Accounts Payable Current Borrowing Other Current Liabilities Subtotal Current Liabilities

$390,000 $600,000 $0 $990,000

$1,340,819 $600,000 $0 $1,940,819

$10,942 $582,900 $0 $593,842

$136,780 $565,800 $0 $702,580

$1,845,760 $548,700 $0 $2,394,460

$1,810,314 $531,600 $0 $2,341,914

$2,512,147 $514,500 $0 $3,026,647

$4,961,776 $497,400 $0 $5,459,176

$3,412,652 $480,300 $0 $3,892,952

$4,096,283 $463,200 $0 $4,559,483

$4,703,395 $446,100 $0 $5,149,495

$4,522,458 $429,000 $0 $4,951,458

$5,535,548 $411,900 $0 $5,947,448

Long-term Liabilities Total Liabilities

$0 $990,000

$0 $1,940,819

$0 $593,842

$0 $702,580

$0 $2,394,460

$0 $2,341,914

$0 $3,026,647

$0 $5,459,176

$0 $3,892,952

$0 $4,559,483

$0 $5,149,495

$0 $4,951,458

$0 $5,947,448

$10,800,000 ($990,000) $0 $9,810,000 $10,800,000

$10,800,000 ($990,000) ($1,513,554) $8,296,446 $10,237,265

$10,800,000 ($990,000) ($1,656,874) $8,153,126 $8,746,969

$10,800,000 ($990,000) ($2,138,370) $7,671,630 $8,374,210

$10,800,000 ($990,000) ($3,512,802) $6,297,198 $8,691,658

$10,800,000 ($990,000) ($4,333,805) $5,476,195 $7,818,109

$10,800,000 ($990,000) ($4,548,773) $5,261,227 $8,287,874

$10,800,000 ($990,000) ($4,251,761) $5,558,239 $11,017,415

$10,800,000 ($990,000) ($4,090,551) $5,719,449 $9,612,401

$10,800,000 ($990,000) ($2,916,073) $6,893,927 $11,453,409

$10,800,000 ($990,000) ($1,501,537) $8,308,463 $13,457,958

$10,800,000 ($990,000) $252,819 $10,062,819 $15,014,277

$10,800,000 ($990,000) $1,394,214 $11,204,214 $17,151,662

$9,810,000

$8,296,446

$8,153,126

$7,671,630

$6,297,198

$5,476,195

$5,261,227

$5,558,239

$5,719,449

$6,893,927

$8,308,463

$10,062,819

$11,204,214

Paid-in Capital Retained Earnings Earnings Total Capital Total Liabilities and Capital Net Worth

Page 8