The View on Estonian Aviation for the Next

The View on Estonian Aviation for the Next 20 Years 20 th Estonian Aviation Seminar 12. 11. 2015

Agenda 1. Past 20 Years 2. Importance of Aviation 3. Next 20 years 4. Contacts Estonian Aviation Seminar, 12 November

Over the last 20 years we have seen the passenger volumes more than quadruple with expected 2. 1 M passengers in 2015 Tallinn Airport Statistics 2, 500, 000 70% 60% 2, 000 50% 40% 1, 500, 000 30% 20% 1, 000 10% 0% 500, 000 -10% -20% 0 -30% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 TLL pax OV pax Source: Tallinn Airport Statistics, Note- 2015 is 10 month figures Estonian Aviation Seminar, 12 November TLL Growth OV Share

The peak in regional airports remain at the time when Estonian Air operated 33 seater Saab aircraft Estonian Regional Airports Summarized Traffic 70, 000 60, 000 50, 000 40, 000 30, 000 20, 000 10, 000 0 2005 2006 2007 2008 2009 Source: Tallinn Airport Statistics, Note- 2015 is 10 month figures Estonian Aviation Seminar, 12 November 2010 2011 2012 2013 2014 2015

In the example of Riga Airport base carrier is fundamental to growth and development of an airport Riga Airport and air. Baltic passenger volumes 6000000 90% 80% 5000000 70% 60% 4000000 50% 40% 3000000 30% 2000000 10% 0% 1000000 -10% 0 -20% 2002 2003 2004 2005 2006 RIX pax Estonian Aviation Seminar, 12 November 2007 2008 BT pax 2009 2010 RIX Growth 2011 BT Share 2012 2013 2014 2015

Agenda 1. Past 20 Years 2. Importance of Aviation 3. Next 20 years 4. Contacts Estonian Aviation Seminar, 12 November

Airlines have lowest profit margins as landscape is faced with strongest competition but all other sectors start benefitting immediately Airline concentration in comparison to supplier industries. . . Duopoly: l Airbus l Boeing Manufacturer Two lessors have 45% of market share Aircraft lessor 1500 airlines despite overcapacity and fierce competition l Less than three providers in deregulated markets l In regulated markets: monopolies and stateowned airports Airlines Ground Handling Two providers dominate 40% of the market, 7 providers control 70% Catering Monopolists l l Airport 4 providers dominate the world market Individual providers dominate single markets Computer Reservation System . . . and the impact on operating margin >30% l 2, 6% profit forecast 16% 15% for 2014 by IATA 3% Source: Lufthansa Consulting research Estonian Aviation Seminar, 12 November 11 -14% 10 -13% 10%

When assesing the value of an airline, there is a wide range of beneficiaries involved to be considered Socio-economic impact Direct impact § Creates jobs (industry average is 60 to 80 airline employees per aircraft) +up to 3% GDP* § Generates payroll Retail Utilities § Increases government revenues from local taxes § Produces airport rental fees Maintenance providers Hotels Airline IT - Gate and hangar space rental Other providers Airport Ground transportation - Landing and parking fees Ground handler § Increases supplier revenues Financial services Caterer - Fuel & Maintenance - Catering & ground handling services Indirect social impact § Increases tourism expenditures (trade, restaurants, hotels, local transportation, etc. . ) § Facilitates business, import / exports, government affairs and VFR travel Tour operators § Jobs & demand for skilled workers § Creates publicity for the region § Link to key world economies Note: * Figures based on averages & global benchmarks for illustration purposes only Source: Economic catalytic effects of Air Transport; Oxford Economic Forecasting Estonian Aviation Seminar, 12 November

Review of studies made on air traffic effect on economy revealed unanimous positive impact Air traffic effect on GDP n n n Direct impact is fairly easy to assess and gives a good indication of the developments Indirect and catalytic effects are harder to assess and depend greatly on the transparency of the economy Oxford economics study found following items: n 10% improvement on Latvian connectivity would increase 11, 5 M euros long-term GDP n Study found correlation between increased air connectivity and increased Foreign Direct Investment (FDI) n Latvian aviation sector provides jobs for roughly 18 600 people n Carrying passengers is much more beneficial for economy as cargo contributed only 1, 3% Source: Kazakhstan – LCG project in 2013, Latvia – Oxford economis study in 2011, Estonia – Tallinn airport study in 2012 Estonian Aviation Seminar, 12 November

Estonia is best in Baltics in infrastructure however low quantity of international seat kilometers per week hinder further improvement The Global Trade Enabling Report 2014 Lithuania n The Global Trade Enabling Report is a good indicator for expressing willingness to invest in certain countries n As Estonia ranks best in port infrastructure and shipping connectivity then improvement in air service connectivity would potentially further increase Estonian position in the list n Best way of improving position is taking over the risk of running the airline and hence making sure that connectivity is guaranteed Latvia Estonia Source: The Global Trade Enabling Report 2014 Estonian Aviation Seminar, 12 November

Only national carrier will take care of the market when things get difficult, adding value for the state and increasing stability amongst investors Passenger traffic in VNO by carriers (in Millions) 2. 8 2. 6 Air Baltic n Airlines operating in Vilnius never recaptured the passengers lost when Fly. LAL went bankruptcy 2. 4 2. 2 Ryanair 2. 0 1. 8 1. 6 Wizz Air n Only the stimulation of 1. 4 1. 2 Lufthansa 1. 0 Small Planet Airlines Scandinavian Airlines n 0. 8 0. 6 0. 4 Others 0. 2 0. 0 2008 2009 2010 Source: Vilnius Airport data, Lufthansa Consulting Estonian Aviation Seminar, 12 November 2011 2012 2013 the market by Ryanair and Wizz Air allowed to recover a decent traffic Would Fly. La. L continued, dynamics would have been completely changed and airport more profitable for the state

Even if to import services then carrier without true mission to serve the area will leave or reduce as seen by the example of Air Baltic Market share of passenger traffic in VNO by carriers Air Baltic Ryanair Wizz Air Lufthansa Small Planet Airlines Scandinavian Airlines Others 2008 2009 Source: Vilnius Airport data, Lufthansa Consulting Estonian Aviation Seminar, 12 November 2010 2011 2012 2013

Agenda 1. Past 20 Years 2. Importance of Aviation 3. Next 20 years 4. Contacts Estonian Aviation Seminar, 12 November

With the optimistic (11%) scenario the growth is exponential and impossibly high where as pessimistic (2%) growth unsatisfactory Tallinn Airport Passenger Traffic forecast n For the base scenario looking average growth rate of 4% over the last 7 years (after recession) airport volumes would reach 4. 6 M passengers n For the optimistic scenario of 10% growth rate (last 20 years average) per year airport would end up in 2035 with more than 15 M passengers n In the case of pessimistic scenario growth will be 2% (average of last 3 years) resulting in 3. 1 M passengers in 2035 16000000 14000000 12000000 10000000 8000000 6000000 4000000 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32 20 33 20 34 20 35 20 19 20 20 20 17 18 20 20 15 16 0 Base Source: Lufthansa Consulting Estonian Aviation Seminar, 12 November Optimistic Pessimistic

What will determine which path will follow for Estonia for the next 20 years? The will of people and decision makers Estonian Aviation Seminar, 12 November n Sucess/Failure of Nordic Aviation Group and their strategy and growth platform n Ministerial plans for the PSO services from/to the islands n Competitive situation around (Finnair, air. Baltic, SAS) and their strategic decision n Ability to increase inbound tourism to Estonia n State priorities for the long-term development of the aviation sector: n Services vs Production n Maritime vs Aviation n Road vs Rail

Agenda 1. Past 20 Years 2. Importance of Aviation 3. Next 20 years 4. Contact Estonian Aviation Seminar, 12 November

Contacts Sven Kukemelk Consultant Lufthansa Consulting Gmb. H FRA ZQ FAC 1/ Frankfurt Airport Center 1 Building B, 7. OG Hugo-Eckner-Ring 60546, Frankfurt, Germany Mob: Fax: +49 (0) 151 589 40 567 +49 69 696 20830 e-mail: Sven. Kukemelk@LHConsulting. com www. LHConsulting. com Estonian Aviation Seminar, 12 November