Strategy implementation results

2015 results deviated from the target values in five parameters:

• passenger turnover;
• revenue from transport services;
• investments;
• carriage acquisition;
• EBITDA margin.

The implementation of FPC Development Strategy was influenced by changes in the macroeconomic environment, regulatory decisions by the government, and management decisions made by the management of FPC and RZD Holding.

In 2011–2015, macroeconomic indicators were outside the range projected in FPC 2030 Development Strategy. Specifically, cumulative GDP growth rate reached 1.3% by 2015 instead of the projected 12.3%. Cumulative wage growth rate reached 5.7% by 2015 instead of the projected 13.7%. At the same time, inflation exceeded the Strategy projection by 19 p.p. (42% actual vs 23% projected by the Strategy).

Apart from macroeconomic factors, FPC Strategy implementation was influenced by the political crisis in Ukraine and by the Russian ruble depreciation. FPC saw its passenger turnover and revenue from international transportation reduce by 79% and 59%, respectively.

FPC Development Strategy provides for compensation of 100% of revenue shortfall by the state and by partial involvement of the state in financing the Company’s investment programme. However, in 2011–2015, subsidies deficit reached RUB 19.8 billion, and the state did not finance the investment programme. A reduction in subsidies was offset by an additional fares increase (up 51% in the regulated sector in 2011–2015).

To provide partial coverage of the subsidies deficit, in 2013, RZD Holding contributed RUB 5 billion to the authorised capital of FPC, which enabled the achievement of the target performance indicator for net assets.

Management decisions made by FPC management focused on implementing the Strategy while maintaining FPC operations at break-even level. As part of cost optimisation efforts in 2011–2015, 105 trains were cancelled, 14 thousand employees laid off, and 25 operational enterprises shut down.

To retain transportation volume FPC management implemented measures aimed at managing demand and improving passenger services.

• Zoom

Groups of factors influencing the Strategy implementation

• Macroeconomic changes
• Regulatory decisions by the government
• Management decisions made by RZD Holding management
• Management decisions made by FPC management

1. Reduced GDP and purchasing power

Nominal inflation rate in 2015	Strategy	Actual
GDP growth rate, %	112.3		101.3
Real wage growth, %	113.7		105.7
Inflation, %	123		142

2. Political situation in Ukraine and the Russian rouble depreciation

	Passenger turnover		Revenue
	EBITDA margin		Investments
			Net assets

1. Subsidies reduction

2. Fares increase in the regulated segment

3. Infrastructure tariff indexation

4. Lack of state financing for the rolling stock replacement

	Passenger turnover		Revenue
	EBITDA margin		Investments
			Net assets

1. Partial coverage of the subsidies deficit

2. Indexation of rates for manned locomotive lease

	Passenger turnover		Revenue
	EBITDA margin		Investments
			Net assets

1. Implementation of anti-crisis measures

2. Demand management

3. Customer experience improvement

• Double-decker trains launched on five routes
• Implementation of the “Daytime Express” Programme
• Multimodal transportation development

	Passenger turnover		Revenue
	EBITDA margin		Investments
			Net assets