A VALUATION OF NORWEGIAN AIR SHUTTLE ASA · 2015-02-16 · Executive summary The main objective of...
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A VALUATION OF NORWEGIAN AIR SHUTTLE ASA Master thesis MSc Accounting, Strategy and Control Copenhagen Business School Author: Line Marie Kjellstad Johansen CPR: XX XX Concentration: Accounting, Strategy and Control Supervisor: Thomas Ryttersgaard Number of standard pages: 80 (174 592 Characters)
Transcript of A VALUATION OF NORWEGIAN AIR SHUTTLE ASA · 2015-02-16 · Executive summary The main objective of...
A VALUATION OF NORWEGIAN
AIR SHUTTLE ASA
Master thesis
MSc Accounting, Strategy and Control
Copenhagen Business School
Author: Line Marie Kjellstad Johansen
CPR: XX XX
Concentration: Accounting, Strategy and Control
Supervisor: Thomas Ryttersgaard
Number of standard pages: 80 (174 592 Characters)
Executive summary
The main objective of this thesis has been to determine the theoretical value of the share of Norwegian
Air Shuttle ASA per 04.12.2013. The valuation was performed through a strategic and financial
analysis that formed the foundation for a forecasted budget of the company’s future financial
performance. This budget was then used as the basis for the valuation of NAS’ share.
The analyses showed that the airline industry is heavily influenced by the development in the global
economy and is marginal in terms of profitability. The industry is also characterized as highly
competitive and many players targets the same customers. This implies a need for a sustainable
competitive advantage to survive the fierce competition. The analyses revealed that Norwegian Air
Shuttle has a higher cost level and lower load factor than the international airlines that apply the same
business model. This was especially significant in terms of labor costs.
Norwegian Air Shuttle has recently changed the organizational structure of the company and
established a new subsidiary in the EU. These actions has been undertaken so the company can gain
the necessary traffic rights abroad and ensure growth in the future. With this restructuring, the
company hopes to use foreign labor on the newly launched long-haul routes. The ultimate objective is
to compete on an equal ground as the international competitors with regards to cost level.
The valuation was conducted through a present value approach, more precisely the Discounted Cash
Flow model, and was evaluated through a sensitivity analysis. Additionally a relative valuation
approach and liquidation approach was conducted.
The theoretical value of Norwegian Air Shuttles share was found to be NOK 290 per 04.12.2013. The
share was traded at NOK 232 on Oslo Stock Exchange the same date which indicates that the share is
undervalued by the market compared to the finding in this thesis.
Table of Content CHAPTER 1 - Introduction .................................................................................................................6
1.2 Methodology .............................................................................................................................6
1.2.1 Data Collection ...................................................................................................................6
1.2.2 Research design ..................................................................................................................7
1.3 Limitations ................................................................................................................................7
CHAPTER 2 – Presentation of the company and airline industry .........................................................8
2.1 The history of Norwegian Air Shuttle ASA ...............................................................................8
2.2 The airline industry ...................................................................................................................9
2.3 Vision, business idea and strategic framework ......................................................................... 11
2.3.1 Mission and strategic framework ...................................................................................... 11
2.3.2 Business model ................................................................................................................. 12
2.3.3 Core activities................................................................................................................... 12
2.4 Organization and Ownership ................................................................................................... 13
2.4.1 Organization ..................................................................................................................... 13
2.4.2 Ownership structure .......................................................................................................... 14
2.5 Peer group ........................................................................................................................... 14
2.5.1 Ryanair ............................................................................................................................. 14
5.2.2 EasyJet ............................................................................................................................. 15
5.2.3 SAS .................................................................................................................................. 15
5.2.4 Finnair .............................................................................................................................. 16
CHAPTER 3 – Strategic Analysis ..................................................................................................... 17
3.1 External analysis ..................................................................................................................... 17
3.2 PET-analysis ........................................................................................................................... 17
3.2.1 Political and legal factors .................................................................................................. 17
3.2.2 Economic factors .............................................................................................................. 18
3.2.2 Technological ................................................................................................................... 21
3.3 Analysis of NAS’ competitive environment ............................................................................. 22
3.3.1 Bargaining power of suppliers .......................................................................................... 22
3.3.2 Bargaining power of buyers .............................................................................................. 24
3.3.3 The threat of new entrants ................................................................................................. 25
3.3.4 The threat of substitutes .................................................................................................... 27
3.3.5 Rivalry among existing firms ............................................................................................ 29
3.3.6 Summary of Porters 5 forces ............................................................................................. 29
3.4 Internal analysis ...................................................................................................................... 30
3.5 Key industry measures analysis ............................................................................................... 30
3.5.1 Load factor ....................................................................................................................... 30
3.5.2 Yield ................................................................................................................................ 31
3.5.3 Unit cost ........................................................................................................................... 33
3.5.4 Operating costs ................................................................................................................. 34
3.5.5 Labor costs ....................................................................................................................... 35
3.5.6 Fuel costs ......................................................................................................................... 37
3.5.7 Other costs ....................................................................................................................... 38
3.6 Internal level analysis .............................................................................................................. 39
3.6.1 Cost leadership ................................................................................................................. 39
3.6.2 Differentiation .................................................................................................................. 39
3.6.3 Focus................................................................................................................................ 40
3.7 SWOT analysis ....................................................................................................................... 40
3.7.1 Strengths and weaknesses ................................................................................................. 40
3.7.2 Opportunities and threats .................................................................................................. 41
CHAPTER 4 – Financial analysis ..................................................................................................... 42
4.1 Quality of the financial statements ........................................................................................... 42
4.2 Reformulation of the income statement and balance sheet ........................................................ 42
42.2 Revenues ........................................................................................................................... 43
4.2.3 Operating expenses ........................................................................................................... 43
4.2.4 Other losses (gains) – net .................................................................................................. 43
4.2.5 Other income .................................................................................................................... 43
4.2.6 Leasing ............................................................................................................................. 43
4.3 Reformulated balance sheet ..................................................................................................... 45
4.3.1 Operating assets and liabilities .......................................................................................... 45
4.4 Profitability analysis ................................................................................................................ 47
4.4.1 Return on invested capital ................................................................................................. 47
4.4.2 Profit margin .................................................................................................................... 49
4.4.3 Asset turnover .................................................................................................................. 50
4.4.4 Return on equity ............................................................................................................... 50
4.5 Items of significance in the income statement .......................................................................... 52
5.5.1 Fuel costs and exchange rates ........................................................................................... 52
4.6 Partial conclusion .................................................................................................................... 53
CHAPTER 5 – FOREASTING AND VALUATION ........................................................................ 55
5.1 The discounted cash flow model .............................................................................................. 55
5.2 The weighted average cost of capital ....................................................................................... 56
5.2.1 Capital structure ............................................................................................................... 56
5.2.2 Cost of debt ...................................................................................................................... 58
5.2.3 Shareholders’ required rate of return – CAPM .................................................................. 59
5.3 Assumptions for the forecasted free cash flow ......................................................................... 62
5.4 Revenues................................................................................................................................. 63
5.4.1 Number of aircrafts ........................................................................................................... 63
5.4.2 ASK per aircraft ............................................................................................................... 63
5.4.3 Yield and load factor ........................................................................................................ 64
5.4.4 Total passenger revenue .................................................................................................... 65
5.4.5 Ancillary revenues ............................................................................................................ 65
5.4.5 Other revenues ................................................................................................................. 65
5.5 Operating expenses ................................................................................................................. 66
5.5.1 Jet fuel costs ..................................................................................................................... 66
5.5.3 Labor costs ....................................................................................................................... 67
5.5.4 Airport charges and Handling charges ............................................................................... 68
5.5.5 Technical maintenance ..................................................................................................... 68
5.5.6 Sales and distribution expenses, Other aircraft expenses and Other operating expenses ..... 68
5.5.7 Leasing costs .................................................................................................................... 68
5.5.8 Depreciation ..................................................................................................................... 69
5.5.9 Financial expenses ............................................................................................................ 69
5.6 Balance sheet .......................................................................................................................... 69
5.6.1 Tangible assets ................................................................................................................. 69
5.6.2 Intangible assets and non-current operating liabilities........................................................ 70
5.6.3 Current assets and current liabilities .................................................................................. 70
5.6.4 Free cash flow statement ................................................................................................... 70
5.7 Present value approach - DCF ................................................................................................. 70
5.8 Sensitivity analysis .................................................................................................................. 71
5.9 Scenario analysis ..................................................................................................................... 72
5.9.1 Worst-case scenario .......................................................................................................... 73
5.9.2 Best-case scenario ............................................................................................................ 74
5.9.3 Labor scenario .................................................................................................................. 74
5.10 The relative valuation approach ............................................................................................. 75
5.11 Liquidation approach ............................................................................................................. 77
5.11.1 Liquidation value of assets .............................................................................................. 77
5.11.2 Liquidation value of liabilities ........................................................................................ 78
5.12 Partial conclusion .................................................................................................................. 78
CHAPTER 6 – CONCLUSION ........................................................................................................ 79
7. References .................................................................................................................................... 81
8. Appendix ...................................................................................................................................... 88
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CHAPTER 1 - Introduction
The aviation industry is characterized by intense competition, pressure on prices and high fuel costs
but the Norwegian low-cost airline, Norwegian Air Shuttle ASA (NAS) has seen outstanding growth
the recent years.
The company is now ready to expand its operations to international markets and is the first European
low-cost carrier to operate long-haul flights. The competition from the international airlines is fierce,
and Norwegian legislative issues regarding labor makes it difficult for NAS to compete on the same
cost level as the international competitors. With the establishment of a new subsidiary outside of
Norway, NAS hopes to compete on an equal playing field to the international competitors. It is thus
interesting to see how this affects the value of the company. This leads to the following problem
statement:
“What is the fair value of Norwegian Air Shuttle ASA’s shares per 04.12.2013”?
To answer the problem statement, a throughout examination of the industry is necessary. Different
analyses of the airline industry and NAS’ competitive environment, as well as the financial value
drivers will be carried out. The following sub-questions will be answered to support the findings.
What is the main external factors that affect NAS’ value creation?
How has NAS’ key industry measures developed compared to its peers?
What is NAS’ competitive advantages?
How does NAS’ key financial ratios compare to the peers?
How sensitive are the valuation estimates to changes in underlying assumptions?
1.2 Methodology
This section describes the overall nature of this paper and presents the models used to answer the
overall problem statement.
1.2.1 Data Collection
This paper is aimed at people interested in the airline industry and NAS particularly, including
investors, employees and shareholders. The paper is written from an investor’s point of view, only
publicly available information is applied and the thesis is based solely on secondary data. This secures
that the thesis is written with an objective perspective and that the information used is not biased due
to interaction with the company. The thesis will consist of a strategic and financial part and both
qualitative and quantitative information will be used. The main information source is NAS and its
peer-group’s annual report’s but also relevant literature on the subject. To support the findings and get
an in-depth understanding of NAS and the airline industry, relevant webpages, industry rapports and
newspaper articles is also used.
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1.2.2 Research design
To give the reader a satisfactory background information the second chapter of the thesis will give a
throughout introduction to the company and the airline industry and describe NAS’ core activities,
current strategy and organizational- and ownership structure. In the third chapter the strategic analysis
will be carried out. The external factors will be analyzed through a PET-analysis and the competitive
environment in the airline industry is examined through Porter’s five forces. The non-financial value
drivers will be assessed through an analysis of the key industry performance measures and the result of
the strategic analysis will be summed up in a SWOT analysis. The forth chapter will consist of a
financial analysis. Here the historic profitability and financial aspects of the company and its peers
will be analyzed. This will be done through reformulating the income statement and balance sheet. In
addition, a description of significant posts in the income statement that is relevant for the forthcoming
forecasting and valuation will be presented. In the fifth chapter the information found in the strategic
and financial analysis will be combined to predict a 10-year forecasted budget for NAS. This
forecasted budget will be used to perform the valuation of the company. The main framework for the
valuation will be the Discounted Cash Flow model. This model will be supplemented by the relative
valuation approach and liquidation value of the company. The final chapter will consist of conclusive
remarks.
1.3 Limitations
This paper is written from an external point of view and is based solely on public information. Since
the objective with this thesis is to find the theoretical value of the stock per 04.12 2013, information
distributed past this date will not be considered.
The models used is this thesis is widely accepted and therefore no further introduction or proof of their
validity will be offered. As the focus of this thesis is NAS and its core operations, all other operations
are excluded from the analysis. This include charter, cargo and other minority interest.
It is chosen to not include possible future Asian competitors in the peer-group as the author possess no
knowledge about accounting practice in the respective countries. In addition, no adjustments has been
done to make up for the differences of fiscal year in the peer-group. It though believed that this will
not have a significant impact on the result.
As the members of the peer-group have different nationalities all values used in the paper has been
calculated in Norwegian Kroner (NOK). The following exchange rates collected on the 3rd of
September 2013, are applied for the whole paper: 100 SEK = 92,29 NOK , 1 EUR = 8,0677 and 1
GBP = 9,3282 NOK.1
1 DNB (2012)
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CHAPTER 2 – Presentation of the company and airline industry
2.1 The history of Norwegian Air Shuttle ASA
Norwegian Air Shuttle ASA was established in January 1993 when Svein Klev and Bjørn and Tore
Kjos took over the aircraft fleet of a recently bankrupt airline. Until 2002 NAS’s main operations were
domestic flights on the west coast of Norway in cooperation with Braatens S.A.F.E. This collaboration
ended in 2002 when Braatens S.A.F.E was acquired by SAS.
After the termination of the domestic routes in western Norway, NAS repositioned themselves as a
low-cost carrier, and it soon challenged SAS’ monopoly in the Norwegian market. NAS’ strategy was
to have an business model which main focus was to reduce costs compared to traditional airlines. This
should be achieved by flying the passengers point-to-point without further responsibility and with no
service onboard. This led to shorter turnaround time, a more efficient utilization of the fleet and a
reduction of operating costs per seat.2 NAS also based its route portfolio on several key factors which
included serving point-to-point markets where flights either had been underserved or overpriced, and
being the first low-cost airline to offer routes that only established airlines had offered previously. A
key factor was also to constantly adjust products and services to match occasional and permanent
fluxes of demand.
From 2002 to 2003 NAS has a passenger growth of 82%, and its operations expanded to foreign
destinations. In December 2003 the shares in NAS were listed on Oslo Stock Exchange with good
response from investors. In 2005 the number of routes had increased from 18 in 2003 to 54, and NAS
could for the first time show their shareholders a positive result. In 2007 NAS was the largest low-cost
carrier in the Nordic region3 and by 2008 they had international bases set up in Poland, Sweden and
Denmark4.
Today NAS is the second largest airline in Scandinavia and the third largest low-cost carrier in
Europe5. In 2012 they placed the largest aircraft order in European history, ordering 222 aircrafts
which included 8 Boeing 787-8 Dreamliner aircrafts for long-haul operations6. The Dremliner is the
fastest and most cost efficient aircraft of its type and is described by CEO, Bjørn Kjos as a “game
changer” for NAS7. They now operate with a route portfolio that includes flights to North-Africa, the
2 Norwegian (2002) 3 Gram (2007) 4 Norwegian (2006) 5 Norwegian (2013) 6 Norwegian (2012a) 7 Matre (2013)
9
Middle-East, North-America and Southeast-Asia and has experienced significant growth in recent
years8.
The long distance revolution
In 2013, NAS started its first long-haul operations through its wholly owned subsidiary Norwegian
Long Haul. The first long-haul flights flew from Oslo to Bangkok, Thailand and New York, USA in
May 2013. The operations where later expanded to several destinations in the US. This launch was a
part of NAS’ so called ‘Long distance revolution’. The new Boeing 787-8 Dreamliner aircrafts are the
company’s key to succeeding in its expansion and was the first step to revolutionize its operations.
The next steps are to establish bases in the different potential markets and expand its destination
portfolio. NAS’ long term goal is to have long-haul operations on a global scale, also operating routes
that do not involve Scandinavia and domestic routes outside its home market, specifically on the Asian
continent.9 In October, 2013 it was announced that NAS will establish two new subsidiaries, one in
Norway and one registered in the EU. In addition they launched new routes, from London to several
destinations in the US. This is its first long-haul routes departing from outside of Scandinavia and this
launch will put NAS in direct competition with the most established players in the industry.
2.2 The airline industry
The airline industry has existed for decades and is by many characterized as risky and volatile. This
section of the paper will look deeper into the development of profitability in the airline industry and
what affects it.
8 Norwegian (2012a) 9 Mikalsen (2013)
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Figure 1: Global Economic Growth and Airline Profit
Net post-tax profit as & of revenues Global GDP growth
Source: Own creation based on information from IATA Global commercial industry outlook June 2012
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When looking at Figure 1 it is apparent that growth in the global economy is essential for growth in
the airline industry as the profit level has been closely linked to the development in the global
economy the past three decades. 10 11 Cyclical patterns are characteristic for the airline industry and
four to six years of profit followed by three of four years of losses seems to be the global pattern12.
This is illustrated by the red line in the figure above. In the following section the industry’s
profitability and cyclical nature will be described.
The development in airline profitability since the mid-1990’s.
In the start of the 1990’s the first
big crisis hit the airline industry.
The fuel prices rose and the
economic climate were getting
colder and demand was sinking.
Cost cutting programs were
implemented and by the mid-
1990 the effect started showing
and as demand perked the airline industry returned to profit13. This positive trend lasted until the start
of the 21st century when yields fell and costs increased. In addition, the international airlines at this
point appeared to be supply-led which suggested that a new cyclical downturn was emerging.14 In
addition to this the dot.com-bubble burst in March, 2000 which caused an economic downturn that led
to a decrease in demand for air travels especially. Also, at this point many low-cost carriers entered the
industry which put a pressure on ticket prices and lowered the profitability of existing firms. The
terrorist attack on September 11, 2001 turned the emerging crisis into a disaster for the airline
industry. The attack led to a closed airspace over the US for security reasons and non-American
carriers adjusted their number of flights from and within the US and extra costs incurred because of
new security regulations. Furthermore, it led to a fear of flying amongst some of the population which
further reduced demand. Another consequence of the attack was a general downturn in the global
economy and as a result the relevant market indicator Revenue Passenger Kilometer (RPK) dropped
significantly. For European carriers the effect had a time lag and the RPK which had zero growth
before the attack, hit its lowest point of -26% in January 2002. In 2003 the SARS epidemic hit and an
official advice to avoid non-essential traveling led to a drop in the flight demand. At the same time the
Iraqi war was announced which led to negative expectations of travel security. 15
10 IATA (a) 11 IATA (2012) 12 Doganis (2001) p.2 13 Doganis (2001) p. 2 14 Doganis (2001) p. 5 15 Cento (2008) p. 50-50
-20
0
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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013F
Figure 2: Global commercial airline profitability 1995-2013
Source: Own creation based on IATA Financial Forecast Briefing note June 2011 and March 2013
11
As you can see on the graph in Figure 2, the airline industry did not experience profit again until 2006.
Unfortunately the financial crisis hit in 2008 and the industry experienced its worst downturn yet.
Demand plunged due to the struggling global economy and record high oil prices led to fuel costs
getting sky high before dropping16. Although the industry saw profit again in 2010 the financial crisis
in the Eurozone again turned the situation around especially for European carriers. Decrease in
demand particularly in the business and cargo segment, increased fuel prices and volatility of prices
and difficulty to get funding were problems the industry faced. However, during 2012 many low-cost
carriers, NAS included, saw growth compared to other network airlines.17 In 2013 this trend is
expected to continue although fluctuating fuel prices and a higher profit margin from the refineries add
to the cost for airlines.18
2.3 Vision, business idea and strategic framework
The vision and strategy of NAS is important to get an understanding of where the company sees itself
in the future. NAS vision is “everyone should afford to fly” and to achieve this they have developed a
business idea which is “to give everyone the opportunity to travel by air, attracting customers by
offering competitive, low fares and a high- quality travel experience based on operational excellence
and helpful, friendly service”.19
2.3.1 Mission and strategic framework
NAS intends to become the preferred supplier of air travel in its selected markets and to generate
excellent profitability and return to their shareholders. To achieve this mission NAS have formed
several strategic principles which include focus on customer orientation where “freedom to choose” is
one of the core points. The freedom to choose gives the customer the opportunity to pay for only the
services desired, and it is offered a low-cost option for price-sensitive customers. This ensures NAS a
broad market reach. Another core point is to continuously focus on revenue maximization and
improvement of the cost base and at the same time offer a mix of destinations for both business and
leisure travelers. NAS focuses on being a positive and entrepreneurial organization which has an “out-
of-the-box” approach to doing business and a flat and lean organizational structure to make decision-
making simple. This is to ensure quick and easy adaption to changes in the market situation. The last
core point of NAS, is to continuously focus on developing high-quality, cost-efficient products and
services through extensive use of industry-leading technology to make NAS a convenient travel
partner.20
16 Wharton (2009) 17 ECA (2013) 18 PWC (2013) 19 Norwegian (2013b) 20 Norwegian (2012)
12
2.3.2 Business model
In the airline industry there are two different types of business models, the low-cost carriers (LCC)
and the full-service network carriers. What characterizes a network carrier is that the airline focuses on
providing different on-board and pre-flight services like airport lounges, connecting flights, drinks and
snacks on board and different service classes. The network carriers are also often members of airline
alliances which gives the customers extra benefits. A low-cost carrier on the other hand focuses on
cost reducing to establish a price leadership strategy in the markets they serve.21 The low-cost model
also strives to reduce fixed and variable unit costs by increasing aircraft capacity and having high load
factors.22 Typical for LCC’s are fees for bringing luggage, self-service check in and an elimination of
free in-flight services like newspapers and snacks. LCC’s also typically sell heavily discounted tickets
if you book long in advance and thereby address price-sensitive customers contrary to network airlines
which typically have business and time-sensitive customers as its main segment. Even though NAS is
a typical low-cost carrier they are not as aggressive on cost savings as other LCC’s. They also offer
two different service classes - low-fare and flex, and a reward program. This way NAS also target
business travelers and time-sensitive customers as well as the price-sensitive ones. Contrary to some
other LCC’s NAS generally operate on the main airports in the cities it serve. Operators in the low-
cost business model have a tendency to choose secondary airports to cut costs on airport fees. All in all
NAS have characteristics from both the network-carrier and low-cost carrier business model, but is
still to be considered as a typical low-cost carrier.
2.3.3 Core activities
NAS primary focus is to provide
point-to-point flights at competitive
prices and with customer-friendly
solutions and service23. In 2012 they
flew 17.7 million passengers to 121
destinations. NAS’ largest hub is
located in Oslo, Norway and the seat
capacity from Oslo Airport is twice
as high as from the second largest
hub at Arlanda Airport,
Stockholm.24 NAS has in the recent years established bases outside Scandinavia to reach new markets
and in 2013 it opens its first base outside of Europe. NAS’s flight operations are the second largest in
the Nordic region in terms of number of passengers and revenue, and it is the largest low-cost carrier
21 Reichmuth et al (2008) 22 Norwegian (2012) 23Norwegian (2012) 24 CAPA (2013a)
36 19 14 9 4 40
10
20
30
40
Figure 3: Market Share Per Airport 2012
Source: Own creation based on Annual report 2012
13
in the region.25 In 2012, NAS held 36% of the market share in the home market26, only beaten by the
Scandinavian Airlines System group (SAS and Widerøe).27 In the Nordic region, NAS has a market
share of 17%28. NAS currently holds a fleet of 81 aircrafts, and has placed an order of 222 additional
aircrafts. These aircrafts are scheduled to be delivered from 2016 and onwards.29
2.4 Organization and Ownership
2.4.1 Organization
NAS is a part of the Norwegian Group where Norwegian Air Shuttle ASA is the parent company. As
seen in Figure 3 the group consists of Norwegian Air Shuttle ASA and the fully owned subsidiaries
Norwegian Air Shuttle Sweden AB, Norwegian Long-Haul AS, AB Norwegian Air Shuttle Finland
Ltd and NAS Asset Management Norway AS. Through Norwegian Finans Holding ASA, NAS owns
20% of Bank Norwegian which NAS’s loyalty program is run in cooperation with.30 The parent
company is responsible for all flight operations except the long-haul operations which are operated by
Norwegian Long-Haul AS
Source: Own creation based on Annual Report 2012
In October 2013 NAS issued a press release stating they would alter the corporate structure of NAS.
This new structure is part of a strategy to secure international growth and necessary traffic rights. Two
fully owned subsidiaries with its own permission for operations will be established, one based in
25 Norwegian (2012) 26 Norwegian (2012) 27 Osloairports (2013) 28 CAPA (2013b) 29 Norwegian (2013c) 30 Norwegian (2012)
Norwegian Air Shuttle ASA
(Parent company)
Norwegian Long-Haul ASCall Norwegian ASNorwegian Finans
Holding ASA
(20%)
Bank Norwegian
AB Norwegian Air Shuttle Finland Ltd
Nas Asset Management
Norway AS
Figure 3- Organizational structure
14
Norway and one in the EU (most likely Ireland). NAS’ states that another reason for the restructuring
is that NAS is in a process of becoming an international company rather than a Scandinavian, which
demands a modernized organizational structure. The objective with the restructuring is to secure NAS
with a position as a competitive and global airline in the future.31
2.4.2 Ownership structure
In the end of 2012 NAS had 5333 different
shareholders divided between private and
institutional investors. The largest
shareholder with 26,99% of the shares is
HBK Invest which is owned by NAS’ CEO
Bjørn Kjos (84,13%), NAS’ board
chairman Bjørn Halvor Kise (8,23%) and
Tokjo Invest (7,63%). Finnair PLC became
shareholders after NAS purchased
FlyNordic in 2007.32 The 20 largest shareholders
hold 60,38% of total shares. At the end of 2012, NAS did not own any of its own shares and
international shareholders controlled 23% of the shares. This shows a growth of 4% since 2011. 33
2.5 Peer group
It is important to determine a peer group that can serve as a benchmark for the strategic and financial
analysis of NAS. The companies included in an ideal peer group should be of the same size and
operate in the same market as NAS. However, in terms of geographical market area and size, there are
no highly comparable companies. The airlines chosen for the peer group has its main market within
Europe and some operate in the long-haul market.
Both business models are also represented in the
peer group. The peer-group found suitable for the
purpose of this paper consists of Ryanair,
EasyJet, SAS and Finnair.
2.5.1 Ryanair
Ryanair is an Irish ultra-low cost carrier
established in 1985. Ryanair serves over 1600
short-haul routes in Europe from 57 bases across
31 Norwegian (2013d) 32 Yle (2013) 33 Norwegian (2012)
Source: Own creation based on Annual Report 2012
27 %
5 %
5 %
4 %2 %
2 %
55 %
Figure 4: Main Shareholders in percentage 2011
HBK Invest
Finnair PLC
Skagen Kon-TikiSkagen Vekst
JP MorganChase BankDanskeInvest Norske
SAS28 %
EasyJet1 %
Ryanair9 %
Finnair8 %
NAS22 %
Other32 %
Peer-group market share in the Nordic Region 2012
Source: Own creation based on SAS annual report 2012
15
the continent. Ryanair started its low-cost business model in 1990, and became Europe’s first low-cost
carrier.34 Their business strategy is to offer the lowest fares in every market, high frequency flights and
optional fees, and its objective is to become the Europe’s largest scheduled passenger airline, through
continued improvements and expanded offerings of its low-fares service. 35 Today Ryanair is the
largest low-cost carrier in Europe and the most profitable airline in Europe in terms of operating
margin. In 2012 they served close to 80 million passengers, making them the second largest airline in
Europe by passenger number, only beaten by Lufthansa. 36 Ryanair currently has three bases in
Scandinavia where as one is located in Oslo, Norway. As the Northern European countries have been
successful in handling the European economic crisis, Ryanair sees potential growth in these markets
and then specially Scandinavia. The company has a plan to increase traffic in Northern Europe by 25%
over the next five years, which may lead to a fiercer competitive environment for NAS.37
5.2.2 EasyJet
EasyJet is a British low-cost carrier airline established in 1995 by Sir Stelios Haji-loannou to offer
low-cost flights within Europe. EasyJet currently have 23 bases across Europe, none of them located
in the Nordic region. It currently operate on over 600 routes in 33 countries which are mainly located
in Europe.38 In June 2013 they opened its first route to Norway, and they now serve all the
Scandinavian countries.39 In February 2013 EasyJet for the first time flew over 60 million passengers
over a 12 month period. EasyJet’s strategic intent is to leverage its cost advantage, leading market
positions and brand to deliver point-to-point low fares with operational efficiency and friendly service
for its customers. Its ambition is to be the preferred short-haul airline, delivering market leading
return.40 EasyJet is similar to NAS in both business model, where both are focused on keeping unit
costs and the operational costs at the lowest possible level, and strategic framework.
5.2.3 SAS
Scandinavian Airlines System (SAS) was founded in 1946 as a merger of three Scandinavian national
airlines. The consortium had mutual interests in intercontinental flight operations and the first SAS
flight left from Stockholm to New York in 1946. For several years SAS had a monopoly situation in
the Scandinavian air travel market, and economic upturns led to minimized focus on costs. In the late
1970’s recession and high fuel prices hit the airline industry and SAS shifted its focus to become more
customer oriented and focus more on business travelers than leisure travelers.41 Today SAS is the
largest airline in the Nordic region in terms of revenue, passengers and flights. In 2012, SAS
34 Ryanair (2013a) 35 Ryanair (2013b) 36 CAPA (2013c) 37 WSJ (2013) 38 Easyjet (2013) 39 Routesonline (2013) 40 Easyjet (2012) 41 SAS (2013)
16
transported 21,7 passengers to 101 destinations and they have 781 daily flights. Its mission is to
“provide the best value for time and money to Nordic travelers whatever purpose of their journey”, but
its focus has been on being the no.1 choice for Nordic business travelers.42 The past years SAS has
experienced financial issues and was on the verge of bankruptcy in late 2012. The company managed
to pull around but is going through a major restructuring process to cut its costs and increase
profitability.43
5.2.4 Finnair
Finnair was founded in 1923 as Aero O/Y and is thereby one of the oldest continually operating
airlines in the world. Today Finnair is the largest airline in Finland and offer flights to Scandinavia,
Europe and Asia. As their home base is located in Helsinki, Finnair has a beneficial location when it
comes to flights to Asia. Hence, Finnair has focused on strengthening its position in the Asian market
and expand the traffic between Europe and Asia in the recent years. Finnair’s vision is “to be the
number one airline in the Nordic countries and the most desired option in Asian traffic”.44 In 2012
Finnair flew 8,8 million passengers to 70 destinations45 and had a market share in the Nordic region of
approximately 9%.46
42 SAS (2012) 43 SAS (2012) 44 Finnair (2012) 45 Finnair (2013) 46 SAS (2012)
17
CHAPTER 3 – Strategic Analysis
The strategic analyses is performed to get an understanding of the internal and external factors that
affect NAS’ operations. These findings will serve as a foundation for the forecasting of future
performance that will be performed later in the paper.
3.1 External analysis
The external analyses will examine the external factors in NAS’ environment that affect value
creation.
3.2 PET-analysis
The PEST-analysis is a tool to detect the macro factors that may affect NAS’ cash flow in the future.
The PEST-analysis indicate that the impact of Political and legal, Economic, Sociocultural and
Technological factors should be examined.47 For the purpose of this paper it is decided to perform a
PET-analysis, which include the factors concluded to have the most impact on NAS’ value creation in
the future, Political and legal, Economic and Technological.
3.2.1 Political and legal factors
The most relevant political issue that concerns NAS is the legislative rules regarding foreign labor.
NAS’s labor costs has been a subject frequently discussed by NAS and other involved parts in the
media. Norwegian labor legislation states that the crew working on an aircraft registered in Norway
must have a Norwegian residency and work permit, and get paid according to Norwegian salary
terms.48 This prohibits NAS from hiring foreign personnel at its international bases and give them
wages according to the local pay and working conditions in the base country. NAS states that it has no
chance to compete against other LCC’s, especially the new Asian low-cost companies, on
Scandinavian salary terms.
In January, 2013 NAS applied for a permission from the Norwegian government to use foreign labor
with according labor and salary agreements on their flights, which was turned down by the Ministry of
Labor.49 As a result, in June, 2013, NAS registered its new 787 Dreamliner aircrafts in Ireland, a
solution that makes it possible to hire foreign personnel and pay them accordingly.50 As the aircrafts
are registered in Ireland, NAS currently operates on a temporary permission to fly the Irish-registered
aircrafts on a Norwegian flight license. This permission ends in December, 2013.51 One of the reasons
that NAS established a new subsidiary in Ireland in October 2013 is to acquire the necessary traffic
rights. This license is time consuming to obtain, and NAS has already been denied the license twice
47 Petersen and Plenborg (2012) p. 188 48 Hvamstad (2013) 49 Larsen, H.L and Skei, L (2013) 50 Skille, Ø.B and Lilleeng,S (2013) 51 NTB (2013)
18
due to insufficient information in the applications.52 If NAS does not get the approval in time, the
company must apply for a new temporary permission from the Norwegian Ministry of Aviation. This
approval is not certain and NAS risk being without a license for the Irish-registered aircrafts. This
scenario it would hurt NAS’s long haul operations.
These actions is a step on the way to compete on a level playing field as the other European airlines
when it comes to cost level.53 These actions is cost reducing measure, especially when it concerns
labor costs.
When on the subject of labor costs, another
issue is the level of real wages in Norway.
Figure 5 shows the development of the
wages and salaries for each airline in the
peer-group. As seen, NAS’ employees earn
more than its LCC peers. This comes as no
surprise as Norway has one of the highest
wage levels in Europe.54
Figure 6 illustrates the difference in real
wages per hour in the home markets of the
peer group. The hourly rate in Norway
averages at EUR 48,3 compared to EUR
21,6 in the UK. These differences offer an
explanation to why NAS’ labor costs are at a
higher level than Ryanair and EasyJet, even
though the airlines follow the same business
model. The fact that Norwegian labor costs
124% more per hour than in the UK
underline NAS’ petition to pay foreign
personnel at local conditions to compete with
airlines operating in these markets.
3.2.2 Economic factors
The economic factors that has the largest impact on NAS’ value creation is the price of jet fuel and
growth in GDP. These factors will be discussed in the following subsections.
52 Dagens Næringsliv (2013) 53Skille, Ø.B and Lilleeng,S (2013) 54 Storeng, O (2013)
300
400
500
600
700
2008 2009 2010 2011 2012
Figure 5: Wages and Salaries per Employee in NOK thousands 2008-2012
NAS
SAS
Ryanair
EasyJet
Finnair
Peer-groupAverage
0
20
40
60
Figure 6: Real wages per hour in EUR in Peer group home countries 2012
Norway Sweden Denmark Finland Ireland UK
Source: Own creation based on Annual reports 2008-2012
Source: Own creation based on information from European
commission, 2013
19
3.2.2. 1 Jet fuel price
Jet fuel is one of the largest external cost drivers for an airline company. Jet fuel is distilled petroleum
and naturally, the price of jet fuel tends to follow the price of crude oil.
Figure 7 shows the development of jet fuel price vs. crude oil the past two decades. The correlation
coefficient is 0,84 which implies a strong correlation. This indicates that the projected future growth in
the oil price can be used to predict the future jet fuel price.
Figure 8 shows the development of the price of jet fuel per gallon in US dollars the past ten years.
The figure shows that the price of jet fuel has gradually increased since the beginning of the century.
In 2008 there was a steep drop in the price per gallon. In July 2008 the price per galleon was US$ 3,89
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Figure 7: Jet Fuel vs Crude oil 1993-2013
Jet fuel Crude Oil
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13Figure 8: Jet Fuel per gallon in US dollars 2003-2013
Source: Index mundi 2013
Source: Index mundi 2013
20
and by February 2009 it had dropped 209% to US$ 1,26. This steep decline can be explained by the
financial crisis, which indicates that the fuel price is influenced by the global economic situation.
During 2012 the fuel price fluctuated from US$ 2,68 to US$ 3,25 per gallon, a change of nearly
21,5%. So far in 2013 the price has peaked at US$ 3,21 in February and had a low-point of US$ 2,72
in May. The price in August 2013 was US$ 3 per gallon.
The demand for oil has increased steadily since its introduction, and 3/5 of all oil supply is turned into
fuel, as the use of car, planes and ships is rising. British oil company BP predicts that the demand for
oil will increase from 89 million barrels a day in 2013 to 104 million per day in 2030.55 This fact
combined with oil being a limited resource, it is indicated that an increase in the future might be
unavoidable. However, the oil price is affected by a lot more than just plain supply and demand, but
also global economic alterations, political imbalances and the notions of investors and speculators.
To avoid the effects of a sudden change in the fuel prices hedging is common in the airline industry.
NAS uses their risk management to avoid the effects of sudden increases in price, whilst at the same
time being able to utilize decreases in the price. NAS states in its annual report (2012) that a 1%
change in jet fuel price will affect the post-tax profit by NOK 100 000. As a comparison SAS states in
its annual report that a 1 % change will have an effect of NOK 73,8 million
To manage the risk NAS uses fuel derivatives and hedges against the risk by using forward
commodity contracts. NAS does not state how much of their anticipated fuel consumption they hedge
in its annual report, but state that “while they do hedge jet fuel to increase predictability and reduce
volatility in earnings, they do so modestly and at a lower relative volume compared to their primary
competitors”56. As a comparison SAS has hedged 50% of their anticipated consumption until October
2013. Finnair has hedged 75% of the expected consumption for the first half of 2013, EasyJet 86% for
the same time period and Ryanair is hedged for 90% of consumption in 2013. NAS’ approach to
hedging may indicate that they are more exposed to fuel price volatility than its competitors. The
predicted development in jet fuel price is important for an airline when estimating future costs. It is
thus natural to look at the prospects of the future development. As the price of jet fuel is highly
correlated to the price of crude oil, this price can be used as a substitute for the jet fuel price. Figure 9
shows the forecasted price of crude oil 2013-2025.
55 Economist (2013) 56 Norwegian (2012)
21
It is seen that the price of
crude oil is estimated to
have a marginally
decreasing growth rate from
2012 to 2013 and then
increase in 2014 before the
price diminishes for the rest
of the period. It is though important to
remember the price is affected by external factors and unforeseen happenings may disturb the forecast.
3.2.2..2 Growth in GDP
As previously illustrated, the development in the airline industry is closely correlated to the
development in the global economy. Thus, the development in the gross domestic product (GDP) can
be used as an indicator of economic growth. Figure 1 illustrates that an increasing growth in GDP
implies an increasing growth in revenues for an airline. The forecasted growth in GDP will thus affect
the projected future earning for NAS. The average forecasted growth in GDP is estimated to be 1,6 %
in the Eurozone the next two years while it is estimated to be 2,4% in Norway and the US.57 In a 20
year perspective the world GDP growth is forecasted to grow on average 3,1% per year. 58 On another
note, Airbus predicts the average growth in air travel to be 4,7% for the next 20-year. 59
3.2.2 Technological
An airlines success is dependent on high tech aircrafts that maximize comfort for the customers while
minimizing costs for the airline. The recent years the focus on building aircrafts that is fuel and cost
efficient had increased. NAS has stated that they expect the new aircraft fleet to have 30% less fuel
consumption than the current which underlines the importance of innovation. In addition the aircrafts
are more environmental friendly as measures have been taken to reduce the CO2-emmisions. This has
given NAS the opportunity to pride itself with the slogan “one of the youngest and greenest fleet in
Europe”, a slogan that might be brand-enhancing. These factors show that the innovation in aircraft
technology is an important factor for the future cost level of an airline.
However, the airlines are just as dependent on reliable and functioning airlines. After all, an aircraft
that does not serve its purpose has the opposite of a cost reducing effect. After the delivery of the first
Boeing 787 Dreamliner in 2013, several technical problems has occurred. These problems has caused
a number of delays and cancellations of flights. This has not only led to unsatisfied customers, but a
media frenzy with allegations of NAS being unfit to fly long-haul routes and stories of horrible
customer service. Even though the technical issues is out of NAS’ control, this is the aircraft
57Word Bank (2013b) 58 Airbus (2013) 59 Airbus (2013)
90
95
100
105
110
Figure 9: Forecasted price of crude oil 2013-2025
Source: Own creation based on numbers from World Bank, 2013
22
manufacturer Boeings responsibility, NAS’ reputation is being damaged. In addition to this, extra
costs incurs as NAS has to wet-lease replacing aircrafts and reimburse customers. NAS has estimated
this cost to be NOK 100 million just in 2013.60 This issue is a critical concern for NAS as the company
is dependent on a reputation as a reliable airline to increase its competitive power. This is especially
important when expanding into new markets.
3.3 Analysis of NAS’ competitive environment
To understand the competition and profitability in an industry it is necessary to analyze the industry’s
underlying structure. This will be done using the recognized framework created by Michael E. Porter
known as “Porter’s five competitive forces that shape strategy”. The five forces are bargaining power
of suppliers, bargaining power of buyers, threat of new entrants, threat of substitutes and the rivalry
among existing firms. If the forces are intense, it is difficult to earn attractive returns on investments.
It is important to understand the forces and its underlying causes to understand what cause the
profitability and provide a framework for how to influence anticipated competition and profitability
over time.61
3.3.1 Bargaining power of suppliers
Powerful suppliers can squeeze profitability out of an industry that is unable to pass on the cost
increase to its customers. A supplier is powerful if it is more concentrated than the industry it sells to,
does not rely heavily on the industry it sells to for its revenues, the companies face switching costs by
changing supplier and there is no substitute for what the supplier provides.62
There are four suppliers which are significant for NAS: Airports, employees, technical maintenance
providers and jet fuel suppliers.
Airports
The airports are essential for the conduct of an airline. They supply the gates that are necessary for
NAS to operate. In many of the cities NAS serve in Scandinavia there is only one airport. This means
NAS have no options to choose from is they want to continue to serve the particular city. In other
cities, there are alternative airports, but they are often much smaller which makes it difficult to
continue operations at the same level. This indicates that the airports possess some bargaining power.
However, the airports are as dependent on the airlines as the airlines are dependent on them. So if
NAS’ main airport, Oslo Airport, decide to raise its fees, NAS could decide to move its operations to
the somewhat close by airports Torp or Rygge, but this would be unfortunate for both parts.
60 NTB (2013b) 61 Porter,M.E (2008)p. 80 62 Porter,M.E (2008) p. 83
23
Even though there is a mutual dependency between the airports and the airlines, the competition
between airlines has increased the past years and as a result the airlines capacity has increased. As the
number of players with high capacity has gotten bigger it makes the dependency of each airline
smaller and this increases the airport’s bargaining power.
Aircraft manufacturers
The number of aircraft producers is not inundating. There are two aircraft manufacturer that are
substantially larger than the others, Airbus and Boeing. This put them in a duopolistic situation which
gives them high bargaining power and it is hard for the airline to negotiate on price.
NAS has previously had a fleet consisting of only Boeing aircrafts, but recently ordered 100 Airbus
A320neo. When the supplier side is so scarce and NAS only has two suppliers of aircrafts, it makes
them dependent on these manufacturers. On the other hand, the manufacturers are dependent on the
airlines as customers but with NAS being relatively small compared to other global airlines, this is not
likely to make a huge impact on the bargaining power. However, the recent large order NAS placed
might increase its bargaining power to some extent.
The cost of changing supplier is high and often long-term contracts are agreed upon. Also specific
training might be required for an aircraft and changing supplier will induce costs further. Purchasing
of aircrafts also require high capital investments and have a long delivery time. Since NAS previously
were bound to only one supplier Boeing, but now has opted for two, it might reduce the bargaining
power of the aircraft manufacturers to some extent. The two manufacturers see that NAS is willing to
change supplier if they are not satisfied and since NAS’ crew already is trained for both aircraft types
this reduces NAS’ changing costs. However, the lack of suppliers and NAS’ company size still gives
the aircraft manufacturers relatively high bargaining power.
Employees
The personnel are important for NAS because they are the public face of the company and their job is
important for NAS’ market value and customer retention. NAS currently has 3036 (2012) employees,
including all different types of personnel. These are looked upon as suppliers because they supply
NAS with the necessary workforce to continue their services. Parts of NAS’s employees are organized
in a labor union which has led to negotiations where it has been threatened with strike several times.
Strikes have been avoided so far, but as NAS has employed more foreign personnel the threat of strike
is again on the horizon. The Norwegian labor organization Parat, which is a part of NAS’ labor union,
states that NAS does not comply with the previously entered agreement concerning the use of foreign
workforce. Parat accuse NAS of ‘social dumping’ based on accusations that NAS is bending the rules
and use foreign personnel on domestic routes while not paying them at the Norwegian scale of tariff.
NAS says in response that they have no intentions of letting the labor unions control its operations.
24
They also state that all employees have competitive salary compared to their home country.63 This is
not the first time these issues have caused a threat of strike for NAS. In 2013 similar negotiations
caused NAS employees to be on the verge of strike, but the parts came to an agreement in the final
hours of the negotiations.64
The result of a strike is significant economic loss, stop in traffic, public attention and pressure on NAS
to give in to the union’s demands. This shows that airline employees have strong bargaining power
and that they are not reluctant of using it to improve their rights.
Fuel suppliers
The airline industry is fuel-intensive and the price of oil is determined by supply and demand. As
previously mentioned the price of oil and jet fuel is highly correlated. Hence, the airlines have little
power to influence the jet fuel prices. This indicates that the jet fuel suppliers have a strong bargaining
power. The only way NAS can reduce its fuel cost is by hedging and as previously mentioned NAS
does this to some extent, but at a lower level than its competitors. Nevertheless, the jet fuel suppliers
still have high bargaining power as fuel is a necessity for an airline and the price of fuel is determined
by external factors.
3.3.2 Bargaining power of buyers
The buyers are NAS’ customers. They are the opposite of the suppliers and powerful customers can
negotiate lower airfares, higher quality and better service by playing the different airlines against each
other. Customers are considered powerful if they are price sensitive and use their power primarily to
pressure prices, if there are few buyers, the industry’s products are standardized or undifferentiated
and the switching costs are low.65
In the airline industry the customers are divided into two groups, business travelers and leisure
travelers. The leisure traveler can be described as anyone whose travel is not related to any business or
work. This is a broad description and includes several individuals with different preferences.
However, to narrow it down, a leisure traveler is considered a person who is price-sensitive, flexible
on time and date and whose switching costs are low. 76% of all air travels are made by leisure
travelers.66
The technological development has made it easy to compare prices from different airlines through
search engines and the increasing number of competitors has made the selection range wider. This
increases the customer’s negotiation strength and intensifies the competition between the airlines. This
development can also indicate that the leisure travelers are prone to choose LCCs over network
63Mikalsen, K.E (2013b) 64 NTB (2012) 65 Porter, M.E (2008) HBR p.83 66 Airbus (2013
25
carriers regardless of airline brand, due to the prices generally being lower. This shows that as long as
the products are standardized, price is the most important variable for the leisure traveler.
Generally speaking each leisure traveler has little bargaining power, but as the group has a significant
sixe, combined they possess power to some extent because of their low switching costs.
The business traveler can be defined as a person who travels on behalf of a company or in work related
matters and this group represents 24% of all travelers.67 The typical business traveler is dependent on
frequent time slots, flexibility and a no-hassle travel. The business travelers are often frequent flyers
and might take advantage of volume discounts or corporate agreements. This can provide the airline
with steady earnings from business travelers and also raise the business travelers switching costs. Due
to this the business traveler’s bargaining power is considered stronger than the leisure travelers.
NAS main customers are the leisure travelers but their focus on business travelers are increasing.
Examples of measures undertaken to attract business travelers are fast-track security checks and Wi-Fi
on board on their aircrafts. However NAS don’t offer lounges or alliance frequent flyer points which
might make the business travelers prefer an airline which does. Findings in the market rapport “Nordic
Business and Travel Forecast and Challenges 2014” supports these arguments as 52% of Nordic
business travelers state that they would never use a low-cost carrier on long-haul flights. 68
All in all the bargaining power of the customers are considered to be moderate as the substantial
group of leisure travelers have low switching costs and the business travelers provide the airline with
steady income.
3.3.3 The threat of new entrants
New entrants to the airline industry would bring new capacity and have a desire to gain market shares
that will put pressure on prices, costs and the rate of investments necessary to compete. 69 The airline
industry is a capital and labor intensive industry and has entry barriers that make it less attractive and
difficult to enter. The main barriers of entry in the airline industry are capital investments, airport
capacity, governmental interaction and airline alliances.
Capital investments
To start an airline capital investments are needed. The most significant investment is aircrafts and the
stated price range of NAS’ latest aircraft order is from USD $90,5 million for the 737-800 to USD
67 Airbus(2013) 68 Kaspersen, L (2013) 69 Porter, M.E p.80
26
$211,8 million for the Dreamliner70. An airline needs several aircrafts in its fleet to be competitive.
Also other costs as personnel, maintenance, fuel etc. will incur.
It is also possible to buy used aircrafts or lease but older aircrafts are less cost efficient. Also, when
leasing aircrafts the airline does not have the possibility to sell the aircraft if profits are down. If a
contract is entered it might be difficult to end the contract prematurely. However, over a third of the
world’s airlines fleets are now being leased71, and this indicates that there are benefits with leasing that
exceed the disadvantages. Nevertheless, leasing aircrafts still requires a substantial capital investment
as renting a Boeing 737 costs around NOK 2 million a month.72
Getting financing from investors is a possibility but as the airline industry is volatile and the chance of
loss is relatively high, investors might be hesitant73.
Airport capacity
To be able to operate its business, the airline must be allocated take-off and landing slots. The
increased growth in air travel has increased the pressure on the available capacity at airports. To
regulate the slots at an airport a coordinator gives permission to an airline to use the full range of
airport infrastructure necessary to operate an airline on a specific time and date. The slot allocation is
regulated by rules governed by IATA. The most basic principle of slot allocation is that if an airline
has operated at least 80% of a slot during the summer/winter period they are entitled to the same slot
the following year. This is called the “grandfather rights” and secure established airlines to
continuously operate their profitable routes.74 How easy it is to gain slots is dependent on the airport
and the spare capacity, as well as how the established airlines utilize their slots. As the capacity of the
already established airlines is increasing, it puts pressure on the airports in Europe. This gives an
obvious advantage for established airlines as it is difficult for new entrants to gain slots and challenge
the established airlines. At some of the major airports, the large airlines might have their own
terminals at the airports where they control the gates.75 This makes it even harder for new entrants to
gain slots.
Governmental intervention
In Europe several airlines are fully or partially owned by the government. These airlines are called
flag-carriers. In the Nordic region SAS and Finnair can be characterized as flag carriers as the
governments are the major shareholders. The issue with government-owned airlines is the possibility
70 Boeing (2013) 71 Economist (2012) 72 Norwegian (2012). 73 Mouawad, J. (2012) 74 European commission (n/a) 75 Mouawad, J. (2012)
27
of financial support from the government. In 2009 and 2010 SAS received financial support to stop
them from going bankrupt. This was highly criticized as it can distort competition and lower the
competition criteria for other airlines. These benefits are hard for new entrants to compete with
although flag carriers are not the norm anymore. There are plenty of examples of airlines which have
made it without governmental support, NAS being one of them.
Also, to run a commercial airline an approval from the Civil Aviation Authority is necessary. Getting
this approval is comprehensive process which demands substantial resources from the applicant.76 This
process can also impact the barrier of entry.
Airline alliance
A frequent flyer program gives the customer a certain number of bonus points to use at future travels
or at merchandise. The airlines which offer these programs are often members of an airline alliance
which allows the customer to earn and use bonus points at any of the member airlines or at different
partners of the alliance. Traveling with an alliance-airline (network carriers) also gives the passengers
other benefits like more flexibility when flights are delayed or cancelled because of so called code
sharing which is when two airlines share the same flight77. The airlines enjoy the benefits of mutual
marketing and traffic feed, and thereby more passengers.
The airline alliances and their frequent flyer programs create a customer loyalty where members of
the programs are more likely to choose airlines where they earn bonus points rather than one where it
doesn’t. To become a member of an alliance the airline needs to fulfill a number of criteria which
include complying with the highest industry standards of customer service, security and technical
infrastructure78. As of October, 2013 no LCCs are members of any of the global airline alliances79.
As seen the high capital requirements, the “grandfather rights” and the benefits of the flag- and
network-carriers make the entry barriers high in the industry. Even though there are examples of new
airlines which have been successful in the past decade, the threat of new entrants are considered to be
relatively low.
3.3.4 The threat of substitutes
A substitute is defined as something that performs the same way or has a similar function as the
industry’s products, and when the threat of substitutes is high the profitability suffers.80 The threat is
considered high if the substitute offers an attractive price-performance trade-off to the industry’s
product and the buyers switching cost is low. In the airline industry the most intuitive substitutes are
76 Luftfartstilsynet (2012) 77 Princeton (n/a) 78 Statalliance (2013) 79 CAPA(2012) 80 Porter, M.E (2008) p.84
28
boats, trains and busses/cars as they fulfill the need for transportation. However, over long distances
these methods of transportation are time consuming. In Scandinavia distances can be long81, and with
Norway being one of the most sparsely populated countries in Europe82, this indicates a need for air
travel. In Denmark on the other hand, high speed trains make the travel time between some
destinations almost as quick as air travel because of the travel- and waiting time to and at the airport.
In addition, a new plan, “Timemodellen”, for transportation has been approved in Denmark. This is a
plan to shorten the travel time between the major cities in Denmark by one hour.83 The highways have
also been developed in the past decade but the travel time is still considered to be significantly longer
than flying.
One matter that has gotten increased attention the recent years is the green movement. It is a common
belief that air travel cause air pollution. Whether this belief is merited or not has been discussed with
several different viewpoints, but this might cause some customers to prefer other means of
transportation when traveling to reduce the emission and be more environmental friendly. This is
however likely to only regard a small percentage of the passengers.
Another substitute that has become more relevant in the recent years is video conferencing. This
substitute is mostly relevant for the business travelers as this provides them with the opportunity to
hold meetings and personally interact with business companions without travelling. This method of
communication holds several benefits. In addition to being environment friendly, a business could
save a substantial amount of money by eliminating travel expenses, and at the same time have a faster
decision making process as the video conference provides a faster and more flexible way of
communication. Despite these advantages, it is likely that many business travelers prefer to meet with
their clients face-to-face, especially if there are large and important decisions to be made.
The threat of substitutes is linked to time and money. Leisure travelers have the option of choosing a
different type of transportation if the cost of flying is too high, but for business travelers which are
time-conscious air travel might be the only option. Though, this is dependent on the travel distance.
On the other hand, the technological developments have made it possible for business travelers to
conduct their business without travelling.
The threat of substitutes is depended on the travel distance and the group of customers. NAS has a
benefit because the travel distances in the home market are long which indicates that air travel is the
preferred method of transportation. This combined with the fact that the average price level of flying is
relatively low in the home market, and air travel being the quicker option gives the factors that
81 SAS(2004) 82 OECD (n/a) 83 Bane Danmark (2013)
29
encourage the use of substitutes less significance. The threat of substitutes is therefore considered to
be low/moderate.
3.3.5 Rivalry among existing firms
A high level of rivalry limits the profitability of an industry. The level which rivalry drives down and
industry’s profits depends on which intensity they compete and the basis on which they compete. The
intensity is considered high if there are numerous competitors, especially in equal size and power
range, the industry growth is slow or the exit barriers are high. 84
The Nordic market consists of few, but dominant airlines. The completive environment is fierce as
several airlines offer the same routes which create direct competition and rivalry.
In the home market SAS is NAS’ biggest competitor. Combined they account for 80% of the
Norwegian market shares, 61% of the shares in the Danish market, 51% in the Swedish and 22% in the
Finnish market.85 Previously, SAS as a network carrier has focused mainly on business travelers but
with its most recent strategic plan 4ExellenceNXG they state that they will focus more on the leisure
travelers to reach a larger part of the market.86 This increases the rivalry with NAS as they now target
the same segments. Internationally, Ryanair and EasyJet is the largest competitors.87 Ryanair and
EasyJet are direct competitors with NAS as they target the same segment of customers, the price-
sensitive. In addition, the launch of long-haul routes between London and the US will put NAS in
fierce competition with the established network carriers British Airways, Virgin Atlantic and
American Airlines amongst some.
In the airline industry the switching costs for the passengers are low, as air travel is considered to be a
standardized service. The only significant factor that differentiates between the airlines is price,
making customers somewhat indifferent to which airline they choose. This makes the competition
fierce and prone to price wars which can become unprofitable for the airlines.
The airline industry is characterized by fierce competition and pressure on prices. There is intense
competition between both the LCCs and the network companies and the service and products are
similar which makes it hard for the customer to differentiate between airlines. The rivalry between the
competitors are strong, especially in NAS home market where NAS and SAS are the two dominating
players.
3.3.6 Summary of Porters 5 forces
The intensity of the different forces is summarized in the table below.
84 Porter, M.E (2008) p. 85. 85 Osloairports (2013) 86SAS (2012) 87 SAS (2012)
30
Table 1: Threat level
As seen in the table there is high barriers for entry and a low threat of substitute services for air travel,
and the power of the customers are moderate. However, the threat of substitutes has the potential to
grow as the infrastructure is improved and the benefits of alternative ways of travel are getting closer
to the advantage of air travel. This combined with the high bargaining power of the suppliers and the
high level of rivalry among the existing firms makes the forces in the airline industry intense. The
power of the forces combined with the volatile nature of the airline industry makes the industry less
attractive.
3.4 Internal analysis
3.5 Key industry measures analysis
The key industry measures analysis will analyze the main drivers for profitability in the airline
industry. In addition to this, NAS’ operational expenses will be separated and examined. The measures
will be compared to the peer-group and the historical development will be illustrated graphically. This
analysis is carried out to get a general understanding of the industry and NAS profitability compared
to the peer-group.
Load factor, yield and unit costs are three ratios which is suitable to examine NAS’s internal cost and
value drivers and compare them to the peer-group. These measurements will be described below.
3.5.1 Load factor
The load factor shows
how much of the total
capacity that is used to
generate earnings. A
100% load factor
means that all seats on
all flights are filled.
The load factor is
calculated by dividing Revenue Passenger Kilometer (RPK) by Available Seat Kilometer (ASK). The
Threat level Low Moderate High
Barganing power of suppliers X
Barganing power of buyers X
Threath from new entrants X
Threat from substitutes X X
Rivalry among existing firms X
50
60
70
80
-10
0
10
20
30
1974 1980 1986 1992 1998 2004 2010
% A
SK
Ch
ange
ove
r ye
ar %
Figure 10: Global Airline Yields and Load Factor 1974-2010
Yield Load Factor
Source: Own creation based on IATA economic briefing December 2008
31
load factor is a poor indicator of profit as the price of the seats is important for the earnings88. If all
remaining available seats are sold at a reduced price this will affect the earnings negatively, compared
to if all tickets were sold to regular fees.89 To avoid this distortion the load factor must be seen in
context with the yield of each passenger. As seen in Figure 10 there is a somewhat negative correlation
between yield and load factor. The higher the load factor gets the lower the yield. The gap between
load factor and yield is larger in the recent years than in the 70’s and 80’s. This could be a result of the
increasing competition between airlines which has led to airlines dumping prices on tickets which has
led to a higher load factor but decreasing revenues. This is why it is not possible to only look at the
load factor when reviewing airlines profitability.
Figure 11 illustrate NAS’ load factor
compared to the peer-group. As seen NAS’
load factor is the lowest between the low-
cost carriers during the whole period. NAS
had a load factor of 79% in 2012 while
EasyJet had a load factor of 88,7%. NAS’s
load factor is on average 4,24 percentage
points below the LCC peer-group average
in the period 2008-2012. A possible
explanation for this is the high number of
routes NAS operates which can make it hard to fill up the aircrafts to the less attractive destinations.
There is a clear relationship between capacity and load factor, and if the growth in capacity exceeds
the growth in passengers, the result is a declining load factor. Not surprisingly NAS has the highest
load factor in relation to the network carriers. This is due to the network carriers’ focus on time-
sensitive customers rather than price-sensitive customers which implies a lower load factor. This
indicates that low-cost carriers are more likely to dump ticket prices to boost their load factor. An
interesting point is that in their latest annual report SAS states that 1% increase in the load factor
would increase earnings by SEK250 million. This shows that improving the load factor could make a
significant difference on revenues, but as earlier pointed out it must be looked upon in relation to the
yield.
3.5.2 Yield
The increased competition in the airline industry has put a pressure on the different carriers. To
capture market shares, airlines reduce flight fares only to be matched by its competitors. As a result the
ticket prices needs to be lowered even more to fill up the seats. The result is that a large proportion of
88 CAPA (2013d) 89 American airlines (n/a)
70
75
80
85
90
2008 2009 2010 2011 2012
Figure 11: Load factor
SAS Ryanair NAS
Easyjet Finnair Average
Source: Own creation based on Annual reports 2008-2012
32
the passengers are flying on discounted fares. A result of this trend may be a decline in the real value
of airline yields.90
Yield is a measure of the average revenue produced per passenger kilometer. 91 The yield is the most
common measure of revenue and is calculated by dividing the revenues by the Revenue Passenger
Kilometer (RPK)92 which is the number of occupied seats multiplied with the distance flown93. As the
capacity of an airplane is not flexible the airline wants to fill up the seats to improve the yield. To do
this the airlines often has to sell tickets to a reduced price which will increase the load factor but not
necessarily return a high yield level. An approach that is used to maintain the highest possible yield is
yield management, where the airline sells high priced tickets to time-sensitive customers who are
willing to pay a higher fare to have a flexible ticket. The cheap tickets are sold to price-sensitive
customers where flights are non-changeable and at unattractive slots. This way the airlines find a
tradeoff between a high load factor and high yield.94 Hence, the yield measurement is a method to see
if an airline is selling discounted tickets to improve the load factor. Factors that affect the yield other
than ticket prices is distance flown, cost efficiency and economic climate.
When analyzing the yield level of the
peer-group it is clear that SAS has the
highest level with NOK 1,09 in 2012
compared to Ryanair which had 0,48.
NAS yield level has decreased over the
period from 0,645 in 2008 to 0,545 in
2012. This level is marginally above the
yield level of EasyJet. It is not surprising
that Ryanair’s yield is at a lower level
than the rest of the peer-group as the
negative correlation between a high load factor and yield is shown in Figure 10. It is however
interesting to note that EasyJet has the highest load factor in the peer-group but a yield level close to
NAS and Finnair.
90 Doganis,R (2001) p. 9 91 Doganis,R (2001) p. 9 92 American airlines (n/a) 93 Norwegian (2012) 94 Voneche, F (2005)
0,2
0,4
0,6
0,8
1
1,2
2008 2009 2010 2011 2012
Figure 12: Yield level
SAS
Ryanair
NAS
Average
EasyJet
Finnair
Source: Own creation based on Annual reports 2008-2013
33
To analyze the combined effects of load
factor and yield, the measurement Ticket
revenue per unit produced (RASK) is
used. This ratio expresses the revenue
generated per ASK and is found by
multiplying load factor with yield. The
development in RASK is seen in Figure
13. As seen the development in RASK is
similar to the development in yield.
A part of the LCC’s strategy is low ticket prices and they are therefore a natural choice for price-
sensitive customers while network carriers tend to target time-sensitive customers and is thus able to
generate a higher ticket revenue. Hence, the fact that NAS’ yield is on the same level as Finnair shows
that NAS as a LCC also manage to target the more rewarding customers. The black line in Figure 12
represents the average of the peer group show a trend of declined yield between 2008 and 2010. A
natural explanation for this is the financial crisis that outburst in 2008 and this further underlines the
point made that yield in the airline industry correlates with the development in the global economy.
Another important factor that is likely to influence NAS’ yield level in the future is the expanded long-
haul operations. Typically an airline is not able to raise the ticket prices so much that it compensates
for the increased stage length. The result is a lower RASK level.
3.5.3 Unit cost
The unit cost is used to measure the cost
level of an airline. It is the Cost per
Available Seat Kilometer (CASK) and
is presented as operating expenses over
produced seat kilometers.95 The unit
cost is a good measurement to compare
the cost level of different airlines. The
unit costs for the peer group is
illustrated in Figure 14. In the figure it is
apparent that Ryanair has the lowest unit cost amongst the peer group. Ryanair’s unit cost in 2012 was
NOK 0,26 which is 0,189 lower than NAS’ unit cost of 0,45. The airline with the highest unit cost is
SAS with 0,89. These numbers indicate that the network carriers tend to have a higher unit cost than
the LCCs, something that is in accordance with the business models.
95 Norwegian (2012)
0,2
0,4
0,6
0,8
1
2008 2009 2010 2011 2012
Figure: 14 Unit Cost
NAS
SAS
Ryanair
EasyJet
Finnair
0,20
0,40
0,60
0,80
1,00
2008 2009 2010 2011 2012
Figure 13: RASK
NAS
SAS
Ryanair
Easyjet
Finnair
Source: Own creation based on Annual reports 2008-2012
Source: Own creation based on annual reports 2008-2012
34
NAS states in its annual report (2012) that its fleet renewal and an investment in advanced IT
infrastructure will reduce its unit costs in the future. Up until now, NAS’ IT systems has been a driver
for cost saving. When NAS first started its operations, it was the first airline to offer self-service
check-in, something that kept both labor costs and boarding time down. Additionally, NAS has taken
into consideration that its customers are price-sensitive and are more likely to book flights if there is
cheap tickets available. To utilize this NAS created a “low-price calendar”, where the customers can
see when there is cheap flights and plan their travels according to this. This way they keep the
transaction and provision costs from booking agencies down in addition to saved labor, and have the
possibility to generate new customers.96 In addition to IT, large scale operations and high asset
utilization are powerful cost reducing measurements. The investment in a larger fleet will help NAS to
exploit the economies of scale and increase the bargaining power with suppliers. NAS’ cost focus has
showed results as its unit cost has decreased from NOK 0,56 in 2008 to NOK 0,45 in 2012. When the
international expansion proceeds and the subsidiary in the EU is fully operating, NAS will have the
possibility to compete with the other established airlines in the same market. As labor costs are
reduced as a result of internationally hired labor, NAS states in its annual report (2012) that they
anticipate their unit cost to surpass its relevant European competitors. 97 To continue the trend NAS
must continuously exercise a tight cost control policy throughout the company.
3.5.4 Operating costs
As the airline industry is a capital
intensive industry, the management is
always trying to find a way to minimize
the costs. However some costs drivers are
company specific and if managed right
they can increase NAS’s competitive
advantage. To minimize the costs NAS
take advantage of economies of scale,
bargaining power and discounts from
external parties. All these cost reducing
actions are easier to exploit as the airline increases in size. NAS also tries to increase the capacity per
aircraft and have high load factors to reduce the fixed and variable unit costs. 98
96 Andersen, E. (2010) 97 Norwegian (2012) 98 Norwegian (2012)
0%
20%
40%
60%
80%
Fuel Labor Other
Figure 15: Operating expenses in % divided into fuel, labor and other costs for peer
group 2012
NAS Ryanair SAS EasyJet Finnair
Source: Own creation based on annual reports 2012
35
To explain the operating expenses the costs are divided into fuel cost, labor cost and other costs as the
first two are the largest single expenses for an airline. Figure 15 shows the different costs groups in
percent of total operating expenses.
3.5.5 Labor costs
Labor cost is the largest single cost that is
not affected by external factors and it is
thus a cost that differentiates between
different airline companies’ cost level.
NAS focuses on effective staff utilization
and put effort in route and crew planning
to increase the optimization. In Figure 16
the labor expenses of NAS and the peer-
group is illustrated. As seen in the figure
NAS’s labor costs were 18% of total operating expenses in 2012 which is one percent lower than the
peer-group average. NAS’s labor costs are still higher than its LCC competitors Ryanair and EasyJet
at respectively 11% and 13%, and the high average is dragged up by SAS who has an average labor
cost of 35%.
Revenues and labor costs often correlates.
An increase in revenue is either (or
simultaneously) caused by an increase in
ticket prices or higher demand of air
travels. It is fair to assume that an increase
in revenue is caused by higher demand
more often than an increase in ticket price
due to the intense competition in the airline
industry. Higher demand leads to higher
demand for personnel which again leads to higher labor costs. Figure 17 shows the labor costs in
percentage of the operating revenues. When comparing Figure 16 and 17 there is a strong similarity of
the graphs. SAS’s personnel costs in percentage of operating revenue is still the highest among the
group with an average of 33,5%. NAS’ personnel costs is on average 17,3%, 1,6 percent point below
the average of the peer-group. However, the LCC competitors Ryanair and EasyJet still has a
significantly lower personnel cost than NAS with Ryanair having an average cost of 10,9%.
5%
15%
25%
35%
2008 2009 2010 2011 2012
Figure: 17 Labor cost in % of Operating Revenue Peer-group 2008-2012
NAS
SAS
Ryanair
EasyJet
Finnair
Peer-groupAverage
10%
20%
30%
40%
2008 2009 2010 2011 2012
Figure: 16 Labor Costs in % of operating expenses Peer-group 2008-2012
NAS
SAS
Ryanair
EasyJet
Finnair
Average
Source: Own creation based on annual reports 2008-2012
Source: Own creation based on annual reports 2008-2012
36
In Figure 18 NAS’ revenue growth compared with
labor cost growth is looked at. As seen there is a
positive trend as the change in revenues from
2009-2010 and onward is increasing whilst the
labor costs are decreasing. This shows that NAS is
able to increase its revenues at a higher pace than
the labor costs. However NAS’ labor costs are still
4% higher than its LCC competitors.
On the other hand, productivity of the employee is also essential. How much output the employee
creates is important for both productivity and cost level. To measure the productivity a relevant
measurement is number of passengers per employee. As there is evidence that there exists a positive
correlation between passengers per employee and profitability99 this is an important measure. Figure
19 shows available seat kilometers per employee while Figure 20 shows number of passengers per
employee.
The LCC’s scores the highest in both number of ASKs per employee and passengers per employee. As
seen in Figure 19 and 20 Ryanair excel in both measures. Ryanair’s employees fly on average 12,6
million ASK’s per year and has 9274 passengers per employee compared to a SAS employee who fly
2,14 ASKs with 1534 passengers per employee. NAS scores lowest amongst the LCCs but still has a
significantly higher productivity level than the network carriers. An average NAS employee fly 8,24
million ASKs per year - 52,9% less than LCC competitor Ryanair. NAS also has 51,8% less
passengers per employee than Ryanair.
99 Norwegian (2012)
0,10
0,15
0,20
0,25
2008-2009 2009-2010 2010-2011 2011-2012
Figure 18: Growth in Labor and Operating Revenue % 2008-2012
Change Labor % Change Revenue %
0
2
4
6
8
10
12
14
2008 2009 2010 2011 2012
Figure 19: ASKs per Employee (million) 2008-2012
NAS
SAS
Ryanair
EasyJet
Finnair
0
2000
4000
6000
8000
10000
12000
NAS SAS Ryanair EasyJet Finnair
Figure 20: Passengers per employee 2008-2012
2008 2009 2010 2011 2012
Source: Own creation based on annual report 2008-2012
Source: Own creation based on annual reports 2008-2012
37
The past year there has been a negative trend in both ASKs per employee and passengers per
employee for NAS. Number of ASKs has seen a negative growth of -1,6% since 2011 while number
of passengers has had a negative growth of -6,4%. This might just be a one-off happening but if this
trend continues it is necessary to look into the cause as cost cutting with regard to labor costs is one of
the company’s main focus. It is evident that even though NAS outdistance the network carriers, it still
need to focus on increasing it productivity should it be able to fully compete with the international
low-cost carriers.
3.5.6 Fuel costs
Jet fuel is the biggest external cost driver for
an airline. The only way NAS can minimize
these costs is by effective risk management
and effective fleet utilization. As previously
mentioned NAS put in an order of 222 new
aircrafts both short- and long-haul in 2012.
This renewal of the fleet is in order with its
objective to have the most cost-efficient and
environment progressive fleet available100. This large order was made so NAS can replace short-haul
aircrafts after 7-9 years of service and hence have a continuous and long-term supply of both
replacement and net growth aircrafts101. The newer the fleet is, the lower the fuel costs are. NAS’ fleet
is on average 4,6 years old which indicates lower fuel costs than airlines with an older fleet. Figure 21
shows the average fleet age for the peer group in 2012. As seen Ryanair has the youngest fleet while
SAS hold the oldest. To compare the oldest and youngest fleet with NAS’ fleet fuel costs per ASK and
fuel cost per RPK is examined.
Table 2: Fuel cost per ASK and RPK
NAS pays NOK 0,14 in fuel per ASK while Ryanair pays 0,11. Network carrier SAS pays almost 50%
more at NOK 0,22. Further, while Ryanair pays only NOK 0,14 in fuel pr RPK, NAS pays 0,18 and
SAS as much as NOK 0,27. These findings supports what is previously stated, that a young fleet is
much more cost efficient than older fleets as they utilize the fuel better.
100 Norwegian (2012) 101Norwegian (2012)
NAS SAS Ryanair
Fleet age 4,6 yr 12,6 yr 3,9 yr
Fuel cost per ASK 0,14 0,22 0,11
Fuel cost per RPK 0,18 0,27 0,14
4,6
12,6
3,9 49,8
0
10
20
Figure 21: Average Fleet age for Peer-group 2012
NAS SAS Ryanair* EasyJet* Finnair
Source: Own creation based on annual reports 2008-2012
38
How much fuel each airline consume per
production unit, ASK, is illustrated in
Figure 22. NAS has the highest average cost
of fuel per ASK amongst the LCC’s with an
average of 0,14 compared to Ryanair’s 0,10
and EasyJet’s 0,13. It is evident that NAS
needs to even more cost efficient when it
comes to fuel. As the average fleet age and
average distance flown are somewhat similar, this is not an explanation to why NAS’ levels are higher
than the other LCC’s. A possible explanation for Ryanair’s low cost level could be the accusations
against Ryanair’s fuel consumption. The accusations were raised after two unfortunate happenings
where the crew on Ryanair flights was forced to issue mayday warnings due to low fuel reserves. The
incidents made people question whether Ryanair put pressure on its crew to fly with a minimum level
of extra fuel to reduce the fuel cost. These allegations were denied, but the Civil Aviation Accident
and Incident Investigation Commission (CIAIAC) concluded that Ryanair “comply with the minimum
legal requirements, but tend to minimize the amount of fuel…and leave none for contingencies” and
that its fuel policy is “based specifically on minimizing the fuel load at the start of the flight…As a
result, Ryanair aircraft generally land with the minimum required fuel”. Further the CIAIAC stated
that “this policy…gives Ryanair a competitive advantage over other airlines that tend to fly with
larger amounts of reserve fuel and therefore use more fuel. Market competition is forcing other
airlines to reduce their costs by adopting fuel policies similar to Ryanair’s”. 102 These findings were
denied by Ryanair. Whether this is the case or not it is important that NAS don’t follow this policy to
meet the market competition. A policy like this can contribute to a weakening of the brand and any
unfortunate happening might ruin NAS’ reputation.
3.5.7 Other costs
The last post in the operating costs is “other costs”. Other costs consists of costs like aircraft leases,
sales and distribution expenses, airport charges, handling charges, technical maintenance expenses and
other aircraft expenses. Most of these costs are externally given and thereby not an area of
improvement. These will thus not be analyzed.
The key measures analysis has revealed that NAS’ costs are generally at a higher level than the low-
cost carriers in the peer-group. This can to some extent be explained by factors discussed in the
external analysis. With regards to the findings in the external analysis, it is important to focus on the
fact that in 2012, NAS has a unit cost and yield level marginally different from EasyJet’s. This shows
102Smith, O (2013)
0,05
0,10
0,15
0,20
0,25
2008 2009 2010 2011 2012
Figure 22: Fuel per ASK NAS
SAS
Ryanair
EasyJet
Finnair
Source: Own creation based on annual reports 2008-2012
39
that if operating on an equal playing field, NAS has the potential to drastically lower its cost level,
especially in relation to labor costs.
3.6 Internal level analysis
It is important to understand NAS’ competitive advantages and disadvantages and why they have
grained their success. This will be analyzed within the frameworks of Michael E. Porter’s Generic
Strategies which describes strategies to achieve and maintain competitive advantage. This framework
will position NAS in relation to cost leadership, differentiation and focus.
3.6.1 Cost leadership
The cost leadership strategy is a strategy where the company tries to achieve competitive advantage by
reducing costs to become the cost leader in the industry. As described in the key industry measures
analysis NAS’ cost level is higher than the international low-cost carrier’s.. Amongst to the netwrok
carriers in the peer-group, NAS is the definite cost leader and close to LCC competitor EasyJet.
Ryanair however is the definite cost leader in the peer-group. The fact that NAS is moving closer to
EasyJet in terms of unit cost and yield indicates that NAS has a potential to lower the costs
significantly when the new subsidiary in the EU is established. The altering of the organizational
structure gives NAS the opportunity to recruit locally at local conditions and thus reduce the labor
costs which will result in a lower unit cost. The recently purchased aircraft fleet which is more cost
efficient than the older fleet will also impact the unit costs. Still, NAS must continue its strict cost
control and strive for optimal utilization and cost efficiency if they shall be able to increase their
international competitiveness.
3.6.2 Differentiation
Differentiation strategy is when a company seek do stand out from their competitors. It has been
argued earlier that air travel is a standardized service which indicates that differentiation is difficult.
However, offering unique services in addition to the actual transportation is a way of differentiation in
the airline industry. The network carriers offer a different level of service, which is reflected in their
price level. This strategy differentiates the two airline groups from each other. A fact that differentiates
NAS from the LCC competitors is that their routes mainly depart from the main airport in the area
they serve. This is untypical for the LCC business model and might be experienced as an advantage
for the customers, depending on their final destination. NAS in general have a higher service level
than other LCCs and their slogan “only pay for what you need” gives the passengers the opportunity to
pay for additional services with no hidden fees for fundamental necessities. In addition, NAS is the
only airline in the peer-group which offers free Wi-Fi to all of its passengers in 80% of its air crafts.
This service awarded them the “Passengers Choice award” for best inflight connectivity and
communications in 2012. An award for “Best low-cost airline” in Europe in 2013 indicates that NAS
has succeeded with differentiating themselves from the other LCCs in a positive way.
40
3.6.3 Focus
This strategy aims for the company to concentrate at a particular niche in the market to either
differentiate themselves or become the cost leader. As previously mentioned there are two main niche
groups in the airline industry, the business travelers and the leisure travelers. Through their two
different service classes, low-fare and flex NAS serve both leisure and business travelers. However,
regarding their long-haul operations it can be argued that they focus more on the leisure group due to
the current destinations. Yet, in general NAS can be said to focus equally on both groups.
When analyzing the different generic strategies it seems like NAS is trying to find their position
amongst the number of competitors. In the home market where its biggest competitor is SAS, NAS is
the absolute cost leader and differentiate themselves from SAS with cheaper tickets and an “only pay
for what you need” strategy. In an international context, NAS is more difficult to position. They don’t
offer unique services that cannot easily be imitated, nor are they the cost leader. An explanation might
be that NAS is a young international airline, it is still expanding into new markets and has yet to fit all
the pieces in the puzzle. Nevertheless, the competition in these markets are fiercer and for NAS to
acquire a sustainable competitive advantage the company needs to follow a unique strategy. A
sustainable competitive is something that is rare and hard to imitate. Since the concept of the LCC
business model is “no frills”, it is hard for a LCC to differentiate itself without offering increased
service or unique attributes which will lead to a higher cost level. As for now, NAS’ biggest
opportunity to get a competitive advantage is to become the cost leader. When the new subsidiary is
established NAS compete on equal ground as the other LCCs, and time will tell if NAS possess the
abilities needed to become the cost leader amongst its international competitors.
3.7 SWOT analysis
The SWOT analysis sums up the strengts, weaknesses, opportunities and threats discovered in the
strategic analysis.
3.7.1 Strengths and weaknesses
NAS most prominent strength is its cost efficient fleet and effective cost structure. This is fundamental
for a successful airline. The cost structure has led to a decreasing unit cost, and high yield compared to
other low-cost carriers. This gives NAS the potential to become cost leader if operating on the right
premises, but the company still has the lowest load factor amongst the low-cost carriers which can be
affect the RASK. The company does not have any sustainable competitive advantages, and the
services they offer are easy to imitate. Though, it’s innovative and “out of the box” approach to doing
business still gives NAS a certain edge which attracts customers. NAS approach to hedging makes
them more exposed to fuel price volatility than its competitors, and their focus on long-haul operations
makes them vulnerable to a decrease in yield.
41
3.7.2 Opportunities and threats
NAS biggest opportunity is the potential to decrease its labor unit cost. This will give the company a
necessary competitive advantage for further growth. Higher fuel prices is a threat for NAS as they do
not hedge to the same extent as other airlines and a sudden and an unforeseen increase can be costly.
The same accounts for the strong labor unions which have high bargaining power. NAS must also sort
out the technical difficulties with the Dreamliner before it launches its routes from London, as trouble
when entering a new market might disrupt its reputation. This is because its brand name is not as
strong in the new markets as in Scandinavia and potential new customers is likely to choose another
airline if NAS shows to be unreliable. The most significant threat for NAS is the possibility that it will
not obtain an Irish flight license. This makes the company dependent on an extended temporary
permission from the Norwegian Ministry of Aviation and due to the governmental and public
opposition towards NAS’ “flagging out” it is not certain that this will be permitted.
Table 3: SWOT-analysis
Strenghts Weakness
Strong brand name No evident competitive advantage
Advanced IT infrastructure Easily imitated services
Decreasing unit cost Lowest load factor among LCC's
Effective cost structure - cost leader in home market Labor cost level
Cost efficient fleet Small scale fuel hedging
Innovative Chance of decreasing yield
Routes appeal to a broad market
Restructuring of the organizational structure
Potential to become cost leader
High current yield level
Opportunities Threats
Decreasing labor unit cost Higher labor unit cost in home market
Market shares in new markets Established competitors
Growth in passengers Increasing fuel prices
Forecasted decrease in oil price High speed trains in Scandinavia
High barganing power for labor unions
Videoconferencing
Norwegian labor legislation
Denied Irish flight license
Further technical issues with aircrafts
INTERNAL
EXTERNAL
42
CHAPTER 4 – Financial analysis
After analyzing the airline industry and NAS’ strategy and business environment, the focus will now
be directed to the financial aspects. When performing a valuation the stock price relies on the expected
future performance of the company. It is therefore natural to analyze the historical financial
performance of NAS in order to understand the underlying cost drivers and what drives the value of
the company. To do this is it necessary to reform the financial income statement and balance sheet. By
doing this the operational drivers of value will be visible. In the last part of this chapter items of
significance in the income statement will be discussed.
The basis of the financial analysis will be the annual reports from the past five years.
4.1 Quality of the financial statements
It is important to assess the validity of the financial statement as companies may have reasons for
altering numbers. Good accounting quality is characterized as a financial statement that provide an
objective picture of the company’s financial position and is free of manipulation103. NAS follow the
International Financial Reporting Standards (IFRS) and the group’s auditor is PricewaterhouseCoopers
AS. It is stated in the auditor’s report that “in our opinion, the financial statements of the parent
company are prepared in accordance with the law and regulations and presents fairly, in all material
respects, the financial position for Norwegian Air Shuttle ASA as at December 31, 2012 and its
financial performance and its cash flows for the year then ended in accordance with the Norwegian
Accounting Act and accounting standards and practices generally accepted in Norway”104. These
findings makes it safe to assume that NAS’ annual reports are in accordance with the prevailing rules
and legislations and give an objective picture of the group’s financial position.
4.2 Reformulation of the income statement and balance sheet
When reforming the income statement, the operational posts are separated from the financial posts.
This way it is easier to see the true value drivers and the separation is also beneficial when the
financial ratios are to be calculated. The definition of what is operational and financial posts is not
always obvious because the definition is not clear cut. Also the classification of items in the income
statement and balance sheet does not clearly distinguish between the two items.105 It is therefore
important to do an arbitrary decision on what should be included in the operational items. The
reformed income statement provides us with NOPAT, net operating profit after taxes and the reformed
balance sheet shows the invested capital. The full reformulated income statement and balance sheet
can be seen in appendix 1-3.
103 Petersen og Plenborg (2012) p. 334 104 Norwegian (2012) 105 Petersen og Plenborg (2012) p. 68-70
43
In the following section a few selected posts are discussed as it is not clear whether they are classified
as operating or financial items.
42.2 Revenues
NAS’ revenues are generated from passenger transport, ancillary revenue and other revenues. The
passenger transport and ancillary revenues stems directly from the operational activities but the other
revenues must be looked into further. NAS states in its annual report that other revenues comprise
revenues from third parties including wet-lease, cargo and revenue from business activities from
subsidiaries that are not airlines. The revenues from the other subsidiaries are revenues from Bank
Norwegian. This activity is considered to be an indirect part of NAS’ core business due to the reward
program that is run in cooperation with Bank Norwegian and is therefore classified as an operating
item.106 This reasoning also include the item Share of profit (loss) from associated companies.
4.2.3 Operating expenses
The majority of NAS’ costs are directly linked to NAS’ core operations. Some items however need to
be discussed further. In 2008 (and the previous years) there is a cost item named Blocked Space. This
is an item that does not occur in the later years. This cost is not prominent and is therefore treated like
a nonrecurring item and not included in the reformulated balance sheet.
4.2.4 Other losses (gains) – net
NAS states in their annual report that the item Other losses (gains) – net is related to losses and gains
on financial assets and financial liabilities. The size of this post has been fluctuating each year
included in the analysis and no information regarding the performance of NAS is given. This post is
therefore treated as a special item and removed from the operating activities in the reformulated
income statement.
4.2.5 Other income
In 2010 NAS received compensation from SAS regarding a law suit. This income is classified as other
income in the income statement. This is something that is not likely to happen in the future and is
treated as a special item. In 2010, 2011 and 2012 NAS has also had other income from sale of assets.
These are considered transitory of nature and is not considered to have any effect on NAS’ future
operations and are subtracted from operating income in the reformulated income statement.
4.2.6 Leasing
NAS’ fleet consists of a mix between leased and owned aircrafts, where the larger part is leased.
Leasing is used to avoid the large capital investments connected with aircraft purchases and in
addition it makes the airline flexible with regards to capacity in the high/low season. There are two
types of leasing - financial and operational. Financial leases are classified as a lease agreement where
106 Petersen og Plenborg (2010) p. 76
44
all material risks and rewards of the asset is transferred to the lessee at the end of the lease term. This
type of lease is stated in the balance sheet as an asset and liability. In an operational lease agreement
most of the risk lies with the contracting party.107 Contrary to a financial lease, the operational lease is
not shown on the balance sheet. Due to this a company which lease its assets tend to have an
artificially low operating profit, and artificially high capital productivity. Therefore it is necessary to
find the asset value and include in the reformulated balance sheet to avoid that the financial ratios
calculated at a later stage are biased. 108
There are several ways to find the asset value of an operating lease. Koller et al (2010) explains a
method where the following formula is used.
𝐴𝑠𝑠𝑒𝑡 𝑣𝑎𝑙𝑢𝑒𝑡−1 = 𝑅𝑒𝑛𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑡
𝑘𝑑 + 1
𝐴𝑠𝑠𝑒𝑡 𝑙𝑖𝑓𝑒
where kd = cost of debt
In this method the asset value is estimated based on rental expenses, cost of debt and asset life.
A second method is constructive capitalization, also called the ILW-method. The ILW-method
estimates the amount of debt and assets that would be reported on the balance sheet if the operational
leases had been treated as financial leases. The liability is calculated as the present value of the future
minimum lease payments. To estimate the present value an interest rate is required and this would
ideally be the average of the historical marginal secured borrowing rates of NAS, at the inception of
the operating leases, weighted by the relative size of each lease in comparison to all operating leases.
An estimate could be the historical interest rate for reported secured long-term debt. The present value
is then treated as the off-balance sheet debt of the non-cancelable obligations under operating leases.
The value of the off-balance sheet asset is estimated by examining the relation between assets and
debt. The ILW is based on three assumptions, first that straight line depreciation is used for all assets,
secondly that both the liability and asset of the operating lease equal the present value of future
minimum lease payments in the beginning of each lease term and finally that the value of both the
asset and liability is zero after the last payment. Further assumptions regarding asset life, tax rate,
interest rate and remaining lease period are required. 109
NAS’ reports that it lease cars and properties in addition to aircrafts. It is fair to assume that these
different items have different asset lives. However, no satisfactory information regarding asset life nor
depreciation plan for the leased items is provided in the annual report. An inaccurate assumption on
107 Norwegian (2012) 108 Koller et all (2010) p. 559
109 Imhoff et al, (1991) p. 51-63
45
asset life could have a large impact on the asset value and this combined with other tricky assumptions
necessary for the ILW method makes both this and Koller et al’s method inappropriate for the purpose
of this paper.
A third method to find the asset value is a method that is applied by many in the banking community.
In this method the lease payments are multiplied by a capitalization rate to find the approximate asset
value. The capitalization rate is found by using the following formula:
1
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 + 1
𝑎𝑠𝑠𝑒𝑡 𝑙𝑖𝑓𝑒
SAS and EasyJet states in their annual rapport that they use a capitalization rate of 7. This method is
found the most suitable for the purpose of this paper and the rate stated by SAS and Easyjet is used as
a benchmark since no satisfactory information is reported from NAS.
The lease interest expenses are then found by multiplying the calculated asset value by the cost of
debt110. These expenses are then subtracted from the operating profit in the reformulated income
statement while the remaining lease expenses are treated as depreciation expenses and are thereby
included in the operational expenses. 111 The capitalized leasing cost is added to tangible assets and
correspondingly to financial liabilities in the reformulated balance sheet.
4.3 Reformulated balance sheet
In the reformulated balance sheet the operating assets and liabilities must be separated from the
financial. This is done to analyze the company’s ability to generate profits. The classification of the
items are discussed in the following.
4.3.1 Operating assets and liabilities
The operating assets and liabilities must be identified so invested capital and net working capital can
be calculated. The invested capital is found by subtracting total operating liabilities from total
operating assets. The invested capital represents the amount a company has invested in its operating
activities and which requires a return. 112
Non-current assets and liabilities
Intangible assets consists of NAS’ software and goodwill. These assets are associated with the
operational side of NAS.
Deferred tax assets and liabilities most commonly arise from differences when accounting for
taxes. It is not stated in the annual report whether the deferred tax assets and liabilities are
110 See section zzz 111 Koller et al (2010) p. 568. 112 Petersen og Plenborg (2012) p. 74.
46
connected to its financial or operating activities and is therefore included on the operational
side as tax assets in most cases are related to operations.113 Consequently, the deferred tax
liabilities will be attributed to the operational side.
Investment in associated companies can be argued that should not be a part of the core
operations. The investment is a 20% share in Bank Norwegian. Bank Norwegian operates
NAS’ cash point system and as these points can be used to purchase different services from
NAS. Bank Norwegian can thereby be looked upon as a sales unit that sells the company’s
products and this item is classified as operating. 114
Current assets and liabilities
Cash and cash equivalents often consists of operating cash and excess cash. It is not
distinguished in the annual report between the two and as Petersen and Plenborg (2012) argues
that in most cases the consequences of reclassifying operational cash as excess cash is modest,
this item is chosen to be treated as a financial activity.
Derivative financial instruments are related to the gains and losses on NAS’ forward foreign
exchange contracts and forward commodity contracts. These contracts are used to minimize
risk related to fuel, aircraft lease and other operating costs denominated in USD. These
financial activities are clearly related to NAS’ operating activities and thereby included in the
operational current assets and liabilities.
Air traffic settlement liabilities, trade and other receivables and trade and other payables are
items related to NAS’ customer and suppliers and hence operating activities and is included in
the current assets and liabilities.
Financial assets and liabilities
The financial side of the balance sheet consists of equity, net interest-bearing debt and minority
interests.
NAS’ borrowings are divided into short-term and long-term borrowings. Both types of
borrowings are interest bearing and thereby a part of NAS’ financial liabilities.
Pension liabilities are interest bearing according to Petersen and Plenborg (2012) and is thus
treated as a financial liability.
As previously mentioned cash and cash equivalents and capitalized operational leases are
attributed to the financial assets and liabilities.
113 Petersen og Plenborg (2012) p. 88 114 Petersen og Plenborg (2012) p.76
47
4.4 Profitability analysis
The profitability analysis examines NAS’ financial performance by using information found in the
reformulated income statement and balance sheet. Sound profitability is important for NAS’ future
survival and to ensure a satisfactory return to shareholders and the historical profitability is an
important element in defining the future expectations from the company.115
When performing a profitability analysis the Return on equity (ROE)
is found. ROE measures the profitability taking both
operating and financial leverage into account. The
structure of the profitability analysis is also called the
Du Pont model and can be seen in a simplified version
below.
4.4.1 Return on invested capital
The return on invested capital (ROIC) is a measure for the overall profitability of operations. The
measure expresses the return on capital invested in NAS’ net operating assets and is important when
analyzing the company’s historical performance. The formula for estimating the ROIC is:
𝑅𝑂𝐼𝐶 = 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 (𝑁𝑂𝑃𝐴𝑇)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
The calculations of ROIC are based on average invested capital as this way of calculation is the most
accurate if there is a steady development of invested capital over the years which is the case with
NAS. 116 The development on NAS’s return on invested capital the past five years compared to the
industry average is shown in Figure 24. NAS’ ROIC in 2012 was 7,64%. This indicates that the
company in 2012 was able to generate 7,64 øre for each NOK invested. The ROIC has been variable
the recent years with as low as 1,96% in 2010 and 10,48 % in 2009 as the highest level.
115 Petersen and Penborg (2012) p. 93 116 Petersen og Plenborg (2012) p. 96
Return on equity (ROE)
Return on invested
captial (ROIC)
Profit marginAsset
turnover
Financial leverage
Source: Own creation based on Petersen and Plenborg, 2012
Figure 23: Du Pont-model
48
NAS’ average ROIC of the period is
5,62 % which is a little higher than the
industry average 2004-2012 of 4,1%.117
This shows that the average profitability
of the company has been better than of
the industry the past four years.
With regard to these findings it is
interesting to see how NAS’ ROIC
performs compared to its main
competitors. In the following graph the development of Ryanair and EasyJet’s ROIC is illustrated.
These two airlines are chosen as a benchmark as they follow the same business model as NAS and
thereby the accounting data and financial ratios are regarded as comparable.
To perform a cross-sectional analysis the data used in the analysis must be comparable.118 Hence, a
reformulation of the income statement and balance sheet following the same premises as for NAS, is
conducted for Ryanair and EasyJet. These can be seen in appendix 8-14.
In the cross-sectional analysis it can be
seen that NAS’ ROIC in general have been
lower than Ryanair and EasyJet’s.
Ryanair’s average ROIC the past five
years have been 10,54% and this level can
be categorized as outstanding compared to
the industry standards. NAS reached a
ROIC higher than its competitors in 2009
due to the reduced fuel cost level and
increased production but on average NAS’
return on the invested capital is significantly lower than its competitors.
As the ROIC is not able to measure and explain whether the profitability is driven by a better revenue
and expense relation or an improved capital utilization119, the ratio will in the following be
117 IATA (2013) 118 Petersen and Plenborg (2012) p.65
119 Petersen and Plenborg (2012) p. 107
10,48%
1,96%
2,41%
7,64%
0,00%
5,00%
10,00%
15,00%
2009 2010 2011 2012
F I G U R E 2 4 : R E T U R N O N I N V E S T E D C A P I T A L 2 0 0 9 - 2 0 1 2
NAS Industry average
0,00%
5,00%
10,00%
15,00%
2009 2010 2011 2012
F I G U R E 2 5 : C R O S S - S E C T I O N A L A N A L Y S I S 2 0 0 9 - 2 0 1 2
NAS Industry average Ryanair Easyjet
Source: Own creation based on annual reports 2008-2012
Source: Own creation based on annual reports 2008-2012
49
decomposed into Profit Margin and Turnover rate of invested capital to better understand what drives
NAS profitability.
The relationship between these ratios can be explained by:
𝑅𝑂𝐼𝐶 = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 (𝑃𝑀) 𝑥 𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑟𝑎𝑡𝑖𝑜 (𝐴𝑇𝑂)
The two variables will be analyzed in the subsequent sections.
4.4.2 Profit margin
The profit margin describes the relationship between revenues and expenses and expresses operating
income as a percentage of net revenue. The profit margin is defined as:
𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =𝑁𝑂𝑃𝐴𝑇
𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑢𝑒𝑠
The airlines operate in an industry where
the competition is high and it is highly
affected by economic cycles. It is
consequently a hard industry to maintain
high profit margins. In the recent years the
airline industry has been characterized by
very low profit margins and the average
expected profit margin in the airline
industry for 2012 was 0,6%.120 This means
that the average airline only is able to
generate a net income of 0,6 øre for each NOK
of sales. Figure 26 shows the development in NAS and its peers’ profit margin the past five years.
It is evident that NAS’ profit margin fluctuated with the same pattern as it’s ROIC. The reason for this
stems from NAS’ costs as the revenues has been steadily increasing during the entire period. Looking
at the profit margin of Ryanair and EasyJet, Ryanair again has a formidable level of the ratio. This
means that Ryanair has a clear competitive cost advantage over the other airlines. This comes as no
surprise as Ryanair has been the clear cost leader in the previous analyses done in Chapter 3. NAS’
profit margin is on average lower than the competitors with NAS’ average being 3,75% compared to
Ryanair’s 12,51% and EasyJet’s 5,96%. On a positive note, in 2012 NAS and EasyJet are developing
towards the same level.
120 CAPA (2012b)
0,00%
5,00%
10,00%
15,00%
20,00%
2008 2009 2010 2011 2012
F IG U R E 26: P R O F IT M AR G IN 2 0 0 8 - 2 0 1 2
NAS Ryanair Easyjet
Source: Own creation based on annual reports 2008-2012
50
4.4.3 Asset turnover
The turnover rate expresses a company’s ability to utilize invested capital. The asset turnover rate is
defined as:
𝐴𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
An asset turnover rate of 1,06 conveys that for each NOK invested in operation, 1,06 NOK is
generated. This implies that a high asset turnover rate is preferable as this shows that the company
effectively uses its assets to generate revenue.
The asset turnover rate of NAS decreased from
1,44 in 2009 to 1,06 in 2012. This is opposite of
EasyJet which had levels almost equal to NAS in
2009 but has seen an increase from 1,40 in 2009
to 1,68 in 2012. On the other hand Ryanair has
had the lowest asset turnover rate during the
whole period. This indicates that Ryanair’s ability
to utilize its assets is worse than the other airlines.
NAS has also seen a reduction in this ability the
past years and this results in inefficiency. An
explanation for NAS’ decreasing asset turnover may be its investments in a new fleet which has led to
a higher increase in investments than in revenue.
When examining Figure 28 it is observed that the
NAS’ ROIC fluctuations are caused mainly by
the fluctuations in the profit margin and thus a
varying revenue and expense relation. As seen
the ROIC and profit margin are almost identical
over the period while the asset turnover rate are
more stable. This strengthens the indication of it
being the revenue and expense relation that is the
main driver of the return on invested capital.
4.4.4 Return on equity
The return on equity (ROE) measures the profitability taking into account both operating and financial
leverage contrary to the previous section where only operating profitability where addressed. The ROE
0,60
1,10
1,60
2,10
2009 2010 2011 2012
F I G U R E : 2 7 A S S E T T U R N O V E R R A T E 2 0 0 9 - 2 0 1 2
NAS Ryanair Easyjet
Source: Own creation based on annual reports 2008-2012
-
0,50
1,00
1,50
2,00
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
2009 2010 2011 2012
F I G U R E 2 8 : R O I C , P R O F I T M A R G I N A N D T U R N O V E R
R A T I O
ROIC Profit Margin
ATO - Right scale
Source: Own creation based on annual reports 2008-2012
51
measures the owners of NAS’ return on their investments. The trends and level of ROE is affected by
the following three factors:121
Operating profitability (ROIC)
Net borrowing interest rate after tax
Financial leverage
Return on equity is found by applying the following relationship:
𝑅𝑂𝐸 = 𝑅𝑂𝐼𝐶 + (𝑅𝑂𝐼𝐶 − 𝑁𝑒𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥) 𝑥𝑁𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝑤ℎ𝑒𝑟𝑒 𝑁𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦= 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒
The net borrowing costs is found by dividing net financial expenses after tax by net interest bearing
debt. Petersen and Plenborg states that the rate found using this formula rarely matches the true
borrowing rate of a firm as there is a difference between deposit and lending rates and currency gains
and losses are included in the financial income and expenses. Due to this the average of the effective
interest rate on borrowings stated in the annual report the respective years will be used as an estimate.
The borrowing cost found will be adjusted for the corporate tax rate which is 28% in Norway.
The financial leverage gives information about the
relationship between debt and equity. It is calculated
as previously mentioned by dividing net interest
bearing debt by book value of equity. The
development of the financial leverage the past five
years can be seen in Figure 29. As observed the
financial leverage ratio has been high the past years
something that indicates a high debt level compared
to equity.
121 Petersen and Plenborg (2012) p. 117
3,46
2,86
3,80
4,62 4,49
2,50
3,00
3,50
4,00
4,50
5,00
2008 2009 2010 2011 2012
Figure 29: Financial leverage
Source: Own creation based on annual reports 2008-2012
52
The return on equity for NAS and the competitors is
illustrated in Figure 30. The level of ROE has
fluctuated a substantial amount from 25% in 2009 to
being negative in 2010 and 2011 and again
increasing to 24% in 2012. The negative levels in
2010 and 2011 is explained by the drop in ROIC due
to the low levels on the profit margin which again
were caused by an higher increase in costs compared
the increase in revenue. Even though the negative
levels in ROE can to some extent be explained by
economic cycles and other external factors it still means that NAS was not able to generate any profit
with the shareholders’ investments these years. EasyJet and Ryanair had a more promising
development in the ROE with an average of respectively 10,65% and 13,09%. This is marginally
higher than NAS’ average of 10,37%. This shows that except from in 2010 and 2011 NAS’ ROE has
been substantially higher than the two other airlines.
4.5 Items of significance in the income statement
The following item is included in this section because a change in the fuel costs and exchange rate will
impact the expectations for the future and thus have special significance to the following chapters of
forecasting and budgeting.
5.5.1 Fuel costs and exchange rates
The fuel costs have been discussed previously in the paper but this section will focus more on the
impact of change in the fuel price.
Table 4: Fuel costs in percent of operating costs
Table 4 shows the development of the fuel costs in percent of operating costs for NAS, Ryanair and
EasyJet. The table shows that the fuel cost is a large part of an airlines total costs and as these costs are
affected by external factors and risk management is important. As previously mentioned NAS’ hedges
to some extent but less than its competitors. As jet fuel are denominated in USD and NAS’ functional
currency is NOK, there are two external factors that affect NAS’ fuel costs – the jet fuel price and the
exchange rate.
2008 2009 2010 2011 2012
NAS 31 % 21 % 33 % 40 % 41 %
Ryanair 36 % 45 % 35 % 39 % 43 %
Easyjet 34 % 33 % 28 % 31 % 44 %
-10,00%
0,00%
10,00%
20,00%
30,00%
2009 2010 2011 2012
F I G U R E 3 0 : R E T U R N O N E Q U I T Y
NAS Easyjet Ryanair
Source: Own creation based on annual reports 2008-2012
53
Table 5: Fuel cost with varying fuel price and exchange rate
Table 5 shows how the fuel cost would have varied at different levels of jet fuel price per ton and
exchange rate. It is evident that a small change in the exchange rate and jet fuel price could have a
huge impact on NAS’ costs if no risk management is undertaken. It must be remembered that NAS is
not exposed to US dollar just through jet fuel, but also through aircraft borrowings and leasing
contracts etc. To minimize the risk of fluctuations NAS had in December, 2012, forward foreign
currency contracts worth MUSD 761 to secure its debt, and secured 8090 tons of jet fuel through
derivative contracts.
Hedging is important to avoid a sudden increase in exchange rates or jet fuel price, but also to have a
better indication of what future costs will be. A sudden increase in cost level might reflect in higher
ticket prices for the customers, which may result in the price sensitive customers choosing another
airline. The fact that NAS hedges its jet fuel to a less extent than its competitors is difficult to asset
whether is the correct strategy or not. Though, when looking at NAS’ fuel cost in percent of operating
costs compared to Ryanair and EasyJet the numbers does not differ significantly which indicates a
right path. Hedging is mentioned in this section to give an indication of the company’s risk exposure.
The hedging strategies have no or little long-term effect on the valuation.
4.6 Partial conclusion
In the financial analysis it was found that NAS’ profitability ratios has been fluctuating the past years.
The ROIC has been fluctuating more than the peer-group due to a varying profit margin. This
indicates that the ROIC is driven by the revenue and expense relation rather than capital utilization.
The asset turnover rate has been decreasing in the analyzed period, most likely due to the investments
in a new fleet which has led the invested capital to increase at a higher pace than the revenues. The
low level of ROIC in 2010 and 2011 led to a negative ROE in these years which means NAS was not
able to generate any profit with the shareholders investments these years.
When analyzing the chosen peer-group for the financial analysis, Ryanair’s low unit cost is reflected
in its financial ratios and this is the airline with the strongest development in ROIC and profit margin
over the analyzed period. NAS had the highest level of ROE in 2009 and 2012, and Ryanair had the
lowest asset turnover rate of the peer-group throughout the whole measured period. EasyJet can be
considered as NAS’ closest peer and in 2012 the two airline’s ratios are somewhat similar. This is a
Fuel price/exchange rate 5NOK/USD 5,5NOK/USD 6NOK/USD 6,5NOK/USD 7NOK/USD
600 USD/ton 1 708 893 1 879 782 2 050 672 2 221 561 2 392 450
800 USD/ton 2 278 524 2 506 376 2 050 672 2 962 081 3 189 934
1000 USD/ton 2 848 155 3 132 971 3 417 786 3 702 602 3 987 417
1200 USD/ton 3 417 786 3 759 565 4 101 343 4 443 122 4 784 900
1400 USD/ton 3 987 417 4 386 159 4 784 900 5 183 642 5 582 384
54
positive sign for NAS as NAS to this date still is a minor player internationally and EasyJet is
considered a large and important airline in the international market.
The low levels on the ratios in 2010 and 2011 can be explained by new investments, but it shows that
revenue growth is not high enough to out weight the negative effect the new investments have on the
financial ratios. However in 2012 the ratios are higher which can indicate that this was a temporary
situation. All in all, the business model can be regarded as sustainable on a long-term perspective
because it is the core business that generates the earnings.
55
CHAPTER 5 – Forecasting and valuation
In the previous chapters a foundation for the subsequent chapter has been build. The strategic analysis
has provided useful information regarding the airline industry and what characterizes it. The strategic
analyses has identified the external factors that affect NAS’ value creation and placed NAS in relation
to its competitors in terms of important industry measures like load factor, yield and unit costs. With
regards to this NAS’ competitive advantages was found. The financial analysis has provided an
understanding of the financial and operational historic performance and given information about the
value drivers. The information collected in these two analyses create the basis of the forecasted budget
that will be projected in this chapter. The forecasting is done to create an indicator of how the
company’s financial performance will develop which is important when estimating the share price.
5.1 The discounted cash flow model
Present value approaches estimate the intrinsic value of a company based on analysts’ projections of
the cash flows of a company and the discount factor that reflects risk in the cash flows and the time
value of money. 122
The most popular of the present value approaches is the discounted cash flow model (DCF). This
model discounts the free cash flow available to all investors at the weighted average cost of capital
(WACC). The model is two staged where the first stage is the forecast period and the second the
terminal period. In this model only the free cash flow to the firm, the growth rate and the WACC
affect the market value of the company. The model can be explained by the following equation:123
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒0 =∑𝐹𝐶𝐹𝐹𝑡
(1 +𝑊𝐴𝐶𝐶)𝑡+
𝑛
𝑡=1
𝐹𝐶𝐹𝐹𝑡
(𝑊𝐴𝐶𝐶 − 𝑔)
⏞ 𝐵𝑢𝑑𝑔𝑒𝑡 𝑃𝑒𝑟𝑖𝑜𝑑
𝑥 1
(1 +𝑊𝐴𝐶𝐶)𝑛
⏞ 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑝𝑒𝑟𝑖𝑜𝑑
where FCFF = Free cash flow to the firm WACC = Weighted average cost of capital
g = growth in the terminal period
n = years in budget period
The DCF method is popular valuation method because of its forward looking approach. It use future
expectations in estimating value rather than historical performance. This is beneficial as the future will
never be exactly the same as the past. The model is also flexible with regards to not being influenced
by the applied accounting practice and it relies on the fundamental expectations of the company and
allows strategic activities to be accounted for.
122 Petersen and Plenborg (2012) p. 212 123 Koller et al (2010) p. 103
56
The model is based on assumptions. The most fundamental one is that it assumes that all cash
surpluses will be paid out as dividends or reinvested in projects with a net present value equal to zero.
The negative sides of this model is that it relies solely on the assumed expectations of the future
performance found in the forecasted budget. This implies that even small errors in assumptions and in
the forecasting measures can lead to large mistakes when estimating the value of the company.124 This
is why a sensitivity analysis is performed after the valuation to see how changes in the assumptions
alter the share price and the value of the company.
In the following sections of the paper the different variables included in the DCF-model will be
estimated and discussed.
5.2 The weighted average cost of capital
As the WACC is one of the key elements in the DCF model this is an important factor. The WACC is
used to discount the future cash flow to find a present value. It is important to use great care when
estimating the WACC as small alterations in can have a great impact on the final value of NAS. The
WACC represents the weighted average cost of equity and net interest bearing debt. The relationship
is expressed in the following:
𝑊𝐴𝐶𝐶 = 𝑁𝐼𝐵𝐷
𝑁𝐼𝐵𝐷 +𝑀𝑉𝐸 x 𝑟𝑑 x (1 − 𝑡) +
𝑀𝑉𝐸
𝑁𝐼𝐵𝐷 + 𝑀𝑉𝐸 x 𝑟𝑒
where NIBD = net interest bearing debt
MVE = market value of equity
𝑟𝑑 = interest rate on net interest bearing debt
𝑟𝑒 = shareholder’s required rate of return
t = the company’s marginal tax rate
In the following sections the capital structure, cost of debt and shareholders return will be discussed.
5.2.1 Capital structure
The calculation of WACC is dependent on the capital structure as this indicates the weights of cost of
debt and cost of equity. The debt-to-equity ratio should reflect the target level rather than the current
weights as the current capital structure don’t necessarily reflect the levels that is expected to prevail in
the future.125
NAS states in their annual report that their policy is to have a capital structure that meets the demands
of operations, reduces cost of capital, complies with financial covenants and future investments
planned by the group and that they will constantly adjust debt and equity to maintain and secure an
optimal capital structure. Hence, there is no information about the explicit target level.
124 Petersen and Plenborg (2012) p. 218 125 Koller et al (2010) p. 262
57
To estimate the target capital structure of a company a combination of three approaches can be used.
126
1. Estimate the company’s current market-value-based capital structure.
To find the target debt-to-equity ratio one must use market values as these values is the numbers that
reflect the true opportunity cost of investors.127 The market value of equity is found by multiplying the
number of shares outstanding with the current market price the same date.128 By 31.12.2012 NAS had
35 162 139 shares outstanding and the market price the same date was NOK 143,9. Yet, the share
price has risen substantially since that time and using the market share price per 21.11.2013 would
have increased NAS’ equity by NOK 2,6 billion. With regards to this, Koller et al (2006) states that
this current share price might only reflect a short-term upswing in the market that the management has
yet to rebalance. The share price of 31.12.2012 is thus used in this paper. As no observable market
value of the net-interest bearing debt is available the book-value of the debt is used as an estimate129.
With respect to these findings the debt-to-equity ratio is estimated to be respectively 78% and 22% per
31.12.2012.
2. Review the capital structure of comparable companies.
In Figure 31 the equity ratio for NAS and its
peer-group is illustrated for the past five years.
In addition to this the peer-group average and
the industry average130 is added. As seen there
is no obvious coherence between equity ratio
and industry when looking at the selected
variables. NAS equity ratio is by far lower
than its competitors and the ratio in the peer-
group varies from 11,61% to 84%. As a result
of this it is problematic to identify a reliable
industry standard.
3. Review business management’s implicit or explicit approach to financing the business and its
implications for the target capital structure.
126 Koller et al (2010) p. 263 127 Petersen and Plenborg (2012) p. 246 128 Koller et al (2010) p. 264 129 Koller et al (2010) p. 263 130 Petersen and Plenborg (2012) p. 248
0,00%
50,00%
100,00%
2008 2009 2010 2011 2012
F I G U R E 3 1 : E Q U I T Y R A T I O 2 0 0 8 - 2 0 1 2
NAS RyanairEasyjet AverageINDUSTRY AVERAGE
Source: Own creation based on annual reports 2008-2012
58
Other than the statement mentioned above there are no statements regarding the target capital
structure.
Given the results of the three approaches above it is concluded that the best estimate for the debt-to-
equity ratio is an average of the past five years. This seems to be the best estimate of a target capital
structure. By using the average historical capital structure changes in share price and externally
influenced cyclical changes has been taken into account. As NAS states that it constantly adjust debt
and equity ratio to maintain and secure an optimal capital structure it is assumed that this has been
done in the past years and the average thus is a good estimate for the future. The equity and debt ratio
used in further calculations is 21% and 79% respectively.
5.2.2 Cost of debt
The interest rate of debt after tax is calculated as:
𝑟𝑑 = (𝑟𝑓 + 𝑟𝑠) 𝑥 (1 − 𝑡)
where 𝑟𝑑 = required rate of return on net interest-bearing debt
𝑟𝑓 = risk-free interest rate
𝑟𝑠 = risk premium on debt (credit spread)
t = corporate rate on tax
The corporate tax in Norway is per 2012 and 2013 28%.
In the following sections the risk-free interest rate and NAS’ company specific risk will be estimated.
5.2.2.1 Risk-free interest rate
The risk-free interest rate expresses how much an investor can earn without incurring any risk. A
proxy for this rate is usually local government bonds as the underlying assumption is that these bonds
are risk-free. For valuation purposes a government bond with a time horizon of 10 or 30 years are
often used. The 30-year bond may suffer from illiquidity which will affect the yields while the 10-year
bond is less sensitive to changes in inflation and matches the underlying cash flow better than the 30-
year bond. 131 Hence, for the purpose of this paper the rate for Norwegian 10-year government bonds
are used as an estimate for the risk-free interest rate. The average rate for this bond was 2,1% in 2012.
132
131 Petersen and Plenborg, 2012. p 249 132 Norges Bank (2012)
59
5.2.2.2 Risk premium on debt
The risk premium on debt is also known as the credit spread. This is the difference between corporate
bonds and credit risk-free bonds.133 For this paper it is calculated as the difference between the issued
bonds and the risk-free interest rate.
The cost of debt after tax for NAS is thus estimated to be:
𝑟𝑑 = (0,021 + (0,075 − 0,021) 𝑥 (1 − 0,28) = 𝟓, 𝟒𝟕 %
5.2.3 Shareholders’ required rate of return – CAPM
The most common method of estimating the shareholders’ required rate of return is the Capital Asset
Pricing Model (CAPM). The basic idea behind the CAPM is that by holding a sufficiently broad
portfolio of shares, investors will only pay for the risk that cannot be diversified away. Hence, it is
only the systematic risk which is priced. The systematic risk is expressed by the beta (β). 134
According to the CAPM the shareholder’s required rate of return is defined as:
𝑟𝑒 = 𝑟𝑓 + 𝛽𝑒 (𝑟𝑚 − 𝑟𝑓)
where 𝑟𝑓 = risk-free interest rate
𝑟𝑚 = return on market portfolio
𝛽𝑒 = Systematic risk on equity (levered beta)
The CAPM model is based on the assumptions that all investors are risk-averse, can sell and buy at
competitive prices and face no transaction cost, can borrow and lend at the risk-free interest rate and
that all investors have homogenous expectations. These assumptions are regarded as unrealistic but it
is stated that the model works as well as the next best alternative. 135
5.2.3.1 Systematic risk – Beta
Beta is the relative risk the company is facing in relation to the market portfolio. An explanation of
how the different levels of beta is interpreted is illustrated in Table 6.
Table 6: Interpretation of Beta
133 Koller et al (2012) p. 488 134 Petersen and Plenborg (2012) p. 249 135 Damodaran (n/a)
β=0 Risk-free investment
β<1 Investment is less risky than the market portfolio
β=1 Investment has the same risk as the market portfolio
β>1 Investment har greater risk than the market portfolio
60
The beta cannot be observed and must thus be estimated. The most common method to estimate the
raw beta is by performing a regression analysis. In this method the returns of NAS’ shares for a
selected time interval, is regressed with the return on a market portfolio to find the estimated beta. The
most common regression model used to estimate beta is the market model. 136 This model is defined
as:
𝑟𝑖 = ∝ + 𝛽𝑟𝑚 + 𝜀
When applying the market model several factors must be taken into consideration. The first factor is
measurement period. Koller et al (2006) recommends using at least five years of data to get enough
data for the analysis. The time horizon is therefore chosen to be from 1.1.2008 – 22.11.2013.
The next factor to take into consideration is the return interval. Return interval refers to whether daily,
weekly or monthly returns should be used in the regression analysis. Daily returns will give the
highest number of observations but will also expose the data set to systematic biases related to non-
trading days. This may also be the case with weekly returns.137 Monthly returns are thus recommended
as this return interval will give the most precise estimate of beta. For this paper a regression analysis
with both monthly and weekly returns are performed to illustrate the difference in beta.
The final factor to take into consideration is the choice of market index. Ideally the beta should be
estimated against the index of which the stock is traded. In NAS’ case this would be Oslo Stock
exchange (OSEBX). However, as this index is heavily weighted in only a few industries (the energy
sector) this index is not applicable for this purpose. With regards to this two international well-
diversified market portfolios are chosen instead. The chosen market indices are Standard & Poor’s 500
index (S&P500) and Morgan Stanley Capital International Index Europe, Australia and Far East
(MSCI EAFE). These indices are recognized as good estimates for the market index as they both
contains a well-diversified market portfolio.
Table 7 illustrates the market index and the two different return intervals. As seen in the table the
different return intervals and market indices lead to different beta estimations.
Table 7: Estimated beta using regression
136 Koller et al (2010) p. 245 137 Koller et al (2010). p.246
NAS/SP500 NAS/MSCI EAFE NAS/SP500 NAS/MSCI EAFE
Beta 1,02 0,95 1,55 1,23
Average
Weekly Monthly
0,985 1,39Source: Yahoo Finance, retrieved 22.11.2013
61
The beta values found when using the regression analysis differ to such an extent that it is found
necessary to take a look at the beta for the airline industry. Damodaran (2013) has analyzed 44 airlines
in Europe and found that the unlevered beta value for the European airline industry is 0,602.138 The
formula for levered beta is:
𝛽𝑙𝑒𝑣𝑒𝑟𝑒𝑑 = 𝛽𝑢𝑛𝑙𝑒𝑣𝑒𝑟𝑒𝑑 𝑥 (1 + 𝐷
𝐸)
When applying the industry beta in this formula a beta level of 2,85 is found. This estimation proves
that the underlying assumptions made when calculation the beta largely affect the value. The reason
for this beta estimate being so high is the debt-to-equity ratio found in section 5.2.1. A lower ratio
would have resulted in a lower beta value.
As the airline industry is volatile and sensitive to external factors it is reasonable to assume that NAS’
systematic risk should be higher than for the market portfolio. A beta of 2,85 is though considered to
be too high. It is thus considered that the average of the beta estimation found in the regression
analysis using monthly return intervals is a reasonable estimate for NAS’s systematic risk. A beta of
1,39 is used as an estimate of beta in the CAPM model.
5.2.3.2 Market risk premium
The market risk premium is the difference between market returns and returns from risk-free
investments and indicates what an investor requires in order to be willing to invest in the market
portfolio rather than in a risk-free portfolio. There are two commonly used ways to determine the risk
premium, ex-post and ex-ante. The ex-post approach examines the difference between historical
returns on the stock market and returns on risk-free investments tracing 50 to 100 years back in time.
A drawback with this approach is that it is backward looking and thus might not be a good indicator
for the future market portfolio’s risk premium. In this paper the latter approach is used. The ex-ante
method attempts on the basis of analyst’ consensus on
future earnings to infer the market portfolios implicit
risk premium. 139 As there is no such consensus, a
selection of assorted financial companies’ and analyst’s
estimate of the risk premium in Norway in 2012 is
presented in Table 8. As seen the estimates vary from
5% to 11,9%. As 11,9% is considered too high, this rate
is disregarded and the average of the remaining risk
138 Damodaran (2013) 139 Petersen and Plenborg (2012) p. 263
Source: PWC(2013b),Deloitte(2013),
Damodaran(2013b)
Table 8: Market Risk Premiums
Pwc 5 %
Deloitte 5,80 %
Bloomberg 11,90 %
Damodaran 5,80 %
Average 7 %
62
premiums is used as an estimate for the risk premium. Thus, for the purpose of this paper a risk
premium of 5,5% is used.
Based on the analyses provided in the above sections, the CAPM is calculated on the basis of a risk-
free interest rate of 2,1%, a beta of 1,39 and a market risk premium of 5,5%. The return on equity is
thus found to be:
𝒓𝒆 = 𝟎, 𝟎𝟐𝟏+ (𝟏,𝟑𝟗 𝒙 𝟎, 𝟎𝟓𝟓) = 𝟎, 𝟎𝟗𝟕𝟓 = 𝟗,𝟕𝟓%
The weighted average cost of capital is hence calculated as:
𝑾𝑨𝑪𝑪 = 𝟎, 𝟕𝟗 𝒙 𝟎, 𝟎𝟓𝟒𝟕+ 𝟎,𝟐𝟏 𝒙 𝟎, 𝟎𝟗𝟕𝟓 = 𝟔, 𝟑𝟕%
The average WACC for European LCC’s between 2004-2012 has been 8,3% according to IATA. 140 In
addition, NAS states that they apply a discount rate of 7,9% for 2012. A reason for the cost of capital
differing from the one stated in the annual report and the airline industry average might be the
assumptions chosen when estimating the WACC. The capital structure has an impact on the WACC
and as previously mentioned, NAS has a very high debt ratio. A reason for this might be because the
capitalized leases are included in the net-interest bearing debt in the reformulated balance sheet,
contrary to in the original. When a calculation of the debt-to-equity ratio without capitalized leases is
performed the estimated WACC is 6,84 %. This is not a significant difference. It is thus assumed that
the underlying assumptions used when calculating the WACC is accurate and the WACC of 6,37 % is
used for the purpose of this paper.
5.3 Assumptions for the forecasted free cash flow
In order to perform the valuation of NAS, an estimate of the future cash flows must be provided. This
is done by combining the findings in the strategic and financial analysis to create a forecast of the
future financial performance. In addition, the financial outlook for the industry is taken into
consideration when establishing the forecasts.
When choosing the budget period, one must be aware that a too short period may undervalue the
company and on the other side, it is hard to forecast specific items a long time into the future.141 To
intercept the long-term effects of the changes NAS is going through, a budget period of 10 years is
chosen.
Even though forecasting is a good way to estimate future performance, there are factors that must be
remembered. The first factor is that the forecasted numbers will always be subject to the analyst’s
individual opinion and thus not truly objective. The second factor is that even though the forecasted
140 IATA (2013) 141 Koller et al (2012) p. 186
63
numbers are a result of thorough analyses, the fact that the numbers are based on historical
performance causes an uncertainty. With regards to this it is important to state that no matter how
thorough and objective the analyses are, it is not possible to predict the future. The forecasting is thus
a result of the individual opinion but is supported by in-depth and well-argued analyses and it is
assumed that the chosen predictions will lead to a qualified and reliable estimate of NAS’ share price.
In the table below the estimated forecast assumptions are showed. The next sections will provide a
discussion on which basis these assumptions are made.
5.4 Revenues
When estimating NAS’ future revenues it is natural to look at the capacity increase NAS is expecting
in the future. This is as discussed in the strategic analysis, measured in number of Available seat
kilometers (ASK). The planned increase of the fleet has been briefly discussed previously in the paper,
but a more thorough analysis is required to estimate the effect with regards to revenues. NAS states
that they anticipate a growth rate in the fleet of 11% from 2016-2023. Combined with the detailed
information the company provides regarding the fleet until 2015 this allows us to calculate an estimate
of future capacity.
5.4.1 Number of aircrafts
The first step is to calculate the average
number of aircrafts in the fleet in the
forecast period. This is done by
analyzing the fleet plan that is provided
until 2015 and estimating an average
growth of 11% annually for the rest of
the forecast period. The result can be
seen in Figure 32. As no information
regarding additional long-haul aircrafts
in the future is provided, it is assumed that the level of long-haul aircrafts will stay at the 2015-level
the remaining period. This year the number is 8. This estimated total number of aircrafts will be used
to estimate ASK per aircraft.
5.4.2 ASK per aircraft
When estimating the ASKs per aircraft it is
necessary to look at the historical levels. As
illustrated in Table 9 ASK’s per aircraft in 2011
was 354,2 and 381,2 in 2012. This implies that
the newer aircrafts implemented in the fleet has
a bigger capacity than the older ones. When estimating ASK’s per short-haul aircraft the historic ASK
62 6884 95 102 114 126 139 154 167 179 194
0
50
100
150
200
250
Figure 32: Number of aircrafts
2011 2012
Number of aircrafts 62 68
Total ASK 21958 25920
ASK per aircraft 354,2 381,2
Source: Own creation based on annual report 2012
Table 9: ASK’s per Aircraft
64
per aircraft is multiplied with number of short haul aircrafts to find the contribution to total ASK’s.
As is it proved that capacity will increase, a 4% growth in ASK per aircraft is added in 2013 and then
2% each year until 2015. After this it is assumed that ASK’s will stay at constant level.
To find the ASK contribution from long-haul aircrafts it is assumed that these aircrafts have a capacity
that is twice the short-haul due to the size and stage length and that this capacity will stay constant.
Table 10: Total ASK’s in forecast period
As seen the introduction of more short-haul aircrafts in the fleet lowers the total ASK per aircraft.
5.4.3 Yield and load factor
When estimating the revenues it is necessary to forecast yield and load factor as we remember from
the strategic analysis that these estimates are important for total revenues. In addition the released
interim rapports from 2013 will serve as an indicator of performance in the first forecast year as the
valuation date is set to 04.12.2013.
The load factor describes how many of the available seats that are sold. In the strategic analysis it was
found that a result of increased capacity could be a diminishing load factor as the growth in capacity
exceeds the growth in the market. In 2012 NAS had a load factor of 79%. As we have seen when
estimating future ASK’s, the capacity will increase at high rate and this combined with fiercer
competition, will make it hard to maintain this load factor. In the interim rapports (Q1-Q3) from 2013
it is stated that load factor diminished in the two first quarters and increased again in the third. This is
in accordance with the findings in the strategic analysis. It is thus assumed that NAS load factor will
stabilize at a lower level than the historical. A reasonable estimate for future load factor is estimated to
be the average of the reported numbers for 2013 which is 78%.
The yield measures the revenue generated per passenger kilometer. NAS will see an increased stage
length as a result of the introduction of long-haul operations. As discussed in the strategic analysis it is
hard for airlines to rise the tickets price to a level that compensates for an increased stage length. In
addition, it is likely that NAS in the introduction period to international markets will promote the
company by selling its tickets at a low price to attract new customers. The modernization of the fleet is
also a cost saving strategy. Lower fuel and operating costs will thus enable NAS further lower its
F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Short-haul 81 88 94 106 118 131 146 159 171 186
Long-haul 3 7 8 8 8 8 8 8 8 8
Total fleet 84 95 102 114 126 139 154 167 179 194
ASK pr short-haul 396,4 404,4 412,4 412,4 412,4 412,4 412,4 412,4 412,4 412,4
ASK pr long-haul 762,4 762,4 762,4 762,4 762,4 762,4 762,4 762,4 762,4 762,4
Long-haul contribution 32 110 35 583 38 769 43 705 48 685 54 164 60 190 65 493 70 504 76 632
Short-haul contribution 2 287 5 336 6 099 6 099 6 099 6 099 6 099 6 099 6 099 6 099
Total ASK 34 397 40 919 44 868 49 804 54 784 60 262 66 289 71 592 76 603 82 731
ASK pr aircraft 409 431 440 437 435 433 431 429 428 427
65
ticket prices in all markets. A final factor that impact the yield level is the previously mentioned
capacity increase. Most likely this will not only affect the load factor because when supply is higher
than demand, a natural consequence is a lower price level. As found in the strategic analysis the stage
length and ticket prices are the two main factors that affect the yield, and an increased stage length and
lower ticket prices is a combination that is very likely to cause a decline in the yield. In the available
quarterly rapports for 2013, it is reported a yield development in coherence with these arguments. It is
therefore estimated that the yield will diminish by a rate of 0,025 in F2013. It is found reasonable to
assume that the diminishing rate will have a slower development in the coming years, and that the
yield will diminish by 0,012 in 2014 and then 0,01 until 2017. The yield is then predicted that to stay
constant at the 2017-level of 0,483 for the rest of the forecast period. This constant level is predicted to
be a reliable estimate as it is 0,007 higher than Ryanair’s current level.
5.4.4 Total passenger revenue
To estimate the total future revenues for NAS total number of ASK’s will be multiplied by RASK
which is found by multiplying yield with load factor. As remembered, RASK indicates the ticket
revenue per unit produced.
Table 11: Forecasted Passenger Revenue
When looking at the latest market forecast of aircraft manufacturer Airbus, they predicts the 20-year
world air traffic growth rate to be 4,7% and as discussed in the PET-analysis, the forecasted world
GDP growth is predicted to be 3,1% over the next 20 years. With regards to this the estimate of future
revenues seems reliable.
5.4.5 Ancillary revenues
Ancillary revenue is revenue generated from sale of additional services. The past years this item has
been 8% and 14,5% of the revenue from passenger transport, but has seen a decreasing trend the past
two years. It is thus predicted to stay at the 2012-level of 12,5% of passenger revenue for the entire
forecast period.
5.4.5 Other revenues
Other revenues is difficult to forecast as they consist of non-foreseeable items like sale of assets and
other compensations. In the past other revenues has on average been 2,16% of passenger transport and
due to this it is projected that other revenues will be 2,16% of passenger revenues throughout the
forecast period
F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Load factor 78 % 78 % 78 % 78 % 78 % 78 % 78 % 78 % 78 % 78 %
Yield 0,525 0,513 0,503 0,493 0,483 0,483 0,483 0,483 0,483 0,483
RASK 0,410 0,400 0,392 0,385 0,377 0,377 0,377 0,377 0,377 0,377
Total ASK 34 397 40 919 44 868 49 804 54 784 60 262 66 289 71 592 76 603 82 731
Revenues 14 086 16 377 17 607 19 155 20 644 22 708 24 979 26 977 28 865 31 175
66
As the revenues are projected with regards to growth in production the remaining part of the forecast
are estimated in relation to revenue.
Table 12: Forecast assumptions for operating expenses
5.5 Operating expenses
The operating expenses consists of different items. An analysis of the different costs are necessary and
will be considered with regards to the findings in the strategic analysis.
5.5.1 Jet fuel costs
As concluded in the PET-analysis the jet fuel price is closely linked to the oil price. It is therefore
difficult to predict the future jet fuel cost as the oil price is determined by many external factors. In
addition it was established that the exchange rate has an effect on the total jet fuel costs in chapter 4.
NAS has purchased a fleet which is stated to consume approximately 30% less jet fuel than the
existing fleet. This factor combined with the increased focus on long distance flights is likely to affect
NAS fuel costs positively. An increased number of flights with a long stage length will decrease total
fuel consumption in relation to productivity because the main part of consumed fuel is related to take-
off and landing.
The predicted jet fuel costs are stated as percent of revenue in the forecasted budget. This is because
the jet fuel cost to some extent correlates with the growth in revenue. A growth in the revenues implies
a higher demand for fuel. Historically NAS’ jet fuel costs has averaged on 27% of the operating
revenue with the 2012-level being 29%. In the PET-analysis it is observed that the price of crude oil is
forecasted to decrease in the budget period except from 2014. This is of course not a sure fact as it also
was reviled in the strategic analysis that the oil-price and accordingly the jet fuel price is volatile and
sensible to many external factors. It is however assumed in the forecasted budget that the jet fuel cost
will have a diminishing development in relation to revenue as a result of the implementation of fuel
efficient aircrafts and a declining jet fuel price. A significant reduction is not expected to happen
immediately as the main part of the fuel efficient aircrafts are supposed to be delivered in 2016 and
onwards. It is therefore predicted that the fuel costs in percent of revenues will have gradually
2008 2009 2010 2011 2012 Average F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Jet fuel 32,2 % 19,5 % 24,9 % 29,4 % 29,1 % 27,0 % 28 % 27 % 26 % 25 % 23 % 22 % 22 % 22 % 22 % 22 %
Airport charges 13,5 % 14,2 % 15,4 % 14,8 % 13,5 % 14,3 % 14 % 14 % 14 % 14 % 14 % 14 % 14 % 14 % 14 % 14 %
Labor costs 17,3 % 17,8 % 18,2 % 17,4 % 16,1 % 17,4 % 16,5 % 16,0 % 16,0 % 15,5 % 14,5 % 14,0 % 13,9 % 13,7 % 13,2 % 13,0 %
Handling charges 9,9 % 9,9 % 10,3 % 9,3 % 8,4 % 9,6 % 10 % 10 % 10 % 10 % 10 % 10 % 10 % 10 % 10 % 10 %
Technical maintenance 9,2 % 9,0 % 8,3 % 6,8 % 6,2 % 7,9 % 6 % 6 % 6 % 6 % 6 % 6 % 5 % 5 % 5 % 5 %
Sales and distribution expenses 1,9 % 2,0 % 2,0 % 1,9 % 2,1 % 2,0 % 2 % 2 % 2 % 2 % 2 % 2 % 2 % 2 % 2 % 2 %
Other operational expenses 5,1 % 5,4 % 4,7 % 4,5 % 4,2 % 4,8 % 5 % 5 % 4 % 4 % 4 % 4 % 4 % 4 % 4 % 4 %
Other aircraft expenses 5,0 % 4,5 % 4,8 % 4,2 % 3,8 % 4,5 % 4 % 4 % 4 % 4 % 4 % 4 % 4 % 4 % 4 % 4 %
Depreciation 2,1 % 2,0 % 2,2 % 2,8 % 3,0 % 2,4 % 3 % 3 % 3 % 3 % 3 % 3 % 3 % 3 % 3 % 3 %
Tax rate 28,0 % 28,0 % 28,0 % 28,0 % 28,0 % 28,0 % 28 % 28 % 28 % 28 % 28 % 28 % 28 % 28 % 28 % 28 %
HISTORICAL FORECAST
FORECAST ASSUMPTIONS
67
diminishing trend and then stabilize at a level of 22% in 2018. This is a 24% reduction from the
current fuel cost which is assumed to be a reasonable cost save for NAS.
5.5.3 Labor costs
As discussed previously in the paper, labor costs is the main focus of NAS’ cost cutting. As
remembered the company has found it necessary to “flag out” parts of its operations in order to cut the
labor costs and compete at an equal ground as its international competitors. In the strategic analysis it
was discovered that one of the biggest threats for NAS is the risk of not receiving the necessary
permission and traffic rights which will allow them to use foreign labor on the long-haul flights. For
the estimated future budget it is assumed that NAS succeed in obtaining these rights and will use
foreign labor on the long haul flights.
With regards to this, there are three main factors that must be taken into consideration the first being
base country of employees and the wage level in the respective country, the second is the productivity
of the employees and the third the bargaining power of employees. NAS has given signals that most of
the crew on long-haul flights will be hired through their Asian bases as the wage level in Asia is much
lower than in Scandinavia and the rest of Europe. This implies that the total labor costs will decrease
as a larger share of the personnel is hired at Asian pay and working conditions. As NAS will focus
more on long-haul operations, the stage length will as mentioned increase. In the strategic analysis is
was found that a long stage-length result in a higher employee productivity which will further cut the
labor costs. The strategic analysis also found the bargaining power of the employees to be strong.
Even though NAS is likely to hire a larger share of foreign personnel, it must be remembered that they
are still obliged to pay the Scandinavian employees at Scandinavian tariff. As the strategic analysis
identified several occasions where the strong labor unions has threatened with strike to maintain their
rights, it is found reasonable to assume that this is likely to happen again. The strong bargaining power
of the employees is thus considered to be a factor that might prevent the steep decline in total labor
costs.
When looking at the historical numbers the labor costs has measured been between 16 - 18% of the
total revenues. Even though it is concluded that the labor costs are likely to decrease it is found
reasonable to assume that the effect will not show instantly. The training of new crew and other
temporary extra costs is likely occur for the first years. It is though reasonable to predict the labor
costs to decrease on a medium-term perspective. With regards to this it is estimated that NAS’ labor
costs will be 16,5% of revenue for the first year in the budget period. Then the costs will have a
diminishing growth rate for the rest of the budget period until it reaches 13% which seems like a fair
estimate of long-term labor cost in percent of operating revenue. This level is found reasonable as this
is close to the current level of competitor EasyJet.
68
5.5.4 Airport charges and Handling charges
These costs are directly related to operations and externally set. It is therefore predicted that these two
cost are directly linked to activity level and thus revenue. The historical airport and handling charge
costs have had a constant development with the average being 14,3 % for the airport charges and 9,6%
for the handling charges. As international operations commence, different price levels at airports,
increased capacity and exchange rate must be taken into account. For these reasons the airport and
handling charges are estimated to be marginally lower than the historical average and is estimated to
be 14% and 9,5% of total revenues in the forecasted budget.
5.5.5 Technical maintenance
The technical maintenance cost is related to maintenance of the different aircrafts. This cost is likely to
decrease combined with the implementation of new aircrafts with lower maintenance cost. The
historical technical maintenance cost has varied between 9 and 6% of operating revenue. In the
forecasted budget the future technical maintenance cost is estimated to be 6% of revenues the first
three years of the budget then decrease to 5% for the rest of the budget period. This is due to the rising
share of aircrafts with low technical maintenance costs in the future years.
5.5.6 Sales and distribution expenses, Other aircraft expenses and Other operating expenses
Because of the extra expenses that has incurred as a result of the Dreamliner issues, the post other
operating expenses will be marginally higher than the historical level in 2013 and 2014. In the
remaining period this item, other aircraft expenses and sales and distribution expenses are estimated to
have a marginally lower level than the 2012-level. This is because these costs are directly linked to
operations and is thus positively affected by the increased capacity.
5.5.7 Leasing costs
As no detailed information regarding future leasing costs are provided, the costs will be estimated on
basis of the historical leasing expenses. When estimating the number of leased aircrafts the detailed
fleet plan will be laid to ground until 2015 and as no information regarding further diversification is
provided, it is assumed that the 2015 levels will stay constant. The lease cost per aircraft in 2012 was
NOK 25823. To find the leasing expenses the estimated number of leased aircrafts is multiplied with
the estimated lease expense per aircraft. As the new fleet will consist of aircrafts that are likely to be
more expensive to lease than the current, it is added 5% to the lease cost per aircraft in the future.
When the present value of leasing expenses is calculated these will be treated the same way as in
section 4.2.6 to find depreciation and interest.
69
Table 13: Forecasted leasing costs
5.5.8 Depreciation
There are several methods to forecast future depreciation and the method chosen in this paper is to
forecast depreciation as a percentage of revenues.142 This method is suitable as NAS’ capital
expenditures are smooth. Since the deprecation of operational leases are included in the historical
reformulated income statement, this is also included in the forecast. The depreciation on leases is
calculated from the forecasted present value of the operational leases. When looking at historical
numbers it is seen that the depreciation rate has been fairly stable relative to the revenues. The 2012
depreciation rate is thus used as an estimate of future depreciation.
5.5.9 Financial expenses
The financial expenses are calculated as a percentage of Net Interest-bearing debt. The rate used to
find the financial expenses is the cost of debt found in section 5.5.2. 143
5.6 Balance sheet
5.6.1 Tangible assets
The tangible assets are directly related to operations and thus will be forecasted in relation to
revenues.144 Tangible assets consist of operational related assets like aircrafts, prepayment to the
aircraft manufacturers and other equipment. The largest item is aircrafts, parts and installations. This
item has historically moved from 8,4% of revenues to 43,5% in 2012. It is thus forecasted to increase
to 55% of revenues in the forecasted period. Buildings has historically contributed marginally to the
assets with an average of 0,1% of revenue but as NAS is expanding the need for buildings is likely to
increase so a level of 0,2% for the budget period is assumed . The other large contributor to tangible
assets is prepayments to aircraft manufacturers. This post consist of prepayments to aircraft
manufacturers before actual delivery. It is decided to keep this level constant at the 2012 level as no
information regarding new additions to this item is provided and because it is assumed delivered assets
will be transferred to aircrafts, parts and installations so the net effect will be zero.
Equipment and fixtures and financial lease assets are forecasted to stay at the historical average.
142 Koller et al (2010) p .194 143 Petersen and Plenborg (2012) p. 176 144 Koller et al (2012) p. 199
F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Leased aircrafts 48 47 43 47 53 59 66 73 82 91
Leasing cost pr plane 27114 27114 27114 27114 27114 27114 27114 27114 27114 27114
Total leasing costs 1 301 473 1 274 359 1 165 903 1 275 263 1 426 207 1 593 756 1 779 734 1 986 171 2 215 315 2 469 665
Capitalized lease 9 110 310 8 920 512 8 161 320 8 926 840 9 983 451 11 156 290 12 458 141 13 903 195 15 507 206 17 287 658
Depreciation 1 240 1 275 1 166 1 276 1 427 1 594 1 780 1 987 2 216 2 471
Lease interest -475 -488 -446 -488 -546 -610 -681 -761 -848 -946
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5.6.2 Intangible assets and non-current operating liabilities
These items have had a stable level in regards to operating revenues the past years. The average level
has been 2,7 % for intangible assets and 2,2% for non-current operating liabilities. As the levels has
been very stable in the historical period, it is assumed that the average level is a good estimate for the
future.
5.6.3 Current assets and current liabilities
These items are directly related to NAS’ activity level and thus revenues. The historical level of
current assets and liabilities has been stable in relation to the revenue and the average historical
development is thus assumed to be a reasonable estimate for the future.
The full forecasted balance sheet can be seen in Appendix 20.
5.6.4 Free cash flow statement
One of the objectives by creating a forecasted budget is to calculate a free cash flow statement which
will indicate NAS’ free cash flow to the firm in the budget period. The calculated free cash flow from
the forecasted budget can be seen in Table 14.
Table 14: Forecasted cash flow statement
As seen the forecasted cash flow to the firm is negative the first two years of the forecast period and
relatively low the next years. This is a result of the large capital expenditures due to investments.
5.7 Present value approach - DCF
As discussed in section 5.1 the discounted cash flow model estimates the intrinsic value of a company.
The approach estimates the enterprise value of NAS by estimating the present value of the future free
cash flows. The estimation of the value of NAS equity and hence share price can be seen below.
F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
NOPAT 877 1 282 1 444 1 949 2 873 3 262 3 798 4 108 4 460 4 822
Depreciation 1 297 1 597 1 846 1 934 1 876 2 057 2 286 2 522 2 773 3 059
Gross CF 2 174 2 879 3 289 3 883 4 749 5 319 6 084 6 630 7 234 7 881
∆ in current assets -330 -308 -135 -170 -164 -227 -250 -220 -208 -254
∆ in current liabilities 553 834 367 462 444 615 677 596 563 688
∆ non-current liabilties 69 112 49 62 60 83 91 80 76 93
∆ in NWC 292 638 281 353 340 471 518 456 431 527
Non-current assets beg 16 105 21 131 23 940 24 309 26 494 28 916 31 982 35 366 38 644 41 980
Non-current assets end 21 131 23 940 24 309 26 494 28 916 31 982 35 366 38 644 41 980 45 878
Depreciation 1 297 1 597 1 846 1 934 1 876 2 057 2 286 2 522 2 773 3 059
CAPEX -6 323 -4 406 -2 215 -4 119 -4 298 -5 123 -5 670 -5 800 -6 109 -6 958
FCFF -3 857 -888 1 355 117 791 667 932 1 286 1 555 1 451
FORECASTED CASH FLOW STATEMENT
71
Table 15: Discounted cash flow approach
The enterprise value is calculated by summing the present value of the free cash flows and the terminal
value and then adding the book value of cash and cash equivalents and assets for sale.145 Then the net
interest-bearing debt is subtracted to find the equity value. The present value of the operating leases is
included in the net interest-bearing debt so no further adjustments with regards to leasing is found
necessary.
With an equity value of 10 187 millNOK and 35 162 139 outstanding shares the share price is
calculated to be NOK 290.
5.8 Sensitivity analysis
In a sensitivity analysis different variables in the DCF-model are changed to see how sensitive the
model is to the underlying assumptions. When the sensitivity analysis is performed, all the other
variables are kept constant to show the true effect.
First the models sensitivity towards a change in the beta value is estimated. This is done as there is
uncertainty connected to the beta value as the value differs greatly dependent on which data and
method is chosen for the estimation.
Table 16: Share price sensitivity to changes in beta value
As seen in Table 16, small changes in the beta value affect the WACC by changing the shareholders’
required rate of return. The share price varies considerably when the beta and henceforth the WACC is
altered.
145 Koller et al (2010) p. 103
F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
FCFF -3 856,51 -888,29 1 355,34 116,74 791,01 666,98 931,66 1 285,76 1 555,25 1 450,69
WACC 6,37 % 6,37 % 6,37 % 6,37 % 6,37 % 6,37 % 6,37 % 6,37 % 6,37 % 6,37 %
Discount 0,940 0,884 0,831 0,781 0,734 0,690 0,649 0,610 0,574
PV -3 625,636 -785,122 1 126,211 91,196 580,942 460,524 604,765 784,657 892,300
PV FCFF 129,839
PV terminal 19 056
EV 19 186
NIBD 10 878
BV net financial assets 1 879
Equity value 10 187
Shares 35,162
Share price 290
Beta 0,89 0,99 1,19 1,29 1,39 1,49 1,59 1,69 1,79
WACC 5,79 % 0,1 6,14 % 6,25 % 6,37 % 6,48 % 6,60 % 6,71 % 6,83 %
Share price 407 381 333 311 290 270 252 234 217
72
Next, the underlying assumptions for the forecasted budget are looked upon. In this analysis the
variables are adjusted with 1 percentage point +/-, except from yield which is adjusted +/- 0,001.
Table 17: Share price sensitivity to underlying assumptions in the forecasted budget
As seen some of the assumptions have a significant impact on the estimated share price. The most
sensitive variable is the growth in terminal value followed by change in labor costs and jet fuel. A
change of one percentage point in the terminal growth moves the share price from 290 to 450/190. If
the labor cost is increased by one percentage point the share price decrease to 166.
The result of the sensitivity analysis underlines what was stated previously, that the DCF model is
highly dependent on the underlying assumptions and thus the analyst’s individual opinions. Is also
shows that NAS is sensitive to changes in the labor costs. This emphasizes that NAS is dependent on
cutting these costs to increase its value. The change in jet fuel cost has the same effect as the change in
labor cost, but as this is an externally set cost no extreme measures besides effective risk management
can be done.
5.9 Scenario analysis
A scenario analysis examines how the share price is affected if the forecast assumptions are changed.
In a typical valuation a best- and worst-case scenario where several variables are altered, is performed.
In this paper it is chosen to focus on the labor costs, jet fuel and most importantly the yield and load
factors which is the variables that determines the revenue growth of NAS. In addition a labor-scenario
will be included to show what the value would be if the labor costs were kept constant. These factors
are chosen as the strategic analysis revealed that the biggest threats for NAS is an increase in jet fuel
price, declining yield and the legislative issues regarding labor. On the same note the opportunities is a
growth in passengers which imply an increased load factor, a cut in labor costs and the potential to
become cost leader.
Table 18: Original scenario
+ 1% 297 162 328 450 311 166 315
-1 % 283 415 250 190 269 419 277
Debt
ratio
Load
factor
Growth
in ASK
Revenue
terminal Yield
Labor
costs
Jet fuel
costs
Original scenario F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Yield 0,525 0,513 0,503 0,493 0,483 0,483 0,483 0,483 0,483 0,483
Load factor 78 % 78 % 78 % 78 % 78 % 78 % 78 % 78 % 78 % 78 %
Jet fuel 28,0 % 27,0 % 26,0 % 25,0 % 23,0 % 22,0 % 22,0 % 22,0 % 22,0 % 22,0 %
Labor 16,5 % 16,0 % 16,0 % 15,5 % 14,0 % 14,5 % 13,9 % 13,7 % 13,2 % 13,0 %
Share price 290
73
5.9.1 Worst-case scenario
In the forecasted budget it is assumed that NAS yield level will diminish at a rate of 0,025 in 2013,
0,012 in 2014 and then a set rate of 0,01 until 2017 where it stabilizes for the rest of the forecast
period. In this scenario it is assumed that the diminishing rate is increased by 0,05 which leads to the
yield stabilizing at 0,458 rather than 0,483. In addition the load factor will decrease by one percentage
point compared to the forecasted budget.
Table 19: Worst-case scenario
In this scenario the expected jet fuel price is expected to increase rather than decrease. This leads the
jet fuel cost to stay at the historical level as the impact of the fuel efficiency from the new fleet will not
show until 2018 when the jet fuel price will gradually diminish to a cost of 22,5% of revenues in 2022.
The labor cost is as previously discussed one of the costs that NAS focus most on cutting and to do
this the company is dependent on a permission to use foreign crew on the long-haul flights. In the
worst-case scenario it is assumed that the needed permissions is not given so the labor costs stay at the
2012-level of 16,1% until 2017 and then gradually diminish until it reaches a level of 14,5%. It is
assumed that NAS will be able to cut the labor costs to a certain extent in a long-term perspective due
to the increase productivity of the long-haul flights.
In the worst-case scenario the share price drops to NOK -109. This is of course not theoretically
possible, but underlines the point made that the airline industry is sensitive to external factors. This
scenario is realistic if its international expansion is a failure and NAS struggles to capture market
shares internationally. Then it is likely that NAS will see a decrease in load factor because of weaker
passenger growth, and yield as they are forced to sell tickets cheap to capture customers. If SAS, the
biggest competitor in the home market is successful in its recent restructuring and strategy to
transform its customer focus from business travelers to leisure travelers there is a genuine possibility
that SAS is able to capture market shares from NAS in the home market. This threat is intensified if
NAS is not able to sort out the technical issues with the Boeing Dreamliner, which cause a serious
threat to its reputation as a reliable and service-minded airline. The Dreamliner issue would mainly
affect the long-haul operations, but these operations are a crucial factor of NAS’ success
internationally. Another possibility is that Ryanair and/or EasyJet expand its operations in NAS’s
home market and thus capture larger market shares. This scenario could lead to price wars amongst the
competitors which will be damaging for NAS’ revenue growth.
Worst-case scenario F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Yield 0,520 0,503 0,488 0,473 0,458 0,458 0,458 0,458 0,458 0,458
Load factor 77 % 77 % 77 % 77 % 77 % 77 % 77 % 77 % 77 % 77 %
Jet fuel 29 % 28 % 28 % 28 % 28 % 27 % 25 % 24 % 23 % 22,5 %
Labor 16,1 % 16,1 % 16,1 % 16,1 % 16 % 15,5 % 14,5 % 14,5 % 14,5 % 14,5 %
Share price -109
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5.9.2 Best-case scenario
In this scenario it is assumed that the yield diminishing rate will be 0,005 less than the current and
stabilizes at 0,508 instead of 0,483. It is assumed that the yield will diminish even in the best-case
scenario as this seems unavoidable due to the increased stage length and it would be unrealistic to
assume ticket prices so high that it would compensate. In addition the load factor is expected to
increase by 1 percentage point. The jet fuel price is expected to be lower than anticipated in the
original scenario, and the result from the implementation of the fuel efficient fleet will show earlier in
the forecast period. In addition it is assumed that NAS is successful in diminishing the labor costs at
an earlier stage than in the original forecast. The result is that the assumed level of a labor cost of 13%
is reached in 2017 rather than in 2022.
Table 20: Best-case scenario
With the assumptions made in this scenario the share price shoots up to NOK 600. The best case
scenario is realistic if NAS is successful in the international expansion and manage to capture a market
share so big they don’t find it necessary to charge discounted ticket prices to attract new customers.
This will result in the yield decreasing at a lower rate. In addition does the high level of market shares
in the international markets increase the load factor which combined with the higher yield level result
in a higher revenue growth.
5.9.3 Labor scenario
NAS main concern regarding labor costs is the legislative issues regarding aircraft registration and
accordingly work force nationality and salary level. If the Norwegian government decides NAS is not
allowed to fly with aircrafts registered in Ireland, and thus foreign crew, or they are not successful in
obtaining the necessary permissions, it would be difficult for NAS to cut its labor cost to the desired
level. The other concern regarding labor costs is the labor unions which are strongly protesting against
the implementation of foreign crew on flights.
The two previous scenario analyses assumes that the variables change for the better or worse
simultaneously and the original forecasted budget is based on the assumptions that NAS is able to
lower their labor costs the intended way. It would thus be interesting to see what the theroretical share
price would have been if the labor costs would stay at the 2012-level when all the other variables stay
at the forecasted level.
Best-case scenario F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Yield 0,53 0,523 0,518 0,513 0,508 0,508 0,508 0,508 0,508 0,508
Load factor 79 % 79 % 79 % 79 % 79 % 79 % 79 % 79 % 79 % 79 %
Jet fuel 27 % 25 % 24 % 23 % 22 % 21 % 21 % 21 % 21 % 21 %
Labor 15 % 14,50 % 14 % 13,50 % 13 % 13 % 13 % 13 % 13 % 13 %
Share price 600
75
Table 21: Labor scenario
As seen, if the labor cost stayed at the 2012 level and the other variables at the forecasted level, the
estimated share price would have been NOK -51. This further underlines the point that NAS is
dependent on cutting the labor costs gain a sustainable competitive power.
5.10 The relative valuation approach
In the relative valuation approach multiples will be used to estimate the value of NAS. This method is
popular amongst practitioners due to its low level of complexity and because it is less time-consuming
than other valuation methods. 146In the relative valuation approach multiples based on common
variables are used to find company value. One of the drawback with the relative valuation approach is
that the value derived from these models often differs from the value estimated in the present value
approach due to different expectation in the market compared to the analyst’s individual forecast. In
addition, the underlying requirements for using multiples are hard to fulfill in practice. As an example
a valuation based on the EV/EBITDA multiple requires the compared companies to have an identical
expected tax rate and depreciation rate.147 As these requirements are not met, the value estimate will be
biased.148 Regardless of these drawbacks, it is chosen to include a valuation based on the EV/EBITDA
and EV/Revenue multiples as it is interesting to see what the value of NAS is estimated to be using
consensus estimates. For the calculation the previously used peer-group consisting of SAS, Ryanair,
EasyJet and Finnair will be used. These are companies that are not truly comparable, but operate in the
same industry and to some extent share the same economic characteristics and outlook. 149
The data used in the analysis is derived from two different sources, Thomson One Banker150and
Damodaran151. This is done as it is interesting to see whether the results will differ. In the analysis
forecasted numbers for 2013 is used from both sources, and as Thomson One provides forecasted
numbers for 2014 an estimation based on these numbers are included. In addition, an estimation only
including multiples from LCC’s, is done to see if the different business models have any impact on the
result.
146 Petersen and Plenborg (2012) p. 226 147 Petersen and Plenborg (2012) p. 227 148 Petersen and Plenborg (2012) p. 234 149 Petersen and Plenborg (2012) p. 227 150 Thomson One (2013) accessed 05.12 151Damodaran (2013)
Labor cost scenario F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Labor 16,1 % 16,1 % 16,1 % 16,1 % 16,1 % 16,1 % 16,1 % 16,1 % 16,1 % 16,1 %
Share price -51
76
Table 22: EV/EBITDA
When looking at the estimated share prices it is observed that the share price differs greatly between
the two sources and between the accounting years. Also when using only the multiples related to
LCC’s, the share price using Damodaran’s estimates decrease contrary to the share price calculated
using Thomson’s. These observations imply that even though the share price found from Damodaran’s
estimates for the LCC’s is close to the share price found in the DCF, the multiple is biased as it relies
too heavily on the chosen source.
Table 23: EV/Revenue
This multiple analysis shows the same tendency as the latter, the estimated share price varies in
relation to source and accounting year.
The above findings shows that a reliable relative valuation needs extensive work and truly comparable
firms to be valid. In this analysis the differences between companies distort the result and the share
price can thus not be considered as a reasonable estimate for NAS.
DAMODARAN THOMSON THOMSON F2014 DAMODARAN THOMSON
Easyjet 7,69 7,3 7,2 7,69 7,3
Ryanair 9,23 7,8 8,3 9,23 7,8
SAS 5,7 8,1 0,8
Finnair 13,08 2,7 N/A
Mean 8,925 6,475 5,433 8,460 7,550
EBITDA 2 498 2 498 3 264 2 498 2 498
EV 22 295 16 175 17 737 21 133 18 860
NIBD 10 878 10 878 14 554 10 878 10 878
Equity value 11 417 5 297 3 183 10 255 7 982
No of shares 35,162 35,162 35,162 35,162 35,162
Share price 325 151 91 292 227
EV/EBITDA 2013/2014 ONLY LCC's 2013
DAMODARAN THOMSON THOMSON F2014 DAMODARAN THOMSON
Easyjet 0,87 1,1 1,1 0,87 1,1
Ryanair 2,09 1,7 1,7 2,09 1,7
SAS 0,39 0,2 0,1
Finnair 0,26 0,2 N/A
Mean 0,90 0,80 0,97 1,48 1,40
Revenues 16 221 16 221 19 316 16 221 16 221
EV 14 639 12 977 18 672 24 007 22 709
NIBD 10 878 10 878 14 554 10 878 10 878
Equity value 3 761 2 099 4 118 13 129 11 831
No of shares 35,162 35,162 35,162 35,162 35,162
Share price 107 60 117 373 336
EV/Revenues 2013/2014 ONLY LCC's 2013
77
5.11 Liquidation approach
The final valuation approach that will be performed is the liquidation approach. This approach
estimates the amount a company could be sold for if all assets were sold and liabilities paid off. This is
not a true option for NAS but the approach is included to further understand what triggers NAS’ value.
In a healthy industry with attractive growth rates and healthy returns, a company’s liquidation value is
typically less than the value as a going company152. When estimating the liquidation value it is
assumed that NAS would go out of business in December 2013 and the forecasted budget for 2013 is
used in the calculations.
The typical steps for calculating a company’s liquidation value is as follows153:
5.11.1 Liquidation value of assets
When calculating the liquidation value of assets one must look at the book value of the assets and
estimate a liquidation value based on this. The main part of tangible assets consists of aircrafts, parts
and installations on leased aircrafts, buildings and equipment and fixtures. As NAS owned fleet
consist of fairly new and cost efficient aircrafts it is assumed that these assets will be liquidated at
book value less 10%. The prepayment to aircraft manufacturers is related to the contract with Boeing
and Airbus to purchase aircrafts. There are two main factors to consider when determining the
liquidation value of this contract. The first being that these contracts allegedly was entered on very
good terms.154 The second factor is the demand for the respective aircrafts. The contract consists of
high tech, cost efficient aircrafts and the aircrafts have a long delivery time. It is thus reasonable to
assume that there will be several airlines that would be interested to take over these contracts. Due to
the assumed favorable terms of the contracts the liquidation value of the contracts is assumed to be
equal to book value.
The remaining tangible assets are assumed to have a liquidation value of book value less 20%, while
inventory and trade and other receivables is estimated to have a liquidation value of book value less
152 Petersen and Plenborg (2012) p. 235 153 Petersen and Plenborg (2012) p. 235 154 Stocklink (2012)
Book value of equity
+/- The difference between the liquidation value and book value of assets
+/- The difference between the liquidation value and book value of liabilities
+/- The liquidation value of off-balance sheet items
- Fees to lawyers, auditors, etc
= Liquidation value
78
respectively 25% and 10%. The intangible assets are estimated to have liquidation value equal to zero.
The financial assets are assumed to have a liquidation value equal to book value.
5.11.2 Liquidation value of liabilities
The liquidation value of liabilities is assumed equal to
book value, except from operational leasing liabilities
where there is an assumed loss of 10% of book value.
This estimated as it is assumed the leasing agreements
will be acquired by other companies, but at a lesser
value. The equity value is estimated as book valued
equity – net financial assets + net financial assets and a
liquidation cost of 10% is assumed. The calculations of
the liquidation approach can be seen in Table 24. As
expected the share price is lower that what was estimated
using the DCF-model and in the multiple analysis when
using LCC’s as a benchmark. This shows that NAS value
is triggered by the expectations of future growth rather than its current status.
5.12 Partial conclusion
When estimating the share price of NAS three different valuation approaches was carried out. It was
found that the share price varies greatly based on the valuation approach and used. The DCF model
returned a share price of NOK 290 whilst the relative valuation approach is concluded to be too biased
towards source and accounting year to be considered as a reliable estimate for the share price. The
liquidation approach returned a value of NOK 91 which is significantly lower than the result from the
DCF. This was though expected and the analysis was carried out to show that the value of NAS relies
on the expectations of future growth.
The DCF model relies on assumptions of the future and is hence considered to be the most reliable
estimate of the value of NAS. As it is concluded that the forecasting is performed in accordance with
the findings in the strategic analysis it is concluded to be a reliable estimate. For the purpose of this
paper the value of NOK 290 is concluded to be the intrinsic value of NAS’ share.
With regards to this it is necessary to mention that there is great uncertainty connected to this price as
the sensitivity- and scenario analysis showed that the share price is hugely sensitive to minor changes
in the forecast assumptions. This underlines the point made previously that a valuation based on an
analyst’s projections of the future always will be biased towards the analyst’s individual opinions, and
hence not be truly objective.
Table 24: Liquidation value
Equity 3 787
Net financial expenses -462
Net financial assets 2 279
New equity 5 604
Loss on tangible assets -875,03
Loss on current assets -163
Loss on leasing liabilities -1 116
Liquidation value 3 449,96
Cost of liquidation 345,00
Liquidation value 3 104,96
No of shares 35,162
Share price 88
79
CHAPTER 6 – Conclusion
The objective of this paper was to determine the theoretical value of NAS’ share per 04.12.2013. This
was done through thorough strategic and financial analyses. The information found in the strategic and
financial analyses was combined to form a foundation for a forecasted budget of the future. This
budget served as the basis for the valuation.
The strategic analyses identified how the airline industry is influenced by the global economic
situation and described the fierce competition in the industry. The analyses placed NAS as a company
with a higher cost level, lower load factor and a marginally higher yield compared to the analyzed
international low-cost carriers. It was particularly noticed that NAS labor costs were significantly
higher than these competitors’. In the past, one could say, NAS has had an advantage as they are the
only low-cost carrier with significant market shares in the home market and thus, the dependency of a
sustainable competitive advantage has not been as urgent. Though, in a market where multiple players
targets the same customer segment, competition is fierce and this is something NAS will particularly
notice as they further expand the international operations. When they launch the long-haul routes from
London to the US they will be in direct competition with some of the largest and most established
airlines in the world. In the internal analysis is was found that NAS, per today, do not possess an
evident and sustainable competitive advantage. It was hence concluded that the only way NAS could
gain competitive power is to cut its costs, in particular, the labor costs. With regards to this, several
external threats was identified with the main being the Norwegian labor legislation which prohibits
NAS to use foreign labor on their flights as long as the aircrafts is registered in Norway. NAS has been
forward thinking and registered its new long-haul aircrafts in Ireland but are dependent on an Irish
flight license to commence operations in 2014, a license they have been denied twice per December
2013. Furthermore the strategic analyses showed that NAS is in risk of a declining yield as a direct
result of capacity increase. The interim reports of 2013 supported these findings by stating a decline in
yield and hence RASK. The financial analyses showed fluctuating results in the years examined, and it
was discovered that NAS financial performance in general is below the LCC peers. It was identified
that NAS ROIC is driven more by the revenue expense relation rather than capital utilization and that
the company has a high debt-to equity ratio.
It was proved in the scenario analysis that the absolutely biggest concern for NAS it the high labor
costs. The share price calculated when applying the DCF-framework with the expected development
incorporated was NOK 290. In the labor scenario, where it was assumed that all variables develop as
expected in the forecasted budget, except for the labor costs, the share price dropped significantly to -
51. These findings empathize NAS’ dependency on the necessary permissions to use foreign personnel
as this is the company’s only chance to cut its labor costs.
80
The second large concern is the declining yield and accordingly RASK level. NAS must find a way to
have an attractive price level and increased stage length simultaneously, without slashing the yield
level and sending the RASK to the grave.
In addition to the DCF-model the relative valuation approach and liquidation value was applied. The
relative valuation approach is disregarded as it was found that the estimates was too biased towards
chosen source and accounting year. The liquidation value approach returned a share price of NOK 88.
As expected this number is significantly lower than the DCF, but it shows that the value of NAS is
based on the expectations of future performance rather than its current assets.
With respect to all the findings in this paper, the share price of Norwegian Air Shuttle ASA is
estimated to be NOK 290 per 04.12.2013. This is higher than the market price of NOK 232 which
indicates that the share is undervalued by the market.
81
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88
8. Appendix
Appendix 1: NAS’ Reformulated income statement
REFORMULATED INCOME STATEMENT NORWEGIAN AIR SHUTTLE
NOK 1000 2008 2009 2010 2011 2012
Passenger transport 5 641 533 6 389 406 7 210 161 9 097 228 11 201 072
Ancillary revenue 463 609 788 655 1 034 006 1 224 744 1 405 495
Other revenues 121 271 131 129 162 172 206 688 234 624
Total revenues 6 226 413 7 309 190 8 406 339 10 528 660 12 841 191
Sales and distribution expenses -115 251 -149 415 -167 859 -198 930 -274 954
Aviation Fuel -2 006 248 -1 423 328 -2 092 859 -3 093 514 -3 740 508
Airport charges -841 999 -1 037 716 -1 295 913 -1 561 369 -1 730 217
Handling charges -615 740 -722 658 -863 551 -982 191 -1 077 334
Technical maintenance expenses -574 077 -659 796 -697 196 -711 597 -792 565
Other aircraft expenses -312 815 -325 371 -405 787 -441 657 -482 932
Personell costs -1 076 068 -1 303 299 -1 531 211 -1 836 194 -2 068 202
Other operational expenses -318 094 -396 058 -397 735 -472 908 -534 336
Share of profitt(loss) from assosiated companies -8 773 3 200 6 328 19 518 32 840
Total operating costs -5 869 065 -6 014 441 -7 445 783 -9 278 842 -10 668 208
EBITDA 357 348 1 294 749 960 556 1 249 818 2 172 983
Lease depreciation 263 193 382 586 480 248 511 871 637 267
Depreciation and amortization and impairment 129 611 148 882 186 707 293 950 385 244
EBIT -35 456 763 281 293 601 443 997 1 150 472
Tax 1 394 176 789 72 214 44 416 166 535
Tax shield 52 797 -53 075 -76 038 -164 278 -58 453
Operating tax 51 403 -229 864 -148 252 -208 694 -224 988
NOPAT 15 947 533 417 145 349 235 303 925 484
Special items
Other losses (gains) - net -147 768 49 315 29 732 305 720 -336 385
Other income - - 191 328 3 471 17 851
Total special items -147 768 49 315 221 060 309 191 -318 534
Earnings before interest - after special items -131 821 582 732 366 409 544 494 606 950
Financial items 351 966 47 974 26 600 -268 911 186 888
Lease interest -163 404 -237 528 -298 163 -317 796 -395 648
Net financial items 188 562,29 -189 554,47 -271 562,55 -586 706,65 -208 759,76
Financial tax (28%) -52 797,44 53 075,25 76 037,51 164 277,86 58 452,73
Profit 3 944,00 446 253,00 170 884,00 122 065,00 456 643,00
89
Appendix 2: Reformulated Balance Sheet – Operational
NON-CURRENT ASSETS 2008 2009 2010 2011 2012
Intangible assets 198 074 190 543 210 293 236 216 237 774
Defferred tax assets 59 759 157 270 2 069 4 293
Total intangible assets 257 833 190 700 210 563 238 285 242 067
Aircrafts, parts and installations on leased aircrafts 523 676 974 892 2 092 136 3 869 159 5 579 757
Equiptment and fixtures 31 014 30 905 26 175 31 991 58 476
Buildings 3 933 3 933 9 525 9 525 9 525
Financial lease assets - 26 092 31 203 27 882 24 562
Investments in associate 44 743 47 934 62 272 82 091 116 050
Prepayment aircraft manufacturers 705 165 1 410 992 2 002 600 2 126 954 2 844 359
Total tangible assets 1 308 531 2 494 748 4 223 911 6 147 602 8 632 729
Total operating non-current assets 1 566 364 2 685 448 4 434 474 6 385 887 8 874 796
Capitalized operating leases 2 986 179 4 340 798 5 448 877 5 807 669 7 230 405
TOTAL NON-CURRENT ASSETS ADJUSTET FOR LEASE 4 552 543 7 026 246 9 883 351 12 193 556 16 105 201
CURRENT ASSETS
Inventory 34 214 40 825 66 191 81 994 68 385
Trade and other recievables 914 379 829 893 842 143 1 072 497 1 096 558
Derivative financial intstrument 18 360 23 688 43 395 242 790 -
Total current operating assets 966 953 894 406 951 729 1 397 281 1 164 943
TOTAL OPERATING ASSETS 5 519 496 7 920 652 10 835 080 13 590 837 17 270 144
OPERATING LIABILITES
Provision for periodic maintenance 114 090 70 336 94 961 81 865 175 306
Deffered tax liabilities 9 695 17 806 89 483 134 646 301 042
Total non-current operational liabilities 123 785 88 142 184 444 216 511 476 348
Trade and other payables 694 832 746 549 1 063 436 1 230 935 1 564 955
Air traffic settlement liabilities 598 162 792 713 954 232 1 208 326 1 739 681
Derivative financial intstrument 104 325 1 227 15 003 539 190 356
Tax payable 267 111 158 976 488 -
Total current operating liabilities 1 397 586 1 651 647 2 033 647 2 440 288 3 494 992
TOTAL OPERATING LIABILITIES 1 521 371 1 739 789 2 218 091 2 656 799 3 971 340
INVESTED CAPITAL 3 998 125 6 180 863 8 616 989 10 934 038 13 298 804
Average invested capital 5 089 494 7 398 926 9 775 514 12 116 421
REFORMULATED BALANCE SHEET - OPERATIONAL
90
Appendix 3: Reformulated balance sheet – financial
Appendix 4: Present value of leasing expenses
LIABILITIES 2008 2009 2010 2011 2012
Capitalized operational leases 2 986 179 4 340 798 5 448 877 5 807 669 7 230 405
Net recognized pension liabilities 61 815 97 558 121 672 151 187 -
Long-term borrowings 440 873 878 878 1 943 903 2 682 888 4 166 854
Short-term borrowings 257 456 675 303 520 972 1 551 918 1 349 459
Financial lease liability 28 829 20 007 15 485 10 853
Total financial liabilities 3 746 323 6 021 366 8 055 431 10 209 147 12 757 571
ASSETS
Other long-term receivables 32 404 26 391 53 242 113 061 135 562
Financial assets available for sale (non-current) 5 628 7 236 2 689 2 689 2 689
Financial assets available for sale (current) - - - - 10 172
Cash and cash equivalents 607 536 1 408 475 1 178 416 1 104 946 1 730 895
Total financial assets 645 568 1 442 102 1 234 347 1 220 696 1 879 318
EQUITY
Share capital 3 236 3 421 3 457 3 488 3 516
Share premium 789 130 1 041 894 1 055 083 1 075 463 1 093 549
Other paid-in equity 38 984 47 421 54 521 63 365 63 365
Other recievables -7 633 -11 032 -7 944 -9 639 -9 335
Retained earnings 73 650 519 902 690 785 812 910 1 269 556
Total equity 897 367 1 601 606 1 795 902 1 945 587 2 420 651
Net interest bearing debt 3 100 755 4 579 264 6 821 084 8 988 451 10 878 253
Net bearing debt + equity 3 998 122 6 180 870 8 616 986 10 934 038 13 298 904
REFORMULATED BALANCE SHEET - FINANCIAL
Cost of debt 5,47 %
Capitalization rate 7
2008 2009 2010 2011 2012
Operational lease payments 426 597 620 114 778 411 829 667 1 032 915
Capitalized operational lease 2 986 179 4 340 798 5 448 877 5 807 669 7 230 405
Interest on capitalized lease 163 403,71 237 528,47 298 162,55 317 795,65 395 647,76
Depreciations on capitalized lease 263 193,29 382 585,53 480 248,45 511 871,35 637 267,24
91
Appendix 5: Calculation of ROE
Appendix 6: Effective borrowing cost
Appendix 7: Credit spread / company specific risk
ROE 2008 2009 2010 2011 2012
ROIC 10,48 % 1,96 % 2,41 % 7,64 %
Borrowing cost 5,22 % 3,70 % 3,76 % 3,90 %
Financial leverage 2,86 3,80 4,62 4,49
ROE 25,52 % -4,63 % -3,84 % 24,43 %
Average ROE 10,37 %
Effective interest rate 8,6 8,6 8,6 8,8 7,5
5,56 7,8 2,5 3,1 6,8
5,4 4,5 4 3,1
7,2 4,5 4,6 3,8
5,6 5,6 5,9
Average effective interest 7,08 7,25 5,14 5,22 5,42
After tax 5,10 % 5,22 % 3,70 % 3,76 % 3,90 %
2008 8,52 4,47 4,05
2009 8,6 4 4,6
2010 8,6 3,52 5,08
2011 8,8 3,12 5,68
2012 7,6 2,1 5,5
Average bond rate
(issued by NAS)
Risk free
interest
Company
spesific risk
92
Appendix 8: Reformulated Income statement Ryanair
2008 2009 2010 2011 2012
Sheduled revenues 2 226 2 343 2 325 2 828 3 504
Ancillary revenues 488 598 664 802 886
Total revenues 2 714 2 941 2 988 3 630 4 390
Staff cost 285,3 309,3 335 376,1 415
Fuel cost 791 1257,1 893,9 1227 1593,6
Maintenance 57 66,8 86 93,9 104
Marketing 17 151,9 144,8 154,6 180
Route charges 259 286,6 336,3 410,6 460,5
Handeling charges 396 443,4 459,1 491,8 554
Other 122 0 0 0 0
Total operating costs 1 928 2 515 2 255 2 754 3 307
EBITDA 786 426 733 876 1 083
Depreciation 176 256,1 235,4 277,7 309,2
Lease depreciation 44 47,16 57,60 58,62 54,70
EBIT 566 123 440 539 719
Tax 48 11,3 35,7 46,3 72,6
Tax shield 16 38 12 13 11
Operating tax 64 27 48 60 83
NOPAT 502 96 392 480 636
Net financial expenses 98 273,1 61,1 67,3 50,2
Lease interest 29 31 38 39 36
Total financial items 127 304 99 106 86
Tax on financial items 15,9 38,0 12,4 13,2 10,8
Profit 391 -170 305 387 560
REFORMULATED INCOME STATEMENT RYANAIR 2008-2012
93
Appendix 9: Reformulated balance sheet – operational
2008 2009 2010 2011 2012
Non current assets 3628,9 3751,6 4383,8 5004,4 4975,3
Current tax 1,6 0,5 9,3
Inventories 2 2,1 2,5 2,7 2,8
Other assets 169,6 91 80,6 99,4 64,9
Trade recievables 44,3 41,8 34,2 50,6 51,5
Derivative fin item 122,6 130 10,3 383,8 231,9
Capitalized lease 508,9 547,4 668,5 680,4 634,9
Current assets 849 812,3 796,1 1216,9 986
Total operating assets 4477,9 4563,9 5179,9 6221,3 5961,3
Provisions 44,8 72 102,9 89,6 103,2
Deferred tax 148,1 155,5 199,6 267,7 319,4
Derivative fin instruments 75,7 54,1 35,4 8,3 53,6
Total non-current operating liabilities 268,6 281,6 337,9 365,6 476,2
Trade and other payables 129,3 132,7 154 150,8 181,2
Accrued expenses and other liabilities 919,4 905,8 1088,2 1224,3 1237,2
Current tax 0 0,4 0,9 0 0
Derivative financial intstruments 141,7 137,4 41 125,4 28,2
Total current operating liabilities 1190,4 1176,3 1284,1 1500,5 1446,6
Total operating liabilities 1459 1457,9 1622 1866,1 1922,8
Invested capital 3018,9 3106 3557,9 4355,2 4038,5
OPERATING
94
Appendix 10: Reformulated balance sheet Ryanair – financial
2008 2009 2010 2011 2012
Liabilities
Capitalized lease 508,9 547,4 668,5 680,4 634,9
Current maturities of debt 366,8 202,9 265,5 336,7 368,4
non-current maturities of debt 1899,7 2195,5 2690,7 3312,7 3256,8
other creditors 99,9 106,5 136,6 126,6 146,3
Total financing liabilities 2875,3 3052,3 3761,3 4456,4 4406,4
Assets
Available for sale 311,5 93,2 116,2 114 149,7
Restricted cash 292,4 291,6 67,8 42,9 35,1
Financial assets: cash 406,3 403,4 1267,7 869,4 772,2
Cash and cash equivalents 1470,8 1583,2 1477,9 2028,3 2708,3
Total financing assets 2481 2371,4 2929,6 3054,6 3665,3
Equity 2624,6 2425,1 2726,2 2953,9 3306,7
net interes b debt 394,3 680,9 831,7 1401,8 741,1
Invested capital 3018,9 3106 3557,9 4355,7 4047,8
FINANCIAL
95
Appendix 11: Reformulated Income statement EasyJet
2008 2009 2010 2011 2012
Total revenue 2362,8 2666,8 2973,1 3452 3854
Total operating costs 2114,2 2441,7 2611,8 2984 3323
EBITDA 248,6 225,1 361,3 468 531
Amortization 2,5 4,4 6,2 7 8
Deprecitation 44,4 55,4 72,5 83 97
Lease Depreciation 64,206 67,396 59,16 63,22 55,1
Loss/profit on disposal of assets for sale 11 -7
EBIT 137,494 108,904 216,44 314,78 370,9
Corporate tax 27 16,5 32,7 23 62
Tax shield 6,55056 15,17712 17,4832 16,0272 12,936
Operating tax 33,55056 -1,32288 50,1832 39,0272 74,936
NOPAT 103,94344 110,22688 166,2568 275,7528 295,964
Net financial expenses -19,2 5,4 19,6 21 14
Lease interest 46,494 48,804 42,84 45,78 39,9
Total financial expenses 27,294 54,204 62,44 66,78 53,9
Financial tax (24%) 6,55056 15,17712 17,4832 16,0272 12,936
Profit 83,2 71,2 121,3 225 255
REFORMULATED INCOME STATEMENT EASYJET
96
Appendix 12: Reformulated balance sheet EasyJet – operational
2008 2009 2010 2011 2012
Non current assets
Goodwill 359,8 365,4 365,4 365 365
Other intangible assets 80,6 81,7 86,8 86 91
Equipment 1102,6 1612,2 1928,1 2149 2395
Derivative financial items 21,3 7,8 8,2 24 21
Other non-current assets 61,1 62,7 53,5 63 57
Deferred tax assets 0,5 0,4 0 0 0
Capitalized lease 774,9 813,4 714 763 665
Total non-current assets 2400,8 2943,6 3156 3450 3594
Current assets
Assets held for sale 195,8 73,2 73,2 0 0
Trade and other recievables 236,9 241,8 194,1 165 241
Derivative financial instruments 96,5 68 52,6 83 73
Total current assets 529,2 383 319,9 248 314
Total operating assets 2930 3326,6 3475,9 3698 3908
Current liabilities
Trade and other payables 653 750,7 828,7 916 1021
Derivative financial intstruments 76 91,1 9,6 52 26
Current tax 75,1 57,7 27,5 9 29
Maintenance provisions 49 45,1 71,4 45 59
Total current liabilities 853,1 944,6 937,2 1022 1135
Non-current liabilities
Derivative financial instruments 0,3 2,6 4 27 24
Non-current deffered income 0 52,6 56,6 59 46
Maintenance provisions 160,4 168,6 144,1 177 141
Deferred tax 108,1 76,7 147,9 179 198
Other non-current liabilities 68,8
Total non-current liabilities 337,6 300,5 352,6 442 409
Total operating liabilities 1190,7 1245,1 1289,8 1464 1544
Invested capital 1739,3 2081,5 2186,1 2234 2364
Operational
97
Appendix 13: Reformulated Balance sheet EasyJet – Financial
2008 2009 2010 2011 2012
Liabilities
Capitalized lease 774,9 813,4 714 763 665
Borrowings Current 56,7 117,6 127,4 155 129
Borrowings non-current 570,2 1003 1084,6 1145 828
Total financing liabilities 1401,8 1934 1926 2063 1622
Assets
Loan notes 12 12,6 13,1 11 10
Restricted cash non-current 42,9 48 32,5 33 29
Restricted cash current 23,30 24,3 23,1 90 130
Money market deposits 230,3 286,3 260 300 238
Cash and cash equivalents 632,2 788,6 911,9 1100 645
Total financing assets 940,7 1159,8 1240,6 1534 1052
Equity 1278,2 1307,3 1500,7 1705 1794
Net interest bearing debt 461,1 774,2 685,4 529 570
Invested capital 1739,3 2081,5 2186,1 2234 2364
Financial
98
Appendix 14: Regression analysis output SP500/NAS - Weekly
Appendix 15: Regression analysis output SP500/NAS – Monthly
Regresjonsstatistikk
Multippel R 0,450583303
R-kvadrat 0,203025313
Justert R-kvadrat 0,191474955
Standardfeil 0,165840671
Observasjoner 71
Variansanalyse
fg SK GK F Signifkans-F
Regresjon 1 0,483433611 0,483433611 17,57740466 8,04612E-05
Residualer 69 1,897715836 0,027503128
Totalt 70 2,381149447
Koeffisienter Standardfeil t-Stat P-verdi Nederste 95% Øverste 95% Nedre 95,0% Øverste 95,0%
Skjæringspunkt 0,013361533 0,019700802 0,678222816 0,499898679 -0,025940491 0,052663558 -0,025940491 0,052663558
X-variabel 1 1,550194383 0,369750512 4,192541551 8,04612E-05 0,812562295 2,287826471 0,812562295 2,287826471
REGRESSION ANALYSIS OUTPUT SP500 AND NAS - MONTHLY
Multippel R 0,43304009
R-kvadrat 0,18752372
Justert R-kvadrat 0,18489435
Standardfeil 0,065393
Observasjoner 311
Variansanalyse
fg SK GK F Signifkans-F
Regresjon 1 0,30497662 0,30497662 71,3187962 1,2022E-15
Residualer 309 1,3213596 0,00427624
Totalt 310 1,62633622
Koeffisienter Standardfeil t-Stat P-verdi Nederste 95%Øverste 95% Nedre 95,0%Øverste 95,0%
Skjæringspunkt 0,00191968 0,00370829 0,51767258 0,60505714 -0,00537701 0,00921637 -0,00537701 0,00921637
X-variabel 1 1,01828228 0,12057748 8,44504566 1,2022E-15 0,7810255 1,25553907 0,7810255 1,25553907
Regresjonsstatistikk
REGRESSION ANALYSIS OUTPUT SP500 AND NAS - WEEKLY
99
Appendix 16: Regression analysis output MSCI EAFE/NAS - Weekly
Appendix 17: Regression analysis output MSCI EAFE/NAS - Weekly
Regresjonsstatistikk
Multippel R 0,47191173
R-kvadrat 0,22270068
Justert R-kvadrat 0,22018515
Standardfeil 0,06396171
Observasjoner 311
Variansanalyse
fg SK GK F Signifkans-F
Regresjon 1 0,36218618 0,36218618 88,5302596 1,1855E-18
Residualer 309 1,26415004 0,0040911
Totalt 310 1,62633622
Koeffisienter Standardfeil t-Stat P-verdi Nederste 95%Øverste 95% Nedre 95,0%Øverste 95,0%
Skjæringspunkt 0,00102996 0,00362745 0,28393644 0,77664925 -0,00610766 0,00816759 -0,00610766 0,00816759
X-variabel 1 0,94808045 0,10076259 9,409052 1,1855E-18 0,74981283 1,14634806 0,74981283 1,14634806
REGRESSION ANALYSIS OUTPUT MSCI EAFE AND NAS - WEEKLY
Regresjonsstatistikk
Multippel R 0,46182442
R-kvadrat 0,21328179
Justert R-kvadrat 0,20188008
Standardfeil 0,16477009
Observasjoner 71
Variansanalyse
fg SK GK F Signifkans-F
Regresjon 1 0,50785583 0,50785583 18,7061182 5,0348E-05
Residualer 69 1,87329362 0,02714918
Totalt 70 2,38114945
Koeffisienter Standardfeil t-Stat P-verdi Nederste 95%Øverste 95% Nedre 95,0%Øverste 95,0%
Skjæringspunkt 0,00803444 0,0195585 0,41078985 0,68249959 -0,03098371 0,04705258 -0,03098371 0,04705258
X-variabel 1 1,22738814 0,28378542 4,32505702 5,0348E-05 0,66125171 1,79352457 0,66125171 1,79352457
REGRESSION ANALYSIS OUTPUT MSCI EAFE AND NAS - MONTHLY
100
Appendix 18: Regression analysis output MSCI EAFE/NAS – Weekly
Appendix 19: Balance sheet forecast assumptions
Mill NOK F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
Passenger 13 580 16 377 17 607 19 155 20 644 22 708 24 979 26 977 28 865 31 175
Other revenues 293 354 380 414 446 490 540 583 623 673
Ancillary revenues 1 697 2 047 2 201 2 394 2 580 2 838 3 122 3 372 3 608 3 897
Total revenues 15 571 18 778 20 188 21 964 23 670 26 037 28 641 30 932 33 097 35 745
Sales and distribution expenses 311 376 404 439 473 521 573 619 662 715
Aviation Fuel 4 360 5 070 5 249 5 491 5 444 5 728 6 301 6 805 7 281 7 864
Airport charges 2 180 2 629 2 826 3 075 3 314 3 645 4 010 4 330 4 634 5 004
Handling charges 1 479 1 784 1 918 2 087 2 249 2 474 2 721 2 939 3 144 3 396
Technical maintenance expenses 965 1 127 1 211 1 208 1 302 1 432 1 432 1 547 1 655 1 787
Other aircraft expenses 623 751 808 879 947 1 041 1 146 1 237 1 324 1 430
Personell costs 2 569 3 004 3 230 3 404 3 314 3 775 3 981 4 238 4 369 4 647
Other operational expenses 747 845 848 922 994 1 094 1 203 1 299 1 390 1 501
Total operating costs 13 235 15 585 16 494 17 505 18 036 19 710 21 366 23 013 24 459 26 344
EBITDA 2 336 3 192 3 694 4 459 5 633 6 327 7 275 7 919 8 638 9 401
Lease depreciation 830 1 033 1 240 1 275 1 166 1 276 1 427 1 594 1 780 1 987
Depreciation and amortization 467,1 563,3 605,6 658,9 710,1 781,1 859,2 928,0 992,9 1 072,3
EBIT 1 038,5 1 595,5 1 848,8 2 524,8 3 757,0 4 270,1 4 988,7 5 396,2 5 865,0 6 341,6
Corporate tax 290,8 446,8 517,7 707,0 1 052,0 1 195,6 1 396,8 1 510,9 1 642,2 1 775,7
Tax shield 129,2 133,7 112,6 131,1 167,9 187,6 206,1 222,2 237,4 256,1
Operating tax -161,5 -313,0 -405,0 -575,9 -884,1 -1 008,1 -1 190,8 -1 288,7 -1 404,8 -1 519,6
NOPAT 877,0 1 282,5 1 443,8 1 949,0 2 872,9 3 262,0 3 797,9 4 107,5 4 460,3 4 822,1
Financial items 779,2 873,0 876,9 956,0 1 046,0 1 158,1 1 282,0 1 403,9 1 529,5 1 675,2
Lease interest -317,7 -395,5 -474,6 -488,0 -446,4 -488,3 -546,1 -610,2 -681,5 -760,5
Net financial items 461,5 477,5 402,3 468,1 599,6 669,8 735,9 793,7 848,0 914,7
Financial tax (28%) 129,2 133,7 112,6 131,1 167,9 187,6 206,1 222,2 237,4 256,1
Profit 1 467,7 1 893,7 1 958,7 2 548,1 3 640,4 4 119,4 4 739,9 5 123,4 5 545,7 5 992,8
FORECASTED BUDGET
Average
2008 2009 2010 2011 2012 F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
In % of revenues
Intangible assets 4,1 % 2,6 % 2,5 % 2,3 % 1,9 % 2,7 % 2 % 2 % 2 % 2 % 2 % 2 % 2 % 2 % 2 % 2 %
Aircrafts, parts and installations 8,4 % 13,3 % 24,9 % 36,7 % 43,5 % 25,4 % 55 % 55 % 55 % 55 % 55 % 55 % 55 % 55 % 55 % 55 %
Equiptment and fixtures 0,50 % 0,42 % 0,31 % 0,30 % 0,46 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 % 0,4 %
Buildings 0,06 % 0,05 % 0,11 % 0,09 % 0,07 % 0,1 % 0,2 % 0,2 % 0,2 % 0,2 % 0,2 % 0,2 % 0,2 % 0,2 % 0,2 % 0,2 %
Financial lease assets 0,00 % 0,36 % 0,37 % 0,26 % 0,19 % 0,2 % 0,24 % 0,24 % 0,24 % 0,24 % 0,24 % 0,24 % 0,24 % 0,24 % 0,24 % 0,24 %
Prepayment aircraft manufacturers 11,33 % 19,30 % 23,82 % 20,20 % 22,15 % 19,4 % 22 % 22 % 22 % 22 % 22 % 22 % 22 % 22 % 22 % 22 %
Inventory 0,5 % 0,6 % 0,8 % 0,8 % 0,5 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 % 0,6 %
Trade and other recievables 14,7 % 11,4 % 10,0 % 10,2 % 8,5 % 11,0 % 9 % 9 % 9 % 9 % 9 % 9 % 9 % 9 % 9 % 9 %
Non current operating liabilities 2,0 % 1,2 % 2,2 % 2,1 % 3,7 % 2,2 % 3,50 % 3,50 % 3,50 % 3,50 % 3,50 % 3,50 % 3,50 % 3,50 % 3,50 % 3,50 %
Trade and other payables 11,2 % 10,2 % 12,7 % 11,7 % 12,2 % 11,6 % 12 % 12 % 12 % 12 % 12 % 12 % 12 % 12 % 12 % 12 %
Air traffic settlement liabilities 9,6 % 10,8 % 11,4 % 11,5 % 13,5 % 11,4 % 14 % 14 % 14 % 14 % 14 % 14 % 14 % 14 % 14 % 14 %
HISTORICAL
In % of revenues
FORECASTED
101
Appendix 20: Forecasted balance sheet
millNOK F2013 F2014 F2015 F2016 F2017 F2018 F2019 F2020 F2021 F2022
In % of revenues
Intangible assets 311,4 375,6 403,8 439,3 473,4 520,7 572,8 618,6 661,9 714,9
Aircrafts, parts and installations 8 563,9 10 327,6 11 103,5 12 079,9 13 018,5 14 320,3 15 752,3 17 012,5 18 203,4 19 659,7
Equiptment and fixtures 62,0 74,8 80,4 87,5 94,3 103,7 114,1 123,2 131,8 142,4
Buildings 31,1 37,6 40,4 43,9 47,3 52,1 57,3 61,9 66,2 71,5
Financial lease assets 36,9 44,5 47,8 52,0 56,1 61,7 67,8 73,3 78,4 84,7
Prepayment aircraft manufacturers 3 449,0 4 159,3 4 471,8 4 865,0 5 243,0 5 767,2 6 344,0 6 851,5 7 331,1 7 917,6
Operational lease 8 676 8 921 8 161 8 927 9 983 11 156 12 458 13 903 15 507 17 288
Total non-current assets 21 130,9 23 939,8 24 309,0 26 494,5 28 915,9 31 982,0 35 366,5 38 644,2 41 980,1 45 878,3
In % of revenues
Inventory 93,4 112,7 121,1 131,8 142,0 156,2 171,8 185,6 198,6 214,5
Trade and other recievables 1 401 1 690 1 817 1 977 2 130 2 343 2 578 2 784 2 979 3 217
Total current assets 1 494,8 1 802,6 1 938,1 2 108,5 2 272,3 2 499,5 2 749,5 2 969,5 3 177,3 3 431,5
Total operating assets 22 625,7 25 742,4 26 247,0 28 603,0 31 188,3 34 481,6 38 116,0 41 613,6 45 157,4 49 309,8
In % of revenues
Non current operating liabilities 544,98 657,21 706,59 768,72 828,45 911,29 1 002,42 1 082,61 1 158,40 1 251,07
Trade and other payables 1 868 2 253 2 423 2 636 2 840 3 124 3 437 3 712 3 972 4 289
Air traffic settlement liabilities 2 180 2 629 2 826 3 075 3 314 3 645 4 010 4 330 4 634 5 004
Total current liabilities 4 048 4 882 5 249 5 711 6 154 6 770 7 447 8 042 8 605 9 294
Total operating liabilities 4 593,39 5 539,37 5 955,53 6 479,24 6 982,63 7 680,89 8 448,98 9 124,90 9 763,64 10 544,73
Net working capital -2 553,6 -3 079,5 -3 310,9 -3 602,0 -3 881,9 -4 270,1 -4 697,1 -5 072,8 -5 427,9 -5 862,2
Invested capital 18 032,27 20 203,07 20 291,51 22 123,72 24 205,63 26 800,68 29 666,97 32 488,73 35 393,73 38 765,11
Net interest-bearing debt 14 245,50 15 960,42 16 030,29 17 477,74 19 122,45 21 172,54 23 436,91 25 666,10 27 961,05 30 624,43
Equity 3 786,78 4 242,64 4 261,22 4 645,98 5 083,18 5 628,14 6 230,06 6 822,63 7 432,68 8 140,67
102
