Contents Page:
Letter of Authentication Acknowledgments Executive Summary !esearch Pro"osal
1 2 #
$ntroduction ðodology
% %
&ain !esults ' (indings Current &arket Position
) )
Analysis and Evaluation $nvestment A""raisal $nvestment Pro,ect $ $nvestment Pro,ect $$ -on.finacial Analysis S/0 Analysis PES Analysis
* 1+ 11 12 1 1 1
Conclusions and !ecommendations
1#
i3liogra"hy A""endices
14 1%
1
Acknowledgments
$ would like to acknowledge and thank:
•
&r 5iannis 6ardoufas7 easy8et Athens Station 5eneral &anager for his time and im"ortant data he offered during the interview9
2
Executive Summary
The management and main shareholders of easyJet plc. have recently expressed interest in growing their business considering the increased demand for private healthcare and more specifically diagnostic services in Greece. As the operational core of the business focuses on this market segment the report analyses! "#hould easyJet plc. further penetrate the Greek market$ %f yes should the expansion plan be organic or via a takeover$&
The first part of the report deploys the research proposal which presents the research rational the theoretical framework as well as the methodology followed. 'ollowing an introductory note outlines details of the company as well as sketches the hypothesis of the research.
The analysis part is based on both primary and secondary research in the form of personal interviews with the top management ('igure )* collection of financial reports and independent sector analysis from the largest market research company in Greece. These data allowed for a detailed evaluation on a financial level (%nvestment Appraisal and +orporate 'inancial Analysis* and on a non,financial level (#-T /0#T*.
The conclusions part deploys an assessment of the two possible investment options for easyJet plc. n the one hand there is a long term heavy investment proect of investing on a large competitor while on the other hand there is the option of launching a new diagnostic centre anew.
Although the 3new location4 proect returns a positive 5/6 compared to the 307uity /urchasing4 which returns a lower 5/6 it is important to consider the long term strategic plan of the company and the non,financial analysis. The discussion part suggests that the second option forms a more attractive investment opportunity of easyJet.
)
!esearch Pro"osal
8esearch 9uestion
"#hould easyJet further penetrate the market for air travel between the :; and Greece$ %f yes should the expansion plan be organic or via a takeover$&
8ationale An investment dilemma is explored whereby easyJet
Theoretical 'ramework The analysis of this report is based on a twofold approach. =oth financial and non, financial considerations will evaluate the potential feasibility of each investment proect. ;ey Areas of #yllabus •
Growth and 0volution
•
+ompany Analysis
•
The external 0nvironment
•
%nvestment Appraisal
>ethodology The procedure of the study was carried,out at primary and secondary level. /rimary 8esearch was conducted with the general manager of easyJet4s station in Athens ?
%nternational Airport (A%A*. The company4s representative in Greece was interviewed in order to identify company4s future strategic and financial plan. The interview also contributed to the author4s knowledge and appreciation related to the industry4s structure in Greece as well as its operating procedures venture risks and the structure of the company.
#econdary 8esearch was carried,out as well in order to collect data and information related to the industry the market and the environment (internal and external* within the company is operating. The data were collected from various sources such as an industry report and insight on cost structure and market analysis in Greece for year 2@@ company4s specific information on strategy and future expansion plans of easyJet plc. and several other resources libraries referring to the Greek legal framework and its characteristics related to the subect.
Possi3le Pro3lems:
=iased interview 7uestions because of vested interests
Solutions:
6erification of data by using other secondary resources +omplementary information from independent sources 0nsure data availability in advance
B
$ntroduction 0asyJet plc. -as C first in 'ebruary 1? serving domestic routes in the :;. %t has been a product of the deregulation in the airline industry and #ir #. Dadi,%oannou4s entrepreneurial will. %n 2@1@ sixteen years afterwards the number of city pairs served by the airline have increased to 2B? and competition has been continuously increasing by the emergence of a large number of competing low,cost carriers. Traditional airlines such as =ritish Airways and lympic Air have been fully adapted to the new challenge offering simpler and lower cost airfares on routes served by easyJet. The company under examination has gained a uni7ue selling point by providing point,to, point services and by removing onboard and airport frills such as free cabin service and pre,assigned seating. >oreover the heavily invest in growing their network from secondary airport in order to achieve more efficient on,time and lower cost flights. The financial performance is depicted in the two figures below. (igure 1: easy8et "lc9; financial "erformance
Years 2006 2007 2008 2009 200
Revenue (€) 129.200.000 191.300.000 123.100.000 43.700.000 188.300.000
Cost of Sales (€) 90.440.000 133.910.000 86.170.000 30.590.000 131.810.000
Operating Costs (€) 15.504.000 22.956.000 14.772.000 5.244.000 22.596.000
Net Profit (€) 23.256.000 34.434.000 22.158.000 7.866.000 33.894.000
(igure 2: easy8et "lc9; financial "erformance gra"h
#ource! easyJet 'inancial Analysis
E
This thesis aims at carrying out a feasibility study investigating two investment alternatives for easyJet plc. The first investment opportunity relates to launching a new route between Gatwick
&ain !esults and (indings Current &arket Position
%n many ways 2@1@ could be seen as a defining year for the low,cost carrier model.. %n contrast to traditional airlines low,cost carriers have achieved a relatively smooth weathering of the recession and a lot better than the fuel,driven crisis of 2@@H. The following table gives a clear indication that the profitability of the sector has held up relatively well. %t is evident that only two of the top 2@ carriers under examination ('light 2@1@* lost money in their financial years ending during 2@1@. This marks an improvement on the six that were in the red at an operating level in 2@@. %t is important to mention that the data below are estimated in :# ollars and account for the entire group of companies easyJet and other carriers hold hence a discrepancy between the two tables. At net level the 2I carriers for which figures were available ('lightglobal 2@1@* generated a combined profit of more than 1 billion in 2@1@. +ontrast this with the small net loss they incurred in 2@@H and the .? billion the %nternational Air Transport Association (%ATA* estimates its members lost collectively in 2@1@ and the picture of a robust performance emerges.
I
Table 1! Airline 8evenues !irline
200 Revenues
C"ange in #
Sout"$est !irlines
#0%&'n
6%
!ir *erlin
#&%6'n
9%2
R+anair
#&%'n
6%9
,as+-et
#&%'n
%8
-et*lue !ir$a+s
#.%.'n
.%0
/ol
#.%'n
2%9
!irran !ir$a+s
#2%.'n
8%.
1est-et !ir$a+s
#2%0'n
%8
3irgin *lue !ir$a+s
#%9'n
0%2
!er 4ingus
#%7'n
%7
#ource! 'light Global 2@1@
&ature $ndustry
Growth has always been central to the profitability of low,cost carriers but the reduction on capacity being evident in more mature low,cost markets such as the 0uropean and 5orth American has re7uired the creation of different ways to raise revenues. This has been the lead for airlines to aggressively target cost,conscious business travelers who wish to trade down to increase co,operation efforts and take immediate measures to gain more ancillary revenues from onboard sales and other services not provided on the fare.
A more cautious capacity approach has also been evident in 0urope but consolidation has helped individual carrier growth. 6uelingKs merger with fellow =arcelona budget operation +lickair enabled the former to grow its share but both carriers had markedly scaled back capacity prior to the tie,up. 0lsewhere carriers have moved into gaps created by low,cost carriers casualties for example central 0uropeKs -iLL Air benefiting from the collapse of #ky0urope and 8yanair moving into former >yAir bases in %taly ('lightGlobal 2@1@*. They also continue to heap pressure on retrenching network carriers where Association of 0uropean Airline members carried H
2@ million fewer passengers in 2@@ expanding in key markets. =y contrast passenger numbers across 0uropean
Analysis
%n order to further evaluate which course of action would prove to be the most beneficial it is necessary to carry out an assessment of the financial as well as the non,financial factors that influence such a decision.
$nvestment A""raisal %nvestment appraisal is the planning process used to determine a firmKs long term investment such as new and replacement machinery new plants new products and research and development proects.
'or the purposes of this report the 5/6 and payback period methods have been used in order to evaluate the two investment options that faced by the firm. The 5/6 analysis has been carried out to assist the author4s estimations of the inflows received by the firm in the first three years of operations net of the effect of inflation and opportunity cost. Additionally the payback period has been used in order to estimate the time re7uired for the return on the two different investment options to CrepayC the sum of the original investments. The formulas for the 5et /resent 6alue and for the payback period are shown below!
-et Present =alue
Pay3ack "eriod
1@
$nvestment Pro,ect $: ‘Investment in a new route from London Gatwick to Athens International Airport.
Table 1 depicts the investment appraisal calculations proected over a B year investment period in the event that the option of launching the newroute is chosen. a3le 1: (inancial Analysis ' $nvestment A""raisal of >!oute London . Athens? Initial costs
€ (thousand)
Administation Marketing Facillities Council taxes Compliance costs Aircra!t Total
$xpected In!lo%s +ear
&e'enues 1 # "
06#0 118 ".8 166. "100#00
Costs "6.0 1.11 "11# 1#. ..#18"
60 800 118 180 0 "#00 5,908
ro!its (F)
*iscounting Factor Interest, #-
"00 1#1" 6""6 10 #8016 489999
0/8 0/61 0/"# 0/#" 0/06 PV= Initial cost NPV=
resent alue 6 116. "# 1010# #.18 448,187 5,908 442,279
#ource! Author
The cost of sales and operating costs are estimated at 2F of total revenue whereas the discount rate of 2F represents the interest rate charged by the 0uropean +entral =ank currently set for as 0uribor. %n this case the discount rate reflects the opportunity costs incurred by investing in the launch of the new diagnostic centre as opposed to an alternative perhaps safer investment such as government bonds. The proect4s /resent 6alue is anticipated to generate a positive 5/6 of ??2.2IM.
a3le 1919: Pay3ack Period of >!oute London @ Athens?
Pa+'a5 Perio
‘New Route’
Years 1 year and 56 days
#ource! Author
11
%t is estimated that if easyJet plc. decides to invest in launching the new route will break even in 1 year and BE days.
$nvestment Pro,ect $$: ‘Investment through Equity purchasing in Hellaset !.A."
Table 2 similarly portrays the respective calculations for the second proect scenario of investing in DellasJet via purchasing 22F of the company4s e7uity on the stock exchange.
a3le 2: (inancial Analysis ' $nvestment A""raisal of >Euity Purchasing? in Bellas8et S9A9 Initial costs
€ (thousand)
Administation Marketing Facillities Council taxes Compliance costs Aircra!t Total
$xpected In!lo%s +ear
&e'enues 1 # "
11 11."" #0# 1060. 168##
Costs 86 10.. #8.0 .1610 #1"8#
6# 680 118 ##0 0 #100 3,730
ro!its (F) 1# 88 #816 8""88 #"6 378630
*iscounting Factor Interest, #-
resent alue
0/8 0/61 0/"# 0/#" 0/06
06. 0#1 #6# .806. ##68 346,322 3,730 342,592
PV= Initial cost= NPV=
#ource! Author
%n this circumstance the initial outlay (22F of the company4s market value* comprises the single maority stake in the company as the second largest investor holds nearly 1EF of the company. This results in a lower 5/6 over the short term period which at first glance means that such an investment does not appear favourable. Dowever this may not depict this investment4s full potential unless it is proected over a medium,long term basis or 7uantified by other means and measures. 12
%nterestingly despite the larger initial outlay involved in buying e7uity in the established airline the /ay,=ack period for the second investment opportunity is a little shorter signifying that the investment is expected to be paid back faster than proect 1.
a3le 2919: Pay3ack Period of >Euity Purchasing? in Bellas8et S9A9
Pa+'a5 Perio
‘Hellas Jet A!u"s"t"on’
Years +ear an 2. a+s
#ource! Author
-on.finacial Analysis %n order for easyJet plc. to decide the best path to its future development it is necessary to explore also the non,financial factors that influence this decision making process and evaluation. This is facilitated with the #-T analysis.
S/01 Analysis 0asyJet offers a high 7uality service at rock bottom prices and offer a number of features including ticketless travel internet booking and assisted travel services for an additional cost over and above the initial travel fare. They have a highly distinctive orange colour on all of their fleet of aircraft in order to make them easily recognisable and provide free of charge advertising of their airline4s way to book tickets. They have a simple and functional website which deploys the price breakdown of the passenger4s travel plan. ffering a full breakdown of the price plan prevents any hidden charges when the customer confirms there booking and reduces inconvenience and stress. 0asyJet offers an online promotion alert which is e,mailed to existing customers and contact on the company4s database that informs potential customers of the ongoing offers discounts and coupon rates. %t has been an increasingly recogniLable brand in the :;. >oreover it operates a fast and efficient service with an average turnaround time of )@ minutes or below which allows for an increased use of aircraft and cabin crew. Also this enables the airline to maintain a reliable and hassle free service to their passengers. As far as weaknesses are concerned easyJet4s main competitors being Jet2 =>% =aby 8yan Air plus a host of smaller independent competitors can restrict and shape pricing policy on some of its less profitable routes as they seek to 1
%nterview with >r ardoufas
1)
compete with their competitors. 'urthermore they do not offer a free food service on longer flights of 2 hours plus which may reduce the interest of some passengers to other airlines. The possible opening of additional routes to maor business and tourism destinations in 0urope may provide the sole important opportunity for future growth. %n addition purchasing fuel in advance may reduce the risk of the airline paying more in the future. 'inally pressure from trade unions and employee relations may drastically impact on the daily operations with potential strikes proving to be very costly to the company4s survival. The economic downturn may lead to a decrease in fre7uent flyers and corporate travel as companies will seek to cut less necessary expenditure leading to less business trips.
PES2 Analysis As far as external political factors are concerned an 0: east,enlargement may provide access to viable new markets with relatively increasing income to spend on short trips. The economic factors consider the likelihood of increasing fuel costs congestion and other environmental restrictions as well as the prospect of higher security and insurance costs to reflect the risk of terrorism. >oreover as the recession is likely to last for a considerable period business travellers will become increasingly conscious of their travel expenses. The socio,cultural factors entail winning over the 'rench and German publics and causing problems as there appears still to be a general unwillingness to use credit cards over the phone or %nternet. The public is general 7uite friendly to the prospect of cheap flights. Dowever they may feel begrudged where they see promotions found in newspapers where flight are for M1@ only to find that the actual cost is much higher for the specific time or day they wish to fly on. A key issue will be the extent to which technological advancements N such as the use of the %nternet on distribution and cost synergies from industry consolidation N can offset upward
pressures
on
prices
and
costs.
2
'light 'lobal 2@@
1?
Conclusions and !ecommendations According to the findings the corporate management of easyJet plc. will make a decision according to the business strategy that has formed for the company4s future. >ore precisely if the management wishes to proceed with a long term and relatively higher investment then the optimal choice would be the organic growth option. This is due to the fact that it re7uires a substantially higher start up cost and is expected to return that investment in a longer term period. n the other hand if the management wishes to make a relatively shorter term investment ac7uiring a stake in rival DellasJet #.A. re7uires a lower amount of money a shorter term return for the investment. +onse7uently launching a new operation would be more favourable. The non, financial analysis illustrates that easyJet plc. may be better off purchasing the competitor since it will also eliminate competition and assist in gaining a higher share of the market.
The findings of the financial analysis (investment appraisal* somewhat conflict the findings of the non,financial factors. %t would therefore be beneficial to carry out a more extensive financial analysis for each scenario covering a longer investment period and providing a greater amount of cost data. This would enable a more accurate comparison of the two investment options as they each contain a very different initial outlay. Also it may be helpful to adopt other methods of investment appraisal such as the Accounting 8ate of 8eturn which are less sensitive to fluctuations in future +ash %nflows. This way with more information that contains more detail the management of easyJet plc. can weigh the advantages and disadvantages of each proect in a clearer and a more precise way.
1B
i3liogra"hy
•
Dall . et al (2@@I* Business Studies )rd edition -aring +ollins 0ssex :;
•
%+A/ >anagement +onsultants (2@@H* Healthcare Industry Analysis Athens Greece
•
unn G. (2@1@* Low-Cost Carriers – coming of age 'lightGlobal accessed on HO2O2@11
-ebsites •
www.hellaset.com
•
http!OOwww.easyet.com
•
www.elfaa.com
1E
A""endix 1: $nterview uestions
91.-hich is the core market segment that easyJet aims at$ 92. %s there a considerable market growth on the core target market$ 9).-hat is the forecasted trend of the :; to Greece tourism model in the future$%s there a significant growth potential that would allow the company to profitably invest in expansion$ 9?. -hat are the expansionary alternatives that the company is currently considering in its business plan$ 9B. -hat are the potential advantages and disadvantages of launching a new route$ 9E -hat are the potential advantages and disadvantages of buying e7uity on a potential competitor4s business$ 9I. %s there a different level of risk associated with launching a new route compared to investing on an existing airline with established business$ 9H. -ould there be any diffusion of the corporate strategy$ 9. -hich are the areas that the company considers expanding at in terms of geographic region$ 91@. -hich are the strengths of the company$ 911. -hat other weaknesses does the company have$ 912. -hich are the opportunities of the company$ 91). -hich are the threats of the company$ 91?. o you consider the current austerity measures taken in Greece to be a deterring factor to the growth of the airlines network in the specific area$
1I
