Århus School of Business, Århus University Corporate Valuation
Valuation of Ryanair Group Members: Konstanty Kasprzyk Lavinia Andrei Marcel Reinders Ruxandra Pană
Advising Professor: Tom Albæk Hansen
,ovember 2009 Number of characters (with spaces): 71,218 without annexes / 150,629 with annexes.
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Contents 1. Introduction ........................................................................................................................................... 6 1.1 Problem Statement .......................................................................................................................... 6 1.2 Introduction of Ryanair ................................................................................................................... 6 1.3 Methodology ................................................................................................................................... 6 1.4 Limitations....................................................................................................................................... 7 2. Analysing historical performance ......................................................................................................... 7 2.1 Invested Capital ............................................................................................................................... 9 2.2 NOPLAT ......................................................................................................................................... 9 2.3 Free Cash Flow .............................................................................................................................. 10 2.4 Return on Invested Capital ............................................................................................................ 10 2.5 Revenue Growth ............................................................................................................................ 11 2.6 Credit Health ................................................................................................................................. 11 2.7 Stock Market performance ............................................................................................................ 12 3. Business Strategy Analysis ................................................................................................................. 12 3.1 Internal analysis ............................................................................................................................. 13 3.2 External analysis............................................................................................................................ 13 3.3 Competitor analysis ....................................................................................................................... 14 3.4 Porter’s 5 Forces ........................................................................................................................... 16 3.4.1 The threat of substitute products ............................................................................................ 16 3.4.2 The threat of the entry of new competitors ............................................................................ 16 3.4.3. The intensity of competitive rivalry ...................................................................................... 16 3.4.4. The bargaining power of customers ...................................................................................... 16 3.4.5. The bargaining power of suppliers........................................................................................ 17 3.5. SWOT analysis ............................................................................................................................. 17 3.5.1. Strengths................................................................................................................................ 17 3.5.2. Weaknesses ........................................................................................................................... 17 3.5.3. Opportunities ......................................................................................................................... 18 3.5.4. Threats ................................................................................................................................... 18 4. Cost of Capital .................................................................................................................................... 19 2
4.1. Ryanair’s cost of equity................................................................................................................ 19 4.1.1. The Risk Free Rate ................................................................................................................ 20 4.1.2. Beta ....................................................................................................................................... 20 4.1.3. The Equity Risk Premium ..................................................................................................... 22 4.2. Ryanair’s After-tax Cost of Debt ................................................................................................. 23 4.3. Ryanair’s Capital Structure .......................................................................................................... 23 5. Forecasting performance ..................................................................................................................... 25 5.1. Base case scenario ........................................................................................................................ 26 5.2. Optimistic scenario ....................................................................................................................... 27 5.3. Pessimistic scenario ...................................................................................................................... 28 6. Calculating and interpreting results .................................................................................................... 30 6.1. Value of operations ...................................................................................................................... 30 6.1.1. Discounted cash flow ............................................................................................................ 30 6.1.3. Value of operations ............................................................................................................... 30 6.2. Equity value .................................................................................................................................. 31 6.2.1. Value of non-operating assets ............................................................................................... 31 6.2.2. Value of non equity claims ................................................................................................... 31 6.2.3. Debt ....................................................................................................................................... 31 6.2.4. Debt equivalents .................................................................................................................... 31 6.2.5. Value of hybrid claims .......................................................................................................... 32 6.2.6. Value per share...................................................................................................................... 32 6.3 Verifying Valuation Results .......................................................................................................... 33 6.3.1. Sensitivity Analysis............................................................................................................... 33 6.3.2 Plausibility analysis................................................................................................................ 34 7. Conclusions ......................................................................................................................................... 34 8. Negotiation outcome ........................................................................................................................... 35 9. Bibliography........................................................................................................................................ 36 10. Annexes ............................................................................................................................................. 38 3
10.1 Historical performance ................................................................................................................ 38 10.1.1. Historical Income statement................................................................................................ 38 10.1.2. Historical Balance Sheets.................................................................................................... 39 10.1.3. Historical NOPLAT ............................................................................................................ 40 10.1.4. Historical Invested Capital .................................................................................................. 41 10.1.5. Historical Cash Flow........................................................................................................... 42 10.1.6. Historical Economic Profit.................................................................................................. 42 10.1.7. Historical operating ratios ................................................................................................... 43 10.1.8. Revenue growth .................................................................................................................. 43 10.1.9. Growth patterns: Ryanair vs. easyJet .................................................................................. 44 10.1.10. Measuring Coverage ......................................................................................................... 44 10.1.11. Total Return To Shareholders: Ryanair vs. easyJet .......................................................... 44 10.2. Market definition, size, share and growth .................................................................................. 45 10.2.1. Market growth ..................................................................................................................... 46 10.3 PESTEL Analysis ........................................................................................................................ 47 10.3.1 Political and legal factors ..................................................................................................... 47 10.3.2 Economic factors.................................................................................................................. 50 10.3.3 Socio-cultural factors ........................................................................................................... 51 10.3.4 Technological factors ........................................................................................................... 52 10.3.5 Environmental factors .......................................................................................................... 52 10.3.6 General Degree of Turbulence in the Environment ............................................................. 53 10.4. The Five Forces analysis of the airline industry......................................................................... 54 10.4.1. The threat of substitute products - low................................................................................ 54 10.4.2. The threat of the entry of new competitors - moderate ....................................................... 55 10.4.3. The intensity of competitive rivalry - high ......................................................................... 56 10.4.4. The bargaining power of customers - moderate.................................................................. 57 10.4.5. The bargaining power of suppliers - high ........................................................................... 57 4
10.5. Competitor Analysis ................................................................................................................... 58 10.5.1. EasyJet ................................................................................................................................ 58 10.5.2. Air Berlin ............................................................................................................................ 60 10.5.3. Conclusion .......................................................................................................................... 61 10.6. Internal analysis .......................................................................................................................... 62 10.6.1. Snapshot .............................................................................................................................. 62 10.6.2. Financial perspective – Main financial ratios ..................................................................... 62 10.6.3. Operational perspective....................................................................................................... 68 10.6.4. Value chain perspective ...................................................................................................... 71 10.7 SWOT Analysis ........................................................................................................................... 72 10.7.1 Strengths............................................................................................................................... 72 10.7.2 Weaknesses .......................................................................................................................... 74 10.7.3 Opportunities ........................................................................................................................ 75 10.7.4 Threats .................................................................................................................................. 76 10.8. Forecasting performance ............................................................................................................ 79 10.8.1. Base case scenario ............................................................................................................... 79 10.8.2 Optimistic scenario .............................................................................................................. 88 10.8.3. Pessimistic Scenario ............................................................................................................ 97
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1. Introduction 1.1 Problem Statement The report at hand goes through the steps of the valuation process for the airline carrier Ryanair. The purpose of the paper is to analyze the company’s historical performance within the context of its industry and market conditions and provide insights into the company’s future performance and thus intrinsic value. The ultimate goal of the report is to provide decision making support for a potential buyer of the airline. 1.2 Introduction of Ryanair The Irish airline company Ryanair has been in business for 25 years. Today, it is the largest European airline, as classified by the IATA ranking. Its business model based on short-haul, point-to-point routes has proven to be a success. The airline currently operates from 32 bases all over Europe, offering over 1,200 scheduled flights per day, and serving 151 locations throughout Europe and Morocco. Ryanair operates a fleet of 202 aircrafts on more than 850 routes. It employs more than 7,000 people. The company has had almost 60 million passengers the past year and expects to carry 66 million people in 2009. During the last 10 years, the company grew by 359% in terms of number of employees, 596% in terms of fleet size, and 965% in terms of operating revenue. 1.3 Methodology In order to be able to value Ryanair, information was gathered in the form of annual reports from Ryanair and its various competitors as well as information on the airline industry and financial markets. In order to get a picture of Ryanair’s historical performance, a financial ratios analysis has been performed based on the company’s balance sheet and income statement from the last 10 years. A strategic business analysis has also been conducted, including a PESTEL and competitor analysis, Porter’s 5 forces and finally a SWOT analysis based on the information generated from the strategic business analysis. We have used the information gathered in calculating the value of the company using two different valuation frameworks: the enterprise discounted cash flow and the economic profit frameworks. We have chosen these frameworks because they do not mix operating performance and capital structure. Furthermore, if used correctly they give identical results and thus reinforce each other. Moreover, while the DCF analysis focuses solely on the cash flows generated by the company, the economic profit method reveals whether the company has earned more than its cost of capital in a given period, and therefore the methods offer complementary information for analysis. We consider using these frameworks appropriate for valuating a company such as Ryanair because, even if 6
historically the company’s debt-to-equity ratio has been rather volatile, we assume the firm will soon reach a period of stability in its growth and will start to manage its capital structure towards a particular target. 1.4 Limitations It is important to note that the valuation was done from an external perspective where no internal information was available to the group for valuation purposes. Nevertheless, the group thinks that the assumptions made in the valuation are reasonable and largely represent reality. Furthermore, it should be noted that in the competitor analysis only the two most important competitors of Ryanair in the lowcost transportation segment were analyzed since this segment is highly fragmented. Moreover, the lowcost air carriers do not only have to compete with each other for passengers but also with the fullservice air carriers. These air carriers were not considered since they have a different business model than Ryanair. The report continues as follows: in the next section, an analysis of the company’s historical performance is presented, followed by a business strategy analysis in section 3. Section 4 presents the calculation of Ryanair’s cost of capital, while in parts 5 and 6 the company’s performance is forecasted on a scenario basis and the calculation of the company’s value is undergone respectively. In section 7 we present our overall conclusions and in part 8 we present the insights gathered during the negotiation exercise.
2. Analysing historical performance In order to accurately and reliably asses a company’s ability to generate cash flows in the future and forecast its performance, it is important to analyze the company’s evolution and understand the drivers behind it. The main sources of information for an external analyst of the company’s historical performance are its financial statements. However, since they are meant for accounting and taxation purposes, before they can be used for valuation purposes, they need to be reorganized. In our analysis of Ryanair’s financial statements, several accounting issues merit special attention: •
Acquisitions and treatment of goodwill – the only acquisition where goodwill was registered was in the 2003-2004 financial year, when Ryanair acquired certain assets from KLM UK Limited, (known as the Buzz acquisition). The amount was reallocated to the “intangible assets account” when the transition to IFRS took place. Growth through acquisition is a somewhat 7
difficult strategy to undertake, especially since it should be a cross-border operation to have considerable impact, in which case there are major obstacles to overcome in terms of legal issues, reaching the expected level of synergies etc. Therefore, Ryanair’s strategy focuses more on internal growth, rather than growth by incorporation of other companies. •
Changes in accounting policies: in the fiscal year 2004-2005, Ryanair made the transition from Irish GAAP to IFRS, which involved the following changes: o Pensions and other post-retirement benefits had to be disclosed; o The reallocation of the value of assets Buzz acquisition from goodwill to intangible assets; o Share-based payments to employees were recognized; o The value of spare parts was transferred from the “inventories” account to “property, plant and equipment”; o Derivatives value was restated at fair value unrealised loss of EUR 146.4 million together with a related deferred tax benefit of EUR 18.3 million has been recorded directly in the opening cash flow hedging reserve;
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Dividends – the company paid no dividends during the 10 year period and management has stated that no dividends will be paid out in the foreseeable future.
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Taxes – the statutory tax rate in the UK has had a decreasing trend, from 23% in 2000 to 12.5% in 2009. Since it has been stable at 12.5% for the past 6 accounting periods, we have used this rate as a basis to calculate the amount of marginal taxes. Although Ryanair has a tax advantage since profits resulting from Ryanair.com are taxed at only 10%, these account for a very small proportion of Ryanair’s taxable income. Since the marginal tax rate is defined as the tax rate on an extra dollar of income and the probability of that dollar being taxed at the statutory tax rate is very high, we estimated Ryanair’s marginal tax rate to be 12.5%.
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Excess cash – we have estimated that even though Ryanair holds impressive amounts of cash, a reasonable amount of operating cash would be 2% of the total cash held during the accounting period. The rest is deemed to be excess cash.
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Other financial fixed assets – are made up of investments in subsidiary undertakings that are particular to the company, not the group and are constant throughout the historical analysis period. 8
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Operating leases – At March 31 2009 Ryanair had 43 of its aircraft financed through operating leases. Since the company is actively using the 43 aircraft as part of its operating activities, we have included the value of the leases in the total invested capital. The value of the leases was calculated using the following formula: =
1 +
We have used the rental expense reported in the respective year by the company in its financial statements. Considering the fact that the expected life for Ryanair’s aircrafts is 23 years and the average age of the fleet is 2.77 years, we have assumed the average asset life to be 20 years. The calculation of the company’s cost of debt is detailed in section 4.2. •
Pension plans – Ryanair has both defined contributions and defined benefit pension schemes. For the defined benefit plans, which are relevant for valuation purposes, Ryanair recorded a pension liability in 2009. Therefore, Ryanair does not have excess pension assets. The liability was subtracted from enterprise value to get to equity value.
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Deferred taxes – Ryanair currently has EUR 32.6 million in deferred taxes (which have decreased substantially because of the loss incurred in the last year). We have treated those as an equity equivalent, adjusting NOPLAT for the change each year and adding it to equity in the total investor funds reconciliation (Annex 10.1.4 – Historical Invested Capital).
2.1 Invested Capital Annex 10.1.4 – Invested Capital represents a calculation of invested capital. The level of invested capital increased by 832% over the 10 year period, with a peak of EUR 5,666,803,000, which is almost 10 times more than the amount of invested capital in 2000. The negative working capital is balanced by a staggering growth in net property, plant and equipment, out of which the largest part is represented by their fleet enlargement. 2.2 NOPLAT NOPLAT shows the total income generated from operations available to Ryanair’s investors. As the table listed under Annex 10.1.3 - OPLAT shows, the company had increasing NOPLAT from 2001 to 2008 of 387%, followed by a decrease in the next year to almost the level registered in 2001. Reasons 9
like the financial crisis and oil prices which reached an all-time high during 2009 caused the downturn. Both the increase in EBITA and the increase in adjustments for operating leases fuelled the upward trend in EBITA. 2.3 Free Cash Flow Ryanair has been slowly improving its cash flow to investors position, which has steadily increased from a negative EUR 460 million to a positive EUR 234 million. As the table under the Annex 10.1.5 – Historical Cash Flow points out, the large investments (capital expenditure and investments in operating leases) are mainly causing the negative cash flow to occur. 2.4 Return on Invested Capital The graph below shows the ROIC tree and how the operational drivers affect ROIC. Gross margin 36.17
Figure 2.1: Ryanair’s ROIC tree Operating margin 19.8 Pre-tax
SG&A / revenues
ROIC
0.63
24.6 Depreciation / revenues
ROIC
6.48
21.7
Cash tax rate
Other operating expenses
11.9
/ revenues 9.26
Operating working capital / Average capital turns
revenues -30
1.24
Fixed assets / revenues 108.64
Intangible assets / revenues 1.72
The ratios are calculated using beginning of the year figures. This ROIC tree presents the dynamics for the year 2008 (we have chosen to leave out 2009 and work with a more “representative year”). The company’s ROIC is driven more by the average capital turns than by the operating margin. Therefore, 10
the company is very efficient in the way it uses its stockholder’s equity to generate revenue. Moving more to the right, we notice that the ratio is influenced by the fixed asset / revenues ratio, which is almost one-to-one. If we reverse the ratio to get fixed asset turnover, the result would be 92.05%, which is considerably more that easyJet’s 57.76%. The figure is in line with the internal analysis that points out the company’s efficiency in managing its fleet. This is most likely the source of their advantage over competitors. In terms of the operating margin, it is mostly driven by the gross margin. Compared to easyJet’s gross margin (at 15.8% in 2009), Ryanair performs better. This is the result of its cost management efforts. We can conclude that Ryanair’s ROIC stems from its fixed asset turnover and its strong gross margin as a result of cost containment. 2.5 Revenue Growth The table in Annex 10.1.8 - Revenue growth breaks down the revenue in revenue per passenger and number of passengers in order to assess whether price or quantities are driving revenue growth. As expected for a low cost airline, it is not high prices that are the main cause, but the high number of passengers. There was a sustained downward trend in revenue/passenger (which decreased by 33.5% over the period in question due to the decrease in average price per flight and the growing number of passengers), while the number of passengers increased by 965%. The table in Annex 10.1.9 – Growth patterns: Ryanair vs. easyJet depicts the evolution of Ryanair’s and easyJet’s revenue growth and their drivers for the last 5 years. easyJet’s position seems to have changed over time. In 2005, its revenue driver was clearly revenue/passenger, although it also had more passengers than Ryanair. Over the period in question, Ryanair posed a serious competitive threat and they cut prices down. Currently, easyJet earns less per passenger than Ryanair does, due to the lower overall revenue and less efficient cost management. In conclusion, as long as Ryanair can manage to keep prices low and thus attract passengers, the company stands a good chance of having a similar revenue growth in the future. 2.6 Credit Health Even though Ryanair uses large amounts of debt to cover their aircraft lease expenses, the interest coverage ratios calculated in Annex 10.1.10 – Measuring Coverage point out that the company is in
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good shape and that its creditworthiness is solid. Glenn Curtis1 states that, ideally, an airline's EBITDA should cover its interest expense by at least two times but preferably three. If we overlook the last financial year,, the lowest coverage for Ryanair was recorded in 2006 at 5.07. Therefore, we can safely posit that the company will have no difficulties in meeting its debt service obligations. The other financial leverage ratios are detailed in the “Internal Analysis” ssection. 2.7 Stock Market performance The graph below shows the total return to shareholders for Ryanair and its largest competi competitor, easyJet, for the period ending on 30 September 2009. The values can be found in Annex 10.1.11. - Total Return To Shareholders: Ryanair vs. easyJet. easyJet. Since neither company pays dividends, it is just the stock prices that drive TRS. For the 5-year year average TRS, easyJet easyJet has almost double the returns. This shows that the difference between the price of a share now and 5 years ago iiss a lot larger for easyJet than for Ryanair. In terms of the 3 – year average, both companies had negative returns, which is a sign that they failed to meet market ma expectations.
Figure 2.2: Shareholder return
However, Ryanair is closer 5 - year average TRS
to the “breakeven “break point”. Finally, over the last year, ye Ryanair
3 - year average TRS
EasyJet Ryanair
easyJet
did and
better
than
exceeded
expectations of the market more than easyJet managed
1 - year averageTRS
to. -1
0
1
2
3
3. Business Strategy Analysis This section includes the conclusions of our more lengthy analyses which are presented in the Annexes. For more information refer to Annex 10.2, Market definition, size, share and growth; Annex 10.3, PESTEL Analysis; Annex 10.4, The 5 Forces Analysis of th thee Airline Industry; Annex 10.5, Competitor analysis; Annex 10.6, Internal analysis and Annex 10.7, SWOT Analysis. 1
Glenn Curtis - Is That Airline Ready dy For Lift Lift-Off?
Retrieved from http://www.investopedia.com/articles/stocks/07/airline_stocks.asp ttp://www.investopedia.com/articles/stocks/07/airline_stocks.asp
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3.1 Internal analysis From a financial perspective, the company has been doing well. Financial ratios point out that the company has been growing at a fast pace. It is extremely liquid holding large amounts of excess cash due to the fact that it cashes in well before the flights actually take place. Ryanair has increased its debt levels in order to fuel growth and to be able to take advantage of the benefits of debt. In terms of profitability, as, expected, the company doesn’t yield high ROA or ROE due to the fact that its main goal for now is growth and high returns are generally associated with mature companies. In terms of investment ratios and stock market performance, the value of the company has been fluctuating. The main influencing factors for the fluctuation are fuel prices and the overall economic recession. Operating performance ratios are also typical for a growing company. Fixed asset turnover decreases due to the expansion of the fleet and operating bases, while revenue per employee is increasing rapidly. From an operational standpoint, the company is aiming for excellence. The company uses the same model as Southwest and strives to keep costs low and to pass all the cost savings down to the customers without making any cutbacks in the key areas driving quality, like training and fleet maintenance. Costs are being kept at a low by using the online booking and check-in systems extensively, in order to reduce the need for excess personnel. The company’s planes and people are highly productive, therefore we can infer that Ryanair manages all its resources efficiently and effectively. Aggressive marketing campaigns – whether on-line or using other media like the television – make the company stand out and attract more and more passengers All of the company’s activities are finely interlinked for a better value creation process. The company manages to add value by starting with as low costs as possible and striving to pass these cost savings to the passengers and combining these benefits with a high quality service. Productivity is another main factor that adds value and increases margins. 3.2 External analysis The European airline market is highly fragmented and in 2008 approximately 230 air carriers existed in total of which the top 50 accounted for more than 90 % of capacity in Europe. Market size is measured by number of booked passengers and according to the International Civil Aviation Organization in 2008 649.090.000 passengers were transported. Ryanair accounted for 58.565.663 passengers which equal a market share of about 9%. This makes Ryanair not only the market leader in the low-cost segment but also the leader for overall European airlines including full service carriers. Lufthansa and Air France accounted for only 7.7% % and 6.8 % respectively in 2008. 13
As far as the market growth is concerned, the airline industry is very sensitive to the overall situation of the global and European economy. In 2008 the market experienced a decline due to the downturn in the global economy. Aviation organizations however, estimate that the in the mid-term growth in Europe will stabilize around 5 %. Reason for this will be mainly the economic development in Eastern European countries. Analyzing the macro-environment of Ryanair with the PESTEL analysis revealed a number of important implications. As far as political and legal factors are concerned the liberalization of the airline industries provides Ryanair with a lot of opportunities but at the same time might fuel an increase in competition. Possible State aid to national flag carriers poses a problem since this provides these carriers with a competitive advantage. Also the increased rights of passengers travelling in Europe could result in additional expenses for compensation. Economic factors affecting the airline industry are the overall economic situation and oil prices. The airline industry is very income elastic which means that in a worsening economic situation as income decreases so does the demand for air transportation. However, since Ryanair is a low-cost airline it is somewhat less affected by an economic recession. Oil prices have seriously affected the industry representing almost 50 % of operating costs. Even though airlines have a number of ways to deal with volatile oil prices, such as hedging, high oil prices pose a serious threat. Socio-cultural factors important to the airline industry are the perceived safety level as well as the trend in the EU to travel abroad for short vacations throughout the EU membership states. Technological factors that should be considered are the wide spread of internet based communication technology and their decreasing costs as this reduces the demand for air travel. Furthermore improvement in aircraft technology and more efficient jet engines make it easier to maintain low fare levels. Considering environmental factors the emission trading scheme to which the airline industry will be added in 2012 is likely to increase costs for the industry which will have to be passed through to passengers resulting probably in a decrease in demand. 3.3 Competitor analysis Competitors that operate in the low-cost segment and have similar business model as Ryanair pose the biggest threat to the company even though full service carriers also compete in the short-haul market for passengers. The two biggest competitors in the low-cost segment are easyJet and Air Berlin. easyJet is a British airline that is headquartered in London Luton Airport. It carries more passengers than any other British carrier and transported about 43.7 million passengers in 2008. In Europe it is the 14
airline with the second highest passenger numbers after Ryanair with 58.6 million passengers. easyJet’s business model is similar to that of Ryanair and that of Southwest in the USA. The company employs a policy of rigorous cost cutting by not offering services such as connecting flights or offering services for additional service charges such as food and beverages. Furthermore easyJet operates only a couple of aircraft types in order to keep operating and maintenance costs low. High aircraft utilization and quick turnaround times are vital parts of easyJet’s business model. However, there are several differences to the Ryanair business model. easyJet, unlike Ryanair, flies in general to the main airport of the cities it serves for example London Gatwick or Paris Charles de Gaulle. Furthermore easyJet tries to attract business passengers by offering convenient services at additional service costs. Air Berlin is after Lufthansa Germany’s second largest air carrier. It is a semi low-cost air carrier which is headquartered in Berlin. It extensively services holiday destinations in the Mediterranean, North Africa and the Canary Islands as well as a selection of various major European cities. In 2008 the Air Berlin carried about 28.6 million passengers. In Europe, Air Berlin is the fifth largest air transportation provider and the third largest low-cost carrier behind Ryanair and easyJet. Air Berlin has a different strategy than Ryanair and easyJet even. It tries to fill the gap between the traditional full service airlines and the low-cost airlines with very limited services even though it officially belongs to the low cost carrier segment. It seeks to achieve the status of a hybrid type of carrier. It tries to set standards with a unique price/performance ratio. Unlike low-cost carriers Air Berlin operates multiple types of aircrafts and also serves long-haul destinations with more than six hours of flight time. The airline tries to offer more services than low-cost carriers but at lower costs than full-service carriers. In conclusion, even though Air Berlin is the third largest low-cost carrier in Europe easyJet seems to pose a bigger threat to Ryanair. The reasons for this are the similar cost structure of easyJet and its business model. Additionally, easyJet is much more focused on the European short-haul market than Air Berlin and generates higher passenger numbers. Also important is the fact that easyJet services more convenient airports in general than Ryanair which many passengers might perceive as the better business proposition. Lastly, the competition between Ryanair and easyJet has become increasingly aggressive in recent years with easyJet attacking Ryanair directly by servicing the same cities in Ireland and England engaging in price wars.
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3.4 Porter’s 5 Forces 3.4.1 The threat of substitute products The other substitute products for airlines are other means of transport like cars, trains or ships. They can pose a threat for a regional, short distance trips. However, with increasing distance, flights become a more popular option for many customers, so in this case the threat is moderate. Recently, the developing communication technologies like internet and teleconferencing, that enable virtual meetings, lowered the need for business travels. We assess the threat of substitute products to be low. 3.4.2 The threat of the entry of new competitors Although it may seem that the barriers of entry should block the industry from new competitors entering the market, the threat of entry of new carriers depends on the costs of access to bank credits and loans as this industry is characterised by high leverage. When borrowing is cheap, the likelihood of new companies entering the market increases. This market gets easily saturated so it is important to have a recognised brand name as well as having frequent flights on most of the routes. Having good slots on the airports (hour and place) also lower the threat of new competitors. We assess that the threat of entry of new competitors is moderate. 3.4.3. The intensity of competitive rivalry Because of the fact that the industry is highly fragmented, the intensity of competitive rivalry is high. The airline companies have high fixed costs and because of high competition in this sector they have relatively low returns. That leaves them in a vulnerable position during the times of economic slowdown or increasing prices of fuel. In order to survive and increase profits the companies need to have unique business models (outsourcing, maximising the use of aircrafts etc.) in order to gain higher profits then the average for industry and outrun the competition. 3.4.4. The bargaining power of customers The bargaining power of customers is high as long as there are other cheap competitors on the route. In this situation customers will usually choose the cheapest option. However, having a strong brand can be of some help. If there aren't any competitors, and the company offers the only cheap connections, the power of customers decreases. We believe that the bargaining power of customers is moderate.
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3.4.5. The bargaining power of suppliers The power of suppliers is high as the returns are small and the two main costs for the airline companies are fuel and labour. The costs of fuel may depend on the efficiency of the carrier however: as the planes consume the highest amounts of jet fuel during take-offs and landings, short haul airlines have lower cost efficiency. Also the prices of fuel tend to fluctuate on monthly basis so companies need to have a business model that accounts for that. The airlines has to pay air pilots, flight attendants, customer relations and airport services such as baggage handlers and dispatchers as well as for the slot on the airport. Ryanair is outsourcing all its check-in and airport services to Servisair in all its locations. High airports fees move cheaper carriers to less popular hours or smaller airports farther away from the big cities. When it comes to aircrafts there are two main suppliers, Boeing and Airbus which limits and stabilizes the competition. The likelihood of those two suppliers creating their own airlines is also low. When it comes to the cost of technical support and maintenance having one or two models of aircrafts is wise from a costs point of view. In conclusion, the two most important forces that shape the airline industry are the threat of competitive rivalry and the bargaining power of suppliers. Competition is high because of the industry fragmentation. The high number of players means that Ryanair can compete directly both with other low cost airlines and with full-service airlines. As for the bargaining power of suppliers, it mainly results from the high dependence of airlines on fuel. 3.5. SWOT analysis 3.5.1. Strengths The strengths of Ryanair lie in a large route network with 146 destinations in 26 different countries. Ryanair also has a strong network of business partners which provide pre-flight and post-flight services through Ryanair’s webpage that the company otherwise could not offer. Due to this commission based cooperation Ryanair can generate large ancillary revenues. The high efficiency of its employees as well as a low turnaround time of aircraft are proof of the company’s high level of strategic fit in which all operations are very well aligned. As a result Ryanair can be certified with good financial health and a high level of liquidity. 3.5.2. Weaknesses Since 2005, Ryanair is battling decreasing margins mainly due to steadily rising fuel prices and 17
decreasing fares resulting from fierce price wars. Operating margins decreased from 25.8 % in 2005 to only 5% in 2009. Moreover, relations to its workforce are not optimal due to the company’s low-cost business model. This resulted in several strikes in the past by ground staff who was not satisfied with working conditions. Disregarding its staff, which is an important cog in Ryanair’s business model, may erode into the company’s efficiency. Customer relations represent another of the company’s weaknesses which, alongside bad press and publicity stunts, create a negative reputation and will eventually erode the company’s brand. A sign of this occurring might be the recent World Travel Awards where while easyJet won the award for Europe’s leading no-frills airline, Ryanair was not even nominated. 2 3.5.3. Opportunities Opportunities for Ryanair lie in the strong shift of consumer preferences from full-service airlines to low-cost airlines due to the fact the private and business passengers try to cut down on expenses for air transportation. This gives rise to growth opportunities as well as the EU policy of admitting new members in Eastern Europe where network are not yet sufficiently developed. Further growth opportunities lie in mergers and acquisitions. The industry is highly fragmented which may result in a consolidation leading to less but bigger companies. 3.5.4. Threats As far as threats are concerned, high and volatile oil prices have significant effect on operating costs and thereby decreasing operating margins. Political and legal threats for Ryanair stem from legislation to increase passenger rights as well as adding the airline industry to the CO2 emission trading scheme which will likely result in higher costs for the company. Furthermore technological developments in the communication technology will decrease demand for air travel. Further threats to the company are an overall deteriorating economic situation and fierce price wars with competitors such as easyJet. EasyJet is Ryanair toughest competitor in the low-cost segment but this threat seems to be moderate since both companies try to avoid direct competition as much as possible. However, competition might increase due to the US airlines’ new right of operating intra-European flights, posing a serious threat to Ryanair’s already small margins. The factors affecting Ryanair’s number of passengers pose also a secondary threat in the form of excess capacity since the large investments the company has made in its aircraft will be equivalent to blocked funds.
2
http://www.worldtravelawards.com/nominees2009-8
18
From the SWOT analysis we can conclude that Ryanair’s increased operational efficiency and cost effectiveness were important to gain competitiveness in the past and have provided a safeguard for the company during the financial crisis but they will not be sufficient in order for it to maintain a unique competitive advantage in the long run.
4. Cost of Capital When choosing to value a company using the enterprise DCF method, the free cash flows have to be discounted by the weighted average cost of capital. This represents the opportunity cost that investors face for investing their funds in one particular business instead of others with a similar risk. The weighted average cost of capital is the market based weighted average of the after-tax cost of debt and cost of equity: =
1 − +
Therefore, the elements needed in order to calculate a company’s cost of capital are the company’s after tax cost of debt, cost of equity and the company’s target capital structure. Since none of these components are directly observable we have used a series of models to estimate each of them. 4.1. Ryanair’s cost of equity Estimating the cost of equity implies determining the expected rate of return of Ryanair stock. Since expected returns cannot be observed directly, we have chosen to use the Capital Asset Pricing Model in order to translate the risk of Ryanair stock into an expected return. The CAPM formula for calculating the cost of equity is:
= !" + # $ − !" % Where: E(Ri )= security I’s expected return Rf = the risk free rate Βi= the stock’s sensitivity to the market E(Rm )= expected return of the market
− !" = equity risk premium
19
4.1.1. The Risk Free Rate The risk free rate is the return on a portfolio that has no covariance with the market. While it is possible to create a portfolio that would fulfil this requirement, the cost of performing this task makes it impracticable. According to Koller, Goedhart, & Wessels(2005), using a 10 year government bond yield provides the best estimate for the risk free rate, when taking into account tradeoffs between the complexity of the estimate, the liquidity of the bond and the coordination between the bond’s and the stock’s cash flows. They also suggest that, when valuing a European based company, the yield from the 10 year German Eurobond should be used. Following this recommendation, we have chosen the 10 year German Government Bond yield as our estimate for the risk free rate. Therefore, for calculating the WACC for the forecast period we used an rf=3.31% at the date of 11 Nov 2009. 4.1.2. Beta Beta represents the degree to which a stock’s and the market’s returns move together. In order to estimate its value, we have used a regression analysis based on the market model:
= & + # + ' The Beta of the Ryanair stock is estimated as being the coefficient of the return of the market in a regression that has the return of the stock as the dependent variable and the return of the market as the independent variable. There are a series of decisions to be taken when implementing the market model. The first one regards choosing an appropriate proxy for the market portfolio. This is necessary since the market portfolio represents a value-weighted portfolio comprised of all assets both traded and not traded, making it practically unobservable. The standard solution is to choose a well diversified, global portfolio, usually an index. According to Koller, Goedhart, & Wessels (2005), the S&P 500 index is the most commonly used proxy for the market portfolio when estimating the betas of large US companies. Since Ryanair is also traded on the NASDAQ stock exchange and large, global, diversified indexes are highly correlated, we have chosen the S&P 500 index as a proxy for the market portfolio. The second decision regards the measurement period and the frequency of measurement for the returns used in the regression. There are various recommendations that take into account the tradeoffs Involved when making such decision. As far as the measurement period is concerned, the trade-off is between decreased variance, and therefore more precision, and the risk of including significant changes within 20
the company’s operations. On, the other hand, when the frequency of measurement is to be decided, the trade-off consists in choosing between increased precision and having illiquidity issues related bias. We have chosen to follow the recommendations of Daves, Ehrhardt, & Kunkel (2000) who concluded that using daily returns for a period of three years provides 91% of the increase in precision without the dangers of including structural changes that might bias the results. Furthermore, in order to avoid liquidity related biases, we have verified that the traded volume of the stock be different from zero on all the trading days included in the estimate. In conclusion we have used a 3 year period of daily data. Assuming an average of 260 trading days per year, this amounts to 780 records, from the 24th of February 2006 to the 31st of March 2009, the year end of the last set of Ryanair financial statements. We used the historical closing prices for both the Ryanair stock and the S&P 500 index, adjusted for any dividends or splits. The regression analysis results are: Element
Value
Lower 99.0%
Upper 99.0%
Beta
1.19
1.050022377
1.329928763
Standard error
0.05420
P-value
<.0001
Adjusted R-squared
0.3818
Table 4.1: Regression data
780 daily Ryanair returns vs SNP500 returns 0,20
Figure 4.1: Ryanair
0,15
regression on 0,10
S&P 500
0,05 RETURN RYAAY
0,00 -0,15
-0,10
-0,05
-0,05 0,00
0,05
0,10
0,15
-0,10 -0,15 -0,20 -0,25 RETURN SNP 500
-0,30
Return RYAAY
21
In order to make sure that the measurement period did not include any structural changes that would bias the beta estimation, we have Figure 4.2: Rolling window beta
plotted the company’s 3year beta for a
Ryanair Beta:2000-2009 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0
period of 10 years between July 2007 and March 2009. It can be noted that for the 3 year period analyzed the value of the beta has been relatively stable,
30.07.2000 30.11.2000 30.03.2001 30.07.2001 30.11.2001 30.03.2002 30.07.2002 30.11.2002 30.03.2003 30.07.2003 30.11.2003 30.03.2004 30.07.2004 30.11.2004 30.03.2005 30.07.2005 30.11.2005 30.03.2006 30.07.2006 30.11.2006 30.03.2007 30.07.2007 30.11.2007 30.03.2008 30.07.2008 30.11.2008 30.03.2009
beta
except for the1.46 kink experienced in the middle of 2008 in mid financial crises. If we would have chosen a 5 year
estimation period we would have included the low values from 2004 and we would have therefore underestimated the risk of the company. Considering the fact that betas revert to the mean, we used the Bloomberg smoothing mechanism to improve our estimate. The adjusted beta is therefore: () ( * = 0.33 + 0.67 0 1.19 2 1.13 4.1.3. The Equity Risk Premium There are various methods of estimating the equity risk premium, which can be classified into three categories: those estimating the future risk premium by extrapolating historical levels, those projecting expected market risk premiums by means of regression analysis and those that reverse engineer the market’s cost of capital. While all three types of methods have their advantages and disadvantages, none of them can estimate the market risk premium exactly. Due to the low availability of data and time resources, we have chosen to estimate the equity risk premium using historical data. In order to do so, we have once again used the S&P 500 index as a proxy for the market. We have used the arithmetic average of 718 monthly returns of the index for the period between February 1950 and October 2009 to determine an average annual return of the market of 8.34%. By deducting the estimated risk free rate of 3.31%, the equity risk premium was calculated at 5.03%. This is consistent with the findings of (Koller, Goedhart, & Wessels, 2005), who find the equity risk premium to be 22
between 4.5% and 5.5%, as well as with, Dimson, Marsh, & Staunton, (2003), who find that “the arithmetic mean risk premium would be around 5%”. After plugging in the values for the components of the CAPM, the value of Ryanair’s cost of equity was calculated at ≈9%. 4.2. Ryanair’s After-tax Cost of Debt Since Ryanair debt is not traded on a market for corporate debt, we have used an indirect method to calculate the yield to maturity of their bonds. We have calculated the cost of debt by adding a premium of 300 points to the risk free rate of 3.31% putting Ryanair’s cost of debt at 6.31%. We have based the estimate of our premium on the analysis of Ryanair’s leverage, solvability and estimated credit rating. Ryanair is not rated by an external credit rating agency. We have used a method developed by Professor Aswath Damodaran3 to estimate a rating and an implicit default spread. Between 2000 and 2008, Ryanair’s equivalent rating has been between AAA and A which implies a spread between 1.25% and 2.5%. However, according to the same analysis, in the financial year ended 31st of March 2009, Ryanair’s interest coverage decreased from above 5 to lower than 1. Although the company is highly liquid, it has high gearing and debt ratios. Furthermore, the company has a large amount of off balance sheet debt, in the form of operating leases. Therefore, we have chosen to increase the default spread to account for the increase in leverage that the company has been experiencing. In order to include the value of the tax shields in the company valuation, the cost of debt is included at an after tax level in the calculation of the weighted average cost of capital. Therefore, we have reduced the value of the cost of debt according to the formula: ! − 3 3 4 = 3 3 4 × 1 − , where Tm is the company’s marginal tax rate. This results in an after-tax cost of debt of 5.52%. 4.3. Ryanair’s Capital Structure The weights of the costs of debt and equity used in calculating the WACC should be based on the target market value weights. We have used three points of view when analyzing the company’s target capital structure.
3
http://pages.stern.nyu.edu/~adamodar/
23
Firstly, we have estimated Ryanair’s current capital structure. Since Ryanair’s debt is not traded on a liquid market we used the book value of debt as a proxy for its market value. The fact that the company does not find itself in financial distress supports the viability of the book value as a proxy, but we do acknowledge the fact that the latest evolution in interest rates causes the book value of debt to differ from current prices. To the book value of debt we have added the off balance sheet debt, in the form of operating leases of aircraft. Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
Debt/Total
11.30%
10.48%
19.51%
18.30%
25.84%
26.65%
21.30%
41.61%
42.19%
88.70%
89.52%
80.49%
81.70%
74.16%
73.35%
78.70%
58.39%
57.81%
value Equity/Total Value Table 4.2: Ryanair capital structure
Table 4.2 presents the evolution of Ryanair’s capital structure between 2001 and 2009. The company’s leverage has increased continually throughout the years, mainly because of the company’s investments in its fleet. According to the company’s annual report, the value of the company’s debt is going to increase even further, due to the further expansion of the fleet. From the current number of 181 aircraft, the fleet is going to reach a level of 292 planes at the end of the 2012 financial year. Ryanair claims that it has been able to generate sufficient funds from operations to meet its non-aircraft acquisitionrelated working capital requirements and that it will continue to do so at least for the next financial year. Therefore, the only increase in debt would be the one taken up to finance the purchase of aircraft. Secondly, we have directed our attention to the target capital structure in the airline industry. According to Koller, Goedhart, & Wessels (2005), the median Debt-to-Market Value for the airline industry is of 33%. Thirdly, we have analyzed management’s philosophy regarding capital structure and the usage of debt financing. In Ryanair’s annual report it is stated that:” The Board of Directors periodically reviews the capital structure of the Company, considering the cost of capital and the risks associated with each class of capital. The Board approves any material adjustments to the capital structure in terms of the relative proportions of debt and equity”. We can therefore assume that the company does not currently have a target capital structure but that it will change it in order to obtain the best risk/return trade-off. Moreover, in the past, Ryanair management has been active in managing the company’s capital structure through share issuing and repurchases. 24
We attribute the increasing rate of debt to the growth Ryanair finds itself in. However, we feel that the rate of growth is going to decrease and the company will soon stabilize and reach the industry target capital structure of 33% Debt to Value ratio. Putting together the above information, Ryanair’s weighted average cost of capital was calculated at 7.84%. Table 4.3 presents a sensitivity analysis regarding the evolution in the weighted average cost of capital. The figures represent levels of the WACC given a 3.31% risk free rate and a Debt-to-market value of 33%. The variable parameters are the credit spread, used to calculate the cost of debt, and beta: beta/spread
1.25
3
5
1.05
7.06
7.57
8.15
1.13
7.33
7.84
8.42
1.19
7.53
8.04
8.62
1.33
8.00
8.51
9.09
Table 4.3: WACC sensitivity
5. Forecasting performance This section includes our forecast of Ryanair’s performance. From the strategic situation of the company and the industry we define three different scenarios and translate them into financial forecasts. For each scenario we have used a 5 year detailed forecast, from 2010 to 2014 and a 10 year summary forecast based solely on key drivers. The continuing value, for the period 2025 onward, is also calculated separately for each scenario. Ryanair’s strategy is to establish itself as Europe’s leading scheduled passenger airline through continuous improving and expanding of its low fare offers while maintaining its focus on cost containment and operating efficiencies. The key features of Ryanair’s long term strategy are: low fares, cost containment and frequent point-to-point flights on short-haul routes. Low fares provide have the purpose to increase demand by appealing to fare-conscious passengers. This strategy implies a low margin and its success is therefore based on the number of passengers attracted, which is consistent with the revenue growth analysis. Any factors that might impair the company in attracting passengers will damage future performance. The frequent point-to-point flights eliminate the need to provide unnecessary “frills” – services like meals or movies – and to offer direct, non-stop routes and avoid the costs of providing “through service,” for connecting passengers, including baggage transfer and transit passenger assistance. In choosing its routes, Ryanair favours secondary airports with convenient 25
transportation to major population centres and regional airports. Any factors affecting Ryanair’s ability to operate in low-cost airports will hinder future performance. Low fares and low margins imply that the company has to keep its costs under strict control. Therefore the main factors that may affect the evolution of Ryanair’s future revenues and hence future performance are passenger levels and operating costs. The recent economic crisis and the way the economy is going to pick up after it have an important impact as well. 5.1. Base case scenario In the Base case scenario, we assume that the airline industry will not suffer any shocks and that the economy is going to recover at a moderate pace. Since in the airline industry, the elasticity of demand with respect to the growth in GDP is close to 2 and the beta of Ryanair is higher than one, we have estimated the growth in revenues for the detailed forecast to be 1% higher than the nominal growth in GDP for the European Union as forecasted by the International Monetary Fund. We have based our summary forecast for revenue growth on the IATA predictions of 4.8% in Europe, which we have adjusted to 5.3% to account for the increased growth in Central and Eastern Europe and for the number of passengers that will switch from FSAs to LCCs. As far as the evolution of Ryanair’s operating costs is concerned, the scenario assumes no major shifts. The company will perform similarly in trying to hedge the evolution in fuel prices. The costs of staff are also going to be maintained in ranges similar to historical values. As a low cost carrier, Ryanair does not practice overbooking and we assume that the impact of the new legislation regarding passenger rights will not have a major impact on the company’s costs. The only increase will occur as a consequence of the inclusion of the airline industry in the Emission Trading Schemes which translates into an increase in the COGS/Revenue ratio as of 2014. The driver for operating costs for the summary forecast is the EBITA margin. Considering the company’s trend of decreasing fares we have estimated this ratio to be 15%, which is lower than the historical and detailed forecast levels. In respect to the continuing value, we have assumed a growth rate in NOPLAT of 2.5% and a ROIC equal to the WACC. The main reasons behind the choice were increasing competition and the fact that in the long run, no company can sustain growth levels above GDP growth. Detailed forecast
Key driver forecast
Year
2010
2011
2012
2013
2014
2015 - 2024
Revenue growth
2.5%
2.9%
4.7%
5%
5.3%
5.3%
COGS/revenue
75%
75%
75%
75%
77%
Continuing value
2.5%
26
EBITA margin ROIC
21% 14%
,OPLAT (000)
447,442
FCF (000) WACC
23% 15.6%
25% 16.3%
26% 16.4%
25% 16.1%
15% 10%
7.84%
508,567
567,827
621,641
624,015
10.6.1
678,052
383,343
276,056
270,932
519,164
504,768
10.6.1
316,054
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
Table 5.1: Key figures for base case scenario
The rest of the assumptions have been consistent with the historical performance of the company and can be seen in Annex 10.7.1. – Base case scenario. According to this scenario the value of the operations is of EUR 5,919,500,000. The continuing value for the base case scenario adds up to EUR 2,787,718,000, which accounts for 52.3% of total operating value. The total enterprise value reaches a level of EUR 8,433,901,000 and the value of equity, EUR 5,266,094,000. By dividing to the total number of shares outstanding, the value per share is at EUR 3,57. 5.2. Optimistic scenario In the up-side scenario the most important factor is the improvement of the overall economic situation in the world and thus in Europe. Due to this, the demand for air transportation will pick up again leading to higher passenger numbers that result in increased revenues and higher load factors. Furthermore it is assumed that the new EU members in Eastern Europe will experience faster economic development than expected, enabling Ryanair to broaden its network and develop more routes to Eastern European countries. Furthermore, it is assumes that state aid to big flag carriers is abandoned or kept at a minimum, denying artificial competitive advantage to these airlines and leading to higher passenger number for Ryanair. These are the main arguments behind our assumptions about the company’s growth rates, which are detailed in Table 5.2 below. It is also assumed that oil prices stay at a moderate level somewhere between 80 and 100 USD per barrel. This ensures that operating costs will not explode which would have serious effects on the EBITA margin. Since prices will not fluctuate, the company’s hedging strategies will prove highly efficient. Furthermore, Ryanair will take full advantage of the technological advances that make aircrafts more fuel efficient. Ryanair plans to also reap the benefits of using the Internet. The company plans to replace all check-in desks with Internet-based check-in facilities. These changes have been announced to take effect from October 2009. This will have a positive impact on the COGS/revenue ratio. 27
As far as political and legal factors are concerned in this scenario it is assumed that no major changes occur that would affect the airline industry negatively. Examples are the introduction of taxes on kerosene or a further improvement of passenger right that could possibly lead to higher compensation payments. In respect to the continuing value, we have assumed a growth rate in NOPLAT of 3% and a ROIC above the WACC. The main reasons behind the choice were flourishing economic environment and the strength of the company’s business model. Detailed forecast Year
Key driver forecast
Continuing value
2010
2011
2012
2013
2014
2015 - 2024
Revenue growth
3%
4%
5%
6%
7%
7%
3%
COGS/revenue EBITA margin ROIC
64% 20% 24.6%
66% 20% 23%
68% 20% 22%
68% 20% 22%
70% 20% 22%
20% 14%
10%
,OPLAT (000)
717,716
743,727
765,310
830,188
841,884
10.6.2
1,126,568
FCF (000)
399,488
508,679
480,635
720,006
688,726
10.6.2
570,724
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
WACC
Table 5.2: Key figures for optimistic case scenario
The rest of the assumptions have been consistent with the historical performance of the company and can be seen in Annex 10.7.2. – Optimistic scenario. According to this scenario the value of the operations is of EUR 10,198,489,000. The continuing value for the optimistic scenario adds up to EUR 5,251,843,000, which accounts for 57,2% of total operating value. The total enterprise value reaches a level of EUR 12,712,890,000 and the value of equity, EUR 9,703,803,000. By dividing to the total number of shares outstanding, the value per share is at EUR 6.59. 5.3. Pessimistic scenario This scenario implies that the world economy will take more time to pick up the pace, meaning that there is a larger stagnation period after which things will only slightly improve. Not that many people will have the money to take vacations far away from home and businesses will start using teleconferences more and more. Therefore, the demand will decrease and with it, the number of passengers and plane load factors. This will do nothing but drive revenue growth down.
28
The company’s costs are likely to go up. Fuel prices will begin to soar because of the fact that this resource is getting scarcer and scarcer. This will drive Ryanair’s cost of goods sold upwards, to a level of well above the historical average but below the levels recorded in 2009. Costs will also increase because of the EU Regulation of Emissions Trading. The CO2 act that will be enforced starting from 2012 stipulates that airliners will have to pay a fee according to how much CO2 they release into the atmosphere. The increase in COGS will of course determine EBITA margins to diminish. Ryanair will not be able to control the increase in costs and will eventually have to increase prices, which are going to get closer to the level of other competitors like easyJet or AirBerlin. If these companies improve their cost management in the long run, then Ryanair will no longer be able to compete on price and passengers will start to use competitor’s services because of airports being located closer to the city or because of better flight schedules, for example. Labour relations are going to also affect the company. In order to cut costs, employees have to perform more tasks than they would in other companies (e.g. pilots currently help unload luggage). The dissatisfaction might stir the waters and management will be forced to increase salaries. This will only increase operating costs and further erode EBITA margins. Because of the decreases in revenue, Ryanair’s ROIC will also suffer, reaching unsatisfactory levels. With regards to the continuing value, we have assumed a growth rate in NOPLAT of 2.5% and a ROIC equal to the WACC. The main reasons behind the choice were the downturn in the economic environment and the company’s decreasing operating margins. All the other assumptions and results are presented in detail in Annex 10.7.3. – Pessimistic scenario. Detailed forecast Year
Key driver forecast
Continuing value
2010
2011
2012
2013
2014
2015 - 2024
Revenue growth
0%
0%
1%
1%
2%
2%
2.5%
COGS/revenue EBITA margin ROIC
78% 13% 10.4%
78% 13% 10.6%
78% 13% 10.8%
78% 13% 10.6%
80% 13% 9.2%
13% 8%
7.84%
338,647
350,716
353,506
306,468
10.6.3
352,813
318,963
287,500
267,069
350,508
271,380
10.6.3
265,410
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
7.84%
,OPLAT (000) FCF (000) WACC
331,242
Table 5.3: Key figures for pessimistic case scenario
Based on the factors outlines above, and on a constant WACC level of 7.84%, the value of Ryanair’s operations is EUR 3,974,802,000. The continuing value for the pessimistic scenario adds up to EUR 29
1,450,541,000, which accounts for 40.55% of total operating value. The total enterprise value reaches a level of EUR 6,489,203,000 and the value of equity, EUR 3,363,744,000. By dividing to the total number of shares outstanding, the value per share is as low as EUR 2.28.
6. Calculating and interpreting results After completing the financial projections and the continuing value estimate this chapter concludes the valuation calculation by deriving the value of operations and the enterprise value. Then non-equity claims are deducted making it possible to calculate the equity value of Ryanair and ultimately a share price. It should be noted that the results mentioned below only focus on the base scenario which is most probable. 6.1. Value of operations In the following the value of operations is reached by discounting the cash flows from operation and adding the continuing value. 6.1.1. Discounted cash flow The cash flows from 2010 to 2024 are discounted with a constant weighted-average cost of capital of 7.84%. The present value of cash flows from operations amounts to EUR 2,545,164,000 in 2009. 6.1.2 Continuing value The present value of the continuing value of Ryanair amounts to EUR 2,787,718,000. It should be noted that the continuing value was estimated with a return on invested capital equal to the weightedaverage cost of capital of 7,84%. Under this assumption value is neither destroyed nor created and the estimated growth of 2,5% (based on estimated European GDP growth) does not affect the continuing value.
Figure 6.1: Value of operations Value of Operations: DCF approach Free Cash Discount Year Flow Factor
6.1.3. Value of operations Adding the present value of the cash flows to the present value of the continuing value results in a value of operations of EUR 5,332,883,000. This value is the adjusted with a mid-year adjustment factor of 1.11 that takes into account the fact that cash flows occur throughout the year and that the valuation is based on November 28th 2009. The adjustment factor is calculated using the following formula: 8: 9
7 3! = 1 +
<<8: <=>
· 1 +
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Cont. Value Operating Value
383.343 276.056 270.932 519.164 504.768 73.423 198.567 209.091 220.172 231.841 244.129 257.068 270.693 285.039 300.146 8.648.625
0,927 0,860 0,797 0,739 0,686 0,636 0,590 0,547 0,507 0,470 0,436 0,404 0,375 0,348 0,322 0,322 16
PV of FCF 355.474 237.377 216.033 383.871 346.093 46.683 117.070 114.313 111.620 108.991 106.424 103.918 101.470 99.080 96.746 2.787.718 5.332.883
Continuing value % Operating value Mid -Year Adjustment Factor Operating Value (Adjusted)
52,3% 1,110 5.919.500
30
After the adjustment the value of operations amounts to EUR 5,919,500,000. The continuing value accounts for 52.3% of the value of operations showing that about half of the operating value is generated after the company has reached a stable status. In Figure 6.1 all information concerning the value of operations is depicted. Furthermore the adjusted operating value is almost twice as much as capital invested which is also reflected by ROIC which is projected to be twice the cost of capital until 2014 but then decreases to only 10%. 6.2. Equity value Calculating the equity value is not as straightforward as calculating the value operations. First the value of non-operating assets has to be determined to find out the enterprise value. Next, the value of nonequity claims has to be estimated in order to be able to deduct these claims from enterprise value to derive the value of equity. 6.2.1. Value of non-operating assets In the case of Ryanair the value of non-operating assets consists mainly of excess marketable securities and financial investments. Ryanair does not have excess pension assets since it recorded a pension liability in 2009. Excess marketable securities amount to EUR 2,361,281,000 at fair market value and consist mostly of excess cash. Financial investments amount to EUR 153,120,000. Since more detailed information on these investments were not disclosed by Ryanair this value represents the book value as of March 31st 2009 mentioned in the annual report. Adding excess marketable securities and financial investments to the value of operations results in an enterprise value of EUR 8,433,901,000. 6.2.2. Value of non equity claims For Ryanair three categories are important namely debt, debt equivalents as well as hybrid claims. In the following, these three non-equity claims are discussed. 6.2.3. Debt Ryanair’s debt consists of fixed as well as floating debt but is not traded and therefore no market values exist. However, book values of Ryanair’s debt seem to be a reasonable approximation because the company is not in financial distress and its default risk has been stable. The value of Ryanair’s debt amounts to EUR 2,452,514,000. 6.2.4. Debt equivalents Under debt equivalents, Ryanair recognized operating leases and retirement related liabilities. The value of operating leases is estimated at EUR 662,788,000 in 2009 while retirement related liabilities 31
amount to EUR 10,157,000. Because Ryanair is committed to a defined-benefit pension plan it grants benefits to its employs regardless of the performance of the plans funds. Since the plan’s funds were insufficient in 2009 the company had to recognize a liability. Other debt equivalents such as long-term or non-operating provisions are not capitalized by Ryanair. Ryanair however had ongoing operating provisions but these are already accounted for under the free cash flow calculation and are not deducted from enterprise value. 6.2.5. Value of hybrid claims Ryanair also issues executive stock options which represent a type of debt equivalent. By using the Black and Scholes option pricing method for non-dividend paying stock the outstanding options value was estimated at EUR 42,347,000. The inputs for the Black and Scholes option price formula such as strike, time to maturity and spot price are based on note 15 (c) of Ryanair’s 2009 annual report. The volatility of the share was calculated based daily returns of the stock for the last 12 years. The value of options was then multiplied by the number of outstanding options. This is only a rough approximation of the real value of outstanding share but trade-offs had to be made due to lack of information. However, this is an insignificant amount since the value of outstanding options is less than 3% of market capitalization. 6.2.6. Value per share The final step in order to derive a value per share is to deduct all non-equity claims from the enterprise value which results in the equity value of the company. By dividing the equity value by the number undiluted shares outstanding the value per share is calculated. In the
Value of Equity
case of Ryanair the equity value amounts to EUR 5,266,094,000 and
Operating Value Excess Mkt Securities
the number of undiluted shares outstanding is 1,473,356,000
Financial Investments Excess Pension Assets
resulting in a value per share for the base scenario of EUR 3.57. If the final share price is calculated then the value per share of the other scenarios has to be considered according with their respective probabilities. The value per share of the three different scenarios and their respective probabilities are as follows:
Enterprise Value Debt Capitalized Operating Leases Retirement Related Liability Preferred Stock Minority Interest Long-Term Operating Provision Restructuring Provision Future Stock Options Stock options
Equity Value
•
Base scenario:
EUR 3.57 – 70%
•
Optimistic scenario: EUR 6.59 – 15%
•
Pessimistic scenario: EUR 2.28 – 15%
No. shares (thousands)
Value per Share
5.919.500 2.361.281 153.120 0 8.433.901 (2.452.514) (662.788) (10.157) 0 0 0 0 0 (42.347) 5.266.094 1.473 3,57
Figure 6.2: Value of equity
32
Combining these values per share results in a final share price for Ryanair of EUR 3.83. 6.3 Verifying Valuation Results 6.3.1. Sensitivity Analysis In order to complement our scenario analysis and check the accuracy of our valuation we performed a sensitivity analysis. By changing some of the key value drivers in the model, we verify if the values change in the direction we expect them to.
WACC Adjusted EBITA Revenue growth
Base value 7,84% 15%
Base equity value 5266114 5266114
5,3%
5266114
Change 0,5% 1%
New equity value 4808013 5643788
Change of EV -8.7% 8%
1%
5435873
3.2%
Table 6.1: Sensitivity analysis of Ryanair’s equity
As we can see in table 6.1, Ryanair’s equity value is sensitive to the changes in its cost of capital which shows that different forecast of WACC can have a huge influence on the estimated final value of the company. Taking in account that estimation of future WACC leaves some uncertainty, high range of values can be the outcome of the valuation, as a change of 1% in WACC results in a 17.4% change in equity value. On the operating side, the model is also very sensitive to changes in the EBITA margins, as a 1% change results in an 8% change in equity value. However, 1% change in revenue growth results in only 3.2% change is value which shows that the model is robust, as the WACC is similar to ROIC, and under those conditions, the value is fairly unaffected by changes in growth.
Change in revenue growth
-3% -2% -1% 0% 1% 2% 3%
WACC 6.34% 4.24 4.42 4.62 4.85 5.13 5.43 5.81
6.84% 3.89 4.02 4.18 4.36 4.57 4.8 5.09
7.34% 3.6 3.69 3.8 3.93 4.09 4.27 4.49
7.84% 3.34 3.4 3.48 3.57 3.69 3.82 3.98
8.34% 3.11 3.15 3.2 3.26 3.34 3.44 3.55
8.84% 9.34% 2.91 2.73 2.93 2.73 2.95 2.74 2.99 2.76 3.04 2.78 3.11 2.82 3.18 2.86
Table 6.2: Sensitivity analysis of Ryanair’s base scenario share price
In the table 6.2, we analyze the influence of the changes in WACC and revenue growth on the base case scenario share price. As the WACC increases, the value of shares decreases, since a larger WACC 33
stands for a lower present value of future cash flows. At the same time, if the revenue growth gets higher, the price of shares also increases as it stands for larger future cash flows. In conclusion, the analysis above proves that changing the key values resulted in expected outcomes; it has also shown that the model is very sensitive to predictions about the future WACC and EBITA margin. 6.3.2 Plausibility analysis Since Ryanair is a listed company, we can compare the value per share that we obtained with the market price. Ryanair stock is currently (4thDec2009) trading on the Irish Stock Exchange at EUR 3.07, which is EUR 0.76 below our current valuation. However, we believe that the stock prices were negatively influenced by certain events and announcements which severely, but unnecessarily deflated the value of the shares. An example would be the fact that the company doubled its fees for checked-in luggage. The event took place in the beginning of this year and the market had a negative reaction to it, interpreting it as a desperate measure aimed at preventing the company from sinking by squeezing some extra revenue from wherever possible. We feel that our valuation is a fair valuation. In our opinion, the market is overly pessimistic. There are analysts’ that share our view and have put out reports which give a valuation as high as EUR 4.16 per share. (Hughes, Lalor, & Houghton, 2009).
7. Conclusions As a conclusion to the process of valuing a company, it is safe to posit that the procedure is a complicated one and is filled with unknowns. There are several obstacles that have to be overcome in order to find the value of a company: •
the lack of data – In most cases, external analysts only have access to the financial statements of the company, which may not convey all the necessary information because of various reasons like the threat of divulging facts to competitors or even improper reporting standards.
•
overlooking an element can have a large impact – it is extremely easy to overlook items that are off-balance sheet, for example. For some companies the impact may be minor, but for an airline company like Ryanair, operating leases are not to be sneezed at. 34
results are to be interpreted in light of the assumptions made – the lack of data forces analysts to make use of various assumptions which have to be backed up by arguments (for example in calculating the cost of capital or in building the scenarios). These are one of the reasons for the discrepancies between analysts’ valuations and yield differences in their results. This uncertainty is also reflected in the fact that the valuation process does not come up with one figure, but with an interval, based on the scenarios employed and the probability weights of each of them.
8. Negotiation outcome Our group has entered the negotiation playing the role of a private equity fund interested in buying 100% of Ryanair’s shares for diversification purposes. Therefore there were no synergies possible between the two companies that would need calculating and that would have affected the valuation price. As a consequence we have based our negotiation strategy and price range on our sensitivity analysis. We started the bidding at EUR 2.8 per share, a price higher than the latest market closing price of EUR 2.7 per share. We set our walk away price at EUR 5.43 per share which corresponded to a WACC smaller with 1.5 percentage points and a growth rate higher with 2 percentage points relative to our base case scenario. We have closed the deal, buying the company shares at EUR 5.3 each. The main reasons for the premium we paid were the leverage power the seller had from the existence of two competing buyers, our group’s emotional determination to buy and last but not least, the relatively close valuation results of the three groups. Although the valuation prices of the seller group and our own were relatively close, they were based on different assumptions concerning, mainly, the company’s cost of capital, growth possibilities and EBITA margins. We feel that these differences in assumptions are understandable considering the attitudes of the two groups, the seller having an optimistic view while buyers are usually more conservative in their assumptions. The negotiation exercise has proved once again, that the final selling price is rarely the same as the valuation price since during a negotiation there are a number of different disruptive factors such as information asymmetry, leverage power or negotiation skills.
35
9. Bibliography Air Transport Agreement. (2007, May 25). Official Journal of the European Union . Alukos, B. (2009, September 18). Will the Airline Industry Face Heavy Turbulence? Retrieved November
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IStockAnalyst:
http://www.istockanalyst.com/article/viewarticle/articleid/3490476 Association of European Airlines. (2009). Industry Q&As. Retrieved November 1, 2009, from Association of European Airlines Web Site: http://www.aea.be/research/qas/index.html Daves, P., Ehrhardt, M., & Kunkel, R. (2000). Estimating systematic risk: the choice of return interval and estimation period. Journal of Financial and Strategic Decisions , 7-13. Dimson, E., Marsh, P., & Staunton, M. (2003). Global evidence on the equity risk premium. Journal of applied corporate finance , 27-38. European Low Fares Airline Association. (2008, December). ELFAA Airline Members Statistics. Retrieved November 1, 2009, from European Low Fares Airline Association Web Site: http://www.elfaa.com/Statistics_December2008.pdf Goedhart, M., Koller, T., & Williams, Z. (2002). The real cost of equity. McKinsey on Finance , 11-15. Hughes, E., Lalor, A., & Houghton, M. (2009, September 25). GoodBody Online. Retrieved November 20,
2009,
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http://www.goodbodyonline.ie/:
http://www.goodbodyonline.ie/include/pdf/REP20090925_RYANAIR.pdf International Air Transport Association. (2009, September). Air Transport Market Analysis. Retrieved November
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http://www.iata.org/NR/rdonlyres/D5EB1CD5-EDA2-4AAE-9DC722131A78A498/0/MIS_Note_Aug09.pdf International Air Transport Association. (2007, December 28). Air Travel Demand. Retrieved November
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http://www.iata.org/NR/rdonlyres/DA8ACB38-676F-4DB1-A2ACF5BCEF74CB2C/0/Industry_Outlook_Sep09.pdf International Air Transport Association. (2009, June). Economics: Traffic and Capacity Analysis. Retrieved
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http://www.iata.org/whatwedo/economics/traffic_analysis.htm International Civil Aviation Organization. (2009). Annual Report of the Council 2008. Retrieved November
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http://www.icao.int/icaonet/dcs/9916/9916_en.pdf Kentleton, R. (2009, June). Credit Suisse on Easyjet. Retrieved November 1, 2009, from Easyjet web site:
http://corporate.easyjet.com/~/media/Files/E/easyJet/pdf/investors/presentations/rachelK-credit-
suisse-22-06-09.ashx Koller, T., Goedhart, M., & Wessels, D. (2005). Valuation - measuring and managing the value of companies (4th Edition ed.). New York: John Wiley & Sons. Lawton, T. C. (2002). Cleared for Take-Off. Ashgate Publishing Ltd. Lynch, R. (2006). Analysing the Environment - basics. In R. Lynch, Corporate Strategy (4th Edition ed., pp. 76-113). Prentice Hall. Lynch, R. (2006). Developing strategic options: the prescriptive process. In R. Lynch, Corporate Strategy (4th Edition ed., pp. 450-451). Prentice Hall. O'Sullivan, M., & Gunnigle, P. (2009). Bearing All the Hallmarks of Oppression. Labor Studies Journal , 34 (2). Ryanair offer to pilots. (2007). European Industrial Relations Review (398). Tessier, N. (2009). The 2008 fuel crisis: an economic overview. ICAO Journal , 12-20.
37
10. Annexes 10.1 Historical performance 10.1.1. Historical Income statement 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- --------------------- --------------------- ---------------------
Income Statement Revenues Other Operating Revenues Cost of Goods Sold
330,571
432,940
550,991
731,951
924,566
1,128,116
1,433,377
1,874,791
2,225,692
39,566
54,465
73,059
110,557
149,658
190,921
259,153
362,104
488,130
(159,605)
(226,660)
(313,756)
(398,315)
(556,107)
(721,005) (1,014,756)
(1,392,764)
(1,732,276)
2,343,868 598,097 (2,296,304)
Selling, Gen & Admin Expenses
(32,123)
(21,526)
(12,356)
(14,623)
(16,141)
(19,622)
(13,912)
(23,795)
(17,168)
(12,753)
Depreciation Expense
(44,052)
(59,175)
(59,010)
(76,865)
(101,391)
(110,357)
(124,405)
(143,503)
(175,949)
(256,117)
Other Oper Expense
(50,302)
(66,033)
(75,995)
(89,231)
(149,298)
(127,315)
(164,411)
(205,088)
(251,349)
(284,160)
84,055
114,011
162,933
263,474
251,287
340,738
375,046
471,745
537,080
92,631
Amortization of Goodwill
0
0
0
0
0
0
0
0
0
0
Intangibles Amort. (Excl. Goodwill)
0
0
0
0
0
0
0
0
0
0 92,631
Reported EBITA
84,055
114,011
162,933
263,474
251,287
340,738
375,046
471,745
537,080
Non-Oper Income
2,322
1,673
1,502
628
3,217
47
815
91
12,153
4,441
Interest Income
7,498
19,666
27,548
31,363
23,891
28,342
38,219
62,983
83,957
75,522
Interest Expense
(3,781)
(11,962)
(19,609)
(57,629)
(73,958)
(82,876)
(97,088)
(130,544)
Reported EBIT
(30,886)
(47,564)
Restructuring Charges
0
0
0
(29)
(9)
Special Items
0
0
0
0
90,094
123,388
172,374
264,550
228,480
309,196
338,888
(17,576)
(18,905)
(21,999)
(25,152)
(21,869)
(29,153)
(32,176)
Earnings Before Taxes Income Taxes Minority Interest Income Before Extraordinary Items Extraordinary Items (After Tax) Net Income Preference dividends Earnings for common shareholders Common dividends
(2,342)
0 (2,302)
0 (1,234)
0 (906)
0
0
(97,175)
(222,537)
451,037
438,927
(180,487)
(15,437)
(48,219)
11,314
0
0
0
0
0
0
0
0
0
72,518
104,483
150,375
239,398
206,611
280,043
306,712
435,600
390,708
0
0
0
0
0
0
0
0
0
72,518
104,483
150,375
239,398
206,611
280,043
306,712
435,600
390,708
0
0
0
0
0
0
0
0
0
72,518
104,483
150,375
239,398
206,611
280,043
306,712
435,600
390,708
0 (169,173) 0 (169,173) 0 (169,173)
0
0
0
0
0
0
0
0
0
72,518
104,483
150,375
239,398
206,611
280,043
306,712
435,600
390,708
(169,173)
Earnings per share (EUR)
216.16
296.14
206.35
317.06
272.77
368.52
399.97
282.04
258.40
(114.42)
Earnings per share - fully diluted (EUR)
214.75
292.59
203.22
312.42
270.03
366.55
397.41
279.68
256.21
(114.42)
Retained profit
0
Statement of changes in equity Opening balance
441,357
669,898
1,002,274
1,241,728
1,455,288
1,734,503
1,991,985
2,539,773
Retained profit
104,483
150,375
239,398
206,611
280,043
306,712
435,600
390,708
0
0
0
0
0
0
0
0
124,058
182,001
56
6,949
5,382
30,590
11,233
Foreign Exchange Rate Changes Issue of New Shares Goodwill Written Off
0
0
0
0
Other Adjustments to Equity
0
0
0
0
669,898
1,002,274
1,241,728
1,455,288
Closing balance
441,357
0 (6,210) 1,734,503
0 (79,820) 1,991,985
0 100,955 2,539,773
(291,591) 0 (136,696) 2,502,194
38
2,502,194 (169,173) 0 (44,400) 0 136,440 2,425,061
10.1.2. Historical Balance Sheets 2000 2001 2002 2003 2004 2005 2006 2007 2008 ----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ----------------- -----------------
Balance Sheet Operating Cash Excess Marketable Securities
6,611
8,659
11,020
14,639
18,491
22,562
28,668
37,496
44,514
348,637
618,061
888,255
1,045,579
1,238,859
1,583,143
1,962,175
2,213,241
2,135,268 34,178
Accounts Receivable
21,974
8,695
10,331
14,970
14,932
20,644
29,909
23,412
Inventories
13,933
15,975
17,125
22,788
26,440
2,460
3,422
2,420
1,997
6,478
12,235
11,035
16,370
19,251
24,612
29,453
132,697
171,165
Other Current Assets Total Current Assets
397,633
663,625
937,766
1,114,346
1,317,973
1,653,421
2,053,627
2,409,266
2,387,122
Net Property Plant and Equipment
315,032
613,591
951,806
1,352,361
1,576,526
2,117,891
2,532,988
2,901,505
3,582,126
Goodwill
0
0
0
0
44,499
0
0
0
0
Other Intangible Assets
0
0
0
0
0
46,841
46,841
46,841
46,841
Other Operating Assets
0
0
0
0
0
0
0
0
0
36
36
0
0
0
0
763
406,075
311,462
Deferred tax asset
0
0
0
0
0
0
0
0
0
Other Non-operating Assets
0
0
0
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
0
0
0
712,701
1,277,252
1,889,572
2,466,707
2,938,998
3,818,153
4,634,219
5,763,687
6,327,551
Investments
Total Assets
Short term debt
13,347
33,072
44,305
64,607
80,682
120,997
153,311
178,918
366,801
Accounts Payable
22,861
29,998
46,779
61,604
67,936
92,118
79,283
127,243
129,289
Tax payable
0
0
0
0
0
17,534
15,247
20,822
0
Dividends payable
0
0
0
0
0
0
0
0
0
Other Current Liabilities
107,445
139,406
217,108
251,328
338,208
418,653
598,031
863,189
1,061,060
Total Current Liabilities
143,653
202,476
308,192
377,539
486,826
649,302
845,872
1,190,172
1,557,150
Balancing Debt Long Term Debt Deferred Income Taxes
0
0
0
0
0
0
81,897
58,666
75,685
112,412
374,756
511,703
773,934
872,645
1,293,860
1,524,417
1,683,148
1,899,694
15,279
30,122
49,317
67,833
94,192
104,180
127,260
151,032
148,088
Other Operating Liabilities
0
0
18,086
5,673
30,047
18,444
37,389
105,197
99,930
Restructuring Provisions
0
0
0
0
0
0
0
0
0
Income smoothing Provisions
0
0
0
0
0
0
0
0
0
On-going operating Provisions
0
0
0
0
0
7,236
16,722
28,719
42,790
Long-term operating Provisions
0
0
0
0
0
0
0
0
0
Retirement Related Liabilities
0
0
0
0
0
10,628
8,677
6,980
2,020
Minority Interest
0
0
0
0
0
0
0
0
0
Preferred Stock
0
0
0
0
0
0
0
0
0
Total Common Equity
441,357
669,898
1,002,274
1,241,728
1,455,288
1,734,503
1,991,985
2,539,773
2,502,194
Total Liabs and Equity
712,701
1,277,252
1,889,572
2,466,707
2,938,998
3,818,153
4,634,219
5,763,687
6,327,551
39
10.1.3. Historical NOPLAT 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
NOPLAT Reported EBITA
114,011
162,933
263,474
251,287
340,738
375,046
471,745
537,080
92,631
7,286
4,021
0
11,541
21,546
47,376
58,183
72,670
78,209
Adj for Non-operating component of pension expense
0
0
0
0
0
0
0
0
0
Add: Interest associated with Long-term operating Provision
0
0
0
0
0
0
0
0
0
Add: Increase in Income smoothing Provision
0
0
0
0
0
0
0
0
0
Adjusted EBITA
121,297
166,954
263,474
262,828
362,284
422,422
529,928
609,750
170,840
Taxes on EBITA
(18,424)
(20,969)
(24,985)
(26,161)
(35,789)
(42,618)
(25,298)
(69,572)
(32,602)
14,843
19,195
18,516
26,359
9,988
23,080
23,772
(2,944)
117,716
165,180
257,005
263,026
336,483
402,884
528,402
Adj for Operating Leases
Change in Deferred Taxes NOPLAT
7,436
537,234
145,674
Taxes on EBIT Prov for Inc Taxes
18,905
21,999
25,152
21,869
29,153
32,176
15,437
48,219
(11,314)
Tax Shield on Interest Exp
2,751
3,726
4,664
5,946
7,204
9,245
10,360
12,136
16,318
Tax Shield on Operating Lease Interest
1,676
764
0
1,443
2,693
5,922
7,273
9,084
9,776
Tax Shield on Non-operating component of pension expense
0
0
0
0
0
0
0
0
0
Tax Shield on Interest associated with Long-term operating Provision
0
0
0
0
0
0
0
0
Tax on Interest Income Tax on Non-operating Income
(4,523)
(285)
(4,736) (95)
(2,986) (109)
(3,543)
(4,777)
(7,873)
(10,495)
0 (9,440)
282
52
102
10,628
27,262
18,424
20,969
24,985
26,161
35,789
42,618
25,298
69,572
32,602
104,483
150,375
239,398
206,611
280,043
306,712
435,600
390,708
(169,173)
14,843
19,195
18,516
26,359
9,988
23,080
23,772
Add: Increase in Income smoothing Provision
0
0
0
0
0
0
0
0
0
Add: Goodwill Amortization
0
0
0
0
0
0
0
0
0
Add: Extraordinary Items
0
0
0
0
0
0
0
0
0
Add: Special Items After Tax
0
0
0
2,049
2,014
1,080
793
85,028
194,720
Taxes on EBIT
(385)
(5,234)
Reconciliation to Net Income Net Income Add: Increase in Deferred Taxes
Add: Minority Interest Adjusted Net Income Add: Interest Exp. After Tax Add: Interest Exp. On Long-term operating Provision Add: Interest Exp. on Op. Leases Add: Interest Exp. on Non-operating component of pension expense Income Available to Investors Add: Restructuring Charges Less: Interest Income After-Tax Less: Non-operating Income After Tax NOPLAT
(2,944)
7,436
0
0
0
0
0
0
0
0
0
119,326
169,570
257,914
235,019
292,045
330,872
460,165
472,792
32,983
9,211
15,883
26,222
41,619
50,425
64,713
72,517
84,952
114,226
0
0
0
0
0
0
0
0
0
5,610
3,257
0
10,098
18,853
41,454
50,910
63,586
68,433
0
0
0
0
0
0
0
0
0
134,147
188,710
284,136
286,736
361,323
437,039
583,591
621,330
215,642
0 (15,143) (1,288) 117,716
0 (22,314) (1,217) 165,180
29 (26,627) (533) 257,005
9 (20,905) (2,815) 263,026
0 (24,799) (41) 336,483
0 (33,442) (713) 402,884
0 (55,110) (80) 528,402
0 (73,462) (10,634) 537,234
40
0 (66,082) (3,886) 145,674
10.1.4. Historical Invested Capital 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------
Invested Capital Operating Working Capital
(81,310)
(123,840)
(214,376)
Net Property Plant and Equipment
315,032
613,591
951,806 (18,086)
(244,165) 1,352,361 (5,673)
(327,030) 1,576,526
Other Assets Net of Other Liabs
0
0
Less: On-going operating Provision
0
0
0
0
(30,047) 0
Value of Operating Leases
0
64,416
34,505
0
99,422
(458,027) 2,117,891
(601,109) 2,532,988
(815,229) 2,901,505
(938,495) 3,582,126
(994,454) 3,644,824
(18,444)
(37,389)
(105,197)
(99,930)
(7,236)
(16,722)
(28,719)
(42,790)
(106,549) (61,807)
192,534
436,716
521,692
634,063
662,788
233,722
554,167
753,849
1,102,523
1,318,871
1,826,718
2,314,484
2,474,052
3,134,974
3,144,802
Goodwill & Intangibles
0
0
0
0
44,499
46,841
46,841
46,841
46,841
46,841
Cumulative Written Off & Amortized
0
0
0
0
0
0
0
0
0
0
Op. Invested Capital (incl.Goodwill)
233,722
554,167
753,849
1,102,523
1,363,370
1,873,559
2,361,325
2,520,893
3,181,815
3,191,643
Excess Marketable Securities
348,637
618,061
888,255
1,045,579
1,238,859
1,583,143
1,962,175
2,213,241
2,135,268
2,361,281
36
36
0
0
0
0
763
406,075
311,462
153,120
Non-operating Assets
0
0
0
0
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
0
0
0
0
Total Investor Funds
582,395
1,172,264
1,642,104
2,148,102
2,602,229
3,456,702
4,324,263
5,140,209
5,628,545
5,706,044
Total Common Equity & Pref. Stock
441,357
669,898
1,002,274
1,241,728
1,455,288
1,734,503
1,991,985
2,539,773
2,502,194
2,425,061
0
0
0
0
0
0
0
0
0
0
15,279
30,122
49,317
67,833
94,192
104,180
127,260
151,032
148,088
155,524
Dividends Payable
0
0
0
0
0
0
0
0
0
0
Income smoothing Provision
0
0
0
0
0
0
0
0
0
0
456,636
700,020
1,051,591
1,309,561
1,549,480
1,838,683
2,119,245
2,690,805
2,650,282
2,580,585
Minority Interest
0
0
0
0
0
0
0
0
0
0
Restructuring Provisions
0
0
0
0
0
0
0
0
0
0
Long-term operating Provision
0
0
0
0
0
0
0
0
0
0
Retirement-Related Liabilities
0
0
0
0
0
10,628
8,677
6,980
2,020
10,157
125,759
407,828
556,008
838,541
953,327
1,414,857
1,759,625
1,920,732
2,342,180
2,452,514
0
64,416
34,505
0
99,422
192,534
436,716
521,692
634,063
662,788
582,395
1,172,264
1,642,104
2,148,102
2,602,229
3,456,702
4,324,263
5,140,209
5,628,545
5,706,044
Op. Invested Capital (excl.Goodwill)
Investments
Cum Goodwill Written Off & Amortized Deferred Income Taxes
Adjusted Equity
Interest Bearing Debt Value of Operating Leases Total Investor Funds
41
10.1.5. Historical Cash Flow 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------
Free Cash Flow NOPLAT Depreciation Gross Cash Flow Increase in Working Capital Capital Expenditures
117,716
165,180
257,005
263,026
336,483
402,884
528,402
537,234
145,674
59,175
59,010
76,865
101,391
110,357
124,405
143,503
175,949
256,117
176,891
224,190
333,870
364,417
446,840
527,289
671,905
713,183
401,791
42,530
90,536
29,789
82,865
130,997
143,082
214,120
123,266
55,959
(357,734)
(397,225)
(477,420)
(325,556)
(651,722)
(539,502)
(512,020)
(856,570)
(318,815)
(12,413)
24,374
(11,603)
18,945
67,808
(5,267)
6,619
7,236
9,486
11,997
14,071
19,017
Incr in other operating assets/liabilities
0
18,086
Incr in Ongoing operating Provisions
0
0
Inv in Operating Leases
0
0
(64,416)
29,911
34,505
(99,422)
(93,112)
(244,182)
(84,976)
(112,371)
(28,725)
Gross Investment
(379,620)
(258,692)
(425,539)
(317,739)
(618,204)
(612,171)
(303,071)
(836,871)
(265,945)
Free Cash Flow Excl. Goodwill
(202,729)
(34,502)
(91,669)
46,678
(171,364)
(84,881)
368,833
(123,688)
135,846
Investment in Goodwill and Intangibles
0
Free Cash Flow Incl. Goodwill
(202,729)
AT Interest Income (Incr)/Decr Excess Mkt Sec
0 (34,502)
0 (91,669)
(44,499) 2,179
(2,342) (173,706)
0 (84,881)
0 368,833
0 (123,688)
15,143
22,314
26,627
20,905
24,799
33,442
55,110
73,462
66,082
(269,424)
(270,194)
(157,324)
(193,280)
(344,284)
(297,135)
(274,297)
94,992
(247,624)
Foreign Exchange Translation
0
0
0
0
0
0
0
0
(Incr)/Decr Retirement Related Assets
0
0
0
0
0
0
0
0
1,288
1,253
533
766
Restructuring Cash Flow
0
0
(29)
(9)
0
0
0
0
Extraordinary items
0
0
0
0
0
0
0
0
Non-operating Cash Flow
(455,722)
Cash Flow Available to Investors
0 135,846
(1,973)
(1,130)
(406,025)
20,219
0 0 (32,492) 0 0
(281,130)
(221,862)
(169,440)
(495,164)
(349,704)
(256,379)
64,985
(78,188)
Financing Flow AT Interest Expense
9,211
15,883
26,222
41,619
50,425
64,713
72,517
84,952
114,226
Interest on Operating Leases
5,610
3,257
0
10,098
18,853
41,454
50,910
63,586
68,433
Interest on Nonoperating Component of Pension Expense
0
0
0
0
0
0
0
0
0
Interest on Long-term Operating Provision
0
0
0
0
0
0
0
0
Decr/(Incr) in Debt Decr/(Incr) in Operating Leases
0
(282,069)
(148,180)
(282,533)
(114,786)
(461,530)
(262,871)
(184,338)
(404,429)
(131,945)
(64,416)
(99,422)
(93,112)
(244,182)
(84,976)
(112,371)
(28,725)
29,911
34,505
Decr/(Incr) in Retirement Rel. Liab
0
0
0
0
Decr/(Incr) in Long-term Operating Provision
0
0
0
0
Payments to Minorities
0
0
0
Common Dividends
0
0
Preferred Dividends
0
Decr/(Incr) in Preferred
0
1,951
1,697
4,960
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
828
49,230
(112,188)
428,287
(92,040)
(349,704)
(256,379)
64,985
(78,188)
Decr/(Incr) in Share Capital
(124,058)
(182,001)
(56)
(6,949)
Total Financing Flow
(455,722)
(281,130)
(221,862)
(169,440)
(10,628)
(495,164)
(8,137)
0
10.1.6. Historical Economic Profit 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------
Economic Profit Before Goodwill Return on Invested Capital
50.4%
29.8%
34.1%
23.9%
25.5%
22.1%
22.8%
21.7%
WACC
7.3%
7.5%
7.2%
7.6%
7.2%
7.6%
8.0%
7.8%
4.6% 7.6%
Spread
43.0%
22.3%
26.9%
16.3%
18.3%
14.4%
14.8%
13.9%
-3.0%
Invested Capital (Beg of Year)
233,722
554,167
753,849
1,102,523
1,318,871
1,826,718
2,314,484
2,474,052
Economic Profit (before Goodwill)
100,597
123,831
202,977
179,167
241,623
263,650
343,491
343,974
3,134,974
NOPLAT
117,716
165,180
257,005
263,026
336,483
402,884
528,402
537,234
145,674
Capital Charge
(17,119)
(41,349)
(54,028)
(83,859)
(94,860)
(139,234)
(184,910)
(193,260)
(238,563)
Economic Profit (before Goodwill)
100,597
123,831
202,977
179,167
241,623
263,650
343,491
343,974
(92,889)
(92,889)
After Goodwill Return on Invested Capital
50.4%
29.8%
34.1%
23.9%
24.7%
21.5%
22.4%
21.3%
WACC
7.3%
7.5%
7.2%
7.6%
7.2%
7.6%
8.0%
7.8%
7.6%
Spread
43.0%
22.3%
26.9%
16.3%
17.5%
13.9%
14.4%
13.5%
-3.0%
1,873,559 260,080
2,361,325 339,749
2,520,893 340,315
4.6%
Invested Capital (Beg of Year) Economic Profit (after Goodwill)
233,722 100,597
554,167 123,831
753,849 202,977
1,102,523 179,167
1,363,370 238,422
NOPLAT
117,716
165,180
257,005
263,026
336,483
402,884
528,402
537,234
145,674
Capital Charge Economic Profit (after Goodwill)
(17,119) 100,597
(41,349) 123,831
(54,028) 202,977
(83,859) 179,167
(98,061) 238,422
(142,804) 260,080
(188,653) 339,749
(196,919) 340,315
(242,127) (96,453)
42
3,181,815 (96,453)
10.1.7. Historical operating ratios 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------
Ratios Adjusted EBITA / Revenues Cost of Goods Sold / Revenues
48.3%
52.4%
56.9%
54.4%
60.1%
63.9%
70.8%
74.3%
77.8%
9.7%
5.0%
2.2%
2.0%
1.7%
1.7%
1.0%
1.3%
0.8%
0.5%
EBITDA / Revenue
42.0%
42.7%
40.8%
43.6%
38.1%
34.3%
28.2%
24.4%
21.4%
1.5%
Depreciation / Revenues
13.3%
13.7%
10.7%
10.5%
11.0%
9.8%
8.7%
7.7%
7.9%
10.9%
Reported EBITA / Revenues
25.4%
26.3%
29.6%
36.0%
27.2%
30.2%
26.2%
25.2%
24.1%
4.0%
1.7%
0.7%
0.0%
1.2%
1.9%
3.3%
3.1%
3.3%
3.3%
28.0%
30.3%
36.0%
28.4%
32.1%
29.5%
28.3%
27.4%
7.3%
SGA costs / Revenue
Adjustments to EBITA / Revenues Adjusted EBITA / Revenues
98.0%
Return on Invested Capital (BY) Net PPE / Revenues Working Capital / Revenues Net Other Assets / Revenues Rev. / Inv. Capital (pre-Goodwill)
72.8%
111.4%
130.0%
146.3%
139.7%
147.8%
135.1%
130.4%
152.8%
-18.8%
-22.5%
-29.3%
-26.4%
-29.0%
-32.0%
-32.1%
-36.6%
-40.0%
0.0%
11.7%
2.2%
-0.6%
6.1%
11.6%
20.4%
17.4%
21.0%
1.0
0.8
0.9
1.9
Pre-Tax ROIC
51.9%
Cash Tax Rate After-Tax ROIC (pre-Goodwill) Rev. / Inv. Capital (incl. Goodwill)
30.1%
35.0%
23.8%
27.5%
0.8 23.1%
0.8 22.9%
0.9
0.7
24.6%
5.4%
3.0%
1.1%
2.5%
-0.1%
7.1%
4.6%
0.3%
11.9%
14.7%
50.4%
29.8%
34.1%
23.9%
25.5%
22.1%
22.8%
21.7%
4.6%
1.9
After-Tax ROIC (incl. Goodwill)
1.0
1.0
1.0
0.8
0.8
0.8
0.8
0.9
0.7
50.4%
29.8%
34.1%
23.9%
24.7%
21.5%
22.4%
21.3%
4.6%
Net PPE / Revenues
107.2%
142.1%
157.4%
158.4%
163.7%
162.2%
144.9%
145.7%
154.2%
Working Capital / Revenues
-23.7%
-30.7%
-31.3%
-30.9%
-34.8%
-36.9%
-37.8%
-39.4%
-41.2%
7.4%
7.3%
0.7%
3.4%
10.5%
19.2%
20.5%
19.7%
21.0%
1.1
0.8
0.8
0.8
Return on Invested Cap (Avg)
Net Other Assets / Revenues Rev. / Inv. Capital (pre-Goodwill)
0.7
0.7
0.8
0.8
0.7
Pre-Tax ROIC
30.8%
25.5%
28.4%
21.7%
23.0%
20.4%
22.1%
21.7%
5.4%
After-Tax ROIC (pre-Goodwill)
29.9%
25.3%
27.7%
21.7%
21.4%
19.5%
22.1%
19.2%
4.6%
After-Tax ROIC (incl. Goodwill)
29.9%
25.3%
27.7%
21.3%
20.8%
19.0%
21.6%
18.8%
4.6%
Average ROE
18.8%
18.0%
21.3%
15.3%
17.6%
16.5%
19.2%
15.5%
-6.9%
31.0%
27.3%
32.8%
26.3%
22.0%
27.1%
30.8%
18.7%
5.3%
NA
37.6%
57.8%
-0.2%
37.8%
16.6%
25.4%
15.1%
-72.0% -72.9%
Growth Rates Revenue Growth Rate Adjusted EBITA Growth Rate NOPLAT Growth Rate
NA
40.3%
55.6%
2.3%
27.9%
19.7%
31.2%
1.7%
137.1%
36.0%
46.3%
23.7%
37.4%
26.0%
6.8%
26.2%
0.3%
44.1%
43.9%
59.2%
-13.7%
35.5%
9.5%
42.0%
-10.3%
-143.3%
Gross Investment Rate
214.6%
115.4%
127.5%
87.2%
138.4%
116.1%
45.1%
117.3%
66.2%
Net Investment / NOPLAT
272.2%
120.9%
135.7%
82.3%
150.9%
121.1%
30.2%
123.0%
6.7%
Invested Capital Growth Rate Net Income Growth Rate Investment Rates (excl. Goodwill)
Financing EBIT/Interest Payable Adjusted EBITA/Interest payable Cash Coverage (Gross CF / Interest) Debt / Total Cap (Book) Debt / Total Cap (Market)
9.5
8.3
8.5
5.3
5.9
5.1
5.7
5.5
0.7
10.1
8.5
8.5
5.5
6.3
5.7
6.4
6.3
1.3
14.8
11.4
10.8
22.2%
37.8%
35.7%
40.3%
39.6%
7.7
44.8%
7.8
46.8%
7.1
43.0%
8.1
48.3%
7.3
50.2%
3.8%
9.9%
9.9%
19.5%
16.9%
23.5%
22.5%
17.5%
35.9%
36.5%
10.1.8. Revenue growth
43
3.1
10.1.9. Growth patterns: Ryanair vs. easyJet
10.1.10. Measuring Coverage
10.1.11. Total Return To Shareholders: Ryanair vs. easyJet
44
10.2. Market definition, size, share and growth The world airline industry includes the transport of passengers, freight and mail by air along regularly scheduled routes. Its volume of business is measured with the help of operating measures. The most common indicator for business volume is passenger traffic. This is measured in passenger kilometres which are calculated by multiplying the number of passengers by the distance they fly. This statistic is also referred to as Revenue Passenger Kilometres (RPK) since only revenue generating passengers are included thus ignoring non revenue traffic such as airline employees travelling on duty. Ryanair only offers passenger transport services and since it only services 5 destinations outside of Europe we can restrict its operating market to flights only leaving from and towards European destinations. The international Civil Aviation Organization sets the total number of passengers flown by European airlines to 649 090 000 in 2008, totalling 1 220 991 million revenue passenger kilometres. Ryanair reported a number of 58 565 663 booked passengers and 63 089 975 600 revenue passenger kilometres Therefore, the company holds a 9% market share according to booked passengers and a 5% market share according to RPK of the entire European airline industry. This second measure puts the company in a less favorable light because it increases with the length of the flights and Ryanair is a short haul carrier by nature. Therefore the definition of the company’s operating market can be restricted further in order to include only European short haul flights. The European short haul airline industry is a very fragmented market and it includes both low cost carriers as well as full service ones. Chart 10.2.14 describes market share by seats offered for the period June 2008-June 2009. Figure 10.2.1 - Market share by seats offered
Ryanair is the market leader with an 8.5% market share and it is followed closely by
4
(Kentleton, 2009)
45
Lufthansa and Air France, two full service carriers. According to the ELFAA (European Low Fares Airline Association, 2008), the association’s airlines carry 150 million passengers a year which accounts for over 35% of the scheduled intra-European traffic. This sets the scheduled traffic at428.57 million passengers. According to this metric, Ryanair holds a 13.7% market share. 10.2.1. Market growth The airline industry is very sensitive to the state of the general economy since air travel demand is income elastic. This implies that the evolution of the airline industry market in general and of the European short haul segment in particular will depend on the trend in the overall economy. This has been quite visible during the last two years that have been marked by the global economic crisis. On the background of the worsening global financial crisis, in 2008, the overall GDP growth only reached a 3.2% level in real terms which translated in a 1.3% growth in global passenger traffic. Focusing on the European economy which directly affects the size of Ryanair’s operating market, the average GDP increase was of only 1.3%, with the higher growth being concentrated among the Commonwealth of Independent States and Central and Eastern Europe. According to the ICAO this has translated in a growth in European international passenger traffic of 4.1% and a decrease in domestic passenger traffic of 2.3%. Furthermore, the organization’s predictions for 2009 were bleak, a decrease in average global GDP of 1.7% causing a decrease in the global air travel market of 3.8%. In the beginning of 2009, the market evolution was more unfavourable than predicted. The passenger traffic plummeted until reaching a low point at the end of the first quarter.
The
however
situation improved
slowly and at the end of August
2009,
the
European RPK was only 2.8% lower than the same
month
in
the
previous year. However, 46
from a year to date perspective the RPK plummeted by 6.3%. Looking ahead, IATA believes that year on year growth rates for passenger demand may turn positive within the next few months (as shown in the attached graph), based on an increase in customer confidence levels. The overall decline in the market in 2009 is estimated at 5%. However, the confidence levels are way below the ones in 2008 and the economic growth is expected to be slower than normal upturns due to the fact that many businesses are recovering from the crisis, jobs are still scarce and consumers use their income to pay off accumulated debt. Therefore, in 2010, the increase in global air travel demand is expected to reach only 4% with European demand increasing with only 3%. In the next 5 years, once the economic turmoil passes and the economic growth in Europe stabilizes, the growth in passenger traffic is also expected to stabilize, around 4.8%, as the growth in global traffic will be driven mostly by developments in Asian countries. However, since Central and Eastern Europe and the CIS countries have a higher economic growth potential they are the most likely base for the increase in European air travel demand. To sum up, Ryanair is market leader in the European short haul airline industry with a market share of 8.5%. The market that has suffered from a serious decline in the last year on the background of the downturn in global economy is expected to recover slowly and to grow at a rate of 3% in the first year and to stabilize at a growth rate of 4.8% in the medium term. The growth is expected to be driven by the economic development in the central and eastern European and CIS member countries. 10.3 PESTEL Analysis The PESTEL framework is a useful method of analyzing a company’s macro environment. It helps understand how factors outside the company can influence its evolution. There are six types of such factors: political, economical, socio-cultural, technological, environmental and legal. These factors are not mutually exclusive but interdependent as particular events can affect the company from more than just one perspective. 10.3.1 Political and legal factors Political issues are very relevant in the airline industry which has been and still is under political influence. This is particularly true in the European Union where Ryanair primarily operates. An example of a political factor is represented by the liberalization of the European airline industry. Many airlines were and still are owned by national governments. The governments protected the 47
interests of the flag carriers since a free competition was perceived as a threat to the state itself. They imposed regulations restricting pricing freedom and product differentiation. In the European Union this situation has come to an end after a process of liberalization of the airline industry. After three packages of measures adopted in December 1987, June 1990 and July 1992, cabotage is allowed for airlines of the member states. This translates in the right of the airline to operate a route within another Member State. A recent liberalization act came under the form of the EU-US Open Skies Agreement, signed in 2007 and which entered into effect on March the 30th 2008, which gives the right to US based airlines to operate intra-EU flights, while European airlines are not permitted to operate intra-US flights and are not allowed to purchase a controlling stake in a US operator. This represents both a great disadvantage and a threat of increased competition for European airlines. For a low fare carrier such as Ryanair, the liberalization has various implications. It has allowed for the company to exist by making innovative pricing policies and product differentiation possible. Furthermore since the packages include provisions on fare transparency, it provides the low cost carriers with an advantage since they have the most transparent pricing policies. Moreover, through the right of cabotage within the EU, it has lead to an increase in the market size firstly because it opened the doors to existing Member States and secondly because the expansion of the European Union, the admission of new members, contributes to the growth of the market size even more. There is, however, a downside represented by possible increased competition originating in the new Member States or by lost market share to any competitor that might obtain a first mover advantage in the new markets. The threat of increased competition is increased by the possibilities of strong US based airlines starting to operate within the EU. In conclusion, any modification of the liberalization legislation may affect the market position of the company. Another example of an issue that has both political and legal roots and that affects the company is the issue of state aid. The EU rules control aid granted by member states to businesses on a selective or discriminatory basis. The EU Treaty prevents member states from granting such aid unless approved in advance by the EU. Any such grant of state aid to an airline may be challenged before the EU or, in certain circumstances, national courts. If aid is thought to have been unlawfully granted it may have to be repaid by the airline to the granting member state, together with interest thereon. In the particular case of the airline industry, governments may try to subsidize flag carriers in order to help them avoid bankruptcy. This help provides the receiving airlines with a non competitive advantage allowing them 48
to operate with wasteful business models and thus leading to a decrease in welfare. Without the state aid their losses become unsustainable and they may face a serious bankruptcy threat. A recent example involves the Italian flag carrier Alitalia who has been allowed an EUR 100million yearly state aid for a period of seven years through the introduction of a EUR 3 per passenger airport tax for foreign companies. While this law affects Ryanair directly by increasing costs it also sets a dangerous precedent. For Ryanair, the state aid legislation has a series of implications. First and foremost, if applied correctly it ensures a lawful competitive environment. Secondly without the help from their governments, flag carriers may go bankrupt which would imply opportunities to increase market share and capacity. However, the Alitalia case has created a strong precedent and suggests that national governments will not give up on flag carriers very easily. All in all, any deviations from or alterations of the law can put the company in a disadvantage. Ryanair proved to be aware of the importance of the law and its implications and has submitted a series of state aid complaints against Air France, Lufthansa, Alitalia, Volare and Olympic Airways. While two of the complaints have been addressed, the company still awaits hearings in the remaining three cases. Another both political and legal issue is the one of airport ownership. Although most airports are owned by government bodies, some have been leased to private corporations that oversee their operation while others have become fully privatized. If any airline would have significant influence on an airport’s operations, it would create a state of monopoly thus giving the airline a competitive advantage. Examples of possible such situations are represented by BAA Airports Ltd and DAA (Dublin Airport Authority). In October 2008 The UK Competition Commission recommended the breakup of the UK BAA airport monopoly. Any evolutions in the change of ownership change in any of the airports Ryanair operates on can have a high impact on the company’s operating cost considering that airport and handling charges represented 15.56% of the company’s total operating expense. A purely legal issue regards the issue by the EU of recent legislation that aims to give better rights to passengers travelling from EU countries. According to this legislation, passengers that are denied boarding are to be financially compensated with amounts ranging from EUR 250 to EUR 600 depending on the length of their scheduled flight. The airlines must also re-schedule the flight or give a refund and if necessary they must provide food and lodging for the passengers until their next possible flight. Although this legislation was introduced to deter full service airlines from practicing
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overbooking, it is also valid in case of long delays or cancelations that were not caused directly by the airline, such as airport disruptions or unfavourable weather. For low fare airlines such as Ryanair, this legislation causes a serious disadvantage. Firstly low cost carriers do not practice overbooking nearly as much as full service carriers, and secondly since the compensations do not depend on the price paid for the ticket, low cost carriers are affected more than the full service ones. In conclusion the main political and legal issues that affect Ryanair are the liberalization of the airline industry, state aid evolutions, changes in airport ownership and the passenger rights legislation. 10.3.2 Economic factors The overall state of the economy is the main economic factor affecting the airline industry. The main reason is that demand for air travel is very income elastic. It has been shown that there is a 1 to 2 relation between the change in GDP and the demand for air travel. Therefore the airline industry is very affected by the economy and its trade cycles. Low fare airlines, as Ryanair, are however less affected by economy downturn periods since in such periods, although they might lose some customers, they attract the ones who would have usually chosen a full service airline. The strong relation between GDP and air travel demand has also been exemplified during the latest economic downturn period as mentioned in the market analysis. Another characteristic of the airline industry that corroborates with its dependence on the cycles of the economy is the fact that in periods of economic boom, investing in capacity in order to satisfy increasing demand is a difficult strategic decision since it means tying up capital in airplanes. If the long term planning is flawed, the resulting un-coordination between capacity and demand can result in idle capacity and low returns on invested capital, in periods of economic downturn, or loss of potential revenue, in periods of economic upturn. Economically, the airline industry is also seriously affected by fuel prices since they represent a high portion of the airliner’s costs. For Ryanair, for example, fuel and oil costs represented 39%, 36% and 44% of total operating costs in 2007, 2008 and 2009 respectively. That is why, the doubling of jet fuel prices from an average of $90/b in 2007 to peak at $180/b in July 2008 caused the airline industry slipping from net profits of $12.9bn in 2007 to an estimated loss of $5bn in 2008 and resulted in 30 airlines ceasing scheduled operations.
50
Airlines have a series of ways in which to mitigate the issue of volatile fuel prices. These include using fuel efficient aircraft, transferring the costs onto the passengers by introducing fuel surcharges or hedging the fuel costs. As a short haul airline, Ryanair is even more affected by fuel prices since airplanes consume the most fuel during takeoff and landing. 10.3.3 Socio-cultural factors Since the airline industry provides a service it is very dependent on its customers that become part of the airliners operations. Therefore the passengers’ perceptions and the way they change can highly impact an airliner’s volume of business. Such a big change has occurred in the population’s perception of air travel. Since the low cost revolution, air travel is no longer seen as an expensive, luxury item. Travelling by plane is now available to the larger public and travelling abroad for a short holiday has recently become a trend within the European Union. The consumers’ perceived safety is also very important in the airline industry. If passengers do not feel safe to travel or to do so by plane they will avoid boarding flights and airliners revenues will plunge. Fear of terrorist attacks such as the September 2001 ones, or fear of health hazards such as the avian flu or the recent swine flu outbreaks can significantly affect passengers’ trust in travelling by plane. Another social factor affecting the airline industry has been the change in demographics around the European Union. The right to free movement of people has lead to an increased number of people
51
relocating within the union for different reasons. This has increased the demand for air travel since all these expats travel to visit their home countries. 10.3.4 Technological factors The most important technological factors affecting the airline industry are the emergence of the internet and developments of technological innovations that reduce the necessity of personal encounters and therefore of air travel. The development of videoconferencing has led to a decrease in air travel demand since the need to fly has disappeared. The impact of the internet has been to give a higher bargaining power to customers due to increased access to information. Prospective passengers can access the web pages of all the airliners and book their own flights according to their preferences. This has lead to an increased competition on price among the airliners and consequently to the need of airliners to increase cost efficiency in order to maintain their margins. Another technological factor has been the improvement of airplane technology. More cost efficient aircrafts have made it easier for low cost carriers to maintain low fare levels. Furthermore the increase in safety has contributed to a higher trust of the passengers in air travel and thus helped in raising the demand in the industry. 10.3.5 Environmental factors Environmental awareness has been increasing in the past decade and all industries have been facing scrutiny from both specialized organizations and consumers themselves. The airline industry makes no exception. The latest environmental issue affecting the airline industry is adding the industry to the EU Emissions Trading Scheme as of 2012. This scheme is a cap-and-trade system for CO2 emissions to encourage industries to improve their CO2 efficiency. Under the legislation, airlines will be granted initial CO2 allowances based on historical “revenue ton kilometres” and a CO2 efficiency benchmark. Any shortage of allowances will have to be purchased in the open market and/or at government auctions. Ryanair reports that although it has not calculated what the effect of the legislation is going to be on the company, it will negatively affect the European airline industry. The airliners will have to pass through the new costs in the fares of the ticket. Especially for low fare carriers this will most likely translate in
52
a decrease in demand as short haul air travel demand is very price sensitive, the European coefficient of elasticity being of -2. Although it has not been issued, there is also a threat of fuel taxes and emission levies being introduced for airliners. This would have a similar effect to the emission trading scheme, further decreasing industry profitability. The following figure summarizes the factors affecting the airline industry macro environment: Economic factors • •
Socio-cultural factors
State of the general economy Volatility and level of fuel prices
• • •
Environmental factors
Technological factors • • •
Consumers’ perception of air travel Passengers perception of air travel safety Change in EU population demographics
Ryanair
The internet Video conferencing technology More efficient aircrafts
• •
Part of EU Emissions Trading Scheme as of 2012 Introduction of fuel taxes
Political and Legal factors • • • •
Liberalization State aid Airport ownership EU passenger rights
10.3.6 General Degree of Turbulence in the Environment Taking into account the environmental analysis above, the degree of turbulence in the business environment can be analyzed. The analysis can be performed according to changeability and predictability.
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The factors influencing changeability are complexity and familiarity of the new events in the industry. For an airliner, the complexity of change has a medium level. At the current levels of globalization, major events have a global impact. An example is provided by the 2001 terrorist attacks that although happened in the United States, they caused a downturn in the global airline industry. Since Ryanair operates in the European Union which is a relatively closed environment from the exterior, the complexity is only at a regional level. From a familiarity point of view, the events that affect the airline industry are can be extrapolated, mainly because they have previously occurred in a different industry. The introduction of the industry in the EU emissions trading scheme has already been affecting various other industries, for example. The factors influencing predictability are rapidity of change and visibility of the future. The change in the industry is not fast since it mostly involves legal aspects that need to go through a bureaucratic process before being approved. This gives the industry players enough time to prepare and to respond once the change occurs. The economic and social changes involving consumers’ perceptions can arguably represent an exception since they do not give significant notice and are more volatile. On the other hand, in these situations the visibility of the future is high, including recurring or at least forecast able events. The relationship between the state of the economy and air travel demand has been thoroughly studied and if changes in the economy occur the effects on the industry can be calculable. In conclusion the level of turbulence in the airline industry is medium and should not pose a threat on the strategic analysis of the company. 10.4. The Five Forces analysis of the airline industry 10.4.1. The threat of substitute products - low Companies in the airline industry face a threat of substitute products offered by other industries. In this case those are mainly alternative ways to travel, like other means of transport such as cars, trains or ships. They can pose a threat for regional, short distance trips. However, with increasing distance, flights become the more popular option for many customers, so in this case, the threat is low. It is believed that when the distance is higher than 400km the airlines no longer compete with other means of transport. Automobile transport depends on the prices of fuel, and since those are relatively high in Europe, it remains as an option popular only on short distance trips. When it comes to bus transport, there exists only one pan-European network of long distance bus lines – Eurolines which consist of around 30 smaller bus companies. They are usually chosen by low budget travellers and students. The bus ticket 54
prices do not vary as much as the prices of airline tickets, as one pays almost the same fare with no regard to when the purchase was made, while the airline fares depend on the period of year and time when the purchase was made. The fast railway (such as TGV) can pose a threat on some of the routes. And it has some benefits for travellers, as the travel time is similar and the train stations are often in the centres of the cities while airports reserved for low cost carriers are located in the outskirts. Also, there is no need to arrive a few hours before the departure of the train, as the passengers don’t have to go through such a strict control as when travelling on plane. However, the slumping prices of airline tickets have recently made train connections to sometimes be more expensive than flights on similar routes. Moreover, in Europe there are not a lot of railway routes that can accommodate high speed trains. In regions like Eastern Europe the modernisation of the railways is extremely expensive and that lowers the chances that those connections will create a strong competition for airlines. The same is true in the mountainous areas, where constructions of tunnels generates high cost and puts the airline industry in an advantageous position. Fast railways need usually subsidies from the government which shows that it is less efficient that cheap airlines. Moreover creation of even faster trains turned out to be extremely expensive and unprofitable which lowers the chances of its implementation in Europe and lowers the threat for airlines. Recently, the developing communication technologies like the internet and teleconferencing, that enable virtual meetings, lowered the need for business travels. However, for the low cost airlines those clients were never an important source of income. The business travellers tend to use more expensive airlines which offer them higher standard services, as the cost of flights is covered by their employers. Additionally they can profit from different frequent-flyer programs that are not offered by LCCs. Also it is believed that that those virtual meetings will not have an effect on regular customers, as people still prefer to meet with their friends and relatives in person that to use the video-conferences to substitute those meetings. 10.4.2. The threat of the entry of new competitors - moderate Although, it may seem that high barriers of entry should block the airline industry from new competitors entering the market. The threat of entry of new carriers depends on the costs of access to bank credits and loans as this industry is characterised by high leverage. When borrowing is cheap, the likelihood of new companies entering the market increases. This market gets easily saturated so it is important to have a recognised brand name as well as having frequent flights on most of the routes. New players are forced to spend a lot of money to become visible. Moreover, new entrants that decide 55
to compete with other LCC companies, on the more popular routes, may lose a price-cutting competition which usually occurs. However the EU law tries to limit this kind of actions that would aim at new players in the industry. Having good slots on the airports (hour and place) also lower the threat of new competitors as new companies often can’t afford to have flights from more popular airports without cutting into their profit margins. So they have to start from the smaller airport, sometimes without the strong infrastructure that would connect them to the cities. Economies of scale are not an important barrier of entry, as often there is no need for bigger planes (although they lower the cost for a passenger) but for more frequent flights. And LCCs achieve economies of scale through low cost structure that lowers the prices and generates new demand increasing the load factor leading to lower unit cost per passenger. The threat of new entrants has recently increased following the enforcing of the Open Skies act between the EU and the United States, which allows US airlines to penetrate the intra European short haul market. Since they are already established airlines, they would face considerably lower entry barriers. 10.4.3. The intensity of competitive rivalry - high The competition in the airline industry is high. There are a lot of companies in this industry and especially among low-cost carriers, price-cutting competition often occurs. The airline companies have high fixed costs and because of high competition in this sector they have relatively low returns. That leaves them in vulnerable position during the times of economic slowdown or increasing fuel prices. In order to survive and increase profits the companies need to have unique business models. Some of those include using outsourcing, maximising the use of aircrafts or using only one or few types of airplanes to lower the maintenance costs etc. Only through strict cost management and looking for new, more effective solutions, a carrier can gain higher profits then the average for industry and outrun the competition. Competition may take place between two low fare airlines or when LCCs decide to enter full service airlines sector, as well when regular airlines want to enter the low fares sector. However, there are not a lot of successful examples of regular airlines trying to compete against LCCs, as FSAs tend to be afraid that the new subsidiaries could cannibalize the parent company. As a result, they are not consequent in the management of the newly created airlines. Other FSAs tend to differentiate their offers, creating few types of fares. The cheapest fares are usually non-refundable, without the possibility to change the 56
date and with no meal or with very limited choice of meal. However, FSAs have to be careful when it comes to adjusting their offers, as they can end up with a product that is neither the cheapest nor different from the competitive ones. The airline industry is characterised by high exit barriers. 10.4.4. The bargaining power of customers - moderate The development of the Internet had an important effect on the amount of information accessible for customers. Nowadays, they can easily compare the prices of different airlines. There are internet services that bring together all the flights on a specific route. As a result the bargaining power of customers is high as long as there other cheap competitors on the route because passengers will usually choose the cheapest option. Consequently the prices of agents have also become lower as they had to cut their margins to face the Internet competition. However having a strong brand is important, as customers may be afraid of new or unknown airlines because of the history of bankruptcies in the LCC industry. If there aren't any competitors, and the company offers the only cheap connection between a pair of cities, the power of customers decreases significantly. 10.4.5. The bargaining power of suppliers - high The power of suppliers is high as the returns are small and the two main costs for the airline companies are fuel and labour. The costs of fuel may depend on the efficiency of the carrier however; as the planes consume the highest amounts of jet fuel during take-offs and landings, short haul airlines have lower cost efficiency. Also the prices of fuel tend to fluctuate on a monthly basis so companies need to have a business model that takes that into consideration. The airlines have to pay air pilots, flight attendants, customer relations and airport services such as baggage handlers and dispatchers as well as for the slot on the airport. The labour is the second largest expense for the industry, and often pilots and staff are part of one or more labour unions, which significantly increases their bargaining power. However, Ryanair has developed a specific policy that limits the creation of unions within the company, thanks to which the staff has limited bargaining power. Ryanair is also outsourcing all its check-in and airport services to Servisair in all its locations. High airports’ fees move cheaper carriers to less popular hours or smaller airports farther away from the big cities. However, as a lot of smaller airports need the LCCs to stimulate growth and generate profit, they often need to offer the best prices in return for a stable number of passengers. The airlines usually have high bargaining power in contact with those airports as they are able to threaten them that they will change airport if their conditions will not be met. Lack of diversification of clients can put local airports in a very vulnerable position. The increase in number of new passengers, when new 57
carriers start to operate, can also force the airport to expand the infrastructure which creates a substantial cost. When it comes to aircrafts there are two main suppliers, European Boeing and Airbus form USA which limits and stabilizes the competition. Those companies are known to compete against each other and rather no cooperation between them can take place. Also the slowdown in airline industry had forced those suppliers to cut costs and lowered their bargain power, as often they can only compete through offering high discounts. The likelihood of those two suppliers creating their own airlines is also low. Also it is unlikely that the airports would want to create an airline. So the risk of a forward integration in the sector is low. When it comes to the cost of technical support and maintenance having one or two models of aircrafts is cost-wise and that is the strategy used by the most of LCC. Consequently, when a supplier wins the first offer from the LCC there are high chances that other purchases will follow in the future. 10.5. Competitor Analysis The European short-haul transportation market is highly fragmented. In 2008 approximately 230 air carriers existed in total of which the top 50 accounted for about 90 % of capacity in Europe. Competition in the short haul market does not only stem from low-cost carrier but also from the full service network carriers such as Lufthansa, British Airways and Air France. The competitors that pose the biggest threat to Ryanair are those that compete in the low cost segment and have a similar strategy as Ryanair. The two competitors that will be analyzed in more detail are easyJet and Air Berlin as they seem to be Ryanair biggest competitors in the European short-haul market within the low-cost segment. 10.5.1. EasyJet EasyJet is a British airline that is headquartered in London Luton Airport. It carries more passengers than any other British carrier and transported about 43.7 million passengers in 2008. In Europe it is the airline with the second highest passenger numbers after Ryanair with 58.6 million passengers. In the following easyJet’s strategy and objectives, resources, products and services and past performance will be analyzed.
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Strategy and objectives
EasyJet’s business model is similar to that of Ryanair and that of Southwest in the USA. The company employs a policy of rigorous cost cutting by not offering services such as connecting flights or offering services for additional service charges such as food and beverages. Furthermore easyJet operates only a couple of aircraft types in order to keep operating and maintenance costs low. High aircraft utilization and quick turnaround times are vital parts of easyJet’s business model. However, there are several differences to the Ryanair business model. EasyJet, unlike Ryanair, flies in general to the main airport of the cities it serves for example London Gatwick or Paris Charles de Gaulle. Furthermore easyJet tries to attract business passengers by offering convenient services at additional service costs. easyJet’s objectives are to keep growing and increase market share organically as well as by acquisition and to open new destinations and hubs throughout Europe. Resources
easyJet has a brought basis of resources to support its operations. In 2008 it employed about 5000 employees and operated a fleet of 172 aircraft. It serves 114 destinations in 27 different countries from 20 different bases across Europe. Products and services
easyJet tickets can be book directly online via the company’s webpage. This is the only way because the company does not pay commissions to travel agents which therefore have no incentives to sell the tickets. easyJet’s aircraft cabin are set up in a single class and with a capacity layout in order to be able to accommodate as many passengers as possible thereby sacrificing space for isles and lavatories. easyJet does not offer meals or beverages as part of the air fare. Passengers however, may buy various drinks and snacks from the onboard easyJet Bistro or purchase various gifts and fragrances from the onboard shop. The sales generated from these items are an important part of the airlines revenues. On all flights easyJet provides an in-flight magazine on some flight even provides in-flight entertainment with movies and comedy shows. Past performance
Ryanair 2008 Passengers (million) Revenues (million) Load Factor Cost/ASM (Euro cent)
58.6 2,942 € 81% 5.8
easyJet 2007 50.9 2,713 € 82% 5.1
2008 43.7 2,363 € 84.1% 6.7
2007 37.2 1,979 € 83.7% 6.1
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easyJet has experienced considerable growth since its start of operations in 1995. Reason for this is the increasing high demand for low cost air transportation. As shown by the table the airline was able to increase its passenger numbers by 17.5% from 2007 to 2008. Its revenues also increased as well as the load factor while Ryanair’s load factor decreased by one % from 2007 to 2008. The cost per available seat mile is roughly one cent higher for easyJet. Reason for this might be among others the higher airport fees for the main airport in the cities easyJet serves. 10.5.2. Air Berlin Air Berlin is after Lufthansa Germany’s second largest air carrier. It is a semi low-cost air carrier which is headquartered in Berlin. It extensively services holiday destinations in the Mediterranean, North Africa and the Canary Islands as well as a selection of various major European cities. In 2008 the Air Berlin carried about 28.6 million passengers. In Europe Air Berlin is the fifth largest air transportation provider and the third largest low-cost carrier behind Ryanair and easyJet. In the following Air Berlin’s strategy and objectives, resources, products and services and past performance will be analyzed. Strategy and objectives
Air Berlin has a different strategy than Ryanair and easyJet even. It tries to fill the gap between the traditional full service airlines and the low-cost airlines with very limited services even though it officially belongs to the low cost carrier segment. It seeks to achieve the status of a hybrid type of carrier. It tries to set standards with a unique price/performance ratio. Unlike low-cost carriers Air Berlin operates multiple types of aircrafts and also serves long-haul destinations with more than six hours of flight time. The airline tries to offer more services than low-cost carriers but at lower costs than full-service carriers. The objective of Air Berlin is to further increase revenues and grow organically as well as by acquisition despite increasingly complex and volatile market situation. Resources
Supporting its operations Air Berlin possesses various resources. It employs roughly 8,300 employees and operates 125 aircrafts of numerous types which are all owned by the company itself. The headcount of Air Berlin is almost twice as high as the Ryanair’s and also shows the difference in business models. The world-wide network which is operated by Air Berlin consists of 126 destinations 60
with a strong focus on Germany and the Mediterranean. Operations center around four hubs in Germany and one on the Spanish island of Mallorca. Products and services
Unlike other low-carriers Air Berlin offers drinks, snack and meals depending on the type of flight. On short-haul flights up to six hours drinks and snacks are for free on all flights. Meals however, have to be purchased at additional costs. Free meals are included for flights longer than six hours. Furthermore Air Berlin offers among other additional services newspapers on flights, assigned seating as well as a frequent flyer program. Past performance
Ryanair 2008 Passengers (million) Revenues (million) Load Factor Cost/ASM (Euro cent)
58.6 2,942 € 81% 5.8
Air Berlin 2007 50.9 2,713 € 82% 5.1
2008 28.6 3,400 € 78,4% 9.8
2007 28.2 2,536 € 77.3% 6.9
Air Berlin has also seen rapid growth in the past especially after the acquisition of DBA in 2006 and LTU International in 2007. Revenues increased roughly about 34 % from 2007 to 2008 while load factor also improved by about 1 %. However cost per available seat mile increased significantly by almost three cents to 9.8 cents. The higher available seat mile costs is prove for Ryanair’s much leaner cost structure clearly depicts the difference in business models between Ryanair and Air Berlin. 10.5.3. Conclusion In conclusion, even though Air Berlin is the third largest low-cost carrier in Europe easyJet seems to pose a bigger threat to Ryanair. Reason for this is the similar cost structure of easyJet and its business model. Additionally, easyJet is much more focused on the European short-haul market than Air Berlin and generates higher passenger numbers. Also important is the fact that easyJet services more convenient airports in general than Ryanair which many passengers might perceive as the better business proposition. Lastly, the competition between Ryanair and easyJet has become increasingly aggressive in recent years with easyJet attacking Ryanair directly by servicing cities in Ireland and engaging in price wars.
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10.6. Internal analysis 10.6.1. Snapshot The Irish airline company Ryanair has been in business for 25 years. Today, it is the largest European airline, as classified by the IATA ranking. Its business model based on short-haul, point-to-point routes has proven to be a success. The airline currently operates from 32 bases all over Europe, offering over 1,200 scheduled flights per day, and serving 151 locations throughout Europe and Morocco. Ryanair operates a fleet of 202 aircrafts on more than 850 routes. It employs more than 7,000 people. The company has had almost 60 million passengers the past year and expects to carry 66 million people in 2009. During the last 10 years, the company grew by 359% in terms of number of employees, 596% in terms of fleet size, and 965% in terms of operating revenue. 10.6.2. Financial perspective – Main financial ratios All the ratios in this section were calculated using the original financial statements i.e. before they were re-organised for valuation purposes. Key figures
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 370. 487. 624.1 842.5 1074.2 1319.0 1692.5 2236.9 2713.8 2942.0 Operating 1 4 Revenue (million euro) 239.4 206.6 266.7 280.1 306.7 390.7 (169.2) ,et (loss) / 72.5 104. 150.4 5 profit after tax (million euro) 239.4 226.5 268.9 268.1 301.5 480.9 105.0 Adjusted net 72.5 104. 150.4 5 profit after tax (million euro) 31.71 29.91 35.38 19.66 25.99 31.81 7.1 21.6 14.8 20.64 Adjusted 1 EPS (euro 2 cent) Ryanair has been on the rise for the past 10 years, as clearly depicted by the figures in the table above. Operating revenue has grown almost 8 times during the period, showing that the company’s value proposition resonated within the market.
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Profits also rose steadily from 2000 to 2008, but the company experienced a loss in the last year of operations. This was primarily the result of ever increasing fuel prices (the fuel bill rose by 59% during the last year compared to the previous one). Other factors that had a saying were costs related to a higher level of activity (223 new routes were opened) and to the growth of the airline. Total operating expenses were 29% higher in 2009 than in 2008. The same trend exists in the evolution of the net profit after tax, with a major drop in 2009. EPS have fluctuated year after year, but had an overall increasing trend. In 2006, there is a drop in value of almost half due to the stock split that occurred in the respective year. EPS continue to grow afterwards, showing that the company is improving its profitability yearly. The last year is, as expected, not as favourable as the previous ones, the company having recorded the lowest EPS for the past 10 years. Liquidity ratios Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Current ratio Acid test
2.77
3.28
3.04
2.95
2.71
2.55
2.43
2.02
1.53
1,84
2.67
3.20
2.99
2.89
2.65
2.54
2.42
2.02
1.53
1,84
365.22
523.18
731.66
903.86
1221.47
1603.65
2329.26
3269.93
4035.61
5506,15
13425.00
14954.00
16550.00
19956.50
24614.00
14450.00
2941.00
2921.00
2208.50
2036,00
36.76
28.58
22.62
22.08
20.15
9.01
1.26
0.89
0.55
0,37
1014.07
1335.36
1709.73
2308.24
2943.08
3613.80
4637.07
6128.48
7435.13
8060,18
20224.50
15334.50
9513.00
12650.50
14951.00
17788.00
25276.50
26660.50
28795.00
37984,50
19.94
11.48
5.56
5.48
5.08
4.92
5.45
4.35
3.87
4.71
365.22
523.18
731.66
903.86
1221.47
1603.65
2329.26
3269.93
4035.61
5506.15
26812.50
26429.50
38388.50
54191.50
64770.00
80027.00
85700.50
103263.00
128266.00
130980.00
73.42
50.52
52.47
59.96
53.03
49.90
36.79
31.58
31.78
23.79
-16.71
-10.45
-24.28
-32.40
-27.80
-35.97
-30.08
-26.34
-27.36
-18.71
Cost of sales per day Average inventory Days inventory outstanding ,et sales per day Average accounts receivable Days receivable outstanding COGS per day Average accounts payable Days payable outstanding Cash conversion cycle
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The ratios presented in the table above all show that Ryanair is an extremely liquid company and is able to cover its current liabilities using its current assets. Even at its lowest (1.53), the current ratio is still well above 1, depicting a high degree of liquidity. The difference between the current ratio and the acid test ratio is only slight, due to the fact that the company holds very few inventories, most of its current assets being in their most liquid form: cash. The cash conversion cycle is negative throughout the 10 year period, which is not something out of the ordinary. All customers buy the tickets in advance, meaning well before any costs related to the transportation have to be incurred by the airline. The money transfer is made quite some time before the service is delivered, so Ryanair can cover any liabilities they may have (for example fuel for the flight) without having any short-term financial constraints. The balance sheet confirms this. If we consider the fact that only 2% of revenue is operating cash, and the rest is excess, we can see the large difference between the two. Operating cash ranges from 0.16% out of excess cash in 2007 (the smallest proportion) to 1.90% in 2000 (the largest proportion). Leverage ratios
Year Gearing Debt ratio Interest coverage
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0,25 0,56 0,51 0,62 0,60 0,75 0,77 0,66 0,76 0,91 0,38 0,48 0,47 0,50 0,50 0,55 0,57 0,56 0,60 0,62 22,23
9,53
8,31
8,53
5,23
5,91
5,07
5,69
5,53
0,71
Throughout the period in question, Ryanair took on more and more debt year after year in order to be able to fuel its aggressive growth. As the gearing ratio or long-term-debt-to-equity ratio shows, Ryanair’s long term debt was 25% out of the value of equity. In 2000, it evolved to almost as much long-term debt as equity. This goes to show that the company is more and more financially stable and has been granted support by the financial institutions. The benefits of debt contributed to increasing the company’s value through tax shields (interest expense increased from EUR 3.8 million in 2000 to EUR 130.5 million in 2009) and increased performance (a company with higher leverage is more productive since employees are aware that debt has to be repaid). The large 91% in 2009 seems alarmingly high, but we should bear in mind that the company increasingly relied on short-term debt over time, which reduced the proportion of long-term loans. This is also underlined by the debt ratio, which shows a less 64
booming trend, but still an increasing one. If total liabilities are compared to total assets, there has been a slow steady growth in the level of debt, corresponding to the company’s increased reliance on debt to finance its assets. We should bear in mind that the company leases its aircrafts. Therefore, the value of the assets appears on the balance sheet, but the value of the corresponding debt does not. If we were to take these issues into account, both the gearing and the debt ratio would have had higher values. The interest coverage ratio is used to determine how easily a company can pay interest expenses on outstanding debt. It becomes clear from the calculations that the company has become more and more burdened by interest expenses on its loans. The large increase in interest expense is equivalent to the drop in interest coverage from 22.23 to under 1. This large difference can also be explained by the fact that earnings have not grown as much as interest expense because of the company’s philosophy of keeping prices low. Average fare decreased from EUR 58.8 in 2000 to EUR 40 in 2009, so the increase in EBIT comes from an increase in routes flown and a decrease in costs. Prof itability ratios
Year Profit margin ROA ROE
2000 0,25 0,13 0,21
2001 0,26 0,11 0,19
2002 0,30 0,09 0,18
2003 0,36 0,11 0,21
2004 0,27 0,08 0,15
2005 0,30 0,08 0,18
2006 0,26 0,07 0,16
2007 0,25 0,08 0,19
2008 0,24 0,06 0,15
2009 0,04 -0,03 -0,07
In the first row of the table, we used EBITA to calculate profit margin. The ratio seems to be somewhat stable throughout the 10 year period, averaging around 0.26 (meaning that EUR 1 of sales generates EUR 0.26 of EBIT), apart from the last year, when it was only of 0.04. ROA has been decreasing all the way, showing that the company’s assets generate less and less net income. This is typical for growing companies, where the asset base is growing far more rapidly than income is. ROE is in a similar situation, where EUR 1 of equity only returns between EUR 0.16 and EUR 0.21 in terms of net income. The same argument stands, growing companies have low returns. Investment ratios
Year EPS P/E ratio
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 21,62 14,81 20,64 31,71 29,91 35,38 19,66 25,99 31,81 7,10 0,42 0,69 0,32 0,20 0,15 0,17 0,40 0,22 0,09 0,41 65
Earnings per share have gone through a series of ups and downs. The change from 2005 to 2006 is mainly due to the stock split. 2008 was the best year, when the company returned EUR 31.81 in terms of EBIT for each share. The P/E ratio shows how the market values the company. Even though 2008 was a good year financially, the market investors would only pay EUR 0.09 for every EUR 1 of earnings (the minimum value out of the 10 years). The highest an investor would have paid was in 2001: EUR 0.69 for EUR 1 of earnings. Operating performance ratios
Year Inventory coverage Fixed asset turnover Revenue/employee
2000 9,57
2001 11,95
2002 15,59
2003 14,48
2004 16,86
2005 2006 2007 2008 2009 237,94 248,45 493,19 737,60 968,55
1,17
0,79
0,66
0,62
0,66
0,61
0,66
0,67
0,69
0,77
266,67 330,22 407,61 444,13 469,50 506,54 552,57 560,48 515,74 461,92
The inventory coverage ratio shows that the company’s cost of goods sold increased exponentially compared to the increase in inventory. If we think of fuel, the largest operating cost, it is consumed at a rapid pace and is not kept in warehouses, and therefore, it generates a more or less immediate expense rather than a cost of storing it. Fixed asset turnover has been declining mainly as a result of the heavy investment in net, property, plant and equipment as part of the company’s growth strategy. The number of aircrafts has been increasing, driving the ratio downward. In the last year, when there has been a decrease in sales due to the recession period, the fixed asset turnover ratio increased. The last ratio in the table is a measure of profitability. As shown, revenue generated by each employee has increased, reaching a peak in 2007. The fall in the following year might be attributable to the high number of hired employees – an additional 1271 compared to the previous year (and the largest difference during the 10 year period), while in the last year, the drop is explained by the general recession.
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Share price performance
Share prices 7 6 5 4 3 2
Share prices
1 0
Source: Yahoo finance (ISE quotes)
The graph above depicts daily share prices for Ryanair from the Irish stock exchange (data is only available from December 2001). Share prices have been somewhat constant, except for the period before the financial crisis. The steep rise in 2006 is caused by the stock split. The downward evolution thereafter, partly due to the large increase in oil prices, which caused the stock market to undervalue the company, founding its reasoning on the belief that the company will not be able to be as profitable and successful as before and will be deeply affected by the rise in prices. As the company proved its capabilities, the share price increased and then stabilized somewhere above EUR 3 per share. Conclusions
From a financial perspective, the company has been doing well. Financial ratios point out that the company has been growing at a fast pace. It is extremely liquid holding large amounts of excess cash due to the fact that it cashes in well before the flights actually take place. Ryanair has increased its debt levels in order to fuel growth and to be able to take advantage of the benefits of debt. In terms of profitability, as, expected, the company doesn’t yield high ROA or ROE due to the fact that its main goal for now is growth and high returns are generally associated with mature companies. In terms of investment ratios and stock market performance, the value of the company has been fluctuating. The main influencing factors for the fluctuation are fuel prices and the overall economic recession. Operating performance ratios are also typical for a growing company. Fixed asset turnover decreases due to the expansion of the fleet and operating bases, while revenue per employee is increasing rapidly.
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10.6.3. Operational perspective Year Scheduled passengers (mil) Average no. employees ,o. planes (at period end)
2000 5.5
2001 8.1
2002 11.1
2003 15.7
2004 23.1
2005 27.6
2006 34.8
2007 42.5
2008 50.9
2009 58.6
1388
1476
1531
1897
2288
2604
3063
3991
5262
6369
26
36
41
54
72
87
103
133
163
181
The table above depicts the magnitude of the company’s operations. Passengers increased tenfold in the past 10 years, the number of employees increased six times and the number of planes increased almost 9 times. Ryanair’s business is run under the same pattern as the American airline company Southwest, the largest low cost airline in the world. Ryanair uses the same principles leading to success. The company’s operations are based on a few building blocks that ensure the company’s competitive advantage in the short-haul market: -
Low fare prices. Increased productivity. Service quality.
Prices
Ryanair reduced its average fair by EUR 20 from almost EUR 60 to EUR 40 within 10 years, which is a considerable amount. How did they do it when oil prices almost doubled in just the past 5 years (from $60 / barrel in 2005 to $ 105 / barrel in 2009)? Firstly, the company absorbed this price increase and did not pass it on to the customers in an attempt to keep fare prices down. It did not impose any fuel surcharge, as opposed to competition. During the last year, this was the direct factor that caused the large profit decline, oil prices reaching an all-time high, but average fare prices fell by EUR 4 compared to the previous year. Secondly, the company is keeping all costs under scrutiny. The graph below shows the company’s cost structure over the past 3 years. In time, the company switched to the more fuel-efficient 737-800 aircrafts which enabled it to keep the proportion of fuel costs stable even though the fleet increased. Moreover, by operating only one type of aircraft, maintenance costs are drastically reduced. In terms of 68
personnel, people have more attributions or less job task restrictions than in other airline companies (for example, even pilots help with baggage in order to reduce the time planes are on-ground). The high increase in staff costs in 2008 was due to an increase in employees needed for the growing fleet, and also a large increase in average pay of EUR 50,399 per year per employee, a record both within the company and within the industry (next in line was Air France with EUR 49,504) In 2000, the company introduced the (at the time) largest booking website. This meant easier and increased access from customers, without having to hire additional personnel. The same intent was behind the launch of the web check-in service from 2006, launch our giving passengers the opportunity to check-in online across the entire route network. 100%
Other
90% 80%
Airport and handling charges
70%
Route charges
60% Aircraft rentals 50% Marketing and distribution costs
40% 30% 20%
Maintenance, materials and repairs
10%
Fuel and oil
0%
Depreciation 2007
2008
2009
Increased productivity
Year 2000 Flights on time 3963 Passenger per employee Load factor 73
2001 83%
2002 78%
2003 92.5%
2004 93%
2005 89.4%
2006 81%
2007 85%
2008 88%
2009 90%
5487
7244
8296
10110
10596
11361
10648
9679
9195
77
81
84
81
84
83
82
82
81
The table above shows a few measures of productivity.
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Ryanair’s airplanes are productive. Thus, they must be on time, so as not to disturb the schedule. Throughout the period, the company was no.1 in terms of the number of flights on time. Turnaround time is also crucial. In 2009, the average turnaround time was only of 25 minutes. The load factor also shows an improvement. Judging by the fact that the fleet also increased, then it becomes clear that the company loses quite little in terms of un-occupied seats. People are also productive. As the table shows, the number of passengers per employee almost tripled. Extensive training programs had a say in this. Even though Ryanair is a low-cost company, management does not seek to apply the same strategy to training, and the results are clear. The result of this strategy is also shown by the revenue per employee ratio computed under the operating performance ratio section of the financial analysis. People are also motivated financially, the average salary of an employee having increased from 49055 in 2005 to 50355 in 2008. The last fiscal year showed a decline, the company struggling to reach breakeven and being influenced by the record-high oil prices and the recession. Service quality
Ryanair prizes quality. 2002 was the first year when it was termed number one for customer service, based on the proportion of lost luggage, percentage of completions and number of complaints. Punctuality is also second to none, the airline being number one in the percentage of flights on time. Throughout the 10 year period. Conclusions
From an operational standpoint, the company is aiming for excellence. The company uses the same model as Southwest and strives to keep costs low and to pass all the cost savings down to the customers without making any cutbacks in the key areas driving quality, like training and fleet maintenance. Costs are being kept at a low by using the online booking and check-in systems extensively, in order to reduce the need for excess personnel. The company’s planes and people are highly productive, therefore we can infer that Ryanair manages all its resources efficiently and effectively. Aggressive marketing campaigns – whether on-line or using other media like the television – make the company stand out and attract more and more passengers.
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10.6.4. Value chain perspective Good linkage between all support activities
infrastructure HRM
Effective & Fewer job Management In-house
Financial
extensive
restrictions; control
incentives;
training
Limited
Performanc
crew
e contracts
Technology
Online
Online
Integrated
development
booking
check-in
systems
system
system
Boeing
Alliances
Procurement
Margin
Firm
Internet sales n/a
Outsourced
Private
Quick
Low
Low cost
discount cost No frills;
cost Limited
Primary
Low
activities
suppliers;
Low cost;
turnaround;
promotions;
resources;
Airport
High
Reliable
Free
Basic/low
agreements; quality;
service;
publicity;
cost;
Low
High
High
handling
diversity of factor;
sales’
productivit
charge
routes;
Yield
y;
airports
One type of
management; High
modern
Powerful TV quality;
plane
ad
No sale of
campaigns
products/fo
load Internet
High
costs Inbound logistics
Operations Outbound logistics
Marketing
Margin
od to cut
Service
& sales
All the issues presented in the financial and operations analyses can be summarized into the value chain. The value chain presented above shows where the company’s margins stem from. The management of all primary activities is the main building block upon which margins are based and to which the support activities create additional value. From the starting point, the company looks for low 71
cost alternatives. It chooses low cost suppliers and airports with lowest airport handling charges. It adds value during operations through quality, diversity of routes, and keeps focusing on cost by using only one type of plane. Service delivery is impeccable, Ryanair being number one in customer service. Aggressive marketing and sales campaign increase the company’s sales and the planes’ load factors. The service can be characterized by high productivity and quality at low cost, which for Ryanair is far from being a utopia. All the support activities add to this value. Within procurement, the company has well set out deals with Boeing for licensing fees and reduced costs for replacement parts and maintenance. It also enters into alliances with various airports, acquiring a series of landing rights – an intangible but valuable asset. Intensive usage of internet services like online booking and check in adds value in the technology development stage. Human resource management also boosts margins. The company has a sustainable philosophy of investing in training and personnel which will reap benefits in the future as well. Cutting costs is not an issue here. Financial rewards are also high, employees having some of the largest salaries in the airline industry. All the separate sections are brought together by good linkage and synergy between all the primary and support activities of Ryanair, which build upon each other and succeed to add value and hence, increase margins. Conclusions
All of the company’s activities are finely interlinked for a better value creation process. The company manages to add value by starting with as low costs as possible and striving to pass these cost savings to the passengers and combining these benefits with a high quality service. Productivity is another main factor that adds value and increases margins. 10.7 SWOT Analysis 10.7.1 Strengths Ryanair owes its position as a market leader in the European short haul airline industry to a combination between its internal resources and capabilities and the external characteristics of the environment. According to market capitalization, Ryanair is the biggest European airline and the leader in its industry according to the number of passengers flown and of seats provided. This is due to Ryanair‘s large route network. It operates on 146 airports in 26 different countries on more than 800 routes. This developed network offers a wide variety of choice and comes to serve the needs of a high 72
proportion of the European population. Furthermore by continually increasing the number of airports and routes it increases its potential market share.
The large network of routes combined with
Ryanair’s operational effectiveness gives passengers the possibility to reach their destination faster and at lower costs. Another of Ryanair’s strength lies in its network of business partners. Through its commission based contracts with providers of pre-flight and post-flight services such as accommodation and short range city transportation, the company manages to supplement its scheduled revenues with ancillary revenues. By choosing to base the cooperation on commissions, the company limited its exposure and by offering access to the services online through the company website, it has considerably reduced the costs of providing them. This has led to a strong contribution of ancillary revenues to the company’s total operating revenues. In the financial year ended 2009, Ryanair’s non-scheduled revenues increased total revenues by 25%. For comparison, Easyjet’s ancillary revenues only increased total revenues by 18%. Ryanair also has a strong point in the efficiency of its employees. In order for the airline to maintain a low turnaround time for example, it is vital for all the personnel to work at maximum efficiency. The efficiency of the Ryanair staff can be observed from its employee to passenger ratio which in 2009 was of 9201 passengers per employee. This is 34% higher than Easyjet’s which only reaches a level of 6855 passengers per employee. From the internal analysis we have also seen that Ryanair has constantly shown a good financial position and very good financial health. The company is very liquid and excluding the last financial year it had very good leverage. The last financial year, marked by the financial crisis, has chipped from the company’s leverage but not its liquidity. All in all, the company has the financial strength to make sure it will maintain its position as market leader as the economy picks up again. However, Ryanair’s biggest strength stems from the company’s high level of strategic fit: all the company’s activities, its operational, marketing and financial strategies are aligned and they not only complement each other but they also reinforce each other to the point of reaching a company wise optimization of efforts. For example choosing the fleet to include the same type of airplanes increases the efficiency of personnel and decreases maintenance costs. This leads also to decreased turnaround times which allow the company to use their aircraft more and decrease costs even further. The increased use of the aircraft does not pose a problem because of low maintenance costs. The low turnaround times also contribute to the company’s commitment to quality by ensuring the planes are on 73
time 90% of cases. This, in its turn helps to maintain the high level of capital turnover, and so forth. By offering consistency this business model provides bedrock for building new capabilities and is therefore, Ryanair’s biggest strength. 10.7.2 Weaknesses The weaknesses of Ryanair are declining margins, swinging cash flows, weak employee relations and poor customer relations. Declining margins Ryanair has declining margins since 2005. Although the operating and net profits of the company continue to increase, the increasing expenses tend to lower the profit margins. The total operating expenses of the company moved from EUR 1,317.5 million in 2006, to EUR 1,765.2 million in 2007 reaching EUR 2,176.7 million in 2008 and EUR 2,849.3 million in 2009. At the same time the operating margin decreased from 25.8% in 2005 to 22.2% in 2006 and later to 21.1% in 2007, 19.8% in 2008 and further slumped to 5% in 2009. This situation was caused mainly by higher fuel costs and the increasing level of activity, as well as increased costs associated with the growth of the airline. Similarly, the net margins of the company decreased from 21.4% in 2006 to 17.6% in 2008 and later 23.2% in 2007, which further decreased to 17.6% in 2008 and -7% in 2009. Declining margins indicate that the company has not been able to manage its cost structure efficiently, which can have a negative effect on its long term financial position. Swinging cash flows The company’s cash flows are fluctuating since 2006. The net cash provided by operating activities increased from EUR 610.6 million in 2006 to EUR 900.8 million in 2007 and later decreased to EUR 703.9 million in 2008 and EUR 413.9 million in 2009. The fluctuating cash position shows that company has problems with cost management. A continuation of this trend could lower availability of resources to pursue growth of Ryanair. Weak employee relations Ryanair has been involved in a number of disputes with its employees. In 2006, Ryanair workers in Girona airport made a few one-day strikes protesting about the working conditions of Ryanair’s ground staff in airports across Spain. The other strike, called by employed security staff, took place in
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December 2006 at Brussels Charleroi airport. The strike in the end was called off. However, it resulted in cancelations and reinstating of the flights. The company also had problems with pilots. In 2007, the company managed to end a long dispute with pilots about the regulation from 2004 that forced them to repay the cost of training (EUR 15,000) for the new planes if the airline was forced to deal with a new labour union within five years. Ryanair’s Business model is known for its labour productivity but the cost-cutting often forces employees to pay for their training, sign the contracts that force them to work in the company for few years and even buy their own uniforms. The failure to maintain good employee morale can result in a halt in its operations and cause significant financial loss for the company. Poor costumer relations Company is known for transferring all the rising costs to its passengers, and introducing a lot of small additional payments. However, often they are announced mainly in order to gain publicity. Contacting the company on the phone is possible only through premium rate line and no email contact is possible. Company tend to earn free publicity through negative press which may have a negative effect on the brand in long term and discourage wealthier/business customers. 10.7.3 Opportunities Shift in consumer preferences People are re-focusing when making the choice of which company they are going to fly with. There is a strong shift from high - end or full service airlines to low – end airlines or low fare airlines. The financial crisis might be one of the reasons behind this shift. Families choose airlines that skim down on the on-board services because they can no longer afford expensive tickets when going on holiday. Businesses are forced to keep costs down so they are not willing to fly their employees using business class and instead turn to the cheaper airlines, especially when the geographic distance is not very large. Therefore, we might infer that this shift could fuel growth in the low fare airline market, clearly to the benefit of Ryanair, ‘steals’ customers from traditional carriers. Growing market size
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The European Union is continually expanding. Eastern countries are in a developing stage and there is an ever-growing flux of people traveling to and from these countries. All the new members, as well as potential members provide attractive opportunities for Ryanair in its quest to extend its network. Take Turkey, Croatia and Macedonia for example. These countries have recently been granted the status of Candidate States to the EU. The main players in Turkey (i.e. Turkish Airlines) and Croatia (i.e. Croatia Airlines) are state, while Macedonian Airlines has ceased operations on 1 September 2009. Once these countries become part of the EU they will be forced by EU law to privatize their national airlines, which have been subsidized and are operating inefficiently. These companies pose no threat from a competitive point of view. Therefore, an enlargement will increase the population of the Union by 81.3 million, increasing the number of potential customers, but will not highly impact on the level of competition in the industry. Less exposure to geopolitical and legal risks The EU provides one additional opportunity. The fact that it is based on strong laws and regulations (regarding for example unfair competition), and the fact that it is a stable political environment implies protection. Ever since 1996, when the EU completed the “Open skies” deregulation of the scheduled airline businesses, airlines were able to compete freely, not being backed by state aid or subsidization. Operating in the EU provides Ryanair with limited exposure to legal or geopolitical risks. Industry consolidation The airline industry can be described by a trend towards consolidation, which implies less competition. The fact that the industry is so fragmented might explain this trend. Consolidation is a game of survival of the fittest, where a large number of companies stake out and buy each other. Inefficient companies either go bankrupt or they get acquired and merge with other bigger and better airlines. Ryanair is already playing this game, having acquired Buzz in 2003 and having made an all cash offer for the national Irish airline, Aer Lingus, in 2006. Ryanair currently owns 29.4% of Air Lingus, more than the Irish Government (25.4%). 10.7.4 Threats In the following, external factors that might threaten Ryanair’s business operations are analyzed, which are crude oil prices, legal threats, technology, competitors and the overall economic situation.
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Crude oil prices The rising prices and high volatility of oil prices obviously pose a big threat to airlines especially the low cost carriers since their average fares are much lower than those of the full service carriers. The costs for oil and kerosene are the biggest single cost position for Ryanair with about 40 per cent of total operating costs but the company still has not introduced an extra fuel charge for passengers. Instead, Ryanair tries to attract more passengers to increase its load factor and to lower average fuel cost per passenger. Legal threats Due EU legislation Ryanair may not be able to negotiate favorable contracts with publicly owned airport thus risking an increase in airport and handling charges which already represent about 16 per cent of operating costs. Furthermore, EU has not long ago strengthened the rights of air passengers in the EU by obliging airlines to grant compensation between EUR 250 and EUR 600 to passengers in cased of denied boarding to various reasons. Since the compensation does not depend on the price of the fare but on the length of the flight this legislation poses a significant threat to low-cost carriers such as Ryanair. Another significant legal risk is the possible introduction of fuel taxes out of environmental concerns in order to reduce the growth of air travel especially growth of low cost carriers. This would increase costs very much making air travel less attractive. The same impact would have a CO2 emission trading scheme that EU legislation will make mandatory for the airline industry. So far it seems that trading will start in 2012 which will definitely have a negative effect on the industry by increasing costs which would have to be passed on to passengers. Technology Besides legal threats, improvements in communication technology and a decrease in costs for communication pose a threat that needs to be considered. Video conferences and communication of the internet have potential to reduce the demand for air travel. Moreover the ever increasing availability of broadband internet connections shifts bargaining power to passengers. By means of internet search passengers can easily compare fares from different air carriers in order to chose the lowest fare thus increasing competition in the industry. Competitors Naturally competitors pose a risk in any industry not only in the airline industry. In Europe the airline industry is highly fragmented with over 230 air carriers. For Ryanair however, the competitor that 77
represents the biggest threat is easyJet. Ryanair and easyJet are the only low-cost carriers with a network that covers continental Europe with hubs and destinations. Other low-cost carriers such as AirBerlin focus only on certain routes or countries within Europe. Although Ryanair and easyJet compete directly only on a couple of routes competition can be tough a times. In the past fierce price wars have erupted for routes in Ireland and the UK. Nonetheless it seems that Ryanair and easyJet try to avoid direct competition as much as possible limiting the risk of price wars, which flare up every now and then. Overall economic situation The airline industry is highly affected by the overall economic situation because demand for air transportation is very income elastic and airlines usually have high fixed costs. However, low-cost carriers are somewhat less affected by economic downturn than because of low fares. Nonetheless, economic downturn poses considerable risk for Ryanair as proofed by the company’s third and fourth quarter results.
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10.8. Forecasting performance 10.8.1. Base case scenario Forecast assumptions – detailed forecast and key driver forecast EUR
Other inputs
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Operations P&L Operating Revenue: % Growth Other Revenue: % Growth COGS: % Revenue SGA: % Revenue Other Op Exp: % Revenue
22,0% 27,6% 63,9% 1,7% 11,3%
27,1% 35,7% 70,8% 1,0% 11,5%
30,8% 39,7% 74,3% 1,3% 10,9%
18,7% 34,8% 77,8% 0,8% 11,3%
5,3% 22,5% 98,0% 0,5% 12,1%
2,5% 10,0% 75,0% 1,5% 24,0%
2,9% 10,0% 75,0% 1,5% 24,0%
4,7% 10,0% 75,0% 1,5% 24,0%
5,0% 10,0% 75,0% 1,5% 24,0%
5,3% 10,0% 77,0% 2,0% 24,0%
2,0% 0,2% 1,8% 8,2% 2,2% 37,1% -39,0%
2,0% 0,2% 2,1% 5,5% 2,1% 41,7% -40,9%
2,0% 0,1% 1,2% 6,8% 7,1% 46,0% -42,4%
2,0% 0,1% 1,5% 5,8% 7,7% 47,7% -42,2%
2,0% 0,1% 1,8% 5,7% 3,9% 44,5% -42,4%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0% -43,3%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0% -43,3%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0% -43,3%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0% -43,3%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0% -43,3%
187,7%
176,7%
154,8%
160,9%
155,5%
155,0%
160,0%
165,0%
165,0%
165,0%
Working capital Op Cash: % Revenue Inventories: % Revenue Acc Rec: % Revenues Acc. Pay: % Revenues OCA: % Revenues OCL: % Revenues WC: % Revenues
Balance Sheet Items 1: Net PPE as % revenues
Off-Balance Sheet Items Operating leases Implied principal Interest rate
192.534 11,2%
436.716 10,8%
521.692 11,2%
634.063 11,5%
662.788 11,8%
729.067
801.973
882.171
882.171
882.171
10,5%
10,5%
10,5%
10,5%
10,5%
2,0%
2,0%
2,0%
2,0%
2,0%
6,0% 6,0%
6,0% 6,0%
6,0% 6,0%
6,0% 6,0%
6,0% 6,0%
Debt Finance & WACC Interest rates Excess cash Balancing debt Short term debt Long term debt - 1 Long term debt - 2
WACC
7,2%
7,6%
8,0%
7,8%
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
9,4% 12,5%
9,5% 12,5%
3,4% 12,5%
11,0% 12,5%
6,3% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
21,0% 11,2% 155,0% -21,4% 46.841
2,9% 23,1% 11,1% 160,0% -20,8% 46.841
4,7% 24,7% 11,1% 165,0% -20,6% 46.841
5,0% 25,7% 11,0% 165,0% -23,7% 46.841
5,3% 24,5% 11,0% 165,0% -26,6% 46.841
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
5,3% 15,0% 10,5% 165,0% -22,6% 46.841
Note: to be calculated in separate model
Tax
Tax rates Effective Marginal
Phase 2 & CV drivers Phase 2 Inputs Revenue growth Adjusted EBITA margin Cash tax rate Closing Net PPE as % Revenues Other Invested Capital as % Revenues Cumulative Goodwill
79
Forecast assumptions – continuing value Continuing value inputs Choose ROIC option 1: Input value 2: Last year of phase 2 3: WACC
3
9,9% 7,8%
ROIC used
7,8%
Growth in NOPLAT
2,5%
Results EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Income Statement Revenues Other Operating Revenues Cost of Goods Sold Selling, Gen & Admin Expenses
2.343.868
2.402.465
2.472.136
2.588.327
2.717.743
2.861.783
598.097
657.907
723.697
796.067
875.674
963.241
(2.296.304) (1.801.849) (1.854.102) (1.941.245) (2.038.307) (2.203.573) (12.753)
(36.037)
(37.082)
(38.825)
(40.766)
(57.236)
Depreciation Expense
(256.117)
(218.689)
(223.429)
(237.325)
(256.244)
(269.057)
Other Oper Expense
(284.160)
(576.592)
(593.313)
(621.198)
(652.258)
(686.828)
92.631
427.205
487.907
545.800
605.841
608.331
Amortization of Goodwill
0
0
0
0
0
0
Intangibles Amort. (Excl. Goodwill)
0
0
0
0
0
0
92.631
427.205
487.907
545.800
605.841
608.331
Reported EBITA
Reported EBIT Non-Oper Income Interest Income Interest Expense Restructuring Charges
4.441
2.221
2.221
2.221
2.221
2.221
75.522
47.226
52.114
56.012
59.874
67.165
(130.544)
(143.906)
(143.906)
(143.906)
(143.906)
(143.906)
0
0
0
0
0
0
Special Items
(222.537)
0
0
0
0
0
Earnings Before Taxes
(180.487)
332.745
398.335
460.126
524.029
533.810
11.314
(34.938)
(41.825)
(48.313)
(55.023)
(56.050)
Income Taxes Minority Interest Income Before Extraordinary Items Extraordinary Items (After Tax) Net Income Preference dividends
0 (169.173) 0 (169.173)
0
0
0
0
297.806
356.510
411.813
469.006
477.760
0
0
0
0
0
297.806
356.510
411.813
469.006
477.760
0
0
0
0
0
297.806
356.510
411.813
469.006
477.760
0
0
0
0
0
(169.173)
297.806
356.510
411.813
469.006
477.760
Earnings per share (EUR)
(114,42)
202,13
241,97
279,51
318,33
324,27
Earnings per share - fully diluted (EUR)
(114,42)
202,13
241,97
279,51
318,33
324,27
Earnings for common shareholders Common dividends Retained profit
0
0
(169.173) 0
80
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Balance Sheet Operating Cash
46.877
48.049
49.443
51.767
54.355
57.236
2.361.281
2.605.694
2.800.599
2.993.715
3.358.245
3.714.758
41.791
36.037
37.082
38.825
40.766
42.927
2.075
4.805
4.944
5.177
5.435
5.724
91.053
72.074
74.164
77.650
81.532
85.853
Total Current Assets
2.543.077
2.766.659
2.966.232
3.167.133
3.540.333
3.906.497
Net Property Plant and Equipment
3.644.824
3.723.820
3.955.418
4.270.739
4.484.276
4.721.942
0
0
0
0
0
0
46.841
46.841
46.841
46.841
46.841
46.841
Excess Marketable Securities Accounts Receivable Inventories Other Current Assets
Goodwill Other Intangible Assets Other Operating Assets
0
0
0
0
0
0
153.120
153.120
153.120
153.120
153.120
153.120
Deferred tax asset
0
0
0
0
0
0
Other Non-operating Assets
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
6.387.862
6.690.440
7.121.611
7.637.833
8.224.570
8.828.401
Short term debt
202.941
202.941
202.941
202.941
202.941
202.941
Accounts Payable
132.671
144.148
148.328
155.300
163.065
171.707
425
35.363
77.188
125.502
180.525
236.575
0
0
0
0
0
0
Other Current Liabilities
1.043.154
1.057.084
1.087.740
1.138.864
1.195.807
1.259.185
Total Current Liabilities
1.379.191
1.439.537
1.516.197
1.622.606
1.742.337
1.870.407
Investments
Total Assets
Tax payable Dividends payable
Balancing Debt
54.074
0
0
0
0
0
2.195.499
2.195.499
2.195.499
2.195.499
2.195.499
2.195.499
Deferred Income Taxes
155.524
155.524
155.524
155.524
155.524
155.524
Other Operating Liabilities
106.549
106.549
106.549
106.549
106.549
106.549
Restructuring Provisions
0
0
0
0
0
0
Income smoothing Provisions
0
0
0
0
0
0
61.807
61.807
61.807
61.807
61.807
61.807
Long Term Debt
On-going operating Provisions Long-term operating Provisions
0
0
0
0
0
0
10.157
8.657
6.657
4.657
2.657
657
Minority Interest
0
0
0
0
0
0
Preferred Stock
0
0
0
0
0
0
Total Common Equity
2.425.061
2.722.867
3.079.378
3.491.191
3.960.197
4.437.957
Total Liabs and Equity
6.387.862
6.690.440
7.121.611
7.637.833
8.224.570
8.828.401
Retirement Related Liabilities
81
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
NOPLAT Reported EBITA
92.631
427.205
487.907
545.800
605.841
608.331
Adj for Operating Leases
78.209
76.552
84.207
92.628
92.628
92.628
Adj for Non-operating component of pension expense
0
0
0
0
0
0
Add: Interest associated with Long-term operating Provision
0
0
0
0
0
0
Add: Increase in Income smoothing Provision
0
0
0
0
0
0
Adjusted EBITA
170.840
503.757
572.115
638.428
698.469
700.959
Taxes on EBITA
(32.602)
(56.315)
(63.548)
(70.601)
(76.828)
(76.944)
Change in Deferred Taxes NOPLAT
7.436
0
0
0
0
0
145.674
447.442
508.567
567.827
621.641
624.015
(11.314)
34.938
41.825
48.313
55.023
56.050
16.318
17.988
17.988
17.988
17.988
17.988
Taxes on EBIT Prov for Inc Taxes Tax Shield on Interest Exp Tax Shield on Operating Lease Interest
9.776
9.569
10.526
11.578
11.578
11.578
Tax Shield on Non-operating component of pension expense
0
0
0
0
0
0
Tax Shield on Interest associated with Long-term operating Provision
0
0
0
0
0
Tax on Interest Income
(9.440)
(5.903) (278)
(6.514) (278)
(7.001) (278)
(7.484) (278)
0 (8.396)
Tax on Non-operating Income
27.262
Taxes on EBIT
32.602
56.315
63.548
70.601
76.828
76.944
(278)
(169.173)
477.760
Reconciliation to Net Income Net Income Add: Increase in Deferred Taxes Add: Increase in Income smoothing Provision
297.806
356.510
411.813
469.006
7.436
0
0
0
0
0
0
0
0
0
0
0
Add: Goodwill Amortization
0
0
0
0
0
0
Add: Extraordinary Items
0
0
0
0
0
0
194.720
0
0
0
0
0
0
0
0
0
0
0
Add: Special Items After Tax Add: Minority Interest Adjusted Net Income Add: Interest Exp. After Tax Add: Interest Exp. On Long-term operating Provision Add: Interest Exp. on Op. Leases Add: Interest Exp. on Non-operating component of pension expense Income Available to Investors Add: Restructuring Charges Less: Interest Income After-Tax Less: Non-operating Income After Tax NOPLAT
32.983
297.806
356.510
411.813
469.006
477.760
114.226
125.918
125.918
125.918
125.918
125.918
0
0
0
0
0
0
68.433
66.983
73.681
81.049
81.049
81.049
0
0
0
0
0
0
215.642
490.708
556.110
618.781
675.974
684.728
0
0
0
0
0
(66.082) (3.886) 145.674
(41.322) (1.943) 447.442
(45.600) (1.943) 508.567
(49.010) (1.943) 567.827
(52.390) (1.943) 621.641
0 (58.769) (1.943) 624.015
82
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Invested Capital Operating Working Capital
(994.454) (1.075.630) (1.147.623) (1.246.247) (1.357.307) (1.475.727)
Net Property Plant and Equipment
3.644.824
Other Assets Net of Other Liabs
3.723.820
3.955.418
4.270.739
4.484.276
4.721.942
(106.549)
(106.549)
(106.549)
(106.549)
(106.549)
Less: On-going operating Provision
(61.807)
(61.807)
(61.807)
(61.807)
(61.807)
(61.807)
Value of Operating Leases
662.788
729.067
801.973
882.171
882.171
882.171
3.144.802
3.208.901
3.441.412
3.738.307
3.840.783
3.960.030
46.841
46.841
46.841
46.841
46.841
46.841
0
0
0
0
0
0
Op. Invested Capital (incl.Goodwill)
3.191.643
3.255.742
3.488.253
3.785.148
3.887.624
4.006.871
Excess Marketable Securities
2.361.281
2.605.694
2.800.599
2.993.715
3.358.245
3.714.758
153.120
153.120
153.120
153.120
153.120
153.120
Non-operating Assets
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
Total Investor Funds
5.706.044
6.014.555
6.441.972
6.931.983
7.398.989
7.874.749
Total Common Equity & Pref. Stock
2.425.061
2.722.867
3.079.378
3.491.191
3.960.197
4.437.957
0
0
0
0
0
0
155.524
155.524
155.524
155.524
155.524
155.524
Op. Invested Capital (excl.Goodwill) Goodwill & Intangibles Cumulative Written Off & Amortized
Investments
Cum Goodwill Written Off & Amortized Deferred Income Taxes
0
(106.549)
Dividends Payable
0
0
0
0
0
0
Income smoothing Provision
0
0
0
0
0
0
2.580.585
2.878.391
3.234.902
3.646.715
4.115.721
4.593.481
Adjusted Equity Minority Interest
0
0
0
0
0
0
Restructuring Provisions
0
0
0
0
0
0
Long-term operating Provision Retirement-Related Liabilities Interest Bearing Debt Value of Operating Leases Total Investor Funds
0
0
0
0
0
0
10.157
8.657
6.657
4.657
2.657
657
2.452.514
2.398.440
2.398.440
2.398.440
2.398.440
2.398.440
662.788
729.067
801.973
882.171
882.171
882.171
5.706.044
6.014.555
6.441.972
6.931.983
7.398.989
7.874.749
83
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Free Cash Flow NOPLAT
145.674
447.442
508.567
567.827
621.641
624.015
Depreciation
256.117
218.689
223.429
237.325
256.244
269.057
Gross Cash Flow
401.791
666.132
731.996
805.152
877.885
893.072
Increase in Working Capital Capital Expenditures Incr in other operating assets/liabilities Incr in Ongoing operating Provisions Inv in Operating Leases Gross Investment Free Cash Flow Excl. Goodwill Investment in Goodwill and Intangibles Free Cash Flow Incl. Goodwill AT Interest Income (Incr)/Decr Excess Mkt Sec
55.959
81.176
71.993
98.624
111.060
118.420
(318.815)
(297.686)
(455.027)
(552.646)
(469.781)
(506.723)
6.619
0
0
0
0
19.017
0
0
0
0
0 0
0
0
(28.725)
(66.279)
(72.906)
(80.198)
(265.945)
(282.788)
(455.940)
(534.220)
(358.721)
(388.304)
135.846
383.343
276.056
270.932
519.164
504.768
0
0
0
0
0
0
135.846
383.343
276.056
270.932
519.164
504.768
66.082
41.322
45.600
49.010
52.390
58.769
(247.624)
(298.487)
(194.906)
(193.116)
(364.530)
(356.513)
Foreign Exchange Translation
0
0
0
0
0
0
(Incr)/Decr Retirement Related Assets
0
0
0
0
0
0 1.943
1.943
1.943
1.943
1.943
Restructuring Cash Flow
Non-operating Cash Flow
0
0
0
0
0
0
Extraordinary items
0
0
0
0
0
0
(78.188)
128.122
128.693
128.770
208.968
208.968
114.226
125.918
125.918
125.918
125.918
125.918
68.433
66.983
73.681
81.049
81.049
81.049
Interest on Nonoperating Component of Pension Expense
0
0
0
0
0
0
Interest on Long-term Operating Provision
0
0
0
0
0
0
Cash Flow Available to Investors
(32.492)
Financing Flow AT Interest Expense Interest on Operating Leases
Decr/(Incr) in Debt Decr/(Incr) in Operating Leases Decr/(Incr) in Retirement Rel. Liab
(131.945)
0
0
0
(28.725)
(66.279)
(72.906)
(80.198)
(8.137)
0
0
0
0 2.000
1.500
2.000
2.000
2.000
Decr/(Incr) in Long-term Operating Provision
0
0
0
0
0
0
Payments to Minorities
0
0
0
0
0
0
Common Dividends
0
0
0
0
0
0
Preferred Dividends
0
0
0
0
0
0
0
0
0
0
0
Decr/(Incr) in Share Capital
Decr/(Incr) in Preferred
(92.040)
0
0
0
0
0
0
Total Financing Flow
(78.188)
128.122
128.693
128.770
208.968
208.968
84
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Economic Profit Before Goodwill Return on Invested Capital
4,6%
14,2%
15,8%
16,5%
16,6%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
6,4%
8,0%
8,7%
8,8%
8,4%
Invested Capital (Beg of Year)
3.134.974
Economic Profit (before Goodwill)
(92.889)
NOPLAT Capital Charge Economic Profit (before Goodwill)
16,2%
3.144.802
3.208.901
3.441.412
3.738.307
3.840.783
200.890
256.989
298.021
328.557
322.898
145.674
447.442
508.567
567.827
621.641
624.015
(238.563)
(246.552)
(251.578)
(269.807)
(293.083)
(301.117)
(92.889)
200.890
256.989
298.021
328.557
322.898
After Goodwill Return on Invested Capital
4,6%
14,0%
15,6%
16,3%
16,4%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
6,2%
7,8%
8,4%
8,6%
8,2%
Invested Capital (Beg of Year) Economic Profit (after Goodwill)
3.181.815 (96.453)
NOPLAT Capital Charge Economic Profit (after Goodwill)
EUR
3.191.643 197.217
3.255.742 253.317
3.488.253 294.348
3.785.148 324.885
16,1%
3.887.624 319.226
145.674
447.442
508.567
567.827
621.641
624.015
(242.127) (96.453)
(250.225) 197.217
(255.250) 253.317
(273.479) 294.348
(296.756) 324.885
(304.790) 319.226
2009 2010 2011 2012 2013 2014 -------------------- --------------------- ----------------------- -------------------- -------------------- --------------------
Working capital Op Cash: % Revenue Operating cash
2,0% 46.877
2,0% 48.049
2,0% 49.443
2,0% 51.767
2,0% 54.355
2,0% 57.236
Inventories: % Revenue Inventories
0,1% 2.075
0,2% 4.805
0,2% 4.944
0,2% 5.177
0,2% 5.435
0,2% 5.724
Acc Rec: % Revenues Accounts receivable
1,8% 41.791
1,5% 36.037
1,5% 37.082
1,5% 38.825
1,5% 40.766
1,5% 42.927
Acc. Pay: % Revenues Accounts payable
5,7% 132.671
6,0% 144.148
6,0% 148.328
6,0% 155.300
6,0% 163.065
6,0% 171.707
3,9% 91.053
3,0% 72.074
3,0% 74.164
3,0% 77.650
3,0% 81.532
3,0% 85.853
44,5% 1.043.154
44,0% 1.057.084
44,0% 1.087.740
44,0% 1.138.864
44,0% 1.195.807
44,0% 1.259.185
(994.029) (55.534) -42,4%
(1.040.267) (46.238) -43,3%
(1.070.435) (30.168) -43,3%
(1.120.745) (50.310) -43,3%
(1.176.783) (56.037) -43,3%
(1.239.152) (62.369) -43,3%
OCA: % Revenues Other current assets OCL: % Revenues Other current liabilities Total operating working capital WC increase/(decrease) WC: % Revenues
85
EUR Revenues
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ -----------------2.343.868 2.402.465 2.472.136 2.588.327 2.717.743 2.861.783 3.013.458 3.173.171 3.341.349 3.518.441 3.704.918 3.901.279 4.108.046 4.325.773 4.555.039 4.796.456 5.050.668
Adjusted EBITA
170.840
503.757
572.115
638.428
698.469
700.959
Taxes on EBITA
(32.602)
(56.315)
(63.548)
(70.601)
(76.828)
(76.944)
Change in Deferred Taxes NOPLAT
EUR
7.436
0
0
0
0
0
145.674
447.442
508.567
567.827
621.641
624.015
452.019
475.976
501.202
527.766
555.738
585.192
616.207
648.866
683.256
719.468
757.600
404.557
425.998
448.576
472.351
497.385
523.747
551.505
580.735
611.514
643.924
678.052
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Op. Invested Capital (excl.Goodwill)
3.144.802
3.208.901
3.441.412
3.738.307
3.840.783
3.960.030
4.291.164
4.518.596
4.758.081
5.010.259
5.275.803
5.555.421
5.849.858
6.159.901
6.486.375
6.830.153
7.192.151
Op. Invested Capital (incl.Goodwill)
3.191.643
3.255.742
3.488.253
3.785.148
3.887.624
4.006.871
4.338.005
4.565.437
4.804.922
5.057.100
5.322.644
5.602.262
5.896.699
6.206.742
6.533.216
6.876.994
7.238.992
135.846
383.343
276.056
270.932
519.164
504.768
73.423
198.567
209.091
220.172
231.841
244.129
257.068
270.693
285.039
300.146
316.054
Free Cash Flow Incl. Goodwill
Economic Profit Before Goodwill Return on Invested Capital
4,6%
14,2%
15,8%
16,5%
16,6%
16,2%
10,2%
9,9%
9,9%
9,9%
9,9%
9,9%
9,9%
9,9%
9,9%
9,9%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
6,4%
8,0%
8,7%
8,8%
8,4%
2,4%
2,1%
2,1%
2,1%
2,1%
2,1%
2,1%
2,1%
2,1%
2,1%
2,1%
Invested Capital (Beg of Year) Economic Profit (before Goodwill)
3.134.974 (92.889)
9,9%
3.144.802
3.208.901
3.441.412
3.738.307
3.840.783
3.960.030
4.291.164
4.518.596
4.758.081
5.010.259
5.275.803
5.555.421
5.849.858
6.159.901
6.486.375
6.830.153
200.890
256.989
298.021
328.557
322.898
94.090
89.571
94.318
99.317
104.581
110.124
115.960
122.106
128.578
135.392
142.568
NOPLAT
145.674
447.442
508.567
567.827
621.641
624.015
404.557
425.998
448.576
472.351
497.385
523.747
551.505
580.735
611.514
643.924
678.052
Capital Charge
(238.563)
(246.552)
(251.578)
(269.807)
(293.083)
(301.117)
(310.466)
(336.427)
(354.258)
(373.034)
(392.804)
(413.623)
(435.545)
(458.629)
(482.936)
(508.532)
(535.484)
(92.889)
200.890
256.989
298.021
328.557
322.898
94.090
89.571
94.318
99.317
104.581
110.124
115.960
122.106
128.578
135.392
142.568
Economic Profit (before Goodwill)
After Goodwill Return on Invested Capital
4,6%
14,0%
15,6%
16,3%
16,4%
16,1%
10,1%
9,8%
9,8%
9,8%
9,8%
9,8%
9,8%
9,8%
9,9%
9,9%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
6,2%
7,8%
8,4%
8,6%
8,2%
2,3%
2,0%
2,0%
2,0%
2,0%
2,0%
2,0%
2,0%
2,0%
2,0%
2,0%
Invested Capital (Beg of Year) Economic Profit (after Goodwill)
3.181.815 (96.453)
3.191.643 197.217
3.255.742 253.317
3.488.253 294.348
3.785.148 324.885
3.887.624 319.226
4.006.871 90.418
4.338.005 85.899
4.565.437 90.646
4.804.922 95.645
5.057.100 100.909
5.322.644 106.451
5.602.262 112.288
5.896.699 118.434
6.206.742 124.905
6.533.216 131.720
9,9%
6.876.994 138.896
NOPLAT
145.674
447.442
508.567
567.827
621.641
624.015
404.557
425.998
448.576
472.351
497.385
523.747
551.505
580.735
611.514
643.924
678.052
Capital Charge Economic Profit (after Goodwill)
(242.127) (96.453)
(250.225) 197.217
(255.250) 253.317
(273.479) 294.348
(296.756) 324.885
(304.790) 319.226
(314.139) 90.418
(340.100) 85.899
(357.930) 90.646
(376.706) 95.645
(396.477) 100.909
(417.295) 106.451
(439.217) 112.288
(462.301) 118.434
(486.609) 124.905
(512.204) 131.720
(539.156) 138.896
86
Name - base scnario Revenue growth Revenue
Detailed Forecast
Key driver forecast
CV Yr
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------2.9% 4.7% 5.0% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 2,402,465 2,472,136 2,588,327 2,717,743 2,861,783 3,013,458 3,173,171 3,341,349 3,518,441 3,704,918 3,901,279 4,108,046 4,325,773 4,555,039 4,796,456 5,050,668
Adjusted EBITA margin Adjusted EBITA
21.0% 503,757
23.1% 572,115
24.7% 638,428
25.7% 698,469
24.5% 700,959
15.0% 452,019
15.0% 475,976
15.0% 501,202
15.0% 527,766
15.0% 555,738
15.0% 585,192
15.0% 616,207
15.0% 648,866
15.0% 683,256
15.0% 719,468
15.0% 757,600
Cash tax rate NOPLAT
11.2% 447,442
11.1% 508,567
11.1% 567,827
11.0% 621,641
11.0% 624,015
10.5% 404,557
10.5% 425,998
10.5% 448,576
10.5% 472,351
10.5% 497,385
10.5% 523,747
10.5% 551,505
10.5% 580,735
10.5% 611,514
10.5% 643,924
10.5% 678,052
Closing Net PPE as % Revenues Net PPE
155.0% 3,723,820
160.0% 3,955,418
165.0% 4,270,739
165.0% 4,484,276
165.0% 4,721,942
165.0% 4,972,205
165.0% 5,235,732
165.0% 5,513,226
165.0% 5,805,427
165.0% 6,113,115
165.0% 6,437,110
165.0% 6,778,277
165.0% 7,137,525
165.0% 7,515,814
165.0% 7,914,152
165.0% 8,333,602
Other Invested Capital as % Revenues Other Invested Capital Invested Capital (pre-Goodwill)
-21.4% (514,919) 3,208,901
-20.8% (514,006) 3,441,412
-20.6% (532,432) 3,738,307
-23.7% (643,492) 3,840,783
-26.6% (761,912) 3,960,030
-22.6% (681,041) 4,291,164
-22.6% (717,137) 4,518,596
-22.6% (755,145) 4,758,081
-22.6% (795,168) 5,010,259
-22.6% (837,311) 5,275,803
-22.6% (881,689) 5,555,421
-22.6% (928,418) 5,849,858
-22.6% (977,625) 6,159,901
-22.6% (1,029,439) 6,486,375
-22.6% (1,083,999) 6,830,153
-22.6% (1,141,451) 7,192,151
Cumulative Goodwill Invested Capital Net Investment
46,841 3,255,742
46,841 3,488,253
46,841 3,785,148
46,841 3,887,624
46,841 4,006,871
46,841 4,338,005 331,133
46,841 4,565,437 227,432
46,841 4,804,922 239,486
46,841 5,057,100 252,178
46,841 5,322,644 265,544
46,841 5,602,262 279,618
46,841 5,896,699 294,437
46,841 6,206,742 310,042
46,841 6,533,216 326,475
46,841 6,876,994 343,778
46,841 7,238,992 361,998
87
10.8.2 Optimistic scenario Forecast assumptions – detailed forecast and key driver forecast period EUR
Other inputs
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Operations P&L Operating Revenue: % Growth Other Revenue: % Growth COGS: % Revenue SGA: % Revenue Other Op Exp: % Revenue
22,0% 27,6% 63,9% 1,7% 11,3%
27,1% 35,7% 70,8% 1,0% 11,5%
30,8% 39,7% 74,3% 1,3% 10,9%
18,7% 34,8% 77,8% 0,8% 11,3%
5,3% 22,5% 98,0% 0,5% 12,1%
3,0% 10,0% 64,0% 1,0% 23,0%
4,0% 10,0% 66,0% 1,0% 23,0%
5,0% 10,0% 68,0% 1,0% 23,0%
6,0% 10,0% 68,0% 1,0% 23,0%
7,0% 10,0% 70,0% 1,5% 23,0%
2,0% 0,2% 1,8% 8,2% 2,2% 37,1%
2,0% 0,2% 2,1% 5,5% 2,1% 41,7%
2,0% 0,1% 1,2% 6,8% 7,1% 46,0%
2,0% 0,1% 1,5% 5,8% 7,7% 47,7%
2,0% 0,1% 1,8% 5,7% 3,9% 44,5%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
187,7%
176,7%
154,8%
160,9%
155,5%
155,0%
160,0%
165,0%
165,0%
165,0%
Working capital Op Cash: % Revenue Inventories: % Revenue Acc Rec: % Revenues Acc. Pay: % Revenues OCA: % Revenues OCL: % Revenues
Balance Sheet Items 1: Net PPE as % revenues
Off-Balance Sheet Items Operating leases Implied principal Interest rate
204.449 11,2%
464.649 10,8%
554.093 11,2%
672.321 11,5%
388.809 11,8%
729.067
801.973
882.171
882.171
882.171
10,5%
10,5%
10,5%
10,5%
10,5%
2,0%
2,0%
2,0%
2,0%
2,0%
5,5% 5,5%
5,5% 5,5%
5,5% 5,5%
5,5% 5,5%
5,5% 5,5%
Debt Finance & WACC Interest rates Excess cash Balancing debt Short term debt Long term debt - 1 Long term debt - 2
WACC
7,2%
7,6%
8,0%
7,8%
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
9,4% 12,5%
9,5% 12,5%
3,4% 12,5%
11,0% 12,5%
6,3% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
33,4% 10,9% 155,0% -22,9% 46.841
4,0% 33,2% 10,9% 160,0% -23,6% 46.841
5,0% 32,6% 10,9% 165,0% -24,3% 46.841
6,0% 33,3% 10,8% 165,0% -28,3% 46.841
7,0% 31,6% 10,8% 165,0% -32,2% 46.841
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
7,0% 20,0% 10,5% 160,0% -25,0% 46.841
Note: to be calculated in separate model
Tax Tax rates Effective Marginal
Phase 2 & CV drivers Phase 2 Inputs Revenue growth Adjusted EBITA margin Cash tax rate Closing Net PPE as % Revenues Other Invested Capital as % Revenues Cumulative Goodwill
88
Forecast assumptions – continuing value Continuing value inputs Choose ROIC option 1: Input value 2: Last year of phase 2 3: WACC ROIC used Growth in NOPLAT
1 10,0% 14,1% 7,8% 10,0% 3,0%
Results 2009 2010 2011 2012 2013 2014 ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Income Statement Revenues Other Operating Revenues Cost of Goods Sold Selling, Gen & Admin Expenses
2,343,868
2,414,184
2,510,751
2,636,289
2,794,466
2,990,079
598,097
657,907
723,697
796,067
875,674
963,241
(2,296,304) (1,545,078) (1,657,096) (1,792,677) (1,900,237) (2,093,055) (12,753)
(24,142)
(25,108)
(26,363)
(27,945)
(44,851)
Depreciation Expense
(256,117)
(218,689)
(224,519)
(241,032)
(260,993)
(276,652)
Other Oper Expense
(284,160)
(555,262)
(577,473)
(606,346)
(642,727)
(687,718)
92,631
728,919
750,253
765,938
838,239
851,043
Amortization of Goodwill
0
0
0
0
0
0
Intangibles Amort. (Excl. Goodwill)
0
0
0
0
0
0
92,631
728,919
750,253
765,938
838,239
851,043
Reported EBITA
Reported EBIT Non-Oper Income Interest Income Interest Expense Restructuring Charges
4,441
2,221
2,221
2,221
2,221
2,221
75,522
47,226
58,126
66,992
75,450
87,240
(130,544)
(131,914)
(131,914)
(131,914)
(131,914)
(131,914)
0
0
0
0
0
0
Special Items
(222,537)
0
0
0
0
0
Earnings Before Taxes
(180,487)
646,451
678,686
703,236
783,995
808,590
11,314
(67,877)
(71,262)
(73,840)
(82,319)
(84,902)
Income Taxes Minority Interest Income Before Extraordinary Items Extraordinary Items (After Tax) Net Income Preference dividends Earnings for common shareholders Common dividends Retained profit
0 (169,173) 0 (169,173) 0 (169,173) 0 (169,173)
0
0
0
0
0
578,574
607,424
629,396
701,676
723,688
0
0
0
0
0
578,574
607,424
629,396
701,676
723,688
0
0
0
0
0
578,574
607,424
629,396
701,676
723,688
0
0
0
0
0
578,574
607,424
629,396
701,676
723,688
Earnings per share (EUR)
(114.42)
392.69
412.27
427.19
476.24
491.18
Earnings per share - fully diluted (EUR)
(114.42)
392.69
412.27
427.19
476.24
491.18
89
2009 2010 2011 2012 2013 2014 ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Balance Sheet Operating Cash
46,877
48,284
50,215
52,726
55,889
59,802
2,361,281
2,906,310
3,349,592
3,772,512
4,362,005
4,930,534
41,791
36,213
37,661
39,544
41,917
44,851
2,075
4,828
5,022
5,273
5,589
5,980
91,053
72,426
75,323
79,089
83,834
89,702
Total Current Assets
2,543,077
3,068,060
3,517,813
3,949,143
4,549,234
5,130,869
Net Property Plant and Equipment
3,644,824
3,741,985
4,017,202
4,349,877
4,610,869
4,933,630
Excess Marketable Securities Accounts Receivable Inventories Other Current Assets
Goodwill Other Intangible Assets Other Operating Assets
0
0
0
0
0
0
46,841
46,841
46,841
46,841
46,841
46,841
0
0
0
0
0
0
153,120
153,120
153,120
153,120
153,120
153,120
Deferred tax asset
0
0
0
0
0
0
Other Non-operating Assets
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
6,387,862
7,010,006
7,734,976
8,498,981
9,360,065
10,264,461
Investments
Total Assets
Short term debt
202,941
202,941
202,941
202,941
202,941
202,941
Accounts Payable
132,671
144,851
150,645
158,177
167,668
179,405
425
68,302
139,564
213,404
295,724
380,626
0
0
0
0
0
0
Other Current Liabilities
1,043,154
1,062,241
1,104,731
1,159,967
1,229,565
1,315,635
Total Current Liabilities
1,379,191
1,478,335
1,597,881
1,734,490
1,895,898
2,078,606
Tax payable Dividends payable
Balancing Debt
54,074
0
0
0
0
0
2,195,499
2,195,499
2,195,499
2,195,499
2,195,499
2,195,499
Deferred Income Taxes
155,524
155,524
155,524
155,524
155,524
155,524
Other Operating Liabilities
106,549
106,549
106,549
106,549
106,549
106,549
Restructuring Provisions
0
0
0
0
0
0
Income smoothing Provisions
0
0
0
0
0
0
61,807
61,807
61,807
61,807
61,807
61,807
Long Term Debt
On-going operating Provisions Long-term operating Provisions
0
0
0
0
0
0
10,157
8,657
6,657
4,657
2,657
657
Minority Interest
0
0
0
0
0
0
Preferred Stock
0
0
0
0
0
0
Total Common Equity
2,425,061
3,003,635
3,611,059
4,240,455
4,942,131
5,665,819
Total Liabs and Equity
6,387,862
7,010,006
7,734,976
8,498,981
9,360,065
10,264,461
Retirement Related Liabilities
90
2009 2010 2011 2012 2013 2014 ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
NOPLAT Reported EBITA
92,631
728,919
750,253
765,938
838,239
851,043
Adj for Operating Leases
45,880
76,552
84,207
92,628
92,628
92,628
Adj for Non-operating component of pension expense
0
0
0
0
0
0
Add: Interest associated with Long-term operating Provision
0
0
0
0
0
0
Add: Increase in Income smoothing Provision
0
0
0
0
0
0
Adjusted EBITA
138,511
805,471
834,461
858,566
930,866
943,671
Taxes on EBITA
(28,561)
(87,755)
(90,734)
(93,256)
(100,678)
(101,787)
Change in Deferred Taxes NOPLAT
7,436
0
0
0
0
0
117,386
717,716
743,727
765,310
830,188
841,884
(11,314)
67,877
71,262
73,840
82,319
84,902
16,318
16,489
16,489
16,489
16,489
16,489
Taxes on EBIT Prov for Inc Taxes Tax Shield on Interest Exp Tax Shield on Operating Lease Interest
5,735
9,569
10,526
11,578
11,578
11,578
Tax Shield on Non-operating component of pension expense
0
0
0
0
0
0
Tax Shield on Interest associated with Long-term operating Provision
0
0
0
0
0
(5,903)
(9,440)
Tax on Non-operating Income
27,262
Taxes on EBIT
28,561
87,755
90,734
93,256
100,678
101,787
(169,173)
(278)
(7,266) (278)
(8,374) (278)
(9,431)
0
Tax on Interest Income
(278)
(10,905) (278)
Reconciliation to Net Income Net Income
578,574
607,424
629,396
701,676
723,688
7,436
0
0
0
0
0
Add: Increase in Income smoothing Provision
0
0
0
0
0
0
Add: Goodwill Amortization
0
0
0
0
0
0
Add: Extraordinary Items
0
0
0
0
0
0
194,720
0
0
0
0
0
0
0
0
0
0
0
32,983
578,574
607,424
629,396
701,676
723,688
114,226
115,425
115,425
115,425
115,425
115,425
0
0
0
0
0
0
40,145
66,983
73,681
81,049
81,049
81,049
Add: Increase in Deferred Taxes
Add: Special Items After Tax Add: Minority Interest Adjusted Net Income Add: Interest Exp. After Tax Add: Interest Exp. On Long-term operating Provision Add: Interest Exp. on Op. Leases Add: Interest Exp. on Non-operating component of pension expense Income Available to Investors Add: Restructuring Charges Less: Interest Income After-Tax Less: Non-operating Income After Tax NOPLAT
0
0
0
0
0
0
187,353
760,982
796,530
825,871
898,150
920,162
0 (66,082) (3,886) 117,386
0 (41,322) (1,943) 717,716
0 (50,860) (1,943) 743,727
0 (58,618) (1,943) 765,310
0 (66,019) (1,943) 830,188
0 (76,335) (1,943) 841,884
91
2009 2010 2011 2012 2013 2014 ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Invested Capital Operating Working Capital Net Property Plant and Equipment Other Assets Net of Other Liabs
(994,454) (1,113,644) (1,226,720) (1,354,917) (1,505,728) (1,675,330) 3,644,824
3,741,985
4,017,202
4,349,877
4,610,869
4,933,630
(106,549)
(106,549)
(106,549)
(106,549)
(106,549)
Less: On-going operating Provision
(61,807)
(61,807)
(61,807)
(61,807)
(61,807)
(61,807)
Value of Operating Leases
388,809
729,067
801,973
882,171
882,171
882,171
2,870,823
3,189,052
3,424,099
3,708,774
3,818,957
3,972,115
46,841
46,841
46,841
46,841
46,841
46,841
0
0
0
0
0
0
Op. Invested Capital (incl.Goodwill)
2,917,664
3,235,893
3,470,940
3,755,615
3,865,798
4,018,956
Excess Marketable Securities
2,361,281
2,906,310
3,349,592
3,772,512
4,362,005
4,930,534
153,120
153,120
153,120
153,120
153,120
153,120
Non-operating Assets
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
Total Investor Funds
5,432,065
6,295,323
6,973,653
7,681,247
8,380,923
9,102,611
Total Common Equity & Pref. Stock
2,425,061
3,003,635
3,611,059
4,240,455
4,942,131
5,665,819
0
0
0
0
0
0
155,524
155,524
155,524
155,524
155,524
155,524
Op. Invested Capital (excl.Goodwill) Goodwill & Intangibles Cumulative Written Off & Amortized
Investments
Cum Goodwill Written Off & Amortized Deferred Income Taxes
(106,549)
Dividends Payable
0
0
0
0
0
0
Income smoothing Provision
0
0
0
0
0
0
2,580,585
3,159,159
3,766,583
4,395,979
5,097,655
5,821,343
Adjusted Equity Minority Interest
0
0
0
0
0
0
Restructuring Provisions
0
0
0
0
0
0
Long-term operating Provision Retirement-Related Liabilities Interest Bearing Debt Value of Operating Leases Total Investor Funds
0
0
0
0
0
0
10,157
8,657
6,657
4,657
2,657
657
2,452,514
2,398,440
2,398,440
2,398,440
2,398,440
2,398,440
388,809
729,067
801,973
882,171
882,171
882,171
5,432,065
6,295,323
6,973,653
7,681,247
8,380,923
9,102,611
92
2009 2010 2011 2012 2013 2014 ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Free Cash Flow NOPLAT
117,386
717,716
743,727
765,310
830,188
841,884
Depreciation
256,117
218,689
224,519
241,032
260,993
276,652
Gross Cash Flow
373,503
936,406
968,246
1,006,342
1,091,181
1,118,536
Increase in Working Capital Capital Expenditures Incr in other operating assets/liabilities Incr in Ongoing operating Provisions Inv in Operating Leases Gross Investment Free Cash Flow Excl. Goodwill Investment in Goodwill and Intangibles Free Cash Flow Incl. Goodwill AT Interest Income (Incr)/Decr Excess Mkt Sec
55,959
119,190
113,076
128,198
150,810
169,602
(318,815)
(315,851)
(499,736)
(573,707)
(521,985)
(599,413)
6,619
0
0
0
0
0
19,017
0
0
0
0
0
283,511
(340,258)
(72,906)
(80,198)
46,291
(536,918)
(459,566)
(525,707)
(371,175)
0
(429,811)
0
419,794
399,488
508,679
480,635
720,006
688,726
0
0
0
0
0
0
419,794
399,488
508,679
480,635
720,006
688,726
66,082
41,322
50,860
58,618
66,019
76,335
(247,624)
(599,103)
(443,283)
(422,919)
(589,493)
(568,529)
Foreign Exchange Translation
0
0
0
0
0
0
(Incr)/Decr Retirement Related Assets
0
0
0
0
0
0 1,943
1,943
1,943
1,943
1,943
Restructuring Cash Flow
Non-operating Cash Flow
(32,492) 0
0
0
0
0
0
Extraordinary items
0
0
0
0
0
0
205,760
(156,350)
118,200
118,276
198,474
198,474
114,226
115,425
115,425
115,425
115,425
115,425
40,145
66,983
73,681
81,049
81,049
81,049
Interest on Nonoperating Component of Pension Expense
0
0
0
0
0
0
Interest on Long-term Operating Provision
0
0
0
0
0
0
Cash Flow Available to Investors
Financing Flow AT Interest Expense Interest on Operating Leases
Decr/(Incr) in Debt Decr/(Incr) in Operating Leases Decr/(Incr) in Retirement Rel. Liab
(131,945) 283,511 (8,137)
0 (340,258)
0
0
(72,906)
(80,198)
0
0
0
0 2,000
1,500
2,000
2,000
2,000
Decr/(Incr) in Long-term Operating Provision
0
0
0
0
0
0
Payments to Minorities
0
0
0
0
0
0
Common Dividends
0
0
0
0
0
0
Preferred Dividends
0
0
0
0
0
0
Decr/(Incr) in Preferred
0
Decr/(Incr) in Share Capital
(92,040)
Total Financing Flow
205,760
0
0
0
0
0
0
0
0
0
0
118,200
118,276
198,474
198,474
(156,350)
93
2009 2010 2011 2012 2013 2014 ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Economic Profit Before Goodwill Return on Invested Capital
3.7%
25.0%
23.3%
22.4%
22.4%
WACC
7.6%
7.8%
7.8%
7.8%
7.8%
7.8%
Spread
-3.9%
17.2%
15.5%
14.5%
14.5%
14.2%
Invested Capital (Beg of Year)
3,173,232 (124,088)
Economic Profit (before Goodwill)
NOPLAT
22.0%
2,870,823
3,189,052
3,424,099
3,708,774
3,818,957
492,644
493,705
496,861
539,420
542,478
117,386
717,716
743,727
765,310
830,188
841,884
Capital Charge
(241,474)
(225,073)
(250,022)
(268,449)
(290,768)
(299,406)
Economic Profit (before Goodwill)
(124,088)
492,644
493,705
496,861
539,420
542,478
After Goodwill Return on Invested Capital
3.6%
24.6%
23.0%
22.0%
22.1%
WACC
7.6%
7.8%
7.8%
7.8%
7.8%
7.8%
Spread
-4.0%
16.8%
15.1%
14.2%
14.3%
13.9%
Invested Capital (Beg of Year) Economic Profit (after Goodwill)
3,220,073 (127,653)
NOPLAT Capital Charge Economic Profit (after Goodwill)
2,917,664 488,972
3,235,893 490,033
3,470,940 493,188
3,755,615 535,748
21.8%
3,865,798 538,806
117,386
717,716
743,727
765,310
830,188
841,884
(245,039) (127,653)
(228,745) 488,972
(253,694) 490,033
(272,122) 493,188
(294,440) 535,748
(303,079) 538,806
2009 2010 2011 2012 2013 2014 -------------------- -------------------- -------------------- -------------------- -------------------- --------------------
Working capital Op Cash: % Revenue Operating cash
2.0% 46,877
2.0% 48,284
2.0% 50,215
2.0% 52,726
2.0% 55,889
2.0% 59,802
0.1% 2,075
0.2% 4,828
0.2% 5,022
0.2% 5,273
0.2% 5,589
0.2% 5,980
Acc Rec: % Revenues Accounts receivable
1.8% 41,791
1.5% 36,213
1.5% 37,661
1.5% 39,544
1.5% 41,917
1.5% 44,851
Acc. Pay: % Revenues Accounts payable
5.7% 132,671
6.0% 144,851
6.0% 150,645
6.0% 158,177
6.0% 167,668
6.0% 179,405
3.9% 91,053
3.0% 72,426
3.0% 75,323
3.0% 79,089
3.0% 83,834
3.0% 89,702
44.5% 1,043,154
44.0% 1,062,241
44.0% 1,104,731
44.0% 1,159,967
44.0% 1,229,565
44.0% 1,315,635
(994,029) (55,534) -42.4%
(1,045,342) (51,313) -43.3%
(1,087,155) (41,814) -43.3%
(1,141,513) (54,358) -43.3%
(1,210,004) (68,491) -43.3%
(1,294,704) (84,700) -43.3%
Inventories: % Revenue Inventories
OCA: % Revenues Other current assets OCL: % Revenues Other current liabilities Total operating working capital WC increase/(decrease) WC: % Revenues
94
Revenues
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 --------------------- --------------------- --------------------- --------------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------2,343,868 2,414,184 2,510,751 2,636,289 2,794,466 2,990,079 3,199,384 3,423,341 3,662,975 3,919,384 4,193,740 4,487,302 4,801,413 5,137,512 5,497,138 5,881,938 6,293,674
Adjusted EBITA
138,511
805,471
834,461
858,566
930,866
943,671
Taxes on EBITA
(28,561)
(87,755)
(90,734)
(93,256)
(100,678)
(101,787)
7,436
0
0
0
0
0
117,386
717,716
743,727
765,310
830,188
841,884
Change in Deferred Taxes NOPLAT
639,877
684,668
732,595
783,877
838,748
897,460
960,283
1,027,502
1,099,428
1,176,388
1,258,735
572,690
612,778
655,673
701,570
750,680
803,227
859,453
919,615
983,988
1,052,867
1,126,568
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 --------------------- --------------------- --------------------- --------------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Invested Capital Op. Invested Capital (excl.Goodwill)
2,870,823
3,189,052
3,424,099
3,708,774
3,818,957
3,972,115
4,319,169
4,621,511
4,945,017
5,291,168
5,661,550
6,057,858
6,481,908
6,935,642
7,421,137
7,940,616
8,496,459
Op. Invested Capital (incl.Goodwill)
2,917,664
3,235,893
3,470,940
3,755,615
3,865,798
4,018,956
4,366,010
4,668,352
4,991,858
5,338,009
5,708,391
6,104,699
6,528,749
6,982,483
7,467,978
7,987,457
8,543,300
419,794
399,488
508,679
480,635
720,006
688,726
225,636
310,436
332,167
355,418
380,298
406,919
435,403
465,881
498,493
533,387
570,724
Free Cash Flow Incl. Goodwill
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 --------------------- --------------------- --------------------- --------------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Economic Profit Before Goodwill Return on Invested Capital
3.7%
25.0%
23.3%
22.4%
22.4%
22.0%
14.4%
14.2%
14.2%
14.2%
14.2%
14.2%
14.2%
14.2%
14.2%
14.2%
WACC
7.6%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
Spread
-3.9%
17.2%
15.5%
14.5%
14.5%
14.2%
6.6%
6.3%
6.3%
6.3%
6.3%
6.3%
6.3%
6.3%
6.3%
6.3%
6.3%
3,173,232
2,870,823
3,189,052
3,424,099
3,708,774
3,818,957
3,972,115
4,319,169
4,621,511
4,945,017
5,291,168
5,661,550
6,057,858
6,481,908
6,935,642
7,421,137
7,940,616
492,644
493,705
496,861
539,420
542,478
261,276
274,155
293,346
313,880
335,852
359,362
384,517
411,433
440,233
471,050
504,023
Invested Capital (Beg of Year) Economic Profit (before Goodwill)
NOPLAT
(124,088)
14.2%
117,386
717,716
743,727
765,310
830,188
841,884
572,690
612,778
655,673
701,570
750,680
803,227
859,453
919,615
983,988
1,052,867
1,126,568
Capital Charge
(241,474)
(225,073)
(250,022)
(268,449)
(290,768)
(299,406)
(311,414)
(338,623)
(362,326)
(387,689)
(414,828)
(443,865)
(474,936)
(508,182)
(543,754)
(581,817)
(622,544)
Economic Profit (before Goodwill)
(124,088)
492,644
493,705
496,861
539,420
542,478
261,276
274,155
293,346
313,880
335,852
359,362
384,517
411,433
440,233
471,050
504,023
Return on Invested Capital
3.6%
24.6%
23.0%
22.0%
22.1%
21.8%
14.2%
14.0%
14.0%
14.1%
14.1%
14.1%
14.1%
14.1%
14.1%
14.1%
14.1%
WACC
7.6%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
Spread
-4.0%
16.8%
15.1%
14.2%
14.3%
13.9%
6.4%
6.2%
6.2%
6.2%
6.2%
6.2%
6.2%
6.2%
6.3%
6.3%
6.3%
3,220,073 (127,653)
2,917,664 488,972
3,235,893 490,033
3,470,940 493,188
3,755,615 535,748
3,865,798 538,806
4,018,956 257,604
4,366,010 270,483
4,668,352 289,674
4,991,858 310,208
5,338,009 332,180
5,708,391 355,689
6,104,699 380,845
6,528,749 407,761
6,982,483 436,561
7,467,978 467,377
7,987,457 500,351
After Goodwill
Invested Capital (Beg of Year) Economic Profit (after Goodwill) NOPLAT Capital Charge Economic Profit (after Goodwill)
117,386
717,716
743,727
765,310
830,188
841,884
572,690
612,778
655,673
701,570
750,680
803,227
859,453
919,615
983,988
1,052,867
1,126,568
(245,039) (127,653)
(228,745) 488,972
(253,694) 490,033
(272,122) 493,188
(294,440) 535,748
(303,079) 538,806
(315,086) 257,604
(342,295) 270,483
(365,999) 289,674
(391,362) 310,208
(418,500) 332,180
(447,538) 355,689
(478,608) 380,845
(511,854) 407,761
(547,427) 436,561
(585,489) 467,377
(626,217) 500,351
95
Name - optimistic scenario Revenue growth Revenue
Detailed Forecast
Key driver forecast
CV Yr
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------4.0% 5.0% 6.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 2,414,184 2,510,751 2,636,289 2,794,466 2,990,079 3,199,384 3,423,341 3,662,975 3,919,384 4,193,740 4,487,302 4,801,413 5,137,512 5,497,138 5,881,938 6,293,674
Adjusted EBITA margin Adjusted EBITA
33.4% 805,471
33.2% 834,461
32.6% 858,566
33.3% 930,866
31.6% 943,671
20.0% 639,877
20.0% 684,668
20.0% 732,595
20.0% 783,877
20.0% 838,748
20.0% 897,460
20.0% 960,283
20.0% 1,027,502
20.0% 1,099,428
20.0% 1,176,388
20.0% 1,258,735
Cash tax rate NOPLAT
10.9% 717,716
10.9% 743,727
10.9% 765,310
10.8% 830,188
10.8% 841,884
10.5% 572,690
10.5% 612,778
10.5% 655,673
10.5% 701,570
10.5% 750,680
10.5% 803,227
10.5% 859,453
10.5% 919,615
10.5% 983,988
10.5% 1,052,867
10.5% 1,126,568
Closing Net PPE as % Revenues Net PPE
155.0% 3,741,985
160.0% 4,017,202
165.0% 4,349,877
165.0% 4,610,869
165.0% 4,933,630
160.0% 5,119,015
160.0% 5,477,346
160.0% 5,860,760
160.0% 6,271,014
160.0% 6,709,985
160.0% 7,179,684
160.0% 7,682,261
160.0% 8,220,020
160.0% 8,795,421
160.0% 9,411,101
160.0% 10,069,878
Other Invested Capital as % Revenues Other Invested Capital Invested Capital (pre-Goodwill)
-22.9% (552,933) 3,189,052
-23.6% (593,103) 3,424,099
-24.3% (641,102) 3,708,774
-28.3% (791,913) 3,818,957
-32.2% (961,515) 3,972,115
-25.0% (799,846) 4,319,169
-25.0% (855,835) 4,621,511
-25.0% (915,744) 4,945,017
-25.0% (979,846) 5,291,168
-25.0% (1,048,435) 5,661,550
-25.0% (1,121,826) 6,057,858
-25.0% (1,200,353) 6,481,908
-25.0% (1,284,378) 6,935,642
-25.0% (1,374,285) 7,421,137
-25.0% (1,470,484) 7,940,616
-25.0% (1,573,418) 8,496,459
Cumulative Goodwill Invested Capital Net Investment
46,841 3,235,893
46,841 3,470,940
46,841 3,755,615
46,841 3,865,798
46,841 4,018,956
46,841 4,366,010 347,054
46,841 4,668,352 302,342
46,841 4,991,858 323,506
46,841 5,338,009 346,151
46,841 5,708,391 370,382
46,841 6,104,699 396,308
46,841 6,528,749 424,050
46,841 6,982,483 453,734
46,841 7,467,978 485,495
46,841 7,987,457 519,480
46,841 8,543,300 555,843
96
10.8.3. Pessimistic Scenario Forecast assumptions – detailed forecast and key value drivers period EUR
Other inputs
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Operations P&L Operating Revenue: % Growth Other Revenue: % Growth COGS: % Revenue SGA: % Revenue Other Op Exp: % Revenue
22,0% 27,6% 63,9% 1,7% 11,3%
27,1% 35,7% 70,8% 1,0% 11,5%
30,8% 39,7% 74,3% 1,3% 10,9%
18,7% 34,8% 77,8% 0,8% 11,3%
5,3% 22,5% 98,0% 0,5% 12,1%
0,0% 0,0% 78,0% 1,5% 24,0%
0,0% 0,0% 78,0% 1,5% 24,0%
1,0% 1,0% 78,0% 1,5% 24,0%
1,0% 1,0% 78,0% 1,5% 24,0%
2,0% 2,0% 80,0% 2,0% 24,0%
2,0% 0,2% 1,8% 8,2% 2,2% 37,1%
2,0% 0,2% 2,1% 5,5% 2,1% 41,7%
2,0% 0,1% 1,2% 6,8% 7,1% 46,0%
2,0% 0,1% 1,5% 5,8% 7,7% 47,7%
2,0% 0,1% 1,8% 5,7% 3,9% 44,5%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
2,0% 0,2% 1,5% 6,0% 3,0% 44,0%
187,7% 7,0%
176,7% 5,9%
154,8% 5,7%
160,9% 6,1%
155,5% 7,1%
155,0% 6,0%
155,0% 6,0%
155,0% 6,0%
155,0% 6,0%
155,0% 6,0%
Working capital Op Cash: % Revenue Inventories: % Revenue Acc Rec: % Revenues Acc. Pay: % Revenues OCA: % Revenues OCL: % Revenues
Balance Sheet Items 1: Net PPE as % revenues Depreciation: % Net PPE b/f
Off-Balance Sheet Items Operating leases Implied principal Interest rate
192.534 11,2%
436.716 10,8%
521.692 11,2%
634.063 11,5%
662.788 11,8%
729.067
801.973
882.171
882.171
882.171
10,5%
10,5%
10,5%
10,5%
10,5%
2,0%
2,0%
2,0%
2,0%
2,0%
6,0% 6,0%
6,0% 6,0%
6,0% 6,0%
6,0% 6,0%
6,0% 6,0%
Debt Finance & WACC Interest rates Excess cash Balancing debt Short term debt Long term debt - 1 Long term debt - 2
WACC
7,2%
7,6%
8,0%
7,8%
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
9,4% 12,5%
9,5% 12,5%
3,4% 12,5%
11,0% 12,5%
6,3% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
10,5% 12,5%
16,0% 11,4% 155,0% -20,3% 46.841
0,0% 16,3% 11,4% 155,0% -18,1% 46.841
1,0% 16,7% 11,4% 155,0% -15,9% 46.841
1,0% 16,7% 11,4% 155,0% -17,2% 46.841
2,0% 14,2% 11,5% 155,0% -18,5% 46.841
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
2,0% 13,0% 10,5% 165,0% -18,0% 46.841
Tax rates Effective Marginal
Phase 2 & CV drivers Phase 2 Inputs Revenue growth Adjusted EBITA margin Cash tax rate Closing Net PPE as % Revenues Other Invested Capital as % Revenues Cumulative Goodwill
97
Forecast assumptions – continuing value Continuing value inputs Choose ROIC option 1: Input value 2: Last year of phase 2 3: WACC
3
8,0% 7,8%
ROIC used
7,8%
Growth in NOPLAT
2,5%
Results EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Income Statement Revenues Other Operating Revenues Cost of Goods Sold Selling, Gen & Admin Expenses
2.343.868
2.343.868
2.343.868
2.367.307
2.390.980
2.438.799
598.097
598.097
598.097
604.078
610.119
622.321
(2.296.304) (1.828.217) (1.828.217) (1.846.499) (1.864.964) (1.951.039) (12.753)
(35.158)
(35.158)
(35.510)
(35.865)
(48.776)
Depreciation Expense
(256.117)
(218.689)
(217.980)
(217.980)
(220.160)
(222.361)
Other Oper Expense
(284.160)
(562.528)
(562.528)
(568.154)
(573.835)
(585.312) 253.632
Reported EBITA
92.631
297.372
298.082
303.243
306.275
Amortization of Goodwill
0
0
0
0
0
0
Intangibles Amort. (Excl. Goodwill)
0
0
0
0
0
0
92.631
297.372
298.082
303.243
306.275
253.632
Reported EBIT Non-Oper Income Interest Income Interest Expense Restructuring Charges
4.441
2.221
2.221
2.221
2.221
2.221
75.522
47.226
50.826
54.931
58.697
62.594
(130.544)
(143.906)
(143.906)
(143.906)
(143.906)
(143.906)
0
0
0
0
0
0
Special Items
(222.537)
0
0
0
0
0
Earnings Before Taxes
(180.487)
202.912
207.222
216.487
223.286
174.540
11.314
(21.306)
(21.758)
(22.731)
(23.445)
(18.327)
Income Taxes Minority Interest Income Before Extraordinary Items Extraordinary Items (After Tax) Net Income Preference dividends Earnings for common shareholders Common dividends Retained profit
0 (169.173) 0 (169.173) 0 (169.173) 0 (169.173)
0
0
0
0
0
181.606
185.464
193.756
199.841
156.213
0
0
0
0
0
181.606
185.464
193.756
199.841
156.213
0
0
0
0
0
181.606
185.464
193.756
199.841
156.213
0
0
0
0
0
181.606
185.464
193.756
199.841
156.213
Earnings per share (EUR)
(114,42)
123,26
125,88
131,51
135,64
106,03
Earnings per share - fully diluted (EUR)
(114,42)
123,26
125,88
131,51
135,64
106,03
98
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Balance Sheet Operating Cash
46.877
46.877
46.877
47.346
47.820
48.776
2.361.281
2.541.313
2.746.536
2.934.842
3.129.685
3.248.810
41.791
35.158
35.158
35.510
35.865
36.582
2.075
4.688
4.688
4.735
4.782
4.878
91.053
70.316
70.316
71.019
71.729
73.164
Total Current Assets
2.543.077
2.698.353
2.903.575
3.093.451
3.289.881
3.412.210
Net Property Plant and Equipment
3.644.824
3.632.995
3.632.995
3.669.325
3.706.019
3.780.139
Excess Marketable Securities Accounts Receivable Inventories Other Current Assets
Goodwill Other Intangible Assets Other Operating Assets
0
0
0
0
0
0
46.841
46.841
46.841
46.841
46.841
46.841
0
0
0
0
0
0
153.120
153.120
153.120
153.120
153.120
153.120
Deferred tax asset
0
0
0
0
0
0
Other Non-operating Assets
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
6.387.862
6.531.309
6.736.531
6.962.738
7.195.860
7.392.310
Investments
Total Assets
Short term debt
202.941
202.941
202.941
202.941
202.941
202.941
Accounts Payable
132.671
140.632
140.632
142.038
143.459
146.328
425
21.731
43.489
66.220
89.665
107.992
0
0
0
0
0
0
Other Current Liabilities
1.043.154
1.031.302
1.031.302
1.041.615
1.052.031
1.073.072
Total Current Liabilities
1.379.191
1.396.606
1.418.364
1.452.815
1.488.096
1.530.333
Tax payable Dividends payable
Balancing Debt
54.074
0
0
0
0
0
2.195.499
2.195.499
2.195.499
2.195.499
2.195.499
2.195.499
Deferred Income Taxes
155.524
155.524
155.524
155.524
155.524
155.524
Other Operating Liabilities
106.549
106.549
106.549
106.549
106.549
106.549
Restructuring Provisions
0
0
0
0
0
0
Income smoothing Provisions
0
0
0
0
0
0
61.807
61.807
61.807
61.807
61.807
61.807
Long Term Debt
On-going operating Provisions Long-term operating Provisions
0
0
0
0
0
0
10.157
8.657
6.657
4.657
2.657
657
Minority Interest
0
0
0
0
0
0
Preferred Stock
0
0
0
0
0
0
Total Common Equity
2.425.061
2.606.667
2.792.131
2.985.887
3.185.728
3.341.941
Total Liabs and Equity
6.387.862
6.531.309
6.736.531
6.962.738
7.195.860
7.392.310
Retirement Related Liabilities
99
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
NOPLAT Reported EBITA
92.631
297.372
298.082
303.243
306.275
253.632
Adj for Operating Leases
78.209
76.552
84.207
92.628
92.628
92.628
Adj for Non-operating component of pension expense
0
0
0
0
0
0
Add: Interest associated with Long-term operating Provision
0
0
0
0
0
0
Add: Increase in Income smoothing Provision
0
0
0
0
0
0
Adjusted EBITA
170.840
373.924
382.289
395.870
398.903
346.260
Taxes on EBITA
(32.602)
(42.682)
(43.642)
(45.154)
(45.397)
(39.792)
Change in Deferred Taxes
7.436
0
0
0
0
0
145.674
331.242
338.647
350.716
353.506
306.468
(11.314)
21.306
21.758
22.731
23.445
18.327
16.318
17.988
17.988
17.988
17.988
17.988
9.776
9.569
10.526
11.578
11.578
11.578
Tax Shield on Non-operating component of pension expense
0
0
0
0
0
0
Tax Shield on Interest associated with Long-term operating Provision
0
0
0
0
0
NOPLAT
Taxes on EBIT Prov for Inc Taxes Tax Shield on Interest Exp Tax Shield on Operating Lease Interest
Tax on Interest Income
(9.440)
(5.903) (278)
(6.353) (278)
(6.866) (278)
(7.337) (278)
0 (7.824)
Tax on Non-operating Income
27.262
Taxes on EBIT
32.602
42.682
43.642
45.154
45.397
39.792
(278)
(169.173)
156.213
Reconciliation to Net Income Net Income Add: Increase in Deferred Taxes Add: Increase in Income smoothing Provision
181.606
185.464
193.756
199.841
7.436
0
0
0
0
0
0
0
0
0
0
0
Add: Goodwill Amortization
0
0
0
0
0
0
Add: Extraordinary Items
0
0
0
0
0
0
194.720
0
0
0
0
0
0
0
0
0
0
0
32.983
181.606
185.464
193.756
199.841
156.213
114.226
125.918
125.918
125.918
125.918
125.918
0
0
0
0
0
0
68.433
66.983
73.681
81.049
81.049
81.049
Add: Special Items After Tax Add: Minority Interest Adjusted Net Income Add: Interest Exp. After Tax Add: Interest Exp. On Long-term operating Provision Add: Interest Exp. on Op. Leases Add: Interest Exp. on Non-operating component of pension expense Income Available to Investors Add: Restructuring Charges Less: Interest Income After-Tax Less: Non-operating Income After Tax NOPLAT
0
0
0
0
0
0
215.642
374.507
385.063
400.724
406.808
363.181
0
0
0
0
0
0
(66.082)
(41.322)
(44.473)
(48.064)
(51.360)
(54.769)
(3.886)
(1.943)
(1.943)
(1.943)
(1.943)
(1.943)
145.674
331.242
338.647
350.716
353.506
306.468
100
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Invested Capital Operating Working Capital
(994.454) (1.036.626) (1.058.384) (1.091.264) (1.124.960) (1.163.992)
Net Property Plant and Equipment
3.644.824
Other Assets Net of Other Liabs
3.632.995
3.632.995
3.669.325
3.706.019
3.780.139
(106.549)
(106.549)
(106.549)
(106.549)
(106.549)
Less: On-going operating Provision
(61.807)
(61.807)
(61.807)
(61.807)
(61.807)
(61.807)
Value of Operating Leases
662.788
729.067
801.973
882.171
882.171
882.171
3.144.802
3.157.081
3.208.228
3.291.876
3.294.874
3.329.962
46.841
46.841
46.841
46.841
46.841
46.841
0
0
0
0
0
0
Op. Invested Capital (incl.Goodwill)
3.191.643
3.203.922
3.255.069
3.338.717
3.341.715
3.376.803
Excess Marketable Securities
2.361.281
2.541.313
2.746.536
2.934.842
3.129.685
3.248.810
153.120
153.120
153.120
153.120
153.120
153.120
Non-operating Assets
0
0
0
0
0
0
Retirement Related Assets
0
0
0
0
0
0
Total Investor Funds
5.706.044
5.898.355
6.154.725
6.426.679
6.624.520
6.778.733
Total Common Equity & Pref. Stock
2.425.061
2.606.667
2.792.131
2.985.887
3.185.728
3.341.941
0
0
0
0
0
0
155.524
155.524
155.524
155.524
155.524
155.524
Dividends Payable
0
0
0
0
0
0
Income smoothing Provision
0
0
0
0
0
0
2.580.585
2.762.191
2.947.655
3.141.411
3.341.252
3.497.465
Minority Interest
0
0
0
0
0
0
Restructuring Provisions
0
0
0
0
0
0
Long-term operating Provision
0
0
0
0
0
0
10.157
8.657
6.657
4.657
2.657
657
2.452.514
2.398.440
2.398.440
2.398.440
2.398.440
2.398.440
662.788
729.067
801.973
882.171
882.171
882.171
5.706.044
5.898.355
6.154.725
6.426.679
6.624.520
6.778.733
Op. Invested Capital (excl.Goodwill) Goodwill & Intangibles Cumulative Written Off & Amortized
Investments
Cum Goodwill Written Off & Amortized Deferred Income Taxes
Adjusted Equity
Retirement-Related Liabilities Interest Bearing Debt Value of Operating Leases Total Investor Funds
0
(106.549)
101
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Free Cash Flow NOPLAT
145.674
331.242
338.647
350.716
353.506
306.468
Depreciation
256.117
218.689
217.980
217.980
220.160
222.361
Gross Cash Flow
401.791
549.931
556.627
568.696
573.665
528.829
Increase in Working Capital Capital Expenditures Incr in other operating assets/liabilities Incr in Ongoing operating Provisions Inv in Operating Leases Gross Investment Free Cash Flow Excl. Goodwill Investment in Goodwill and Intangibles Free Cash Flow Incl. Goodwill AT Interest Income (Incr)/Decr Excess Mkt Sec
55.959
42.172
21.758
32.880
33.695
39.033
(318.815)
(206.861)
(217.980)
(254.310)
(256.853)
(296.481)
6.619
0
0
0
0
0
19.017
0
0
0
0
0
(28.725)
(66.279)
(72.906)
(80.198)
0
(265.945)
(230.968)
(269.127)
(301.628)
(223.157)
(257.449)
0
135.846
318.963
287.500
267.069
350.508
271.380
0
0
0
0
0
0
135.846
318.963
287.500
267.069
350.508
271.380
66.082
41.322
44.473
48.064
51.360
54.769
(247.624)
(234.106)
(205.222)
(188.306)
(194.843)
(119.125)
Foreign Exchange Translation
0
0
0
0
0
(Incr)/Decr Retirement Related Assets
0
0
0
0
0
0
1.943
1.943
1.943
1.943
1.943 0
Non-operating Cash Flow
(32.492)
0
Restructuring Cash Flow
0
0
0
0
0
Extraordinary items
0
0
0
0
0
0
(78.188)
128.122
128.693
128.770
208.968
208.968
114.226
125.918
125.918
125.918
125.918
125.918
68.433
66.983
73.681
81.049
81.049
81.049
Interest on Nonoperating Component of Pension Expense
0
0
0
0
0
0
Interest on Long-term Operating Provision
0
0
0
0
0
0
0
0
0
0
0
Cash Flow Available to Investors
Financing Flow AT Interest Expense Interest on Operating Leases
Decr/(Incr) in Debt Decr/(Incr) in Operating Leases Decr/(Incr) in Retirement Rel. Liab
(131.945) (28.725)
(66.279)
(72.906)
(80.198)
0
(8.137)
1.500
2.000
0
2.000
2.000
2.000
Decr/(Incr) in Long-term Operating Provision
0
0
0
0
0
0
Payments to Minorities
0
0
0
0
0
0
Common Dividends
0
0
0
0
0
0
Preferred Dividends
0
0
0
0
0
0
Decr/(Incr) in Preferred
0
0
0
0
0
0
Decr/(Incr) in Share Capital
(92.040)
0
0
0
0
0
Total Financing Flow
(78.188)
128.122
128.693
128.770
208.968
208.968
102
EUR
2009 2010 2011 2012 2013 2014 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Economic Profit Before Goodwill Return on Invested Capital
4,6%
10,5%
10,7%
10,9%
10,7%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
2,7%
2,9%
3,1%
2,9%
1,5%
Invested Capital (Beg of Year)
3.134.974
Economic Profit (before Goodwill)
(92.889)
NOPLAT Capital Charge Economic Profit (before Goodwill)
9,3%
3.144.802
3.157.081
3.208.228
3.291.876
3.294.874
84.689
91.132
99.191
95.423
48.150
145.674
331.242
338.647
350.716
353.506
306.468
(238.563)
(246.552)
(247.515)
(251.525)
(258.083)
(258.318)
(92.889)
84.689
91.132
99.191
95.423
48.150
After Goodwill Return on Invested Capital
4,6%
10,4%
10,6%
10,8%
10,6%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
2,5%
2,7%
2,9%
2,7%
1,3%
Invested Capital (Beg of Year) Economic Profit (after Goodwill)
3.181.815 (96.453)
NOPLAT Capital Charge Economic Profit (after Goodwill)
EUR
3.191.643 81.017
3.203.922 87.460
3.255.069 95.519
3.338.717 91.750
9,2%
3.341.715 44.478
145.674
331.242
338.647
350.716
353.506
306.468
(242.127) (96.453)
(250.225) 81.017
(251.187) 87.460
(255.197) 95.519
(261.755) 91.750
(261.990) 44.478
2009 2010 2011 2012 2013 2014 ------------------ ---------------------- -------------------- ------------------ ------------------ ------------------
Working capital Op Cash: % Revenue Operating cash
2,0% 46.877
2,0% 46.877
2,0% 46.877
2,0% 47.346
2,0% 47.820
2,0% 48.776
Inventories: % Revenue Inventories
0,1% 2.075
0,2% 4.688
0,2% 4.688
0,2% 4.735
0,2% 4.782
0,2% 4.878
Acc Rec: % Revenues Accounts receivable
1,8% 41.791
1,5% 35.158
1,5% 35.158
1,5% 35.510
1,5% 35.865
1,5% 36.582
Acc. Pay: % Revenues Accounts payable
5,7% 132.671
6,0% 140.632
6,0% 140.632
6,0% 142.038
6,0% 143.459
6,0% 146.328
3,9% 91.053
3,0% 70.316
3,0% 70.316
3,0% 71.019
3,0% 71.729
3,0% 73.164
44,5% 1.043.154
44,0% 1.031.302
44,0% 1.031.302
44,0% 1.041.615
44,0% 1.052.031
44,0% 1.073.072
(994.029) (55.534) -42,4%
(1.014.895) (20.866) -43,3%
OCA: % Revenues Other current assets OCL: % Revenues Other current liabilities Total operating working capital WC increase/(decrease) WC: % Revenues
(1.014.895) (1.025.044) (1.035.294) (1.056.000) 0 (10.149) (10.250) (20.706) -43,3% -43,3% -43,3% -43,3%
103
EUR Revenues
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ -----------------2.343.868 2.343.868 2.343.868 2.367.307 2.390.980 2.438.799 2.487.575 2.537.327 2.588.073 2.639.835 2.692.632 2.746.484 2.801.414 2.857.442 2.914.591 2.972.883 3.032.340
Adjusted EBITA
170.840
373.924
382.289
395.870
398.903
346.260
Taxes on EBITA
(32.602)
(42.682)
(43.642)
(45.154)
(45.397)
(39.792)
Change in Deferred Taxes NOPLAT
EUR
7.436
0
0
0
0
0
145.674
331.242
338.647
350.716
353.506
306.468
323.385
329.852
336.450
343.179
350.042
357.043
364.184
371.467
378.897
386.475
394.204
289.429
295.218
301.122
307.145
313.288
319.553
325.945
332.463
339.113
345.895
352.813
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Op. Invested Capital (excl.Goodwill)
3.144.802
3.157.081
3.208.228
3.291.876
3.294.874
3.329.962
3.656.736
3.729.870
3.804.468
3.880.557
3.958.168
4.037.332
4.118.078
4.200.440
4.284.449
4.370.138
4.457.540
Op. Invested Capital (incl.Goodwill)
3.191.643
3.203.922
3.255.069
3.338.717
3.341.715
3.376.803
3.703.577
3.776.711
3.851.309
3.927.398
4.005.009
4.084.173
4.164.919
4.247.281
4.331.290
4.416.979
4.504.381
135.846
318.963
287.500
267.069
350.508
271.380
222.083
226.525
231.055
235.677
240.390
245.198
250.102
255.104
260.206
265.410
Free Cash Flow Incl. Goodwill
EUR
(37.344)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Economic Profit Before Goodwill Return on Invested Capital
4,6%
10,5%
10,7%
10,9%
10,7%
9,3%
8,7%
8,1%
8,1%
8,1%
8,1%
8,1%
8,1%
8,1%
8,1%
8,1%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
2,7%
2,9%
3,1%
2,9%
1,5%
0,9%
0,2%
0,2%
0,2%
0,2%
0,2%
0,2%
0,2%
0,2%
0,2%
0,2%
Invested Capital (Beg of Year) Economic Profit (before Goodwill)
NOPLAT Capital Charge Economic Profit (before Goodwill)
3.134.974 (92.889)
8,1%
3.144.802
3.157.081
3.208.228
3.291.876
3.294.874
3.329.962
3.656.736
3.729.870
3.804.468
3.880.557
3.958.168
4.037.332
4.118.078
4.200.440
4.284.449
4.370.138
84.689
91.132
99.191
95.423
48.150
28.360
8.530
8.700
8.875
9.052
9.233
9.418
9.606
9.798
9.994
10.194
145.674
331.242
338.647
350.716
353.506
306.468
289.429
295.218
301.122
307.145
313.288
319.553
325.945
332.463
339.113
345.895
352.813
(238.563)
(246.552)
(247.515)
(251.525)
(258.083)
(258.318)
(261.069)
(286.688)
(292.422)
(298.270)
(304.236)
(310.320)
(316.527)
(322.857)
(329.314)
(335.901)
(342.619)
(92.889)
84.689
91.132
99.191
95.423
48.150
28.360
8.530
8.700
8.875
9.052
9.233
9.418
9.606
9.798
9.994
10.194
After Goodwill Return on Invested Capital
4,6%
10,4%
10,6%
10,8%
10,6%
9,2%
8,6%
8,0%
8,0%
8,0%
8,0%
8,0%
8,0%
8,0%
8,0%
8,0%
WACC
7,6%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
7,8%
Spread
-3,0%
2,5%
2,7%
2,9%
2,7%
1,3%
0,7%
0,1%
0,1%
0,1%
0,1%
0,1%
0,1%
0,1%
0,1%
0,1%
0,1%
Invested Capital (Beg of Year) Economic Profit (after Goodwill)
NOPLAT Capital Charge Economic Profit (after Goodwill)
3.181.815 (96.453)
3.191.643 81.017
3.203.922 87.460
3.255.069 95.519
3.338.717 91.750
3.341.715 44.478
3.376.803 24.688
3.703.577 4.858
3.776.711 5.028
3.851.309 5.202
3.927.398 5.380
4.005.009 5.561
4.084.173 5.745
4.164.919 5.934
4.247.281 6.126
4.331.290 6.322
8,0%
4.416.979 6.522
145.674
331.242
338.647
350.716
353.506
306.468
289.429
295.218
301.122
307.145
313.288
319.553
325.945
332.463
339.113
345.895
352.813
(242.127) (96.453)
(250.225) 81.017
(251.187) 87.460
(255.197) 95.519
(261.755) 91.750
(261.990) 44.478
(264.741) 24.688
(290.360) 4.858
(296.094) 5.028
(301.943) 5.202
(307.908) 5.380
(313.993) 5.561
(320.199) 5.745
(326.530) 5.934
(332.987) 6.126
(339.573) 6.322
(346.291) 6.522
104
Name - pessimistic scnario Revenue growth Revenue
Detailed Forecast
Key driver forecast
CV Yr
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------0.0% 1.0% 1.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2,343,868 2,343,868 2,367,307 2,390,980 2,438,799 2,487,575 2,537,327 2,588,073 2,639,835 2,692,632 2,746,484 2,801,414 2,857,442 2,914,591 2,972,883 3,032,340
Adjusted EBITA margin Adjusted EBITA
16.0% 373,924
16.3% 382,289
16.7% 395,870
16.7% 398,903
14.2% 346,260
13.0% 323,385
13.0% 329,852
13.0% 336,450
13.0% 343,179
13.0% 350,042
13.0% 357,043
13.0% 364,184
13.0% 371,467
13.0% 378,897
13.0% 386,475
13.0% 394,204
Cash tax rate NOPLAT
11.4% 331,242
11.4% 338,647
11.4% 350,716
11.4% 353,506
11.5% 306,468
10.5% 289,429
10.5% 295,218
10.5% 301,122
10.5% 307,145
10.5% 313,288
10.5% 319,553
10.5% 325,945
10.5% 332,463
10.5% 339,113
10.5% 345,895
10.5% 352,813
Closing Net PPE as % Revenues Net PPE
155.0% 3,632,995
155.0% 3,632,995
155.0% 3,669,325
155.0% 3,706,019
155.0% 3,780,139
165.0% 4,104,499
165.0% 4,186,589
165.0% 4,270,321
165.0% 4,355,727
165.0% 4,442,842
165.0% 4,531,699
165.0% 4,622,333
165.0% 4,714,780
165.0% 4,809,075
165.0% 4,905,257
165.0% 5,003,362
Other Invested Capital as % Revenues Other Invested Capital Invested Capital (pre-Goodwill)
-20.3% (475,915) 3,157,081
-18.1% (424,767) 3,208,228
-15.9% (377,449) 3,291,876
-17.2% (411,145) 3,294,874
-18.5% (450,177) 3,329,962
-18.0% (447,764) 3,656,736
-18.0% (456,719) 3,729,870
-18.0% (465,853) 3,804,468
-18.0% (475,170) 3,880,557
-18.0% (484,674) 3,958,168
-18.0% (494,367) 4,037,332
-18.0% (504,254) 4,118,078
-18.0% (514,340) 4,200,440
-18.0% (524,626) 4,284,449
-18.0% (535,119) 4,370,138
-18.0% (545,821) 4,457,540
Cumulative Goodwill Invested Capital Net Investment
46,841 3,203,922
46,841 3,255,069
46,841 3,338,717
46,841 3,341,715
46,841 3,376,803
46,841 3,703,577 326,774
46,841 3,776,711 73,135
46,841 3,851,309 74,597
46,841 3,927,398 76,089
46,841 4,005,009 77,611
46,841 4,084,173 79,163
46,841 4,164,919 80,747
46,841 4,247,281 82,362
46,841 4,331,290 84,009
46,841 4,416,979 85,689
46,841 4,504,381 87,403
105
