Contents Page:
Letter of Authentication Acknowledgments Executive Summary Research Proposal
1 2 3 4
Introduction Methodology
6 6
Main Results & Findings Current Market Position
7 7
Analysis and Evaluation Investment Appraisal Investment Project I Investment Project II Non-finacial Analysis SWOT Analysis PEST Analysis
9 10 11 12 13 13 13
Conclusions and Recommendations
14
Bibliography Appendices
15 16
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Acknowledgments
I would like to acknowledge and thank: •
Mr Giannis Dardoufas, easyJet Athens Station General Manager for his time and important data he offered during the interview.
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Executive Summary The management and main shareholders of easyJet plc. have recently expressed interest in growing their business considering the increased demand for private healthcare and more specifically diagnostic services in Greece. As the operational core of the business focuses on this market segment, the report analyses: “Should easyJet plc. further penetrate the Greek market? If yes, should the expansion plan be organic or via a takeover?” The first part of the report deploys the research proposal which presents the research rational, the theoretical framework as well as the methodology followed. Following, an introductory note outlines details of the company as well as sketches the hypothesis of the research. The analysis part is based on both primary and secondary research in the form of personal interviews with the top management (Figure 3), collection of financial reports, and independent sector analysis from the largest market research company in Greece. These data allowed for a detailed evaluation on a financial level (Investment Appraisal and Corporate Financial Analysis) and on a non-financial level (SWOT, PEST). The conclusions part deploys an assessment of the two possible investment options for easyJet plc. On the one hand, there is a long term, heavy investment project of investing on a large competitor while on the other hand; there is the option of launching a new diagnostic centre anew. Although the ‘new location’ project returns a positive NPV compared to the ‘Equity Purchasing’ which returns a lower NPV, it is important to consider the long term strategic plan of the company and the non-financial analysis. The discussion part suggests that the second option forms a more attractive investment opportunity of easyJet.
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Research Proposal
Research Question “Should easyJet further penetrate the market for air travel between the UK and Greece? If yes, should the expansion plan be organic or via a takeover?” Rationale An investment dilemma is explored whereby easyJet Ltd. UK’s largest low-cost carrier assesses two investment opportunities. On the one hand, the firm examines the possibility of launching a new route between London and Volos in mainland Greece. On the other hand, the firm estimates the possibility of purchasing a majority stake in a Greek competitor who operates charter flights from the UK to Chania airport in Crete. The aim is for easyJet to expand its network to leisure destinations around Greece. Theoretical Framework The analysis of this report is based on a twofold approach. Both financial and nonfinancial considerations will evaluate the potential feasibility of each investment project. Key Areas of Syllabus •
Growth and Evolution
•
Company Analysis
•
The external Environment
•
Investment Appraisal
Methodology The procedure of the study was carried-out at primary and secondary level. Primary Research was conducted with the general manager of easyJet’s station in Athens International Airport (AIA). The company’s representative in Greece was interviewed 4
in order to identify company’s future strategic and financial plan. The interview also contributed to the author’s knowledge and appreciation related to the industry’s structure in Greece, as well as its operating procedures, venture risks and the structure of the company. Secondary Research was carried-out as well in order to collect data and information related to the industry, the market and the environment (internal and external) within the company is operating. The data were collected from various sources such as an industry report and insight on cost structure and market analysis in Greece for year 2009, company’s specific information on strategy and future expansion plans of easyJet plc. and several other resources libraries referring to the Greek legal framework and its characteristics related to the subject.
Possible Problems: Biased interview questions because of vested interests Limited point of view as only two interviews have been carried out A degree of risk associated with the company’s unwillingness to provide confidential data
Solutions: Verification of data by using other secondary resources Complementary information from independent sources Ensure data availability in advance
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Introduction EasyJet plc. Was " first in February 1994 serving domestic routes in the UK. It has been a product of the deregulation in the airline industry and Sir S. Hadji-Ioannou’s entrepreneurial will. In 2010, sixteen years afterwards, the number of city pairs served by the airline have increased to 254 and competition has been continuously increasing by the emergence of a large number of competing low-cost carriers. Traditional airlines such as British Airways and Olympic Air have been fully adapted to the new challenge, offering simpler and lower cost airfares on routes served by easyJet. The company under examination has gained a unique selling point by providing point-topoint services and by removing onboard and airport frills such as free cabin service and pre-assigned seating. Moreover, the heavily invest in growing their network from secondary airport in order to achieve more efficient, on-time and lower cost flights. The financial performance is depicted in the two figures below. Figure 1: “easyJet plc.” financial performance
Years 2006 2007 2008 2009 2010
Revenue (€) 129.200.000 191.300.000 123.100.000 43.700.000 188.300.000
Cost of Sales (€) 90.440.000 133.910.000 86.170.000 30.590.000 131.810.000
Operating Costs (€) 15.504.000 22.956.000 14.772.000 5.244.000 22.596.000
Net Profit (€) 23.256.000 34.434.000 22.158.000 7.866.000 33.894.000
Figure 2: “easyJet plc.” financial performance graph 250.000.000 Revenue (€) Net Profit (€)
200.000.000
150.000.000
100.000.000
50.000.000
0 2006
2007
2008
2009
2010
Source: easyJet Financial Analysis
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This thesis aims at carrying out a feasibility study investigating two investment alternatives for easyJet plc. The first investment opportunity relates to launching a new route between Gatwick, London’s second largest Airport and the city of Volos which features an emerging tourist destination for many UK travelers during summer months. The second investment opportunity relates to an institutional investment of easyJet Charters plc., a subsidiary of easyJet plc., to acquire a small Greek charter operator called HellasJet. The company currently operates charter flights from major EU airports to holiday destinations in Greece with a greater emphasis to Chania airport, west of Herakleion, Crete’s main airport. The second project refers to a purchase of 22% of equity via collecting shares from the stock exchange. Despite increased controversy from the ownership of easyJet plc. The management of both airlines will create synergistic benefits to both parties and will lead to increase in the value of both companies.
Main Results and Findings Current Market Position In many ways 2010 could be seen as a defining year for the low-cost carrier model.. In contrast to traditional airlines, low-cost carriers have achieved a relatively smooth weathering of the recession and a lot better than the fuel-driven crisis of 2008. The following table gives a clear indication that the profitability of the sector has held up relatively well. It is evident that only two of the top 20 carriers under examination (Flight, 2010), lost money in their financial years ending during 2010. This marks an improvement on the six that were in the red at an operating level in 2009. It is important to mention that the data below are estimated in US Dollars and account for the entire group of companies easyJet and other carriers hold; hence a discrepancy between the two tables. At net level, the 27 carriers for which figures were available (Flightglobal, 2010) generated a combined profit of more than $1 billion in 2010. Contrast this with the small net loss they incurred in 2008 and the $9.4 billion the International Air Transport Association (IATA) estimates its members lost collectively in 2010, and the picture of a robust performance emerges.
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Table 1: Airline Revenues Airline
2010 Revenues
Change in $
Southwest Airlines
$10.4bn
-6.1%
Air Berlin
$4.6bn
-9.2%
Ryanair
$4.1bn
6.9%
EasyJet
$4.1bn
-11.8%
JetBlue Airways
$3.3bn
-3.0
Gol
$3.1bn
-12.9%
AirTran Airways
$2.3bn
-8.3%
WestJet Airways
$2.0bn
-15.8%
Virgin Blue Airways
$1.9bn
-10.2%
Aer Lingus
$1.7bn
-15.7%
Source: Flight Global, 2010
Mature Industry Growth has always been central to the profitability of low-cost carriers, but the reduction on capacity being evident in more mature low-cost markets such as the European and North American, has required the creation of different ways to raise revenues. This has been the lead for airlines to aggressively target cost-conscious business travelers who wish to trade down, to increase co-operation efforts and take immediate measures to gain more ancillary revenues from onboard sales and other services not provided on the fare. Low-cost carriers give greater attention to revenues then they have had in the past, due to their need to raise revenue per passenger flown. The fact that competitive forces combined with increasing fuel costs reduce the potential for high profit margins, airlines wish to cross-sell to the captive market they control. Without the growth effect these carriers have worked on other ways to improve their revenues, lifting top-fare limits and moving into the Global Distribution Systems. A more cautious capacity approach has also been evident in Europe, but consolidation has helped individual carrier growth. Vueling's merger with fellow Barcelona budget operation Clickair enabled the former to grow its share, but both carriers had markedly scaled back capacity prior to the tie-up. Elsewhere carriers have moved into gaps created by low-cost carriers casualties, for example central Europe's Wizz Air benefiting from the collapse of SkyEurope and Ryanair moving into former MyAir bases in Italy (FlightGlobal, 2010). They also continue to heap pressure on retrenching network carriers, where Association of European Airline members carried 20 million fewer passengers in 2009, expanding in key markets. By contrast, 8
passenger numbers across European Low Fares Airline Association members were 8.7% higher at 162.5 million in 2009 (FlightGlobal, 2010). European low-cost operators continue to push the envelope on ancillary revenues, growing in a diverse range of directions. But Ryanair's ambitions to use mobile telephony as the platform for a range of additional future services have taken a hit by the recent decision of its service provider OnAir to walk away from a deal to equip its full fleet (FlightGlobal, 2010).
Analysis/Evaluation Having explored the environment in which easyJet plc. operates and despite several challenges it faces on the external environment, it is a well established, successful and profitable organization, that now faces the opportunity for further development and market penetration. This penetration is to be achieved by following one of two obvious courses. The first project opportunity, involves organically launching the new route from London to Volos. The second option represents investing into another, existing, major player in the Greek market, HellasJet. Specifically, the latter option would correspond to the purchase of 22% of the larger company’s equity, on the stock exchange. In order to further evaluate which course of action would prove to be the most beneficial, it is necessary to carry out an assessment of the financial as well as the non-financial factors that influence such a decision.
Investment Appraisal Investment appraisal is the planning process used to determine a firm's long term investment such as new and replacement machinery, new plants, new products, and research and development projects.
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For the purposes of this report, the NPV and payback period methods have been used in order to evaluate the two investment options that faced by the firm. The NPV analysis has been carried out to assist the author’s estimations of the inflows received by the firm in the first three years of operations, net of the effect of inflation and opportunity cost. Additionally, the payback period has been used in order to estimate the time required for the return on the two different investment options to "repay" the sum of the original investments. The formulas for the Net Present Value and for the payback period are shown below:
Net Present Value
Payback period
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Investment Project I: ‘Investment in a new route from London Gatwick to Athens International Airport. Table 1 depicts the investment appraisal calculations, projected over a 5 year investment period, in the event that the option of launching the newroute is chosen. Table 1: Financial Analysis & Investment Appraisal of ‘Route London - Athens’ Initial costs
€ (thousand)
Administation Marketing Facillities Council taxes Compliance costs Aircraft Total Expected Inflows Year
Revenues 1 2 3 4 5
50620 151859 455578 1366733 4100200
Costs 46570 139711 419132 1257395 3772184
60 800 118 180 550 4200 5,908 Profits (FV)
Discounting Factor Interest: 2%
4050 12149 36446 109339 328016 489999
0,98 0,961 0,942 0,924 0,906 PV= Initial cost NPV=
Present Value 3969 11675 34332 101029 297183 448,187 5,908 442,279
Source: Author The cost of sales and operating costs are estimated at 92% of total revenue, whereas the discount rate of 2% represents the interest rate charged by the European Central Bank currently set for as Euribor. In this case the discount rate reflects the opportunity costs incurred by investing in the launch of the new diagnostic centre as opposed to an alternative, perhaps safer investment such as government bonds. The project’s Present Value is anticipated to generate a positive NPV of 442.279€. Table 1.1.: Payback Period of ‘Route London – Athens’
Payback Period
‘New Route’
Years 1 year and 56 days
Source: Author
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It is estimated that if easyJet plc. decides to invest in launching the new route will break even in 1 year and 56 days.
Investment Project II: ‘Investment through Equity purchasing in HellasJet S.A.’ Table 2 similarly portrays the respective calculations for the second project scenario of investing in HellasJet via purchasing 22% of the company’s equity on the stock exchange. Table 2: Financial Analysis & Investment Appraisal of ‘Equity Purchasing’ in HellasJet S.A. Initial costs
€ (thousand)
Administation Marketing Facillities Council taxes Compliance costs Aircraft Total Expected Inflows Year
Revenues 1 2 3 4 5
39115 117344 352032 1056097 3168292
Costs 35986 107957 323870 971610 2914829
62 680 118 220 550 2100 3,730 Profits (FV) 3129 9388 28163 84488 253463 378630
Discounting Factor Interest: 2%
Present Value
0,98 0,961 0,942 0,924 0,906
3067 9021 26529 78067 229638 346,322 3,730 342,592
PV= Initial cost= NPV=
Source: Author In this circumstance, the initial outlay (22% of the company’s market value) comprises the single majority stake in the company as the second largest investor holds nearly 16% of the company. This results in a lower NPV over the short term period, which at first glance means that such an investment does not appear favourable. However, this may not depict this investment’s full potential, unless it is projected over a medium-long term basis or quantified by other means and measures. 12
Interestingly, despite the larger initial outlay involved in buying equity in the established airline, the Pay-Back period for the second investment opportunity is a little shorter, signifying that the investment is expected to be paid back faster than project 1. Table 2.1.: Payback Period of ‘Equity Purchasing’ in HellasJet S.A.
Payback Period
‘Hellas Jet Acquisition’
Years 1 year and 23 days
Source: Author
Non-finacial Analysis In order for easyJet plc. to decide the best path to its future development, it is necessary to explore also the non-financial factors that influence this decision making process and evaluation. This is facilitated with the SWOT analysis.
SWOT1 Analysis EasyJet offers a high quality service at rock bottom prices and offer a number of features including ticketless travel, internet booking and assisted travel services for an additional cost over and above the initial travel fare. They have a highly distinctive orange colour on all of their fleet of aircraft in order to make them easily recognisable and provide free of charge advertising of their airline’s way to book tickets. They have a simple and functional website which deploys the price breakdown of the passenger’s travel plan. Offering a full breakdown of the price plan prevents any hidden charges when the customer confirms there booking and reduces inconvenience and stress. EasyJet offers an online promotion alert which is e-mailed to existing customers and contact on the company’s database that informs potential customers of the ongoing offers, discounts and coupon rates. It has been an increasingly recognizable brand in the UK. Moreover, it operates a fast and efficient service with an average turnaround time of 30 minutes or below which allows for an increased use of aircraft and cabin crew. Also, this enables the airline to maintain a reliable and hassle free service to their passengers. As far as weaknesses are concerned, easyJet’s main competitors being Jet2, BMI Baby, Ryan Air plus a host of smaller independent competitors can restrict and shape pricing policy on some of its less profitable routes 1
Interview with Mr Dardoufas
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as they seek to compete with their competitors. Furthermore, they do not offer a free food service on longer flights of 2 hours plus which may reduce the interest of some passengers to other airlines. The possible opening of additional routes to major business and tourism destinations in Europe may provide the sole important opportunity for future growth. In addition, purchasing fuel in advance may reduce the risk of the airline paying more in the future. Finally, pressure from trade unions and employee relations may drastically impact on the daily operations with potential strikes proving to be very costly to the company’s survival. The economic downturn may lead to a decrease in frequent flyers and corporate travel as companies will seek to cut less necessary expenditure leading to less business trips.
PEST2 Analysis As far as external political factors are concerned, an EU east-enlargement may provide access to viable, new markets with relatively increasing income to spend on short trips. The economic factors consider the likelihood of increasing fuel costs, congestion and other environmental restrictions, as well as the prospect of higher security and insurance costs to reflect the risk of terrorism. Moreover, as the recession is likely to last for a considerable period, business travellers will become increasingly conscious of their travel expenses. The socio-cultural factors entail winning over the French and German publics and causing problems as there appears still to be a general unwillingness to use credit cards over the phone or Internet. The public is general quite friendly to the prospect of cheap flights. However they may feel begrudged where they see promotions found in newspapers where flight are for €10 only to find that the actual cost is much higher for the specific time or day they wish to fly on. A key issue will be the extent to which technological advancements – such as the use of the Internet on distribution and cost synergies from industry consolidation – can offset upward
2
pressures
on
prices
and
costs.
Flight Flobal, 2009
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Conclusions and Recommendations According to the findings, the corporate management of easyJet plc. will make a decision according to the business strategy that has formed for the company’s future. More precisely, if the management wishes to proceed with a long term and relatively higher investment, then the optimal choice would be the organic growth option. This is due to the fact that it requires a substantially higher start up cost and is expected to return that investment in a longer term period. On the other hand, if the management wishes to make a relatively shorter term investment, acquiring a stake in rival HellasJet S.A., requires a lower amount of money, a shorter term return for the investment. Consequently, launching a new operation would be more favourable. The non- financial analysis illustrates that easyJet plc. may be better off purchasing the competitor since it will also eliminate competition and assist in gaining a higher share of the market. The findings of the financial analysis (investment appraisal) somewhat conflict the findings of the non-financial factors. It would therefore be beneficial to carry out a more extensive financial analysis for each scenario, covering a longer investment period and providing a greater amount of cost data. This would enable a more accurate comparison of the two investment options, as they each contain a very different initial outlay. Also, it may be helpful to adopt other methods of investment appraisal such as the Accounting Rate of Return, which are less sensitive to fluctuations in future Cash Inflows. This way, with more information that contains more detail, the management of easyJet plc. can weigh the advantages and disadvantages of each project in a clearer and a more precise way.
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Bibliography •
Hall, D. et al (2007) Business Studies, 3rd edition, Waring Collins, Essex, UK
•
ICAP Management Consultants (2008) Healthcare Industry Analysis, Athens, Greece
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Dunn, G., (2010) Low-Cost Carriers – coming of age, FlightGlobal, accessed on 8/2/2011
Websites •
www.hellasjet.com
•
http://www.easyjet.com
•
www.elfaa.com
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Appendix 1: Interview Questions Q1.Which is the core market segment that easyJet aims at? Q2. Is there a considerable market growth on the core target market? Q3.What is the forecasted trend of the UK to Greece tourism model in the future?Is there a significant growth potential that would allow the company to profitably invest in expansion? Q4. What are the expansionary alternatives that the company is currently considering in its business plan? Q5. What are the potential advantages and disadvantages of launching a new route? Q6 What are the potential advantages and disadvantages of buying equity on a potential competitor’s business? Q7. Is there a different level of risk associated with launching a new route compared to investing on an existing airline with established business? Q8. Would there be any diffusion of the corporate strategy? Q9. Which are the areas that the company considers expanding at in terms of geographic region? Q10. Which are the strengths of the company? Q11. What other weaknesses does the company have? Q12. Which are the opportunities of the company? Q13. Which are the threats of the company? Q14. Do you consider the current austerity measures taken in Greece to be a deterring factor to the growth of the airlines network in the specific area?
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