Asset Turnover Analysis: Turnover Rate of Invested Capital

consumption, which may depend on the fleet and fleet efficiency. High fuel efficiency can be linked to newer aircrafts or specific types of aircrafts. On all flights in general, fuel is consumed regardless of revenue and load factors. Consequently, it is relevant to measure fuel expenses in relation to capacity in terms of ASK. Table 12 shows this measure for Lufthansa and its peers.

Fuel expenses of easyJet and SAS have been translated to EUR million using the following FX rates from xe.com:

FX Rates 2013 2014 2015 2016 2017

EUR/GBP (December) 1.19818 1.28769 1.3554 1.17489 1.12553 SEK/EUR (October) 8.78065 9.25537 9.36082 9.91655 9.72937

Table 11 - FX Rates, Based on xe.com

The industry-wide decrease in Fuel Expense per ASK for all airlines can be explained the previously seen drop in oil prices, together with higher fuel efficiencies for all fleets due to newer airplanes (Cooper, et al., 2018).

Fuel Expense per

ASK (in EUR cents) 2013 2014 2015 2016 2017 Average

Lufthansa 2.71 2.52 2.11 1.70 1.62 2.13

Air France-KLM 2.53 2.45 2.23 1.65 1.57 2.09

easyJet 1.91 2.03 1.94 1.49 1.25 1.72

IAG 2.58 2.38 2.21 1.62 1.51 2.06

Ryanair 1.61 1.61 1.55 1.47 1.21 1.49

SAS 2.31 2.11 2.03 1.45 1.45 1.87

Average 2.27 2.18 2.01 1.56 1.44 1.89

Table 12 - Fuel Expenses per ASK for Lufthansa and its Peers, Own Calculations Based on Annual Reports

high revenues coming from investments. The ratio is calculated using the following formula and expresses the amount of revenue generated per invested Euro (Petersen & Plenborg, 2012):

𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Calculated Turnover Rates of Invested Capital for Lufthansa and the comparable companies can be seen in Table 13 below:

Turnover Rate of

Invested Capital 2013 2014 2015 2016 2017 Average

Lufthansa 2.23 2.01 1.83 1.73 1.87 1.93

Air France-KLM 2.10 1.67 1.75 1.46 1.50 1.70

easyJet 1.43 1.47 1.48 1.27 1.39 1.41

IAG 1.70 1.46 1.32 1.34 1.34 1.43

Ryanair 1.13 1.16 1.32 1.41 1.23 1.25

SAS 1.39 1.11 1.09 0.96 1.09 1.13

Average 1.66 1.48 1.46 1.36 1.40 1.47

Table 13 - Turnover Rates of Invested Capital for Lufthansa and its Peers, Own Calculations Based on Annual Reports

Lufthansa’s Turnover Rate of Invested Capital was 1.87 in 2017, indicating revenues of EUR 1.87 are generated for every Euro the airline invested in operations (Petersen & Plenborg, 2012). Following this logic, Lufthansa had its invested capital tied up for 365/1.87 = 195 days in 2017. The decreasing trend for Lufthansa in the years 2013 to 2016 similarly expresses that the airline has become less efficient in utilizing its invested capital. From Lufthansa’s analytical balance sheet, it is observed that increases in Invested Capital exceed increases in Revenue, causing a declining turnover rate of invested capital. Looking at Turnover Rates of Invested Capital for Lufthansa’s peers, it is evident that this trend is general for the industry due to the same reasons. However, in 2017 slight increases in the turnover rates are observed for Lufthansa and most of its peers as illustrated in Figure 22.

Figure 22 - Turnover Rate of Invested Capital of Lufthansa and its Peers, Own Cculations Based on Annual Reports

Lufthansa managed to maintain the highest turnover rates compared to its peers over the entire period 2013 - 2017. Trend analyses and common-size analyses of Lufthansa’s and the peers’

analytical balance sheets, which can be found in Appendix 9, were conducted to further analyze the causes of these trends.

6.1.5.1 Trend Analysis and Common-Size Analysis of Lufthansa’s Analytical Balance Sheet The trend analysis of Lufthansa’s analytical balance sheets shows that Invested Capital increased by 40% from 2013 to 2017, as Total Operating Assets increased by 35.70% during this period, while Total Operating Liabilities appreciated by only 28.20%.Together with lower growth in Net Revenues it resulted in declining turnover rates for the period 2013 – 2016.

Through higher net revenue growth in 2017, the rate improved again in 2017.

Additionally, it is relevant to analyze the positions of Lufthansa’s balance sheet accounting items in terms of impact and importance to Invested Capital. A variation of a common-size analysis is conducted, in which Days on Hand for each accounting item expresses the number of days the respective item consumes cash. Days on Hand for Lufthansa’s balance sheet accounting items are shown in Appendix 9 and are calculated using the following equation (Petersen & Plenborg, 2012):

𝐷𝑎𝑦𝑠 𝑜𝑛 𝐻𝑎𝑛𝑑 = 365

𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

0 0,5 1 1,5 2 2,5

2013 2014 2015 2016 2017

Turnover Rate of Invested Capital

Lufthansa Air France-KLM easyJet

IAG Ryanair SAS

Firstly, Days on Hand for Invested Capital for Lufthansa and its peers are shown in Table 14.

Days on Hand of

Invested Capital 2013 2014 2015 2016 2017 Average Lufthansa 163.85 181.59 199.97 210.78 195.06 190.25 Air France-KLM 173.93 218.76 208.46 250.60 242.96 218.94 easyJet 254.59 248.01 246.92 286.90 263.25 259.93

IAG 214.88 250.38 277.54 271.87 272.72 257.48

Ryanair 322.70 316.01 277.27 259.06 295.77 294.16

SAS 262.22 328.42 334.30 380.57 335.65 328.23

Average 219.41 246.78 249.49 268.02 260.10 248.76

Table 14 - Days on Hand of Invested Capital for Lufthansa and its Peers, Own Calculations Based on Annual Reports

An appreciation from year 2013 to 2016 followed by a decline in 2017 is observed, which could be expected given the similar decrease in Turnover Rates of Invested Capital in 2013 – 2016 followed by an increase in 2017. Days on Hand of 195.06 in 2017 reveals that it takes Lufthansa 195.06 days on average to turn Invested Capital into Revenue. Lufthansa generally has lower Days on Hand on Invested Capital than its peers, meaning that the company is quicker at generating revenue from invested capital. This is obvious given Lufthansa’s higher Turnover Rates of Invested Capital. Appendix 9 shows that large contributors to Days on Hand are the items Aircraft and Reserve Engines as well as Trade Receivables.

6.1.5.2 Aircrafts and Engines and Capitalized Operating Leases

Given the nature of the aviation business, it is unsurprising that large investments are made in aircrafts and related assets. In 2017, Lufthansa’s book value of Aircraft and Reserve Engines amounted to EUR 15,959 million, representing more than half of Lufthansa’s total book value of Operating Assets (Appendix 3). Table 15 shows Days on Hand for Aircrafts and Engines for Lufthansa and its peers.

Days on Hand for

Aircrafts & Engines 2013 2014 2015 2016 2017 Average Lufthansa 148.11 162.80 163.86 168.27 161.48 160.90 Air France-KLM 132.47 126.13 120.78 132.14 138.53 130.01 easyJet 192.77 202.15 221.02 250.74 251.44 223.62

IAG 198.29 210.32 215.33 195.05 185.64 200.93

Ryanair 361.62 361.64 348.35 344.91 390.65 361.43

SAS 73.79 71.31 64.36 75.24 66.70 70.28

Average 184.51 189.06 188.95 194.39 199.07 191.20

Table 15 - Days on Hand for Aircrafts and Engines for Lufthansa and its Peers, Own Calculations Based on Annual Reports

Lufthansa’s Days on Hand for this item was 161.48 in 2017, indicating the number of days before revenue is generated from the investment. Compared to its peers, Lufthansa is relatively effective in utilizing its investments, and in 2017 is only beaten by SAS, which has less than half of Lufthansa Days on Hand, and by Air France-KLM. This might be due to SAS having an older fleet than Lufthansa and the other competitors, resulting in lower book value of aircrafts for SAS.

An inclining trend in book value for Aircrafts and Engines is revealed in analytical financial statements (Appendix 3), which can be linked to Lufthansa’s business growth in 2017, mainly due to consolidations of Brussels Air and wet-lease contracts from airberlin (Lufthansa Annual Report, 2017). Moreover, on-going investments are done in new aircrafts that are more efficient in terms of fuel and passenger comfort.

Table 16 shows Days on Hand for Capitalized Operating Leases, revealing Lufthansa’s strong position in turning those investments into revenue in shorter time than its peers.

Days on Hand for Capitalized Operating Leases

2013 2014 2015 2016 2017 Average

Lufthansa 7.34 7.05 7.66 11.77 10.47 8.86

Air France-KLM 144.89 174.60 174.40 185.48 178.74 171.62

easyJet 16.40 15.90 15.83 15.81 19.62 16.71

IAG 125.67 138.38 140.63 166.66 163.72 147.01

Ryanair 88.45 91.63 86.15 55.74 54.80 75.35

SAS 1.71 1.25 1.19 1.08 1.16 1.28

Average 64.077 71.47 70.98 72.76 71.42 70.14

Table 16 - Days on Hand for Capitalized Operating Leases for Lufthansa and its Peers, Own Calculations Based on Annual Reports

Days on Hand for Capitalized Operating Leases are very low for Lufthansa, SAS, and easyJet, because they own most of their airplanes, while a large number of Air France-KLM and IAG’s fleet consists of leased aircrafts.

In document Valuation of (Sider 57-61)