Economic Value Added Analysis

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6.3.4.4 Sensitivity towards Market Share, Non-seat Revenues, Fuel, and Ground Operations

Varying (i) market share, (ii) non-seat revenues, (iii) fuel price, and (iv) ground operation costs concludes: An increase of 3% in the jet fuel price, results in a 35.3% decrease of the implied share price to 1,142.1 pence.

Going hand in hand with the previous finding that jet fuel prices are an important value driver for easyJet, and airline in general. A 0.5% increase in easyJet’s market share, results in a 22.7% increase in the implied share price driving it to 2,167.1 pence. A decrease in easyJet’s ground operations of 3% of the estimated base case,

could lead to an increase of 45.0% of the implied share price, i.e. 2,562.0 pence. The model sensitivity towards an improvement in the non-seat revenue growth per passenger of 6% is only minor, as it leads to an increase of 0.4%, and respectively an implied share price of 1,779.9 pence. For all four it can be seen, that they have a large impact on the implied share price, too.

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6.4.1 Implied Share Price

The description of the EVA model points to its key input: (i) the return on investments made, (ii) the cost of capital for investments made, and (3) the capital required for investments made in a specific year³²³. Consequently, easyJet’s EVA for a given year is derived by using the years modelled net operating profit after tax minus the product of capital invested in the period and the WACC. The corresponding capital invested is calculated by using the periods initial capital invested, amended by the net change in working capital and net CapEx.

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 𝐴𝑑𝑑𝑒𝑑 = 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 − (∑𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 ∗ 𝑊𝐴𝐶𝐶)

∑𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 + 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 + 𝑁𝑒𝑡 𝐶𝑎𝑝𝐸𝑥

Equation 42: Economic Value Added Calculation

6.4.1.1 Calculation

Firstly, the annual EVA contribution is calculated. The modelled EVA values decline, with the

largest set-backs in 2018 (-31.3%) and 2020 (-17.2%). The backswing in 2018 is mainly driven by the decrease in net operating profits of 20.8% (from GBP 387 m to GBP 300 m), the same accounts for 2020, with a decrease of 12.0%. The present value of the modelled EVAs (discounted by using the WACC of 2.7% for each forecast years) amounts to GBP 945 m. Adding the capital initially (i.e. in 2017) invested, provides an enterprise value (EV) of GBP 6,786 m. The initial investment represents 89.2% of the total enterprise value based on the model assumptions, which is a large portion and a common outcome for these models, however, below the 93.9% the terminal value accounted for in the DCF model. easyJet’s (equity) market capitalization is calculated by adding the 2017 modelled net cash position (GBP 230 m); the resulting market capitalization of easyJet is GBP 7,016 m based on the model assumptions. Dividing the total equity value by the number of shares outstanding (397.21 m) gives an implied share price of 1,766.44 pence

6.4.2 Sensitivity Analysis

As both, the DCF and the EVA model base their conclusions on the same model, they do lead to the same enterprise value, equity value and implied share price and are also subject to the same sensitivities³²⁴.

323 As the outcome of an EVA analysis heavily depends on the investments (i.e. the invested capital), it is regularly used to look into capital intensive sectors, such as e.g. the airline industry.

324 Appendix 88 provides a detailed sensitivity analysis on the EVA model.

EVA (GBPm) Projection

2017 2018 2019 2020 2021 2022 2023

Number of forecast period 1 2 3 4 5 6 7

Net operating profit after tax 378 300 300 264 241 223 205

Invested capital as WACC 169 156 146 137 128 120 112

EVA 209 144 154 128 113 103 93

Table 28: Economic Value Added Results

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6.5 TOWS: Threats, Opportunities, Weaknesses, Strength Analysis

In addition to the SWOT analysis the results of a TOWS analysis are conducted in this section, referring to the relationship between easyJet’s strengths, weaknesses, opportunities, and threats, to provide a basis for exploring potential strategic options.

Strengths Weaknesses

Opportunities

(i) Focusing on economically strong countries with stable demand for travelling and room for growth

(ii) Focus on European markets allows for additional growth potential from broadening the footprint

(iii) Focusing on data and digitalization to create competitive advantages to enhance market position

(iv) In a market, driven by innovations, a technology leader can set trends and realize early-bird profits

(v) Advanced pricing system, room for non-seat revenues and price-sensitive travellers allow for growth

(vi) Operating the competitive airline industry with oligopolistic tendencies may allow for extra profits

(vii) Strong momentum with respect to development of seat revenues and costs (e.g. employee costs)

(viii) Cost focused culture allows keeping up with competition and peers in terms of aggressive prices

(ix) Strong brand name, that allows to profitably serve both, the leisure and business travellers segments

(x) Operating a homogenous fleet produces economies of scale e.g. re purchase price and maintenance

(xi) Homogenous fleet and technologically advanced maintenance allow for further cost reductions

(xii) Focusing on reduction of fuel consumption, thus being able to position as environmental friendly

(xiii) Customer and operational excellence increase customer satisfaction while reducing disruption costs

(xiv) Strong entry barriers, making it for new entrants from the outside extremely difficult to compete

(xv) Successfully weathering-out historic oil price and currency fluctuations, allows for a positive outlook

(xvi) Collecting account receivables quicker than peers and competitors allows for saving interest expense

(xvii) Executive management team with a large variety of professional backgrounds can provide new angles

Opportunities

(i) Operating the competitive airline industry with oligopolistic tendencies can bolster profits

(ii) In light of still weak non-seat revenues, their future positive development would enhance profits

(iii) Technological edge may help to create comparative advantages in the future

(iv) No access to the fast growing regions outside the mature European creates opportunities

(v) Historic refusal to participate in alliances may lead to future potential, if the strategy is adjusted

(vi) Expanding into new products, such as telecommunications or bus travel my provide opportunities

(vii) Union representation of cabin crews allows for a quick solution, if any problems arise

Strength Weaknesses

Threats

(i) Operating the competitive airline industry with oligopolistic tendencies can bolster profits

(ii) In light of still weak non-seat revenues, their future positive development would enhance profits

(iii) Technological edge may help to create comparative advantages in the future

(iv) No access to the fast growing regions outside the mature European creates opportunities

(v) Historic refusal to participate in alliances may lead to future potential, if the strategy is adjusted

(vi) Expanding into new products, such as telecommunications or bus travel my provide opportunities

(vii) Union representation of cabin crews allows for a quick solution, if any problems arise

Threats

(i) Strong dependence on the condition of the overall economy (i.e. the GDP growth rate) bears risk

(ii) Operating the competitive airline industry with oligopolistic tendencies puts pressure on profits

(iii) In light of still weak non-seat revenues, their future positive development is at least questionable

(iv) Operating top tier airports, having a strong positions there, limits future growth potential

(v) Lean, cost focused culture that aims to cut costs, provides limited room for further cost cutting

(vi) Even with a technological edge, no (strong) sustained advantages can be created in the industry

(vii) Comparing the profitability of the peers, it may be difficult to preserve current achievements

(viii) No access to the fast growing countries and regions outside the mature European core markets

(ix) Homogenous fleet bears risk, with respect to a prices increase and/or reputation (e.g. accidents)

(x) Revenues GBP- and EUR- and fuel USD-driven, provides exposure to fuel price and currency risks

(xi) Operating a capital intensive business, leads to substantial sensitivity to changes in interest rates

(xii) Operating a highly regulated market, produces unpredictable and unforeseeable risks (e.g. BREXIT)

(xiii) Refusal to participate in alliances may lead to giving-up profitable business and growth potential

(xiv) New products, such as advanced telecommunications or bus travel challenge the aircraft industry

(xv) Executive management team with on average relatively low airline expertise/background

(xvi) Union representation of cabin crews creates enhanced risk of strikes (e.g. with respect to salary)

(xvii) Airlines are exposed to catastrophes and terrorists attacks, both produce costs and endanger business

Table 29: TOWS Analysis

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In document Copenhagen Business School Master Thesis (Sider 109-112)