7.2 Pro Forma: Balance Sheet
65 and are set to their respective five-year averages. Koller et al. (2010) argue that depreciation and amortization should be projected based on tangible assets and definite intangible assets, as they easily connect to each other. These items are set to track NAS’ production development, at a rate equal to their respective five-year averages.
66 Air traffic settlement liabilities were also highlighted in the financial analysis. It is an accrual adjustment of revenue, relating to ticket purchases bought prior to the booked flight taking place. It is thus outstanding on NAS’ reporting date and directly relate to NAS’ revenues. Following the argumentation of Koller et al.
(2010) and the preceding section, the thesis estimates a constant ratio equal to its five-year average ratio of 17.71% of revenues.
Trade and Other Payables
Trade and other payables mainly comprise accrual modifications to operating costs and are non-interest bearing. It is thus appropriate to connect this aggregate item to operating costs. NAS’ trade and other payables have increased at a higher pace than operating expenses, increasing from 14.66%-20.30% the past five years. The thesis believes that the 2017 ratio of 20.30% better reflects NAS’ projected cost development, considering its progressively increasing operating costs, and is thus applied in the short- to long-term.
7.2.2 Tangible Assets
Tangible assets are items of a physical nature that can be touched, such as buildings and equipment.145 It comprises prepayments, aircrafts, buildings and financial lease asset for NAS.
The financial implications of prepayments to aircraft manufacturers were discussed in section 5.3.1 in the financial analysis. The practical implication is that NAS’ prepayments are relocated to the other line item, aircraft, parts and installations, upon delivery of said aircrafts. NAS’ annual report states that the airline has established a down-payment agreement with Boeing for undelivered aircrafts, which is not disclosed to the public. Also, airlines are expected to sustain a 3%-5% pre-delivery charge to be settled at contract initiation, according to Morrell (1997). The prepayments usually follow a quarterly schedule, with an increased payment frequency approaching delivery. In addition, approximately 30% of the purchasing price is normally due two years prior to the delivery date.146 NAS’ committed fleet plan and forecasted fleet growth show a stable increase in NAS’ aircraft fleet in the forecasting period. Prepayments in relation to ASK has historically resided between 7.21%-12.36%. Considering that the scheduled aircraft deliveries is expected to peak in 2018, the thesis estimates this ratio to remain high equaling 15.36% in 2018. However, as NAS receives the remaining aircrafts, the ratio steadily decreases. The ratio is estimated to decrease 1% annually following 2018, to reflect the lower portion of prepayments.
The item aircrafts, parts and installations are easily related to the portion of NAS’ fleet that is not leased.
Hence, it is natural to connect the development in this driver to the number of aircrafts that NAS own at any period in time. Moreover, the item has naturally increased since 2013, following NAS’ fleet expansion.
145 Petersen et al. (2017), Financial Statement Analysis: Valuation - Credit Analysis - Performance Evaluation, p. 676
146 Morrell (1997), Airline Finance, p. 111
67 Specifically, the short- and medium-term forecasts of NAS’ aircrafts, parts and installations are estimated as the product of the average aircraft value and the projected number of owned aircrafts.
Buildings relate to housing of crews and administration. The thesis connects this item to ASK as NAS’
expansion strategy necessitates additional crews and administrative facilities. The ratio has been stable and the thesis has no information suggesting extraordinary investments in this item. Buildings is estimated to remain a constant portion of ASK, equal to its five-year average of 0.41%. The item financial lease asset is not forecasted as it encompasses items that NAS discarded in 2015.
7.2.3 Intangible Assets
Intangible assets are identifiable non-monetary assets that cannot be seen, touched or physically measured.147 It comprises goodwill, software and other intangible assets with definite and indefinite life, relating to prior investment activities. Other intangible assets include estimated fair value of the Norwegian brand name, charter operations, slots and operating certificates, which are not amortized. Goodwill relates to the acquisition of NAS Sweden AB in 2007 and is tested annually for impairment and carried at cost less accumulated impairment losses.148149 These are declared indefinite assets, which have remained fixed the last five years. Furthermore, the strategic analysis did not reveal impending adjustments. Hence, they are kept constant at their respective 2017 levels of NOK 29.2 million and NOK 93.9 million. Software relates to external consulting fees for developing NAS’ booking systems. NAS has made additions to its software each fiscal year since 2013, which are amortized over an estimated useful life of three to five years per addition.150 The thesis finds it reasonable to assume that NAS will maintain its software investments as it expands operations to new markets. Investments are expected to increase at the same pace as NAS’ production.
Software is thus estimated to remain at its five-year average ratio of ASK, equal to 0.17%.
7.2.4 Net Interest-Bearing Debt
The thesis estimates NAS’ NIBD as a portion of the forecasted Invested Capital. Hence, NAS’ NIBD increases 54% in the period, which is needed to finance the increasing fleet of aircrafts and route expansion.
147 Petersen et al. (2017), Financial Statement Analysis: Valuation - Credit Analysis - Performance Evaluation, p. 674
148 Norwegian, NAS Annual Report 2016, p. 67
149 Norwegian, NAS Annual Report 2016, p. 29
150 Norwegian, NAS Annual Report 2016, p. 67