RYANAIR HOLDINGS PLC COMPANY REPORT · Ryanair will be the airliner with the largest investment in...
Transcript of RYANAIR HOLDINGS PLC COMPANY REPORT · Ryanair will be the airliner with the largest investment in...
THIS REPORT WAS PREPARED BY “STUDENT’S NAME”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
See more information at WWW.NOVASBE.PT Page 1/34
MASTERS IN FINANCE
EQUITY RESEARCH
65.5%
6.1%
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15
52-week cumulative return: Ryanair vs MSCI Europe
RYA LN Equity MXEU Index
The European aviation market is in a turning point. The flag
carriers, which at the beginning of the century dominated the
European air space, are majorly under austere restructuring
processes due to overlong operational inefficiencies, large debt
burdens and massive personnel costs. As a consequence, these
airliners are cutting back capacity and rethinking the traditional
business model for the short-haul segment. Meanwhile, the low-
cost carriers display financial capability to make significant
investments in fleet to both accommodate the expected growth in
passengers at their current routes and to penetrate where flag
carriers are reducing capacity.
Ryanair will be the airliner with the largest investment in fleet with
over 350 aircrafts to be delivered during the next nine years.
Following the restructuring process of Lufthansa and Air Berlin,
Ryanair will be adding significant capacity to Germany’s domestic
and international markets. Other markets, such as Scandinavia
and Central/Eastern Europe are also likely to be key to the
expansion of the ultra-low cost carrier, while it will consolidate its
market leader position in Southern Europe.
Company description
Ryanair is Europe’s largest airliner with over 90 million passengers carried in fiscal 2015. The carrier operates a comprehensive network of routes across 31 countries with a fleet of more than 300 B737-800 aircrafts. The very efficient cost structure allows Ryanair to offer the lowest average fares in the market, which have an implicit discount of 40% to its closest competitors in Western Europe. The airliner will surpass the 100 million passengers carried this fiscal year and it plans to carry 180 million passengers by 2024. Ryanair has in place orders for additional Boeing 737-800 and the new Boeing 737 MAX 200s, which will increase the fleet to 520 aircrafts in 2024.
RYANAIR HOLDINGS PLC COMPANY REPORT
AIRLINES INDUSTRY 8 JANUARY 2016
STUDENT: ANTÓNIO CALEIA [email protected]
European aviation market in a restructuring process
Low-cost carriers with a competitive edge
Recommendation: BUY
Vs Previous Recommendation -
Price Target FY16: 23.72€
Vs Previous Price Target -
Price (as of 5-Jan-2016) 15.00 €
52-week range (€) 9.04-15.30
Market Cap (M€) 19,723.85
Outstanding Shares (M) 1,319.3
Source: Bloomberg
Source: Bloomberg
(Values in € millions) FY
2015 A FY
2016 E FY
2017 F
Revenues 5,654 6,465 7,135x
EBITDAR 1,530 1,985 2,561
EBITDAR Margin (%) 27.1% 30.7% 35.9%
Net Income 867 1,221 1,623
EPS (€) 0.63 0.91 1.21
Net Debt (256) (317) 157
Net Debt/EBITDA -0.18x -0.17x 0.06x
P/E 20.5x 22.3x 25.6x
ROE 21.5% 30.9% 37.2%
ROA 8.1% 11.9% 14.3%
Source: Ryanair reports and Nova Research Team
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Table of Contents
EXECUTIVE SUMMARY .......................................................................... 3
EUROPEAN AVIATION MARKET AT A GLANCE .................................. 4
RYANAIR HOLDINGS PLC: OVERVIEW ................................................. 5
SHAREHOLDER STRUCTURE ............................................................... 7
GROUP STRUCTURE .............................................................................. 7
RYANAIR’S REVENUES .......................................................................... 8
RYANAIR’S COSTS ................................................................................. 9
FINANCING OF AIRCRAFTS ACQUISITION..........................................10
HEDGING ................................................................................................11
RYANAIR’S STRATEGY .........................................................................12
GERMANY ............................................................................................................ 13 NORTHERN EUROPE ........................................................................................... 13 GREECE .............................................................................................................. 14 CENTRAL AND EASTERN EUROPE ...................................................................... 15
VALUATION ............................................................................................16
INCOME STATEMENT ........................................................................................... 16 BALANCE SHEET ................................................................................................. 21 UNLEVERED FREE CASH FLOW (UFCF)............................................................ 23 DISCOUNT RATE .................................................................................................. 24 ENTERPRISE VALUE, EQUITY VALUE AND VALUE PER SHARE .......................... 25 SENSITIVITY ANALYSIS ........................................................................................ 26 VALUING AN OPPORTUNITY: TRANSATLANTIC ROUTES ...................................... 27
FINANCIALS AND VALUATION KPIS ....................................................32
DISCLOSURES AND DISCLAIMER .......................................................34
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1.09 1.12 1.15 1.18 1.21 1.24 1.28 1.30 1.33 1.35
8.3%9.4%
10.4% 10.8% 11.2% 11.4%12.1% 12.4% 12.6% 12.6%
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Number of passengers intra-European aviation market (in B)*
Ryanair market share
Source: Eurostat, Eurocontrol and Nova Research Tem*It does not include Turkey and Russia
668 839 6771,786
(460) (790)(1,537)
(382)
1,848
(6,000)
(4,500)
(3,000)
(1,500)
-
1,500
3,000
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
EBIT Cash Taxes Δ NWC CAPEX Unlevered FCF
Values in M€Source: Nova Research Team
6%
11%
15%
19%17% 17%
13%11%
9%8%
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
WACC ROIC
Source: Nova Research Team
14.29
20.98
23.56
19.37
18.31
21.36
19.51
18.01
42.97
25.62
23.87
29.61
23.72
25.32
27.11
28.55
Beta of the industry
Average fare elasticity
Load factor coefficient
Terminal value
Aircraft price discounts
Route Charges
Airport and Handling…
Oil price
Source: Nova Research Team
2,179
31,558 31,395 31,70729,379
(163)
312
-5,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
Source: Nova Research Team
Executive Summary
Ryanair is expected to increase its market share in the intra-European air
transportation market (excluding Russia and Turkey) from 8.3% as of
fiscal 2015 to 12.6% as of fiscal 2024.
The airliner has on order 364 aircrafts (including options), which will be
allocated in the short-term majorly to Germany’s domestic and
international markets. In addition, Ryanair is predicted to increase its
presence in Scandinavia, Greece and Central/Eastern Europe during the
next decade.
Nova Research Team expects that the airliner will carry 170 million
passengers by fiscal 2024, below management team projections of 180
million. For fiscal 2016, Ryanair is on track to carry 105 million
passengers.
From fiscal 2020 to fiscal 2023 Ryanair is expected to display a negative
Unlevered Free Cash Flow (UFCF) due to the acquisition of 163 aircrafts
at total cost estimated to be around 17 B€.
Despite the negative UFCF, this investment in CAPEX creates value to
shareholders since the ROIC continues to be higher than the airliner’s
cost of capital during the period.
Since a significant part of the investment in fleet will be made to replace
existing less efficient aircrafts, mainly after fiscal 2020, the annual growth
in seat capacity will start to slow down and so will operating revenues.
Consequently, the ROIC will decrease towards the WACC from fiscal
2020 ownwards.
In perpetuity, Nova Research Team expects the ROIC to be equal to
Ryanair’s cost of capital, since the airliner is not likely to hold its cost
advantage indefinitely. From fiscal 2024 onwards, Nova Research Team
expects that Ryanair grows annually by 1.5%.
An equity value as for the beginning of fiscal 2017 of 31.7 B€ and a value per share of €23.72 was reached.
At last, it was performed sensitivity analysis and computed confidence intervals for various parameters used in the valuation model.
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16.5%
29.5%34.0% 35.8%
39.6%
2004 2008 2010 2012 2014
Source: CAPA
Graph I:LCCs share of total seats in Europe
9.604 9.7510.039
10.3110.588
10.85211.166
11.397
1.7% 1.5%
3.0% 2.7% 2.7% 2.5% 2.9%2.1%
0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%
8.5
9
9.5
10
10.5
11
11.5
12
2014A 2015E 2016F 2017F 2018F 2019F 2020F 2021F
IFR Flight Movement (in K) Annual growth
Source: Eurocontrol
Graph II:Forecast of flight movements in Europe*
*departures and arrivals in Europe (excluding Russia) using instrument flight rules
European aviation market at a glance
In the past the European aviation market was characterized by strict regulations,
the domination of flag carriers and a large portion of state-owned airports. All
these features together contributed to the fragmentation of the European air into
national markets, which in turn sustained low competition. Following the Single
European Act of 1986, it was created in the 90s a Single Aviation Market for the
EU countries, which removed all commercial restrictions for airliners travelling
within the region.
The aforementioned deregulation greatly contributed to the strong growth in air
transportation in Europe over the last two decades and enabled the expansion of
the low-cost segment. Airliners such as Ryanair, EasyJet and Norwegian have
been consistently gaining market share in the intra-European market at the cost
of the legacy carriers, which have been either going bankrupt or integrating1.
Looking forward to improve efficiency and profitability margins, big airliners such
as Air France and KLM and Iberia and British Airways have merged2. In addition,
Lufthansa enlarged its passengers group by acquiring Austrian Airlines and
Swiss3 and, more recently International Airlines Group acquired Aer Lingus.
Alongside the bankruptcies and merges/acquisitions, the enlargement of
international alliances has been consolidating the European air travelling market.
The recovery of Europe from the financial crisis and the posterior debt crisis will
impact positively the demand for air travelling in the region. In the short-term, the
number of flights in Europe is expected to grow by 1.5% and 3% in 2015 and
2016, respectively. After 2016, the traffic growth is expected to stabilize at around
2.5% with Turkey being the main contributor upon the opening of the new airport
in Istanbul in October 2017. However, Europe will face a capacity constraint that
will restrict the growth in air traffic. For example, in 2021, 200,000 flights will not
1 These new groups benefit from cuts in overheads, higher presence in core markets and from an extension of routes and capacity. Ultimately, this integration shall improve efficiency towards the competitors’ levels: low-cost carriers in the intra-Europe market and Gulf carriers in the long-haul segment.
2Air France and KLM merged in 2004. Despite the operational figures of Air France being consistently below KLM’s, until the financial crisis the merger was successful with the combined operating margin increasing from ~3% as of fiscal 2004 to ~6% as of fiscal 2008. Although the group has returned to a profit in fiscal 2011, it has been unable to reach pre-crisis operating margins. Consequently, in 2014 a restructuring plan was launched, which targeted to reduce the Group’s unit costs between 1% and 1.5% per annum. This restructuring has been hard to implement due to the negotiations with the labour unions.
British Airways (BA) and Iberia merged in 2011 and formed the International Airlines Group. A restructuring plan was launched for Iberia in the following year given the very different operational efficiencies between the airliners. In opposition to Air France-KLM Group, this restructuring process has been successful with a reduction of more than 4,500 jobs and a significant improvement of operational metrics by Iberia. Overall, the group has improved operational margins from 3.3% in 2011 to 5.5% in 2014. Nevertheless, an operational gap still persists between BA and Iberia. Aer Lingus acquisition impact cannot be measured yet given the few time passed by since the integration of the airliner in the group.
3 These mergers were successful in expanding Lufthansa’s international network. However, the group is currently confronting a problem with a large pension deficit.
Single Aviation Market – no commercial restrictions in the European air space …
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364
323
242
239
209
127
100
69
56
48
Ryanair
easyJet
Norwegian
Wizz Air
Turkish Airlines
Lufthansa
Pegasus…
Aeroloft
Vueling
Sun Express
Graph IV:Top 10 Euopean airliners by narrow body aircrafts
expected deliveries
Source: CAPA, July 2015*It includes options
245
297256 238
217238
157124
60
2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: CAPA, July 2015*It includes options
Graph III:Narrow body aircraft projected deliveries in Europe*
41.5
64.8
77.5
77.5
90.6
Source: Companies last annual fillingsThe figures presented correspond to the total passengers carried by each arliner (includes extra EU). Lufthansa does not include Austrian Arlines and Swiss.
Graph V:Largest European airliners (million passengers)
take-off due to the lack of capacity in European airports, which represents a
reduction in the potential growth of 1.7%4.
European airliners will face additional challenges in this new growth spurt.
Besides the competition from Gulf airliners in the long-haul segment and the
pressure to be cost efficient, European airliners are now faced with the pressure
to renew their fleet as concerns about the noise and fuel consumption increase.
In addition, LCCs5 are faced with the challenge to continue the expansion into
regional and secondary airports without cannibalizing existing revenues and
extend their network of primary airports keeping their low-fares policy.
Furthermore, an intensification of the competition is expected in the short-haul
segment as the narrow body fleet operating in the region increases and as the
legacy carriers begin to adopt a hybrid business model.
Big question marks still persist on how supranational institutions and national
government will increase airports capacity and on how air traffic in the European
sky will be managed in the next decades. Studies on the possibility of a Single
European Sky (i.e. like in the US) have shown some progress but it is still far
from reaching the transference of the air traffic management from national level
to supranational institutions due to States’ reluctance to lose supremacy on this
matter. In addition, a simpler and more efficient regulatory structure, lower
charges at monopoly airports and lower tax burden on passengers are topics on
the agenda of European Commission to be discussed in the next years.
Ryanair Holdings PLC: Overview
Ryanair is an ultra-low-cost airliner operating frequent point-to-point services
across Europe and North Africa. Currently it is the biggest European airliner by
number of passengers, with 91 million passengers carried in fiscal 2015 and on
track to reach 105 million passengers in fiscal 2016. Ryanair operates more than
1,600 daily flights from 76 bases that connect 197 destinations. The airliner holds
a fleet of more than 300 Boeing 737-800 which is expected to increase to 520
aircrafts in fiscal 2024. According to the management team, by that time Ryanair
will carry c. 180 million passengers, double the amount of passengers flying with
the airliner today.
4 Source: Eurocontrol seven-year forecast, September 2015. Nova Research Team believes that the impact of these airport restrictions on the value of Ryanair will be negligible. Ryanair flies from/to airports without slot requirements and the airliner current expansion plan leaves aside Europe’s mega hubs. Therefore, Ryanair is unlikely to face major capacity constraints. The impact of the airport lack of capacity will be felt by other airliners operating mainly from European hubs (e.g. KLM, Air France, British Airways and Lufthansa). Given the excess demand, two non-mutually exclusive scenarios are possible to occur: a growing demand for alternative means of transportation (e.g. high speed trains) or a shift of demand to regional airports. The latter scenario was not incorporated in Ryanair’s price recommendation. 5 Low cost carriers.
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41
52 50
29
39 4249
45
25
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Graph VI:Ryanair aircraft deliveries*
Source: Ryanair annual reports*It includes options
More recently, as Ryanair looks to attract more business travellers and as flag
carriers reduce the traffic at their primary airports due to the restructuring
processes, the airliner has been expanding its network of primary airports,
namely Warsaw, Athens, Lisbon, Glasgow International, Cologne/Bonn,
Copenhagen and Berlin. Michael O’Leary, Ryanair’s CEO, expects that half of
the growth in the next five years will come from the primary airports.
Nonetheless, the core business of Ryanair is still to offer frequent direct
connections to secondary and regional airports near major population centres
and travel destinations. This strategy allows the airliner to benefit from lower
landing and handling fees, faster turnarounds and higher on-time departures. In
addition, these airports do not maintain slot requirements that limit the number of
allowed take-offs and landings.
In order to keep maintenance and personnel training cost low and to leverage its
position with Boeing, Ryanair has a policy of purchasing a single aircraft model.
The airliner has ordered 380 Boeing aircraft6, of which 200 (including 100 aircraft
option) are the new Boeing 737 Max 200 that will increase the seating capacity
by 11 to 200 seats as well as reducing the oil consumption by 18% and the noise
by 40%. The latter aspects will become valuable assets to Ryanair as the
environmental concerns on the industry increase.
In the beginning of fiscal 2015, following the reputation of a less-friendly
customer service and after various lawsuits by customers, Ryanair launched the
“Always Getting Better” program. The airliner adopted a quiet flight policy in dawn
and night flights, the allocation of seats, the possibility to carry a second bag for
free and it cut on airport and luggage fees. Ryanair introduce also new packages
at a discount for business travellers and families.
Although Ryanair’s current strategy is to grow organically, the airliner has made
some acquisitions in the past. In 2003 it acquired the LCC Buzz from KLM, which
increase its presence at London Stansted and allowed for the immediate access
to 11 French regional airports. Following the privation of Aer Lingus in 2006,
Ryanair acquired a stake of 29.8% in the Irish company. The airliner tried to
enlarge its ownership at various times but it was stopped either by Aer Lingus’
shareholders that considered the offer too low or by EU competition authorities.
In July of this fiscal year, Ryanair agreed to sell its position in Aer Lingus to IAG
for 400 M€7.
6 As of 1st April 2015. 7 Ryanair paid 407 M€ for its stake in Aer Lingus and received 18 M€ in dividends during the nine years holding period. This means that Ryanair made a small profit in its investment in Aer Lingus.
Secondary airports enable lower airport charges, faster turnarounds and higher on-time departures …
Heathrow, Charles de Gaulle and Frankfurt Main are out of Ryanair’s radar of primary airports…
Ryanair’s M&A activity…
Improving customer experience through AGB program …
Increasing number of primary airports served …
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6.1%6.0%
3.8%
3.2%
4.1%
4.2%
72.7%
Graph VII: Ryanair's shareholder structure
HSBC HOLDINGS PLC
FIDELITY INVESTMENTS
O'LEARY MICHAEL
STANDARD LIFE INVESTMENTS
BAILLIE GIFFORD
BLACKROCK
OTHERS
Source: BloombergNote: As of 31st December 2015
Shareholder Structure
As of 31st December 2015, Ryanair had 1,319.32 M one-class ordinary shares
outstanding, of which 4% were held by its directors and executive officers, where
special emphasis goes to the Ryanair’s CEO, Michael O’Leary, with a stake of
3.8%. The remaining 96% were trading in the market. At the same date, the
airliner had 17.7 M share options outstanding with a weighted average exercise
price of 6.94€ (in-the-money) and a weighted average maturity of 6 years.
Therefore, the airliner has 1,337.02 M diluted shares8.
Ryanair shares are majorly held by investment groups, which have a jointly
shareholding of 85.7%. Moreover, the shares are traded in the Irish Stock
Exchange, in the London Stock Exchange and in the NASDAQ through ADRs.
The airliner distributes frequently returns to its shareholders both through special
dividends and share buybacks. Since fiscal year 2008 the firm has returned to its
shareholders a total amount of 2,934 M€, of which 1,422 M€ correspond to share
buybacks and €1,512 M€ correspond to special dividends. Following the sale of
the 29.8% stake in Aer Lingus, Ryanair will distribute in fiscal 2016 an additional
400 M€ to shareholders.
Group Structure
Ryanair Holdings PLC
Ryanair Ltd
Aircraft Branding Ltd
Airport Marketing Services Ltd
Aviation Risk Holdings BV
East Midlands Training Ltd
FR Finance BV
Coinside Ltd
Darley Investments Ltd
FR Hangars Ltd
IM Aviation Risk Holdings Ltd
FRC Investments Ltd
Prestwick Aero Ltd
Ryanair UK Ltd
Ryanair.com Ltd
Mazine Ltd
Ryanair Ltd
Note: Ryanair is the full owner of all the subsidiaries, except Mazine Ldt where it holds a stake of 75%
8In the calculation of the Ryanair’s value per share (in the next section), it was used the diluted number of shares.
Ryanair has a complex group structure with various subsidiaries providing complementary services to the core business, such as financing, marketing and training activities. Since we do not have individual accounts for these subsidiaries and as the weight of these operations in the activity of the group is negligible, Nova Research Team looked at the group as a whole (i.e. Ryanair Holdings PLC).
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0%
20%
40%
60%
80%
100%
0
500
1000
1500
2000
2500
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY 2013 FY 2014 FY 2015
Revenues (in M€) Load Factor
Source: Ryanair Reports and Website*It includes scheduled and ancillary revenues
Graph VIII:Ryanair's quarterly revenue* and load factor
75%
21%
2%2%
Graph IX:Ryanair's revenues composition
Scheduled revenues
Non-flight scheduled
In-flight sales
Internet-related
Source: Ryanair Annual Report 2015
FY 2015 FY 2014 FY 2013 FY 2014 FY 2013 FY 2012
Average fare (in €) 47 46 48 89 83 80
Load Factor 88% 83% 82% 91% 89% 89%1FY starts in April 2FY starts in October
Ryanair1 EasyJet2
Ryanair’s revenues
As for the whole intra-European air transportation industry, Ryanair revenues are
characterized by seasonality along the year with a peak during the second quarter
and a low during the fourth quarter (i.e. summer and winter, respectively).
Furthermore, the air travelling business is dependent on the overall economic
performance.
Unlike legacy carriers that rely heavily on the sale of the tickets, the LCCs
business model relies both on the sale of tickets and ancillary revenues. These
consist in revenues from non-flight scheduled operations, including revenues from
excess baggage charges, priority boarding and reserved seating, in-flight sales of
beverages, food and merchandise and Internet-related services (i.e. consisting of
commissions of products/services sold through Ryanair’s platforms such as car
rental, accommodation or travel insurance).
Finally, Ryanair has a “load factor active/price passive” strategy regarding
revenues, meaning that its primary goal is to fill in the airplane as much as
possible even if that comes at a cost of a lower fare charged9. In the previous
fiscal year, Ryanair charged on average 47 € per ticket which granted a load factor
rate of 88%. Ryanair has consistently had the lowest fares amongst the European
airliners, however, due to its policy of flying to secondary and regional airports,
where the demand is more elastic, its load factors have not been as high as the
main competitor, EasyJet, which has a larger network of primary airports.
Table I: Historical average fare and load factor of Ryanair compared to main competitor, EasyJet
Source: Companies annual reports
A new threat in terms of efficiency is arising from Eastern Europe. Despite the
slightly higher airfare charged (48€ as of fiscal 2015), Wizz Air displays the lowest
average yield per mile among European airliners (5.0 euro cents against 6.1 euro
cents of Ryanair). Wizz Air will expand its fleet by 239 aircrafts in the next years
and it will be Ryanair’s number one competitor in routes intra-Eastern/Central
Europe and routes connecting the region to Western Europe.
9 The rational for this policy is that the marginal revenue (airfare plus additional ancillary revenues) is higher than the marginal cost for any aircraft capacity. Therefore, it is optimal to have 100% load factor.
Wizz Air – a new threat for Ryanair…
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2011 2012 2013 2014 2015
Graph X:Fuel Costs as a percentage of operating costs
Air France EasyJet
IAG Ryanair
Source: FT Research
Ryanair1 EasyJet2 Norwegian3 Wizz Air1 IAG3 Lufthansa3 Air France -
KLM3
FY 2015 FY 2015 FY 2014 FY 2015 FY 2014 FY 2014 FY 2016
Average yield per mile (in € cents) 6.1 12.5 8.3 5.0 14.2 17.5 17.5
Load Factor 88.0% 91.5% 80.9% 86.7% 80.4% 80.1% 84.7%1FY starts in April 2FY starts in October 3FY starts in January
Source: Companies annual reports
Ryanair1 EasyJet2 Norwegian3 Wizz Air1 IAG3 Lufthansa3 Air France -
KLM3
FY 2015 FY 2015 FY 2014 FY 2015 FY 2014 FY 2014 FY 2016
Staff 6 9 15 5 59 69 94
Airport & Handling 8 21 14 18 27 50 43
Route Charges 6 6 8 - 20 - -
Ownership & Maintenance 7 8 21 14 38 23 51
Marketing, distribution and other 3 7 4 3 26 91 50
Total cost excluding fuel per
passenger (in €)29 51 62 40 170 233 238
CASM (in € cents) 5.77 9.28 8.67 5.82 12.23 18.86 14.891FY starts in April 2FY starts in October 3FY starts in January
Source: Companies annual reports
Table II: Selected European airliners average yield per mile and load factor
Ryanair’s costs10
The success of Ryanair’s business model depends on its ability to control costs.
This enables the airliner to persistently have the lowest cost structure in the
industry and thus offer the lowest fares while maintaining a profit. However, the
most significant cost for airliners, which is the jet fuel, cannot be totally controlled.
Hence, Ryanair has to have some degree of flexibility on the other operating costs
such for instance when the price of fuel increases it is possible to cut elsewhere in
order to keep its low fares without affecting significantly the earnings. The same is
true when the price decreases sharply since Ryanair hedges on average 90% of
the expected fuel consumption. As competitors benefit from lower operating costs,
the airfares in the market will tend to decrease and, hence, Ryanair needs to have
flexibility in the costs to compete with those lower fares. Moreover, as Ryanair has
the lowest cost per passenger after fuel expenses, the fuel represents a higher
portion of the total operating expenses. Due to this, Ryanair profits would be more
sensible to changes in jet fuel price if it was not for its almost full hedging policy. 11
Table III: Selected European airliners operating costs and cost per available seat mile (CASM)
10 For the LCCs (i.e. Ryanair, EasyJet, Norwegian and Wizz Air) the yield corresponds only to the scheduled revenue divided by the revenue passenger miles. For the other (flag carriers) it is not possible to make the split between scheduled and ancillary revenues and, hence, it was used the total revenue to compute the yield. 11 For Wizz Air, Lufthansa and Air France-KLM Group it was not possible to split between airport and handling and en-route charges. The values for Norwegian, IAG, Lufthansa and Air France KLM include long-haul. As a large portion of the flight cost is in landing and taking-off the aircraft, the cost for these airliners is undervalued when compared to the other airliners with shorter average length of passenger haul.
10
11
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43.2%
15.5%
11.9%
10.9%
8.2%
5.1%
2.9%2.4%
Graph XI:Ryanair's cost structure
Fuel and oil
Airport and handling charges
Route charges
Staff costs
Depreciation
Marketing, distribution and other
Maintenance, materials and repairs
Aircraft rentals
Source: Ryanair Annual Report 2015
The charges paid to use the airport facilities and handling services are also
important for Ryanair cost management. These charges are expected to increase
due to Ryanair’s plan to serve more primary airports. Similarly important are the
route charges paid for the air traffic management services. If the Single European
Sky initiative is successful the air traffic management services will have a much
lower cost to the providers of the service, which may in turn be reflected in lower
charges per mile. However, Nova Research Team cannot perceive how likely this
scenario is, since there has been ongoing debate on the matter for many years but
few progress was made. Therefore, for valuation purposes this scenario was not
taken into account.
Labour costs represent a substantial percentage of Ryanair costs and they have a
crucial characteristic for the success of the low-cost business model that is being
considerably flexible and controllable. Ryanair staff is expected to increase from
below 10 million employees in fiscal 2015 to over 16 million employees by fiscal
2024. Regarding staff costs, at the beginning of fiscal 2016 the airliner increased
the salaries by 2%. From fiscal 2017 onwards the average annual staff cost is
expected to be adjusted to take into account the inflation of the period.
Amongst the low cost carriers Ryanair is the airliner that displays lower cost per
passenger excluding fuel expenses. The biggest challenge for Ryanair in the
medium-long term is to sustain this cost advantage as it expands its routes to
primary airports and as the concerns regarding its working policies increase.
Further EU regulation on the employees’ rights can also increase considerably the
labour costs. On the other hand, the expectation of lower route charges, the
increasing pressure of airliners on supranational institutions to regulate the airport
charges, mainly in monopoly airports, and the trend towards the abolishment of air
travel tax may more than outweigh the increase in the aforementioned costs.
Financing of aircrafts acquisition
At the end of FY 2015 Ryanair had a fleet of 308 Boeing 737-200 aircraft, the
majority financed through the US Export-Import Bank guaranteed loans (202
aircrafts). Other source of financial leasing the airliner uses is the Japanese
Operating Leases with a call options (FY 2015: 26 aircrafts) that gives Ryanair the
right to acquire the aircraft at a predetermined price after 10.5 years. In addition, in
order to reduce the acquisition costs and allow for more financial flexibility,
Ryanair sells and leasebacks some aircrafts delivered by Boeing (FY 2015: 51
aircrafts). Another financing instrument issued but not so common is the issuance
of bonds. More recently, the firm has issued unsecured Eurobond that enabled it
to raise from the market €1.7 billion at a blended interest rate of 1.5%. At last, in a
US Ex-Im Bank guaranteed loans – the base of aircraft financing …
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 11/34
FY 2016 FY 2017 FY 2015 FY 2016 FY 2015 FY 2016 FY 2015 FY 2016
Fuel
Hedging 95% 95% 80% 58% 27% 2% 0% 10%
1FY starts in April 2FY starts in October 3FY starts in January
Source: Companies annual reports
Southwest Airlines3Ryanair1 EasyJet2 Norwegian3
234 211 212 231 219 218 225 220 207 195
11 44 56 56 56 56 56 56 56 5651 51 51 51 51 51 51 51 51 5112 34 49
64 94 126 136 162 195 218308
340368
402 420451 468 489 509 520
-
100
200
300
400
500
600
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XII:Ryanair's projected aircraft financing instruments
No. of aircraft with debt Remaining Financed with Ryanair's own resources
Operational Leasing - Sale-and-Leaseback No Outstanding Debt Remaining
Source: Nova Research Team
lower proportion of the total number of purchases the airliner uses commercial
debt financing (FY 2015: 6 aircrafts).
Ryanair’s strategy to finance most of its aircraft acquisitions through the U.S.
Export-Import Bank enables the airliner to enjoy below-market average interest
rates and so reduce the financial expenses. In addition, the unusual issuance of
the Eurobond took advantage of historically low interest rates, which in turn will
reduce the future interest cost for the airliner. Lastly, the sale and leaseback of
aircrafts delivers liquidity in the short-term, however, unlike the abovementioned
instruments, it does not create any value to the company when compared to
equivalent debt instruments12.
Hedging
Ryanair has a very active hedging policy regarding the oil price. Historically, the
company has used jet fuel forwards to hedge between 70% and 90% of the
forecasted annual fuel consumption. For fiscal year 2016, the airliner has locked in
95% of the forecasted fuel consumption at $930 per metric ton and, for fiscal year
2017, it has already locked in 95% at $622 pmt. Even though many airliners
reduced the percentage of fuel hedging after the drop in oil prices, Ryanair kept
having a conservative approach to the commodity.
Table IV: Selected airliners future fuel hedging
12 The sale and lease-back will decrease on-balance sheet financial leverage, which in turn decreases the beta leveraged of the company and the cost of capital. Nevertheless, this instrument is more costly than an equivalent amount of debt and so will reduce the free cash flow available to investors. At the end, both effects shall cancel out and the value of the firm will not depend on the amount of operational leasing agreements outstanding.
Lower financing cost, more value to shareholders …
95% of the fuel consumption locked for fiscal 2017 …
“RYANAIR HOLDINGS PLC” COMPANY REPORT
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1.4
3.2
3.8
3.9
5.0
5.3
6.9
18.7
18.9
21.3
12%
17%
25%
26%
7%
5%
46%
16%
18%
25%
Morocco
Portugal
Belgium
Poland
France
Germany
Ireland
UK
Spain
Italy
Graph XIII:Ryanair top 10 countries by deparding seats
Market share Departing seats (in M)
Source: Ryanair results presentation fiscal 2015
The company uses further derivative financial instruments to hedge the exposition
to foreign currency and interest rates risks. The foreign currency risk arises
primarily with the UK pounds sterling and the US dollar. The company hedges
naturally a substantial part of the costs in UK pounds sterling by matching
revenues in UK pounds sterling. More significant are the cost arising in US dollars,
namely the jet fuel, the aircraft acquisition and maintenance and the aviation
insurance, which are hedged using forward currency contracts. The interest rate
risk arising from the debt and operational leasings in U.S. dollars is managed by
using cross-currency swap contracts that convert the floating interest rate debt in
US dollars to fixed interest rate in euros. The part of the debt that is not covered
by the aforementioned contracts is hedged by holding floating interest rate
deposits in US dollars.
Ryanair’s hedging policy reduces the volatility of earnings and increases its
predictability. Therefore, it reduces the overall risk of the firm and, hence, it
increases the value of the company to shareholders.
Ryanair’s strategy
Ryanair holds an average market share of 8.3% across Europe and it has
consolidated its position as a market leader in some of Europe’s largest markets
such as Italy and Spain, where it holds 26% and 18% market share13, respectively.
Moreover, the airliner is expected to increase its average market share in the next
nine years to 12.6%. In the short/medium-term Germany will be the main driver for
growth, where Ryanair is expected to increase its market share from 4.7% to
20%14. The airliner is also likely to enlarge its market share in Scandinavia, where
it cut back capacity to the detriment of the past expansion in Italy. In addition,
Ryanair will keep adding capacity in Greece, a favoured vacation destination for
many countries in Western Europe where it has a strong presence. In the long-
run, the main trigger of growth is expected to be Central and Eastern Europe. The
airliner is the market leader in some of these countries (i.e. Poland, Lithuania and
Slovakia), nevertheless, other opportunities to grow will surge following the
projected economic growth for the region.
13 Ryanair’s FY 2015 results presentation. Market share calculated as a percentage of the departing seats in the country. 14 The passengers carried from Germany represents around 12.5% of the intra-European aviation market (as of 2015, Eurostat). Therefore, the increase in the market share in the country will mean an increase in the overall market share of 1.9%.
Further hedges of operational
expenses and interest rates …
Lower overall risk – more value to shareholders …
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 13/34
0.96 0.96 0.991.09 1.12 1.15 1.18 1.21 1.24 1.28 1.30 1.33 1.35
7.9% 8.2% 8.3% 8.3%9.4%
10.4% 10.8% 11.2% 11.4%12.1% 12.4% 12.6% 12.6%
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Graph XIV:Ryanair market share
Number of passengers intra-European aviation market (in B)* Ryanair market share
Source: Eurostat, Eurocontrol and Nova Research Tem*It does not include Turkey and Russia
24.6
22.8
12.5
11.7
8.4
2.2%
2.0%
1.1%
1.0%
0.8%
Spain
Germany
UK
Italy
France
Graph XV:Top 5 Germany country pairs
Passengers carried
Share of the intra-European market*
Source: Eurostat, as of 2014*It does not include Turkey and Russia
0
50
100
150
200
250
300
Graph XVI:Ryanair's weekly departures from Germany
Summer 2012 Summer 2013
Summer 2014 Summer 2015
Source: Flightstatus
34%
17%10%
6%
5%3%
25%
Graph XVII:Market shares in Northern Europe
SAS Norwegian
Finnair LH group
Winderoe Ryanair
Others
Source: CAPA
Germany
Germany is the second largest market for air transportation in Westwern Europe
with 112 million departing seats as of 2014, where Ryanair accounts for only
4.7%. Lufthansa is the clear market leader in the country with a market share of
31.9% (41.1% if Germanwings is taken into account), followed by Air Berlin with
12.6% of the departing seats. Germany international and domestic air
transportation market has seen negligible penetration of foreign LCCs as the
competition from the national flag carrier and national LCCs left few profit
opportunities even for efficient airliners like Ryanair and EasyJet. Nevertheless, as
a result of the restructuring process of Lufthansa group and Air Berlin, which has
meant cutting routes and traffic, there is an opportunity to return to Germany
domestic market seven years later and increase the routes and frequency of the
flights to Spain and Italy - two favoured destinations for German travellers where
Ryanair already has a strong presence. Ryanair has already started a fast
expansion and it aims to capture up to 20% of the market. The rapid growth
strategy will include primary airports such as Berlin Tegel, Düsseldorf and Munich
with connections between them and with other major European hubs. The main
airport in the country, Frankfurt Main, will not be part of the network served by
Ryanair given the slot requirements, the not feasible Ryanair’s turnaround goal of
25 minutes and the high charges at the airport.
Northern Europe
Altogether, the Nordic countries had almost 70 million departing seats in 2014,
where Norway stands out with around 26 million seats. The Nordic air scape is
clearly dominated by the flag carrier of Sweden, Norway and Denmark – SAS.
With a share of 34% of the seats departing from the Nordic countries, SAS is the
market leader in each of these countries, except in Finland were Finnair carries
Forecast
“RYANAIR HOLDINGS PLC” COMPANY REPORT
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0
50
100
150
200
250
300
Denmark Finland Sweden Norway
Graph XVIII:Ryanair's weekly departures in Northern Europe
Summer 2012 Summer 2013
Summer 2014 Summer 2015
Source: Flightstatus
4.7
9.0
9.4
9.9
45.2
0.4%
0.8%
0.8%
0.9%
4.1%
Netherlands
Germany
UK
Spain
Intra-Northern Europe
Graph XIX:Top 5 Nothern Europe country pairs
Share of the intra-European market*
Passengers Carried
Source: Eurostat, as of 2014*It does not include Turkey and Russia
0
40
80
120
160
Athens Chania Thessaloniki
Graph XXI:Weekly Departures Greece
Summer 2012 Summer 2013
Summer 2014 Summer 2015
Source: Flightstatus
2.0
2.6
5.1
5.6
6.3
0.2%
0.2%
0.5%
0.5%
0.6%
Greece
United Kingdom
Germany
Italy
France
Graph XX:Top 5 Greece country pairs
Share of the intra-European market*
Passengers Carried
Source: Eurostat, as of 2014*It does not include Turkey and Russia
almost 60% of the passengers. Finland is also characterized by a very low
penetration of LCC, since the segment represent less than 20% of the total market
when compared to a European average of around 40%. Norwegian Air Shuttle is
per excellence the LCC of Scandinavia with an overall market share of 17% and
there has been low penetration of foreign LCCs such as Ryanair and EasyJet
which hold a market share inferior to 5%.
SAS and Finnair have gone through a restructuring process recently, of which
Norwegian took advantage to increase its presence in the region. Despite this
attractive scenario, Ryanair has been taking capacity out of Scandinavia since
2012/2013, particularly in Sweden where it had built a wide network of 20 regional
and primary airports. This is a consequence of the aircraft reallocation towards
Italy - where Ryanair entered the domestic market - and Ireland - after the
abolishment of the air travel tax. Additionally, Ryanair has been reallocating the
capacity inside the region from regional airports to the main hubs in Scandinavia:
Copenhagen, Stockholm Skavsta, Gothenburg City Airport and Oslo Rygge.
It is predictable that Ryanair expands in the attractive Scandinavian market in the
medium-term as the deliveries of the new Boeing 737 start taking place, namely
by serving routes to Spain and the UK. However, the airliner might be unable to
compete in the larger Intra-Northern Europe market given the established
presence of the national carriers such as SAS, Nowergian and Finnair.
Greece
Unlike any other country in the Balkans, Ryanair has been building in the recent
past a significant presence in Greece, being the second largest airliner by seat
capacity in the country, just behind the national flag carrier Aegean Airlines.
Greece has seen one of the fastest penetrations of LCCs, mainly at the cost of the
previously stated-owned Olympic Air. The share of international seats taken
by LCCs grew from 21% in 2009 to 40% in 201415. Nevertheless, the domestic
market continues to be largely dominated by legacy carrier, namely the merged
Aegean Airlines and Olympic Air, counting with a slightly presence of Ryanair.
Ryanair has been expanding its domestic and international routes to/from Greece
and serves currently 11 airports with 3 bases. In the sequence of the global
strategy to increase the network of primary airports, in 2013 Ryanair started flying
to Greece’s busiest airport, Athens International, and it has been increasing
capacity in Athens since then. It is predictable that Ryanair leverages further its
presence in Athens to smooth the seasonality in revenues coming from the
15 CAPA - Greece aviation and tourism - Part 1: potentially major forces in supporting economic re-development
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 15/34
3.1%
1.7%
2.7%
3.0%
2.5%
3.0%
2.8%
3.0%
3.5%
2.5%
2.1%
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia
Graph XXII:Real GDP CAGR14-20
Source: Economist Intelligence Unit
8.2%
26.7% 26.2%30.2%
4.4% 5.2% 4.0% 4.9%
2004 2010 2012 2014
Graph XXIII:LCCs share of total seats
Eastern/Central Europe (To / From)
Eastern/Central Europe (Within)
Source: CAPA
country, while at the same time it increases the connections during peak season
from the UK, France, Italy and Germany to the country’s summer destinations.
Central and Eastern Europe
After the widespread economic downturn all over Europe following the financial
crisis in 2007, Central and Eastern Europe is fastest growing region in Europe.
Nevertheless, it is still characterized by a low families’ disposable income that is
predictable to increase as the economy grows. Moreover, the intra-
Central/Eastern European countries market still has a limited size and is
dominated by the national flag carriers and the largest LCC in the region, Wizz Air.
Therefore, with the economic upspring, the demand for air travelling for both intra-
region and connections to the Western will increase and significant opportunities
will arise for Ryanair due to the low penetration of LCCs and the few sizable
legacy carriers currently operating in these countries that display financial health.
Poland is the largest market for air travelling in the region with over 12 million
departing seats as of 2014. Ryanair currently serves 11 airports and is the number
one carrier in the country with a market share of 26%. Ryanair’s previous strategy
of serving only secondary airports has driven it away from Poland’s busiest airport
(and one of the busiest in the whole region), Warsaw Chopin. Although the current
strategy foresees an enlargement of the primary airports network, it should not
pass in the medium-term by Warsaw Chopin since Wizz Air has gained a
significant market share in the airport and it currently serves the major hubs in
Western Europe. Moreover, the competition from the already restructured and with
a fast-growing plan Lot Polish Airlines will limit Ryanair’s ability to conquer further
market share in the country and its strategy will pass by consolidating its position
in the connections to the Western, while looking for opportunities in the
connections to other Eastern countries.
Except in Poland, where the national air carrier LOT Airlines seems to be
financially healthy and able to invest in fleet to accommodate the projected future
demand, Ryanair and Wizz Air are in the pole position to expand their presence in
the region. Both airliners have large aircraft orders for the next years and they will
certainly not disregard the opportunities these countries display.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 16/34
4152 50
29 3117 21 20
11
825
28 25
14
41
52 50
29
39 4249
45
25
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Graph XXIV:Aircraft planned deliveries
Orders Options
Source: Ryanair Annual Report 2015
Valuation
In order to reach the value of Ryanair shares, it was initially projected an income
statement and balance sheet for every year until fiscal 2024. Nova Research
Team believes the margins and CAPEX levels will stabilize by then and, hence, a
perpetuity formula was applied to compute the present value of the cash flow
generated by the airliner from fiscal 2025 onwards.
Besides the projections of the established business in Europe, a business plan
was designed for the possibility of Ryanair operating transatlantic routes16. The
value of both European and transatlantic segments was calculated separately and
since we cannot perceive how likely the latter scenario is, its value is solely
indicative. Therefore, our price recommendation focuses only on Ryanair’s
established segment.
Income Statement
Scheduled Revenues
The scheduled revenues were computed according to the following bottom-up
approach:
Scheduled Revenues = Passengers carried * Average fare where Passengers carried = Available seats * Load factor
where Available seats = Average no. of aircrafts * Average sectors flown by aircraft * no. of passengers by aircraft
Available seats In what concerns the average number of aircrafts, Nova Research Team broke
down further the analysis into deliveries occurring during the fiscal year, disposals
of aircrafts, aircrafts grounded during the winter and wet leases. Regarding aircraft
deliveries, Ryanair ordered from Boeing 272 aircrafts: 172 Boeing 737-800 to be
delivered until fiscal 2019 and 100 Boeing 737 MAX 200 to be delivered between
fiscal 2020 and fiscal 202417. Moreover, the airliner still holds an option to buy
further 100 Boeing 737 MAX 200 until fiscal 2024.18 Secondly, as the fleet
increases Ryanair plans to dispose less efficient aircrafts. It is expected that these
disposals occur after the peak season, which matches with Ryanair’s half of the
fiscal year. In addition, Ryanair grounds every winter aircrafts because of both
weak demand and to perform longer maintenance work. Supported on historical
16 Referred hereafter also as “transatlantic segment”; “transatlantic business”; “transatlantic project” 17 As of April 1st, 2015 18 By analysing historical deliveries, Nova Research Team found that the average month of delivery was August, which was assumed to keep constant for the projection period.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 17/34
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2024
Average no. aircrafts 311 350 372 396 415 497
Average sectors flown by aircraft 1,940 1,940 1,940 1,940 1,940 1,940
No. passengers per aircraft 189 189 189 189 189 192
Available Seats FY (in M) 114 128 137 145 152 185
Source: Nova Research Team
R Square 56%
Adjusted R Square 53%
Observations 17
Coefficients std. error P-value Lower 95% Upper 95%
Intercept 1.093 0.065 0.000% 0.954 1.231
Av. Fare without Inflation (0.006) 0.001 0.056% -0.009 -0.003
311350 372 396
415453
473 490 497
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Graph XXV:Forecasted average number of aircraft operating
during the year
Deliveries Disposals
Grounded Wet leases
Average no. Aircrafts
Source: Ryanair Annual Reports and Nova Research Team
analysis, it was assumed that the airliner will ground 40 aircrafts in fiscal 2016,
which will increase to 64 in fiscal 2024. Al last, Ryanair usually wet leases aircrafts
during the summer to accommodate demand. As the fleet will increase
significantly, it is not predictable that there will be need to use short-term leases
from fiscal 2017 onwards. Following the aforementioned approach, it is expected
an average annual growth of the fleet of 6% from fiscal 2016 until fiscal 2024.
Regarding the average number of sectors flown by each aircraft during the year,
Nova Research Team does not expect major changes relative to the past. It is
predictable that Ryanair expands its network of routes in Eastern/Central Europe
and in the Nordic region. At the same time, Ryanair will enhance its position in
domestic markets by flying more frequently and by expanding the airports served
within countries such as Germany, Spain, Italy and Greece. Overall, Nova
Research Team believes that the average annual sectors flown by each aircrafts
will keep constant throughout the analysis period at 1,940 sectors.
Finally, regarding aircraft capacity, each Boeing 737-800 can carry 189
passengers, while the Boeing 737 MAX 200 will increase the capacity to 200
passengers. The average number of seats during the year was weighted on the
number of each type of aircraft operation during that fiscal year.
The number available seats are expected to increase from 114 million in fiscal
2016 to 185 million in fiscal 2024, which represents an average annual growth of
6.3% during the period.
Table V: Available seats per fiscal year breakdown
Load factor Theoretically, the load factor is very dependent on both demand and average
fares charged. Since none of the proxies used for demand (growth in EU’s GDP
and growth in RPK in Europe) was statistically significant to explain past variations
in the load factor, the latter was computed based on the following regression:19
Load factor = α + β* Average fare + ϥ, where the average fare is adjusted for inflation
19 In the sensitivity analysis performed latter in this chapter, it was built a 95% confidence interval for Ryanair’s share value based on the lower 95% and upper 95% confidence thresholds for the average fare without inflation coefficient.
19
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 18/34
4,932 5,371 6,202 7,192 7,865 8,622 9,430 10,430 11,1061,533 1,7751,853
2,0022,102
2,3752,495
2,5602,594
6,4657,146
8,0569,193
9,96610,997
11,92512,990
13,700
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Scheduled Revenues (in M€) Ancillary Revenue (in M€)
Source: Nova Research Team
105 120 128 136 142 155 162 168 170
114128
137145 152
167 175 182 185
92.0% 93.5% 93.6% 93.4% 93.0% 92.8% 92.4% 92.2% 92.0%
9.4% 10.4% 10.8% 11.2% 11.4% 12.1% 12.4% 12.6% 12.6%0.0%
20.0%
40.0%60.0%
80.0%
100.0%
120.0%140.0%
160.0%
180.0%
200.0%
-
20
4060
80
100
120140
160
180
200
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XVI:Forcasted passengers carried by Ryanair and implict market share
No. Passengers (in M) Available Seat Miles (in M) Load Factor Market Share*
Source: Nova Research Team and Eurostat*It does not include Turkey and Russia
Nova Research Team projections are in line with Ryanair’s management team for
the short-run. Nevertheless, we took a more conservative approach for a longer
time horizon: we expect Ryanair to carry 170 million passengers by fiscal 2024,
while the management team believes the airliner will carry around 180 million
passengers by then. This corresponds to a market share in the intra-European
aviation market (excluding Russia and Turkey) of 12.6% by fiscal 2024. Currently
Ryanair holds an 8.3% market share, which means that Nova Research Team
expects a penetration of 4.3% over the course of the next nine years.
Average Fare
The average fare charged by Ryanair is very dependent on its operating cost.
Since the airliner has a “load factor active/ yield passive” strategy, the fares are
majorly set in a cost plus a margin basis rather than looking at competitors price
offering for the same routes. Therefore, Nova Research Team performed a
regression for the elasticity of the average fare charged in relation to the cost of
each available seat per mile (CASM):20
ln (average fare) = α + β1* ln (CASM) + ϥ
Ancillary Revenues
The ancillary revenue was computed by multiplying the average ancillary revenue
by the number of passengers carried during the fiscal year. Since the partnership
20 Similarly to the load factor regression, it was computed a 95% confidence interval to the average fare.
R Square 66%
Adjusted R Square 63%
Observations 17
Coefficients std. error P-value Lower 95% Upper 95%
Intercept 5.497 0.315 0.000% 4.826 6.167
ln(CASM) 0.603 0.112 0.008% 0.364 0.84320
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 19/34
4,932 5,358 5,750 6,233 6,709 7,527 8,096 8,635 8,9951,533 1,778 1,920 2,069 2,198
2,4482,605
2,758 2,861
6,4657,136 7,670
8,3018,907
9,97510,701
11,393 11,856
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XXVII:Breakdown project operating revenues
Scheduled Revenues (in M€) Ancillary Revenue (in M€)
Source: Nova Research Team
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2007 2011 2015 2019 2023
Graph XXVIII:Forecasted european brent price, jet fuel price
and USD/EUR FOREX rate
Europe Brent (US$ per Gallon)
Average Rynair's jet price (€ per Gallon)
Market exchange rate (USD/EUR)
Source: World Bank (Forecast October 2015) and Nova Research Team
with Hertz ended during fiscal 201621 and the airliner was left without a car
partnership for July and August, at the time it established a new partnership with
CarTrawler22, we expected a decrease in the average ancillary revenue for fiscal
2016 between 5% and 10%23. From fiscal 2017 onwards Nova Research Tem
expects that the average ancillary revenue will keep constant at fiscal 2016 levels
(in a real basis) due to the use of global system distribution services. Finally, the
average ancillary revenue was adjusted to take into consideration the expected
inflation rate for each fiscal year.
Fuel and Oil Expenses Fuel and oil expenses are an exceptionally important cost for any airliner and
account for almost half of Ryanair’s operating expenses. This caption was
computed with the following reasoning:
Fuel and oil expenses = av. jet fuel price * av. consumption per mile * total miles flown
Ryanair hedged 95% of the expected jet fuel consumption for fiscal 2016 and
fiscal 2017 at US$ 2.93 and US$ 1.97 per US gallon, respectively. The airliner had
also locked the exchange rate related to 95% of the expected jet fuel expenses for
the same period at 1.33 US$/€ and 1.19 US$/€, respectively. For the remaining
part of the expected consumption, Ryanair will purchase jet fuel at the market
future spot price. Since jet kerosene is not widely covered by analysts and as it
has had a correlation with the price of Europe Brent close to one, Nova Research
Team assumed that the expected variation in the price of jet kerosene would
21Recently Ryanair started using global distribution services (e.g. Amadeus and Travelport), which give travel agents direct access to all of its fares. This means that tickets can be purchased without having to go through the airline’s website, where Hertz’s serv ices were advertised. Hertz accused Ryanair of breaching the contract and ended the long-lasting relationship between the two parties. 22 CarTrawler is an Irish online platform that connects a large number of car rental companies (including Hertz) to the final customer. 23 Car rental revenues represent around 10% of the total ancillary revenue.
Forecast
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 20/34
2,0401,755 1,808
2,0282,232
2,5362,763
2,9903,181
468 527 561 596 624 682 712 738 749
2.161.65 1.60 1.69 1.78 1.89 2.00 2.12 2.26
(0.50)
0.50
1.50
2.50
3.50
4.50
5.50
6.50
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Graph XXIX:Forecasted fuel and oil expenses and its KPIs
Fuel and Oil Expenses (in M€)
Total Miles Flown (in M)
Average fuel price (€ per US Gallons)
Source: Nova Research Team
correspond to the expected variation in the price of Europe Brent24. In addition, the
exchange rate at which the jet fuel will be bought was assumed to be the 1.11
US$/€ for fiscal 2016 and 1.06 US$/€ for fiscal 201725. Ultimately, from 2018
onwards the average price of jet fuel is based solely in World Bank expectations
for the Europe Brent price converted to euros at the future spot USD-EUR
exchange rate.
Although Ryanair has been decreasing the average consumption per aircraft in
last three years, as the airliner will expand the network of primary airport that have
traffic congestions and longer turnarounds, Nova Research Team assumed that
the consumption will keep constant at 2015 levels, which was 2.01 US gallons per
mile flown. From fiscal 2020 onwards, the fuel consumption is expected to
decrease as the delivery of the new Boeing 737 MAX 200 start taking place. This
aircraft is expected to be up to 18% more fuel efficient, which will translate in a
reduction on the average consumption per mile to 1.88 US gallons by fiscal 2024.
For the total miles flown, it was multiplied the number of available seats during the
fiscal year by the average length of passenger haul. The latter is predicted to
remain at 776 miles since Ryanair will compensate longer hauls with more
domestic flights.
The fuel and oil expenses will increase significantly during the period due to
Ryanair’s expansion of the fleet. Nevertheless, the airliner is expected to benefit
from low oil prices, such that the weight of this caption will reduce from an
historical average26 of 35% to around 26% during the forecasted period.
EBITDAR In FY 2018 Ryanair shall reach a remarkable EBITDAR margin of 36.1%
supported on the full benefit of low oil prices27. The margin will drop afterwards,
mainly due the expected increase in the airport and handling charges. All the other
captions are expected to maintain a roughly constant weight relative to operating
revenues. During the forecast period it is expected an average EBITDAR margin
of 32.5%, which is 880 basis points above the historical average (i.e. from fiscal
2008 to 2015). This improvement on the EBITDAR margin results mainly from the
steep reduction of the weight of oil and fuel expenses during the forecast period.
24 Based on the forecast of World Bank in October 2015. 25 1.11 US$/€ corresponds to the average between the exchange rate from March 2015 until December 2015 and the Euro futures price
in CME for March 2016; 1.06 US$/€ corresponds to the average of the euro futures price trading in CME for the period correspondent to fiscal 2017; from fiscal 2018 onwards the exchange rate was computed based on the relative purchasing power parity. 26 This average was computed from fiscal 2008 until fiscal 2015. 27 Ryanair has hedged the future fuel consumption at a higher price than current expected future price for the commodity. Therefore, just from fiscal 2018 the airliner will fully benefit from the low oil prices.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 21/34
1,9852,561 2,766 2,867 2,968 3,216 3,335 3,417 3,387
30.7%35.9% 36.1% 34.5% 33.3% 32.2% 31.2% 30.0% 28.6%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-
1,000
2,000
3,000
4,000
5,000
6,000
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XXX:Forecasted EBITDAR and EBITDAR margin
EBITDAR (in M€) EBITDAR Margin (%)
Source: Nova Research Team
Balance Sheet
Property, Plant and Equipment
Ryanair will increase the fleet by more than 200 aircrafts in the next nine years
with the acquisition of 172 Boeing 737-800 aircrafts until fiscal 2019 and 200
Boeing 737 MAX 200 aircrafts between fiscal 2020 and fiscal 202428. Nova
Research Team observed an implicit discount on CAPEX for fiscal 2015 of around
40%, which was considered to hold for all aircrafts acquired under the Boeing
contract of 2013 (i.e. relative to the acquisition of the Boeing 737-800 until fiscal
2019). Regarding the Boeing 737 MAX 200, Ryanair’s CEO stated that these
aircrafts will be acquired under less favourable commercial terms, but still at a
discount from the list price. From the analysis of historical debt, Nova Research
team found implicit discounts on aircraft acquisitions ranging from 10% to 40%.
Therefore, for the deliveries taking place after fiscal 2019, it was considered a
discount of 10% relative to the listed price of 104 M€29. In addition, the price of the
aircrafts will increase annually by the inflation rate in the US.
The other items of the PPE caption (i.e. Hangars and buildings, Fixtures and
fittings, Motor vehicles, etc.) will also increase to accommodate the expansion of
the fleet. Nonetheless, the impact of these items in the overall level of CAPEX are
still insignificant. The CAPEX will escalate with the delivery of the new Boeing 737
MAX 200, which is expected to cost around 17 B€ spread over five years.
28 The airliner will dispose 99 aircrafts and 61 operational leasing contracts will end during the period. 29 List price as of 2014.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 22/34
1,2531,552
1,889
910
3,2533,964
4,731
3,647
1,312
33 40 44
1835 42 49
3713 -
1,000
2,000
3,000
4,000
5,000
525456585
105125145165
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XXXI:Forecasted aicraft delivery and CAPEX
CAPEX (in M€) Aircrafts acquired during the year
Source: Nova Research Team
4,032 4,6625,959 6,147
8,461
11,184
14,47616,236 15,318
77 116214 187 255
466626
759 780
(100)1003005007009001,1001,3001,500
-2,0004,0006,0008,000
10,00012,00014,00016,00018,000
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XXXII:Forecast debt and interest expense
Current Maturities of Debt Non-Current Maturities of Debt
Interest Expense
Values in M€Source: Nova Research Team
Debt
Ryanair has financed most of its aircrafts acquisitions through the Ex-Im US Bank
guaranteed loans. Except in fiscal 2016 and 2017 where all/some aircraft will be
acquired with the proceeds from the issuance of the Eurobonds, it is predictable
that Ryanair finances the aircrafts with debt, mainly through aforementioned
instrument. These debt facilities have generally had 12 years to maturity with
annual amortizations of the initial capital. It was assumed that they are
remunerated at the 6M-EURIBOR plus a spread of 1.83%. The interest rate is
expected to increase throughout the period (FY 2016: 1.3% to FY2024: 4.9%) as
inflation reaches its long-term equilibrium of 2% and as the real EURIBOR interest
rate converges to the pre-crisis level of around 1%.
Working Capital
Although there are relevant variations on the working capital during the year, the
year end is a good proxy for the average working capital during the year. In
addition, it was considered that Ryanair would keep the same cash conversion
cycle as in fiscal 2015.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 23/34
(2,091) (2,275) (2,448) (2,661) (2,872)(3,232)
(3,487)(3,732) (3,901)
351 374 401 437 473 532 575 616 647
(2,442) (2,649) (2,849)(3,098)
(3,345)(3,764)
(4,062) (4,348) (4,549)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XXXIII:Forecasted working capital
Inventories Prepayments
Trade receivables Operational Cash
Trade Payables Accrued Expenses and Other Liabilities
Working Capital
Values in M€Source: Nova Research Team
6%
11%
15%
19%17% 17%
13%11%
9%8%
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
FY2023
FY2024
Graph XXXIV:Ryanair's ROIC and WACC evolution
WACC ROIC
Source: Nova Research Team
The Accrued Expenses and Other Liabilities, which includes unearned revenue, is
the main component in the working capital. This caption is expect to increase
significantly during the period as Ryanair carries more passengers and, hence,
benefits from a higher amount of forward bookings. As a result, Ryanair will benefit
from constant disinvestments in working capital throughout the period, which can
cover around 20% of the anticipated capital expenditures.
Unlevered Free Cash Flow (UFCF)
The CAPEX is the main caption in the free cash flow generated by the firm.
Despite the disinvestment in net working capital during the period, the cost of
expanding the fleet will decrease the annual cash available to all investors relative
to what the firm generates from operations. In particular, from fiscal 2020 to fiscal
2023 Ryanair is expected to display a negative UFCF due to the acquisition of 163
aircrafts at total cost estimated to be around 17 B€. Despite the negative UFCF,
this investment in CAPEX creates value to shareholders since the ROIC continues
to be higher than the airliner’s cost of capital during the period.
As a signifcant part of the investment in fleet will be made to replace existing less
efficient aircrafts30, mainly after fiscal 2020, the annual growth in seat capacity will
start to slow down and, so will operating revenues. Consequently, the ROIC will
decrease towards the WACC from fiscal 2020 ownwards. In perpetuity, Nova
Research Team expects the ROIC to be equal Ryanair’s cost of capital, since the
airliner is not likely to hold its cost advantage indefinitely. Wizz Air already
replicated its bussiness model and other large European aviation groups are likely
to explore the ultra-low cost segment through its subsidiaries. In addition, it was
30 Of the 311 aircrafts acquired during the period, 99 will replace existing aircrafts. After fiscal 2020 will occur ¾ of the planned disposals.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 24/34
Comparables βu
Ryanair 0.56
Tier I - European LCC
easyJet 0.44
Air Berlin 1.10
Norwegian Air Shuttle 0.54
Tier II - International LCC
Southwest Airlines (US) 1.11
Jetblue (US) 1.01
WestJet (Canada) 0.46
Cebu Airliners (Philippines) 0.36
Allegiant Travels (US) 0.94
Tier II - European legacy carriers
IAG 1.03
Lufthansa Group 0.85
Air France_KLM 0.85
SAS 0.50
Flybe Group 0.56
Average 0.74
Unlevered Cost of Capital
Rf 1.35%
Bu 0.74
MRP 6.25%
Ru 5.95%
Cost of Debt
Rf 1.35%
Rating BBB+
Credit Default Spread 1.60%
Rd 2.95%
Unl. cost of capital, cost of debt and
WACC
Table VI:
668 839 677
1,786
(460) (790)(1,537)
(382)
1,848
(6,000)
(4,500)
(3,000)
(1,500)
-
1,500
3,000
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Graph XXXV: Forecasted Unlvered Free Cash Flown breakdwon
EBIT Cash Operational Taxes
Δ NWC CAPEX
Unlevered FCF
Values in M€Source: Nova Research Team
considered that the historial median payout ratio of 75% will hold in perpetuity.
Therefore, the UFCF is expected to grow from fiscal 2024 ownwards at 1.5%.
Discount rate
Ryanair displays an unlevered cost of capital lower than the average of the
selected comparable companies (refer to Table VI), mainly due to the low
operational leverage. Nevertheless, the financial theory supports that in the long-
run the operational risk of an individual airliner will tend to the average of the
market. Therefore, the unlevered cost of capital was calculated based on the
market unlevered beta of 0.7431. In addition, it was considered a risk free of
1.35%, which corresponds to the yield to maturity of the 30-Y German Bunds and
a market risk premium of 6.25%32. Therefore, by applying the CAPM formula,
Nova Research Team reached an unlevered cost of capital for Ryanair of 5.95%.
In what concerns the cost of debt, although Ryanair has unsecured bonds
currently trading with a BBB+ credit rating, Nova Research Team did not use the
yield to maturity of these bonds as a proxy for the cost of debt for two reasons:
these bonds are infrequently traded and they bear default risk. Based on
Damodaran research, a BBB+ bond has on average an implicit default spread of
1.60%. Therefore, given the risk-free for Europe of 1.35%, Ryanair’s cost of debt
was considered to be 2.95%.
Al last, as it happens with the operational risk of a company, the financial theory
says that the level of financial leverage of a company tends to the market average
31 The unlevered beta for the airliners was computed based on the Bloomberg’s levered beta for two years of weekly data. Besides the capital structure, the latter beta was adjusted for the risk of debt. Based on the credit rating of each airliner it was attributed a default spread (i.e. from Damodaran). Then, we reach the cost of debt by adding the risk free for the country of each company. At last, using the CAPM formula it was computed the implicit beta of debt. The unlevered calculated according to the following formula: βu = [βe + βd * D/E * (1-t)] / [1+ D/E * (1-t)]. In this calculation it was assumed that a constant level of debt for the airliners. 32 Based on a publication of KPMG Netherlands “Equity Market Risk Premium – Research Summary”, October 2015
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 25/34
WACC Terminal Value
Net Debt/Equity 24.36%
Ru 5.95%
Rd 2.95%
Re 6.68%
t 12.50%
D/EV 19.59%
WACC 5.88%
Source: Bloomberg; Damodaran, KPMG
2,179
31,058 30,896 31,20828,879
(163)
312
-5,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
Graph XXXVI:Equity value breakdown
Source: Nova Research Team
in the long-run. In this particular case, the D/E to equity ratio of Ryanair shall tend
to 24.36% in perpetuity. Therefore, we will reach a long-term cost of equity for
Ryanair of 6.68% and a long-term WACC of 5.88%, which will be used to discount
the cash flow generated by the airliner after fiscal 2024.
Enterprise Value, Equity Value and Value per Share
Nova Research Team believes Ryanair will continue to rely heavily on debt
instruments to finance the aircraft acquisitions. As most of the aircrafts are
acquired under a SPV, which was a scheduled debt repayment, the tax shields
shall exhibit the same risk profile as the debt itself. Therefore, the tax shields were
discounted at the cost of debt of 2.95%, while the unlevered free cash flows were
discounted at the unlevered cost of capital of 5.95%. Following this approach, a
value of operations for the explicit period of 2.2 B€ was reached.
Nevertheless, Nova Research Team considers that Ryanair will adjust its debt
relative to the value of the company towards the market average as it stabilizes
the fleet growth. Therefore, the cash flows in perpetuity were discounted at the
long-term WACC of 5.88%. In addition, it was considered that the CAPEX after
fiscal 2024 will be essentially to replace operational assets and that the revenues
and the free cash flow will grow annually by 1.5%. Following this reasoning,
Ryanair operations are worth 31.6 B€. Adjusting this value for non-operational net
assets (i.e. intangible assets, net derivative financial instruments, non-operational
deferred taxes and provisions33) and for the net debt, we reached an equity value
as for the beginning of fiscal 2017 of 31.7 B€ and a value per share of €23.7234.
33 All at market values. 34 The value per share was computed by dividing the equity value by the diluted number of shares.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 26/34
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
D/EV -0.8% -1.0% 0.5% 2.7% 1.7% 7.0% 12.6% 18.8% 21.9%
P/E 22.3x 25.6x 19.5x 19.4x 18.8x 20.0x 21.6x 25.1x 29.4x
EV/EBITDAR 19.7x 15.6x 12.4x 11.9x 11.6x 12.0x 11.9x 12.7x 13.2x
EV/EBITDA 21.3x 16.5x 13.0x 12.4x 12.0x 12.5x 12.4x 13.1x 13.7x
Source: Nova Research Team
Table VII:
Selected financial ratios
Sensitivity analysis
The oil price is the hardest to predict input in the model. Nonetheless, Ryanair
share price is not as dependent as one would expect on the oil price since the
average airfares tend adjust to reflect the price of the input. Performing a
sensitivity analysis with changes in the price of oil of between -20% and 20%, we
found that the value of Ryanair shares predicted by our model vary between
€18.01 and €28.55. The same exercise was performed to the Airport and Handling
Charges and Route Charges captions and similar results were obtained. Nova
Research Team still analysed the impact on the value of the shares if there were
no discounts in the acquisition of the aircrafts from Boeing and concluded that the
share value is not very dependent on these discounts. Regarding the terminal
value, the value of Ryanair shares range between €19.37 and €29.61 when we
change the WACC and growth rate by 1%. It was still computed a 95% confidence
interval for the value per share in respect to the load factor coefficient and the
average fare elasticity. For the former we have an interval of €0.32, while for the
latter the interval increases to €4.64. At last, it was computed a 95% interval for
the unlevered beta of the industry. Since the standard error of the regression of
each comparable company return on the MSCI World Index return was large, the
value per share changes significantly with this input.
14.29
20.98
23.56
19.37
18.31
21.36
19.51
18.01
42.97
25.62
23.87
29.61
23.72
25.32
27.11
28.55
Beta of the industry
Average fare elasticity
Load factor coefficient
Terminal value
Aircraft price discounts
Route Charges
Airport and Handling…
Oil price
Graph XXXVII:Sensitivity analysis to selected parameters
Source: Nova Research Team
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 27/34
420.6462.7
840.2
2007 2014 2034 F
Source: Boeing Market Outlook
Graph XXXVIII:Europe - North America (RPK in s USD)
2,287 2,3332,464
2,5982,734
228233
237242
247
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Graph XXXIX:Forecasted price per aircraft and CAPEX
CAPEX Price
Values in M€Source: Nova Research Team
2,282
4,419
6,409
8,248
9,935
128
255
370
476
573
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Graph XL:Forecasted debt and interest expense
Current Debt
Non-current Debt
Interest Expense
Values in M€Source: Nova Research Team
Valuing an opportunity: transatlantic routes
The reinvention of the low-cost model to the long-haul segment is not a recent
concept. Back in 1977, Laker Airways launched the first transatlantic flight from
London Gatwick to New York at a clear discount to the legacy carriers, but soon
went bankrupt as a consequence of the 80s crisis. Already in the 21th century,
other LCCs such as Air Berlin, WestJet, WOW Air and Norwegian Air Shuttle
started operating transatlantic routes at fares as low as 200 euros for a round-trip.
The race for launching massive low-cost operations in transatlantic routes has
started as FSC such as Lufthansa and Air France-KLM announced their plans to
launch a transatlantic low-cost subsidiary. Ryanair has already announced its
intention to create a long-haul subsidiary in 2007, but the airliner left this plan
aside for a while following the financial crisis in 2008. Now that the world economy
starts resurging, Ryanair seeks to enter this very attractive market again.
Nevertheless, the backlog of orders of both Boeing and Airbus on their newly
created long-haul aircrafts (Boeing 787 Dreamliner, Airbus A330 and Airbus A350)
and the non-favourable current commercial conditions to make the flights viable
make it unpredictable for Ryanair to launch transatlantic operations in the next
couple of years.
According to the analysis of the aircrafts currently available to fly long-haul, Nova
Research Team concluded that the aircraft that best suits the low-cost business
model for transatlantic is the Boeing 787-800. This aircraft has a capacity up to
around 300 seats, which minimizes the load factor risk when compared with other
aircrafts flying long distances such as the Boeing 747-800, the Boeing 777-300,
the Airbus A350 or the Airbus A380, and it is one of the most fuel efficient aircrafts
operating nowadays. The Boeing 737-800 sells for 224.6 M$ (as of 2015) and the
price shall increase every year by the US inflation rate.
Analysts think Ryanair will need around 50 aircrafts to fulfil the demand between
Europe and North America. Nova Research Team considered that Boeing will
deliver annually at least 10 aircrafts to Ryanair, given the low backlog of the
aircraft maker by 2020. In addition, the airliner will need to invest in hangars,
fixtures and fittings and in plant and equipment to support the transatlantic
operations. Nonetheless, there will be some synergies in CAPEX with the current
business, namely in what concerns the European offices.
Ryanair is expected to rely heavily on debt instruments to finance these
acquisitions, as it has happened in the core market. Furthermore, it was assumed
that the airliner would be offered similar debt cost and maturities as in the
European business.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 28/34
Airports served:
London Stansted
Dublin Airport
Berlin Schonefeld
Rome Ciampino
Milan Bergamo
Madrid Barajas
Paris Beauvais
Airports served:
La Guardia, NY
Chicago-O’Hare International, IL
Logan International, MA
Miami International, FL
Washington Dulles International
Seattle – Tacoma International, WA
FY 2021
Airports served:
London Stansted
Dublin Airport
Berlin Schonefeld
Rome Ciampino
Milan Bergamo
Madrid Barajas
Paris Beauvais
Brussels Charleroi
Barcelona El-Prate
Manchester Airport
Köln Bonn Airport
Glasgow or Edinburg
City Airport Bremen
Lisbon Airport
Airports served:
La Guardia, NY
Chicago-O’Hare International, IL
Logan International, MA
Miami International, FL
Washington Dulles International
Seattle – Tacoma International, WA
William P. Hobby, TX
Phoenix Sky Harbor International, AZ
Orlando International, FL
Metropolitan Oakland International, CA
Los Angeles International, CA
San Diego Intl-Lindbergh Field, CA
FY 2025
Note: The European airports without arrows serve all the US airports marked
392
840
1,328
1,911
2,506
2.0
3.9
5.9
7.8
9.8
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Graph XLI:Forecasted passengers and operating revenues
Scheduled Revenues (in M€)
Ancillary Revenues (in M€)
Number of Passengers (in M)
Source: Nova Research Team
Analysts believe that when Ryanair transatlantic segment matures it will connect
around 14 European cities to 12 American cities. Nova Research Team
considered Ryanair will serve the following cities:
The transatlantic routes are characterized by constant demand throughout the
year that enables the airliners to display higher load factors, unlike in intra-Europe
where there is a peak during summer and a deep down during winter and, hence,
load factors range significantly along the year. From the analysis of Lufthansa, Air
France-KLM and IAG, we concluded that transatlantic routes yield on average 7%
more load factor than the European routes. Nova Research Team took a
conservative approach and assumed the load factor for Ryanair would be around
92% (i.e. relative to 91% in Europe for fiscal 2015).
Regarding the revenues, from the analysis of the only public traded low-cost in the
world operating just long-haul routes, Air Asia X, we concluded that Ryanair will
charge around 4.21 euro cents for each mile, meaning that, for example, the
average one-way fare from London to New York would be around €145. The
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 29/34
KPIs FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Average consumption per mile (in U.S. Gallon) 2.55 2.55 2.55 2.55 2.55
Average Fuel Price per U.S. Gallon (€) 2.40 2.56 2.97 3.29 3.35
Average Airport and Handling Charge 2,476 2,525 2,576 2,627 2,680
Average Route Charge 1.24 1.26 1.29 1.31 1.34
Staff per aircraft 48 48 48 48 48
Sales, operations, management and administration - - - - -
Average Annual Cost of Each Employee 72,254 73,699 75,173 76,677 78,210
Marketing, Distribution and Other (% Revenues) 5.2% 5.2% 5.2% 5.2% 5.2%
Maintenance, Materials and Repairs per aircraft 15.35 31.31 47.90 65.14 83.06
Source: Nova Research Team
Table VIII:
Operating expenses KPIs
168 377677
1,0511,403
73
115
164
219
172
260
351
443
376
804
1,333
1,954
2,562
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Graph XLII:Operating expnses breakdown
Fuel and Oil Expenses Airport and Handling Charges
Route Charges Staff Costs
Marketing, Distribution and Other Maintenance, Materials and Repairs
Depreciation
Values in M€Source: Nova Research Team
ancillary revenue shall represent 20% of the total revenues, significantly lower
than in the European business where it accounts for 25% of the revenues.
Regarding operational costs, fuel expenses would weigh more on the cost
structure than in the European business. Nevertheless, the fuel expense per mile
flown is expected to decrease significantly. In what concerns airport and route
charges, Ryanair would benefit from lower average charges in the US. The staff
cost would rise significantly both because Ryanair would have extra-expenses
such as crew stays and due to the higher number of staff required to operate the
Boeing 787-800 aircraft. However, some synergies with the current business are
expectable, namely in the incremental number of sales, administration, operations
and administration employees. As the airliner does not have the same brand
awareness in the US as it currently has in Europe, the transatlantic project would
require a higher portion of the revenues to be canalized to marketing. Finally, the
cost with maintenance, materials and repairs would increase due to the more
expensive components of the Boeing 787-800 relative to the Boeing 737-800.
“RYANAIR HOLDINGS PLC” COMPANY REPORT
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109207
321442
567
(131)(281)
(452)
(657)(862)
(22) (73) (131)(215)
(295)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Graph XLIII:Forecasted Working Capital
Inventories Prepayments Trade receivables
Operational Cash Trade Payables Accrued Expenses
Working capital
Values in M€Source: Nova Research Team
(2,165) (2,095) (2,160) (2,213) (2,272)
(3,000)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
-
500
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Graph XLIV:Forecasted Unlevered Free Cash Flow
EBIT Notional Taxes
Δ NWC CAPEXUnlevered Operating CF
Values in M€Source: Nova Research Team
Regarding the net working capital, it was considered that the transatlantic project
would have the same cash conversion cycle as in the European market. Although
one would expect the days in advance sales to increase comparatively to
Ryanair’s current segment, since the airliner already displays 93 days in advance
sales we consider a cautious approach to keep it.
Unlevered Free Cash Flow
Similarly to the business segment in Europe, the main caption of the free cash
flow generated by the project is the CAPEX. Due to the large investment in fleet
necessary to operate the transatlantic routes, Ryanair will need funds to finance
the operations in the first years of the project. From fiscal 2026 onwards the free
cash flow to the firm is expected to turn positive as Ryanair decreases the level of
investment. In line with the expectations of Boeing35, Nova Research Team
forecasted the unlevered free cash flow to grow at a rate of 3% until perpetuity.
35 Boeing Market Outlook projects the Europe-North America segment to grow 3% from 2015 until 2034
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 31/34
Comparables βu
Air Asia X LCC with just long-haul segment (Malaysia)0.81
Norwegian Air Shuttle LCC subsidiary in transatlantic routes 0.32
WestJet Low cost with transatlantic routes (Based in Canada)0.62
Cebu Airliners LCC with long-haul segment (Philipines) 0.67
Average 0.60
Source: Bloomberg
Unlevered Cost of Capital
Rf 1.35%
Bu 0.60
MRP 6.25%
Ru 5.12%
WACC Terminal Value
Net Debt/Equity 86.47%
Ru 5.12%
Rd 2.95%
Re 7.00%
t 12.50%
D/EV 46.37%
WACC 4.95%
Source: Bloomberg,
Damodaran and KPMG
Discount rate and values of operations
The long-haul segment is less cyclical than the short-haul segment. Therefore, as
one would expect, the implied risk of an airliner flying long distances relative to
airliners that focus just in the short-haul is significantly lower. Through the analysis
of comparable LCC operating in the long-haul segment, Nova Research Team
reached an unlevered beta for the project of 0.60.
Table IX: Comparable companies and unlevered beta
Based on the same risk free rate and market risk premium presented in Ryanair’s
valuation, we reached an unlevered cost of capital of 5.12%. Regarding the cost of
debt, it was assumed that the long-haul segment subsidiary would have the same
debt contractual conditions. In addition, it was assumed that the launch of
transatlantic operations would not affect the credit rating of the whole company.
As the long-haul segment is less cyclical, the airliners are on average more
leveraged. Nova Research Team believes that after fiscal 2025 Ryanair’s long-
haul segment will tend to the average debt-to-enterprise value of 46.4%.
Consequently, the cash flows from fiscal 2025 onwards were discounted at the
WACC of 4.95%.
Nova Research Team reach a net present value for Ryanair transatlantic project of
6.9 B€, which corresponds to 5.19€ for each Ryanair current shareholder.
Therefore, despite the unfavourable commercial conditions to acquire long-haul
aircrafts, the current outlook for the oil price makes it is worth to launch an ultra-
low cost airliner to operate transatlantic routes.
Table X:
Cost of capital
“RYANAIR HOLDINGS PLC” COMPANY REPORT
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Ryanair Holdings PLC
Income Statement (in € M) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2024
Scheduled Revenues 4,260.3 4,932.1 5,358.0 5,750.3 6,232.5 6,709.1 8,995.1
Ancillary Revenues 1,393.7 1,533.2 1,777.8 1,919.7 2,068.6 2,197.6 2,860.8
Total Operating Revenue 5,654.0 6,465.3 7,135.8 7,670.0 8,301.2 8,906.6 11,855.8
Fuel and Oil Expenses (1,992.1) (2,040.3) (1,755.2) (1,808.5) (2,027.5) (2,231.8) (3,181.4)
Ex-Fuel Operating Expenses (2,131.9) (2,439.8) (2,819.7) (3,095.6) (3,406.5) (3,706.8) (5,287.7)
EBITDAR 1,530.0 1,985.1 2,560.9 2,766.0 2,867.1 2,968.1 3,386.8
Rents and Depreciation (487.1) (534.2) (590.1) (663.2) (699.9) (825.4) (1,351.4)
EBIT 1,042.9 1,450.9 1,970.8 2,102.8 2,167.2 2,142.6 2,035.3
Financial Result (60.5) (55.1) (115.8) (213.6) (186.9) (254.5) (779.6)
EBT 982.4 1,395.8 1,855.0 1,889.2 1,980.4 1,888.1 1,255.7
Taxes (115.7) (174.5) (231.9) (236.1) (247.5) (236.0) (157.0)
Profit for the Year 866.7 1,221.3 1,623.1 1,653.0 1,732.8 1,652.1 1,098.7
Forecast
KPIs
Load Factor 88.00% 92.00% 93.53% 93.63% 93.42% 93.00% 92.02%
Average Booked Passenger Fare 47.05 47.05 44.60 44.97 45.97 47.39 52.76
Average Ancillary Revenue 15.39 14.63 14.80 15.01 15.26 15.52 16.78
Average Lenght of Passenger Haul (Miles) 776 776 776 776 776 776 776
Sectors Flow 544,466 602,912 679,510 722,503 767,870 804,274 965,266
Average consumption per mile 2.01 2.01 2.01 2.01 2.01 2.00 1.88
Average Fuel Price per U.S. Gallon (€) 2.34 2.16 1.65 1.60 1.69 1.78 2.26
Average Airport and Handling Charge 1,309.2 1,375.0 1,461.0 1,556.3 1,660.6 1,774.1 2,330.8
Average Route Charge per Mile 1.30 1.30 1.31 1.33 1.35 1.38 1.49
Staff per aircraft 31 31 31 31 31 31 31
Average Annual Cost of Each Employee 52,410 53,458 54,094 54,878 55,768 56,743 61,331
Marketing, Distribution and Other (% Revenues) 4.1% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%
Maintenance, Materials and Repairs per aircraft 0.48 0.48 0.49 0.50 0.51 0.52 0.57
Annual Rent per Aircraft Leased 2.08 2.09 2.12 2.17 2.22 2.27 2.47
Financials and valuation KPIs Income Statement
Balance Sheet
Ryanair Holdings PLC
Historical
Balance Sheet (in € M) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020FY 2021 FY 2024
Property, Plant and Equipment 5,471.1 6,299.2 7,368.6 8,704.6 9,027.7 11,573.4 20,976.4
Intangible Assets 46.8 46.8 46.8 46.8 46.8 46.8 46.8
Working Capital (1,824.7) (2,095.1) (2,279.3) (2,451.9) (2,664.9) (2,876.0) (3,905.3)
Net Deferred Tax Assets (462.3) (418.5) (418.5) (418.5) (418.5) (418.5) (418.5)
Net Derivative Financial Instruments 413.8 10.3 10.3 10.3 10.3 10.3 10.3
Net Other non-Operating Assets 134.3 (206.9) (206.9) (206.9) (206.9) (206.9) (206.9)
Shareholder's Equity 4,035.3 3,953.1 4,364.5 4,783.6 5,222.8 5,641.6 6,963.0
Net Debt (256.1) (317.2) 156.5 900.8 571.7 2,487.5 9,539.8
Forecast
KPIs
Payout Ratio 72.59% 74.68% 74.68% 74.68% 74.68% 74.68% 74.68%
PPE and Debt
Price of each aircraft 39 38 38 43 50 92 100
Aircrafts Delivered (including options) 11 41 52 50 29 39 25
Sale and Lease Back 0 8 12 6 11 4 12
Lease Returns 0 -8 -12 -6 -11 -4 -12
Disposals 0 -1 -12 -10 0 -4 -2
Aircrafts at the end of FY 308 340 368 402 420 451 520
No. of aircraft with debt Remaining 234 211 212 231 219 218 195
Financed with Ryanair's own resources 11 44 56 56 56 56 56
Aircrafts Under Op. Leasing 51 51 51 51 51 51 51
No Outstanding Debt Remaining 12 34 49 64 94 126 218
“RYANAIR HOLDINGS PLC” COMPANY REPORT
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KPIs
Working Capital
Inventory Turnover 5.68 5.68 5.68 5.68 5.68 5.68 5.68
Prepayments/Operating costs ex-depreciation 0.03 0.03 0.03 0.03 0.03 0.03 0.03
Days on Sales Outstanding 5.15 5.15 5.15 5.15 5.15 5.15 5.15
Days on Payable Outstanding 16.94 16.94 16.94 16.94 16.94 16.94 16.94
Unearned Revenues/Scheduled Revenues 0.26 0.26 0.26 0.26 0.26 0.26 0.26
Cash Flow Statement
Ryanair Holdings PLC
Historical
CF Statement (in € M) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020FY 2021 FY 2024
EBIT 1,042.9 1,450.9 1,970.8 2,102.8 2,167.2 2,142.6 2,035.3
- Cash Operational Taxes (104.7) (225.2) (246.3) (262.9) (270.9) (267.8) (254.4)
'- Notional Taxes (130.4) (181.4) (246.3) (262.9) (270.9) (267.8) (254.4)
'+ ∆ Net Deffered Tax Liabilities 25.7 (43.8) - - - - -
'+Tax Adjustments 6.9 - - - - - -
NOPLAT 945.1 1,225.7 1,724.4 1,840.0 1,896.3 1,874.8 1,780.9
+Depreciation 377.7 424.7 482.2 552.6 586.6 707.0 1,209.4
Gross CF 1,322.8 1,650.5 2,206.6 2,392.6 2,482.9 2,581.8 2,990.3
- Δ NWC 397.3 270.4 184.2 172.6 213.0 211.1 169.6
- CAPEX (788.5) (1,252.8) (1,551.6) (1,888.6) (909.7) (3,252.7) (1,312.3)
Unlevered Operating CF 931.6 668.0 839.2 676.6 1,786.2 (459.8) 1,847.6
- Δ Intangible Assets - - - - - - -
+ CF Excess Cash (1,528.4) 338.5 (156.6) (552.8) (516.3) (398.5) 572.1
+ CF Available for Sale Assets 0.0 371.0 - - - - -
+ CF Derivative Financial Instruments (75.0) 403.5 - - - - -
+ CF Net Pension Funds Liabilities 0.4 - - - - - -
+ Non-operating CF from Operating Leasing 9.4 (29.8) - - - - -
+ Δ Deffered Taxes on NOLCF - - - - - - -
+ Foreign Exchange Gain/Loss (4.2) - - - - - -
+ Gains on Disposal of PPE - 22.0 - - - - -
FCF to the firm (665.7) 1,770.5 682.6 123.9 1,269.9 (858.3) 2,419.6
- Interest Expense (74.3) (77.1) (115.8) (213.6) (186.9) (254.5) (779.6)
+ Interest Tax Shield 9.3 9.6 14.5 26.7 23.4 31.8 97.5
+Δ Debt 1,347.9 (399.6) 630.3 1,297.1 187.2 2,314.3 (917.4)
+Δ Cash Shareholders' Equity (617.3) (1,303.6) (1,211.6) (1,234.0) (1,293.6) (1,233.3) (820.1)
FCF from Financing 665.6 (1,770.6) (682.6) (123.9) (1,269.9) 858.3 (2,419.6)
“RYANAIR HOLDINGS PLC” COMPANY REPORT
PAGE 34/34
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by António Caleia, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.