Ryanair Valuation - Corporate Valuation Project

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Århus School of Business, Århus University

Corporate Valuation

Valuation of Ryanair

Group Members:

Konstanty Kasprzyk

Lavinia Andrei

Marcel Reinders

Ruxandra Pană

Advising Professor: Tom Albæk Hansen

,ovember 2009

Number of characters (with spaces): 71,218 without annexes / 150,629 with annexes.

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Contents 1. Introduction ........................................................................................................................................... 6

1.1 Problem Statement .......................................................................................................................... 6

1.2 Introduction of Ryanair ................................................................................................................... 6

1.3 Methodology ................................................................................................................................... 6

1.4 Limitations....................................................................................................................................... 7

2. Analysing historical performance ......................................................................................................... 7

2.1 Invested Capital ............................................................................................................................... 9

2.2 NOPLAT ......................................................................................................................................... 9

2.3 Free Cash Flow .............................................................................................................................. 10

2.4 Return on Invested Capital ............................................................................................................ 10

2.5 Revenue Growth ............................................................................................................................ 11

2.6 Credit Health ................................................................................................................................. 11

2.7 Stock Market performance ............................................................................................................ 12

3. Business Strategy Analysis ................................................................................................................. 12

3.1 Internal analysis ............................................................................................................................. 13

3.2 External analysis............................................................................................................................ 13

3.3 Competitor analysis ....................................................................................................................... 14

3.4 Porter’s 5 Forces ........................................................................................................................... 16

3.4.1 The threat of substitute products ............................................................................................ 16

3.4.2 The threat of the entry of new competitors ............................................................................ 16

3.4.3. The intensity of competitive rivalry ...................................................................................... 16

3.4.4. The bargaining power of customers ...................................................................................... 16

3.4.5. The bargaining power of suppliers ........................................................................................ 17

3.5. SWOT analysis ............................................................................................................................. 17

3.5.1. Strengths................................................................................................................................ 17

3.5.2. Weaknesses ........................................................................................................................... 17

3.5.3. Opportunities ......................................................................................................................... 18

3.5.4. Threats ................................................................................................................................... 18

4. Cost of Capital .................................................................................................................................... 19

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4.1. Ryanair’s cost of equity ................................................................................................................ 19

4.1.1. The Risk Free Rate ................................................................................................................ 20

4.1.2. Beta ....................................................................................................................................... 20

4.1.3. The Equity Risk Premium ..................................................................................................... 22

4.2. Ryanair’s After-tax Cost of Debt ................................................................................................. 23

4.3. Ryanair’s Capital Structure .......................................................................................................... 23

5. Forecasting performance ..................................................................................................................... 25

5.1. Base case scenario ........................................................................................................................ 26

5.2. Optimistic scenario ....................................................................................................................... 27

5.3. Pessimistic scenario ...................................................................................................................... 28

6. Calculating and interpreting results .................................................................................................... 30

6.1. Value of operations ...................................................................................................................... 30

6.1.1. Discounted cash flow ............................................................................................................ 30

6.1.3. Value of operations ............................................................................................................... 30

6.2. Equity value .................................................................................................................................. 31

6.2.1. Value of non-operating assets ............................................................................................... 31

6.2.2. Value of non equity claims ................................................................................................... 31

6.2.3. Debt ....................................................................................................................................... 31

6.2.4. Debt equivalents .................................................................................................................... 31

6.2.5. Value of hybrid claims .......................................................................................................... 32

6.2.6. Value per share...................................................................................................................... 32

6.3 Verifying Valuation Results .......................................................................................................... 33

6.3.1. Sensitivity Analysis............................................................................................................... 33

6.3.2 Plausibility analysis................................................................................................................ 34

7. Conclusions ......................................................................................................................................... 34

8. Negotiation outcome ........................................................................................................................... 35

9. Bibliography........................................................................................................................................ 36

10. Annexes ............................................................................................................................................. 38

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10.1 Historical performance ................................................................................................................ 38

10.1.1. Historical Income statement ................................................................................................ 38

10.1.2. Historical Balance Sheets .................................................................................................... 39

10.1.3. Historical NOPLAT ............................................................................................................ 40

10.1.4. Historical Invested Capital .................................................................................................. 41

10.1.5. Historical Cash Flow ........................................................................................................... 42

10.1.6. Historical Economic Profit.................................................................................................. 42

10.1.7. Historical operating ratios ................................................................................................... 43

10.1.8. Revenue growth .................................................................................................................. 43

10.1.9. Growth patterns: Ryanair vs. easyJet .................................................................................. 44

10.1.10. Measuring Coverage ......................................................................................................... 44

10.1.11. Total Return To Shareholders: Ryanair vs. easyJet .......................................................... 44

10.2. Market definition, size, share and growth .................................................................................. 45

10.2.1. Market growth ..................................................................................................................... 46

10.3 PESTEL Analysis ........................................................................................................................ 47

10.3.1 Political and legal factors ..................................................................................................... 47

10.3.2 Economic factors.................................................................................................................. 50

10.3.3 Socio-cultural factors ........................................................................................................... 51

10.3.4 Technological factors ........................................................................................................... 52

10.3.5 Environmental factors .......................................................................................................... 52

10.3.6 General Degree of Turbulence in the Environment ............................................................. 53

10.4. The Five Forces analysis of the airline industry ......................................................................... 54

10.4.1. The threat of substitute products - low ................................................................................ 54

10.4.2. The threat of the entry of new competitors - moderate ....................................................... 55

10.4.3. The intensity of competitive rivalry - high ......................................................................... 56

10.4.4. The bargaining power of customers - moderate .................................................................. 57

10.4.5. The bargaining power of suppliers - high ........................................................................... 57

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10.5. Competitor Analysis ................................................................................................................... 58

10.5.1. EasyJet ................................................................................................................................ 58

10.5.2. Air Berlin ............................................................................................................................ 60

10.5.3. Conclusion .......................................................................................................................... 61

10.6. Internal analysis .......................................................................................................................... 62

10.6.1. Snapshot .............................................................................................................................. 62

10.6.2. Financial perspective – Main financial ratios ..................................................................... 62

10.6.3. Operational perspective....................................................................................................... 68

10.6.4. Value chain perspective ...................................................................................................... 71

10.7 SWOT Analysis ........................................................................................................................... 72

10.7.1 Strengths............................................................................................................................... 72

10.7.2 Weaknesses .......................................................................................................................... 74

10.7.3 Opportunities ........................................................................................................................ 75

10.7.4 Threats .................................................................................................................................. 76

10.8. Forecasting performance ............................................................................................................ 79

10.8.1. Base case scenario ............................................................................................................... 79

10.8.2 Optimistic scenario .............................................................................................................. 88

10.8.3. Pessimistic Scenario ............................................................................................................ 97

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1. Introduction

1.1 Problem Statement

The report at hand goes through the steps of the valuation process for the airline carrier Ryanair. The

purpose of the paper is to analyze the company’s historical performance within the context of its

industry and market conditions and provide insights into the company’s future performance and thus

intrinsic value. The ultimate goal of the report is to provide decision making support for a potential

buyer of the airline.

1.2 Introduction of Ryanair

The Irish airline company Ryanair has been in business for 25 years. Today, it is the largest European

airline, as classified by the IATA ranking. Its business model based on short-haul, point-to-point routes

has proven to be a success. The airline currently operates from 32 bases all over Europe, offering over

1,200 scheduled flights per day, and serving 151 locations throughout Europe and Morocco. Ryanair

operates a fleet of 202 aircrafts on more than 850 routes. It employs more than 7,000 people. The

company has had almost 60 million passengers the past year and expects to carry 66 million people in

2009. During the last 10 years, the company grew by 359% in terms of number of employees, 596% in

terms of fleet size, and 965% in terms of operating revenue.

1.3 Methodology

In order to be able to value Ryanair, information was gathered in the form of annual reports from

Ryanair and its various competitors as well as information on the airline industry and financial markets.

In order to get a picture of Ryanair’s historical performance, a financial ratios analysis has been

performed based on the company’s balance sheet and income statement from the last 10 years. A

strategic business analysis has also been conducted, including a PESTEL and competitor analysis,

Porter’s 5 forces and finally a SWOT analysis based on the information generated from the strategic

business analysis. We have used the information gathered in calculating the value of the company using

two different valuation frameworks: the enterprise discounted cash flow and the economic profit

frameworks. We have chosen these frameworks because they do not mix operating performance and

capital structure. Furthermore, if used correctly they give identical results and thus reinforce each other.

Moreover, while the DCF analysis focuses solely on the cash flows generated by the company, the

economic profit method reveals whether the company has earned more than its cost of capital in a

given period, and therefore the methods offer complementary information for analysis. We consider

using these frameworks appropriate for valuating a company such as Ryanair because, even if

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historically the company’s debt-to-equity ratio has been rather volatile, we assume the firm will soon

reach a period of stability in its growth and will start to manage its capital structure towards a particular

target.

1.4 Limitations

It is important to note that the valuation was done from an external perspective where no internal

information was available to the group for valuation purposes. Nevertheless, the group thinks that the

assumptions made in the valuation are reasonable and largely represent reality. Furthermore, it should

be noted that in the competitor analysis only the two most important competitors of Ryanair in the low-

cost transportation segment were analyzed since this segment is highly fragmented. Moreover, the low-

cost air carriers do not only have to compete with each other for passengers but also with the full-

service air carriers. These air carriers were not considered since they have a different business model

than Ryanair.

The report continues as follows: in the next section, an analysis of the company’s historical

performance is presented, followed by a business strategy analysis in section 3. Section 4 presents the

calculation of Ryanair’s cost of capital, while in parts 5 and 6 the company’s performance is forecasted

on a scenario basis and the calculation of the company’s value is undergone respectively. In section 7

we present our overall conclusions and in part 8 we present the insights gathered during the negotiation

exercise.

2. Analysing historical performance

In order to accurately and reliably asses a company’s ability to generate cash flows in the future and

forecast its performance, it is important to analyze the company’s evolution and understand the drivers

behind it. The main sources of information for an external analyst of the company’s historical

performance are its financial statements. However, since they are meant for accounting and taxation

purposes, before they can be used for valuation purposes, they need to be reorganized.

In our analysis of Ryanair’s financial statements, several accounting issues merit special attention:

• Acquisitions and treatment of goodwill – the only acquisition where goodwill was registered

was in the 2003-2004 financial year, when Ryanair acquired certain assets from KLM UK

Limited, (known as the Buzz acquisition). The amount was reallocated to the “intangible assets

account” when the transition to IFRS took place. Growth through acquisition is a somewhat

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difficult strategy to undertake, especially since it should be a cross-border operation to have

considerable impact, in which case there are major obstacles to overcome in terms of legal

issues, reaching the expected level of synergies etc. Therefore, Ryanair’s strategy focuses more

on internal growth, rather than growth by incorporation of other companies.

• Changes in accounting policies: in the fiscal year 2004-2005, Ryanair made the transition from

Irish GAAP to IFRS, which involved the following changes:

o Pensions and other post-retirement benefits had to be disclosed;

o The reallocation of the value of assets Buzz acquisition from goodwill to intangible

assets;

o Share-based payments to employees were recognized;

o The value of spare parts was transferred from the “inventories” account to “property,

plant and equipment”;

o Derivatives value was restated at fair value unrealised loss of EUR 146.4 million

together with a related deferred tax benefit of EUR 18.3 million has been recorded

directly in the opening cash flow hedging reserve;

• Dividends – the company paid no dividends during the 10 year period and management has

stated that no dividends will be paid out in the foreseeable future.

• Taxes – the statutory tax rate in the UK has had a decreasing trend, from 23% in 2000 to 12.5%

in 2009. Since it has been stable at 12.5% for the past 6 accounting periods, we have used this

rate as a basis to calculate the amount of marginal taxes. Although Ryanair has a tax advantage

since profits resulting from Ryanair.com are taxed at only 10%, these account for a very small

proportion of Ryanair’s taxable income. Since the marginal tax rate is defined as the tax rate on

an extra dollar of income and the probability of that dollar being taxed at the statutory tax rate is

very high, we estimated Ryanair’s marginal tax rate to be 12.5%.

• Excess cash – we have estimated that even though Ryanair holds impressive amounts of cash, a

reasonable amount of operating cash would be 2% of the total cash held during the accounting

period. The rest is deemed to be excess cash.

• Other financial fixed assets – are made up of investments in subsidiary undertakings that are

particular to the company, not the group and are constant throughout the historical analysis

period.

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• Operating leases – At March 31 2009 Ryanair had 43 of its aircraft financed through operating

leases. Since the company is actively using the 43 aircraft as part of its operating activities, we

have included the value of the leases in the total invested capital. The value of the leases was

calculated using the following formula:

�� =��

�� + 1��

We have used the rental expense reported in the respective year by the company in its financial

statements. Considering the fact that the expected life for Ryanair’s aircrafts is 23 years and the

average age of the fleet is 2.77 years, we have assumed the average asset life to be 20 years. The

calculation of the company’s cost of debt is detailed in section 4.2.

• Pension plans – Ryanair has both defined contributions and defined benefit pension schemes.

For the defined benefit plans, which are relevant for valuation purposes, Ryanair recorded a

pension liability in 2009. Therefore, Ryanair does not have excess pension assets. The liability

was subtracted from enterprise value to get to equity value.

• Deferred taxes – Ryanair currently has EUR 32.6 million in deferred taxes (which have

decreased substantially because of the loss incurred in the last year). We have treated those as

an equity equivalent, adjusting NOPLAT for the change each year and adding it to equity in the

total investor funds reconciliation (Annex 10.1.4 – Historical Invested Capital).

2.1 Invested Capital

Annex 10.1.4 – Invested Capital represents a calculation of invested capital. The level of invested

capital increased by 832% over the 10 year period, with a peak of EUR 5,666,803,000, which is almost

10 times more than the amount of invested capital in 2000. The negative working capital is balanced by

a staggering growth in net property, plant and equipment, out of which the largest part is represented by

their fleet enlargement.

2.2 NOPLAT

NOPLAT shows the total income generated from operations available to Ryanair’s investors. As the

table listed under Annex 10.1.3 - �OPLAT shows, the company had increasing NOPLAT from 2001 to

2008 of 387%, followed by a decrease in the next year to almost the level registered in 2001. Reasons

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like the financial crisis and oil prices which reached an all-time high during 2009 caused the downturn.

Both the increase in EBITA and the increase in adjustments for operating leases fuelled the upward

trend in EBITA.

2.3 Free Cash Flow

Ryanair has been slowly improving its cash flow to investors position, which has steadily increased

from a negative EUR 460 million to a positive EUR 234 million. As the table under the Annex 10.1.5 –

Historical Cash Flow points out, the large investments (capital expenditure and investments in

operating leases) are mainly causing the negative cash flow to occur.

2.4 Return on Invested Capital

The graph below shows the ROIC tree and how the operational drivers affect ROIC.

The ratios are calculated using beginning of the year figures. This ROIC tree presents the dynamics for

the year 2008 (we have chosen to leave out 2009 and work with a more “representative year”). The

company’s ROIC is driven more by the average capital turns than by the operating margin. Therefore,

Figure 2.1: Ryanair’s ROIC tree

ROIC

21.7

Pre-tax

ROIC

24.6

Cash tax rate

11.9

Operating margin

19.8

Average capital

turns

1.24

Gross margin

36.17

SG&A / revenues

0.63

Depreciation / revenues

6.48

Fixed assets / revenues

108.64

Operating working capital /

revenues

-30

Other operating expenses

/ revenues

9.26

Intangible assets / revenues

1.72

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the company is very efficient in the way it uses its stockholder’s equity to generate revenue. Moving

more to the right, we notice that the ratio is influenced by the fixed asset / revenues ratio, which is

almost one-to-one. If we reverse the ratio to get fixed asset turnover, the result would be 92.05%,

which is considerably more that easyJet’s 57.76%. The figure is in line with the internal analysis that

points out the company’s efficiency in managing its fleet. This is most likely the source of their

advantage over competitors. In terms of the operating margin, it is mostly driven by the gross margin.

Compared to easyJet’s gross margin (at 15.8% in 2009), Ryanair performs better. This is the result of

its cost management efforts.

We can conclude that Ryanair’s ROIC stems from its fixed asset turnover and its strong gross margin

as a result of cost containment.

2.5 Revenue Growth

The table in Annex 10.1.8 - Revenue growth breaks down the revenue in revenue per passenger and

number of passengers in order to assess whether price or quantities are driving revenue growth. As

expected for a low cost airline, it is not high prices that are the main cause, but the high number of

passengers. There was a sustained downward trend in revenue/passenger (which decreased by 33.5%

over the period in question due to the decrease in average price per flight and the growing number of

passengers), while the number of passengers increased by 965%.

The table in Annex 10.1.9 – Growth patterns: Ryanair vs. easyJet depicts the evolution of

Ryanair’s and easyJet’s revenue growth and their drivers for the last 5 years. easyJet’s position

seems to have changed over time. In 2005, its revenue driver was clearly revenue/passenger,

although it also had more passengers than Ryanair. Over the period in question, Ryanair posed a

serious competitive threat and they cut prices down. Currently, easyJet earns less per passenger

than Ryanair does, due to the lower overall revenue and less efficient cost management.

In conclusion, as long as Ryanair can manage to keep prices low and thus attract passengers, the

company stands a good chance of having a similar revenue growth in the future.

2.6 Credit Health

Even though Ryanair uses large amounts of debt to cover their aircraft lease expenses, the interest

coverage ratios calculated in Annex 10.1.10 – Measuring Coverage point out that the company is in

good shape and that its creditworthiness is solid. Glenn Curtis

should cover its interest expense by at least two times but preferably three. If we overlook the last

financial year, the lowest coverage for Ryanair was recorded in 2006 at 5.07. Therefore, we can safely

posit that the company will have no difficulties in meeting its debt service obligations. The other

financial leverage ratios are detailed in the “Internal Analysis” s

2.7 Stock Market performance

The graph below shows the total return to shareholders for Ryanair and its largest competi

for the period ending on 30 September 2009. The values can be found in

To Shareholders: Ryanair vs. easyJet

that drive TRS. For the 5-year average TRS, e

difference between the price of a share now and 5 years ago i

In terms of the 3 – year average, both companies had negative returns, which is a sign that they failed

3. Business Strategy Analysis

This section includes the conclusions of our more lengthy analyses which are presented in the Annexes.

For more information refer to Annex 10.2, Market definition, size, share and growth;

PESTEL Analysis; Annex 10.4, The 5 Forces Analysis of th

analysis; Annex 10.6, Internal analysis

1 Glenn Curtis - Is That Airline Ready For Lift

Retrieved from http://www.investopedia.com/articles/stocks/07/airline_stocks.asp

-1 0

1 - year averageTRS

3 - year average TRS

5 - year average TRS

Figure 2.2: Shareholder return

good shape and that its creditworthiness is solid. Glenn Curtis1 states that, ideally, an airline's EBITDA


, the lowest coverage for Ryanair was recorded in 2006 at 5.07. Therefore, we can safely


financial leverage ratios are detailed in the “Internal Analysis” section.

The graph below shows the total return to shareholders for Ryanair and its largest competi

for the period ending on 30 September 2009. The values can be found in Annex

easyJet. Since neither company pays dividends, it is just the stock prices

year average TRS, easyJet has almost double the returns. This shows that the

difference between the price of a share now and 5 years ago is a lot larger for

year average, both companies had negative returns, which is a sign that they failed

to meet ma

However,

to the “break

Finally, over the last ye

Ryanair did better than

easyJet

expectations of the market

more than

to.

Business Strategy Analysis


Annex 10.2, Market definition, size, share and growth;

The 5 Forces Analysis of the Airline Industry;

Internal analysis and Annex 10.7, SWOT Analysis.

dy For Lift-Off?

ttp://www.investopedia.com/articles/stocks/07/airline_stocks.asp

1 2 3

EasyJet

Ryanair

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states that, ideally, an airline's EBITDA


, the lowest coverage for Ryanair was recorded in 2006 at 5.07. Therefore, we can safely


The graph below shows the total return to shareholders for Ryanair and its largest competitor, easyJet,

Annex 10.1.11. - Total Return

. Since neither company pays dividends, it is just the stock prices

asyJet has almost double the returns. This shows that the

s a lot larger for easyJet than for Ryanair.

year average, both companies had negative returns, which is a sign that they failed

to meet market expectations.

However, Ryanair is closer

to the “breakeven point”.

Finally, over the last year,

Ryanair did better than

easyJet and exceeded

expectations of the market

more than easyJet managed

to.


Annex 10.2, Market definition, size, share and growth; Annex 10.3,

e Airline Industry; Annex 10.5, Competitor

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3.1 Internal analysis

From a financial perspective, the company has been doing well. Financial ratios point out that the

company has been growing at a fast pace. It is extremely liquid holding large amounts of excess cash

due to the fact that it cashes in well before the flights actually take place. Ryanair has increased its debt

levels in order to fuel growth and to be able to take advantage of the benefits of debt. In terms of

profitability, as, expected, the company doesn’t yield high ROA or ROE due to the fact that its main

goal for now is growth and high returns are generally associated with mature companies. In terms of

investment ratios and stock market performance, the value of the company has been fluctuating. The

main influencing factors for the fluctuation are fuel prices and the overall economic recession.

Operating performance ratios are also typical for a growing company. Fixed asset turnover decreases

due to the expansion of the fleet and operating bases, while revenue per employee is increasing rapidly.

From an operational standpoint, the company is aiming for excellence. The company uses the same

model as Southwest and strives to keep costs low and to pass all the cost savings down to the customers

without making any cutbacks in the key areas driving quality, like training and fleet maintenance. Costs

are being kept at a low by using the online booking and check-in systems extensively, in order to

reduce the need for excess personnel. The company’s planes and people are highly productive,

therefore we can infer that Ryanair manages all its resources efficiently and effectively. Aggressive

marketing campaigns – whether on-line or using other media like the television – make the company

stand out and attract more and more passengers

All of the company’s activities are finely interlinked for a better value creation process. The company

manages to add value by starting with as low costs as possible and striving to pass these cost savings to

the passengers and combining these benefits with a high quality service. Productivity is another main

factor that adds value and increases margins.

3.2 External analysis

The European airline market is highly fragmented and in 2008 approximately 230 air carriers existed in

total of which the top 50 accounted for more than 90 % of capacity in Europe. Market size is measured

by number of booked passengers and according to the International Civil Aviation Organization in

2008 649.090.000 passengers were transported. Ryanair accounted for 58.565.663 passengers which

equal a market share of about 9%. This makes Ryanair not only the market leader in the low-cost

segment but also the leader for overall European airlines including full service carriers. Lufthansa and

Air France accounted for only 7.7% % and 6.8 % respectively in 2008.

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As far as the market growth is concerned, the airline industry is very sensitive to the overall situation of

the global and European economy. In 2008 the market experienced a decline due to the downturn in the

global economy. Aviation organizations however, estimate that the in the mid-term growth in Europe

will stabilize around 5 %. Reason for this will be mainly the economic development in Eastern

European countries.

Analyzing the macro-environment of Ryanair with the PESTEL analysis revealed a number of

important implications. As far as political and legal factors are concerned the liberalization of the

airline industries provides Ryanair with a lot of opportunities but at the same time might fuel an

increase in competition. Possible State aid to national flag carriers poses a problem since this provides

these carriers with a competitive advantage. Also the increased rights of passengers travelling in

Europe could result in additional expenses for compensation. Economic factors affecting the airline

industry are the overall economic situation and oil prices. The airline industry is very income elastic

which means that in a worsening economic situation as income decreases so does the demand for air

transportation. However, since Ryanair is a low-cost airline it is somewhat less affected by an

economic recession. Oil prices have seriously affected the industry representing almost 50 % of

operating costs. Even though airlines have a number of ways to deal with volatile oil prices, such as

hedging, high oil prices pose a serious threat.

Socio-cultural factors important to the airline industry are the perceived safety level as well as the

trend in the EU to travel abroad for short vacations throughout the EU membership states.

Technological factors that should be considered are the wide spread of internet based communication

technology and their decreasing costs as this reduces the demand for air travel. Furthermore

improvement in aircraft technology and more efficient jet engines make it easier to maintain low fare

levels. Considering environmental factors the emission trading scheme to which the airline industry

will be added in 2012 is likely to increase costs for the industry which will have to be passed through to

passengers resulting probably in a decrease in demand.

3.3 Competitor analysis

Competitors that operate in the low-cost segment and have similar business model as Ryanair pose the

biggest threat to the company even though full service carriers also compete in the short-haul market

for passengers. The two biggest competitors in the low-cost segment are easyJet and Air Berlin.

easyJet is a British airline that is headquartered in London Luton Airport. It carries more passengers

than any other British carrier and transported about 43.7 million passengers in 2008. In Europe it is the

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airline with the second highest passenger numbers after Ryanair with 58.6 million passengers. easyJet’s

business model is similar to that of Ryanair and that of Southwest in the USA. The company employs a

policy of rigorous cost cutting by not offering services such as connecting flights or offering services

for additional service charges such as food and beverages. Furthermore easyJet operates only a couple

of aircraft types in order to keep operating and maintenance costs low. High aircraft utilization and

quick turnaround times are vital parts of easyJet’s business model. However, there are several

differences to the Ryanair business model. easyJet, unlike Ryanair, flies in general to the main airport

of the cities it serves for example London Gatwick or Paris Charles de Gaulle. Furthermore easyJet

tries to attract business passengers by offering convenient services at additional service costs.

Air Berlin is after Lufthansa Germany’s second largest air carrier. It is a semi low-cost air carrier

which is headquartered in Berlin. It extensively services holiday destinations in the Mediterranean,

North Africa and the Canary Islands as well as a selection of various major European cities. In 2008 the

Air Berlin carried about 28.6 million passengers. In Europe, Air Berlin is the fifth largest air

transportation provider and the third largest low-cost carrier behind Ryanair and easyJet. Air Berlin has

a different strategy than Ryanair and easyJet even. It tries to fill the gap between the traditional full

service airlines and the low-cost airlines with very limited services even though it officially belongs to

the low cost carrier segment. It seeks to achieve the status of a hybrid type of carrier. It tries to set

standards with a unique price/performance ratio. Unlike low-cost carriers Air Berlin operates multiple

types of aircrafts and also serves long-haul destinations with more than six hours of flight time. The

airline tries to offer more services than low-cost carriers but at lower costs than full-service carriers.

In conclusion, even though Air Berlin is the third largest low-cost carrier in Europe easyJet seems to

pose a bigger threat to Ryanair. The reasons for this are the similar cost structure of easyJet and its

business model. Additionally, easyJet is much more focused on the European short-haul market than

Air Berlin and generates higher passenger numbers. Also important is the fact that easyJet services

more convenient airports in general than Ryanair which many passengers might perceive as the better

business proposition. Lastly, the competition between Ryanair and easyJet has become increasingly

aggressive in recent years with easyJet attacking Ryanair directly by servicing the same cities in Ireland

and England engaging in price wars.

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3.4 Porter’s 5 Forces

3.4.1 The threat of substitute products

The other substitute products for airlines are other means of transport like cars, trains or ships. They

can pose a threat for a regional, short distance trips. However, with increasing distance, flights become

a more popular option for many customers, so in this case the threat is moderate. Recently, the

developing communication technologies like internet and teleconferencing, that enable virtual

meetings, lowered the need for business travels. We assess the threat of substitute products to be low.

3.4.2 The threat of the entry of new competitors

Although it may seem that the barriers of entry should block the industry from new competitors

entering the market, the threat of entry of new carriers depends on the costs of access to bank credits

and loans as this industry is characterised by high leverage. When borrowing is cheap, the likelihood of

new companies entering the market increases. This market gets easily saturated so it is important to

have a recognised brand name as well as having frequent flights on most of the routes. Having good

slots on the airports (hour and place) also lower the threat of new competitors. We assess that the threat

of entry of new competitors is moderate.

3.4.3. The intensity of competitive rivalry

Because of the fact that the industry is highly fragmented, the intensity of competitive rivalry is high.

The airline companies have high fixed costs and because of high competition in this sector they have

relatively low returns. That leaves them in a vulnerable position during the times of economic

slowdown or increasing prices of fuel. In order to survive and increase profits the companies need to

have unique business models (outsourcing, maximising the use of aircrafts etc.) in order to gain higher

profits then the average for industry and outrun the competition.

3.4.4. The bargaining power of customers

The bargaining power of customers is high as long as there are other cheap competitors on the route. In

this situation customers will usually choose the cheapest option. However, having a strong brand can

be of some help. If there aren't any competitors, and the company offers the only cheap connections,

the power of customers decreases. We believe that the bargaining power of customers is moderate.

17

3.4.5. The bargaining power of suppliers

The power of suppliers is high as the returns are small and the two main costs for the airline companies

are fuel and labour. The costs of fuel may depend on the efficiency of the carrier however: as the planes

consume the highest amounts of jet fuel during take-offs and landings, short haul airlines have lower

cost efficiency. Also the prices of fuel tend to fluctuate on monthly basis so companies need to have a

business model that accounts for that. The airlines has to pay air pilots, flight attendants, customer

relations and airport services such as baggage handlers and dispatchers as well as for the slot on the

airport. Ryanair is outsourcing all its check-in and airport services to Servisair in all its locations. High

airports fees move cheaper carriers to less popular hours or smaller airports farther away from the big

cities.

When it comes to aircrafts there are two main suppliers, Boeing and Airbus which limits and stabilizes

the competition. The likelihood of those two suppliers creating their own airlines is also low. When it

comes to the cost of technical support and maintenance having one or two models of aircrafts is wise

from a costs point of view.

In conclusion, the two most important forces that shape the airline industry are the threat of competitive

rivalry and the bargaining power of suppliers. Competition is high because of the industry

fragmentation. The high number of players means that Ryanair can compete directly both with other

low cost airlines and with full-service airlines. As for the bargaining power of suppliers, it mainly

results from the high dependence of airlines on fuel.

3.5. SWOT analysis

3.5.1. Strengths

The strengths of Ryanair lie in a large route network with 146 destinations in 26 different countries.

Ryanair also has a strong network of business partners which provide pre-flight and post-flight services

through Ryanair’s webpage that the company otherwise could not offer. Due to this commission based

cooperation Ryanair can generate large ancillary revenues. The high efficiency of its employees as well

as a low turnaround time of aircraft are proof of the company’s high level of strategic fit in which all

operations are very well aligned. As a result Ryanair can be certified with good financial health and a

high level of liquidity.

3.5.2. Weaknesses

Since 2005, Ryanair is battling decreasing margins mainly due to steadily rising fuel prices and

18

decreasing fares resulting from fierce price wars. Operating margins decreased from 25.8 % in 2005 to

only 5% in 2009. Moreover, relations to its workforce are not optimal due to the company’s low-cost

business model. This resulted in several strikes in the past by ground staff who was not satisfied with

working conditions. Disregarding its staff, which is an important cog in Ryanair’s business model, may

erode into the company’s efficiency. Customer relations represent another of the company’s

weaknesses which, alongside bad press and publicity stunts, create a negative reputation and will

eventually erode the company’s brand. A sign of this occurring might be the recent World Travel

Awards where while easyJet won the award for Europe’s leading no-frills airline, Ryanair was not even

nominated. 2

3.5.3. Opportunities

Opportunities for Ryanair lie in the strong shift of consumer preferences from full-service airlines to

low-cost airlines due to the fact the private and business passengers try to cut down on expenses for air

transportation. This gives rise to growth opportunities as well as the EU policy of admitting new

members in Eastern Europe where network are not yet sufficiently developed. Further growth

opportunities lie in mergers and acquisitions. The industry is highly fragmented which may result in a

consolidation leading to less but bigger companies.

3.5.4. Threats

As far as threats are concerned, high and volatile oil prices have significant effect on operating costs

and thereby decreasing operating margins. Political and legal threats for Ryanair stem from legislation

to increase passenger rights as well as adding the airline industry to the CO2 emission trading scheme

which will likely result in higher costs for the company. Furthermore technological developments in

the communication technology will decrease demand for air travel. Further threats to the company are

an overall deteriorating economic situation and fierce price wars with competitors such as easyJet.

EasyJet is Ryanair toughest competitor in the low-cost segment but this threat seems to be moderate

since both companies try to avoid direct competition as much as possible. However, competition might

increase due to the US airlines’ new right of operating intra-European flights, posing a serious threat to

Ryanair’s already small margins. The factors affecting Ryanair’s number of passengers pose also a

secondary threat in the form of excess capacity since the large investments the company has made in its

aircraft will be equivalent to blocked funds.

2 http://www.worldtravelawards.com/nominees2009-8

19

From the SWOT analysis we can conclude that Ryanair’s increased operational efficiency and cost

effectiveness were important to gain competitiveness in the past and have provided a safeguard for the

company during the financial crisis but they will not be sufficient in order for it to maintain a unique

competitive advantage in the long run.

4. Cost of Capital

When choosing to value a company using the enterprise DCF method, the free cash flows have to be

discounted by the weighted average cost of capital. This represents the opportunity cost that investors

face for investing their funds in one particular business instead of others with a similar risk.

The weighted average cost of capital is the market based weighted average of the after-tax cost of debt

and cost of equity:

�� =��

��1 − �� + �

��

Therefore, the elements needed in order to calculate a company’s cost of capital are the company’s

after tax cost of debt, cost of equity and the company’s target capital structure. Since none of these

components are directly observable we have used a series of models to estimate each of them.

4.1. Ryanair’s cost of equity

Estimating the cost of equity implies determining the expected rate of return of Ryanair stock. Since

expected returns cannot be observed directly, we have chosen to use the Capital Asset Pricing Model in

order to translate the risk of Ryanair stock into an expected return.

The CAPM formula for calculating the cost of equity is:

� � = !" + # $ �� − !"%

Where: E(Ri )= security I’s expected return

Rf = the risk free rate

Βi= the stock’s sensitivity to the market

E(Rm )= expected return of the market

�� − !" = equity risk premium

20

4.1.1. The Risk Free Rate

The risk free rate is the return on a portfolio that has no covariance with the market. While it is possible

to create a portfolio that would fulfil this requirement, the cost of performing this task makes it

impracticable. According to Koller, Goedhart, & Wessels(2005), using a 10 year government bond

yield provides the best estimate for the risk free rate, when taking into account tradeoffs between the

complexity of the estimate, the liquidity of the bond and the coordination between the bond’s and the

stock’s cash flows. They also suggest that, when valuing a European based company, the yield from

the 10 year German Eurobond should be used. Following this recommendation, we have chosen the 10

year German Government Bond yield as our estimate for the risk free rate. Therefore, for calculating

the WACC for the forecast period we used an rf=3.31% at the date of 11 Nov 2009.

4.1.2. Beta

Beta represents the degree to which a stock’s and the market’s returns move together. In order to

estimate its value, we have used a regression analysis based on the market model:

= & + #� + '

The Beta of the Ryanair stock is estimated as being the coefficient of the return of the market in a

regression that has the return of the stock as the dependent variable and the return of the market as the

independent variable.

There are a series of decisions to be taken when implementing the market model.

The first one regards choosing an appropriate proxy for the market portfolio. This is necessary since the

market portfolio represents a value-weighted portfolio comprised of all assets both traded and not

traded, making it practically unobservable. The standard solution is to choose a well diversified, global

portfolio, usually an index. According to Koller, Goedhart, & Wessels (2005), the S&P 500 index is the

most commonly used proxy for the market portfolio when estimating the betas of large US companies.

Since Ryanair is also traded on the NASDAQ stock exchange and large, global, diversified indexes are

highly correlated, we have chosen the S&P 500 index as a proxy for the market portfolio.

The second decision regards the measurement period and the frequency of measurement for the returns

used in the regression. There are various recommendations that take into account the tradeoffs Involved

when making such decision. As far as the measurement period is concerned, the trade-off is between

decreased variance, and therefore more precision, and the risk of including significant changes within

21

the company’s operations. On, the other hand, when the frequency of measurement is to be decided, the

trade-off consists in choosing between increased precision and having illiquidity issues related bias. We

have chosen to follow the recommendations of Daves, Ehrhardt, & Kunkel (2000) who concluded that

using daily returns for a period of three years provides 91% of the increase in precision without the

dangers of including structural changes that might bias the results. Furthermore, in order to avoid

liquidity related biases, we have verified that the traded volume of the stock be different from zero on

all the trading days included in the estimate.

In conclusion we have used a 3 year period of daily data. Assuming an average of 260 trading days per

year, this amounts to 780 records, from the 24th of February 2006 to the 31st of March 2009, the year

end of the last set of Ryanair financial statements. We used the historical closing prices for both the

Ryanair stock and the S&P 500 index, adjusted for any dividends or splits.

The regression analysis results are:

Element Value Lower 99.0% Upper 99.0%

Beta 1.19 1.050022377 1.329928763

Standard error 0.05420

P-value <.0001

Adjusted R-squared 0.3818

-0,30

-0,25

-0,20

-0,15

-0,10

-0,05

0,00

0,05

0,10

0,15

0,20

-0,15 -0,10 -0,05 0,00 0,05 0,10 0,15

RE

TU

RN

RY

AA

Y

RETURN SNP 500

780 daily Ryanair returns vs SNP500 returns

Return RYAAY

Table 4.1: Regression data

Figure 4.1:

Ryanair

regression on

S&P 500

22

In order to make sure that the measurement period did not include any structural changes that would

bias the beta estimation, we have

plotted the company’s 3year beta for a

period of 10 years between July 2007

and March 2009. It can be noted that

for the 3 year period analyzed the value

of the beta has been relatively stable,

except for the1.46 kink experienced in

the middle of 2008 in mid financial

crises.

If we would have chosen a 5 year

estimation period we would have included the low values from 2004 and we would have therefore

underestimated the risk of the company.

Considering the fact that betas revert to the mean, we used the Bloomberg smoothing mechanism to

improve our estimate. The adjusted beta is therefore:

�()��( *�� = 0.33 + 0.67 0 1.19 2 1.13

4.1.3. The Equity Risk Premium

There are various methods of estimating the equity risk premium, which can be classified into three

categories: those estimating the future risk premium by extrapolating historical levels, those projecting

expected market risk premiums by means of regression analysis and those that reverse engineer the

market’s cost of capital. While all three types of methods have their advantages and disadvantages,

none of them can estimate the market risk premium exactly.

Due to the low availability of data and time resources, we have chosen to estimate the equity risk

premium using historical data.

In order to do so, we have once again used the S&P 500 index as a proxy for the market. We have used

the arithmetic average of 718 monthly returns of the index for the period between February 1950 and

October 2009 to determine an average annual return of the market of 8.34%. By deducting the

estimated risk free rate of 3.31%, the equity risk premium was calculated at 5.03%. This is consistent

with the findings of (Koller, Goedhart, & Wessels, 2005), who find the equity risk premium to be

00,20,40,60,8

11,21,41,6

30

.07

.20

00

30

.11

.20

00

30

.03

.20

01

30

.07

.20

01

30

.11

.20

01

30

.03

.20

02

30

.07

.20

02

30

.11

.20

02

30

.03

.20

03

30

.07

.20

03

30

.11

.20

03

30

.03

.20

04

30

.07

.20

04

30

.11

.20

04

30

.03

.20

05

30

.07

.20

05

30

.11

.20

05

30

.03

.20

06

30

.07

.20

06

30

.11

.20

06

30

.03

.20

07

30

.07

.20

07

30

.11

.20

07

30

.03

.20

08

30

.07

.20

08

30

.11

.20

08

30

.03

.20

09

Ryanair Beta:2000-2009

beta

Figure 4.2: Rolling window beta

23

between 4.5% and 5.5%, as well as with, Dimson, Marsh, & Staunton, (2003), who find that “the

arithmetic mean risk premium would be around 5%”.

After plugging in the values for the components of the CAPM, the value of Ryanair’s cost of equity

was calculated at ≈9%.

4.2. Ryanair’s After-tax Cost of Debt

Since Ryanair debt is not traded on a market for corporate debt, we have used an indirect method to

calculate the yield to maturity of their bonds. We have calculated the cost of debt by adding a premium

of 300 points to the risk free rate of 3.31% putting Ryanair’s cost of debt at 6.31%. We have based the

estimate of our premium on the analysis of Ryanair’s leverage, solvability and estimated credit rating.

Ryanair is not rated by an external credit rating agency. We have used a method developed by

Professor Aswath Damodaran3 to estimate a rating and an implicit default spread. Between 2000 and

2008, Ryanair’s equivalent rating has been between AAA and A which implies a spread between

1.25% and 2.5%. However, according to the same analysis, in the financial year ended 31st of March

2009, Ryanair’s interest coverage decreased from above 5 to lower than 1. Although the company is

highly liquid, it has high gearing and debt ratios. Furthermore, the company has a large amount of off

balance sheet debt, in the form of operating leases. Therefore, we have chosen to increase the default

spread to account for the increase in leverage that the company has been experiencing.

In order to include the value of the tax shields in the company valuation, the cost of debt is included at

an after tax level in the calculation of the weighted average cost of capital. Therefore, we have reduced

the value of the cost of debt according to the formula:

��! − �� 3�� 3� ��4� = �3�� 3� ��4� × �1 − ��,

where Tm is the company’s marginal tax rate. This results in an after-tax cost of debt of 5.52%.

4.3. Ryanair’s Capital Structure

The weights of the costs of debt and equity used in calculating the WACC should be based on the

target market value weights. We have used three points of view when analyzing the company’s target

capital structure.

3 http://pages.stern.nyu.edu/~adamodar/

24

Firstly, we have estimated Ryanair’s current capital structure. Since Ryanair’s debt is not traded on a

liquid market we used the book value of debt as a proxy for its market value. The fact that the company

does not find itself in financial distress supports the viability of the book value as a proxy, but we do

acknowledge the fact that the latest evolution in interest rates causes the book value of debt to differ

from current prices. To the book value of debt we have added the off balance sheet debt, in the form of

operating leases of aircraft.

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009

Debt/Total

value

11.30% 10.48% 19.51% 18.30% 25.84% 26.65% 21.30% 41.61% 42.19%

Equity/Total

Value

88.70% 89.52% 80.49% 81.70% 74.16% 73.35% 78.70% 58.39% 57.81%

Table 4.2 presents the evolution of Ryanair’s capital structure between 2001 and 2009. The company’s

leverage has increased continually throughout the years, mainly because of the company’s investments

in its fleet. According to the company’s annual report, the value of the company’s debt is going to

increase even further, due to the further expansion of the fleet. From the current number of 181 aircraft,

the fleet is going to reach a level of 292 planes at the end of the 2012 financial year. Ryanair claims

that it has been able to generate sufficient funds from operations to meet its non-aircraft acquisition-

related working capital requirements and that it will continue to do so at least for the next financial

year. Therefore, the only increase in debt would be the one taken up to finance the purchase of aircraft.

Secondly, we have directed our attention to the target capital structure in the airline industry.

According to Koller, Goedhart, & Wessels (2005), the median Debt-to-Market Value for the airline

industry is of 33%.

Thirdly, we have analyzed management’s philosophy regarding capital structure and the usage of debt

financing. In Ryanair’s annual report it is stated that:” The Board of Directors periodically reviews the

capital structure of the Company, considering the cost of capital and the risks associated with each

class of capital. The Board approves any material adjustments to the capital structure in terms of the

relative proportions of debt and equity”. We can therefore assume that the company does not currently

have a target capital structure but that it will change it in order to obtain the best risk/return trade-off.

Moreover, in the past, Ryanair management has been active in managing the company’s capital

structure through share issuing and repurchases.

Table 4.2: Ryanair capital structure

25

We attribute the increasing rate of debt to the growth Ryanair finds itself in. However, we feel that the

rate of growth is going to decrease and the company will soon stabilize and reach the industry target

capital structure of 33% Debt to Value ratio.

Putting together the above information, Ryanair’s weighted average cost of capital was calculated at

7.84%.

Table 4.3 presents a sensitivity analysis regarding the evolution in the weighted average cost of capital.

The figures represent levels of the WACC given a 3.31% risk free rate and a Debt-to-market value of

33%. The variable parameters are the credit spread, used to calculate the cost of debt, and beta:

beta/spread 1.25 3 5

1.05 7.06 7.57 8.15

1.13 7.33 7.84 8.42

1.19 7.53 8.04 8.62

1.33 8.00 8.51 9.09

5. Forecasting performance

This section includes our forecast of Ryanair’s performance. From the strategic situation of the

company and the industry we define three different scenarios and translate them into financial

forecasts. For each scenario we have used a 5 year detailed forecast, from 2010 to 2014 and a 10 year

summary forecast based solely on key drivers. The continuing value, for the period 2025 onward, is

also calculated separately for each scenario.

Ryanair’s strategy is to establish itself as Europe’s leading scheduled passenger airline through

continuous improving and expanding of its low fare offers while maintaining its focus on cost

containment and operating efficiencies. The key features of Ryanair’s long term strategy are: low fares,

cost containment and frequent point-to-point flights on short-haul routes. Low fares provide have the

purpose to increase demand by appealing to fare-conscious passengers. This strategy implies a low

margin and its success is therefore based on the number of passengers attracted, which is consistent

with the revenue growth analysis. Any factors that might impair the company in attracting passengers

will damage future performance. The frequent point-to-point flights eliminate the need to provide

unnecessary “frills” – services like meals or movies – and to offer direct, non-stop routes and avoid the

costs of providing “through service,” for connecting passengers, including baggage transfer and transit

passenger assistance. In choosing its routes, Ryanair favours secondary airports with convenient

Table 4.3: WACC sensitivity

26

transportation to major population centres and regional airports. Any factors affecting Ryanair’s ability

to operate in low-cost airports will hinder future performance. Low fares and low margins imply that

the company has to keep its costs under strict control. Therefore the main factors that may affect the

evolution of Ryanair’s future revenues and hence future performance are passenger levels and

operating costs. The recent economic crisis and the way the economy is going to pick up after it have

an important impact as well.

5.1. Base case scenario

In the Base case scenario, we assume that the airline industry will not suffer any shocks and that the

economy is going to recover at a moderate pace. Since in the airline industry, the elasticity of demand

with respect to the growth in GDP is close to 2 and the beta of Ryanair is higher than one, we have

estimated the growth in revenues for the detailed forecast to be 1% higher than the nominal growth in

GDP for the European Union as forecasted by the International Monetary Fund. We have based our

summary forecast for revenue growth on the IATA predictions of 4.8% in Europe, which we have

adjusted to 5.3% to account for the increased growth in Central and Eastern Europe and for the number

of passengers that will switch from FSAs to LCCs.

As far as the evolution of Ryanair’s operating costs is concerned, the scenario assumes no major shifts.

The company will perform similarly in trying to hedge the evolution in fuel prices. The costs of staff

are also going to be maintained in ranges similar to historical values. As a low cost carrier, Ryanair

does not practice overbooking and we assume that the impact of the new legislation regarding

passenger rights will not have a major impact on the company’s costs. The only increase will occur as a

consequence of the inclusion of the airline industry in the Emission Trading Schemes which translates

into an increase in the COGS/Revenue ratio as of 2014. The driver for operating costs for the summary

forecast is the EBITA margin. Considering the company’s trend of decreasing fares we have estimated

this ratio to be 15%, which is lower than the historical and detailed forecast levels.

In respect to the continuing value, we have assumed a growth rate in NOPLAT of 2.5% and a ROIC

equal to the WACC. The main reasons behind the choice were increasing competition and the fact that

in the long run, no company can sustain growth levels above GDP growth.

Detailed forecast Key driver forecast Continuing value

Year 2010 2011 2012 2013 2014 2015 - 2024

Revenue growth 2.5% 2.9% 4.7% 5% 5.3% 5.3% 2.5%

COGS/revenue 75% 75% 75% 75% 77%

27

EBITA margin 21% 23% 25% 26% 25% 15%

ROIC 14% 15.6% 16.3% 16.4% 16.1% 10% 7.84%

,OPLAT (000) 447,442 508,567 567,827 621,641 624,015 10.6.1 678,052

FCF (000) 383,343 276,056 270,932 519,164 504,768 10.6.1 316,054

WACC 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84%

Table 5.1: Key figures for base case scenario

The rest of the assumptions have been consistent with the historical performance of the company and

can be seen in Annex 10.7.1. – Base case scenario.

According to this scenario the value of the operations is of EUR 5,919,500,000. The continuing value

for the base case scenario adds up to EUR 2,787,718,000, which accounts for 52.3% of total operating

value. The total enterprise value reaches a level of EUR 8,433,901,000 and the value of equity, EUR

5,266,094,000. By dividing to the total number of shares outstanding, the value per share is at EUR

3,57.

5.2. Optimistic scenario

In the up-side scenario the most important factor is the improvement of the overall economic situation

in the world and thus in Europe. Due to this, the demand for air transportation will pick up again

leading to higher passenger numbers that result in increased revenues and higher load factors.

Furthermore it is assumed that the new EU members in Eastern Europe will experience faster economic

development than expected, enabling Ryanair to broaden its network and develop more routes to

Eastern European countries. Furthermore, it is assumes that state aid to big flag carriers is abandoned or

kept at a minimum, denying artificial competitive advantage to these airlines and leading to higher

passenger number for Ryanair. These are the main arguments behind our assumptions about the

company’s growth rates, which are detailed in Table 5.2 below.

It is also assumed that oil prices stay at a moderate level somewhere between 80 and 100 USD per

barrel. This ensures that operating costs will not explode which would have serious effects on the

EBITA margin. Since prices will not fluctuate, the company’s hedging strategies will prove highly

efficient. Furthermore, Ryanair will take full advantage of the technological advances that make

aircrafts more fuel efficient. Ryanair plans to also reap the benefits of using the Internet. The company

plans to replace all check-in desks with Internet-based check-in facilities. These changes have been

announced to take effect from October 2009. This will have a positive impact on the COGS/revenue

ratio.

28

As far as political and legal factors are concerned in this scenario it is assumed that no major changes

occur that would affect the airline industry negatively. Examples are the introduction of taxes on

kerosene or a further improvement of passenger right that could possibly lead to higher compensation

payments.

In respect to the continuing value, we have assumed a growth rate in NOPLAT of 3% and a ROIC

above the WACC. The main reasons behind the choice were flourishing economic environment and the

strength of the company’s business model.


Year 2010 2011 2012 2013 2014 2015 - 2024

Revenue growth 3% 4% 5% 6% 7% 7% 3%

COGS/revenue 64% 66% 68% 68% 70%

EBITA margin 20% 20% 20% 20% 20% 20%

ROIC 24.6% 23% 22% 22% 22% 14% 10%

,OPLAT (000) 717,716 743,727 765,310 830,188 841,884 10.6.2 1,126,568

FCF (000) 399,488 508,679 480,635 720,006 688,726 10.6.2 570,724

WACC 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84%

Table 5.2: Key figures for optimistic case scenario

The rest of the assumptions have been consistent with the historical performance of the company and

can be seen in Annex 10.7.2. – Optimistic scenario.

According to this scenario the value of the operations is of EUR 10,198,489,000. The continuing value

for the optimistic scenario adds up to EUR 5,251,843,000, which accounts for 57,2% of total operating

value. The total enterprise value reaches a level of EUR 12,712,890,000 and the value of equity, EUR

9,703,803,000. By dividing to the total number of shares outstanding, the value per share is at EUR

6.59.

5.3. Pessimistic scenario

This scenario implies that the world economy will take more time to pick up the pace, meaning that

there is a larger stagnation period after which things will only slightly improve. Not that many people

will have the money to take vacations far away from home and businesses will start using

teleconferences more and more. Therefore, the demand will decrease and with it, the number of

passengers and plane load factors. This will do nothing but drive revenue growth down.

29

The company’s costs are likely to go up. Fuel prices will begin to soar because of the fact that this

resource is getting scarcer and scarcer. This will drive Ryanair’s cost of goods sold upwards, to a level

of well above the historical average but below the levels recorded in 2009. Costs will also increase

because of the EU Regulation of Emissions Trading. The CO2 act that will be enforced starting from

2012 stipulates that airliners will have to pay a fee according to how much CO2 they release into the

atmosphere. The increase in COGS will of course determine EBITA margins to diminish.

Ryanair will not be able to control the increase in costs and will eventually have to increase prices,

which are going to get closer to the level of other competitors like easyJet or AirBerlin. If these

companies improve their cost management in the long run, then Ryanair will no longer be able to

compete on price and passengers will start to use competitor’s services because of airports being

located closer to the city or because of better flight schedules, for example.

Labour relations are going to also affect the company. In order to cut costs, employees have to perform

more tasks than they would in other companies (e.g. pilots currently help unload luggage). The

dissatisfaction might stir the waters and management will be forced to increase salaries. This will only

increase operating costs and further erode EBITA margins.

Because of the decreases in revenue, Ryanair’s ROIC will also suffer, reaching unsatisfactory levels.

With regards to the continuing value, we have assumed a growth rate in NOPLAT of 2.5% and a ROIC

equal to the WACC. The main reasons behind the choice were the downturn in the economic

environment and the company’s decreasing operating margins. All the other assumptions and results

are presented in detail in Annex 10.7.3. – Pessimistic scenario.


Year 2010 2011 2012 2013 2014 2015 - 2024

Revenue growth 0% 0% 1% 1% 2% 2% 2.5%

COGS/revenue 78% 78% 78% 78% 80%

EBITA margin 13% 13% 13% 13% 13% 13%

ROIC 10.4% 10.6% 10.8% 10.6% 9.2% 8% 7.84%

,OPLAT (000) 331,242 338,647 350,716 353,506 306,468 10.6.3 352,813

FCF (000) 318,963 287,500 267,069 350,508 271,380 10.6.3 265,410

WACC 7.84% 7.84% 7.84% 7.84% 7.84% 7.84% 7.84%

Table 5.3: Key figures for pessimistic case scenario

Based on the factors outlines above, and on a constant WACC level of 7.84%, the value of Ryanair’s

operations is EUR 3,974,802,000. The continuing value for the pessimistic scenario adds up to EUR

30

Value of Operations: DCF approachFree Cash Discount PV

Year Flow Factor of FCF

2010 383.343 0,927 355.474

2011 276.056 0,860 237.377

2012 270.932 0,797 216.033

2013 519.164 0,739 383.871

2014 504.768 0,686 346.093

2015 73.423 0,636 46.683

2016 198.567 0,590 117.070

2017 209.091 0,547 114.313

2018 220.172 0,507 111.620

2019 231.841 0,470 108.991

2020 244.129 0,436 106.424

2021 257.068 0,404 103.918

2022 270.693 0,375 101.470

2023 285.039 0,348 99.080

2024 300.146 0,322 96.746

Cont. Value 8.648.625 0,322 2.787.718

Operating Value 16 5.332.883

Continuing value % Operating value 52,3%

Mid -Year Adjustment Factor 1,110

Operating Value (Adjusted) 5.919.500

1,450,541,000, which accounts for 40.55% of total operating value. The total enterprise value reaches a

level of EUR 6,489,203,000 and the value of equity, EUR 3,363,744,000. By dividing to the total

number of shares outstanding, the value per share is as low as EUR 2.28.

6. Calculating and interpreting results

After completing the financial projections and the continuing value estimate this chapter concludes the

valuation calculation by deriving the value of operations and the enterprise value. Then non-equity

claims are deducted making it possible to calculate the equity value of Ryanair and ultimately a share

price. It should be noted that the results mentioned below only focus on the base scenario which is most

probable.

6.1. Value of operations

In the following the value of operations is reached by discounting the cash flows from operation and

adding the continuing value.

6.1.1. Discounted cash flow

The cash flows from 2010 to 2024 are discounted with a constant weighted-average cost of capital of

7.84%. The present value of cash flows from operations amounts to EUR 2,545,164,000 in 2009.

6.1.2 Continuing value

The present value of the continuing value of Ryanair amounts to EUR 2,787,718,000. It should be

noted that the continuing value was estimated with a return on invested capital equal to the weighted-

average cost of capital of 7,84%. Under this assumption value is neither destroyed nor created and the

estimated growth of 2,5% (based on estimated European GDP growth) does not affect the continuing

value.

6.1.3. Value of operations

Adding the present value of the cash flows to the present value of the

continuing value results in a value of operations of EUR

5,332,883,000. This value is the adjusted with a mid-year adjustment

factor of 1.11 that takes into account the fact that cash flows occur

throughout the year and that the valuation is based on November 28th

2009. The adjustment factor is calculated using the following formula:

��7�3! = �1 + ��8

9: · �1 + ��<<8

<=>:

Figure 6.1: Value of operations

31

After the adjustment the value of operations amounts to EUR 5,919,500,000. The continuing value

accounts for 52.3% of the value of operations showing that about half of the operating value is

generated after the company has reached a stable status. In Figure 6.1 all information concerning the

value of operations is depicted. Furthermore the adjusted operating value is almost twice as much as

capital invested which is also reflected by ROIC which is projected to be twice the cost of capital until

2014 but then decreases to only 10%.

6.2. Equity value

Calculating the equity value is not as straightforward as calculating the value operations. First the value

of non-operating assets has to be determined to find out the enterprise value. Next, the value of non-

equity claims has to be estimated in order to be able to deduct these claims from enterprise value to

derive the value of equity.

6.2.1. Value of non-operating assets

In the case of Ryanair the value of non-operating assets consists mainly of excess marketable securities

and financial investments. Ryanair does not have excess pension assets since it recorded a pension

liability in 2009. Excess marketable securities amount to EUR 2,361,281,000 at fair market value and

consist mostly of excess cash. Financial investments amount to EUR 153,120,000. Since more detailed

information on these investments were not disclosed by Ryanair this value represents the book value as

of March 31st 2009 mentioned in the annual report. Adding excess marketable securities and financial

investments to the value of operations results in an enterprise value of EUR 8,433,901,000.

6.2.2. Value of non equity claims

For Ryanair three categories are important namely debt, debt equivalents as well as hybrid claims. In

the following, these three non-equity claims are discussed.

6.2.3. Debt

Ryanair’s debt consists of fixed as well as floating debt but is not traded and therefore no market values

exist. However, book values of Ryanair’s debt seem to be a reasonable approximation because the

company is not in financial distress and its default risk has been stable. The value of Ryanair’s debt

amounts to EUR 2,452,514,000.

6.2.4. Debt equivalents

Under debt equivalents, Ryanair recognized operating leases and retirement related liabilities. The

value of operating leases is estimated at EUR 662,788,000 in 2009 while retirement related liabilities

32

Value of EquityOperating Value 5.919.500

Excess Mkt Securities 2.361.281

Financial Investments 153.120

Excess Pension Assets 0

Enterprise Value 8.433.901

(2.452.514)

(662.788)

(10.157)

Preferred Stock 0

0

0

0

Future Stock Options 0

(42.347)

5.266.094

1.473

3,57

Equity Value

Long-Term Operating Provision

Debt

Capitalized Operating Leases

Retirement Related Liability

Minority Interest

Restructuring Provision

Stock options

Value per ShareNo. shares (thousands)

amount to EUR 10,157,000. Because Ryanair is committed to a defined-benefit pension plan it grants

benefits to its employs regardless of the performance of the plans funds. Since the plan’s funds were

insufficient in 2009 the company had to recognize a liability.

Other debt equivalents such as long-term or non-operating provisions are not capitalized by Ryanair.

Ryanair however had ongoing operating provisions but these are already accounted for under the free

cash flow calculation and are not deducted from enterprise value.

6.2.5. Value of hybrid claims

Ryanair also issues executive stock options which represent a type of debt equivalent. By using the

Black and Scholes option pricing method for non-dividend paying stock the outstanding options value

was estimated at EUR 42,347,000. The inputs for the Black and Scholes option price formula such as

strike, time to maturity and spot price are based on note 15 (c) of Ryanair’s 2009 annual report. The

volatility of the share was calculated based daily returns of the stock for the last 12 years. The value of

options was then multiplied by the number of outstanding options. This is only a rough approximation

of the real value of outstanding share but trade-offs had to be made due to lack of information.

However, this is an insignificant amount since the value of outstanding options is less than 3% of

market capitalization.

6.2.6. Value per share

The final step in order to derive a value per share is to deduct all non-equity claims from the enterprise

value which results in the equity value of the company. By dividing the equity value by the number

undiluted shares outstanding the value per share is calculated. In the

case of Ryanair the equity value amounts to EUR 5,266,094,000 and

the number of undiluted shares outstanding is 1,473,356,000

resulting in a value per share for the base scenario of EUR 3.57.

If the final share price is calculated then the value per share of the

other scenarios has to be considered according with their respective

probabilities. The value per share of the three different scenarios and

their respective probabilities are as follows:

• Base scenario: EUR 3.57 – 70%

• Optimistic scenario: EUR 6.59 – 15%

• Pessimistic scenario: EUR 2.28 – 15%

Figure 6.2: Value of equity

33

Combining these values per share results in a final share price for Ryanair of EUR 3.83.

6.3 Verifying Valuation Results

6.3.1. Sensitivity Analysis

In order to complement our scenario analysis and check the accuracy of our valuation we performed a

sensitivity analysis. By changing some of the key value drivers in the model, we verify if the values

change in the direction we expect them to.

Base value

Base equity value

Change New equity value

Change of EV

WACC 7,84% 5266114 0,5% 4808013 -8.7% Adjusted EBITA

15% 5266114 1% 5643788 8%

Revenue growth

5,3% 5266114 1% 5435873 3.2%

As we can see in table 6.1, Ryanair’s equity value is sensitive to the changes in its cost of capital which

shows that different forecast of WACC can have a huge influence on the estimated final value of the

company. Taking in account that estimation of future WACC leaves some uncertainty, high range of

values can be the outcome of the valuation, as a change of 1% in WACC results in a 17.4% change in

equity value. On the operating side, the model is also very sensitive to changes in the EBITA margins,

as a 1% change results in an 8% change in equity value. However, 1% change in revenue growth

results in only 3.2% change is value which shows that the model is robust, as the WACC is similar to

ROIC, and under those conditions, the value is fairly unaffected by changes in growth.

WACC

Change

in

revenue

growth

6.34% 6.84% 7.34% 7.84% 8.34% 8.84% 9.34% -3% 4.24 3.89 3.6 3.34 3.11 2.91 2.73 -2% 4.42 4.02 3.69 3.4 3.15 2.93 2.73 -1% 4.62 4.18 3.8 3.48 3.2 2.95 2.74

0% 4.85 4.36 3.93 3.57 3.26 2.99 2.76 1% 5.13 4.57 4.09 3.69 3.34 3.04 2.78

2% 5.43 4.8 4.27 3.82 3.44 3.11 2.82

3% 5.81 5.09 4.49 3.98 3.55 3.18 2.86

In the table 6.2, we analyze the influence of the changes in WACC and revenue growth on the base

case scenario share price. As the WACC increases, the value of shares decreases, since a larger WACC

Table 6.1: Sensitivity analysis of Ryanair’s equity

Table 6.2: Sensitivity analysis of Ryanair’s base scenario share price

34

stands for a lower present value of future cash flows. At the same time, if the revenue growth gets

higher, the price of shares also increases as it stands for larger future cash flows.

In conclusion, the analysis above proves that changing the key values resulted in expected outcomes; it

has also shown that the model is very sensitive to predictions about the future WACC and EBITA

margin.

6.3.2 Plausibility analysis

Since Ryanair is a listed company, we can compare the value per share that we obtained with the

market price.

Ryanair stock is currently (4thDec2009) trading on the Irish Stock Exchange at EUR 3.07, which is

EUR 0.76 below our current valuation. However, we believe that the stock prices were negatively

influenced by certain events and announcements which severely, but unnecessarily deflated the value

of the shares. An example would be the fact that the company doubled its fees for checked-in luggage.

The event took place in the beginning of this year and the market had a negative reaction to it,

interpreting it as a desperate measure aimed at preventing the company from sinking by squeezing

some extra revenue from wherever possible.

We feel that our valuation is a fair valuation. In our opinion, the market is overly pessimistic. There are

analysts’ that share our view and have put out reports which give a valuation as high as EUR 4.16 per

share. (Hughes, Lalor, & Houghton, 2009).

7. Conclusions

As a conclusion to the process of valuing a company, it is safe to posit that the procedure is a

complicated one and is filled with unknowns. There are several obstacles that have to be overcome in

order to find the value of a company:

• the lack of data – In most cases, external analysts only have access to the financial statements of

the company, which may not convey all the necessary information because of various reasons

like the threat of divulging facts to competitors or even improper reporting standards.

• overlooking an element can have a large impact – it is extremely easy to overlook items that are

off-balance sheet, for example. For some companies the impact may be minor, but for an airline

company like Ryanair, operating leases are not to be sneezed at.

35

results are to be interpreted in light of the assumptions made – the lack of data forces analysts to make

use of various assumptions which have to be backed up by arguments (for example in calculating the

cost of capital or in building the scenarios). These are one of the reasons for the discrepancies between

analysts’ valuations and yield differences in their results. This uncertainty is also reflected in the fact

that the valuation process does not come up with one figure, but with an interval, based on the

scenarios employed and the probability weights of each of them.

8. Negotiation outcome

Our group has entered the negotiation playing the role of a private equity fund interested in buying

100% of Ryanair’s shares for diversification purposes. Therefore there were no synergies possible

between the two companies that would need calculating and that would have affected the valuation

price. As a consequence we have based our negotiation strategy and price range on our sensitivity

analysis. We started the bidding at EUR 2.8 per share, a price higher than the latest market closing

price of EUR 2.7 per share. We set our walk away price at EUR 5.43 per share which corresponded to a

WACC smaller with 1.5 percentage points and a growth rate higher with 2 percentage points relative to

our base case scenario.

We have closed the deal, buying the company shares at EUR 5.3 each. The main reasons for the

premium we paid were the leverage power the seller had from the existence of two competing buyers,

our group’s emotional determination to buy and last but not least, the relatively close valuation results

of the three groups.

Although the valuation prices of the seller group and our own were relatively close, they were based on

different assumptions concerning, mainly, the company’s cost of capital, growth possibilities and

EBITA margins. We feel that these differences in assumptions are understandable considering the

attitudes of the two groups, the seller having an optimistic view while buyers are usually more

conservative in their assumptions.

The negotiation exercise has proved once again, that the final selling price is rarely the same as the

valuation price since during a negotiation there are a number of different disruptive factors such as

information asymmetry, leverage power or negotiation skills.

36

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38

10. Annexes

10.1 Historical performance

10.1.1. Historical Income statement

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- --------------------- --------------------- ---------------------

Income Statement

Revenues 330,571 432,940 550,991 731,951 924,566 1,128,116 1,433,377 1,874,791 2,225,692 2,343,868

Other Operating Revenues 39,566 54,465 73,059 110,557 149,658 190,921 259,153 362,104 488,130 598,097

Cost of Goods Sold (159,605) (226,660) (313,756) (398,315) (556,107) (721,005) (1,014,756) (1,392,764) (1,732,276) (2,296,304)

Selling, Gen & Admin Expenses (32,123) (21,526) (12,356) (14,623) (16,141) (19,622) (13,912) (23,795) (17,168) (12,753)

Depreciation Expense (44,052) (59,175) (59,010) (76,865) (101,391) (110,357) (124,405) (143,503) (175,949) (256,117)

Other Oper Expense (50,302) (66,033) (75,995) (89,231) (149,298) (127,315) (164,411) (205,088) (251,349) (284,160)

Reported EBITA 84,055 114,011 162,933 263,474 251,287 340,738 375,046 471,745 537,080 92,631

Amortization of Goodwill 0 0 0 0 0 0 0 0 0 0

Intangibles Amort. (Excl. Goodwill) 0 0 0 0 0 0 0 0 0 0

Reported EBIT 84,055 114,011 162,933 263,474 251,287 340,738 375,046 471,745 537,080 92,631

Non-Oper Income 2,322 1,673 1,502 628 3,217 47 815 91 12,153 4,441

Interest Income 7,498 19,666 27,548 31,363 23,891 28,342 38,219 62,983 83,957 75,522

Interest Expense (3,781) (11,962) (19,609) (30,886) (47,564) (57,629) (73,958) (82,876) (97,088) (130,544)

Restructuring Charges 0 0 0 (29) (9) 0 0 0 0 0

Special Items 0 0 0 0 (2,342) (2,302) (1,234) (906) (97,175) (222,537)

Earnings Before Taxes 90,094 123,388 172,374 264,550 228,480 309,196 338,888 451,037 438,927 (180,487)

Income Taxes (17,576) (18,905) (21,999) (25,152) (21,869) (29,153) (32,176) (15,437) (48,219) 11,314

Minority Interest 0 0 0 0 0 0 0 0 0 0

Income Before Extraordinary Items 72,518 104,483 150,375 239,398 206,611 280,043 306,712 435,600 390,708 (169,173)

Extraordinary Items (After Tax) 0 0 0 0 0 0 0 0 0 0

Net Income 72,518 104,483 150,375 239,398 206,611 280,043 306,712 435,600 390,708 (169,173)

Preference dividends 0 0 0 0 0 0 0 0 0 0

Earnings for common shareholders 72,518 104,483 150,375 239,398 206,611 280,043 306,712 435,600 390,708 (169,173)

Common dividends 0 0 0 0 0 0 0 0 0 0

Retained profit 72,518 104,483 150,375 239,398 206,611 280,043 306,712 435,600 390,708 (169,173)

Earnings per share (EUR) 216.16 296.14 206.35 317.06 272.77 368.52 399.97 282.04 258.40 (114.42)

Earnings per share - fully diluted (EUR) 214.75 292.59 203.22 312.42 270.03 366.55 397.41 279.68 256.21 (114.42)

Statement of changes in equity

Opening balance 441,357 669,898 1,002,274 1,241,728 1,455,288 1,734,503 1,991,985 2,539,773 2,502,194

Retained profit 104,483 150,375 239,398 206,611 280,043 306,712 435,600 390,708 (169,173)

Foreign Exchange Rate Changes 0 0 0 0 0 0 0 0 0

Issue of New Shares 124,058 182,001 56 6,949 5,382 30,590 11,233 (291,591) (44,400)

Goodwill Written Off 0 0 0 0 0 0 0 0 0

Other Adjustments to Equity 0 0 0 0 (6,210) (79,820) 100,955 (136,696) 136,440

Closing balance 441,357 669,898 1,002,274 1,241,728 1,455,288 1,734,503 1,991,985 2,539,773 2,502,194 2,425,061

39

10.1.2. Historical Balance Sheets

2000 2001 2002 2003 2004 2005 2006 2007 2008----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ----------------- -----------------

Balance Sheet

Operating Cash 6,611 8,659 11,020 14,639 18,491 22,562 28,668 37,496 44,514

Excess Marketable Securities 348,637 618,061 888,255 1,045,579 1,238,859 1,583,143 1,962,175 2,213,241 2,135,268

Accounts Receivable 21,974 8,695 10,331 14,970 14,932 20,644 29,909 23,412 34,178

Inventories 13,933 15,975 17,125 22,788 26,440 2,460 3,422 2,420 1,997

Other Current Assets 6,478 12,235 11,035 16,370 19,251 24,612 29,453 132,697 171,165

Total Current Assets 397,633 663,625 937,766 1,114,346 1,317,973 1,653,421 2,053,627 2,409,266 2,387,122

Net Property Plant and Equipment 315,032 613,591 951,806 1,352,361 1,576,526 2,117,891 2,532,988 2,901,505 3,582,126

Goodwill 0 0 0 0 44,499 0 0 0 0

Other Intangible Assets 0 0 0 0 0 46,841 46,841 46,841 46,841

Other Operating Assets 0 0 0 0 0 0 0 0 0

Investments 36 36 0 0 0 0 763 406,075 311,462

Deferred tax asset 0 0 0 0 0 0 0 0 0

Other Non-operating Assets 0 0 0 0 0 0 0 0 0

Retirement Related Assets 0 0 0 0 0 0 0 0 0

Total Assets 712,701 1,277,252 1,889,572 2,466,707 2,938,998 3,818,153 4,634,219 5,763,687 6,327,551

Short term debt 13,347 33,072 44,305 64,607 80,682 120,997 153,311 178,918 366,801

Accounts Payable 22,861 29,998 46,779 61,604 67,936 92,118 79,283 127,243 129,289

Tax payable 0 0 0 0 0 17,534 15,247 20,822 0

Dividends payable 0 0 0 0 0 0 0 0 0

Other Current Liabilities 107,445 139,406 217,108 251,328 338,208 418,653 598,031 863,189 1,061,060

Total Current Liabilities 143,653 202,476 308,192 377,539 486,826 649,302 845,872 1,190,172 1,557,150

Balancing Debt 0 0 0 0 0 0 81,897 58,666 75,685

Long Term Debt 112,412 374,756 511,703 773,934 872,645 1,293,860 1,524,417 1,683,148 1,899,694

Deferred Income Taxes 15,279 30,122 49,317 67,833 94,192 104,180 127,260 151,032 148,088

Other Operating Liabilities 0 0 18,086 5,673 30,047 18,444 37,389 105,197 99,930

Restructuring Provisions 0 0 0 0 0 0 0 0 0

Income smoothing Provisions 0 0 0 0 0 0 0 0 0

On-going operating Provisions 0 0 0 0 0 7,236 16,722 28,719 42,790

Long-term operating Provisions 0 0 0 0 0 0 0 0 0

Retirement Related Liabilities 0 0 0 0 0 10,628 8,677 6,980 2,020

Minority Interest 0 0 0 0 0 0 0 0 0

Preferred Stock 0 0 0 0 0 0 0 0 0

Total Common Equity 441,357 669,898 1,002,274 1,241,728 1,455,288 1,734,503 1,991,985 2,539,773 2,502,194

Total Liabs and Equity 712,701 1,277,252 1,889,572 2,466,707 2,938,998 3,818,153 4,634,219 5,763,687 6,327,551

40

10.1.3. Historical NOPLAT

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------

NOPLAT

Reported EBITA 114,011 162,933 263,474 251,287 340,738 375,046 471,745 537,080 92,631

Adj for Operating Leases 7,286 4,021 0 11,541 21,546 47,376 58,183 72,670 78,209

Adj for Non-operating component of pension expense 0 0 0 0 0 0 0 0 0

Add: Interest associated with Long-term operating Provision 0 0 0 0 0 0 0 0 0

Add: Increase in Income smoothing Provision 0 0 0 0 0 0 0 0 0

Adjusted EBITA 121,297 166,954 263,474 262,828 362,284 422,422 529,928 609,750 170,840

Taxes on EBITA (18,424) (20,969) (24,985) (26,161) (35,789) (42,618) (25,298) (69,572) (32,602)

Change in Deferred Taxes 14,843 19,195 18,516 26,359 9,988 23,080 23,772 (2,944) 7,436

NOPLAT 117,716 165,180 257,005 263,026 336,483 402,884 528,402 537,234 145,674

Taxes on EBIT

Prov for Inc Taxes 18,905 21,999 25,152 21,869 29,153 32,176 15,437 48,219 (11,314)

Tax Shield on Interest Exp 2,751 3,726 4,664 5,946 7,204 9,245 10,360 12,136 16,318

Tax Shield on Operating Lease Interest 1,676 764 0 1,443 2,693 5,922 7,273 9,084 9,776

Tax Shield on Non-operating component of pension expense 0 0 0 0 0 0 0 0 0

Tax Shield on Interest associated with Long-term operating Provision 0 0 0 0 0 0 0 0 0

Tax on Interest Income (4,523) (5,234) (4,736) (2,986) (3,543) (4,777) (7,873) (10,495) (9,440)

Tax on Non-operating Income (385) (285) (95) (109) 282 52 102 10,628 27,262

Taxes on EBIT 18,424 20,969 24,985 26,161 35,789 42,618 25,298 69,572 32,602

Reconciliation to Net Income

Net Income 104,483 150,375 239,398 206,611 280,043 306,712 435,600 390,708 (169,173)

Add: Increase in Deferred Taxes 14,843 19,195 18,516 26,359 9,988 23,080 23,772 (2,944) 7,436

Add: Increase in Income smoothing Provision 0 0 0 0 0 0 0 0 0

Add: Goodwill Amortization 0 0 0 0 0 0 0 0 0

Add: Extraordinary Items 0 0 0 0 0 0 0 0 0

Add: Special Items After Tax 0 0 0 2,049 2,014 1,080 793 85,028 194,720

Add: Minority Interest 0 0 0 0 0 0 0 0 0

Adjusted Net Income 119,326 169,570 257,914 235,019 292,045 330,872 460,165 472,792 32,983

Add: Interest Exp. After Tax 9,211 15,883 26,222 41,619 50,425 64,713 72,517 84,952 114,226

Add: Interest Exp. On Long-term operating Provision 0 0 0 0 0 0 0 0 0

Add: Interest Exp. on Op. Leases 5,610 3,257 0 10,098 18,853 41,454 50,910 63,586 68,433

Add: Interest Exp. on Non-operating component of pension expense 0 0 0 0 0 0 0 0 0

Income Available to Investors 134,147 188,710 284,136 286,736 361,323 437,039 583,591 621,330 215,642

Add: Restructuring Charges 0 0 29 9 0 0 0 0 0

Less: Interest Income After-Tax (15,143) (22,314) (26,627) (20,905) (24,799) (33,442) (55,110) (73,462) (66,082)

Less: Non-operating Income After Tax (1,288) (1,217) (533) (2,815) (41) (713) (80) (10,634) (3,886)

NOPLAT 117,716 165,180 257,005 263,026 336,483 402,884 528,402 537,234 145,674

41

10.1.4. Historical Invested Capital

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------

Invested Capital

Operating Working Capital (81,310) (123,840) (214,376) (244,165) (327,030) (458,027) (601,109) (815,229) (938,495) (994,454)

Net Property Plant and Equipment 315,032 613,591 951,806 1,352,361 1,576,526 2,117,891 2,532,988 2,901,505 3,582,126 3,644,824

Other Assets Net of Other Liabs 0 0 (18,086) (5,673) (30,047) (18,444) (37,389) (105,197) (99,930) (106,549)

Less: On-going operating Provision 0 0 0 0 0 (7,236) (16,722) (28,719) (42,790) (61,807)

Value of Operating Leases 0 64,416 34,505 0 99,422 192,534 436,716 521,692 634,063 662,788

Op. Invested Capital (excl.Goodwill) 233,722 554,167 753,849 1,102,523 1,318,871 1,826,718 2,314,484 2,474,052 3,134,974 3,144,802

Goodwill & Intangibles 0 0 0 0 44,499 46,841 46,841 46,841 46,841 46,841

Cumulative Written Off & Amortized 0 0 0 0 0 0 0 0 0 0

Op. Invested Capital (incl.Goodwill) 233,722 554,167 753,849 1,102,523 1,363,370 1,873,559 2,361,325 2,520,893 3,181,815 3,191,643

Excess Marketable Securities 348,637 618,061 888,255 1,045,579 1,238,859 1,583,143 1,962,175 2,213,241 2,135,268 2,361,281

Investments 36 36 0 0 0 0 763 406,075 311,462 153,120

Non-operating Assets 0 0 0 0 0 0 0 0 0 0

Retirement Related Assets 0 0 0 0 0 0 0 0 0 0

Total Investor Funds 582,395 1,172,264 1,642,104 2,148,102 2,602,229 3,456,702 4,324,263 5,140,209 5,628,545 5,706,044

Total Common Equity & Pref. Stock 441,357 669,898 1,002,274 1,241,728 1,455,288 1,734,503 1,991,985 2,539,773 2,502,194 2,425,061

Cum Goodwill Written Off & Amortized 0 0 0 0 0 0 0 0 0 0

Deferred Income Taxes 15,279 30,122 49,317 67,833 94,192 104,180 127,260 151,032 148,088 155,524

Dividends Payable 0 0 0 0 0 0 0 0 0 0

Income smoothing Provision 0 0 0 0 0 0 0 0 0 0

Adjusted Equity 456,636 700,020 1,051,591 1,309,561 1,549,480 1,838,683 2,119,245 2,690,805 2,650,282 2,580,585

Minority Interest 0 0 0 0 0 0 0 0 0 0

Restructuring Provisions 0 0 0 0 0 0 0 0 0 0

Long-term operating Provision 0 0 0 0 0 0 0 0 0 0

Retirement-Related Liabilities 0 0 0 0 0 10,628 8,677 6,980 2,020 10,157

Interest Bearing Debt 125,759 407,828 556,008 838,541 953,327 1,414,857 1,759,625 1,920,732 2,342,180 2,452,514

Value of Operating Leases 0 64,416 34,505 0 99,422 192,534 436,716 521,692 634,063 662,788

Total Investor Funds 582,395 1,172,264 1,642,104 2,148,102 2,602,229 3,456,702 4,324,263 5,140,209 5,628,545 5,706,044

42

10.1.5. Historical Cash Flow

10.1.6. Historical Economic Profit

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------

Free Cash Flow

NOPLAT 117,716 165,180 257,005 263,026 336,483 402,884 528,402 537,234 145,674

Depreciation 59,175 59,010 76,865 101,391 110,357 124,405 143,503 175,949 256,117

Gross Cash Flow 176,891 224,190 333,870 364,417 446,840 527,289 671,905 713,183 401,791

Increase in Working Capital 42,530 90,536 29,789 82,865 130,997 143,082 214,120 123,266 55,959

Capital Expenditures (357,734) (397,225) (477,420) (325,556) (651,722) (539,502) (512,020) (856,570) (318,815)

Incr in other operating assets/liabilities 0 18,086 (12,413) 24,374 (11,603) 18,945 67,808 (5,267) 6,619

Incr in Ongoing operating Provisions 0 0 0 0 7,236 9,486 11,997 14,071 19,017

Inv in Operating Leases (64,416) 29,911 34,505 (99,422) (93,112) (244,182) (84,976) (112,371) (28,725)

Gross Investment (379,620) (258,692) (425,539) (317,739) (618,204) (612,171) (303,071) (836,871) (265,945)

Free Cash Flow Excl. Goodwill (202,729) (34,502) (91,669) 46,678 (171,364) (84,881) 368,833 (123,688) 135,846

Investment in Goodwill and Intangibles 0 0 0 (44,499) (2,342) 0 0 0 0

Free Cash Flow Incl. Goodwill (202,729) (34,502) (91,669) 2,179 (173,706) (84,881) 368,833 (123,688) 135,846

AT Interest Income 15,143 22,314 26,627 20,905 24,799 33,442 55,110 73,462 66,082

(Incr)/Decr Excess Mkt Sec (269,424) (270,194) (157,324) (193,280) (344,284) (297,135) (274,297) 94,992 (247,624)

Foreign Exchange Translation 0 0 0 0 0 0 0 0 0

(Incr)/Decr Retirement Related Assets 0 0 0 0 0 0 0 0 0

Non-operating Cash Flow 1,288 1,253 533 766 (1,973) (1,130) (406,025) 20,219 (32,492)

Restructuring Cash Flow 0 0 (29) (9) 0 0 0 0 0

Extraordinary items 0 0 0 0 0 0 0 0 0

Cash Flow Available to Investors (455,722) (281,130) (221,862) (169,440) (495,164) (349,704) (256,379) 64,985 (78,188)

Financing Flow

AT Interest Expense 9,211 15,883 26,222 41,619 50,425 64,713 72,517 84,952 114,226

Interest on Operating Leases 5,610 3,257 0 10,098 18,853 41,454 50,910 63,586 68,433

Interest on Nonoperating Component of Pension Expense 0 0 0 0 0 0 0 0 0

Interest on Long-term Operating Provision 0 0 0 0 0 0 0 0 0

Decr/(Incr) in Debt (282,069) (148,180) (282,533) (114,786) (461,530) (262,871) (184,338) (404,429) (131,945)

Decr/(Incr) in Operating Leases (64,416) 29,911 34,505 (99,422) (93,112) (244,182) (84,976) (112,371) (28,725)

Decr/(Incr) in Retirement Rel. Liab 0 0 0 0 (10,628) 1,951 1,697 4,960 (8,137)

Decr/(Incr) in Long-term Operating Provision 0 0 0 0 0 0 0 0 0

Payments to Minorities 0 0 0 0 0 0 0 0 0

Common Dividends 0 0 0 0 0 0 0 0 0

Preferred Dividends 0 0 0 0 0 0 0 0 0

Decr/(Incr) in Preferred 0 0 0 0 0 0 0 0 0

Decr/(Incr) in Share Capital (124,058) (182,001) (56) (6,949) 828 49,230 (112,188) 428,287 (92,040)

Total Financing Flow (455,722) (281,130) (221,862) (169,440) (495,164) (349,704) (256,379) 64,985 (78,188)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------

Economic Profit

Before Goodwill

Return on Invested Capital 50.4% 29.8% 34.1% 23.9% 25.5% 22.1% 22.8% 21.7% 4.6%

WACC 7.3% 7.5% 7.2% 7.6% 7.2% 7.6% 8.0% 7.8% 7.6%

Spread 43.0% 22.3% 26.9% 16.3% 18.3% 14.4% 14.8% 13.9% -3.0%

Invested Capital (Beg of Year) 233,722 554,167 753,849 1,102,523 1,318,871 1,826,718 2,314,484 2,474,052 3,134,974

Economic Profit (before Goodwill) 100,597 123,831 202,977 179,167 241,623 263,650 343,491 343,974 (92,889)

NOPLAT 117,716 165,180 257,005 263,026 336,483 402,884 528,402 537,234 145,674

Capital Charge (17,119) (41,349) (54,028) (83,859) (94,860) (139,234) (184,910) (193,260) (238,563)

Economic Profit (before Goodwill) 100,597 123,831 202,977 179,167 241,623 263,650 343,491 343,974 (92,889)

After Goodwill

Return on Invested Capital 50.4% 29.8% 34.1% 23.9% 24.7% 21.5% 22.4% 21.3% 4.6%

WACC 7.3% 7.5% 7.2% 7.6% 7.2% 7.6% 8.0% 7.8% 7.6%

Spread 43.0% 22.3% 26.9% 16.3% 17.5% 13.9% 14.4% 13.5% -3.0%

Invested Capital (Beg of Year) 233,722 554,167 753,849 1,102,523 1,363,370 1,873,559 2,361,325 2,520,893 3,181,815

Economic Profit (after Goodwill) 100,597 123,831 202,977 179,167 238,422 260,080 339,749 340,315 (96,453)

NOPLAT 117,716 165,180 257,005 263,026 336,483 402,884 528,402 537,234 145,674

Capital Charge (17,119) (41,349) (54,028) (83,859) (98,061) (142,804) (188,653) (196,919) (242,127)

Economic Profit (after Goodwill) 100,597 123,831 202,977 179,167 238,422 260,080 339,749 340,315 (96,453)

43

10.1.7. Historical operating ratios

10.1.8. Revenue growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009----------------- ----------------- ----------------- ----------------- ------------------- ----------------- ---------------------- ---------------------- ---------------------- ----------------------

Ratios

Adjusted EBITA / Revenues

Cost of Goods Sold / Revenues 48.3% 52.4% 56.9% 54.4% 60.1% 63.9% 70.8% 74.3% 77.8% 98.0%

SGA costs / Revenue 9.7% 5.0% 2.2% 2.0% 1.7% 1.7% 1.0% 1.3% 0.8% 0.5%

EBITDA / Revenue 42.0% 42.7% 40.8% 43.6% 38.1% 34.3% 28.2% 24.4% 21.4% 1.5%

Depreciation / Revenues 13.3% 13.7% 10.7% 10.5% 11.0% 9.8% 8.7% 7.7% 7.9% 10.9%

Reported EBITA / Revenues 25.4% 26.3% 29.6% 36.0% 27.2% 30.2% 26.2% 25.2% 24.1% 4.0%

Adjustments to EBITA / Revenues 1.7% 0.7% 0.0% 1.2% 1.9% 3.3% 3.1% 3.3% 3.3%

Adjusted EBITA / Revenues 28.0% 30.3% 36.0% 28.4% 32.1% 29.5% 28.3% 27.4% 7.3%

Return on Invested Capital (BY)

Net PPE / Revenues 72.8% 111.4% 130.0% 146.3% 139.7% 147.8% 135.1% 130.4% 152.8%

Working Capital / Revenues -18.8% -22.5% -29.3% -26.4% -29.0% -32.0% -32.1% -36.6% -40.0%

Net Other Assets / Revenues 0.0% 11.7% 2.2% -0.6% 6.1% 11.6% 20.4% 17.4% 21.0%

Rev. / Inv. Capital (pre-Goodwill) 1.9 1.0 1.0 0.8 0.9 0.8 0.8 0.9 0.7

Pre-Tax ROIC 51.9% 30.1% 35.0% 23.8% 27.5% 23.1% 22.9% 24.6% 5.4%

Cash Tax Rate 3.0% 1.1% 2.5% -0.1% 7.1% 4.6% 0.3% 11.9% 14.7%

After-Tax ROIC (pre-Goodwill) 50.4% 29.8% 34.1% 23.9% 25.5% 22.1% 22.8% 21.7% 4.6%

Rev. / Inv. Capital (incl. Goodwill) 1.9 1.0 1.0 0.8 0.8 0.8 0.8 0.9 0.7

After-Tax ROIC (incl. Goodwill) 50.4% 29.8% 34.1% 23.9% 24.7% 21.5% 22.4% 21.3% 4.6%

Return on Invested Cap (Avg)

Net PPE / Revenues 107.2% 142.1% 157.4% 158.4% 163.7% 162.2% 144.9% 145.7% 154.2%

Working Capital / Revenues -23.7% -30.7% -31.3% -30.9% -34.8% -36.9% -37.8% -39.4% -41.2%

Net Other Assets / Revenues 7.4% 7.3% 0.7% 3.4% 10.5% 19.2% 20.5% 19.7% 21.0%

Rev. / Inv. Capital (pre-Goodwill) 1.1 0.8 0.8 0.8 0.7 0.7 0.8 0.8 0.7

Pre-Tax ROIC 30.8% 25.5% 28.4% 21.7% 23.0% 20.4% 22.1% 21.7% 5.4%

After-Tax ROIC (pre-Goodwill) 29.9% 25.3% 27.7% 21.7% 21.4% 19.5% 22.1% 19.2% 4.6%

After-Tax ROIC (incl. Goodwill) 29.9% 25.3% 27.7% 21.3% 20.8% 19.0% 21.6% 18.8% 4.6%

Average ROE 18.8% 18.0% 21.3% 15.3% 17.6% 16.5% 19.2% 15.5% -6.9%

Growth Rates

Revenue Growth Rate 31.0% 27.3% 32.8% 26.3% 22.0% 27.1% 30.8% 18.7% 5.3%

Adjusted EBITA Growth Rate NA 37.6% 57.8% -0.2% 37.8% 16.6% 25.4% 15.1% -72.0%

NOPLAT Growth Rate NA 40.3% 55.6% 2.3% 27.9% 19.7% 31.2% 1.7% -72.9%

Invested Capital Growth Rate 137.1% 36.0% 46.3% 23.7% 37.4% 26.0% 6.8% 26.2% 0.3%

Net Income Growth Rate 44.1% 43.9% 59.2% -13.7% 35.5% 9.5% 42.0% -10.3% -143.3%

Investment Rates (excl. Goodwill)

Gross Investment Rate 214.6% 115.4% 127.5% 87.2% 138.4% 116.1% 45.1% 117.3% 66.2%

Net Investment / NOPLAT 272.2% 120.9% 135.7% 82.3% 150.9% 121.1% 30.2% 123.0% 6.7%

Financing

EBIT/Interest Payable 9.5 8.3 8.5 5.3 5.9 5.1 5.7 5.5 0.7

Adjusted EBITA/Interest payable 10.1 8.5 8.5 5.5 6.3 5.7 6.4 6.3 1.3

Cash Coverage (Gross CF / Interest) 14.8 11.4 10.8 7.7 7.8 7.1 8.1 7.3 3.1

Debt / Total Cap (Book) 22.2% 37.8% 35.7% 40.3% 39.6% 44.8% 46.8% 43.0% 48.3% 50.2%

Debt / Total Cap (Market) 3.8% 9.9% 9.9% 19.5% 16.9% 23.5% 22.5% 17.5% 35.9% 36.5%

44

10.1.9. Growth patterns: Ryanair vs. easyJet

10.1.10. Measuring Coverage

10.1.11. Total Return To Shareholders: Ryanair vs. easyJet

45

10.2. Market definition, size, share and growth

The world airline industry includes the transport of passengers, freight and mail by air along regularly

scheduled routes. Its volume of business is measured with the help of operating measures. The most

common indicator for business volume is passenger traffic. This is measured in passenger kilometres

which are calculated by multiplying the number of passengers by the distance they fly. This statistic is

also referred to as Revenue Passenger Kilometres (RPK) since only revenue generating passengers are

included thus ignoring non revenue traffic such as airline employees travelling on duty.

Ryanair only offers passenger transport services and since it only services 5 destinations outside of

Europe we can restrict its operating market to flights only leaving from and towards European

destinations.

The international Civil Aviation Organization sets the total number of passengers flown by European

airlines to 649 090 000 in 2008, totalling 1 220 991 million revenue passenger kilometres. Ryanair

reported a number of 58 565 663 booked passengers and 63 089 975 600 revenue passenger kilometres

Therefore, the company holds a 9% market share according to booked passengers and a 5% market

share according to RPK of the entire European airline industry. This second measure puts the company

in a less favorable light because it increases

with the length of the flights and Ryanair is a

short haul carrier by nature.

Therefore the definition of the company’s

operating market can be restricted further in

order to include only European short haul

flights.

The European short haul airline industry is a

very fragmented market and it includes both

low cost carriers as well as full service ones.

Chart 10.2.14 describes market share by seats

offered for the period June 2008-June 2009.

Ryanair is the market leader with an 8.5%

market share and it is followed closely by

4 (Kentleton, 2009)

Figure 10.2.1 - Market share by seats offered

46

Lufthansa and Air France, two full service carriers.

According to the ELFAA (European Low Fares Airline Association, 2008), the association’s airlines

carry 150 million passengers a year which accounts for over 35% of the scheduled intra-European

traffic. This sets the scheduled traffic at428.57 million passengers. According to this metric, Ryanair

holds a 13.7% market share.

10.2.1. Market growth

The airline industry is very sensitive to the state of the general economy since air travel demand is

income elastic. This implies that the evolution of the airline industry market in general and of the

European short haul segment in particular will depend on the trend in the overall economy.

This has been quite visible during the last two years that have been marked by the global economic

crisis. On the background of the worsening global financial crisis, in 2008, the overall GDP growth

only reached a 3.2% level in real terms which translated in a 1.3% growth in global passenger traffic.

Focusing on the European economy which directly affects the size of Ryanair’s operating market, the

average GDP increase was of only 1.3%, with the higher growth being concentrated among the

Commonwealth of Independent States and Central and Eastern Europe. According to the ICAO this has

translated in a growth in European international passenger traffic of 4.1% and a decrease in domestic

passenger traffic of 2.3%. Furthermore, the organization’s predictions for 2009 were bleak, a decrease

in average global GDP of 1.7% causing a decrease in the global air travel market of 3.8%.

In the beginning of 2009, the market evolution was more unfavourable than predicted. The passenger

traffic plummeted until

reaching a low point at

the end of the first

quarter. The situation

however improved

slowly and at the end of

August 2009, the

European RPK was only

2.8% lower than the

same month in the

previous year. However,

47

from a year to date perspective the RPK plummeted by 6.3%.

Looking ahead, IATA believes that year on year growth rates for passenger demand may turn positive

within the next few months (as shown in the attached graph), based on an increase in customer

confidence levels. The overall decline in the market in 2009 is estimated at 5%. However, the

confidence levels are way below the ones in 2008 and the economic growth is expected to be slower

than normal upturns due to the fact that many businesses are recovering from the crisis, jobs are still

scarce and consumers use their income to pay off accumulated debt. Therefore, in 2010, the increase in

global air travel demand is expected to reach only 4% with European demand increasing with only 3%.

In the next 5 years, once the economic turmoil passes and the economic growth in Europe stabilizes,

the growth in passenger traffic is also expected to stabilize, around 4.8%, as the growth in global traffic

will be driven mostly by developments in Asian countries. However, since Central and Eastern Europe

and the CIS countries have a higher economic growth potential they are the most likely base for the

increase in European air travel demand.

To sum up, Ryanair is market leader in the European short haul airline industry with a market share of

8.5%. The market that has suffered from a serious decline in the last year on the background of the

downturn in global economy is expected to recover slowly and to grow at a rate of 3% in the first year

and to stabilize at a growth rate of 4.8% in the medium term. The growth is expected to be driven by

the economic development in the central and eastern European and CIS member countries.

10.3 PESTEL Analysis

The PESTEL framework is a useful method of analyzing a company’s macro environment. It helps

understand how factors outside the company can influence its evolution. There are six types of such

factors: political, economical, socio-cultural, technological, environmental and legal. These factors are

not mutually exclusive but interdependent as particular events can affect the company from more than

just one perspective.

10.3.1 Political and legal factors

Political issues are very relevant in the airline industry which has been and still is under political

influence. This is particularly true in the European Union where Ryanair primarily operates.

An example of a political factor is represented by the liberalization of the European airline industry.

Many airlines were and still are owned by national governments. The governments protected the

48

interests of the flag carriers since a free competition was perceived as a threat to the state itself. They

imposed regulations restricting pricing freedom and product differentiation.

In the European Union this situation has come to an end after a process of liberalization of the airline

industry. After three packages of measures adopted in December 1987, June 1990 and July 1992,

cabotage is allowed for airlines of the member states. This translates in the right of the airline to

operate a route within another Member State.

A recent liberalization act came under the form of the EU-US Open Skies Agreement, signed in 2007

and which entered into effect on March the 30th 2008, which gives the right to US based airlines to

operate intra-EU flights, while European airlines are not permitted to operate intra-US flights and are

not allowed to purchase a controlling stake in a US operator. This represents both a great disadvantage

and a threat of increased competition for European airlines.

For a low fare carrier such as Ryanair, the liberalization has various implications. It has allowed for the

company to exist by making innovative pricing policies and product differentiation possible.

Furthermore since the packages include provisions on fare transparency, it provides the low cost

carriers with an advantage since they have the most transparent pricing policies. Moreover, through the

right of cabotage within the EU, it has lead to an increase in the market size firstly because it opened

the doors to existing Member States and secondly because the expansion of the European Union, the

admission of new members, contributes to the growth of the market size even more. There is, however,

a downside represented by possible increased competition originating in the new Member States or by

lost market share to any competitor that might obtain a first mover advantage in the new markets. The

threat of increased competition is increased by the possibilities of strong US based airlines starting to

operate within the EU. In conclusion, any modification of the liberalization legislation may affect the

market position of the company.

Another example of an issue that has both political and legal roots and that affects the company is the

issue of state aid. The EU rules control aid granted by member states to businesses on a selective or

discriminatory basis. The EU Treaty prevents member states from granting such aid unless approved in

advance by the EU. Any such grant of state aid to an airline may be challenged before the EU or, in

certain circumstances, national courts. If aid is thought to have been unlawfully granted it may have to

be repaid by the airline to the granting member state, together with interest thereon. In the particular

case of the airline industry, governments may try to subsidize flag carriers in order to help them avoid

bankruptcy. This help provides the receiving airlines with a non competitive advantage allowing them

49

to operate with wasteful business models and thus leading to a decrease in welfare. Without the state

aid their losses become unsustainable and they may face a serious bankruptcy threat. A recent example

involves the Italian flag carrier Alitalia who has been allowed an EUR 100million yearly state aid for a

period of seven years through the introduction of a EUR 3 per passenger airport tax for foreign

companies. While this law affects Ryanair directly by increasing costs it also sets a dangerous

precedent.

For Ryanair, the state aid legislation has a series of implications. First and foremost, if applied correctly

it ensures a lawful competitive environment. Secondly without the help from their governments, flag

carriers may go bankrupt which would imply opportunities to increase market share and capacity.

However, the Alitalia case has created a strong precedent and suggests that national governments will

not give up on flag carriers very easily. All in all, any deviations from or alterations of the law can put

the company in a disadvantage. Ryanair proved to be aware of the importance of the law and its

implications and has submitted a series of state aid complaints against Air France, Lufthansa, Alitalia,

Volare and Olympic Airways. While two of the complaints have been addressed, the company still

awaits hearings in the remaining three cases.

Another both political and legal issue is the one of airport ownership. Although most airports are

owned by government bodies, some have been leased to private corporations that oversee their

operation while others have become fully privatized. If any airline would have significant influence on

an airport’s operations, it would create a state of monopoly thus giving the airline a competitive

advantage. Examples of possible such situations are represented by BAA Airports Ltd and DAA

(Dublin Airport Authority). In October 2008 The UK Competition Commission recommended the

breakup of the UK BAA airport monopoly. Any evolutions in the change of ownership change in any

of the airports Ryanair operates on can have a high impact on the company’s operating cost considering

that airport and handling charges represented 15.56% of the company’s total operating expense.

A purely legal issue regards the issue by the EU of recent legislation that aims to give better rights to

passengers travelling from EU countries. According to this legislation, passengers that are denied

boarding are to be financially compensated with amounts ranging from EUR 250 to EUR 600

depending on the length of their scheduled flight. The airlines must also re-schedule the flight or give a

refund and if necessary they must provide food and lodging for the passengers until their next possible

flight. Although this legislation was introduced to deter full service airlines from practicing

50

overbooking, it is also valid in case of long delays or cancelations that were not caused directly by the

airline, such as airport disruptions or unfavourable weather.

For low fare airlines such as Ryanair, this legislation causes a serious disadvantage. Firstly low cost

carriers do not practice overbooking nearly as much as full service carriers, and secondly since the

compensations do not depend on the price paid for the ticket, low cost carriers are affected more than

the full service ones.

In conclusion the main political and legal issues that affect Ryanair are the liberalization of the airline

industry, state aid evolutions, changes in airport ownership and the passenger rights legislation.

10.3.2 Economic factors

The overall state of the economy is the main economic factor affecting the airline industry. The main

reason is that demand for air travel is very income elastic. It has been shown that there is a 1 to 2

relation between the change in GDP and the demand for air travel. Therefore the airline industry is very

affected by the economy and its trade cycles. Low fare airlines, as Ryanair, are however less affected

by economy downturn periods since in such periods, although they might lose some customers, they

attract the ones who would have usually chosen a full service airline. The strong relation between GDP

and air travel demand has also been exemplified during the latest economic downturn period as

mentioned in the market analysis.

Another characteristic of the airline industry that corroborates with its dependence on the cycles of the

economy is the fact that in periods of economic boom, investing in capacity in order to satisfy

increasing demand is a difficult strategic decision since it means tying up capital in airplanes. If the

long term planning is flawed, the resulting un-coordination between capacity and demand can result in

idle capacity and low returns on invested capital, in periods of economic downturn, or loss of potential

revenue, in periods of economic upturn.

Economically, the airline industry is also seriously affected by fuel prices since they represent a high

portion of the airliner’s costs. For Ryanair, for example, fuel and oil costs represented 39%, 36% and

44% of total operating costs in 2007, 2008 and 2009 respectively. That is why, the doubling of jet fuel

prices from an average of $90/b in 2007 to peak at $180/b in July 2008 caused the airline industry

slipping from net profits of $12.9bn in 2007 to an estimated loss of $5bn in 2008 and resulted in 30

airlines ceasing scheduled operations.

51

Airlines have a series of ways in which to mitigate the issue of volatile fuel prices. These include using

fuel efficient aircraft, transferring the costs onto the passengers by introducing fuel surcharges or

hedging the fuel costs. As a short haul airline, Ryanair is even more affected by fuel prices since

airplanes consume the most fuel during takeoff and landing.

10.3.3 Socio-cultural factors

Since the airline industry provides a service it is very dependent on its customers that become part of

the airliners operations. Therefore the passengers’ perceptions and the way they change can highly

impact an airliner’s volume of business. Such a big change has occurred in the population’s perception

of air travel. Since the low cost revolution, air travel is no longer seen as an expensive, luxury item.

Travelling by plane is now available to the larger public and travelling abroad for a short holiday has

recently become a trend within the European Union.

The consumers’ perceived safety is also very important in the airline industry. If passengers do not

feel safe to travel or to do so by plane they will avoid boarding flights and airliners revenues will

plunge. Fear of terrorist attacks such as the September 2001 ones, or fear of health hazards such as the

avian flu or the recent swine flu outbreaks can significantly affect passengers’ trust in travelling by

plane.

Another social factor affecting the airline industry has been the change in demographics around the

European Union. The right to free movement of people has lead to an increased number of people

52

relocating within the union for different reasons. This has increased the demand for air travel since all

these expats travel to visit their home countries.

10.3.4 Technological factors

The most important technological factors affecting the airline industry are the emergence of the internet

and developments of technological innovations that reduce the necessity of personal encounters and

therefore of air travel. The development of videoconferencing has led to a decrease in air travel

demand since the need to fly has disappeared.

The impact of the internet has been to give a higher bargaining power to customers due to increased

access to information. Prospective passengers can access the web pages of all the airliners and book

their own flights according to their preferences. This has lead to an increased competition on price

among the airliners and consequently to the need of airliners to increase cost efficiency in order to

maintain their margins.

Another technological factor has been the improvement of airplane technology. More cost efficient

aircrafts have made it easier for low cost carriers to maintain low fare levels. Furthermore the increase

in safety has contributed to a higher trust of the passengers in air travel and thus helped in raising the

demand in the industry.

10.3.5 Environmental factors

Environmental awareness has been increasing in the past decade and all industries have been facing

scrutiny from both specialized organizations and consumers themselves. The airline industry makes no

exception.

The latest environmental issue affecting the airline industry is adding the industry to the EU Emissions

Trading Scheme as of 2012. This scheme is a cap-and-trade system for CO2 emissions to encourage

industries to improve their CO2 efficiency. Under the legislation, airlines will be granted initial CO2

allowances based on historical “revenue ton kilometres” and a CO2 efficiency benchmark. Any

shortage of allowances will have to be purchased in the open market and/or at government auctions.

Ryanair reports that although it has not calculated what the effect of the legislation is going to be on the

company, it will negatively affect the European airline industry. The airliners will have to pass through

the new costs in the fares of the ticket. Especially for low fare carriers this will most likely translate in

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a decrease in demand as short haul air travel demand is very price sensitive, the European coefficient of

elasticity being of -2.

Although it has not been issued, there is also a threat of fuel taxes and emission levies being

introduced for airliners. This would have a similar effect to the emission trading scheme, further

decreasing industry profitability.

The following figure summarizes the factors affecting the airline industry macro environment:

10.3.6 General Degree of Turbulence in the Environment

Taking into account the environmental analysis above, the degree of turbulence in the business

environment can be analyzed. The analysis can be performed according to changeability and

predictability.

Technological factors

• The internet

• Video conferencing

technology

• More efficient aircrafts

Economic factors

• State of the general

economy

• Volatility and level of

fuel prices

Socio-cultural factors

• Consumers’ perception of air travel

• Passengers perception of air travel

safety

• Change in EU population

demographics

Environmental factors

• Part of EU Emissions Trading

Scheme as of 2012

• Introduction of fuel taxes

Ryanair

Political and Legal factors

• Liberalization

• State aid

• Airport ownership

• EU passenger rights

54

The factors influencing changeability are complexity and familiarity of the new events in the industry.

For an airliner, the complexity of change has a medium level. At the current levels of globalization,

major events have a global impact. An example is provided by the 2001 terrorist attacks that although

happened in the United States, they caused a downturn in the global airline industry. Since Ryanair

operates in the European Union which is a relatively closed environment from the exterior, the

complexity is only at a regional level. From a familiarity point of view, the events that affect the airline

industry are can be extrapolated, mainly because they have previously occurred in a different industry.

The introduction of the industry in the EU emissions trading scheme has already been affecting various

other industries, for example.

The factors influencing predictability are rapidity of change and visibility of the future. The change in

the industry is not fast since it mostly involves legal aspects that need to go through a bureaucratic

process before being approved. This gives the industry players enough time to prepare and to respond

once the change occurs. The economic and social changes involving consumers’ perceptions can

arguably represent an exception since they do not give significant notice and are more volatile. On the

other hand, in these situations the visibility of the future is high, including recurring or at least forecast

able events. The relationship between the state of the economy and air travel demand has been

thoroughly studied and if changes in the economy occur the effects on the industry can be calculable.

In conclusion the level of turbulence in the airline industry is medium and should not pose a threat on

the strategic analysis of the company.

10.4. The Five Forces analysis of the airline industry

10.4.1. The threat of substitute products - low

Companies in the airline industry face a threat of substitute products offered by other industries. In this

case those are mainly alternative ways to travel, like other means of transport such as cars, trains or

ships. They can pose a threat for regional, short distance trips. However, with increasing distance,

flights become the more popular option for many customers, so in this case, the threat is low. It is

believed that when the distance is higher than 400km the airlines no longer compete with other means

of transport.

Automobile transport depends on the prices of fuel, and since those are relatively high in Europe, it

remains as an option popular only on short distance trips. When it comes to bus transport, there exists

only one pan-European network of long distance bus lines – Eurolines which consist of around 30

smaller bus companies. They are usually chosen by low budget travellers and students. The bus ticket

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prices do not vary as much as the prices of airline tickets, as one pays almost the same fare with no

regard to when the purchase was made, while the airline fares depend on the period of year and time

when the purchase was made.

The fast railway (such as TGV) can pose a threat on some of the routes. And it has some benefits for

travellers, as the travel time is similar and the train stations are often in the centres of the cities while

airports reserved for low cost carriers are located in the outskirts. Also, there is no need to arrive a few

hours before the departure of the train, as the passengers don’t have to go through such a strict control

as when travelling on plane. However, the slumping prices of airline tickets have recently made train

connections to sometimes be more expensive than flights on similar routes. Moreover, in Europe there

are not a lot of railway routes that can accommodate high speed trains. In regions like Eastern Europe

the modernisation of the railways is extremely expensive and that lowers the chances that those

connections will create a strong competition for airlines. The same is true in the mountainous areas,

where constructions of tunnels generates high cost and puts the airline industry in an advantageous

position. Fast railways need usually subsidies from the government which shows that it is less efficient

that cheap airlines. Moreover creation of even faster trains turned out to be extremely expensive and

unprofitable which lowers the chances of its implementation in Europe and lowers the threat for

airlines.

Recently, the developing communication technologies like the internet and teleconferencing, that

enable virtual meetings, lowered the need for business travels. However, for the low cost airlines those

clients were never an important source of income. The business travellers tend to use more expensive

airlines which offer them higher standard services, as the cost of flights is covered by their employers.

Additionally they can profit from different frequent-flyer programs that are not offered by LCCs. Also

it is believed that that those virtual meetings will not have an effect on regular customers, as people still

prefer to meet with their friends and relatives in person that to use the video-conferences to substitute

those meetings.

10.4.2. The threat of the entry of new competitors - moderate

Although, it may seem that high barriers of entry should block the airline industry from new

competitors entering the market. The threat of entry of new carriers depends on the costs of access to

bank credits and loans as this industry is characterised by high leverage. When borrowing is cheap, the

likelihood of new companies entering the market increases. This market gets easily saturated so it is

important to have a recognised brand name as well as having frequent flights on most of the routes.

New players are forced to spend a lot of money to become visible. Moreover, new entrants that decide

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to compete with other LCC companies, on the more popular routes, may lose a price-cutting

competition which usually occurs. However the EU law tries to limit this kind of actions that would

aim at new players in the industry.

Having good slots on the airports (hour and place) also lower the threat of new competitors as new

companies often can’t afford to have flights from more popular airports without cutting into their profit

margins. So they have to start from the smaller airport, sometimes without the strong infrastructure that

would connect them to the cities.

Economies of scale are not an important barrier of entry, as often there is no need for bigger planes

(although they lower the cost for a passenger) but for more frequent flights. And LCCs achieve

economies of scale through low cost structure that lowers the prices and generates new demand

increasing the load factor leading to lower unit cost per passenger.

The threat of new entrants has recently increased following the enforcing of the Open Skies act

between the EU and the United States, which allows US airlines to penetrate the intra European short

haul market. Since they are already established airlines, they would face considerably lower entry

barriers.

10.4.3. The intensity of competitive rivalry - high

The competition in the airline industry is high. There are a lot of companies in this industry and

especially among low-cost carriers, price-cutting competition often occurs. The airline companies have

high fixed costs and because of high competition in this sector they have relatively low returns. That

leaves them in vulnerable position during the times of economic slowdown or increasing fuel prices. In

order to survive and increase profits the companies need to have unique business models. Some of

those include using outsourcing, maximising the use of aircrafts or using only one or few types of

airplanes to lower the maintenance costs etc. Only through strict cost management and looking for new,

more effective solutions, a carrier can gain higher profits then the average for industry and outrun the

competition.

Competition may take place between two low fare airlines or when LCCs decide to enter full service

airlines sector, as well when regular airlines want to enter the low fares sector. However, there are not a

lot of successful examples of regular airlines trying to compete against LCCs, as FSAs tend to be afraid

that the new subsidiaries could cannibalize the parent company. As a result, they are not consequent in

the management of the newly created airlines. Other FSAs tend to differentiate their offers, creating

few types of fares. The cheapest fares are usually non-refundable, without the possibility to change the

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date and with no meal or with very limited choice of meal. However, FSAs have to be careful when it

comes to adjusting their offers, as they can end up with a product that is neither the cheapest nor

different from the competitive ones. The airline industry is characterised by high exit barriers.

10.4.4. The bargaining power of customers - moderate

The development of the Internet had an important effect on the amount of information accessible for

customers. Nowadays, they can easily compare the prices of different airlines. There are internet

services that bring together all the flights on a specific route. As a result the bargaining power of

customers is high as long as there other cheap competitors on the route because passengers will usually

choose the cheapest option. Consequently the prices of agents have also become lower as they had to

cut their margins to face the Internet competition. However having a strong brand is important, as

customers may be afraid of new or unknown airlines because of the history of bankruptcies in the LCC

industry. If there aren't any competitors, and the company offers the only cheap connection between a

pair of cities, the power of customers decreases significantly.

10.4.5. The bargaining power of suppliers - high

The power of suppliers is high as the returns are small and the two main costs for the airline companies

are fuel and labour. The costs of fuel may depend on the efficiency of the carrier however; as the planes

consume the highest amounts of jet fuel during take-offs and landings, short haul airlines have lower

cost efficiency. Also the prices of fuel tend to fluctuate on a monthly basis so companies need to have a

business model that takes that into consideration. The airlines have to pay air pilots, flight attendants,

customer relations and airport services such as baggage handlers and dispatchers as well as for the slot

on the airport. The labour is the second largest expense for the industry, and often pilots and staff are

part of one or more labour unions, which significantly increases their bargaining power. However,

Ryanair has developed a specific policy that limits the creation of unions within the company, thanks to

which the staff has limited bargaining power. Ryanair is also outsourcing all its check-in and airport

services to Servisair in all its locations.

High airports’ fees move cheaper carriers to less popular hours or smaller airports farther away from

the big cities. However, as a lot of smaller airports need the LCCs to stimulate growth and generate

profit, they often need to offer the best prices in return for a stable number of passengers. The airlines

usually have high bargaining power in contact with those airports as they are able to threaten them that

they will change airport if their conditions will not be met. Lack of diversification of clients can put

local airports in a very vulnerable position. The increase in number of new passengers, when new

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carriers start to operate, can also force the airport to expand the infrastructure which creates a

substantial cost.

When it comes to aircrafts there are two main suppliers, European Boeing and Airbus form USA which

limits and stabilizes the competition. Those companies are known to compete against each other and

rather no cooperation between them can take place. Also the slowdown in airline industry had forced

those suppliers to cut costs and lowered their bargain power, as often they can only compete through

offering high discounts. The likelihood of those two suppliers creating their own airlines is also low.

Also it is unlikely that the airports would want to create an airline. So the risk of a forward integration

in the sector is low. When it comes to the cost of technical support and maintenance having one or two

models of aircrafts is cost-wise and that is the strategy used by the most of LCC. Consequently, when a

supplier wins the first offer from the LCC there are high chances that other purchases will follow in the

future.

10.5. Competitor Analysis

The European short-haul transportation market is highly fragmented. In 2008 approximately 230 air

carriers existed in total of which the top 50 accounted for about 90 % of capacity in Europe.

Competition in the short haul market does not only stem from low-cost carrier but also from the full

service network carriers such as Lufthansa, British Airways and Air France.

The competitors that pose the biggest threat to Ryanair are those that compete in the low cost segment

and have a similar strategy as Ryanair. The two competitors that will be analyzed in more detail are

easyJet and Air Berlin as they seem to be Ryanair biggest competitors in the European short-haul

market within the low-cost segment.

10.5.1. EasyJet

EasyJet is a British airline that is headquartered in London Luton Airport. It carries more passengers

than any other British carrier and transported about 43.7 million passengers in 2008. In Europe it is the

airline with the second highest passenger numbers after Ryanair with 58.6 million passengers. In the

following easyJet’s strategy and objectives, resources, products and services and past performance will

be analyzed.

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Strategy and objectives

EasyJet’s business model is similar to that of Ryanair and that of Southwest in the USA. The company

employs a policy of rigorous cost cutting by not offering services such as connecting flights or offering

services for additional service charges such as food and beverages. Furthermore easyJet operates only a

couple of aircraft types in order to keep operating and maintenance costs low. High aircraft utilization

and quick turnaround times are vital parts of easyJet’s business model.

However, there are several differences to the Ryanair business model. EasyJet, unlike Ryanair, flies in

general to the main airport of the cities it serves for example London Gatwick or Paris Charles de

Gaulle. Furthermore easyJet tries to attract business passengers by offering convenient services at

additional service costs.

easyJet’s objectives are to keep growing and increase market share organically as well as by acquisition

and to open new destinations and hubs throughout Europe.

Resources

easyJet has a brought basis of resources to support its operations. In 2008 it employed about 5000

employees and operated a fleet of 172 aircraft. It serves 114 destinations in 27 different countries from

20 different bases across Europe.

Products and services

easyJet tickets can be book directly online via the company’s webpage. This is the only way because

the company does not pay commissions to travel agents which therefore have no incentives to sell the

tickets. easyJet’s aircraft cabin are set up in a single class and with a capacity layout in order to be able

to accommodate as many passengers as possible thereby sacrificing space for isles and lavatories.

easyJet does not offer meals or beverages as part of the air fare. Passengers however, may buy various

drinks and snacks from the onboard easyJet Bistro or purchase various gifts and fragrances from the

onboard shop. The sales generated from these items are an important part of the airlines revenues. On

all flights easyJet provides an in-flight magazine on some flight even provides in-flight entertainment

with movies and comedy shows.

Past performance

2008 2007 2008 2007

Passengers (million) 58.6 50.9 43.7 37.2

Revenues (million) 2,942 € 2,713 € 2,363 € 1,979 €

Load Factor 81% 82% 84.1% 83.7%

Cost/ASM (Euro cent) 5.8 5.1 6.7 6.1

Ryanair easyJet

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easyJet has experienced considerable growth since its start of operations in 1995. Reason for this is the

increasing high demand for low cost air transportation. As shown by the table the airline was able to

increase its passenger numbers by 17.5% from 2007 to 2008. Its revenues also increased as well as the

load factor while Ryanair’s load factor decreased by one % from 2007 to 2008. The cost per available

seat mile is roughly one cent higher for easyJet. Reason for this might be among others the higher

airport fees for the main airport in the cities easyJet serves.

10.5.2. Air Berlin

Air Berlin is after Lufthansa Germany’s second largest air carrier. It is a semi low-cost air carrier which

is headquartered in Berlin. It extensively services holiday destinations in the Mediterranean, North

Africa and the Canary Islands as well as a selection of various major European cities. In 2008 the Air

Berlin carried about 28.6 million passengers. In Europe Air Berlin is the fifth largest air transportation

provider and the third largest low-cost carrier behind Ryanair and easyJet. In the following Air Berlin’s

strategy and objectives, resources, products and services and past performance will be analyzed.

Strategy and objectives

Air Berlin has a different strategy than Ryanair and easyJet even. It tries to fill the gap between the

traditional full service airlines and the low-cost airlines with very limited services even though it

officially belongs to the low cost carrier segment. It seeks to achieve the status of a hybrid type of

carrier. It tries to set standards with a unique price/performance ratio. Unlike low-cost carriers Air

Berlin operates multiple types of aircrafts and also serves long-haul destinations with more than six

hours of flight time. The airline tries to offer more services than low-cost carriers but at lower costs

than full-service carriers.

The objective of Air Berlin is to further increase revenues and grow organically as well as by

acquisition despite increasingly complex and volatile market situation.

Resources

Supporting its operations Air Berlin possesses various resources. It employs roughly 8,300 employees

and operates 125 aircrafts of numerous types which are all owned by the company itself. The

headcount of Air Berlin is almost twice as high as the Ryanair’s and also shows the difference in

business models. The world-wide network which is operated by Air Berlin consists of 126 destinations

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with a strong focus on Germany and the Mediterranean. Operations center around four hubs in

Germany and one on the Spanish island of Mallorca.

Products and services

Unlike other low-carriers Air Berlin offers drinks, snack and meals depending on the type of flight. On

short-haul flights up to six hours drinks and snacks are for free on all flights. Meals however, have to

be purchased at additional costs. Free meals are included for flights longer than six hours. Furthermore

Air Berlin offers among other additional services newspapers on flights, assigned seating as well as a

frequent flyer program.

Past performance

Air Berlin has also seen rapid growth in the past especially after the acquisition of DBA in 2006 and

LTU International in 2007. Revenues increased roughly about 34 % from 2007 to 2008 while load

factor also improved by about 1 %. However cost per available seat mile increased significantly by

almost three cents to 9.8 cents. The higher available seat mile costs is prove for Ryanair’s much leaner

cost structure clearly depicts the difference in business models between Ryanair and Air Berlin.

10.5.3. Conclusion

In conclusion, even though Air Berlin is the third largest low-cost carrier in Europe easyJet seems to

pose a bigger threat to Ryanair. Reason for this is the similar cost structure of easyJet and its business

model. Additionally, easyJet is much more focused on the European short-haul market than Air Berlin

and generates higher passenger numbers. Also important is the fact that easyJet services more

convenient airports in general than Ryanair which many passengers might perceive as the better

business proposition. Lastly, the competition between Ryanair and easyJet has become increasingly

aggressive in recent years with easyJet attacking Ryanair directly by servicing cities in Ireland and

engaging in price wars.

2008 2007 2008 2007

Passengers (million) 58.6 50.9 28.6 28.2

Revenues (million) 2,942 € 2,713 € 3,400 € 2,536 €

Load Factor 81% 82% 78,4% 77.3%

Cost/ASM (Euro cent) 5.8 5.1 9.8 6.9

Ryanair Air Berlin

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10.6. Internal analysis

10.6.1. Snapshot

The Irish airline company Ryanair has been in business for 25 years. Today, it is the largest European

airline, as classified by the IATA ranking. Its business model based on short-haul, point-to-point routes

has proven to be a success. The airline currently operates from 32 bases all over Europe, offering over

1,200 scheduled flights per day, and serving 151 locations throughout Europe and Morocco. Ryanair

operates a fleet of 202 aircrafts on more than 850 routes. It employs more than 7,000 people. The

company has had almost 60 million passengers the past year and expects to carry 66 million people in

2009.

During the last 10 years, the company grew by 359% in terms of number of employees, 596% in terms

of fleet size, and 965% in terms of operating revenue.

10.6.2. Financial perspective – Main financial ratios

All the ratios in this section were calculated using the original financial statements i.e. before they were

re-organised for valuation purposes.

Key figures

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Operating Revenue (million euro)

370.1

487.4

624.1 842.5 1074.2 1319.0 1692.5 2236.9 2713.8 2942.0

,et (loss) / profit after tax (million euro)

72.5 104.5

150.4 239.4 206.6 266.7 280.1 306.7 390.7 (169.2)

Adjusted net profit after tax (million euro)

72.5 104.5

150.4 239.4 226.5 268.9 268.1 301.5 480.9 105.0

Adjusted EPS (euro cent)

21.62

14.81

20.64 31.71 29.91 35.38 19.66 25.99 31.81 7.1

Ryanair has been on the rise for the past 10 years, as clearly depicted by the figures in the table above.

Operating revenue has grown almost 8 times during the period, showing that the company’s value

proposition resonated within the market.

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Profits also rose steadily from 2000 to 2008, but the company experienced a loss in the last year of

operations. This was primarily the result of ever increasing fuel prices (the fuel bill rose by 59% during

the last year compared to the previous one). Other factors that had a saying were costs related to a

higher level of activity (223 new routes were opened) and to the growth of the airline. Total operating

expenses were 29% higher in 2009 than in 2008.

The same trend exists in the evolution of the net profit after tax, with a major drop in 2009.

EPS have fluctuated year after year, but had an overall increasing trend. In 2006, there is a drop in

value of almost half due to the stock split that occurred in the respective year. EPS continue to grow

afterwards, showing that the company is improving its profitability yearly. The last year is, as expected,

not as favourable as the previous ones, the company having recorded the lowest EPS for the past 10

years.

Liquidity ratios

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Current ratio

2.77 3.28 3.04 2.95 2.71 2.55 2.43 2.02 1.53 1,84

Acid test 2.67 3.20 2.99 2.89 2.65 2.54 2.42 2.02 1.53 1,84

Cost of sales per day

365.22 523.18 731.66 903.86 1221.47 1603.65 2329.26 3269.93 4035.61 5506,15

Average inventory

13425.00 14954.00 16550.00 19956.50 24614.00 14450.00 2941.00 2921.00 2208.50 2036,00

Days inventory outstanding

36.76 28.58 22.62 22.08 20.15 9.01 1.26 0.89 0.55 0,37

,et sales per day

1014.07 1335.36 1709.73 2308.24 2943.08 3613.80 4637.07 6128.48 7435.13 8060,18

Average accounts receivable

20224.50 15334.50 9513.00 12650.50 14951.00 17788.00 25276.50 26660.50 28795.00 37984,50

Days receivable outstanding

19.94 11.48 5.56 5.48 5.08 4.92 5.45 4.35 3.87 4.71

COGS per day

365.22 523.18 731.66 903.86 1221.47 1603.65 2329.26 3269.93 4035.61 5506.15

Average accounts payable

26812.50 26429.50 38388.50 54191.50 64770.00 80027.00 85700.50 103263.00 128266.00 130980.00

Days payable outstanding

73.42 50.52 52.47 59.96 53.03 49.90 36.79 31.58 31.78 23.79

Cash conversion cycle

-16.71 -10.45 -24.28 -32.40 -27.80 -35.97 -30.08 -26.34 -27.36 -18.71

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The ratios presented in the table above all show that Ryanair is an extremely liquid company and is

able to cover its current liabilities using its current assets. Even at its lowest (1.53), the current ratio is

still well above 1, depicting a high degree of liquidity. The difference between the current ratio and the

acid test ratio is only slight, due to the fact that the company holds very few inventories, most of its

current assets being in their most liquid form: cash.

The cash conversion cycle is negative throughout the 10 year period, which is not something out of the

ordinary. All customers buy the tickets in advance, meaning well before any costs related to the

transportation have to be incurred by the airline. The money transfer is made quite some time before

the service is delivered, so Ryanair can cover any liabilities they may have (for example fuel for the

flight) without having any short-term financial constraints. The balance sheet confirms this. If we

consider the fact that only 2% of revenue is operating cash, and the rest is excess, we can see the large

difference between the two. Operating cash ranges from 0.16% out of excess cash in 2007 (the smallest

proportion) to 1.90% in 2000 (the largest proportion).

Leverage ratios

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gearing 0,25 0,56 0,51 0,62 0,60 0,75 0,77 0,66 0,76 0,91

Debt ratio

0,38 0,48 0,47 0,50 0,50 0,55 0,57 0,56 0,60 0,62

Interest coverage

22,23 9,53 8,31 8,53 5,23 5,91 5,07 5,69 5,53 0,71

Throughout the period in question, Ryanair took on more and more debt year after year in order to be

able to fuel its aggressive growth. As the gearing ratio or long-term-debt-to-equity ratio shows,

Ryanair’s long term debt was 25% out of the value of equity. In 2000, it evolved to almost as much

long-term debt as equity. This goes to show that the company is more and more financially stable and

has been granted support by the financial institutions. The benefits of debt contributed to increasing the

company’s value through tax shields (interest expense increased from EUR 3.8 million in 2000 to EUR

130.5 million in 2009) and increased performance (a company with higher leverage is more productive

since employees are aware that debt has to be repaid). The large 91% in 2009 seems alarmingly high,

but we should bear in mind that the company increasingly relied on short-term debt over time, which

reduced the proportion of long-term loans. This is also underlined by the debt ratio, which shows a less

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booming trend, but still an increasing one. If total liabilities are compared to total assets, there has been

a slow steady growth in the level of debt, corresponding to the company’s increased reliance on debt to

finance its assets.

We should bear in mind that the company leases its aircrafts. Therefore, the value of the assets appears

on the balance sheet, but the value of the corresponding debt does not. If we were to take these issues

into account, both the gearing and the debt ratio would have had higher values.

The interest coverage ratio is used to determine how easily a company can pay interest expenses on

outstanding debt. It becomes clear from the calculations that the company has become more and more

burdened by interest expenses on its loans. The large increase in interest expense is equivalent to the

drop in interest coverage from 22.23 to under 1. This large difference can also be explained by the fact

that earnings have not grown as much as interest expense because of the company’s philosophy of

keeping prices low. Average fare decreased from EUR 58.8 in 2000 to EUR 40 in 2009, so the increase

in EBIT comes from an increase in routes flown and a decrease in costs.

Profitability ratios

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Profit margin 0,25 0,26 0,30 0,36 0,27 0,30 0,26 0,25 0,24 0,04

ROA 0,13 0,11 0,09 0,11 0,08 0,08 0,07 0,08 0,06 -0,03

ROE 0,21 0,19 0,18 0,21 0,15 0,18 0,16 0,19 0,15 -0,07

In the first row of the table, we used EBITA to calculate profit margin. The ratio seems to be somewhat

stable throughout the 10 year period, averaging around 0.26 (meaning that EUR 1 of sales generates

EUR 0.26 of EBIT), apart from the last year, when it was only of 0.04.

ROA has been decreasing all the way, showing that the company’s assets generate less and less net

income. This is typical for growing companies, where the asset base is growing far more rapidly than

income is. ROE is in a similar situation, where EUR 1 of equity only returns between EUR 0.16 and

EUR 0.21 in terms of net income. The same argument stands, growing companies have low returns.

Investment ratios

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

EPS 21,62 14,81 20,64 31,71 29,91 35,38 19,66 25,99 31,81 7,10

P/E ratio

0,42 0,69 0,32 0,20 0,15 0,17 0,40 0,22 0,09 0,41

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Earnings per share have gone through a series of ups and downs. The change from 2005 to 2006 is

mainly due to the stock split. 2008 was the best year, when the company returned EUR 31.81 in terms

of EBIT for each share.

The P/E ratio shows how the market values the company. Even though 2008 was a good year

financially, the market investors would only pay EUR 0.09 for every EUR 1 of earnings (the minimum

value out of the 10 years). The highest an investor would have paid was in 2001: EUR 0.69 for EUR 1

of earnings.

Operating performance ratios

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Inventory coverage

9,57 11,95 15,59 14,48 16,86 237,94 248,45 493,19 737,60 968,55

Fixed asset turnover

1,17 0,79 0,66 0,62 0,66 0,61 0,66 0,67 0,69 0,77

Revenue/employee 266,67 330,22 407,61 444,13 469,50 506,54 552,57 560,48 515,74 461,92

The inventory coverage ratio shows that the company’s cost of goods sold increased exponentially

compared to the increase in inventory. If we think of fuel, the largest operating cost, it is consumed at a

rapid pace and is not kept in warehouses, and therefore, it generates a more or less immediate expense

rather than a cost of storing it.

Fixed asset turnover has been declining mainly as a result of the heavy investment in net, property,

plant and equipment as part of the company’s growth strategy. The number of aircrafts has been

increasing, driving the ratio downward. In the last year, when there has been a decrease in sales due to

the recession period, the fixed asset turnover ratio increased.

The last ratio in the table is a measure of profitability. As shown, revenue generated by each employee

has increased, reaching a peak in 2007. The fall in the following year might be attributable to the high

number of hired employees – an additional 1271 compared to the previous year (and the largest

difference during the 10 year period), while in the last year, the drop is explained by the general

recession.

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Share price performance

The graph above depicts daily share prices for Ryanair from the Irish stock exchange (data is only

available from December 2001). Share prices have been somewhat constant, except for the period

before the financial crisis. The steep rise in 2006 is caused by the stock split. The downward evolution

thereafter, partly due to the large increase in oil prices, which caused the stock market to undervalue

the company, founding its reasoning on the belief that the company will not be able to be as profitable

and successful as before and will be deeply affected by the rise in prices. As the company proved its

capabilities, the share price increased and then stabilized somewhere above EUR 3 per share.

Conclusions

From a financial perspective, the company has been doing well. Financial ratios point out that the

company has been growing at a fast pace. It is extremely liquid holding large amounts of excess cash

due to the fact that it cashes in well before the flights actually take place. Ryanair has increased its debt

levels in order to fuel growth and to be able to take advantage of the benefits of debt. In terms of

profitability, as, expected, the company doesn’t yield high ROA or ROE due to the fact that its main

goal for now is growth and high returns are generally associated with mature companies. In terms of

investment ratios and stock market performance, the value of the company has been fluctuating. The

main influencing factors for the fluctuation are fuel prices and the overall economic recession.

Operating performance ratios are also typical for a growing company. Fixed asset turnover decreases

due to the expansion of the fleet and operating bases, while revenue per employee is increasing rapidly.

0

1

2

3

4

5

6

7

Share prices

Share prices

Source: Yahoo finance (ISE quotes)

68

10.6.3. Operational perspective

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Scheduled passengers (mil)

5.5 8.1 11.1 15.7 23.1 27.6 34.8 42.5 50.9 58.6

Average no. employees

1388 1476 1531 1897 2288 2604 3063 3991 5262 6369

,o. planes (at period end)

26 36 41 54 72 87 103 133 163 181

The table above depicts the magnitude of the company’s operations. Passengers increased tenfold in the

past 10 years, the number of employees increased six times and the number of planes increased almost

9 times.

Ryanair’s business is run under the same pattern as the American airline company Southwest, the

largest low cost airline in the world. Ryanair uses the same principles leading to success. The

company’s operations are based on a few building blocks that ensure the company’s competitive

advantage in the short-haul market:

- Low fare prices.

- Increased productivity.

- Service quality.

Prices

Ryanair reduced its average fair by EUR 20 from almost EUR 60 to EUR 40 within 10 years, which is

a considerable amount. How did they do it when oil prices almost doubled in just the past 5 years (from

$60 / barrel in 2005 to $ 105 / barrel in 2009)?

Firstly, the company absorbed this price increase and did not pass it on to the customers in an attempt

to keep fare prices down. It did not impose any fuel surcharge, as opposed to competition. During the

last year, this was the direct factor that caused the large profit decline, oil prices reaching an all-time

high, but average fare prices fell by EUR 4 compared to the previous year.

Secondly, the company is keeping all costs under scrutiny. The graph below shows the company’s cost

structure over the past 3 years. In time, the company switched to the more fuel-efficient 737-800

aircrafts which enabled it to keep the proportion of fuel costs stable even though the fleet increased.

Moreover, by operating only one type of aircraft, maintenance costs are drastically reduced. In terms of

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personnel, people have more attributions or less job task restrictions than in other airline companies

(for example, even pilots help with baggage in order to reduce the time planes are on-ground). The high

increase in staff costs in 2008 was due to an increase in employees needed for the growing fleet, and

also a large increase in average pay of EUR 50,399 per year per employee, a record both within the

company and within the industry (next in line was Air France with EUR 49,504) In 2000, the company

introduced the (at the time) largest booking website. This meant easier and increased access from

customers, without having to hire additional personnel. The same intent was behind the launch of the

web check-in service from 2006, launch our giving passengers the opportunity to check-in online

across the entire route network.

Increased productivity

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Flights on time

83% 78% 92.5% 93% 89.4% 81% 85% 88% 90%

Passenger per employee

3963 5487 7244 8296 10110 10596 11361 10648 9679 9195

Load factor 73 77 81 84 81 84 83 82 82 81

The table above shows a few measures of productivity.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009

Other

Airport and handling

charges

Route charges

Aircraft rentals

Marketing and

distribution costs

Maintenance,

materials and repairs

Fuel and oil

Depreciation

70

Ryanair’s airplanes are productive. Thus, they must be on time, so as not to disturb the schedule.

Throughout the period, the company was no.1 in terms of the number of flights on time. Turnaround

time is also crucial. In 2009, the average turnaround time was only of 25 minutes. The load factor also

shows an improvement. Judging by the fact that the fleet also increased, then it becomes clear that the

company loses quite little in terms of un-occupied seats.

People are also productive. As the table shows, the number of passengers per employee almost tripled.

Extensive training programs had a say in this. Even though Ryanair is a low-cost company,

management does not seek to apply the same strategy to training, and the results are clear. The result of

this strategy is also shown by the revenue per employee ratio computed under the operating

performance ratio section of the financial analysis. People are also motivated financially, the average

salary of an employee having increased from 49055 in 2005 to 50355 in 2008. The last fiscal year

showed a decline, the company struggling to reach breakeven and being influenced by the record-high

oil prices and the recession.

Service quality

Ryanair prizes quality. 2002 was the first year when it was termed number one for customer service,

based on the proportion of lost luggage, percentage of completions and number of complaints.

Punctuality is also second to none, the airline being number one in the percentage of flights on time.

Throughout the 10 year period.

Conclusions

From an operational standpoint, the company is aiming for excellence. The company uses the same

model as Southwest and strives to keep costs low and to pass all the cost savings down to the customers

without making any cutbacks in the key areas driving quality, like training and fleet maintenance. Costs

are being kept at a low by using the online booking and check-in systems extensively, in order to

reduce the need for excess personnel. The company’s planes and people are highly productive,

therefore we can infer that Ryanair manages all its resources efficiently and effectively. Aggressive

marketing campaigns – whether on-line or using other media like the television – make the company

stand out and attract more and more passengers.

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10.6.4. Value chain perspective

Firm

infrastructure Good linkage between all support activities

Margin

HRM Effective &

extensive

training

Fewer job

restrictions;

Limited

crew

Management

control

In-house Financial

incentives;

Performanc

e contracts

Technology

development

Online

booking

system

Online

check-in

system

Integrated

systems

Internet sales n/a

Procurement Boeing

discount

Alliances Outsourced Private Low cost

Primary

activities

Low cost

suppliers;

Airport

agreements;

Low

handling

charge

airports

No frills;

Low cost;

High

quality;

High

diversity of

routes;

One type of

modern

plane

Quick

turnaround;

Reliable

service;

High load

factor;

Low cost

promotions;

Free

publicity;

Internet

sales’

Yield

management;

Powerful TV

ad

campaigns

Limited

resources;

Basic/low

cost;

High

productivit

y;

High

quality;

No sale of

products/fo

od to cut

costs

Margin

Inbound

logistics

Operations Outbound

logistics

Marketing

& sales

Service

All the issues presented in the financial and operations analyses can be summarized into the value

chain. The value chain presented above shows where the company’s margins stem from. The

management of all primary activities is the main building block upon which margins are based and to

which the support activities create additional value. From the starting point, the company looks for low

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cost alternatives. It chooses low cost suppliers and airports with lowest airport handling charges. It adds

value during operations through quality, diversity of routes, and keeps focusing on cost by using only

one type of plane. Service delivery is impeccable, Ryanair being number one in customer service.

Aggressive marketing and sales campaign increase the company’s sales and the planes’ load factors.

The service can be characterized by high productivity and quality at low cost, which for Ryanair is far

from being a utopia.

All the support activities add to this value. Within procurement, the company has well set out deals

with Boeing for licensing fees and reduced costs for replacement parts and maintenance. It also enters

into alliances with various airports, acquiring a series of landing rights – an intangible but valuable

asset. Intensive usage of internet services like online booking and check in adds value in the technology

development stage. Human resource management also boosts margins. The company has a sustainable

philosophy of investing in training and personnel which will reap benefits in the future as well. Cutting

costs is not an issue here. Financial rewards are also high, employees having some of the largest

salaries in the airline industry. All the separate sections are brought together by good linkage and

synergy between all the primary and support activities of Ryanair, which build upon each other and

succeed to add value and hence, increase margins.

Conclusions

All of the company’s activities are finely interlinked for a better value creation process. The company

manages to add value by starting with as low costs as possible and striving to pass these cost savings to

the passengers and combining these benefits with a high quality service. Productivity is another main

factor that adds value and increases margins.

10.7 SWOT Analysis

10.7.1 Strengths

Ryanair owes its position as a market leader in the European short haul airline industry to a

combination between its internal resources and capabilities and the external characteristics of the

environment.

According to market capitalization, Ryanair is the biggest European airline and the leader in its

industry according to the number of passengers flown and of seats provided. This is due to Ryanair‘s

large route network. It operates on 146 airports in 26 different countries on more than 800 routes.

This developed network offers a wide variety of choice and comes to serve the needs of a high

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proportion of the European population. Furthermore by continually increasing the number of airports

and routes it increases its potential market share. The large network of routes combined with

Ryanair’s operational effectiveness gives passengers the possibility to reach their destination faster and

at lower costs.

Another of Ryanair’s strength lies in its network of business partners. Through its commission based

contracts with providers of pre-flight and post-flight services such as accommodation and short range

city transportation, the company manages to supplement its scheduled revenues with ancillary

revenues. By choosing to base the cooperation on commissions, the company limited its exposure and

by offering access to the services online through the company website, it has considerably reduced the

costs of providing them. This has led to a strong contribution of ancillary revenues to the company’s

total operating revenues. In the financial year ended 2009, Ryanair’s non-scheduled revenues increased

total revenues by 25%. For comparison, Easyjet’s ancillary revenues only increased total revenues by

18%.

Ryanair also has a strong point in the efficiency of its employees. In order for the airline to maintain a

low turnaround time for example, it is vital for all the personnel to work at maximum efficiency. The

efficiency of the Ryanair staff can be observed from its employee to passenger ratio which in 2009 was

of 9201 passengers per employee. This is 34% higher than Easyjet’s which only reaches a level of 6855

passengers per employee.

From the internal analysis we have also seen that Ryanair has constantly shown a good financial

position and very good financial health. The company is very liquid and excluding the last financial

year it had very good leverage. The last financial year, marked by the financial crisis, has chipped from

the company’s leverage but not its liquidity. All in all, the company has the financial strength to make

sure it will maintain its position as market leader as the economy picks up again.

However, Ryanair’s biggest strength stems from the company’s high level of strategic fit: all the

company’s activities, its operational, marketing and financial strategies are aligned and they not only

complement each other but they also reinforce each other to the point of reaching a company wise

optimization of efforts. For example choosing the fleet to include the same type of airplanes increases

the efficiency of personnel and decreases maintenance costs. This leads also to decreased turnaround

times which allow the company to use their aircraft more and decrease costs even further. The

increased use of the aircraft does not pose a problem because of low maintenance costs. The low

turnaround times also contribute to the company’s commitment to quality by ensuring the planes are on

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time 90% of cases. This, in its turn helps to maintain the high level of capital turnover, and so forth. By

offering consistency this business model provides bedrock for building new capabilities and is

therefore, Ryanair’s biggest strength.

10.7.2 Weaknesses

The weaknesses of Ryanair are declining margins, swinging cash flows, weak employee relations and

poor customer relations.

Declining margins

Ryanair has declining margins since 2005. Although the operating and net profits of the company

continue to increase, the increasing expenses tend to lower the profit margins. The total operating

expenses of the company moved from EUR 1,317.5 million in 2006, to EUR 1,765.2 million in 2007

reaching EUR 2,176.7 million in 2008 and EUR 2,849.3 million in 2009. At the same time the

operating margin decreased from 25.8% in 2005 to 22.2% in 2006 and later to 21.1% in 2007, 19.8% in

2008 and further slumped to 5% in 2009. This situation was caused mainly by higher fuel costs and the

increasing level of activity, as well as increased costs associated with the growth of the airline.

Similarly, the net margins of the company decreased from 21.4% in 2006 to 17.6% in 2008 and later

23.2% in 2007, which further decreased to 17.6% in 2008 and -7% in 2009. Declining margins indicate

that the company has not been able to manage its cost structure efficiently, which can have a negative

effect on its long term financial position.

Swinging cash flows

The company’s cash flows are fluctuating since 2006. The net cash provided by operating activities

increased from EUR 610.6 million in 2006 to EUR 900.8 million in 2007 and later decreased to EUR

703.9 million in 2008 and EUR 413.9 million in 2009. The fluctuating cash position shows that

company has problems with cost management. A continuation of this trend could lower availability of

resources to pursue growth of Ryanair.

Weak employee relations

Ryanair has been involved in a number of disputes with its employees. In 2006, Ryanair workers in

Girona airport made a few one-day strikes protesting about the working conditions of Ryanair’s ground

staff in airports across Spain. The other strike, called by employed security staff, took place in

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December 2006 at Brussels Charleroi airport. The strike in the end was called off. However, it resulted

in cancelations and reinstating of the flights.

The company also had problems with pilots. In 2007, the company managed to end a long dispute with

pilots about the regulation from 2004 that forced them to repay the cost of training (EUR 15,000) for

the new planes if the airline was forced to deal with a new labour union within five years. Ryanair’s

Business model is known for its labour productivity but the cost-cutting often forces employees to pay

for their training, sign the contracts that force them to work in the company for few years and even buy

their own uniforms.

The failure to maintain good employee morale can result in a halt in its operations and cause significant

financial loss for the company.

Poor costumer relations

Company is known for transferring all the rising costs to its passengers, and introducing a lot of small

additional payments. However, often they are announced mainly in order to gain publicity. Contacting

the company on the phone is possible only through premium rate line and no email contact is possible.

Company tend to earn free publicity through negative press which may have a negative effect on the

brand in long term and discourage wealthier/business customers.

10.7.3 Opportunities

Shift in consumer preferences

People are re-focusing when making the choice of which company they are going to fly with. There is a

strong shift from high - end or full service airlines to low – end airlines or low fare airlines. The

financial crisis might be one of the reasons behind this shift. Families choose airlines that skim down

on the on-board services because they can no longer afford expensive tickets when going on holiday.

Businesses are forced to keep costs down so they are not willing to fly their employees using business

class and instead turn to the cheaper airlines, especially when the geographic distance is not very large.

Therefore, we might infer that this shift could fuel growth in the low fare airline market, clearly to the

benefit of Ryanair, ‘steals’ customers from traditional carriers.

Growing market size

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The European Union is continually expanding. Eastern countries are in a developing stage and there is

an ever-growing flux of people traveling to and from these countries. All the new members, as well as

potential members provide attractive opportunities for Ryanair in its quest to extend its network. Take

Turkey, Croatia and Macedonia for example. These countries have recently been granted the status of

Candidate States to the EU. The main players in Turkey (i.e. Turkish Airlines) and Croatia (i.e. Croatia

Airlines) are state, while Macedonian Airlines has ceased operations on 1 September 2009. Once these

countries become part of the EU they will be forced by EU law to privatize their national airlines,

which have been subsidized and are operating inefficiently. These companies pose no threat from a

competitive point of view. Therefore, an enlargement will increase the population of the Union by 81.3

million, increasing the number of potential customers, but will not highly impact on the level of

competition in the industry.

Less exposure to geopolitical and legal risks

The EU provides one additional opportunity. The fact that it is based on strong laws and regulations

(regarding for example unfair competition), and the fact that it is a stable political environment implies

protection. Ever since 1996, when the EU completed the “Open skies” deregulation of the scheduled

airline businesses, airlines were able to compete freely, not being backed by state aid or subsidization.

Operating in the EU provides Ryanair with limited exposure to legal or geopolitical risks.

Industry consolidation

The airline industry can be described by a trend towards consolidation, which implies less competition.

The fact that the industry is so fragmented might explain this trend. Consolidation is a game of survival

of the fittest, where a large number of companies stake out and buy each other. Inefficient companies

either go bankrupt or they get acquired and merge with other bigger and better airlines. Ryanair is

already playing this game, having acquired Buzz in 2003 and having made an all cash offer for the

national Irish airline, Aer Lingus, in 2006. Ryanair currently owns 29.4% of Air Lingus, more than the

Irish Government (25.4%).

10.7.4 Threats

In the following, external factors that might threaten Ryanair’s business operations are analyzed, which

are crude oil prices, legal threats, technology, competitors and the overall economic situation.

77

Crude oil prices

The rising prices and high volatility of oil prices obviously pose a big threat to airlines especially the

low cost carriers since their average fares are much lower than those of the full service carriers. The

costs for oil and kerosene are the biggest single cost position for Ryanair with about 40 per cent of total

operating costs but the company still has not introduced an extra fuel charge for passengers. Instead,

Ryanair tries to attract more passengers to increase its load factor and to lower average fuel cost per

passenger.

Legal threats

Due EU legislation Ryanair may not be able to negotiate favorable contracts with publicly owned

airport thus risking an increase in airport and handling charges which already represent about 16 per

cent of operating costs.

Furthermore, EU has not long ago strengthened the rights of air passengers in the EU by obliging

airlines to grant compensation between EUR 250 and EUR 600 to passengers in cased of denied

boarding to various reasons. Since the compensation does not depend on the price of the fare but on the

length of the flight this legislation poses a significant threat to low-cost carriers such as Ryanair.

Another significant legal risk is the possible introduction of fuel taxes out of environmental concerns in

order to reduce the growth of air travel especially growth of low cost carriers. This would increase

costs very much making air travel less attractive. The same impact would have a CO2 emission trading

scheme that EU legislation will make mandatory for the airline industry. So far it seems that trading

will start in 2012 which will definitely have a negative effect on the industry by increasing costs which

would have to be passed on to passengers.

Technology

Besides legal threats, improvements in communication technology and a decrease in costs for

communication pose a threat that needs to be considered. Video conferences and communication of the

internet have potential to reduce the demand for air travel.

Moreover the ever increasing availability of broadband internet connections shifts bargaining power to

passengers. By means of internet search passengers can easily compare fares from different air carriers

in order to chose the lowest fare thus increasing competition in the industry.

Competitors

Naturally competitors pose a risk in any industry not only in the airline industry. In Europe the airline

industry is highly fragmented with over 230 air carriers. For Ryanair however, the competitor that

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represents the biggest threat is easyJet. Ryanair and easyJet are the only low-cost carriers with a

network that covers continental Europe with hubs and destinations. Other low-cost carriers such as

AirBerlin focus only on certain routes or countries within Europe. Although Ryanair and easyJet

compete directly only on a couple of routes competition can be tough a times. In the past fierce price

wars have erupted for routes in Ireland and the UK. Nonetheless it seems that Ryanair and easyJet try

to avoid direct competition as much as possible limiting the risk of price wars, which flare up every

now and then.

Overall economic situation

The airline industry is highly affected by the overall economic situation because demand for air

transportation is very income elastic and airlines usually have high fixed costs. However, low-cost

carriers are somewhat less affected by economic downturn than because of low fares. Nonetheless,

economic downturn poses considerable risk for Ryanair as proofed by the company’s third and fourth

quarter results.

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10.8. Forecasting performance

10.8.1. Base case scenario

Forecast assumptions – detailed forecast and key driver forecast

EUR Other inputs 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------

Operations

P&LOperating Revenue: % Growth 22,0% 27,1% 30,8% 18,7% 5,3% 2,5% 2,9% 4,7% 5,0% 5,3%

Other Revenue: % Growth 27,6% 35,7% 39,7% 34,8% 22,5% 10,0% 10,0% 10,0% 10,0% 10,0%

COGS: % Revenue 63,9% 70,8% 74,3% 77,8% 98,0% 75,0% 75,0% 75,0% 75,0% 77,0%

SGA: % Revenue 1,7% 1,0% 1,3% 0,8% 0,5% 1,5% 1,5% 1,5% 1,5% 2,0%

Other Op Exp: % Revenue 11,3% 11,5% 10,9% 11,3% 12,1% 24,0% 24,0% 24,0% 24,0% 24,0%

Working capital

Op Cash: % Revenue 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%

Inventories: % Revenue 0,2% 0,2% 0,1% 0,1% 0,1% 0,2% 0,2% 0,2% 0,2% 0,2%

Acc Rec: % Revenues 1,8% 2,1% 1,2% 1,5% 1,8% 1,5% 1,5% 1,5% 1,5% 1,5%

Acc. Pay: % Revenues 8,2% 5,5% 6,8% 5,8% 5,7% 6,0% 6,0% 6,0% 6,0% 6,0%

OCA: % Revenues 2,2% 2,1% 7,1% 7,7% 3,9% 3,0% 3,0% 3,0% 3,0% 3,0%

OCL: % Revenues 37,1% 41,7% 46,0% 47,7% 44,5% 44,0% 44,0% 44,0% 44,0% 44,0%

WC: % Revenues -39,0% -40,9% -42,4% -42,2% -42,4% -43,3% -43,3% -43,3% -43,3% -43,3%

Balance Sheet Items

1: Net PPE as % revenues 187,7% 176,7% 154,8% 160,9% 155,5% 155,0% 160,0% 165,0% 165,0% 165,0%

Off-Balance Sheet Items

Operating leases

Implied principal 192.534 436.716 521.692 634.063 662.788 729.067 801.973 882.171 882.171 882.171

Interest rate 11,2% 10,8% 11,2% 11,5% 11,8% 10,5% 10,5% 10,5% 10,5% 10,5%

Debt Finance & WACC

Interest rates Excess cash 2,0% 2,0% 2,0% 2,0% 2,0%

Balancing debt

Short term debt 6,0% 6,0% 6,0% 6,0% 6,0%

Long term debt - 1 6,0% 6,0% 6,0% 6,0% 6,0%

Long term debt - 2

WACC 7,2% 7,6% 8,0% 7,8% 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%

Note: to be calculated in separate model

Tax

Tax rates Effective 9,4% 9,5% 3,4% 11,0% 6,3% 10,5% 10,5% 10,5% 10,5% 10,5%

Marginal 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5%

Phase 2 & CV drivers

Phase 2 Inputs

Revenue growth 2,9% 4,7% 5,0% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3%

Adjusted EBITA margin 21,0% 23,1% 24,7% 25,7% 24,5% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0%

Cash tax rate 11,2% 11,1% 11,1% 11,0% 11,0% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5%

Closing Net PPE as % Revenues 155,0% 160,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0% 165,0%

Other Invested Capital as % Revenues -21,4% -20,8% -20,6% -23,7% -26,6% -22,6% -22,6% -22,6% -22,6% -22,6% -22,6% -22,6% -22,6% -22,6% -22,6% -22,6%

Cumulative Goodwill 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841 46.841

80

Forecast assumptions – continuing value

Results

Continuing value inputs

Choose ROIC option 3

1: Input value

2: Last year of phase 2 9,9%

3: WACC 7,8%

ROIC used 7,8%

Growth in NOPLAT 2,5%

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Income Statement

Revenues 2.343.868 2.402.465 2.472.136 2.588.327 2.717.743 2.861.783

Other Operating Revenues 598.097 657.907 723.697 796.067 875.674 963.241

Cost of Goods Sold (2.296.304) (1.801.849) (1.854.102) (1.941.245) (2.038.307) (2.203.573)

Selling, Gen & Admin Expenses (12.753) (36.037) (37.082) (38.825) (40.766) (57.236)

Depreciation Expense (256.117) (218.689) (223.429) (237.325) (256.244) (269.057)

Other Oper Expense (284.160) (576.592) (593.313) (621.198) (652.258) (686.828)

Reported EBITA 92.631 427.205 487.907 545.800 605.841 608.331

Amortization of Goodwill 0 0 0 0 0 0

Intangibles Amort. (Excl. Goodwill) 0 0 0 0 0 0

Reported EBIT 92.631 427.205 487.907 545.800 605.841 608.331

Non-Oper Income 4.441 2.221 2.221 2.221 2.221 2.221

Interest Income 75.522 47.226 52.114 56.012 59.874 67.165

Interest Expense (130.544) (143.906) (143.906) (143.906) (143.906) (143.906)

Restructuring Charges 0 0 0 0 0 0

Special Items (222.537) 0 0 0 0 0

Earnings Before Taxes (180.487) 332.745 398.335 460.126 524.029 533.810

Income Taxes 11.314 (34.938) (41.825) (48.313) (55.023) (56.050)

Minority Interest 0 0 0 0 0 0

Income Before Extraordinary Items (169.173) 297.806 356.510 411.813 469.006 477.760

Extraordinary Items (After Tax) 0 0 0 0 0 0

Net Income (169.173) 297.806 356.510 411.813 469.006 477.760

Preference dividends 0 0 0 0 0 0

Earnings for common shareholders (169.173) 297.806 356.510 411.813 469.006 477.760

Common dividends 0 0 0 0 0 0

Retained profit (169.173) 297.806 356.510 411.813 469.006 477.760

Earnings per share (EUR) (114,42) 202,13 241,97 279,51 318,33 324,27

Earnings per share - fully diluted (EUR) (114,42) 202,13 241,97 279,51 318,33 324,27

81

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Balance Sheet

Operating Cash 46.877 48.049 49.443 51.767 54.355 57.236

Excess Marketable Securities 2.361.281 2.605.694 2.800.599 2.993.715 3.358.245 3.714.758

Accounts Receivable 41.791 36.037 37.082 38.825 40.766 42.927

Inventories 2.075 4.805 4.944 5.177 5.435 5.724

Other Current Assets 91.053 72.074 74.164 77.650 81.532 85.853

Total Current Assets 2.543.077 2.766.659 2.966.232 3.167.133 3.540.333 3.906.497

Net Property Plant and Equipment 3.644.824 3.723.820 3.955.418 4.270.739 4.484.276 4.721.942

Goodwill 0 0 0 0 0 0

Other Intangible Assets 46.841 46.841 46.841 46.841 46.841 46.841

Other Operating Assets 0 0 0 0 0 0

Investments 153.120 153.120 153.120 153.120 153.120 153.120

Deferred tax asset 0 0 0 0 0 0

Other Non-operating Assets 0 0 0 0 0 0

Retirement Related Assets 0 0 0 0 0 0

Total Assets 6.387.862 6.690.440 7.121.611 7.637.833 8.224.570 8.828.401

Short term debt 202.941 202.941 202.941 202.941 202.941 202.941

Accounts Payable 132.671 144.148 148.328 155.300 163.065 171.707

Tax payable 425 35.363 77.188 125.502 180.525 236.575

Dividends payable 0 0 0 0 0 0

Other Current Liabilities 1.043.154 1.057.084 1.087.740 1.138.864 1.195.807 1.259.185

Total Current Liabilities 1.379.191 1.439.537 1.516.197 1.622.606 1.742.337 1.870.407

Balancing Debt 54.074 0 0 0 0 0

Long Term Debt 2.195.499 2.195.499 2.195.499 2.195.499 2.195.499 2.195.499

Deferred Income Taxes 155.524 155.524 155.524 155.524 155.524 155.524

Other Operating Liabilities 106.549 106.549 106.549 106.549 106.549 106.549

Restructuring Provisions 0 0 0 0 0 0

Income smoothing Provisions 0 0 0 0 0 0

On-going operating Provisions 61.807 61.807 61.807 61.807 61.807 61.807

Long-term operating Provisions 0 0 0 0 0 0

Retirement Related Liabilities 10.157 8.657 6.657 4.657 2.657 657


Preferred Stock 0 0 0 0 0 0

Total Common Equity 2.425.061 2.722.867 3.079.378 3.491.191 3.960.197 4.437.957

Total Liabs and Equity 6.387.862 6.690.440 7.121.611 7.637.833 8.224.570 8.828.401

82

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

NOPLAT

Reported EBITA 92.631 427.205 487.907 545.800 605.841 608.331

Adj for Operating Leases 78.209 76.552 84.207 92.628 92.628 92.628

Adj for Non-operating component of pension expense 0 0 0 0 0 0

Add: Interest associated with Long-term operating Provision 0 0 0 0 0 0

Add: Increase in Income smoothing Provision 0 0 0 0 0 0

Adjusted EBITA 170.840 503.757 572.115 638.428 698.469 700.959

Taxes on EBITA (32.602) (56.315) (63.548) (70.601) (76.828) (76.944)

Change in Deferred Taxes 7.436 0 0 0 0 0

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015

Taxes on EBIT

Prov for Inc Taxes (11.314) 34.938 41.825 48.313 55.023 56.050

Tax Shield on Interest Exp 16.318 17.988 17.988 17.988 17.988 17.988

Tax Shield on Operating Lease Interest 9.776 9.569 10.526 11.578 11.578 11.578

Tax Shield on Non-operating component of pension expense 0 0 0 0 0 0

Tax Shield on Interest associated with Long-term operating Provision 0 0 0 0 0 0

Tax on Interest Income (9.440) (5.903) (6.514) (7.001) (7.484) (8.396)

Tax on Non-operating Income 27.262 (278) (278) (278) (278) (278)

Taxes on EBIT 32.602 56.315 63.548 70.601 76.828 76.944


Net Income (169.173) 297.806 356.510 411.813 469.006 477.760

Add: Increase in Deferred Taxes 7.436 0 0 0 0 0


Add: Goodwill Amortization 0 0 0 0 0 0

Add: Extraordinary Items 0 0 0 0 0 0

Add: Special Items After Tax 194.720 0 0 0 0 0

Add: Minority Interest 0 0 0 0 0 0

Adjusted Net Income 32.983 297.806 356.510 411.813 469.006 477.760

Add: Interest Exp. After Tax 114.226 125.918 125.918 125.918 125.918 125.918

Add: Interest Exp. On Long-term operating Provision 0 0 0 0 0 0

Add: Interest Exp. on Op. Leases 68.433 66.983 73.681 81.049 81.049 81.049

Add: Interest Exp. on Non-operating component of pension expense 0 0 0 0 0 0

Income Available to Investors 215.642 490.708 556.110 618.781 675.974 684.728

Add: Restructuring Charges 0 0 0 0 0 0

Less: Interest Income After-Tax (66.082) (41.322) (45.600) (49.010) (52.390) (58.769)

Less: Non-operating Income After Tax (3.886) (1.943) (1.943) (1.943) (1.943) (1.943)

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015

83

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Invested Capital

Operating Working Capital (994.454) (1.075.630) (1.147.623) (1.246.247) (1.357.307) (1.475.727)


Other Assets Net of Other Liabs (106.549) (106.549) (106.549) (106.549) (106.549) (106.549)

Less: On-going operating Provision (61.807) (61.807) (61.807) (61.807) (61.807) (61.807)

Value of Operating Leases 662.788 729.067 801.973 882.171 882.171 882.171

Op. Invested Capital (excl.Goodwill) 3.144.802 3.208.901 3.441.412 3.738.307 3.840.783 3.960.030

Goodwill & Intangibles 46.841 46.841 46.841 46.841 46.841 46.841

Cumulative Written Off & Amortized 0 0 0 0 0 0 0

Op. Invested Capital (incl.Goodwill) 3.191.643 3.255.742 3.488.253 3.785.148 3.887.624 4.006.871


Investments 153.120 153.120 153.120 153.120 153.120 153.120

Non-operating Assets 0 0 0 0 0 0


Total Investor Funds 5.706.044 6.014.555 6.441.972 6.931.983 7.398.989 7.874.749

Total Common Equity & Pref. Stock 2.425.061 2.722.867 3.079.378 3.491.191 3.960.197 4.437.957

Cum Goodwill Written Off & Amortized 0 0 0 0 0 0


Dividends Payable 0 0 0 0 0 0

Income smoothing Provision 0 0 0 0 0 0

Adjusted Equity 2.580.585 2.878.391 3.234.902 3.646.715 4.115.721 4.593.481



Long-term operating Provision 0 0 0 0 0 0

Retirement-Related Liabilities 10.157 8.657 6.657 4.657 2.657 657

Interest Bearing Debt 2.452.514 2.398.440 2.398.440 2.398.440 2.398.440 2.398.440



84

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Free Cash Flow

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015

Depreciation 256.117 218.689 223.429 237.325 256.244 269.057

Gross Cash Flow 401.791 666.132 731.996 805.152 877.885 893.072

Increase in Working Capital 55.959 81.176 71.993 98.624 111.060 118.420

Capital Expenditures (318.815) (297.686) (455.027) (552.646) (469.781) (506.723)

Incr in other operating assets/liabilities 6.619 0 0 0 0 0

Incr in Ongoing operating Provisions 19.017 0 0 0 0 0

Inv in Operating Leases (28.725) (66.279) (72.906) (80.198) 0 0

Gross Investment (265.945) (282.788) (455.940) (534.220) (358.721) (388.304)

Free Cash Flow Excl. Goodwill 135.846 383.343 276.056 270.932 519.164 504.768

Investment in Goodwill and Intangibles 0 0 0 0 0 0

Free Cash Flow Incl. Goodwill 135.846 383.343 276.056 270.932 519.164 504.768

AT Interest Income 66.082 41.322 45.600 49.010 52.390 58.769

(Incr)/Decr Excess Mkt Sec (247.624) (298.487) (194.906) (193.116) (364.530) (356.513)

Foreign Exchange Translation 0 0 0 0 0 0

(Incr)/Decr Retirement Related Assets 0 0 0 0 0 0

Non-operating Cash Flow (32.492) 1.943 1.943 1.943 1.943 1.943

Restructuring Cash Flow 0 0 0 0 0 0

Extraordinary items 0 0 0 0 0 0

Cash Flow Available to Investors (78.188) 128.122 128.693 128.770 208.968 208.968

Financing Flow

AT Interest Expense 114.226 125.918 125.918 125.918 125.918 125.918

Interest on Operating Leases 68.433 66.983 73.681 81.049 81.049 81.049

Interest on Nonoperating Component of Pension Expense 0 0 0 0 0 0

Interest on Long-term Operating Provision 0 0 0 0 0 0

Decr/(Incr) in Debt (131.945) 0 0 0 0 0

Decr/(Incr) in Operating Leases (28.725) (66.279) (72.906) (80.198) 0 0

Decr/(Incr) in Retirement Rel. Liab (8.137) 1.500 2.000 2.000 2.000 2.000

Decr/(Incr) in Long-term Operating Provision 0 0 0 0 0 0

Payments to Minorities 0 0 0 0 0 0

Common Dividends 0 0 0 0 0 0

Preferred Dividends 0 0 0 0 0 0

Decr/(Incr) in Preferred 0 0 0 0 0 0

Decr/(Incr) in Share Capital (92.040) 0 0 0 0 0

Total Financing Flow (78.188) 128.122 128.693 128.770 208.968 208.968

85

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Economic Profit

Before Goodwill

Return on Invested Capital 4,6% 14,2% 15,8% 16,5% 16,6% 16,2%

WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 6,4% 8,0% 8,7% 8,8% 8,4%

Invested Capital (Beg of Year) 3.134.974 3.144.802 3.208.901 3.441.412 3.738.307 3.840.783

Economic Profit (before Goodwill) (92.889) 200.890 256.989 298.021 328.557 322.898

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015

Capital Charge (238.563) (246.552) (251.578) (269.807) (293.083) (301.117)


After Goodwill


WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 6,2% 7,8% 8,4% 8,6% 8,2%


Economic Profit (after Goodwill) (96.453) 197.217 253.317 294.348 324.885 319.226

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015

Capital Charge (242.127) (250.225) (255.250) (273.479) (296.756) (304.790)


EUR 2009 2010 2011 2012 2013 2014-------------------- --------------------- ----------------------- -------------------- -------------------- --------------------

Working capital

Op Cash: % Revenue 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%

Operating cash 46.877 48.049 49.443 51.767 54.355 57.236

Inventories: % Revenue 0,1% 0,2% 0,2% 0,2% 0,2% 0,2%

Inventories 2.075 4.805 4.944 5.177 5.435 5.724

Acc Rec: % Revenues 1,8% 1,5% 1,5% 1,5% 1,5% 1,5%

Accounts receivable 41.791 36.037 37.082 38.825 40.766 42.927

Acc. Pay: % Revenues 5,7% 6,0% 6,0% 6,0% 6,0% 6,0%

Accounts payable 132.671 144.148 148.328 155.300 163.065 171.707

OCA: % Revenues 3,9% 3,0% 3,0% 3,0% 3,0% 3,0%

Other current assets 91.053 72.074 74.164 77.650 81.532 85.853

OCL: % Revenues 44,5% 44,0% 44,0% 44,0% 44,0% 44,0%

Other current liabilities 1.043.154 1.057.084 1.087.740 1.138.864 1.195.807 1.259.185

Total operating working capital (994.029) (1.040.267) (1.070.435) (1.120.745) (1.176.783) (1.239.152)

WC increase/(decrease) (55.534) (46.238) (30.168) (50.310) (56.037) (62.369)

WC: % Revenues -42,4% -43,3% -43,3% -43,3% -43,3% -43,3%

86

EUR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Revenues 2.343.868 2.402.465 2.472.136 2.588.327 2.717.743 2.861.783 3.013.458 3.173.171 3.341.349 3.518.441 3.704.918 3.901.279 4.108.046 4.325.773 4.555.039 4.796.456 5.050.668

Adjusted EBITA 170.840 503.757 572.115 638.428 698.469 700.959 452.019 475.976 501.202 527.766 555.738 585.192 616.207 648.866 683.256 719.468 757.600

Taxes on EBITA (32.602) (56.315) (63.548) (70.601) (76.828) (76.944)


NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015 404.557 425.998 448.576 472.351 497.385 523.747 551.505 580.735 611.514 643.924 678.052

EUR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Op. Invested Capital (excl.Goodwill) 3.144.802 3.208.901 3.441.412 3.738.307 3.840.783 3.960.030 4.291.164 4.518.596 4.758.081 5.010.259 5.275.803 5.555.421 5.849.858 6.159.901 6.486.375 6.830.153 7.192.151

Op. Invested Capital (incl.Goodwill) 3.191.643 3.255.742 3.488.253 3.785.148 3.887.624 4.006.871 4.338.005 4.565.437 4.804.922 5.057.100 5.322.644 5.602.262 5.896.699 6.206.742 6.533.216 6.876.994 7.238.992

Free Cash Flow Incl. Goodwill 135.846 383.343 276.056 270.932 519.164 504.768 73.423 198.567 209.091 220.172 231.841 244.129 257.068 270.693 285.039 300.146 316.054

Economic Profit

Before Goodwill

Return on Invested Capital 4,6% 14,2% 15,8% 16,5% 16,6% 16,2% 10,2% 9,9% 9,9% 9,9% 9,9% 9,9% 9,9% 9,9% 9,9% 9,9% 9,9%

WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 6,4% 8,0% 8,7% 8,8% 8,4% 2,4% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1%

Invested Capital (Beg of Year) 3.134.974 3.144.802 3.208.901 3.441.412 3.738.307 3.840.783 3.960.030 4.291.164 4.518.596 4.758.081 5.010.259 5.275.803 5.555.421 5.849.858 6.159.901 6.486.375 6.830.153

Economic Profit (before Goodwill) (92.889) 200.890 256.989 298.021 328.557 322.898 94.090 89.571 94.318 99.317 104.581 110.124 115.960 122.106 128.578 135.392 142.568

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015 404.557 425.998 448.576 472.351 497.385 523.747 551.505 580.735 611.514 643.924 678.052

Capital Charge (238.563) (246.552) (251.578) (269.807) (293.083) (301.117) (310.466) (336.427) (354.258) (373.034) (392.804) (413.623) (435.545) (458.629) (482.936) (508.532) (535.484)


After Goodwill


WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 6,2% 7,8% 8,4% 8,6% 8,2% 2,3% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%


Economic Profit (after Goodwill) (96.453) 197.217 253.317 294.348 324.885 319.226 90.418 85.899 90.646 95.645 100.909 106.451 112.288 118.434 124.905 131.720 138.896

NOPLAT 145.674 447.442 508.567 567.827 621.641 624.015 404.557 425.998 448.576 472.351 497.385 523.747 551.505 580.735 611.514 643.924 678.052

Capital Charge (242.127) (250.225) (255.250) (273.479) (296.756) (304.790) (314.139) (340.100) (357.930) (376.706) (396.477) (417.295) (439.217) (462.301) (486.609) (512.204) (539.156)


87

Name - base scnario Detailed Forecast Key driver forecast CV Yr

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------

Revenue growth 2.9% 4.7% 5.0% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%

Revenue 2,402,465 2,472,136 2,588,327 2,717,743 2,861,783 3,013,458 3,173,171 3,341,349 3,518,441 3,704,918 3,901,279 4,108,046 4,325,773 4,555,039 4,796,456 5,050,668

Adjusted EBITA margin 21.0% 23.1% 24.7% 25.7% 24.5% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

Adjusted EBITA 503,757 572,115 638,428 698,469 700,959 452,019 475,976 501,202 527,766 555,738 585,192 616,207 648,866 683,256 719,468 757,600

Cash tax rate 11.2% 11.1% 11.1% 11.0% 11.0% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%

NOPLAT 447,442 508,567 567,827 621,641 624,015 404,557 425,998 448,576 472,351 497,385 523,747 551,505 580,735 611,514 643,924 678,052

Closing Net PPE as % Revenues 155.0% 160.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0% 165.0%

Net PPE 3,723,820 3,955,418 4,270,739 4,484,276 4,721,942 4,972,205 5,235,732 5,513,226 5,805,427 6,113,115 6,437,110 6,778,277 7,137,525 7,515,814 7,914,152 8,333,602

Other Invested Capital as % Revenues -21.4% -20.8% -20.6% -23.7% -26.6% -22.6% -22.6% -22.6% -22.6% -22.6% -22.6% -22.6% -22.6% -22.6% -22.6% -22.6%

Other Invested Capital (514,919) (514,006) (532,432) (643,492) (761,912) (681,041) (717,137) (755,145) (795,168) (837,311) (881,689) (928,418) (977,625) (1,029,439) (1,083,999) (1,141,451)

Invested Capital (pre-Goodwill) 3,208,901 3,441,412 3,738,307 3,840,783 3,960,030 4,291,164 4,518,596 4,758,081 5,010,259 5,275,803 5,555,421 5,849,858 6,159,901 6,486,375 6,830,153 7,192,151

Cumulative Goodwill 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841 46,841

Invested Capital 3,255,742 3,488,253 3,785,148 3,887,624 4,006,871 4,338,005 4,565,437 4,804,922 5,057,100 5,322,644 5,602,262 5,896,699 6,206,742 6,533,216 6,876,994 7,238,992

Net Investment 331,133 227,432 239,486 252,178 265,544 279,618 294,437 310,042 326,475 343,778 361,998

88

10.8.2 Optimistic scenario

Forecast assumptions – detailed forecast and key driver forecast period

EUR Other inputs 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------

Operations



COGS: % Revenue 63,9% 70,8% 74,3% 77,8% 98,0% 64,0% 66,0% 68,0% 68,0% 70,0%

SGA: % Revenue 1,7% 1,0% 1,3% 0,8% 0,5% 1,0% 1,0% 1,0% 1,0% 1,5%


Working capital

Op Cash: % Revenue 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%


Acc Rec: % Revenues 1,8% 2,1% 1,2% 1,5% 1,8% 1,5% 1,5% 1,5% 1,5% 1,5%

Acc. Pay: % Revenues 8,2% 5,5% 6,8% 5,8% 5,7% 6,0% 6,0% 6,0% 6,0% 6,0%

OCA: % Revenues 2,2% 2,1% 7,1% 7,7% 3,9% 3,0% 3,0% 3,0% 3,0% 3,0%

OCL: % Revenues 37,1% 41,7% 46,0% 47,7% 44,5% 44,0% 44,0% 44,0% 44,0% 44,0%

Balance Sheet Items



Operating leases


Interest rate 11,2% 10,8% 11,2% 11,5% 11,8% 10,5% 10,5% 10,5% 10,5% 10,5%

Debt Finance & WACC


Balancing debt

Short term debt 5,5% 5,5% 5,5% 5,5% 5,5%

Long term debt - 1 5,5% 5,5% 5,5% 5,5% 5,5%

Long term debt - 2

WACC 7,2% 7,6% 8,0% 7,8% 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%

Note: to be calculated in separate model

Tax


Marginal 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5%


Phase 2 Inputs

Revenue growth 4,0% 5,0% 6,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0% 7,0%


Cash tax rate 10,9% 10,9% 10,9% 10,8% 10,8% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5%




89


Results



1: Input value 10,0%


3: WACC 7,8%

ROIC used 10,0%


2009 2010 2011 2012 2013 2014----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Income Statement

Revenues 2,343,868 2,414,184 2,510,751 2,636,289 2,794,466 2,990,079

Other Operating Revenues 598,097 657,907 723,697 796,067 875,674 963,241

Cost of Goods Sold (2,296,304) (1,545,078) (1,657,096) (1,792,677) (1,900,237) (2,093,055)

Selling, Gen & Admin Expenses (12,753) (24,142) (25,108) (26,363) (27,945) (44,851)

Depreciation Expense (256,117) (218,689) (224,519) (241,032) (260,993) (276,652)

Other Oper Expense (284,160) (555,262) (577,473) (606,346) (642,727) (687,718)

Reported EBITA 92,631 728,919 750,253 765,938 838,239 851,043



Reported EBIT 92,631 728,919 750,253 765,938 838,239 851,043

Non-Oper Income 4,441 2,221 2,221 2,221 2,221 2,221

Interest Income 75,522 47,226 58,126 66,992 75,450 87,240

Interest Expense (130,544) (131,914) (131,914) (131,914) (131,914) (131,914)


Special Items (222,537) 0 0 0 0 0

Earnings Before Taxes (180,487) 646,451 678,686 703,236 783,995 808,590

Income Taxes 11,314 (67,877) (71,262) (73,840) (82,319) (84,902)


Income Before Extraordinary Items (169,173) 578,574 607,424 629,396 701,676 723,688


Net Income (169,173) 578,574 607,424 629,396 701,676 723,688


Earnings for common shareholders (169,173) 578,574 607,424 629,396 701,676 723,688


Retained profit (169,173) 578,574 607,424 629,396 701,676 723,688

Earnings per share (EUR) (114.42) 392.69 412.27 427.19 476.24 491.18

Earnings per share - fully diluted (EUR) (114.42) 392.69 412.27 427.19 476.24 491.18

90

2009 2010 2011 2012 2013 2014----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Balance Sheet

Operating Cash 46,877 48,284 50,215 52,726 55,889 59,802

Excess Marketable Securities 2,361,281 2,906,310 3,349,592 3,772,512 4,362,005 4,930,534

Accounts Receivable 41,791 36,213 37,661 39,544 41,917 44,851

Inventories 2,075 4,828 5,022 5,273 5,589 5,980

Other Current Assets 91,053 72,426 75,323 79,089 83,834 89,702

Total Current Assets 2,543,077 3,068,060 3,517,813 3,949,143 4,549,234 5,130,869

Net Property Plant and Equipment 3,644,824 3,741,985 4,017,202 4,349,877 4,610,869 4,933,630


Other Intangible Assets 46,841 46,841 46,841 46,841 46,841 46,841


Investments 153,120 153,120 153,120 153,120 153,120 153,120




Total Assets 6,387,862 7,010,006 7,734,976 8,498,981 9,360,065 10,264,461

Short term debt 202,941 202,941 202,941 202,941 202,941 202,941

Accounts Payable 132,671 144,851 150,645 158,177 167,668 179,405

Tax payable 425 68,302 139,564 213,404 295,724 380,626


Other Current Liabilities 1,043,154 1,062,241 1,104,731 1,159,967 1,229,565 1,315,635

Total Current Liabilities 1,379,191 1,478,335 1,597,881 1,734,490 1,895,898 2,078,606

Balancing Debt 54,074 0 0 0 0 0

Long Term Debt 2,195,499 2,195,499 2,195,499 2,195,499 2,195,499 2,195,499

Deferred Income Taxes 155,524 155,524 155,524 155,524 155,524 155,524

Other Operating Liabilities 106,549 106,549 106,549 106,549 106,549 106,549



On-going operating Provisions 61,807 61,807 61,807 61,807 61,807 61,807


Retirement Related Liabilities 10,157 8,657 6,657 4,657 2,657 657



Total Common Equity 2,425,061 3,003,635 3,611,059 4,240,455 4,942,131 5,665,819

Total Liabs and Equity 6,387,862 7,010,006 7,734,976 8,498,981 9,360,065 10,264,461

91

2009 2010 2011 2012 2013 2014----------------- ----------------- ----------------- ----------------- ----------------- -----------------

NOPLAT

Reported EBITA 92,631 728,919 750,253 765,938 838,239 851,043

Adj for Operating Leases 45,880 76,552 84,207 92,628 92,628 92,628




Adjusted EBITA 138,511 805,471 834,461 858,566 930,866 943,671

Taxes on EBITA (28,561) (87,755) (90,734) (93,256) (100,678) (101,787)

Change in Deferred Taxes 7,436 0 0 0 0 0

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884

Taxes on EBIT

Prov for Inc Taxes (11,314) 67,877 71,262 73,840 82,319 84,902

Tax Shield on Interest Exp 16,318 16,489 16,489 16,489 16,489 16,489

Tax Shield on Operating Lease Interest 5,735 9,569 10,526 11,578 11,578 11,578



Tax on Interest Income (9,440) (5,903) (7,266) (8,374) (9,431) (10,905)

Tax on Non-operating Income 27,262 (278) (278) (278) (278) (278)

Taxes on EBIT 28,561 87,755 90,734 93,256 100,678 101,787


Net Income (169,173) 578,574 607,424 629,396 701,676 723,688

Add: Increase in Deferred Taxes 7,436 0 0 0 0 0




Add: Special Items After Tax 194,720 0 0 0 0 0


Adjusted Net Income 32,983 578,574 607,424 629,396 701,676 723,688

Add: Interest Exp. After Tax 114,226 115,425 115,425 115,425 115,425 115,425


Add: Interest Exp. on Op. Leases 40,145 66,983 73,681 81,049 81,049 81,049


Income Available to Investors 187,353 760,982 796,530 825,871 898,150 920,162


Less: Interest Income After-Tax (66,082) (41,322) (50,860) (58,618) (66,019) (76,335)

Less: Non-operating Income After Tax (3,886) (1,943) (1,943) (1,943) (1,943) (1,943)

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884

92

2009 2010 2011 2012 2013 2014----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Invested Capital

Operating Working Capital (994,454) (1,113,644) (1,226,720) (1,354,917) (1,505,728) (1,675,330)

Net Property Plant and Equipment 3,644,824 3,741,985 4,017,202 4,349,877 4,610,869 4,933,630

Other Assets Net of Other Liabs (106,549) (106,549) (106,549) (106,549) (106,549) (106,549)

Less: On-going operating Provision (61,807) (61,807) (61,807) (61,807) (61,807) (61,807)

Value of Operating Leases 388,809 729,067 801,973 882,171 882,171 882,171

Op. Invested Capital (excl.Goodwill) 2,870,823 3,189,052 3,424,099 3,708,774 3,818,957 3,972,115

Goodwill & Intangibles 46,841 46,841 46,841 46,841 46,841 46,841

Cumulative Written Off & Amortized 0 0 0 0 0 0

Op. Invested Capital (incl.Goodwill) 2,917,664 3,235,893 3,470,940 3,755,615 3,865,798 4,018,956

Excess Marketable Securities 2,361,281 2,906,310 3,349,592 3,772,512 4,362,005 4,930,534

Investments 153,120 153,120 153,120 153,120 153,120 153,120



Total Investor Funds 5,432,065 6,295,323 6,973,653 7,681,247 8,380,923 9,102,611

Total Common Equity & Pref. Stock 2,425,061 3,003,635 3,611,059 4,240,455 4,942,131 5,665,819


Deferred Income Taxes 155,524 155,524 155,524 155,524 155,524 155,524



Adjusted Equity 2,580,585 3,159,159 3,766,583 4,395,979 5,097,655 5,821,343




Retirement-Related Liabilities 10,157 8,657 6,657 4,657 2,657 657

Interest Bearing Debt 2,452,514 2,398,440 2,398,440 2,398,440 2,398,440 2,398,440

Value of Operating Leases 388,809 729,067 801,973 882,171 882,171 882,171

Total Investor Funds 5,432,065 6,295,323 6,973,653 7,681,247 8,380,923 9,102,611

93

2009 2010 2011 2012 2013 2014----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Free Cash Flow

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884

Depreciation 256,117 218,689 224,519 241,032 260,993 276,652

Gross Cash Flow 373,503 936,406 968,246 1,006,342 1,091,181 1,118,536

Increase in Working Capital 55,959 119,190 113,076 128,198 150,810 169,602

Capital Expenditures (318,815) (315,851) (499,736) (573,707) (521,985) (599,413)

Incr in other operating assets/liabilities 6,619 0 0 0 0 0

Incr in Ongoing operating Provisions 19,017 0 0 0 0 0

Inv in Operating Leases 283,511 (340,258) (72,906) (80,198) 0 0

Gross Investment 46,291 (536,918) (459,566) (525,707) (371,175) (429,811)

Free Cash Flow Excl. Goodwill 419,794 399,488 508,679 480,635 720,006 688,726


Free Cash Flow Incl. Goodwill 419,794 399,488 508,679 480,635 720,006 688,726

AT Interest Income 66,082 41,322 50,860 58,618 66,019 76,335

(Incr)/Decr Excess Mkt Sec (247,624) (599,103) (443,283) (422,919) (589,493) (568,529)



Non-operating Cash Flow (32,492) 1,943 1,943 1,943 1,943 1,943



Cash Flow Available to Investors 205,760 (156,350) 118,200 118,276 198,474 198,474

Financing Flow

AT Interest Expense 114,226 115,425 115,425 115,425 115,425 115,425

Interest on Operating Leases 40,145 66,983 73,681 81,049 81,049 81,049



Decr/(Incr) in Debt (131,945) 0 0 0 0 0

Decr/(Incr) in Operating Leases 283,511 (340,258) (72,906) (80,198) 0 0

Decr/(Incr) in Retirement Rel. Liab (8,137) 1,500 2,000 2,000 2,000 2,000






Decr/(Incr) in Share Capital (92,040) 0 0 0 0 0

Total Financing Flow 205,760 (156,350) 118,200 118,276 198,474 198,474

94

2009 2010 2011 2012 2013 2014----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Economic Profit

Before Goodwill

Return on Invested Capital 3.7% 25.0% 23.3% 22.4% 22.4% 22.0%

WACC 7.6% 7.8% 7.8% 7.8% 7.8% 7.8%

Spread -3.9% 17.2% 15.5% 14.5% 14.5% 14.2%

Invested Capital (Beg of Year) 3,173,232 2,870,823 3,189,052 3,424,099 3,708,774 3,818,957

Economic Profit (before Goodwill) (124,088) 492,644 493,705 496,861 539,420 542,478

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884

Capital Charge (241,474) (225,073) (250,022) (268,449) (290,768) (299,406)

Economic Profit (before Goodwill) (124,088) 492,644 493,705 496,861 539,420 542,478

After Goodwill

Return on Invested Capital 3.6% 24.6% 23.0% 22.0% 22.1% 21.8%

WACC 7.6% 7.8% 7.8% 7.8% 7.8% 7.8%

Spread -4.0% 16.8% 15.1% 14.2% 14.3% 13.9%

Invested Capital (Beg of Year) 3,220,073 2,917,664 3,235,893 3,470,940 3,755,615 3,865,798

Economic Profit (after Goodwill) (127,653) 488,972 490,033 493,188 535,748 538,806

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884

Capital Charge (245,039) (228,745) (253,694) (272,122) (294,440) (303,079)

Economic Profit (after Goodwill) (127,653) 488,972 490,033 493,188 535,748 538,806

2009 2010 2011 2012 2013 2014-------------------- -------------------- -------------------- -------------------- -------------------- --------------------

Working capital

Op Cash: % Revenue 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Operating cash 46,877 48,284 50,215 52,726 55,889 59,802

Inventories: % Revenue 0.1% 0.2% 0.2% 0.2% 0.2% 0.2%

Inventories 2,075 4,828 5,022 5,273 5,589 5,980

Acc Rec: % Revenues 1.8% 1.5% 1.5% 1.5% 1.5% 1.5%

Accounts receivable 41,791 36,213 37,661 39,544 41,917 44,851

Acc. Pay: % Revenues 5.7% 6.0% 6.0% 6.0% 6.0% 6.0%

Accounts payable 132,671 144,851 150,645 158,177 167,668 179,405

OCA: % Revenues 3.9% 3.0% 3.0% 3.0% 3.0% 3.0%

Other current assets 91,053 72,426 75,323 79,089 83,834 89,702

OCL: % Revenues 44.5% 44.0% 44.0% 44.0% 44.0% 44.0%

Other current liabilities 1,043,154 1,062,241 1,104,731 1,159,967 1,229,565 1,315,635

Total operating working capital (994,029) (1,045,342) (1,087,155) (1,141,513) (1,210,004) (1,294,704)

WC increase/(decrease) (55,534) (51,313) (41,814) (54,358) (68,491) (84,700)

WC: % Revenues -42.4% -43.3% -43.3% -43.3% -43.3% -43.3%

95

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025--------------------- --------------------- --------------------- --------------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Revenues 2,343,868 2,414,184 2,510,751 2,636,289 2,794,466 2,990,079 3,199,384 3,423,341 3,662,975 3,919,384 4,193,740 4,487,302 4,801,413 5,137,512 5,497,138 5,881,938 6,293,674

Adjusted EBITA 138,511 805,471 834,461 858,566 930,866 943,671 639,877 684,668 732,595 783,877 838,748 897,460 960,283 1,027,502 1,099,428 1,176,388 1,258,735

Taxes on EBITA (28,561) (87,755) (90,734) (93,256) (100,678) (101,787)

Change in Deferred Taxes 7,436 0 0 0 0 0

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884 572,690 612,778 655,673 701,570 750,680 803,227 859,453 919,615 983,988 1,052,867 1,126,568

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025--------------------- --------------------- --------------------- --------------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Invested Capital

Op. Invested Capital (excl.Goodwill) 2,870,823 3,189,052 3,424,099 3,708,774 3,818,957 3,972,115 4,319,169 4,621,511 4,945,017 5,291,168 5,661,550 6,057,858 6,481,908 6,935,642 7,421,137 7,940,616 8,496,459

Op. Invested Capital (incl.Goodwill) 2,917,664 3,235,893 3,470,940 3,755,615 3,865,798 4,018,956 4,366,010 4,668,352 4,991,858 5,338,009 5,708,391 6,104,699 6,528,749 6,982,483 7,467,978 7,987,457 8,543,300

Free Cash Flow Incl. Goodwill 419,794 399,488 508,679 480,635 720,006 688,726 225,636 310,436 332,167 355,418 380,298 406,919 435,403 465,881 498,493 533,387 570,724

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025--------------------- --------------------- --------------------- --------------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------

Economic Profit

Before Goodwill

Return on Invested Capital 3.7% 25.0% 23.3% 22.4% 22.4% 22.0% 14.4% 14.2% 14.2% 14.2% 14.2% 14.2% 14.2% 14.2% 14.2% 14.2% 14.2%

WACC 7.6% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8%

Spread -3.9% 17.2% 15.5% 14.5% 14.5% 14.2% 6.6% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%

Invested Capital (Beg of Year) 3,173,232 2,870,823 3,189,052 3,424,099 3,708,774 3,818,957 3,972,115 4,319,169 4,621,511 4,945,017 5,291,168 5,661,550 6,057,858 6,481,908 6,935,642 7,421,137 7,940,616

Economic Profit (before Goodwill) (124,088) 492,644 493,705 496,861 539,420 542,478 261,276 274,155 293,346 313,880 335,852 359,362 384,517 411,433 440,233 471,050 504,023

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884 572,690 612,778 655,673 701,570 750,680 803,227 859,453 919,615 983,988 1,052,867 1,126,568

Capital Charge (241,474) (225,073) (250,022) (268,449) (290,768) (299,406) (311,414) (338,623) (362,326) (387,689) (414,828) (443,865) (474,936) (508,182) (543,754) (581,817) (622,544)

Economic Profit (before Goodwill) (124,088) 492,644 493,705 496,861 539,420 542,478 261,276 274,155 293,346 313,880 335,852 359,362 384,517 411,433 440,233 471,050 504,023

After Goodwill

Return on Invested Capital 3.6% 24.6% 23.0% 22.0% 22.1% 21.8% 14.2% 14.0% 14.0% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%

WACC 7.6% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% 7.8%

Spread -4.0% 16.8% 15.1% 14.2% 14.3% 13.9% 6.4% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.3% 6.3% 6.3%

Invested Capital (Beg of Year) 3,220,073 2,917,664 3,235,893 3,470,940 3,755,615 3,865,798 4,018,956 4,366,010 4,668,352 4,991,858 5,338,009 5,708,391 6,104,699 6,528,749 6,982,483 7,467,978 7,987,457

Economic Profit (after Goodwill) (127,653) 488,972 490,033 493,188 535,748 538,806 257,604 270,483 289,674 310,208 332,180 355,689 380,845 407,761 436,561 467,377 500,351

NOPLAT 117,386 717,716 743,727 765,310 830,188 841,884 572,690 612,778 655,673 701,570 750,680 803,227 859,453 919,615 983,988 1,052,867 1,126,568

Capital Charge (245,039) (228,745) (253,694) (272,122) (294,440) (303,079) (315,086) (342,295) (365,999) (391,362) (418,500) (447,538) (478,608) (511,854) (547,427) (585,489) (626,217)

Economic Profit (after Goodwill) (127,653) 488,972 490,033 493,188 535,748 538,806 257,604 270,483 289,674 310,208 332,180 355,689 380,845 407,761 436,561 467,377 500,351

96

Name - optimistic scenario Detailed Forecast Key driver forecast CV Yr

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025-------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- --------------------

Revenue growth 4.0% 5.0% 6.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Revenue 2,414,184 2,510,751 2,636,289 2,794,466 2,990,079 3,199,384 3,423,341 3,662,975 3,919,384 4,193,740 4,487,302 4,801,413 5,137,512 5,497,138 5,881,938 6,293,674


Adjusted EBITA 805,471 834,461 858,566 930,866 943,671 639,877 684,668 732,595 783,877 838,748 897,460 960,283 1,027,502 1,099,428 1,176,388 1,258,735

Cash tax rate 10.9% 10.9% 10.9% 10.8% 10.8% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%

NOPLAT 717,716 743,727 765,310 830,188 841,884 572,690 612,778 655,673 701,570 750,680 803,227 859,453 919,615 983,988 1,052,867 1,126,568


Net PPE 3,741,985 4,017,202 4,349,877 4,610,869 4,933,630 5,119,015 5,477,346 5,860,760 6,271,014 6,709,985 7,179,684 7,682,261 8,220,020 8,795,421 9,411,101 10,069,878


Other Invested Capital (552,933) (593,103) (641,102) (791,913) (961,515) (799,846) (855,835) (915,744) (979,846) (1,048,435) (1,121,826) (1,200,353) (1,284,378) (1,374,285) (1,470,484) (1,573,418)




Net Investment 347,054 302,342 323,506 346,151 370,382 396,308 424,050 453,734 485,495 519,480 555,843

97

10.8.3. Pessimistic Scenario

Forecast assumptions – detailed forecast and key value drivers period

EUR Other inputs 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------

Operations



COGS: % Revenue 63,9% 70,8% 74,3% 77,8% 98,0% 78,0% 78,0% 78,0% 78,0% 80,0%

SGA: % Revenue 1,7% 1,0% 1,3% 0,8% 0,5% 1,5% 1,5% 1,5% 1,5% 2,0%


Working capital

Op Cash: % Revenue 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%


Acc Rec: % Revenues 1,8% 2,1% 1,2% 1,5% 1,8% 1,5% 1,5% 1,5% 1,5% 1,5%

Acc. Pay: % Revenues 8,2% 5,5% 6,8% 5,8% 5,7% 6,0% 6,0% 6,0% 6,0% 6,0%

OCA: % Revenues 2,2% 2,1% 7,1% 7,7% 3,9% 3,0% 3,0% 3,0% 3,0% 3,0%

OCL: % Revenues 37,1% 41,7% 46,0% 47,7% 44,5% 44,0% 44,0% 44,0% 44,0% 44,0%

Balance Sheet Items


Depreciation: % Net PPE b/f 7,0% 5,9% 5,7% 6,1% 7,1% 6,0% 6,0% 6,0% 6,0% 6,0%


Operating leases


Interest rate 11,2% 10,8% 11,2% 11,5% 11,8% 10,5% 10,5% 10,5% 10,5% 10,5%

Debt Finance & WACC


Balancing debt

Short term debt 6,0% 6,0% 6,0% 6,0% 6,0%

Long term debt - 1 6,0% 6,0% 6,0% 6,0% 6,0%

Long term debt - 2

WACC 7,2% 7,6% 8,0% 7,8% 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%


Marginal 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5% 12,5%


Phase 2 Inputs

Revenue growth 0,0% 1,0% 1,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%


Cash tax rate 11,4% 11,4% 11,4% 11,4% 11,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5% 10,5%




98


Results



1: Input value


3: WACC 7,8%

ROIC used 7,8%


EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Income Statement

Revenues 2.343.868 2.343.868 2.343.868 2.367.307 2.390.980 2.438.799

Other Operating Revenues 598.097 598.097 598.097 604.078 610.119 622.321

Cost of Goods Sold (2.296.304) (1.828.217) (1.828.217) (1.846.499) (1.864.964) (1.951.039)

Selling, Gen & Admin Expenses (12.753) (35.158) (35.158) (35.510) (35.865) (48.776)

Depreciation Expense (256.117) (218.689) (217.980) (217.980) (220.160) (222.361)

Other Oper Expense (284.160) (562.528) (562.528) (568.154) (573.835) (585.312)

Reported EBITA 92.631 297.372 298.082 303.243 306.275 253.632



Reported EBIT 92.631 297.372 298.082 303.243 306.275 253.632

Non-Oper Income 4.441 2.221 2.221 2.221 2.221 2.221

Interest Income 75.522 47.226 50.826 54.931 58.697 62.594

Interest Expense (130.544) (143.906) (143.906) (143.906) (143.906) (143.906)


Special Items (222.537) 0 0 0 0 0

Earnings Before Taxes (180.487) 202.912 207.222 216.487 223.286 174.540

Income Taxes 11.314 (21.306) (21.758) (22.731) (23.445) (18.327)


Income Before Extraordinary Items (169.173) 181.606 185.464 193.756 199.841 156.213


Net Income (169.173) 181.606 185.464 193.756 199.841 156.213


Earnings for common shareholders (169.173) 181.606 185.464 193.756 199.841 156.213


Retained profit (169.173) 181.606 185.464 193.756 199.841 156.213

Earnings per share (EUR) (114,42) 123,26 125,88 131,51 135,64 106,03

Earnings per share - fully diluted (EUR) (114,42) 123,26 125,88 131,51 135,64 106,03

99

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Balance Sheet

Operating Cash 46.877 46.877 46.877 47.346 47.820 48.776


Accounts Receivable 41.791 35.158 35.158 35.510 35.865 36.582

Inventories 2.075 4.688 4.688 4.735 4.782 4.878

Other Current Assets 91.053 70.316 70.316 71.019 71.729 73.164

Total Current Assets 2.543.077 2.698.353 2.903.575 3.093.451 3.289.881 3.412.210



Other Intangible Assets 46.841 46.841 46.841 46.841 46.841 46.841


Investments 153.120 153.120 153.120 153.120 153.120 153.120




Total Assets 6.387.862 6.531.309 6.736.531 6.962.738 7.195.860 7.392.310

Short term debt 202.941 202.941 202.941 202.941 202.941 202.941

Accounts Payable 132.671 140.632 140.632 142.038 143.459 146.328

Tax payable 425 21.731 43.489 66.220 89.665 107.992


Other Current Liabilities 1.043.154 1.031.302 1.031.302 1.041.615 1.052.031 1.073.072

Total Current Liabilities 1.379.191 1.396.606 1.418.364 1.452.815 1.488.096 1.530.333

Balancing Debt 54.074 0 0 0 0 0

Long Term Debt 2.195.499 2.195.499 2.195.499 2.195.499 2.195.499 2.195.499


Other Operating Liabilities 106.549 106.549 106.549 106.549 106.549 106.549



On-going operating Provisions 61.807 61.807 61.807 61.807 61.807 61.807


Retirement Related Liabilities 10.157 8.657 6.657 4.657 2.657 657



Total Common Equity 2.425.061 2.606.667 2.792.131 2.985.887 3.185.728 3.341.941

Total Liabs and Equity 6.387.862 6.531.309 6.736.531 6.962.738 7.195.860 7.392.310

100

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

NOPLAT

Reported EBITA 92.631 297.372 298.082 303.243 306.275 253.632

Adj for Operating Leases 78.209 76.552 84.207 92.628 92.628 92.628




Adjusted EBITA 170.840 373.924 382.289 395.870 398.903 346.260

Taxes on EBITA (32.602) (42.682) (43.642) (45.154) (45.397) (39.792)


NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468

Taxes on EBIT

Prov for Inc Taxes (11.314) 21.306 21.758 22.731 23.445 18.327

Tax Shield on Interest Exp 16.318 17.988 17.988 17.988 17.988 17.988

Tax Shield on Operating Lease Interest 9.776 9.569 10.526 11.578 11.578 11.578



Tax on Interest Income (9.440) (5.903) (6.353) (6.866) (7.337) (7.824)

Tax on Non-operating Income 27.262 (278) (278) (278) (278) (278)

Taxes on EBIT 32.602 42.682 43.642 45.154 45.397 39.792


Net Income (169.173) 181.606 185.464 193.756 199.841 156.213

Add: Increase in Deferred Taxes 7.436 0 0 0 0 0




Add: Special Items After Tax 194.720 0 0 0 0 0


Adjusted Net Income 32.983 181.606 185.464 193.756 199.841 156.213

Add: Interest Exp. After Tax 114.226 125.918 125.918 125.918 125.918 125.918


Add: Interest Exp. on Op. Leases 68.433 66.983 73.681 81.049 81.049 81.049


Income Available to Investors 215.642 374.507 385.063 400.724 406.808 363.181


Less: Interest Income After-Tax (66.082) (41.322) (44.473) (48.064) (51.360) (54.769)

Less: Non-operating Income After Tax (3.886) (1.943) (1.943) (1.943) (1.943) (1.943)

NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468

101

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Invested Capital

Operating Working Capital (994.454) (1.036.626) (1.058.384) (1.091.264) (1.124.960) (1.163.992)


Other Assets Net of Other Liabs (106.549) (106.549) (106.549) (106.549) (106.549) (106.549)

Less: On-going operating Provision (61.807) (61.807) (61.807) (61.807) (61.807) (61.807)


Op. Invested Capital (excl.Goodwill) 3.144.802 3.157.081 3.208.228 3.291.876 3.294.874 3.329.962

Goodwill & Intangibles 46.841 46.841 46.841 46.841 46.841 46.841

Cumulative Written Off & Amortized 0 0 0 0 0 0 0

Op. Invested Capital (incl.Goodwill) 3.191.643 3.203.922 3.255.069 3.338.717 3.341.715 3.376.803


Investments 153.120 153.120 153.120 153.120 153.120 153.120




Total Common Equity & Pref. Stock 2.425.061 2.606.667 2.792.131 2.985.887 3.185.728 3.341.941





Adjusted Equity 2.580.585 2.762.191 2.947.655 3.141.411 3.341.252 3.497.465




Retirement-Related Liabilities 10.157 8.657 6.657 4.657 2.657 657

Interest Bearing Debt 2.452.514 2.398.440 2.398.440 2.398.440 2.398.440 2.398.440



102

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Free Cash Flow

NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468

Depreciation 256.117 218.689 217.980 217.980 220.160 222.361

Gross Cash Flow 401.791 549.931 556.627 568.696 573.665 528.829

Increase in Working Capital 55.959 42.172 21.758 32.880 33.695 39.033

Capital Expenditures (318.815) (206.861) (217.980) (254.310) (256.853) (296.481)

Incr in other operating assets/liabilities 6.619 0 0 0 0 0

Incr in Ongoing operating Provisions 19.017 0 0 0 0 0

Inv in Operating Leases (28.725) (66.279) (72.906) (80.198) 0 0

Gross Investment (265.945) (230.968) (269.127) (301.628) (223.157) (257.449)

Free Cash Flow Excl. Goodwill 135.846 318.963 287.500 267.069 350.508 271.380


Free Cash Flow Incl. Goodwill 135.846 318.963 287.500 267.069 350.508 271.380

AT Interest Income 66.082 41.322 44.473 48.064 51.360 54.769

(Incr)/Decr Excess Mkt Sec (247.624) (234.106) (205.222) (188.306) (194.843) (119.125)



Non-operating Cash Flow (32.492) 1.943 1.943 1.943 1.943 1.943



Cash Flow Available to Investors (78.188) 128.122 128.693 128.770 208.968 208.968

Financing Flow

AT Interest Expense 114.226 125.918 125.918 125.918 125.918 125.918

Interest on Operating Leases 68.433 66.983 73.681 81.049 81.049 81.049



Decr/(Incr) in Debt (131.945) 0 0 0 0 0

Decr/(Incr) in Operating Leases (28.725) (66.279) (72.906) (80.198) 0 0

Decr/(Incr) in Retirement Rel. Liab (8.137) 1.500 2.000 2.000 2.000 2.000






Decr/(Incr) in Share Capital (92.040) 0 0 0 0 0

Total Financing Flow (78.188) 128.122 128.693 128.770 208.968 208.968

103

EUR 2009 2010 2011 2012 2013 2014------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Economic Profit

Before Goodwill


WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 2,7% 2,9% 3,1% 2,9% 1,5%



NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468

Capital Charge (238.563) (246.552) (247.515) (251.525) (258.083) (258.318)


After Goodwill


WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 2,5% 2,7% 2,9% 2,7% 1,3%



NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468

Capital Charge (242.127) (250.225) (251.187) (255.197) (261.755) (261.990)


EUR 2009 2010 2011 2012 2013 2014------------------ ---------------------- -------------------- ------------------ ------------------ ------------------

Working capital

Op Cash: % Revenue 2,0% 2,0% 2,0% 2,0% 2,0% 2,0%

Operating cash 46.877 46.877 46.877 47.346 47.820 48.776

Inventories: % Revenue 0,1% 0,2% 0,2% 0,2% 0,2% 0,2%

Inventories 2.075 4.688 4.688 4.735 4.782 4.878

Acc Rec: % Revenues 1,8% 1,5% 1,5% 1,5% 1,5% 1,5%

Accounts receivable 41.791 35.158 35.158 35.510 35.865 36.582

Acc. Pay: % Revenues 5,7% 6,0% 6,0% 6,0% 6,0% 6,0%

Accounts payable 132.671 140.632 140.632 142.038 143.459 146.328

OCA: % Revenues 3,9% 3,0% 3,0% 3,0% 3,0% 3,0%

Other current assets 91.053 70.316 70.316 71.019 71.729 73.164

OCL: % Revenues 44,5% 44,0% 44,0% 44,0% 44,0% 44,0%

Other current liabilities 1.043.154 1.031.302 1.031.302 1.041.615 1.052.031 1.073.072

Total operating working capital (994.029) (1.014.895) (1.014.895) (1.025.044) (1.035.294) (1.056.000)

WC increase/(decrease) (55.534) (20.866) 0 (10.149) (10.250) (20.706)

WC: % Revenues -42,4% -43,3% -43,3% -43,3% -43,3% -43,3%

104

EUR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Revenues 2.343.868 2.343.868 2.343.868 2.367.307 2.390.980 2.438.799 2.487.575 2.537.327 2.588.073 2.639.835 2.692.632 2.746.484 2.801.414 2.857.442 2.914.591 2.972.883 3.032.340

Adjusted EBITA 170.840 373.924 382.289 395.870 398.903 346.260 323.385 329.852 336.450 343.179 350.042 357.043 364.184 371.467 378.897 386.475 394.204

Taxes on EBITA (32.602) (42.682) (43.642) (45.154) (45.397) (39.792)


NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468 289.429 295.218 301.122 307.145 313.288 319.553 325.945 332.463 339.113 345.895 352.813

EUR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Op. Invested Capital (excl.Goodwill) 3.144.802 3.157.081 3.208.228 3.291.876 3.294.874 3.329.962 3.656.736 3.729.870 3.804.468 3.880.557 3.958.168 4.037.332 4.118.078 4.200.440 4.284.449 4.370.138 4.457.540

Op. Invested Capital (incl.Goodwill) 3.191.643 3.203.922 3.255.069 3.338.717 3.341.715 3.376.803 3.703.577 3.776.711 3.851.309 3.927.398 4.005.009 4.084.173 4.164.919 4.247.281 4.331.290 4.416.979 4.504.381

Free Cash Flow Incl. Goodwill 135.846 318.963 287.500 267.069 350.508 271.380 (37.344) 222.083 226.525 231.055 235.677 240.390 245.198 250.102 255.104 260.206 265.410

EUR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ ------------------

Economic Profit

Before Goodwill


WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 2,7% 2,9% 3,1% 2,9% 1,5% 0,9% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2%



NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468 289.429 295.218 301.122 307.145 313.288 319.553 325.945 332.463 339.113 345.895 352.813

Capital Charge (238.563) (246.552) (247.515) (251.525) (258.083) (258.318) (261.069) (286.688) (292.422) (298.270) (304.236) (310.320) (316.527) (322.857) (329.314) (335.901) (342.619)


After Goodwill


WACC 7,6% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8% 7,8%

Spread -3,0% 2,5% 2,7% 2,9% 2,7% 1,3% 0,7% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1% 0,1%



NOPLAT 145.674 331.242 338.647 350.716 353.506 306.468 289.429 295.218 301.122 307.145 313.288 319.553 325.945 332.463 339.113 345.895 352.813

Capital Charge (242.127) (250.225) (251.187) (255.197) (261.755) (261.990) (264.741) (290.360) (296.094) (301.943) (307.908) (313.993) (320.199) (326.530) (332.987) (339.573) (346.291)


105

Name - pessimistic scnario Detailed Forecast Key driver forecast CV Yr

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------

Revenue growth 0.0% 1.0% 1.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Revenue 2,343,868 2,343,868 2,367,307 2,390,980 2,438,799 2,487,575 2,537,327 2,588,073 2,639,835 2,692,632 2,746,484 2,801,414 2,857,442 2,914,591 2,972,883 3,032,340


Adjusted EBITA 373,924 382,289 395,870 398,903 346,260 323,385 329,852 336,450 343,179 350,042 357,043 364,184 371,467 378,897 386,475 394,204

Cash tax rate 11.4% 11.4% 11.4% 11.4% 11.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%

NOPLAT 331,242 338,647 350,716 353,506 306,468 289,429 295,218 301,122 307,145 313,288 319,553 325,945 332,463 339,113 345,895 352,813


Net PPE 3,632,995 3,632,995 3,669,325 3,706,019 3,780,139 4,104,499 4,186,589 4,270,321 4,355,727 4,442,842 4,531,699 4,622,333 4,714,780 4,809,075 4,905,257 5,003,362


Other Invested Capital (475,915) (424,767) (377,449) (411,145) (450,177) (447,764) (456,719) (465,853) (475,170) (484,674) (494,367) (504,254) (514,340) (524,626) (535,119) (545,821)




Net Investment 326,774 73,135 74,597 76,089 77,611 79,163 80,747 82,362 84,009 85,689 87,403

Ryanair Valuation - Corporate Valuation Project

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