Introduction
EasyJet plc. Was " first in February 1994 serving domestic routes in the UK. It has been a product of the deregulation in the airline industry and Sir S. Hadji-Ioannou’s entrepreneurial will. In 2010, sixteen years afterwards, the number of city pairs served by the airline have increased to 254 and competition has been continuously increasing by the emergence of a large number of competing low-cost carriers. Traditional airlines such as British Airways and Olympic Air have been fully adapted to the new challenge, offering simpler and lower cost airfares on routes served by easyJet. The company under examination has gained a unique selling point by providing point-to-point services and by removing onboard and airport frills such as free cabin service and pre-assigned seating. Moreover, the heavily invest in growing their network from secondary airport in order to achieve more efficient, on-time and lower cost flights. The financial performance is depicted in the two figures below.
Figure 1: “easyJet plc.” financial performance
Figure 2: “easyJet plc.” financial performance graph
Source: easyJet Financial Analysis
This thesis aims at carrying out a feasibility study investigating two investment alternatives for easyJet plc. The first investment opportunity relates to launching a new route between Gatwick, London’s second largest Airport and the city of Volos which features an emerging tourist destination for many UK travelers during summer months. The second investment opportunity relates to an institutional investment of easyJet Charters plc., a subsidiary of easyJet plc., to acquire a small Greek charter operator called HellasJet. The company currently operates charter flights from major EU airports to holiday destinations in Greece with a greater emphasis to Chania airport, west of Herakleion, Crete’s main airport. The second project refers to a purchase of 22% of equity via collecting shares from the stock exchange. Despite increased controversy from the ownership of easyJet plc. The management of both airlines will create synergistic benefits to both parties and will lead to increase in the value of both companies.
Main Results and Findings
Current Market Position
In many ways 2010 could be seen as a defining year for the low-cost carrier model.. In contrast to traditional airlines, low-cost carriers have achieved a relatively smooth weathering of the recession and a lot better than the fuel-driven crisis of 2008. The following table gives a clear indication that the profitability of the sector has held up relatively well. It is evident that only two of the top 20 carriers under examination (Flight, 2010), lost money in their financial years ending during 2010. This marks an improvement on the six that were in the red at an operating level in 2009. It is important to mention that the data below are estimated in US Dollars and account for the entire group of companies easyJet and other carriers hold; hence a discrepancy between the two tables. At net level, the 27 carriers for which figures were available (Flightglobal, 2010) generated a combined profit of more than $1 billion in 2010. Contrast this with the small net loss they incurred in 2008 and the $9.4 billion the International Air Transport Association (, and the picture of a robust performance emerges.
Table 1: Airline Revenues
Source: Flight Global, 2010
Mature Industry
Growth has always been central to the profitability of low-cost carriers, but the reduction on capacity being evident in more mature low-cost markets such as the European and North American, has required the creation of different ways to raise revenues. This has been the lead for airlines to aggressively target cost-conscious business travelers who wish to trade down, to increase co-operation efforts and take immediate measures to gain more ancillary revenues from onboard sales and other services not provided on the fare.
Low-cost carriers give greater attention to revenues then they have had in the past, due to their need to raise revenue per passenger flown. The fact that competitive forces combined with increasing fuel costs reduce the potential for high profit margins, airlines wish to cross-sell to the captive market they control. Without the growth effect these carriers have worked on other ways to improve their revenues, lifting top-fare limits and moving into the Global Distribution Systems.
A more cautious capacity approach has also been evident in Europe, but consolidation has helped individual carrier growth. Vueling's merger with fellow Barcelona budget operation enabled the former to grow its share, but both carriers had markedly scaled back capacity prior to the tie-up. Elsewhere carriers have moved into gaps created by low-cost carriers casualties, for example central Europe's benefiting from the collapse of SkyEurope and Ryanair moving into former MyAir bases in Italy (FlightGlobal, 2010). They also continue to heap pressure on retrenching network carriers, where Association of European Airline members carried 20 million fewer passengers in 2009, expanding in key markets. By contrast, passenger numbers across European Low Fares Airline Association members were 8.7% higher at 162.5 million in 2009 (FlightGlobal, 2010). European low-cost operators continue to push the envelope on ancillary revenues, growing in a diverse range of directions. But Ryanair's ambitions to use mobile telephony as the platform for a range of additional future services have taken a hit by the recent decision of its service provider (FlightGlobal, 2010).
Analysis/Evaluation
Having explored the environment in which easyJet plc. operates and despite several challenges it faces on the external environment, it is a well established, successful and profitable organization, that now faces the opportunity for further development and market penetration. This penetration is to be achieved by following one of two obvious courses. The first project opportunity, involves organically launching the new route from London to Volos. The second option represents investing into another, existing, major player in the Greek market, HellasJet. Specifically, the latter option would correspond to the purchase of 22% of the larger company’s equity, on the stock exchange.
In order to further evaluate which course of action would prove to be the most beneficial, it is necessary to carry out an assessment of the financial as well as the non-financial factors that influence such a decision.
Investment Appraisal
Investment appraisal is the planning process used to determine a firm's long term investment such as new and replacement machinery, new plants, new products, and research and development projects.
For the purposes of this report, the NPV and payback period methods have been used in order to evaluate the two investment options that faced by the firm. The NPV analysis has been carried out to assist the author’s estimations of the inflows received by the firm in the first three years of operations, net of the effect of inflation and opportunity cost. Additionally, the payback period has been used in order to estimate the time required for the return on the two different investment options to "repay" the sum of the original investments. The formulas for the Net Present Value and for the payback period are shown below:
Net Present Value
Payback period
Investment Project I:
‘Investment in a new route from London Gatwick to Athens International Airport.
Table 1 depicts the investment appraisal calculations, projected over a 5 year investment period, in the event that the option of launching the newroute is chosen.
Table 1: Financial Analysis & Investment Appraisal of ‘Route London - Athens’
Source: Author
The cost of sales and operating costs are estimated at 92% of total revenue, whereas the discount rate of 2% represents the interest rate charged by the European Central Bank currently set for as Euribor. In this case the discount rate reflects the opportunity costs incurred by investing in the launch of the new diagnostic centre as opposed to an alternative, perhaps safer investment such as government bonds.
The project’s Present Value is anticipated to generate a positive NPV of 442.279€.
Table 1.1.: Payback Period of ‘Route London – Athens’
Source: Author
It is estimated that if easyJet plc. decides to invest in launching the new route will break even in 1 year and 56 days.
Investment Project II:
‘Investment through Equity purchasing in HellasJet S.A.’
Table 2 similarly portrays the respective calculations for the second project scenario of investing in HellasJet via purchasing 22% of the company’s equity on the stock exchange.
Table 2: Financial Analysis & Investment Appraisal of ‘Equity Purchasing’ in HellasJet S.A.
Source: Author
In this circumstance, the initial outlay (22% of the company’s market value) comprises the single majority stake in the company as the second largest investor holds nearly 16% of the company. This results in a lower NPV over the short term period, which at first glance means that such an investment does not appear favourable. However, this may not depict this investment’s full potential, unless it is projected over a medium-long term basis or quantified by other means and measures.
Interestingly, despite the larger initial outlay involved in buying equity in the established airline, the Pay-Back period for the second investment opportunity is a little shorter, signifying that the investment is expected to be paid back faster than project 1.
Table 2.1.: Payback Period of ‘Equity Purchasing’ in HellasJet S.A.
Source: Author
Non-finacial Analysis
In order for easyJet plc. to decide the best path to its future development, it is necessary to explore also the non-financial factors that influence this decision making process and evaluation. This is facilitated with the SWOT analysis.
SWOT[1] Analysis
EasyJet offers a high quality service at rock bottom prices and offer a number of features including ticketless travel, internet booking and assisted travel services for an additional cost over and above the initial travel fare. They have a highly distinctive orange colour on all of their fleet of aircraft in order to make them easily recognisable and provide free of charge advertising of their airline’s way to book tickets. They have a simple and functional website which deploys the price breakdown of the passenger’s travel plan. Offering a full breakdown of the price plan prevents any hidden charges when the customer confirms there booking and reduces inconvenience and stress. EasyJet offers an online promotion alert which is e-mailed to existing customers and contact on the company’s database that informs potential customers of the ongoing offers, discounts and coupon rates. It has been an increasingly recognizable brand in the UK. Moreover, it operates a fast and efficient service with an average turnaround time of 30 minutes or below which allows for an increased use of aircraft and cabin crew. Also, this enables the airline to maintain a reliable and hassle free service to their passengers. As far as weaknesses are concerned, easyJet’s main competitors being Jet2, BMI Baby, Ryan Air plus a host of smaller independent competitors can restrict and shape pricing policy on some of its less profitable routes as they seek to compete with their competitors. Furthermore, they do not offer a free food service on longer flights of 2 hours plus which may reduce the interest of some passengers to other airlines. The possible opening of additional routes to major business and tourism destinations in Europe may provide the sole important opportunity for future growth. In addition, purchasing fuel in advance may reduce the risk of the airline paying more in the future. Finally, pressure from trade unions and employee relations may drastically impact on the daily operations with potential strikes proving to be very costly to the company’s survival. The economic downturn may lead to a decrease in frequent flyers and corporate travel as companies will seek to cut less necessary expenditure leading to less business trips.
PEST[2] Analysis
As far as external political factors are concerned, an EU east-enlargement may provide access to viable, new markets with relatively increasing income to spend on short trips. The economic factors consider the likelihood of increasing fuel costs, congestion and other environmental restrictions, as well as the prospect of higher security and insurance costs to reflect the risk of terrorism. Moreover, as the recession is likely to last for a considerable period, business travellers will become increasingly conscious of their travel expenses. The socio-cultural factors entail winning over the French and German publics and causing problems as there appears still to be a general unwillingness to use credit cards over the phone or Internet. The public is general quite friendly to the prospect of cheap flights. However they may feel begrudged where they see promotions found in newspapers where flight are for €10 only to find that the actual cost is much higher for the specific time or day they wish to fly on. A key issue will be the extent to which technological advancements – such as the use of the Internet on distribution and cost synergies from industry consolidation – can offset upward pressures on prices and costs.
Conclusions and Recommendations
According to the findings, the corporate management of easyJet plc. will make a decision according to the business strategy that has formed for the company’s future. More precisely, if the management wishes to proceed with a long term and relatively higher investment, then the optimal choice would be the organic growth option. This is due to the fact that it requires a substantially higher start up cost and is expected to return that investment in a longer term period. On the other hand, if the management wishes to make a relatively shorter term investment, acquiring a stake in rival HellasJet S.A., requires a lower amount of money, a shorter term return for the investment. Consequently, launching a new operation would be more favourable. The non- financial analysis illustrates that easyJet plc. may be better off purchasing the competitor since it will also eliminate competition and assist in gaining a higher share of the market.
The findings of the financial analysis (investment appraisal) somewhat conflict the findings of the non-financial factors. It would therefore be beneficial to carry out a more extensive financial analysis for each scenario, covering a longer investment period and providing a greater amount of cost data. This would enable a more accurate comparison of the two investment options, as they each contain a very different initial outlay. Also, it may be helpful to adopt other methods of investment appraisal such as the Accounting Rate of Return, which are less sensitive to fluctuations in future Cash Inflows. This way, with more information that contains more detail, the management of easyJet plc. can weigh the advantages and disadvantages of each project in a clearer and a more precise way.
Bibliography
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Hall, D. et al (2007) Business Studies, 3rd edition, Waring Collins, Essex, UK
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ICAP Management Consultants (2008) Healthcare Industry Analysis, Athens, Greece
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Dunn, G., (2010) Low-Cost Carriers – coming of age, FlightGlobal, accessed on 8/2/2011
Websites
Appendix 1: Interview Questions
Q1.Which is the core market segment that easyJet aims at?
Q2. Is there a considerable market growth on the core target market?
Q3.What is the forecasted trend of the UK to Greece tourism model in the future?Is there a significant growth potential that would allow the company to profitably invest in expansion?
Q4. What are the expansionary alternatives that the company is currently considering in its business plan?
Q5. What are the potential advantages and disadvantages of launching a new route?
Q6 What are the potential advantages and disadvantages of buying equity on a potential competitor’s business?
Q7. Is there a different level of risk associated with launching a new route compared to investing on an existing airline with established business?
Q8. Would there be any diffusion of the corporate strategy?
Q9. Which are the areas that the company considers expanding at in terms of geographic region?
Q10. Which are the strengths of the company?
Q11. What other weaknesses does the company have?
Q12. Which are the opportunities of the company?
Q13. Which are the threats of the company?
Q14. Do you consider the current austerity measures taken in Greece to be a deterring factor to the growth of the airlines network in the specific area?
[1] Interview with Mr Dardoufas
[2] Flight Flobal, 2009