Ryanair Valuation - Corporate Valuation Project

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.
Gross margin
Figure 2.1: Ryanair’s ROIC tree 36.17
Operating margin
19.8
Pre-tax SG&A / revenues
ROIC 0.63
24.6
Depreciation / revenues
ROIC
6.48
21.7
Cash tax rate Other operating expenses

11.9 / revenues
9.26
Operating working capital /

Average capital
revenues
turns
-30
1.24
Fixed assets / revenues

108.64
Intangible assets / revenues

1.72
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,
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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
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good shape and that its creditworthiness is solid. Glenn Curtis1 states that, ideally, an airline's EBITDA
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” ssection.
2.7 Stock Market performance
The graph below shows the total return to shareholders for Ryanair and its largest competi
competitor, easyJet,
for the period ending on 30 September 2009. The values can be found in Annex 10.1.11. - Total Return
easyJet. Since neither company pays dividends, it is just the stock prices
To Shareholders: Ryanair vs. easyJet.
that drive TRS. For the 5-year
year average TRS, easyJet
easyJet has almost double the returns. This shows that the
difference between the price of a share now and 5 years ago iiss a lot larger for easyJet than for Ryanair.
In terms of the 3 – year average, both companies had negative returns, which is a sign that they failed
to meet market
ma expectations.
Figure 2.2: Shareholder return
However, Ryanair is closer
5 - year average TRS to the “breakeven
“break point”.
Finally, over the last year,
ye
Ryanair did better than
3 - year average TRS EasyJet
easyJet and exceeded
Ryanair
expectations of the market
more than easyJet managed
1 - year averageTRS
to.
-1 0 1 2 3
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; Annex 10.3,
PESTEL Analysis; Annex 10.4, The 5 Forces Analysis of th
thee Airline Industry; Annex 10.5, Competitor
analysis; Annex 10.6, Internal analysis and Annex 10.7, SWOT Analysis.
1
Glenn Curtis - Is That Airline Ready
dy For Lift
Lift-Off?
Retrieved from http://www.investopedia.com/articles/stocks/07/airline_stocks.asp
ttp://www.investopedia.com/articles/stocks/07/airline_stocks.asp
12
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.
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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
17
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
18
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
19
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
20
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
Table 4.1: Regression data
Figure 4.1: 780 daily Ryanair returns

0,20
vs SNP500 returns
Ryanair
0,15
regression on
0,10
S&P 500
0,05
0,00
RETURN RYAAY
-0,15 -0,10 -0,05 -0,05 0,00 0,05 0,10 0,15
-0,10
-0,15
-0,20
-0,25
-0,30 Return RYAAY
RETURN SNP 500
21
In order to make sure that the measurement period did not include any structural changes that would
bias the beta estimation, we have
Figure 4.2: Rolling window beta
plotted the company’s 3year beta for a
Ryanair Beta:2000-2009
period of 10 years between July 2007
1,6
1,4 and March 2009. It can be noted that
1,2
1 for the 3 year period analyzed the value
0,8
0,6 of the beta has been relatively stable,
0,4
beta except for the1.46 kink experienced in
0,2
0
the middle of 2008 in mid financial
30.07.2000
30.11.2000
30.03.2001
30.07.2001
30.11.2001
30.03.2002
30.07.2002
30.11.2002
30.03.2003
30.07.2003
30.11.2003
30.03.2004
30.07.2004
30.11.2004
30.03.2005
30.07.2005
30.11.2005
30.03.2006
30.07.2006
30.11.2006
30.03.2007
30.07.2007
30.11.2007
30.03.2008
30.07.2008
30.11.2008
30.03.2009
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
22
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/
23
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 11.30% 10.48% 19.51% 18.30% 25.84% 26.65% 21.30% 41.61% 42.19%
value
Equity/Total 88.70% 89.52% 80.49% 81.70% 74.16% 73.35% 78.70% 58.39% 57.81%
Value
Table 4.2: Ryanair capital structure
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.
24
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
Table 4.3: WACC sensitivity
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
25
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%
26
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.
27
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.
28
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
29
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. Figure 6.1: Value of operations
Value of Operations: DCF approach
Free Cash Discount PV
6.1.3. Value of operations Year Flow Factor of FCF
2010 383.343 0,927 355.474
Adding the present value of the cash flows to the present value of the 2011 276.056 0,860 237.377
2012 270.932 0,797 216.033
2013 519.164 0,739 383.871
continuing value results in a value of operations of EUR 2014 504.768 0,686 346.093
2015 73.423 0,636 46.683
5,332,883,000. This value is the adjusted with a mid-year adjustment 2016
2017
198.567
209.091
0,590
0,547
117.070
114.313
2018 220.172 0,507 111.620
factor of 1.11 that takes into account the fact that cash flows occur 2019 231.841 0,470 108.991
2020 244.129 0,436 106.424
throughout the year and that the valuation is based on November 28th 2021
2022
257.068
270.693
0,404
0,375
103.918
101.470
2023 285.039 0,348 99.080
2009. The adjustment factor is calculated using the following formula: 2024
Cont. Value
300.146
8.648.625
0,322
0,322
96.746
2.787.718
Operating Value 16 5.332.883
8: <<8:
73! = 1 + · 1 +
Continuing value % Operating value 52,3%
9 <=>
Mid -Year Adjustment Factor 1,110
Operating Value (Adjusted) 5.919.500
30
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
31
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
Value of Equity
case of Ryanair the equity value amounts to EUR 5,266,094,000 and Operating Value 5.919.500
Excess Mkt Securities 2.361.281
the number of undiluted shares outstanding is 1,473,356,000 Financial Investments 153.120
Excess Pension Assets 0
resulting in a value per share for the base scenario of EUR 3.57.
Enterprise Value 8.433.901
Debt (2.452.514)
Capitalized Operating Leases (662.788)
If the final share price is calculated then the value per share of the
Retirement Related Liability (10.157)
Preferred Stock 0
other scenarios has to be considered according with their respective Minority Interest 0
Long-Term Operating Provision 0
probabilities. The value per share of the three different scenarios and Restructuring Provision 0
Future Stock Options 0
their respective probabilities are as follows: Stock options (42.347)
Equity Value 5.266.094
• Base scenario: EUR 3.57 – 70% No. shares (thousands) 1.473

Value per Share 3,57
• Optimistic scenario: EUR 6.59 – 15% Figure 6.2: Value of equity
• Pessimistic scenario: EUR 2.28 – 15%
32
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 Base equity Change New equity Change of

value value value EV
WACC 7,84% 5266114 0,5% 4808013 -8.7%
Adjusted 15% 5266114 1% 5643788 8%
EBITA
Revenue 5,3% 5266114 1% 5435873 3.2%
growth
Table 6.1: Sensitivity analysis of Ryanair’s equity
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 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
in
-2% 4.42 4.02 3.69 3.4 3.15 2.93 2.73
revenue -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
growth
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
Table 6.2: Sensitivity analysis of Ryanair’s base scenario share price
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
33
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.
34
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.
35
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37
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
38
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
39
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
40
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
41
10.1.5. Historical Cash Flow
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)
10.1.6. Historical Economic Profit

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)
42
10.1.7. Historical operating ratios
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%
10.1.8. Revenue growth
43
10.1.9. Growth patterns: Ryanair vs. easyJet
10.1.10. Measuring Coverage
10.1.11. Total Return To Shareholders: Ryanair vs. easyJet
44
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%
Figure 10.2.1 - Market share by seats offered
market share and it is followed closely by
4
(Kentleton, 2009)
45
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,
46
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
47
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
48
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
49
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.
50
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
51
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
52
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:
Economic factors Socio-cultural factors
• State of the general • Consumers’ perception of air travel

economy • Passengers perception of air travel
• Volatility and level of safety
fuel prices • Change in EU population
demographics
Environmental factors
Technological factors
• The internet
Ryanair • Part of EU Emissions Trading
Scheme as of 2012
• Video conferencing • Introduction of fuel taxes
technology
• More efficient aircrafts
Political and Legal factors
• Liberalization
• State aid
• Airport ownership
• EU passenger rights
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.
53
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
55
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
57
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
Ryanair easyJet
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%
59
Cost/ASM (Euro cent) 5.8 5.1 6.7 6.1
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
Ryanair Air Berlin

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
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.
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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 370. 487. 624.1 842.5 1074.2 1319.0 1692.5 2236.9 2713.8 2942.0
Revenue 1 4
(million euro)
,et (loss) / 72.5 104. 150.4 239.4 206.6 266.7 280.1 306.7 390.7 (169.2)
profit after 5
tax (million
euro)
Adjusted net 72.5 104. 150.4 239.4 226.5 268.9 268.1 301.5 480.9 105.0
profit after 5
tax (million
euro)
Adjusted 21.6 14.8 20.64 31.71 29.91 35.38 19.66 25.99 31.81 7.1
EPS (euro 2 1
cent)
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 2.77 3.28 3.04 2.95 2.71 2.55 2.43 2.02 1.53 1,84
ratio
Acid test 2.67 3.20 2.99 2.89 2.65 2.54 2.42 2.02 1.53 1,84
Cost of 365.22 523.18 731.66 903.86 1221.47 1603.65 2329.26 3269.93 4035.61 5506,15
sales per
day
Average 13425.00 14954.00 16550.00 19956.50 24614.00 14450.00 2941.00 2921.00 2208.50 2036,00
inventory
Days 36.76 28.58 22.62 22.08 20.15 9.01 1.26 0.89 0.55 0,37
inventory
outstanding
,et sales 1014.07 1335.36 1709.73 2308.24 2943.08 3613.80 4637.07 6128.48 7435.13 8060,18
per day
Average 20224.50 15334.50 9513.00 12650.50 14951.00 17788.00 25276.50 26660.50 28795.00 37984,50
accounts
receivable
Days 19.94 11.48 5.56 5.48 5.08 4.92 5.45 4.35 3.87 4.71
receivable
outstanding
COGS per 365.22 523.18 731.66 903.86 1221.47 1603.65 2329.26 3269.93 4035.61 5506.15
day
Average 26812.50 26429.50 38388.50 54191.50 64770.00 80027.00 85700.50 103263.00 128266.00 130980.00
accounts
payable
Days 73.42 50.52 52.47 59.96 53.03 49.90 36.79 31.58 31.78 23.79
payable
outstanding
Cash -16.71 -10.45 -24.28 -32.40 -27.80 -35.97 -30.08 -26.34 -27.36 -18.71
conversion
cycle
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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 0,38 0,48 0,47 0,50 0,50 0,55 0,57 0,56 0,60 0,62
ratio
Interest 22,23 9,53 8,31 8,53 5,23 5,91 5,07 5,69 5,53 0,71
coverage
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.
Prof itability 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 0,42 0,69 0,32 0,20 0,15 0,17 0,40 0,22 0,09 0,41
ratio
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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 9,57 11,95 15,59 14,48 16,86 237,94 248,45 493,19 737,60 968,55
coverage
Fixed asset 1,17 0,79 0,66 0,62 0,66 0,61 0,66 0,67 0,69 0,77
turnover
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
Share prices
7
6
5
4
3
2 Share prices
1
0
Source: Yahoo finance (ISE quotes)
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.
67
10.6.3. Operational perspective
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Scheduled 5.5 8.1 11.1 15.7 23.1 27.6 34.8 42.5 50.9 58.6
passengers
(mil)
Average no. 1388 1476 1531 1897 2288 2604 3063 3991 5262 6369
employees
,o. planes 26 36 41 54 72 87 103 133 163 181
(at period
end)
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
68
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.
100% Other
90%
Airport and handling
80% charges
70% Route charges
60%
Aircraft rentals
50%
40% Marketing and

distribution costs
30%
Maintenance,
20% materials and repairs
10% Fuel and oil
0% Depreciation
2007 2008 2009
Increased productivity
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Flights on 83% 78% 92.5% 93% 89.4% 81% 85% 88% 90%
time
Passenger 3963 5487 7244 8296 10110 10596 11361 10648 9679 9195
per
employee
Load factor 73 77 81 84 81 84 83 82 82 81
The table above shows a few measures of productivity.
69
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.
70
10.6.4. Value chain perspective
Firm
Margin
Good linkage between all support activities
infrastructure
HRM Effective & Fewer job Management In-house Financial
extensive restrictions; control incentives;
training Limited Performanc
crew e contracts
Technology Online Online Integrated Internet sales n/a
development booking check-in systems
system system
Procurement Boeing Alliances Outsourced Private Low cost
discount
Primary Low cost No frills; Quick Low cost Limited
activities suppliers; Low cost; turnaround; promotions; resources;
Airport High Reliable Free Basic/low
agreements; quality; service; publicity; cost;
Low High High load Internet High
handling diversity of factor; sales’ productivit
charge routes; Yield y;
airports One type of management; High
modern Powerful TV quality;
plane ad No sale of
campaigns products/fo
Margin
od to cut
costs
Inbound Operations Outbound Marketing Service
logistics logistics & sales
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
71
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
72
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
73
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
74
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
75
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.
76
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
77
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.
78
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&L
Operating 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
79
Forecast assumptions – continuing value
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%
Results
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
80
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
81
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
82
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
83
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
84
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%
85
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)
86
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
87
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
P&L
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
Interest rates
Excess cash 2,0% 2,0% 2,0% 2,0% 2,0%
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
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 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%
88
1: Input value 10,0%

3: WACC 7,8%
ROIC used 10,0%
Results
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
89
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
90
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
91
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
92
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
93
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%
94
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
95
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
96
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
P&L
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
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%
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 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%
97
1: Input value
3: WACC 7,8%
ROIC used 7,8%
Results
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
98
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
99
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
100
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
101
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
102
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%
103
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)
104
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
105

Ryanair Valuation - Corporate Valuation Project

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Ryanair Valuation - Corporate Valuation Project

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Århus School of Business, Århus University

Advising Professor: Tom Albæk Hansen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10. Annexes ............................................................................................................................................. 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

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

10.4.2. 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

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

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

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

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

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

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

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

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