Sample 1

Corporate Finance
Final project:
The Air transportation industry
Company
Risk Characteristics
Investment Performance
American
Airlines
6.26
-5.92%
35.00%
n.m.
ROC WACC
8.15%
Ryanair
1.24
27.35%
27.00%
BAA
1.42
4.43%
7.00%
Asur
0.82
28.42%
15.00%
5.24%
2.80%
3.23%
2.01%
2.27%
3.53%
ach
Beta
Jensen's
Alpha
R
squared
ROE COE
Capital
Structure
Dividend Policy
Current
Debt
ratio
Optimal
Debt
Ratio
(1,129.50)
86.65%
20.00%
53.30
23.87%
10.00%
(191.00)
44.86%
45.00%
(37.30)
0.00%
20.00%
EVA
Change
in
WACC
7.06%
0.04%
0.00%
0.54%
Valuations
Duration
Dividends
FCFE
Value/share
Price/Share
765.3
10.06
10.20
5.3
23.5205
6.76
5.55
3.3
145
257.1
3.22
5.80
14.3
41.2
31.69
30.45
EXECUTIVE SUMMARY ................................................................................................... 3

INTRODUCTION AND THE COMPANIES........................................................................ 4
1. Introduction
......................................................................................................................................................................... 4
2. Brief description of the companies
.................................................................................................................................. 6
CORPORATE GOVERNANCE ANALYSIS ...................................................................... 8

1. Balance of power between management and shareholders
.......................................................................................... 8
2. Management
compensation.............................................................................................................................................. 9
3. Market
coverage................................................................................................................................................................ 11
4. Social
responsibility.......................................................................................................................................................... 12
STOCKHOLDER ANALYSIS .......................................................................................... 14

RISK PROFILE .............................................................................................................. . 16
1. Market risk and
return...................................................................................................................................................... 16
2. Bottom up betas
................................................................................................................................................................ 20
3. Cost of equity
.................................................................................................................................................................... 22
4. Cost of debt........................................................................................................................................................................
23
5. Cost of
capital.................................................................................................................................................................... 25
INVESTMENT RETURN ANALYSIS............................................................................... 27

1. Typical project
................................................................................................................................................................... 27
2. Measuring Returns
........................................................................................................................................................... 28
3. Future
outlook................................................................................................................................................................... 30
CAPITAL STRUCTURE CHOICES................................................................................. 33

1. Current financing mix
...................................................................................................................................................... 33
2. Trade off on Debt and
Equity......................................................................................................................................... 35
OPTIMAL CAPITAL STRUCTURE ................................................................................. 37

1. Current Cost of Capital / Financing Mix
...................................................................................................................... 37
2. Cost of Capital at Different Financing
Mixes............................................................................................................... 37
3. Firm Value at Optimal
..................................................................................................................................................... 38
4. Optimal capital structure APV approcah
................................................................................................................... 40
5. Sector and market debt ratios
......................................................................................................................................... 42
MECHANICS OF MOVING TOWARDS THE OPTIMAL................................................. 43

1. A Path to the Optimal...................................................................................................................................................... 43
2. Quantitative Analysis and Overall Recommendation on Financing
Mix................................................................. 43
3. Summary of desirable debt charachteristics
................................................................................................................. 47
DIVIDEND POLICY ......................................................................................................... 48

1. Current Dividend Policy
.................................................................................................................................................. 48
DIVIDEND POLICY: A FRAMEWORK ........................................................................... 51

1. Affordable
Dividends........................................................................................................................................................ 51
2. Management Trust and Changing Dividend Policy
................................................................................................... 51
VALUATION.................................................................................................................... 54
1. Valuation models
.............................................................................................................................................................. 54
2. Valuation assumptions and
inputs................................................................................................................................. 54
3. Valuation results
.............................................................................................................................................................. 57
I.
Executive Summary
Corporate Governance and Stockholder analysis

We believe that the stockholders interests are generally well
protected in the companies subject to our review of Chemical Industry of
Pakistan. The marginal investor in all companies is well diversified, often
national investors.
Risk Profile
We used two measures of bete to estimate the exposure of each
company to market risk. Not surprisingly, the results reflect the
fundamental characteristics of each company and in particular variance of
earnings and leverage. The riskiest company as measured by historical
regression beta is American Airlines and the least risky BAA. Because of
the historical character of the regressions beta and high standard errors of
the estimates we used bottom-up betas in our further analysis.
In addition, we used two methods to compute returns of each company
with relation to its risk
Jensens Alpha and Treynor ratio. Under both methods the top performing
companies were Ryanair and Asur.
Investment analysis
In analyzing the returns of the investment projects at which companies
we looked at a typical project in each line of business and computed
accounting measures of returns, such as ROC and ROE. Ryanair proved to
be the company with highest returns and it was the only company that
generated positive EVA. In addition we assessed the future prospects of each
company, analyzing the sustainability of its competitive advantages. This
analysis was used as a basis for the valuation of the
firms.
Capital structure
The four companies adopt very diferent policies with regards to their
capital structure, ranging from the highly overlevered American Airlines
(debt ratio of 87%) to the all equity financed Asur. Taking into account the
potential benefits and disadvantages from the use of debt we computed
optimal capital structures for each firm and assessed the impact on the share
price from moving from the current capital structure to the optimal. The
result was an average of 8.12% increase in the firm
value of the firms, although most of this increase comes from American
Airlines. It was interesting to find that BAAs current debt ratio is equal to
its optimum roughly 45%.
Dividend policy
Both Amrican Airlines and Ryanair are non-dividend paying
companies, although for very diferent reason. While focus of AAs policies is
to return to profitability before being able to aford any dividends, Ryanair
exhibits a great potential to invest in projects with positive excess returns
(ROC exceeds Cost of capital). BAA and Asur are companies with more
steady and predictable cash flows and reinvestment needs and this is
reflected in their dividend policies. Our analysis is presented in Sections X
and XI.
Valuation
The results from our valuations are presented in the table below:
Valuation summary
Model Chosen
Value per Share
Current Stock Price
Undervalued / (overvalued)
Reccomendation
American
Airlines
FCFF 2 Stage
10.06
10.20
-1.3%
HOLD
Ryanair
FCFF 3 Stage
6.76
5.55
21.8%
BUY
BAA
FCFF 2 Stage
3.22
5.80
-44.4%
SELL
Asur
FCFF 2 Stage
31.69
30.45
4.1%
HOLD
Source: Analysis
page
s.
The valuation models are based on the results from our analysis as
presented in the following
II.
Introduction and the companies
1.
Introductio
n
The current report examines major trends in the Chemical sector of Pakistan
focusing on four companies in particular Ibrahim Fibres, Sitara Chemicals
& Sitara Per Oxide. The companies reviewed operate in two diferent
businesses, Non Petro Chemicals& Petro Chemicals and are at diferent stage
of their life cycle. The purpose of the report is to analyze diferent aspects of
their corporate finance policies and to assess the efect of these policies on
the value the managements of these firms create for their shareholders.
Figure 1 Summary company information

American
Company
Throughout the report
analysis has been
presented based on
information gathered from various sources, including statutory filings with

regulatory authorities in the respective jurisdiction, company annual reports,
management presentation and other publicly available information. We have
tried
to
acknowledge
each
source
of
information
where
possible.
Figures and data that is not referenced to any source has been result of
our own analysis.
A list of commonly used terms and abbreviations is presented below:
Term
AA, AMR
BAA
BoD
BVE
BVD
D
E
Load Factor
MVE
MVD
n.a, N/A
RAPM or Revenue Yield
T
1
2
Meaning
American Airlines
British Airport Authority
Board of Directors
Book value of equity
Book value of debt
Debt
Equity
Percentage of seats sold to total available seats
Market value of Equity
Market value of debt
Information not available n.m.
Information not meaningful
Revenues per passenger per mile
Tax rate
Translated using the average Local Currency/ Dollar rate for 2004
Translated using the closing local currency / Dollar rate as at 31 December 2004
For computational ease the analysis for each company has been
undertaken in the reporting currency under which the company reports
annual results US dollars (for AA and Asur), Euro (Ryanair), British pounds
(BAA). All figures are in million local currency unless otherwise indicated.
2. Brief description of the companies
American Airlines
AMR was established in 1926 and had Charles Lindberg as chief pilot of
its fleet of 3 DH 4 bi- planes. The company was listed in 1939 and throughout
the years grew on acquisitions and survived several crisis (included World
War II that forced them to turn half of the fleet to the military airline). The
company
grew
internationally
and
domestically
especially
after
the
deregulation act of 1978. In

2001, before September 11 acquired all the assets of TWA, but then was hit by
an economic recession,
increased competition from low cost carriers and the terrorist attack.
Nowadays AMR Corporation is a holding company that provides
scheduled
passenger
and
airfreight
services
to
approximately
150
destinations in North America, the Caribbean, Latin America, Europe and

the Pacific through its American Airlines subsidiary. The Company in 2004
employed roughly 92,000 people and its headquarter is at Dallas Forth Worth
Airport, Texas. For the FY ended
12/31/04, revenues rose 7% to $18.65B. Net loss fell 38% to $761M. Results
reflect higher afiliate
passenger revenues a decline in wage costs but also an increase in fuel costs.
Ryanair
Ryanair was founded in 1985 by the Ryan family in Ireland. It started
with one scheduled flight between south-eastern Ireland and London
Gatwick. First crew members were required to be less than 5 foot 2 inches
tall in order to fit in the tiny cabin of the only 15-seater aircraft. Soon after
its launch, the company acquires permission to challenge British Airways and
Aer Lingus on the Dublin London route. The number of passengers grew
from 5,000 to 82,000 in the first 2 year of operations. The next few years are
marked by growth in the number of routes and passengers between Ireland
and the United Kingdom. However, by 1990 the company had accumulated
over D20 million in losses. The Ryan family invested additional 20 million
in capital in the business which went through substantial financial and
operational restructuring copying the South West Airlines model, Ryanair
was re-launched as Europes first low cost airline. This was a revolutionary
new model for the European air transportation market and some publications
note that people queued up for three days
to get the Easter sale fares. The new model incorporated move towards
same aircraft fleet, direct sales, scrapping of drinks and food served on
board and cutting turnaround time and costs. In 1995 the company launches
the first low cost airfares on UK routes and in 1997 in Europe. In the same
year the company gets listed on the Irish Stock Exchange. Promotional fares
of D1 on domestic and European routes attracted the attention of passengers.
Today, Ryanair is the largest European low cost airline carrying over 7
million passengers annually on 220 routes across 19 countries. Operations
are concentrated in 12 European bases and the company employees over
2,600 employees.
BAA
BAA is engaged in the management and operation of airport facilities in
the UK and overseas. The company is headquartered in London, UK and has
a workforce of about 12,500 employees. The company owns seven UK
airports: Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and
Southampton. BAA also has interests in 13 airports located in Italy, Australia,
US and Oman. BAAs airports in the UK and overseas serve 230 million
passengers a year. The companys operations are divided into the following
segments: airports, retail, BAA Property, rail and other. The airport segment
primarily oversees terminal and airfield management. In the terminal
management area, the company looks after buildings, passenger services and
cargo. In the airfield management division, the company maintains and
operates runways and taxiways. BAA also develops, manages and markets
commercial activities at its UK airports. BAAs UK airport retail activity is
made up of two complementary businesses: Retail management at UK
airports and World Duty Free. Retail management at UK airports involves
the development, management and marketing of commercial activities at
BAAs seven UK airports. These include shopping, catering, financial
services,
travel,
services,
parking,
telecommunications
and
management. The business specializes in luxury brands and operates
media
64 stores across the UK

airports.
Asur
Grupo Aeroportuario del Sureste (Asur) holds a concession from the
Mexican government to operate, maintain and develop nine airports in the,
primarily touristic, Southeastern region of Mexico.
The companys main
airport is the Cancun International Airport, which generates over 70% of

Asurs revenues and is the second busiest airport in Mexico. Cancun and the
surrounding Mayan Riviera, are Mexicos top tourist destination and among
the fastest growing tourist developments in the country.
Asurs nine
airports served more than 13.8 million passengers in 2004, of which around
60% were international passengers and 40% were domestic passengers.

Approximately 70% of the international passengers traveled on flights
originating from the United States.
As of 2003,
17
Mexican and 45 international airlines operated directly or through codesharing agreements from
Asurs airports.
Asur was established in 1998 as part of the Mexican governments airport
privatization program, which included three regional airport groups and the
Mexico City International Airport.
A private consortium, ITA, led by
Copenhagen Airports won the 50-year concession to operate the nine airports
in the Southeastern group. The consortium acquired a 15% stake in Asur,
while the remaining shares were floated in the NYSE and the Mexican Stock
Exchange on October 3, 2000. The Mexican government, through one of its
development banks, Nafin, retained an 11.1% stake in Asur to be floated
on a future date. As the long-term operator of the airports, Asur generates
revenues from two main sources: aeronautical services and non-aeronautical
services.
The former account for 75% of total revenues and are derived
primarily from passenger and landing charges, aircraft parking charges, and
general airport services.
operations
and
access
complementary services.
Non-aeronautical services are divided into retail

fees
charged
to
third-party
providers
of
While the aeronautical revenues are heavily
regulated by the Mexican government, the retail operations and access fees
provide an important growth opportunity for Asur. These have grown at a
compounded annual growth rate of
22.9% since 1999, when they accounted for only 14% of total revenues.
Summary financial data for each company is presented in Appendix I.
III.
Corporate Governance Analysis
1. Balance of power between management and shareholders
We believe that the interests of shareholders are relatively well

protected by the corporate governance policies of the four companies
analyzed, with the possible exception of American Airlines. As an example at
AA, directors are nominated for life and more than half are CEOs of other
companies, two of them in related businesses. A shareholder is challenging
the lifetime rule at the next general shareholders meeting in May.
Recently, some board members and the CEO have raised their own salaries.
Insiders are generally not overrepresented in the companies boards,
while the CEOs tend to
have a long history with their companies, once again with the notable
exception of American Airlines. One interesting common feature is that all of
the CEOs are relatively young with an average age of
only 48 years.
These last two factors could suggest a dynamic leadership
with intimate knowledge of the challenges and opportunities facing their

businesses.
Although the balance of power seems to tilt in favor of
shareholders, it is interesting to note that 3 out of the 4 companies have

board members who are CEOs of other companies.
This could indicate a
lesser oversight due to the lack of time and possible conflicts of interest,
although it should be noted that only AA board members are CEOs of related
companies. Nonetheless, the large percentage of institutional shareholders
in most firms, as well as the relative absence of insiders in the boards of
directors, leads us to believe that shareholders hold an adequate level of
power and oversight in their companies. An exception in terms of number of
insiders is BAA, where company executives represent a majority of the
board. We believe that management discretion is counterbalanced in this
case by the oversight of the regulatory authority, the Civil Aviation Authority
(CAA).
Figure 2 Balance of power between stockholders and current managers
Ry
an
air
As
ur
B
A
A
A
Stock
holders
Incumbent
managers
2. Management compensation
Management compensation does not appear to be an issue at any of the
companies analyzed. Only the CEO of Ryanair earns more than US$1 million
in total compensation (half of which is in stock options).
All firms, with the
exception of Asur, use stock options as a mean to align managements

interest with those of shareholders, but with the exception of Ryanair,
none of the CEOs own a significant stake in their companies.
Details about
the CEOs, their compensations and the composition of the Board are
presented in Figure 3 and Figure 4.
Figure 3 Brief presentation of management
Chief Executive Officers
Name
Age
American
Airlines
Ryanair
BAA
Gerard Arpey
46
Michael O'Leary
43
Mike Clasper
52
Years at the Company

Years as CEO
Education
23
3
MBA
17
9
n.a.
4
3
MA, Engeneering,
St John's College
Cambridge
CEO Compensation
Salary ('000)
Bonus ('000)
Other (000)
Stock Options (000.)
Total Compensation (000).)
Stock Ownership (% of Total)
Market Value of Stock Held (mm)
518.8
0.2
172.0
691.0
0.1%
1.14
505.0
127.0
49.0
502.0
1,183.0
5.44%
237
553.0
167.0
21.0
525.0
741.0
0.001%
0.1
Asur
Kjeld Binger
50
6 (Asur), 11
(CPH)
1
BSc in Structural
and Civil
Engineering
(Denmark)
N/A
N/A
N/A
0
1,317.0*
0%
0.0
* Compensation to all 5 executive officers including the

CEO
Source: Annual repor ts, Sta tutory filings
Figure 4 Board of Directors
Board of Directors
Number of members
Insiders
CEO of other Companies?
Related Co mpanies?
American
Airlines
Ryanair
BAA
Asur
13
1
7
2
9
1
no
no
9
5
yes
No
7
3
3
Yes
Source: Annual reports, Bloomberg, various public sources
3. Market coverage
Figure 5 Firms and markets sources of information
As
ur
B
A
A
Ry
an
air
A
A
Source of information
Markets
Firm
All firms, with the exception of American Airlines, have shares listed in
more than one stock exchange and thus garner significant investors interest
outside of their home markets.
In the case of Asur, its shares are more
heavily traded in the NYSE than in its home market of Mexico.
The two
airlines in our sample are leaders in their sectors, while BAA is the largest
airport group in the world and Asur is the only public airport company in the
Americas. As such and despite the travails of the air transportation sector,
all companies are relatively widely followed by the financial community and
command significant trading volumes. Nevertheless, with the exception of
American Airlines, most of the information on the companies is provided by
the firms themselves, since some of the sub-sectors in which they operate,
discount airlines and airport operations, are relatively new and with few
comparable companies. With respect to the view of research analysts, this
seems to be about evenly split between buy and hold recommendations,
despite their out-performance of the market, once again with the notable
exception of American Airlines.
Figure 6 Listings
Year of Listing
Main Listing
Other listings
Shares (million)
Free Float
Type of Stock
Source: Bloomberg
American
Airlines
1939
NYSE
no
161.2
157.98
Ordinary
Ryanair
1997
ISE
NASDAQ, LSE
754.3
660.32
Common
BAA
1987
London
ADRs
1,060.9
1,060.9
Common
Asur
2000
New York Stock Exchange
Mexican Stock Exchange
30.0
0.6941
Series B (85 %) and Ser ies BB (15%)
Figure 7 Market coverage

Analyst coverage
Number of Analysts
Analysts Recommendations (%)
Buy
Hold
Sell
Daily Average Trading Volume (mm)
2002
2003
2004
2005YTD
American Airlines
10
Ryanair
19
BAA
12
Asur
5+
50%
40%
10%
63.16%
26.32%
10.53%
50%
50%
0%
60.0%
40.0%
0.0%
2.14
8.06
5.13
4 .0 6
1.54
2.64
2.26
3 .41
4.98
7.01
6.43
6 .9 3
1.01
0.83
1.37
3 .2 7
Source: Annual reports, Statutory filings, Bloomberg, Zacks, Yahoo Finance and various public sources
4. Social responsibility
Due to the wide variability of business environments under which the
four firms operate, we have chosen to do a firm specific analysis of social
issues.
Figure 8 Social consciousness and responsibility
A
A
B
A
A
As
ur
Ry
an
air
Social
Social Consciousness
Consciousness
Very low
Very High
American Airlines
Given the poor operating performance of the past few years, driven by
(i) a steep fall-off in the demand for air travel, particularly business travel, (ii)
reduced pricing power due to increasing competition from low-cost carriers
and (iii) the aftermath of the terrorist attacks of September 11,
2001, American Airlines did not consider corporate responsibility a top
priority and stopped
publishing the Annual report for the Coalition for Environmentally
Responsible Economies in
2001.
AMR is therefore focusing on the mere respect of the many local and
federal environmental laws and regulations (air and water pollution, noise).
The company has been named as a potentially responsible party for

land or water contaminations in California, Oklahoma and Florida. AMR has
already accrued $ 6 millionn for settlement expected, but the actual amount
that AMR will have to pay is still unknown.
Ryanair
The perceived image of Ryanair as a low cost air carrier and provider of
value of its passengers is extremely important for the company. This image is
aligned with the operational model of the company, using modern fleet of
aircrafts
with
lower
fuel
consumption
reducing
the
emissions
and
environmental damage. In addition, its policy to operate from remote

airports resulted in numerous benefits for the communities in these regions,
increasing economic activity. However, major focus of the company is to be
perceived as a value provider for its passengers.
BAA
Given its handling of all the major airports in the UK BAA as well
undergoes
substantial public scrutiny. Recently the debate over the
environmental impact of the new Terminal at Heathrow and the new runaway
at Stansted has further heightened attention. BAA has always been receptive
to issues coming from airport communities and currently pledges 0.15% of
its pre-tax profits (equiv. to slightly under 1 mm in 2004). to 21st Century
Communities Trust, a charity it created.
Asur
As the monopoly provider of the main airport facilities in nine
southeastern Mexican cities, Asur faces significant public oversight and
societal constraints.
The Mexican Airport Law of 1995 established the
general framework regulating the construction, operation, maintenance and

development of Mexican airport facilities in the benefit of the public good.
Moreover, Asur is also subject to Mexican federal and state laws and
regulations relating to the protection of the environment. The level of
environmental regulation in Mexico has increased in recent years, and the

enforcement of the law is becoming more stringent.
Asur generally has a positive image with the Mexican public and a
strong reputation as a good corporate citizen, since it has greatly improved
the quality and scope of the facilities and services ofered by its nine
airports. However, in the near future the company could face criticism by
local
government oficials that want to build new airport facilities in their regions,
such as in Veracruz and
Quintana Roo (Cancun and Cozumel airports).
IV.
Stockholder Analysis
All firms in our sample, with the exception of BAA which has a more
widespread investor base made up of small private investors, have a strong
institutional shareholder base which commands over 2/3 of the total
outstanding shares of their companies.
This contrasts sharply with an
industry average of only 33%, and gives credibility to our argument that
corporate governance is relatively strong and minority shareholder rights are
well protected.
Moreover, the top 5 institutional shareholders in all
companies are among the largest and most diversified asset management
companies in the world. On the other hand and with the exception of Asur,
insider holdings are relatively small and in line with the industry average of
6%. All these facts suggest that the marginal investor for all firms is a well
diversified global institutional investor and we can thus proceed to carry out
CAPM based risk and return analyses for the companies. In the case of BAA,
even though the majority of the shares are held by private individuals, these
tend to be buy-and-hold investors with the majority of the trading is done by
institutional funds, which are therefore the marginal investor.
Most firms in our sample have only one type of share, common or
ordinary. We take a look at the exceptions below:
American Airlines
AMR Corporation has only common stock outstanding, but the board of
directors has already authorized the CEO to issue 20million shares of
preferred stock, probably to ease the deep financial stress of the company.
Book value of equity has been negative for the last 3 quarters and debt ratio
is around 90%.
Asur
Asur has two types of shares: B shares and BB shares. Series B shares
currently represent 85%
of the companys capital, while series BB shares represent the remaining
15%.
Each series B share and series BB share entitles the holder to one
vote at the general shareholders meeting.
However, holders of series BB
shares are entitled to elect only two members of the board of directors, while
holders of series B shares are entitled to name the remaining directors.
Under the companys bylaws, each shareholder or group of shareholders
owning at least 10% of Asurs capital stock in the form of
series B shares is entitled to elect one member to the board of directors for
each 10% interest that it owns.
Directors and senior management do not
own any shares of Asur. Pursuant to the companys bylaws, the holders of
series BB shares are entitled to appoint and remove Asurs CEO and one
half of the executive oficers reporting directly to the CEO. Currently,
four executive oficers report directly to the CEO, one of whom was
appointed by ITA as holder of the BB shares.
The shareholders distribution as well as details about institutional and
insiders holdings in the
companies are presented in Figure 9, Figure
10 and Figure 11.
Figure 9 Distribution of stockholders
Ot her 1%
100%
90%
80%
Insider 2%
Insider 31%
Insider 12%
70%
Ot her 88%
60%
50%
40%
30%
Inst it ut ional 87%

Insider 0.03%
20%
10%
Inst it ut ional
0%
12%
AA
Ry an
Figure 10 Institutional Holdings

Institutional
holdings
American Airlines
Number of shares held
(million)
% of Shares
Outstanding
Top 5 Holders
BAA
Asur
Ryanair
BAA
Asur
158.0
n/a
124.2
20.8
98.0%
70% +
11.6%
69.41%
Fidelity Management
Fidelity Investment
Legal & General
Primecap Management
Capital Group Company
Scottish Widows
Wellington
Management
Allianz Global
Newton Inv.
Mgmt
Threadneedle Inv.
Hall Phoenix
Guilder Gagnon
Holding
Wellington
Management
Janus
69.5
392.2
93.1
First State Investment

Management UK
Columbia Wagner Asset
Management
Oakmark International
Small Cap Fund
Schroder Investment
Management Group
American Express
Financial Corp
6.5
Causeway Capital
by Top 5 (million)
% of Shares
Outstanding
43.1%
Source: Bloomberg, Statutory filings
52.0%
8 .7 %
21.57%
Figure 11 Insiders holdings

American
Airlines
Ryanair
BAA
Asur
3.22
88.3
0.3
9.2
2% Daniel
Garton (CEO)
Jeffrey Campbell
12.47% Michael
O'Leary
0.03%
Sir Mike Hodgkinson
(Exec. Director) Joel
Hoerner
(Non-exec. Dir)
Tony Ward
(Exec. Director)
30.59% ITA
(15.01%)
Insiders ownership
(million)
% of Shares Outstanding
Major Holders
Anthony Ryan
Charles Marlett
(Executive VP)
Gary Kennedy
Ryan Family
members
JanisKong (Exec. D ir.)
Nafin (11.10%)
Copenhagen Airports
(2.50%)
Fernando Chico Pardo
(1.98%)
Source: Bloomberg, Statutory filings, various public sources
V.
Risk Profile
1. Market risk and return
In analyzing the risk characteristics of the four companies we first

looked at their returns over a five year period compared them to the returns
of a broad based market index such as the S&P 500. Figure 12 below
presents the rebased share prices of all four companies and the level of the
S&P 500 (Jan 2000 = 100).
Figure 12 Stock price performance

300%
A sur
250%
200%
150%
100%
50%
0%
0
S'
0
0
"'
S'
"'
> -- .
C)
'3
0
S'
"'
'3
"'
> -.
'3
0
"'
S'
"'
"'
"'
S'
"'
'3
> -"' 0
.
S'
"'
S'
'3
> -"' 0
"
S'
"
"'
S'
"
"'
> -- .
..;-
S '
S'
In general, three out of the four firms (Ryanair, BAA and Asur) did better than the market.
These results were expected for Ryanair and Asur since the two companies are at the growth stage of
their evolutionary cycle. BAA on the other hand, is more mature less volatile company characterized
by steady income stream and cash flows. AA suffered serious problems after swift change in its
operating environment - dramatic drop in air transport passengers, higher security related costs and
economic slowdown impacted negatively the company, especially after September 11 terrorist attacks
in the US.
To analyze the market risk of the four firms we regressed their returns against broad based
market index and used the coefficient of the regression as a measure of market risk. We used 5 year
monthly returns for the regression, with the exception of Asur, which was listed in late 2000. The
choice of index reflected the marginal investor in each company, assuming that each investor is
exposed to the same market risks in their respective market. Although based in Europe, Ryanair and
BAA attracted a number of large institutional investors with operations around the world and with the
ability to diversify their holdings more broadly. Therefore, the reference index used in the regression
for these companies was the Morgan Stanley Global Index. The reference index used for Asur was the
S&P 500, since it is traded mostly in the US and its marginal investor is based in the US. Our analysis
17
focuses on the regression coeficient (beta), the regression constant (used for
computation of Jensens alpha) and the regression R-squared. The results
from the regressions are summarized in Figure 13.
Figure 13 Risk return characteristics
Risk profile
American Airlines
Regression Beta
4.67
Reference index
S&P 500
Industry average beta
1.34
Average Risk free rate
Jensen's Alpha
-5.92%
2
R of Regression
Standard Error of Beta
Jansen's Alpha indust ry average
Ryanair
1.21
MS Global Index
1.80
4.59%
27.35%
BAA
0.35
MS Global Index
0.95
4.58%
4.43%
Asur
0.99
S&P 500
0.95
4.24%
28.42%
35.0%
0.56
27.0%
0.48
7.0%
0.17
15.0%
0.32
-4.27%
-4.27%
n/a
n/a
Source: B loomberg , analysis, www.damodaran.com
Slope of the regression - Beta

The coeficients of the individual regressions are the companies betas
and are used as a measure of the company exposure to market risk. The
analysis indicates that American Airlines is the company with highest
exposure to market risk (regression beta of 4.67), which is also more than 3
times the industry average. This is a reflection of high indebtedness and
negative and volatile earnings. Ryanair and BAA on the other hand have
regression betas much lower than the industry averages, while Asur is
close to its peers. The reasons behind the diferent risk profiles of each
firm will be examined in greater details further in the report.
We also examined the excess returns of each firm as measured by
its Treynor ratio. The
Treynor ratio measures the excess return of a stock given its level of risk
(non-diversifiable) and is computed with the formula below:
Rstock " Rf
Treynor =
!
Figure 14 below presents the Treynor ratios and the spread between
stock Treynor ratio and the market Treynor ratio over diferent investment
horizons. The results suggest that over the last 5 years Ryanair had highest
excess return compared to the market taking into consideration its risk.
None of the stocks outperformed the market over a 10 year period. Over the
last couple of years the best performing stock was Asur. These two stock
18
were excluded from the 10 year horizon analysis, as data for them was not
available.
19
Figure 14 Treynor ratios
70.0%
Excess return
80.0%
60.0%
70.00%
60.00%
50.00%
50.0%
40.00%
40.0%
30.00%
30.0%
20.00%
20.0%
10.00%
10.0%
0.0%
1 year
2 year
5 year
10 year
-10.0%
Tr
ey
no
r
rat
io
0.00%
-10.00%
-20.0%
-20.00%
Investment horizon
Treynor ratio AA
Treynor ratio Ryanair
Treynor ratio BAA
Treynor ratio Asur
Excess return AA
Excess return Ryanair
Excess return BAA
Excess return Asur
The calculations of the Treynor ratios are presented in Appendix II.

Intercept of the regression and Jensens alpha
We further used the intercept of the regression to compare the
actual stock performance of each company to the market expectation. For
each stock we computed Jensens alpha equal to
I n t e r c e p t R i s k F r e e r a t e x ( 1 B e t a ) , using the average
monthly risk free over the period. The results were annualized using the
formula:
( 1 + M o n t h l y e xc e s s r e t u rn )
12
The annualized returns indicated that on average all companies except

for American generated returns that exceeded the markets expectations. In
addition, comparing Ryanairs high excess return to the negative industry
Jensens alpha suggests that the company performed better than expected at
a time when the sector as whole did not meet the markets expectations.
R-squared
R-squared of the regression provides information as to what proportion
of the variability in returns could be explained by the regression, or in other
words what part of the variability in the returns (total risk) can be attributed
to beta (market risk). The market non-diversifiable risk represents
35%, 27%, 7% and 15% for AA, Ryanair, BAA and Asur respectively. The
remainder is company specific, non-diversifiable risk. While the relatively
low R-squared for Ryanair and Asur could be explained by the fact that they
were small, fast growing companies during the observed period and were
facing numerous company specific challenges in establishing their business
models, we were surprised to estimate that BAA was characterized by a
large proportion of (93%) of company specific, diversifiable risk. One
possible explanation could be the fact that airport operators revenues are
generally much more stable stream and have a fixed nature they are based
on long term contracts under which airport slots are sold to airline
companies. Even in the event of drop in passenger numbers the charge
payable to airports is generally steady.
Standard errors
The standard errors of the regression betas appear to be significant,
suggesting a wide interval for the possible values of the beta. This is one of
the reasons why we considered an alternative approach to measuring the
companies exposure to market risk, which is described bellow.
2. Bottom up betas
As an alternative approach to regressions betas we considered using
bottom-up betas for our analysis. This is mainly due to the following factors:
As growing companies Ryanair and Asur are likely to change
over time, hence alter their risk profile. In addition, their
capital structure is likely to change;
BAA is mature, steady company which risk profile is likely
to remain similar.
However, the standard error of the regression beta indicates

that it might nor be a reliable measure of risk;
American Airline as a company facing financial difficulties is
likely to change in the
long term if it is to return to profitability. Making a going
concern assumption about the business requires change in the
company and hence, its risk profile. Therefore we believed that
historical indicators might not be a reliable measure for the
future.
Estimates of unlevered beta

We used market information about firms in the sector to estimate the
risk profile of each of the companies. While the main stream of cash flows for
BAA and Asur come from their core business (Airport Development and
Maintenance), a significant part is generated from general retail services,
electronics and luxury goods retail and restaurants. Each of the businesses is
exposed to a diferent extend to market risks.
In order to capture these
diferences in the risk profile of each business we estimated the value of

each business and used these values as a weight to come up with an overall
beta of the firms. The value of each business unit was estimated by applying
a market Enterprise Value / Sales ratio to the respective revenue streams
from each business. The average unlevered beta for each respective sector
was then used to compute the firm beta. Calculation of the unlevered beta
of BAA
and Asur is presented in Figure 15 and Figure 16.
Figure 15 Unlevered Bottom up Beta for BAA
Estimated
Business line
Airport
Unlevered
Division
Weight *
Value
4,125
Comparable Firms
Airport
Development/Maintenance
Beta
0.73
Weight
46%
Beta
0.34
Retail
4,770
Retail (Consumer Electronics /

Luxury / Restaurants)
1.05
54%
0.56
Firm total
8,895
0.90
Figure 16 Unlevered Bottom up Beta for Asur

Estimated
Business Line
Aeronautical services
Non-aeronautical services
Commercial activities
Luxury
Restaurants
Access fees
Firm total
Value
684.2
228.5
76.3
38.2
38.2
152.2
912.7
Comparable Firms
Airports
Retail Perfume &

Cosmetics
Retail - Restaurants
Real Estate
Mgmt/Services
Unlevered
Division
Weight *
Beta
0.88
Weight
75.0%
Beta
0.66
1.08
0.82
4.2%
4.2%
0.05
0.03
0 .4 7
16.7%
0 .0 8
100.0%
0.82
Since Ryanair and American Airlines operate in a single business

we used the respective unlevered sector average betas (for European and
US firms) to compute bottom-up betas.
Bottom-up betas
After estimating unlevered beta for each firm we levered back the beta to estimate a firm beta
that reflects the additional risk associated with financial leverage. The sector betas were unlevered and
re-levered using the formulae bellow:
{3unle
vered
Where:
f3ma rket
f3te vered = f3unte vered
x(l + (1 - T )x(D I E))
(1+ (1- T)(D I

E)
T
D /E
applicable tax rate;

market value of debt / market value of equity
The market value of equity has been computed as current share price multiplied by the number of
shares outstanding. Details of the computation of the market value of debt are presented in Figure 21.
Figure 17 Beta estimation - summary
American
Beta measure
Airlines
Ryanair
BAA
Asur
Top down Beta
4.67
1.21
0.35
0.99
Bottom up Beta (levered)
6.26
1.24
1.42
0.82
Industry avg. Beta (levered)
1.34
1.80
0.95
0.88
3. Cost of equity
The computed bottom up beta has been use to compute the cost of equity for the firms. This is the
return expected return by equity investors in the observed companies and an important input for the
calculation of the overall cost of capital. The cost of equity has been calculate using the Capital Asset
Pricing Model and includes the following inputs:
Risk free rate of return (Rf) -in estimating the cost of equity we have used long term government
bond denominated in the respective currency to come up with the risk free. The current 10 year
US, German and UK bond yields were used in the analysis for AA, Ryanair and BAA respectively.
The 10 year maturity of the bond used reflects the long term investment horizon of the likely
projects. Other periods should be considered for shorter term projects. The analysis for Asur is
done in US dollars and the relevant risk free rate used in the analysis is the 10 years
US treasure
bond.
Market risk premium (Rp)- this measure reflects the excess return to which an investor is entitled
as a compensation for the higher risk he / she undertakes by investing in risky security rather than a
??
riskless one. We have used the geometric average of excess returns from
the US market over long term Treasury bonds for the period between
1929 and 2004. We assumed that the US market, being the largest and
most mature capital market in the world is a good proxy for the market
risk premium required by the investors. In the case of Asur, we added an
additional country risk premium of 1.8%, to account for the increased risk
to equity investors of investing in a Mexican- based company. The country
risk premium is based on the Mexican sovereign debt rating of Baa
(spread of 1.2%) and relative volatility of equity compared to bonds
(assumed to be 1.5 times). The country risk premium applied to Asur was
1.8%
Beta as computed above.
The cost of equity, for all companies except Asur, is defined as:
Ke = Rf + x Rp
The cost of equity for Asur, is defined as:
Ke = Rf + x (Rp+Country Risk)
We did not add any country risk premium for AMR, Ryanair or BAA, since the US,
Republic of
Ireland and the UK are all AAA rated countries.
The cost of equity computation is summarized in Figure 18.
Figure 18 Calculation of cost of equity
Cost of Equity
American Airlines
Risk Free Rate
4.27%
Beta
6.26
Risk Premium
4.82%
Country Risk
Cost of Equity
34.54%
Ryanair
3.47%
1.24
4.82%
-
BAA
4.5%
1.42
4.82%
-
Asur
4.24%
0.82
4.82%
1.80%
9.45%
11.30%
9.65%
4. Cost of debt
The other important component of the cost of capital is the cost of
debt. It reflects the perceived risk of the companies by lenders and debt
investors, or its credit risk. The two components of credit risk are default
risk (or the probability that a company will cease making payments as
agreed in the credit agreement) and non-recovery risk (or the probability of
23
recovery of the capital provided, once the company goes in default). More
detailed analysis of the borrowing policies of all firms is presented in
Section VII Capital Structure.
24
The cost of debt for each company has two components a risk free
rate of return and compensation for the credit risk associated with the
company. In estimating the credit risk for each company we took 2
approaches:
For American Airlines and BAA we looked at the current credit
rating of the company.
The companies had recently issued traded bonds which represent a good
indicator of the risk of their debt and hence we used the implied default
read on long term publicly traded debt.
Since Ryanair has not issued any publicly traded debt, we
computed synthetic credit
rating for the firm based on its interest rate cover ratio.
Asur currently has no debt.
After obtaining the respective credit ratings we looked at the credit
default spreads corresponding to each rating, which is a measure of the risk
premium required. For AA and BAA we used the credit default spread
embedded in current yields of publicly traded debt. We computed the cost of
debt for each by adding the default spread to the risk free rate for the
respective company. The results are presented in Figure 19.
Figure 19 Calculation of cost of debt
Cost of debt
Credit Rating
Spread vs. Treasury (a)
Risk Free Rate (b)
Pre-tax Cost of Debt (c) = (a) + (b)
Marginal Tax Rate
American Airlines
CCC
9.66%
4.27%
13.93%
35.00%
Ryanair
A1.00%
3.47%
4.47%
12.50%
BAA
A+
0.70%
4.47%
5.17%
30.00%
Asur
n.a.
0.00%
0.00%
0.00%
33.00%
13.93%
3.91%
3.62%
0.00%
After Tax Cost of Debt (c) * (1-tax rate)
After computing the cost of debt for each firm we computed the after
tax cost of debt. The after tax cost of debt reflects the fact that interest
payable on debt is deductible from the operating income for tax purposes and
results in tax savings for the firms.
In the case of American Airlines, the company cannot benefit from
lower tax bill by financing its operations with debt. The company has net
operating loss before interest and hence pays no taxes. In addition American
Airlines has a huge accumulated tax loss, which could be carried forward and
used to ofset future taxable income. Therefore the company does not enjoy
tax benefits from the use of debt and we excluded this component from the
cost of capital calculation.
5. Cost of capital
Market value of equity
The market value of equity for each firm has been estimated by
multiplying the number of shares outstanding for each company by the
current share price. The market values of equity are presented in Figure 20.
Figure 20 Market values of equity
Market Value of Equity (million)
American Airlines
Market Value of Equity (million)
1,862.2
Ryanair
4,352.4
BAA
6,153.3
Asur
912.7
Source: Bloomberg
Market value of debt

In estimating the market value of debt we again took two approaches:
Use the current value for debt that is publicly traded and
information is obtainable;
Project interest and principal payments and discount them back
at the current cost of debt as estimated above.
In projecting the interest payments we have used the current interest
payments to book value of debt ratio as a proxy for the average interest rate
payable on the debt; and the average maturity of the outstanding debt.
In addition, AA, Ryanair and BAA have significant operating lease
commitments, which are
not recorded in their books. Such commitments require that the firms make
regular payments to the lessors in exchange for the use of assets (aircrafts,
real estate). Such transactions are treated as rent for accounting purposes
and lease payments are recorded as operating expense. The essence of the
transaction, however, is financing the use of the assets and lease payments
could be viewed as interest and principal repayment of a loan provided for
the acquisition of the assets. Moreover, the companies are committed to
making these payments for a long period of time.
We treated lease commitment as another form of debt and discounted
the future lease payments at the current cost of debt to estimate their
current market value. The present value of all future lease payments have
been included in
the market value of the companies debt and
the
operating income has been adjusted by adding back the operating lease
payment and subtracting the estimated depreciation charge associated with

recording the leased assets in the companies books.
Summary of the market value of debt calculation is presented in Figure 21.
Figure 21 Estimation of market value of debt

Market value of debt (million)
American Airlines
Book Value of Debt
14,254.0
Current cost of debt
13.93%
Average maturity
7.3
Interest Expense
894.0
Market Value of Debt (a)
6,261.3
PV of Oper ating Leases (b)
5,822.57
Total Market Value of Debt (a) + (b)
12,083.9
Ryanair
1,178.7
4.47%
6.4
53.3
1,179.6
181.64
BAA
4,578.7
5.17%
11.1
143.0
4,618.2
388.82
Asur
0.00%
-
1,361.3
5,007.1
Debt and Equity ratios

The market values of debt and equity have been used as weights in
calculating the weighted average cost of capital.
Figure 22 Capital weights
Market Value of Equity (a)

Market Value of Debt (b)
Firm Value (a) + (b)
D/(D+E)
E/(D+E)
American
Airlines
1,862.2
12,083.8
13,946.0
86.65%
13.4%
Ryanair
4,352.4
1,361.3
5,713.7
23.82%
76.2%
Industry
Avg.*
33% - 49%
67% - 51%
BAA
6,153.3
5,007.1
11,160.4
44.86%
55.1%
Asur
912.7
912.7
0%
100%
Industry
Avg.**
9% - 35%
91% - 65%
Source: Bloomberg, own analysis, www.damodaran.com

*Air lin e Transpor tation industry, **Airport main tenance an d operation industry
Comparing the debt ratios for the analyzed companies to the industry
average we observe that AAs financial leverage is significantly higher than
that of the average for the sector (between 39% for European companies and
49% for US airlines.). On the other hand, Asur is rather unusual in its
industry since it does not have any debt.
These inputs are used in computing the cost of capital for each firm.
The weighted average cost of capital is computed as follows:
W A C C = K e x E / ( D + E ) + K d x D /( E + D )
The inputs and results are summarized in
Figure 23.
Figure 23 Calculation of cost of capital

Cost of capital
American
Beta
Cost of Equity
E/(D+E)
After-tax Cost of Debt
D/(D+E)
WACC
Airlines
6.26
34.54%
13.35%
13.93%
86.65%
Ryanair
1.24
9.45%
76.18%
3.91%
23.82%
BAA
1.42
11.30%
55.14%
3.62%
44.86%
Asur
0.82
9.65%
100.00%
0.00%
0.00%
16.69%
8.13%
7.85%
9.65%
Not surprisingly the company with highest cost of capital is American

Airlines, reflecting its high risk. The high cost of capital is driven by two
factors high beta (volatile earnings and high debt to equity ratio) and high
cost of debt (low credit rating because of high debt and huge interest
payments). The lowest cost of capital, that of BAA, reflects the fact that
the company is relatively mature and stable, with predictable earnings
and cash flows and is less subjective to market fluctuations.
The estimated cost of capital of and cost equity are the hurdle rates that
should be used in
capital allocation decisions in each company. These are the minimum
acceptable rates against performance of each new project considered should
be measured return on equity against the cost of equity and return on
capital against cost of capital. In addition, the cost of equity and cost of
capital rates are the rates at which projects cash flows should be
discounted to estimate their net present
valu
e.
VI.
Investment Return Analysis
The ability of each firm to grow and create value for its stockholders
ultimately depends on its management capability to identify and undertake
projects that generate returns exceeding the cost of capital employed. In this
section we will analyze the quality of the projects that the four companies
undertake ad review the past performance of the companies as measured by
indicators such as Return on Capital (ROC) and Return on Equity (ROE).
1. Typical project
The companies, subject to our analysis are involved primarily in 3
types of businesses air transportation, aeronautical services and retail
services. Aeronautical services include operation and maintenance of airport
and all related facilities that are used by passengers and airlines. Some of
the characteristics of a typical project for each business are presented in
Figure 24.
Figure 24 Typical projects

Business
Typical Project / Flow Characteristics
Airlines
Fleet Acquisition: Long term payment, Long life of the asset

New Route Opening: local offices and labor force. Long term and
different currencies
Set up of new bases long term, may have option value to expand in
new routes at a later stage.
New Terminal buildings and maintenance. Long term, single currency
Cash flows are volatile and sensitive to macroeconomic risk factors.
Aeronautical Services
Medium to long term

Cash outflows that are primarily in local currency,
but there could be a significant dollar component
Cash inflows that are almost exclusively in local currency
Part of cash flows related to passengers can be volatile and sensitive to
global risk factors.
Another significant part of cash flows is less volatile as it consists of
fixed payments made by airlines for use of facilities and servicing.
Medium term
Retail
Cash outflows that are almost exclusively in local currency

Cash inflows that are primarily in local currency,
but there could be a significant dollar component
Can be very volatile, specially sensitive to global risk factors
In general, the time horizon of the core businesses of companies is long

term with the exception of the retail business which has shorter duration of
its projects. Airline and retail businesses cash flows are sensitive to macro
risk factors and certain cyclicality (following the economic cycles) might
exist. Aeronautical services business, however, is less exposed to such
cyclicality as the bulk of its revenues are generated from long term contracts
with airlines for the use of their facilities. Even in the case of an airline to
meet its payments, big international hubs such as Heathrow and Gatwick
operated by BAA have a solid backlog of airlines, which are ready to
purchase potentially available landing slots.
2. Measuring Returns
ROE and ROC
For each of the company we computed the Return on Equity (ROE) and
Return on Capital (ROC) as follows:
where:
ROE =
NetIncome
(BVEt +
BVEt !1 )
/2
ROC =
O
p
.
In
come(1 ! T )
(BVEt + BVDt + BVEt !1 + BVDt !1 ) /
2
BVE
- book value of equity
BVD
- book value of debt
- tax rate
- time period
The historical returns are presented in

Figure
25
and Figure 26.
Figure 25 ROE, ROC and industry averages
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
American Airlines
ROE
ROC
Ry anair
BAA
ROE (indusry average)
Asur
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
ROC (industry average)
Source: Analysis and industry average from www.damodaran.com
Figure 26 Investment returns
ROE
ROC
American
Airlines
3
n.m.
8.54%
Ryanair
14.69%
16.94%
BAA
8.50%
5.59%
Asur
5.15%
4.76%
Economic Value Added

We further compared the obtained returns to the cost of equity and cost of
capital. The results are presented in Figure 27 and Figure 28.
The ROE calculation is not meaningful as it has negative net earnings and negative book value of equity
Figure 27 Equity Economic Value Added

4
ROE (a)
Cost of Equity (b)
Equity Return Spread (a)-(b)
Average book value of equity
Equity EVA
American
Airlines
nm
34.54%
nm
(268.0)
Ryanair
14.69%
9.45%
5.24%
1,574.7
BAA
8.50%
11.30%
-2.80%
4,797.0
Asur
5.15%
9.65%
-3.23%
1,057.7
n.a
82.5
(134.5)
(47.6)
From the companies included in the analysis only Ryanair created

excess returns on equity
(Return in Equity Cost of Equity). It created a positive equity economic
value added (EVA) of
82.5 million based on the last 12 months results. At the same time the airline
industry destroyed on average value of $ 4,95765.7 in 20045. Both BAA and
Asur had return on equity lower than their cost of equity. Comparing these
results with the positive Jensens alpha values calculated in Section IV, we
can conclude that although both firms performed better that the market
expected, they still have not generated equity returns in excess of their
equity costs.
Multiplying the spread between the return on capital and cost of
capital for each company by the average book value of total capital (equity +
debt) we estimated the economic value added for each firm.
Figure 28 Economic Value Added
ROC
Cost of Capital (b)
Capital Return Spread (a)-(b)
Average book value of capital
EVA (million)
American
Airlines
8.54%
16.69%
-8.15%
13,862.5
Ryanair
10.14%
8.13%
2.01%
2,652.8
BAA
5.59%
7.85%
-2.27%
8,427.0
Asur
4.76%
9.65%
-4.89%
1,057.7
(1,129.5)
53.3
(191.0)
(51.7)
Again the only company that created value during the observed
period was Ryanair. The average EVA for the sector in 2004 was
$9,551.76
3. Future outlook
The ability of any of the companies to generate positive excess returns
depends on its competitive
advantages and their sustainability in the medium and long term. In this
section we look at some key
The ROE calculation is not meaningful as it has negative net earnings and negative book value of equity
Equity EVA for US market used as a comparison. Source: w ww.damodaran.com
6
EVA for US air transportation sector used as comparable. Source: www.damodaran .com
5
indicators for the air transportation sector, which could help us to

understand how the companies are positioned for the future.
Figure 29 Comparison of key figures airline transportation
US Industry
EU Industry
Traditional and low cost air carriers at a glance
AMR
RyanAir
Average
Average
Revenue Yield per Passenger Mile (RAPM) ($ cents)
11.5
n.a.
12.3
15.8
Load Factor
72.8%
84.0%
73.4%
64.8%
Number of Planes
1,013
79
213
80.9
Revenue per Employee ('000 $ or EURO)
202.4
489.3
174.6
n.a.
Average Age of planes
12.5
n.a.
11.2
n.a.
Source: AMR annual Report, Ryan Air Annual Report, ATA (Air Transport Association), AEA (association of European
Airlines) and Elfaa (association of low fares airlines) Economic reports
The analysis suggests that while Ryanair is relatively small airline

in terms of number of aircrafts it has more eficient operations which is
evident from higher load factor (seats capacity utilization) and higher
revenues per employee ($635K7 compared to $202K for American Airlines).
Further analysis supports the fact that Ryanair relies on operational
eficiencies to maintain its cost
advantages:
Figure 30
KPI
Key Performance Indicators
Passenger per employee

Average fare (Euros)
Lost bags per 1000 passengers
Employees per aircraft
Schedule on time
Ryanair
Low cost carriers
Industry Average
10,050
40.0
0.5
35
93.0%
6,000
86.3
n.a.
n.a.
85.0%
1,069
206.6
11.3
n.a.
81.2%
Source:Ryanair, Association of European Low Cost Airlines (www.elfaa.com)
On average Ryanair benefits from much higher passenger to employee

ratio and much lower employees to aircraft ratio, which helps the company
to maintain cost eficiency. Indicators such as lost bags per 1,000 and
schedule on time suggest operational eficiencies and customer satisfaction.
One of the reasons for this is the structure of the aircraft fleet that Ryanair
uses as compared to its peers Ryanair currently employes predominantly
two types of aircrafts Boeing 737-200 and Boeing
737-800 and a program whereby all aircrafts will be replaced with 737-800
machines is in place.
American Airlines, on the other hand, has a large fleet comprising of 11

diferent types of aircrafts, which have diferent technical and maintenance
requirements, adding to the costs of the company.
Composition of the fleet is presented in Figure 31.
At approximate exchange rate of $1.3 per Euro 1

Figure 31 Composition of the aircraft fleet American Airlines
Number of
Age and Costs
Long Haul
Short Haul
Total
planes
727
286
1,013
Number of different
Average Age
models
7
4
11
(years)
12.5
4.8
10.3
Source AMR and ATA Economic Report
Conclusions
In conclusion, we believe that in the medium term Ryanair can sustain
competitive advantages which will allow the company to earn return on capital
in excess of its cost of capital. The company has an investment program aimed
at increasing its capacity from the current 15 million passenger per year to 50
million by 2010. This would enhance Ryanairs growth, however at the expense
of huge capital spending.
American Airlines, on the other hand is facing fierce competition in a
market where it clearly lacks significant competitive advantages. Excess
domestic capacity, fragmented market and increasing competition from low cost
carriers such as JetBlue and SouthWest Airlines are all factors that have negative
impact on the company. We believe that the renewal of the fleet is crucial for AMR: the
current aged and too diverse fleet generates, by itself, an ineficient cost
structure (more maintenance costs, diferent training for pilots and mechanics,
different scheduling of engines check up). Moreover the average age of AMR
fleet is over 10 years and this represent a huge cost in term fuel (old airplanes
are less eficient) landing fees at the airports (old airplanes are heavier) and
customer satisfaction (old airplane are less comfortable and therefore less
attractive). Finally the company is targeting expansion in international markets,
where it believes it can enjoy higher growth an margins, but new long haul
planes are needed to successfully compete in that arena. AMR average age of
long haul planes is close to 13 years. Overall we believe that AMR as a

traditional flag carrier should focus on the international long haul segment (not
threatened by low cost carriers, as passenger need to be comfortable in a long
trip) by renewing its fleet on ofering a vast network of routes thanks to
international alliances.
Returns on capital and operating margin long term are going to be positive
again, but below the peaks
of the mid nineties.
In the case of BAA what project it takes and the associated returns
depend on negotiations with the CAA, the regulatory authority. Negotiations
take place every place 5-years with the next one scheduled to be in March
2008.
Tarifs
are
currently
set
below
their
market
prices
and
the
consequence of this is that BAA shareholders are subsidizing the airlines

landing at its airports. We
think that this situation is very unlikely to change in the short term, at least
until the new review in
March 2008.
Similarly for Asur, the company faces mandatory capital investments
which are negotiated with the Mexican Ministry of Communications and
Transportation every five years. In the coming years, Asurs main investment
project will be the construction of a second runway at the Cancun airport, to
handle the higher than expected growth in passenger volumes. This project
has already been moved forward five years from its original start date,
signaling the companys strong confidence in its growth
prospects for the coming years.
VII.
Capital Structure Choices
1. Current financing mix

Figure 32 below summarizes the current debt structure of American Airlines,
BAA and Ryanir (Asur has no debt). As can be observed, the three companies
employ very diferent kinds of debt:
A m e r i c a n
Airlines
AA has outstanding a wide variety of notes, from bank debt, plain vanilla
bonds to more structured debt instruments. On one hand this is driven by
the necessity to tailor the debt to match the companys cash flow profile
and risk, which is very specific. On the other hand this is a symptom of the
financial difficulties the company has been going through and the need to
raise capital in any form it was available. With this respect, it is worth
noticing that the BoD has even authorized (but not yet issued) the emission of
20million preferred shares.
R y a
nair
Ryanair has only bank debt outstanding and this is a reflection of both the
early stage of the life cycle is in and its ability to generate cash flows, thus
funding growth largely with internal funds. We expect the financing mix to
change as the company continues to expand and it will need to access the
public bond markets to fund its future projects.
B
A
BAAs debt is almost all made up by straight bonds (82% of the total), with
the rest coming from bank debt and two outstanding convertible bonds
issues. This is due to the high stability and predictability of its cash flows,
which has given BAA easy access to the public the bond markets. The
company has issued substantial debt over the last years (Gross Debt went
from approx. 1.0 bn in 1995 to over 4 bn today with D/E climbing from
20% to 81%) as a result of the expected capex expenditures connected with
the fifth terminal at Heathrow and other projects.
A s
ur
Asur has no debt outstanding as it has been able to fund all its capex
requirements through internal cash-flows.
Figure 32 Current debt characteristics
Company
Americal Airlines
Type of Financing
Secured Variable and Fixed rate
indebtness
Enhanced Equipment trust
certificates
Special facility revenue bond
Credit Facility Agreement
Senior Convertibles Notes
Debentures
Notes
Other
Straight Bond
Straight Bond
Straight Bond
Straight Bond
Interest Rate on
Books
Maturity
6,340.0
2.03% - 9.16%
2021
3,707.0
946.0
850.0
619.0
330.0
303.0
1,159.0
200.0
400.0
300.0
250.0
2.14% - 9.09%
6.00% - 8.50%
9.150%
4.25% - 4.50%
9.00% - 10.20%
7.88% - 10.55%
2011
2036
2010
2023-2024
2021
2039
7.875%
5.750%
11.750%
8.500%
2007
2013
2016
2021
Amount (mm)
BAA
Straight Bond
Straight Bond
Straight Bond
Convertible Bond
Convertible Bond
Secured bank debt
Secured bank debt
200.0
900.0
750.0
424.0
425.0
80.3
84.2
6.375%
5.750%
4.500%
2.940%
2.625%
n.a.
n.a.
2028
2031
2014
2008
2009
2005
2006
Ryanair
Secured bank debt

Secured bank debt
88.1
92.1
n.a.
n.a.
2007
2008
Secured bank deb t
608.2
n.a.
2009 - 2016
In addition to the balance sheet debt 3 of the 4 companies analyzed

have relevant off-balance sheet items related to operating leases that we
summarize below.
Figure 33 Debt embedded in operating lease commitments

Off Balance Sheet Debt
PV of Operating Leases
As a % of total market value of
debt
American Airlines
5,822.57
Ryanair
181.64
BAA
388.82
48%
13%
8%
Asur
-
2. Trade off on Debt and Equity

Each company advantages and disadvantages of debt are analyzed in the table
on the next page.
Figure 34 Assessment of Debt / Equity Trade off

Factor
Added discipline
American Airlines
Ryanair
BAA
Asur
AMR debt is so overwhelming that an increase in debt

would not be a benefit for the company. The
management is struggling to bring the p&l back to
black in order to be able to meet the payments for the
debt
Ryanair's stockholder base is quite

concentrated and major shareholders are
represented in the management. The added
discipline from increased debt would not be
major benefit for the company
Tax benefits
Since the company has been losing money in the past 5

years, there are no tax advantages related to the use of
debt. Moreover due to high tax losses carried forward it
is quite likely that the company is not going to pay
taxes in the next few years. This is also reflected in our
Cost of capital calculations
The marginal tax rate of the company is

12.5% while the effective tax rate is only
9.6% (9.5% average over the last 3 years)
BAA would not benefit from an increase in

debt as it is already very close to its optimal
debt ratio and an increase would therefore
push up its cost of capital. Furthermore there is
very little to gain from a discipline perspective
given the highly regulated environment in
which it operates, which already restricts
management discretion
BAA effective tax rate is 30% with nearly no
variation over the years and it is equal to the
marginal tax rate
The additional debt is likely to

provide little in added
management discipline, since
Asur is a highly regulated
company with strong
shareholder representation in
management and a primarily
institutional shareholder base
Asur could derive a significant
tax benefit if it carried some debt
in its balance sheet, since it faces
a 33% marginal tax rate
Bankruptcy risk
With a negative book value in the past 3 quarters, a

negative operating income in the past 4 years and a
88% debt ratio the company is clearly risking
bankruptcy. The company has no sustainable
advantage in the competitive arena and in the 2004
annual report the management stated that "the reduced
pricing power, resulting mainly from greater cost
sensitivity on the part of travelers (especially business
travelers), increasing competition from low-cost
carriers and the continuing increase in pricing
transparency resulting from the use of the Internet, will
persist indefinitely and possibly permanently".
The earnings of the company have been

growing steadily, although in the long term
this might be more difficult to sustain. In
general, the company is less volatile to the
economic cycle relative to its peers because
of more efficient cost structure. In addition,
it provides low price services which might
be preferred in times of recession, i.e. some
counter-cyclicality may exist.
Bankruptcy risk is very remote thanks not only

to the very stable nature of its cash flows, but
most importantly to the regulatory
environment and the resulting indirect
oversight on its activities exercised by the
British government through the Civil Aviation
Authority
Given that Asur's cashflows are

highly sensitive to external
shocks, it would face
considerable bankruptcy costs if
it were to carry significant
amounts of debt
Agency costs
Typical projects for the company are expansion of

aircraft fleet and set of of new hubs. Funds are easy to
track and agency costs are not expected to be high
Typical projects for the company are

expansion of aircraft fleet and set of of new
hubs. Funds are easy to track and agency
costs are not expected to be high
Asur's well-regarded
management team is largely
drawn from the ITA consortium
which is the largest shareholder
in the company
Future flexibility
The company has at the moment no financial

flexibility: covenants on debt are stringent and the
price war on the market can be met only renewing the
fleet. The company also intend to expand in the
international markets in search for higher growht and
markets, but do not have the financial resources to fully
support such initiatives.
As the company is in its growth phase, the

need for financial flexibility is high.
Ryanair has a big number of projects launching new routes and setting up new
bases every year and the ability to take such
projects in the future depends on its
financial flexibility.
Agency costs are minimized by the restrictions

imposed on the projects BAA can take and the
return on capital is allowed to earn, which is
negotiated with the CAA every 5 years. Given
these factors, BAA's stock has very similar
characteristics to a bond, minimizing therefore
conflicts of interest between stockholders and
lenders
The company has in theory excess debt
capacity, although using debt to fund new
projects (assuming similar returns to the
current ones) would be value destroying, given
the current negative ROC-WACC spread.
Notwithstanding this, BAA plans to use debt
to fund the very large capital commitments it
will face over the next 5 Year, which are
almost totally due to the construction of a fifth
terminal at Heathrow (2004-2009 total
expected capex is over 6.0 bn. with average
capex/sales climbing from 27% in 1993-2003
to 49% in 2004-2009)
Page 36
Given Asur's considerable

visibility on its investments
requirements, additional debt is
unlikely to take away much
future financing flexibility
Based on the above analysis, we draw the following conclusions:
BAA and Asur have the ability to carry higher debt ratios given the
relative stability of their cash flow profile compared to Ryanair and
American Airlines. Whereas BAA debt ratio is a at the correct level, Asur
has substantial untapped debt capacity which it should use
Given its profitability (and the resulting capacity to reap the tax
advantages of debt) and relative lower sensitivity to economic cycles
compared to other airlines, Ryanair should be able to have a higher debt
ratio.
American Airlines debt ratio is clearly too high, even though it must be
noted that AAs distress
is more the result of its negative operating profitability than
excessive debt in the first place.
VIII.
Optimal Capital Structure
1. Current Cost of Capital / Financing Mix

In the table below we computed the current cost of capital for each of
our companies, with the cost of equity based on a levered bottom-up beta and
using market values to compute the debt/equity weights. As expected given
their operating and financial profiles, American Airlines has the highest cost of
capital and BAA the lowest. Asurs cost of capital is equal to its cost of equity
given that it is only equity financed.
Figure 35 Current cost of capital and inputs for calculation of optimal cost of capital
Cost of capital - summary
American Airlines
Ryanair
BAA
Cost of Equity
34.54%
9.45%
11.30%
14%
4%
4%
D/(D+E)
87%
24%
45%
E/(D+E)
13%
76%
55%
Rating
CCC
AA+
Stock Price
10.2
5.77
5.8
Cost of Capital
16.69%
8.13%
7.85%
Firm Value (million)
13,946.0
5,713.7
11,160.4
Asur
9.65%
0%
0%
100%
Not Rated
30.45
9.65%
912.7
2. Cost of Capital at Diferent Financing Mixes

37
As the next step in our analysis to estimate the optimal capital

structure we used the cost of capital approach to compute a diferent WACC
at each debt ratio for our companies. The table below
summarizes our results
Cost of capital
38
Debt Ratio
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
American Airlines
10.07%
9.76%
9.63%
10.96%
11.78%
13.86%
20.06%
22.06%
24.06%
26.06%
Ryanair
8.16%
8.09%
8.13%
8.71%
11.30%
13.33%
14.53%
21.40%
23.40%
25.40%
BAA
8.82%
8.58%
8.39%
8.24%
8.18%
8.90%
11.03%
14.79%
15.99%
17.19%
Asur
9.65%
9.48%
9.39%
9.56%
9.93%
12.01%
12.48%
13.89%
14.50%
15.11%
Based on the objective of minimizing the cost of capital, the table above yields
the following results:
American Airlines: assuming a normalized EBIT of $ 2600million
(which results in a ROC of
8.54%, American Airlines should reduce its debt/capital ratio from the
current 87% to 20%.
Ryanair: contrary to the result of our qualitative analysis, this

analysis shows that Ryanair is currently over levered and should
decrease its debt/capital ratio from its current 24% to 10%.
BAA: BAA is currently at its optimal capital ratio (the actual optimum is
at the current debt ratio of around 45%). The higher optimum can be
explained by the low variability and uncertainty of its
profitability
due
to
the
regulatory
environment
in
operating
which
BAA
operates. This enables the management to design the companys debt

profile with a low level of error.
Asur: The company is clearly under levered and should move to a

20% debt/capital ratio in order to maximize firm value.
3. Firm Value at Optimal
The following tables present the computed expected Firm Value and
Stock Price (both assuming positive growth and no growth) if our companies
were to move to their optimal capital ratios.
Figure 36 Effect of moving to the optimal capital structure
Optimal Ratios
American
Airlines
11.01%
4.07%
20.00%
80.00%
Cost of Equity
(D+E)
(D+E)
Rating
Current stock price
Cost of Capital
Ryanair
8.62%
3.34%
10.00%
90.00%
BAA
11.30%
3.62%
44.86%
55.14%
BB+
10.20
9.63%
AAA
5.77
8.09%
A+
5.8
7.85%
Firm Value
(1)
(million)
24,173.0
5,742.7
11,160.4
Firm Value
(2)
(million)
33,107.3
5,763.7
$74.99
$5.80
$130.41
$5.83
Stock Price at optimum
(1)
Stock Price at optimum(2)
Asur
10.56%
4.72% D/
20.00% E/
80.00%
A- (probably capped at
BBB)
30.45
9.39%
938.1
951.2
31.30
31.74
(1) assuming no growth, (2) assuming 3% growth

* BAA is currently at its optimum debt ratio
Figure 37 Firm value at the optimum capital structure

Firm value at optimal capital
American
structure
Airlines
Debt Ratio
Current
86.65%
Optimal
20.00%
Rating
Current
CCC
Cost of Capital
Firm Value
(1)
Ryanair
23.87%
10.00%
A-
BAA
44.86%
A+
Optimal
Current
Optimal
BB+
16.69%
9.63%
AAA
8.13%
8.09%
7.85%
7.85%
Current
Optimal
13,946.0
24,173.0
5,716.8
5,742.7
11,160.4
11,160.4
10,227.0
25.9
0.0
Change in firm value

(1) assuming no growth
Asur
0%
20%
Not Rated
A- (probably
capped at
BBB)
10.13%
9.59%
912.7
963.5
50.8
As the table shows American Airlines is the company that would benefit the
most from the transition, whereas the efect on Ryanair and Asurs value would
be more limited. More in detail:
American
Airlines:
strong
deleveraging
(from
86.65%
to
20%
debt/capital) will be dificult to execute in the short term, barring a

Chapter 11 situation which in any event would significantly impact the
equity value as well. The crucial aspect is that we believe that AMR cannot
but maintain current Capex. We therefore believe that even though
necessary, moving to
the Optimal capital structure is going to be a
very long process. More specifically, the company needs to reinvest in

the fleet (particularly the long haul fleet: the only one that cannot be
threatened by low cost carriers, and the one that is operating where the
company believes the higher growth and margins are) in order to be able
to compete in the market and get back to profitability.
Ryanair: the company should focus on reducing its debt/capital ratio
by raising more equity
capital to fund its future projects, instead of using debt as it has
done in the last years.
Asur: raising its debt ratio by issuing debt would benefit the company not
only from an increase in firm value, but also from opening a new capital
source, therefore facilitating access to it in the future. We estimate, that
although Asurs interest coverage ratio at its optimum 20% debt ratio
would warrant an A- rating, this would probably be capped at BBB,
which is the sovereign debt ratio for Mexico.
4. Optimal capital structure
APV approcah
We also applied the APV approach with American airlines in order to
verify the optimal capital structure we have identified earlier. Given its state
of financial distress we believed that this additional approach can give us
more insight about their real debt capacity.
Our basic assumptions in this
process are:
Cost of Bankruptcy: direct and indirect costs of bankruptcy are estimated
very high given the high capital intensive business model and the complex
regulations of the industry. Our guess estimate is
45% of firm value.
Tax rate is assumed at 35% stable
Unlevered firm value is calculated as Current Firm Value tax benefits on
debt + Expected
Bankruptcy cost.
Figure 38 APV optimal capital structure - assumptions
Basic
American Airlines
Assumptions
Current Debt ratio
86.8%
Unlevered Firm Value =
$12,615.13
Current Firm Market Value
$13,923.99
Tax rate
Debt Market value
Tax Benefits on Debt
Expected Bankruptcy costs
Bankruptcy probability
Cost of Bankruptcy
35%
$12,083.85
$4,229.35
45%
47%
$2,920.49
We have undergone an iterative process that yielded us the capital structure

that maximize the firm
value.
Figure 39 AA optimum debt level APC approach
Unlevered
Tax
Debt
Firm
$ Debt
Rate
ratio
Value
Expected
Tax
benefit
Rating
Prob of
Default
Bankruptcy
Costs
Value of
Firm
0%
10%
20%
$0.00
$1,307.21
$2,707.69
35%
35%
35%
$12,615.13
$12,615.13
$12,615.13
$0.00
$457.52
$947.69
AAA
AAA
A+
0.01%
0.01%
0.40%
$0.57
$0.59
$24.37
$12,614.57
$13,072.07
$13,538.46
30%
40%
50%
60%
70%
80%
87%
90%
$4,198.77
$5,515.42
$6,687.62
$7,457.22
$9,010.81
$10,679.48
$11,072.48
$11,614.96
35%
35%
35%
35%
35%
35%
35%
35%
$12,615.13
$12,615.13
$12,615.13
$12,615.13
$12,615.13
$12,615.13
$12,615.13
$12,615.13
$1,469.57
$1,930.40
$2,340.67
$2,610.03
$3,153.78
$3,737.82
$3,875.37
$4,065.24
ABB
B
CCC
CCC
CCC
0
CC
1.41%
12.20%
26.26%
50.00%
50.00%
50.00%
65.00%
65.00%
$88.80
$756.99
$1,580.55
$2,796.46
$2,896.33
$3,003.60
$3,731.89
$3,774.86
$13,995.90
$13,788.54
$13,375.25
$12,428.70
$12,872.59
$13,349.35
$12,758.61
$12,905.51
Source Aswath Damodaran, AMR Annual Report, our estimates
The analysis yields us an optimal debt ratio of 30%, not far from the
results obtained with the optimal capital structure model.
However, given the high subjectivity of the bankruptcy cost, we have
run a sensitivity analysis that, taking into account also the tax rate, provide
a measure of the debt ratio that maximize the firm value.
Figure 40 Sensitivity analysis tax rate (horizontal axis) and bankruptcy costs (vertical axis)
$0.30
20%
25%
30%
35%
40%
45%
50%
55%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
80%
30%
30%
30%
30%
30%
30%
30%
30%
30%
30%
80%
80%
30%
30%
30%
30%
30%
30%
30%
30%
30%
90%
80%
80%
30%
30%
30%
30%
30%
30%
30%
30%
90%
80%
80%
80%
30%
30%
30%
30%
30%
30%
30%
90%
90%
80%
80%
80%
30%
30%
30%
30%
30%
30%
90%
90%
90%
80%
80%
80%
30%
30%
30%
30%
30%
90%
90%
90%
80%
80%
80%
80%
30%
30%
30%
30%
90%
90%
90%
90%
80%
80%
80%
80%
30%
30%
30%
60%
90%
90%
90%
90%
90%
80%
80%
80%
80%
30%
30%
5. Sector and market debt ratios

Sector debt ratios
In addition, we looked at the sector and the debt ratios at which other
firms in the air transportation industry operate. We looked at a sample of 44
companies at analyzed their debt to capital ratios. In order to account for the
diference in size, risk and tax rate we regressed the market debt ratio against
ln(Revenues), beta and efective tax rate for each company. The resultant
regression is as follows: M a r k e t D e b t t o C a p i t a l = 0 . 3 8 7 - 0 .2 6 0
E f f Ta x R a t e - 0 . 0 1 9 5 L n R e v + 0 . 1 3 7 3 - y r
Regression Beta
The R-squared of the regression is 41.1%. The T-statistics reveal
insignificance at 95% confidence interval. The results from the
regression indicate the following debt ratios:
Figure 41 Debt ratios based on sector information.
Variable Coefficient
AA Ryanair
Constant
0.387
0%
9.90%
Tax rate
-0.26
LnRev
-0.0195
9.83
6.98
Beta
0.137
6.26
1.24
Predicted Debt ratio
105%
40%
BAA
Asur
29%
7.59
1.42
33.5%
7.59
0.82
36%
26%
We are quite reluctant to base our recommendations on this ratios for two
reasons:
Although the relatively high R-squared of the regression the
coeficients are with large standard errors and statistically insignificant
(as indicated by the low T-values)
The sector as a whole is characterized by high degree of financial leverage,
which might result in the regression overestimating the appropriate level
of debt.
Market debt ratios
We additionally looked at a regression based on the overall market. The
regression applied is:
Market Debt to Capital = 4.881 + 0.81 Eff Tax Rate - 0.3
04 Insider holding +
0.841EBITDA/AV Capex/Total assets
The results are summarized below:
Figure 42 Optimal capital structure market regression

Variable Coefficient
Constant
4.881
Insider holdings
-0.304
Effective tax rate
0.81
EBITDA/EV
0.841
Capex/Total assets
-2.987
Predicted Debt ratio
AA
Ryanair
BAA
Asur
2.00
7.92
2.85
12.47
9.9
9.03
10.44
0.03
29.0
9.46
12.56
30.59
33.5
13.75
3.25
2.44%
-14.47%
-1.20%
24.61%
The market debt ratio regression clearly provided some controversial

results for AA, Ryanair and
BAA, suggesting a negative market debt ratio, which is contrary to our
previous analysis based on cost of capital or APV (for American Airlines)
IX.
Mechanics of moving towards the optimal
1. A Path to the Optimal

In the table below we have listed the main cash flow characteristics of
the three businesses our companies are in: Airlines (American Airlines and
Ryanair), Aeronautical service and Retail (BAA and Asur). We have then listed
what would be the optimal features of the debt for each business.
Figure 43 Typical projects and cash flow characteristics
Business
Typical Project
Cash Flow Characteristics
Airlines
Fleet Acquisition: Long term payment, Long life of
the asset
New Route Opening: local offices and labor force.
Long term and different currencies
Type of Financing
Debt should be
Long term
Multiple currencies
New Terminal buildings and maintenance

Aeronautical
Services
Retail
Medium to long term

Cash outflows that are primarily in local currency,
(there could be a significant dollar component for
Asur)
Cash inflows that are almost exclusively in local
currency
BAA: very stable cash flows
Asur: volatile due to exposure to tourism travel
Medium/Long term
Single currency (dollar portion for
Asur)
Medium term
Cash outflows that are almost exclusively in local
currency
Cash inflows that are primarily in local currency
although influenced by relative strength of
pound/peso
Can be very volatile, specially sensitive to global
risk factors
Medium Term
Asur: if possible tied to influx of

tourism
Mix of currencies
Asur: if possible tied to influx of
tourism
2. Quantitative Analysis and Overall Recommendation on Financing Mix

To further evaluate the optimal debt characteristics for each company
we regressed the firm value and the EBITDA of each of our companies
against: Change in Long Term Rate, GDP growth, Change in local currency,
Change in inflation and Change in the price of oil (only for American Airlines
and Ryanair). The Firm value regression results and the conclusion for each
company are shown below. Regressions on EBITDA against macroeconomic
variables are presented in Appendix IV.
A m e r i c a n
Airlines
The current crisis of the company makes firm variations very unpredictable
and driven much more by company specific issues rather than macroeconomic
variables. Not surprisingly results are disappointing in terms of signs of the
coeficients and T statistic significance.
Long Term Interest Rates: very weak R square and T statistic.

The regression suggests that the duration of the operating assets of
the company is very low. .
GDP Growth:
The companys earnings are cyclical and shows a
positive coeficient with EBITDA. R-squared is fairly significant: AMR

is undoubtedly a cyclical company. The negative coeficient with firm
value is likely to be related to the high leverage: high GDP growth
rates are usually related to high interest rates that afects negatively
the firm value.
Dollar: A weaker dollar helps EBITDA, but at the same time has a
slightly negative efect on firm value. Revenues in foreign currencies
(about 35% of total sales) explain the relations with EBITDA, although
the efect is small (probably ofset by foreign currency costs and
expenses).
The
company
should
use
predominantly
dollar
denominated debt.
Inflation: Does not impact significantly EBITDA, while is negatively
correlated to the firm value, probably due to the high amount of debt,
hence higher discount rate.
Price of Oil: Oil seems to be completely non influent on company
firm value or EBITDA.
This can be due to two factors: 1) the company has pursued an
eficient hedging strategy 2) companys firm value is driven by
company specific issues related to bankruptcy risk, rather than

industry themes.
Based on this analysis we would suggest the company to use mainly dollar
denominated debt with fixed
rate
s.
The regression results for FV are
presented below
Figure 44 Regression of Firm value against macroeconomic variables

American Airlines
Firm value (dependent variable)
Change in Long Term rate
GDP growth
Change in Dollar
Change in Inflation
Change in price of oil
Constant
Coefficient
T-statistic
8.205
20.3
8.2
7.29
7.34
1.81
-4.08
0.61
-3.3
0.047
0.55
-2.08
1.2
-1.13
0.24
1.6%
19.3%
7.4%
6.6%
0.3%
Ryanair
Long Term Interest Rates:
- the regression on change of
firm value on change in long term rates indicates that the average
duration of the operating assets of the firm is approximately 5.3 year
G D P
G r o w t h :
interestingly the firm value is positively
related to the combined GDP growth of EU 15 countries (where the

companies generates its revenues), while the operating income is
negatively related. One possible interpretation of this is that higher
GDP growth boasts companys long term growth prospects. On the
other hand, fundamentally the low cost airline model attracts more
passengers during economic slowdown when travelers are generally
more price sensitive, hence negative correlation with the operating
earnings.
E u r o : - Alhough the value of the firm does not appear to be
influenced by the Euro exchange
rate, stronger currency has significant negative impact on operating
income. Therefore we would recommend use of mix of currencies in
the capital structure
I n f l a t i o n : - Ryanairs firm value seems to be significantly related
to the inflation rate and our
recommendation would be to use floating rate financing.
P r i c e o f O i l : - in addition, we looked at the price of oil as a facto
that might impact the firms value and profitability. It appeared that
changes in the oil prices have little impact on the firm, which is the
result of the airlines hedging strategy. In addition, during the
analyzed period Ryanair was less exposed to the increasing oil prices
compared to some its American counterparties as the price increases

were partially ofset by the loss of value of the US dollar, which is the
referent currency for the price of oil.
The results from the regressions are presented in the tables below.

Ryanair
Constant
Coefficient
T-statistic of
coefficient

30.2
-5.3
GDP growth
6.03
3.24
Change in EURO
32.4
0.68
Change in Inflation
18.8
6.56
Change in price of oil
38.5
-0.532
BAA
Long Term Interest Rates:
-0.2
2.63
-0.27
1.56
-1.08
0.70%
36.60%
1.20%
16.80%
16.3%
Both regressions have a negative
coeficient which points to a longer duration of debt, approx. 2 years.

It should be noted that the T-statistic and the R2 of both regressions
are very weak.
GDP Growth:
BAA is positively correlated to GDP growth but
shows a low degree of cyclicality as evidenced by the coeficients.

GBP: BAA is not influenced by changes in the British Pound.
Inflation: the FV
regression shows a high positive sensitivity to
changes in inflation, which therefore suggests the use of floating rate

debt
Based upon this analysis, we would recommend that BAA issues debt:
With a high duration. Given the weakness of the regression we would
not use the coeficient number as a proxy for the duration
In British pounds
Floating rate
BAA current debt satisfies all these characteristics, except for the fact that
most of the current debt is with fixed rate. The regressions results are
presented in the tables below.
BAA
GDP growth
Change in GBP
Change in Inflation
Constant
Coefficient
T-statistic
8.80
6.60
10.30
11.50
-3.30
1.72
-0.72
15.9
0.21
0.20
-0.04
0.74
0.6%
0.2%
0.0%
7.2%
As
u r Long Term Interest Rates: the regressions on interest rates,
suggest that Asur market value and EBITDA increase with higher
Mexican interest rates, which is somewhat counterintuitive. A possible
explanation might be that, often a rise in domestic rates is a response
to higher inflation and/or a depreciation in the peso, both of which
might entice more US tourists to visit Asurs destinations. It is
interesting to note the relatively high R2 of 54.4% in the EBITDA
regression.
GDP Growth: Once again we note the relatively high R2s, compared to
the other three
companies in our sample. Clearly, Asurs prospects are highly
correlated to economic activity as would be expected from a tourismbased company. The cyclicality of Asurs business was quite evident
after the terrorist attacks of 9/11, when its foreign passengers arrivals
contracted dramatically. This leads to a recommendation for careful
use of debt.
Exchange Rate: Asurs firm value and EBITDA seems to be afected
little by changes in the
value of the peso with respect to the dollar, which is, once again, a
surprising result. Nevertheless, we would advise that if Asur issues
debt in the future, it should do so for the most part in the domestic
market and in peso denominations.
Inflation: the link between firm value and domestic inflation suggests
that Asur should issue
any future debt with a variable, rather than a fixed, rate.
ASUR
Interest Rate (Cetes)
Mexican GDP
Exchange Rate (Peso/Dollar)
Mexican Inflation
Constant
Coefficient
27.7
2.5
28.4
163
2.99
10.4
-0.98
29.7
T-statistic
3. Summary of desirable debt charachteristics
1.12
2.52
-0.63
-1.68
10.3%
36.6%
3.5%
20.3%
The profile of the ideal debt that the companies should use is presented in
Figure 48 below:
Figure 48 Summary of desired debt features

Company
Maturity
Currency
Interest rate
Comments
Other features
American Airlines
Medium to long term,

despite the regression
US dollars
Fixed rate
Analysis distorted by
the distressed state of
the firm
Ryanair
medium term (5
years)
Euro
Floating rate
Analysis is distorted
by the growth stage of
the firm
BAA
short term (2 years)
British
Pounds
Fixed rate
n.a.
None, provided
that the company
is hedged against
sharp movement in
price of oil
None, provided
that the company
is hedged against
sharp movement in
price of oil
n.a.
Asur
short to medium term
Peso
Floating rate
n.a.
n.a.
X.
Dividend Policy
1. Current Dividend Policy

Of the four companies that we are analyzing, only two of them pay
dividends: BAA and Asur. This is consistent with their diferent characteristics
in terms of cash flow profile, expected growth and profitability. The main
factors behind American Airlines and Ryanair not issuing dividends are the
following:
American Airlines: The constraint is clearly the financial and

operational distress the company is going through
Ryanair: although the company is profitable it chooses not to pay

dividend given the stage of the life cycle and the consequent growth it
has to fund. Investors have been rewarded by the high stock price
appreciation over the last years. In addition, the management of Ryanair
stated on a number of occasion that it does not intend to pay out
dividends in the foreseeable future as it intends to fund a large scale
capacity expansion program. The management put up the issue for a
large purchase of 50 new Boeing 737-800 aircrafts for vote at the
forthcoming general annual meeting.
BAA
BAA has kept a stable dividend policy over the past 5 years, with an
average dividend yield of
48
3.3%. The companys policy of keeping a stable dividend yield was evidenced
in 2002 when it paid a dividend although it recorded a much lower net
income (this resulted in a dividend payout ratio of
49
114%). The only year in which BAA bought back stock has been in 2001
to return cash to its shareholders after it had sold some non-core assets.
Figure 49 Dividend policy - BAA
Historical Dividends BAA
Dividend Paid (mm)
Stock Buyback
Total Cash to shareholders
Average Market Cap
Dividend Yield (%)
Dividend Payout (%)
2000
150
0
150
4,071
3.7%
58%
2001
178
141
319
6,604
2.7%
46%
2002
188
0
188
6,787
2.8%
114%
2003
196
0
196
5,027
3.9%
52%
2004
205
0
205
6,106
3.4%
54%
Source: BAA annual reports, Bloomberg
Asur
Asur has only recently started to pay dividends to its shareholders
through a special cash dividend in 2002, in which it paid over 200% of its net
income. The company generates enough cash to fully fund its increased
capital expenditures and still have a significant dividend payout ratio. In the
last general shareholder meeting, the company decided to begin a regular
cash dividend of approximately US$0.50 per share and to set up a reserve
account for stock buybacks. We welcome both moves, as the companys ROC
is far lower than its cost of capital and it is rapidly accumulating excess cash.
Figure 50 Dividend policy - Asur
Dividend policy ASUR
Dividend Paid ($ mm)
Stock Buyback
Total Cash to shareholders
Dividend Yield (%)
Dividend Payout (%)
2000
0.00
0.00
0.00
0.0%
0.0%
2001
0.00
0.00
0.00
0.0%
0.0%
2002
43.42
0.00
43.42
12.0%
213.0%
2003
13.88
0.00
13.88
3.4%
56.5%
2004
n.a.
n.a.
n.a.
n.a.
n.a.
Source: Asur Annual reports
49
Figure 51 Trade Offs on Dividend Policy

Factor
Stockholder Tax
Preferences
American Airlines
Ryanair
BAA
Most of the stockholder are American Institutional

investors and should be therefore indifferent between the
choice of dividends or buybacks. Given the financial
situation of the company no investor is buying AMR shares
expecting other than stock appreciation.
The Company has a consistent history of

paying dividends. This is reflected in its
stockholders base, which is made up mostly of
small private shareholders
Information
Effects and
signaling
Incentives
In the unlikely case of a change in dividend policy (the

company paid no dividend in the past 5 years) the market
would read that a strong signal of confidence.
Effects on
flexibility
The good side of the crisis the company is suffering it is it

could cancel dividends and now has free hands on this
Bond Covenants
and Rating
Agency
Debt covenants are pretty high. The company must meet a

detailed schedule of financing for the $ 850mn credit
facility in terms of current assets (no less than 1.5bn every
quarter)
The marginal stockholder in Ryanair is

large internationally diversified
institutional investor, who probably has
the flexibility to move any dividend and
capital gains to locations with highest tax
advantage. From this standpoint the
stockholders might indifferent between
capital or income gains.
Given the good returns on capital and the
largely announced capital investments
plans a dividend announcement might
signal that the company has run out of
good projects and have a negative impact
on the growth expectation hence on the
stock value
Dividend policy is constrained by the
huge capital expenditure requirements
related to the companies expansion
program.
Neither of these would be a constraint for
Ryan air.
Constra ints
policy.
and Cash flow to fixed charges around 1x.
Page 50
Asur
Investors in Asur expect
recurrent dividend
payments
Given the high number of analysts that follow

the stock and the amount of disclosure given
by the company, any signal imbedded in a
change in dividend policy would have most
probably already been captured by the market
Minimal, as Asur has no

history of sticky dividends
and is more inclined to
pay special dividends
BAAs dividend policy in the short medium

term is constrained by the heavy capex
spending related to the new terminal at
Heathrow.
Neither of these factors would be a restraint to
BAA raising dividends
Asur has no debt
Investors in Asur expect

recurrent dividend
payments
XI.
Dividend Policy: a Framework
1. Afordable Dividends
In order to determine the amount our companies could have paid out
in dividends we have computed the average FCFE over the last 5-year and
compared it to the dividends and buyback paid by the companies. As
mentioned before American Airlines and Ryanair do not payout any dividends.
Even though both companies could have potentially returned cash to their
shareholders, none of them did, but for completely diferent reasons:
American Airlines positive FCFE come exclusively from the borrowings
necessary to pay previous debt and try to renew the old fleet; Ryan Air
decided to retain its FCFE to fund future growth. BAA and Asur have as well
paid out less than what they could have to their shareholders.
Figure 52 Dividend policy sector analysis
Dividend policy analysis
Average FCFE in million (last 5 years)
Average Dividends & Stock Buybacks
Difference
% Dividends / Stock Buybacks
Figure 53 Dividend policy sector analysis
Dividend policy - Sector analysis
Dividend Yield
Dividend Yield (sector)
Difference
Payout Ratio
Payout Ratio (sector)
Difference
American
Airlines
765.3
0
765.3
0.0%
American
Airlines
0.0%
0.06%
-0.06%
0.0%
2.6%
-2.6%
Ryanair
23.5
0
23.5
0.0%
Ryanair
0.0%
0.05%
-0.05%
0.0%
79.4%
-79.4%
BAA
248
183
-65
74%
Asur
41.2
14.3
26.9
34.7%
BAA
3.4%
Asur
3.9%
3.36%
54.4%
3.90%
67.4%
54.4%
67.4%
2. Management Trust and Changing Dividend Policy

As a second step in our analysis we analyzed past ROE and ROC to judge
if firms that paid out less than they could aford created value for their
shareholders. In the case of Ryanair the company has been justified in its
policy of not paying out dividends by the largely positive spread, both in terms
of ROE-Cost of Equity and ROC-WACC. On the other hand BAA and Asur both
51
have recorded negative ROE-Cost of Equity / ROC-WACC spreads. This

suggests that they should increase their dividend payout ratios.
Figure 54 Analysis of past returns and dividend policy
52
Analysis of dividend policy

ROE
Cost of Equity
Difference
ROC
WACC
Difference
American
Airlines
n.m.
34.54%
Na
8.54%
16.69%
-8.15%
Figure 55 Analysis of past returns AA

Historical returns AA
ROE
Cost of Equity
Difference
ROC
WACC
Difference
Figure 56 Analysis of past returns Ryanair

Historical returns Ryanair
ROE
Cost of Equity
Difference
ROC
WACC
Difference
Figure 57 Analysis of past returns BAA
Historical returns BAA
ROE
Cost of Equity
Difference
ROC
WA C C
Difference
Figure 58 Analysis of past returns Asur

Historical Returns Asur
ROE
Cost of Equity
Difference
ROC
WACC
Difference
Ryanair
14.69%
9.45%
5.24%
16.94%
8.13%
8.81%
Industry
Average
2.76%
10.69%
-7.93%
14.22%
8.65%
5.57%
2001
-32.79%
15.69%
-48.49%
-12.29%
14.32%
-26.62%
2002
-366.88%
42.69%
-409.56%
-16.82%
16.04%
-32.86%
2001
18.80%
8.25%
10.56%
12.02%
7.85%
4.17%
2002
17.99%
9.46%
8.53%
10.74%
8.95%
1.80%
BAA
8.23%
11.30%
-3.07%
5.59%
7.85%
-2.27%
2003
-2669.57%
26.01%
-2695.58%
-4.23%
15.70%
-19.94%
Asur
5.15%
9.65%
-4.50%
4.76%
9.65%
-4.89%
2004
Nm
29.88%
Nm
-0.72%
15.96%
-16.68%
2003
21.34%
9.53%
11.81%
12.59%
8.57%
4.02%
LTM
14.69%
9.45%
5.24%
16.94%
8.13%
8.81%
2001
8.59%
10.35%
-1.76%
6.07%
8.92%
2002
3.41%
9.48%
-6.07%
5.72%
7.77%
2003
7.89%
10.51%
-2.63%
5.56%
7.85%
2004
8.23%
11.30%
-3.07%
5.59%
7.85%
-2.85%
-2.05%
-2.30%
-2.27%
2003
2.45%
10.46%
-8.01%
2.94%
10.46%
-7.52%
2004
5.15%
9.65%
-4.50%
4.76%
9.65%
-4.89%
2001
2.31%
9.89%
-7.58%
2.25%
9.89%
-7.65%
2002
1.81%
9.94%
-8.14%
1.89%
9.94%
-8.05%
Industry
average
10.20%
n.a.
n.a.
5.71%
n.a.
n.a.
52
Figure 59 Analysis of historical returns
\
30.00%
20.00%
25.00%
10.00%
20.00%
15.00%
0.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
2001
2002
2003
2004
-20.00%
-10.00%
-15.00%
-30.00%
- 32.8%
- 366.9%
-20.00%
-40.00%
- 2669.6%
-25.00%
-30.00%
-50.00%
American airlines ROE
Ryanair ROE
BAA ROE
Asur ROE
AA Spread
Ryanair Spread
BAA Spread
Asur Spread
Recommendations
American Airlines AA has the priority to return back to
profitability before being able to give any cash back to its
stockholders. It seems that to a significant extend the problems of AA
stem from its high leverage and any dividend payment would reduce
the value of the equity, resulting in even worse debt ratio
Ryanair the company has not paid any dividends, but it appears
that it has a good portfolio of investment projects that can and do
generate positive value for its stockholders. In addition, good
corporate governance practices ensure that investors money is in
good hands with Ryanairs management and we support the current
non-divident policy of the company
BAA with its low risk profile and in its steady and reliable cash
flows, BAA has definitely attracted dividend addict shareholders,
evident by the distribution of ownership. It is the company with a
large number of smaller investors who probably rely more on income
than on capital gain from this company. Appropriately it payout out
large portion of its available free cash flow to equity (74%) back to its
53
shareholders. Taken into account the regulated nature of the

business and the fact that BAA cannot upgrade the prices it currently
charges from Airline until 2008, we suggest it accumulate a certain
cash cushion to meet unexpected turns in the economic trends.
Current retention ration of about 25% seems appropriate.
54
Asur Asur has been retaining a significant portion of their

available free cash flow to equity and on the other hand has not
been able to deliver excess returns over it s cost of capital. We
believe that it should return more cash to its stockholders in the
form of dividends. In addition, it is not constrained by high debt
ratio as its debt capacity is still
unused.
XII.
Valuation
1. Valuation models
Based on the analysis presented above we proceeded to perform
valuation of the market value of the equity of all four companies. Table Figure
60 below summarizes the choice of our valuation model and the results.
Figure 60 Summary of valuation results
American
Valuation summary
Airlines
Model Chosen
FCFF 2 Stage
Value per Share
10.06
Current Stock Price
10.20
-1.3%
Reccom endation
HOLD
Ryanair
FCFF 3 Stage
6.76
5.55
21.8%
BU Y
BAA
FCFF 2 Stage
3.22
5.80
-44.4%
S EL L
Asur
FCFF 2 Stage
31.69
30.45
4.1%
HOLD
Source: Analysis
The choice of growth period reflects the sustainability of competitive

advantages of each firm as outlined in Part 3 Section IV Investment Returns
and Future prospects.
2. Valuation assumptions and inputs.
The valuation assumptions are presented in Figure 61 to Figure 64 below.
54
Figure 61 American Airlines DCF valuation assumptions

American Airlines
Length of Period
Revenues
Pre-tax Operating Margin
Tax Rate
Return on Capital
Non-Cash Working Capital
Reinvestment Rate (Net Cap Ex + Working
Capital Investments/EBIT
Expected growth Rate in EBIT
Debt Capital Ratio
Beta
Cost of Equity
Cost of D ebt
High Growth Phase

10.0
18,883.0
13.8%
35% (theoretical)
8.5%
-8.4%
Stable Growth
Forver
16.5%
1.4%
86.6%
6.26
34.5%
13.9%
19.0%
2.0%
25.0%
1.22
10.2%
25.0%
35.0%
10.5%
-8.4%
Source: Company reports, analysis

Figure 62 Ryanair DCF valuation assumptions
Ryanair
High Growth Phase
Length of Period
4 years and 4 years transitional period
Operating income growth
22.53%
Tax Rate
Return on Capital
Cost of capital
Debt Capital Ratio
Beta
Cost of Equity
Cost of Debt
Stable Growth
Forever
3%
12.50%
15.48%
8.13%
starting at 8.45% and declining to 2%
20.00%
7.78%
7.78%
2.00%
146%
23.87%
1.24
9.5%
4.5%
39%
10.00%
1.00
8.3%
4.0%

Figure 63 BAA DCF valuation assumptions
BAA
Length of Period
Revenues
Tax Rate
Return on Capital
Debt Capital Ratio
Beta
Cost of Equity
Cost of D ebt
High Growth Phase
Stable Growth
Forever
4 Years
Starting at 1,970 and growing with 4.8%
CAGR
30%
5.23%
Growing at 2.00%
30%
6.93%
Starting at 161.65% and declining to 28.85%

starting at 8.45% and declining to 2%
45%
1.42
11.30%
5.17%
28.85%
2.00%
45%
0.90
8.81%
5.17%
55
Figure 64 Asur DCF valuation assumptions

Asur
Length of Period
Revenues
Pre-tax Operating Margin
Tax Rate
Return on Capital
Debt Capital Ratio
Beta
Cost of Equity
Cost of D ebt
High Growth Phase

5.0
177.2
Stable Growth
Forever
33.0%
7.5%
5.93
33.0%
11.0%
5.93
85.0%
7.0%
0.0%
0.82
10.0%
0 .0 %
30.0%
3.0%
20.0%
0.80
8.1%
7 .0 %
In building our assumptions into the valuation model we had the following
approach:
We have used the bottom-up beta estimates we calculated earlier in the cost
of equity computation.
The risk characteristics in perpetuity are likely to change as follows:
o American Airline changing debt ratio (going concern
assumption) should reduce risk and hence beta. The beta used in
perpetuity is the unlevered average industry beta re- levered to a
more sustainable debt ratio
o Ryanair as the company grows and becomes more mature,
the risk is expected to converge with the market
o BAA and Asur risk is assumed to converge with market risk,
although at the low end reflecting stability in cash flows
Growth rate are derived from fundamentals and based on ROC and
Reinvestment rates. In perpetuity the growth rate is set at levels below or
close to long term sustainable economic growth as we dont expect these
sectors to be the major drivers of economic growth.
Growth phase Capex and Working capital changes have been projected
on the basis of historical data. I perpetuity the implied reinvestment
rates were used (derived as a function of growth and ROC).
56
Leverage we projected that in the long term the companies gradually

move to their optimal capital structure, except for BAA,which is already at
its optimum.
In addition, Asur is assumed to generate a ROC slightly higher than its cost of
capital in the future. The
rationale behind this is that as the company becomes more mature and
moves towards its optimum capital structure the cost of capital is likely to
fall. This fall is likely to be supplemented by reduced risk
57
premium for Mexico, as the country becomes less risky place for investors. We
believe that Asur could sustain the higher ROC partly because of its most
valuable asset the concession to use the airports. This asset gradually
depreciates reducing the book value of the equity of the firm, and on the other
hand does not require capital expenditures to replace it. It is also a natural
barrier to entry to competitors in the sector and it give Asur the exclusive right
of being airport operator. We assumed that in perpetuity the ROC of Asur will
move towards the industry average of around 11.0%
3. Valuation results
The valuation results are presented in
Figure 65 Valuation results
Value of Operating Assets

Cash & Marketable Securities
Firm Value
Market Value of Debt
Equity Value
Value of Equity in Options
Value of Equity in Common Stock
Number of Shares
Value per Share
American
Airlines
13,776.0
148.0
13,924.0
12,083.8
1,840.1
217.9
1,622.3
161.2
10.06
Ryanair
5,272.9
1,447.9
6,720.7
1,549.1
5,171.7
71.7
5,099.9
754.3
6.76
BAA
7,452.1
973.9
8,426.0
5,007.1
3,417.9.
2.45
3,415.4
1,060.9
3.22
Asur
848.0
102.8
950.8
950.8
950.8
30.0
31.69
Source: Analysis
We performed the DCF valuation on the basis of the inputs presented

above. The equity values of AA, Ryanair and BAA includes also the equity
options outstanding written by the companies. In computing the options
values we have used the annualized standard deviation in the log-normal
returns
on a monthly basis for 5
years ( Ln$
& P1
#
! ), the average strike price and maturity of the
options.
%P 0 "
On the basis of the valuations results we reached the following conclusions

Valuation summary
Value per Share
Current Stock Price
American Airlines
10.06
10.20
Ryanair
6.76
5.55
BAA
3.22
5.80
Asur
31.69
30.45
57
Recommendation
-1.3%
HOLD
21.8%
BUY
-44.4%
SELL
4.1%
HOLD
Source: Analysis
58
58
Appendix I
AMR Income Statement
Passenger Revenues
of which American Airlines
of which Regional
2001
17,208
15,780
1,428
2002
15,871
14,440
1,431
2003
15,851
14,332
1,519
2004
16,897
15,021
1,876
1Q04
4,098
3,678
420
1Q05
4,292
3,841
451
2004TTM
17,091
15,184
1,907
Cargo
Other
Total Revenues
662
1,099
18,969
561
988
17,420
558
1,031
17,440
625
1,123
18,645
148
266
4,512
151
307
4,750
628
1,164
18,883
Labour Costs
Fuel
Commission and Bookings
Maintenance
Other rentals and airport fees
Food Service
Other Operating
Special Charges
US Government Grant
-8,032
-2,888
-1,540
-1,165
-1,197
-778
-2,996
-1,466
856
-8,392
-2,562
-1,163
-1,108
-1,198
-698
-2,715
-718
10
-7,264
-2,772
-1,063
-860
-1,173
-611
-2,428
-407
358
-6,719
-3,969
-1,107
-971
-1,187
-558
-2,366
-11
0
-1,640
-808
-288
-231
-305
-137
-582
0
0
-1,644
-1,097
-271
-235
-300
-125
-617
0
0
-6,723
-4,258
-1,090
-975
-1,182
-546
-2,401
-11
0
Ebitdar
Aircraft Rentals
Ebitda
Depreciation and Amortization
Ebit
Interest Income
Interest Charges
Capitalized Interest
Other
Financial Income / (Charges)
EBT
Tax Benefits
Income (Loss)
Accounting Change Impact
Net Loss
-237
-829
-1,066
-1,404
-2,470
110
-538
144
-2
-286
-2,756
994
-1,762
0
-1,762
-1,124
-840
-1,964
-1,366
-3,330
71
-685
86
-2
-530
-3,860
1337
-2,523
-988
-3,511
1,220
-687
533
-1,377
-844
55
-703
71
113
-464
-1,308
80
-1,228
0
-1,228
1,757
-609
1,148
-1,292
-144
66
-871
80
108
-617
-761
0
-761
521
-153
368
-326
42
14
-212
18
-28
-208
-166
461
-148
313
-290
23
36
-235
23
-9
-185
-162
1,697
-604
1,093
-1,256
-163
88
-894
85
127
-594
-757
0
-757
-761
-757
59
AA Balance Sheet
Current Assets
Currrent Liabilities
Inventory
2001
6,469
-6,740
0
2002
4,833
-6,372
0
2003
4,562
-5,755
0
2004
4,851
-6,212
0
1Q05
5,272
-6,852
0
Net Working Capital
-271
-1,539
-1,193
-1,361
-1,580
Tangible Assets
Intangible Assets
Financial Assets (cash)
19,655
6,615
102
19,694
5,636
104
19,460
5,188
120
19,137
4,665
120
19,116
4,631
148
Total Assets
26,372
25,434
24,768
23,922
23,895
Termination Indemnity
reserves
-10,122
-9,760
-9,599
-8,812
-8,758
Net Capital Employed
15,979
14,135
13,976
13,749
13,557
Total Debt
Total Equity
-10,606
5,373
-13,178
957
-13,930
46
-14,330
-581
-14,254
-697
15,979
14,135
13,976
13,749
13,557
60
Ryanair - Income statement
Last Twelve
months
Dec-04
Dec-03
2004
'000 EUR
'000 EUR
'000 EUR
'000 EUR
Operating revenues
1,238,387
1,015,536
Operating expenses
Depreciation and amortization
Lease payments
Staff, fuel, route charges and others
Total operating expenses
(100,623)
(42,018)
(811,193)
(953,834)
(70,960)
(23,636)
(636,753)
(731,349)
Operating profit before exceptional costs
284,553
Reorganization costs
Other exceptional costs
Amortization of goodwill
Total exceptional costs
EBIT
2003
'000
EUR
2002
'000
EUR
2001
2000
'000
EUR
'000 EUR
851,373
1,074,224
842,508
624,050
(71,728)
(6,450)
(509,771)
(587,949)
(101,391)
(24,832)
(684,211)
(810,434)
(76,865)
(502,169)
(579,034)
(59,010)
(4,021)
398,086)
(461,117)
284,187
263,424
263,790
263,474
162,933
114,011
84,055
(2,287)
(2,287)
(1,702)
(1,702)
(3,012)
(9,491)
(1,757)
(14,260)
(3,012)
(9,491)
(2,342)
(14,845)
282,485
249,164
248,945
350
263,474
340
162,933
222
114,011
173
84,055
128
Financial charges
Interest expenses
Other financial income/(charge)
Total
282,266
383
(53,254)
25,981
(27,273)
(40,992)
17,368
(23,624)
(35,302)
18,486
(16,816)
(47,564)
27,099
(20,465)
(30,886)
31,962
1,076
(19,609)
29,050
9,441
(11,962)
21,339
9,377
(3,781)
9,820
6,039
Profit before tax
254,993
258,861
232,348
228,480
264,550
172,374
123,388
90,094
Taxes
(23,680)
231,313
(22,446)
(21,869)
(25,152)
(21,999)
209,902
206,611
239,398
150,375
Net income
(24,257)
34,604
487,405
(59,175)
(7,286)
(306,933)
(373,394)
(18,905)
104,483
370,137
(44,052)
(2,097)
(239,933)
(286,082)
(17,576)
72,518
61
Balance sheet
Fixed assets
Intangible
Tangible
Total fixed assets
Current asets
Cash and liquid resources
Receivables
Prepayments and other receivables
Inventories
Total current assets
Total assets
Current liabilities
Payables
Accrued expenses and others
Current portion of long term debt
Short term borrowings
Total current liabilities
Long term liabilities
Provisions
Other creditors
Long term debt
Total long term liabilities
Shareholders equity
Share capital
Share premium
Profit and loss
Total equity funds
Total liabilities and equity
Last Twelve
months
Dec-04
Dec-03
2004
2003
2002
2001
'000 EUR
'000 EUR
'000 EUR
'000 EUR
'000 EUR
'000 EUR
'000 EUR
30,872
1,845,452
1,876,324
30,872
1,845,452
1,876,324
45,085
1,611,127
1,656,212
44,499
1,576,526
1,621,025
1,352,361
1,352,361
951,806
951,806
36
613,591
613,627
315
315
1,447,850
14,467
18,608
27,160
1,508,085
1,447,850
14,467
18,608
27,160
1,508,085
1,124,671
11,478
22,977
24,183
1,183,309
1,257,350
14,932
19,251
26,440
1,317,973
1,060,218
14,970
16,370
22,788
1,114,346
899,275
10,331
11,035
17,125
937,766
626,720
8,695
12,235
15,975
663,625
355
21
6
13
397
3,384,409
3,384,409
2,839,521
2,938,998
2,466,707
1,889,572
1,277,252
712
89,439
317,049
106,841
2,325
515,654
89,439
317,049
106,841
2,325
515,654
82,491
223,679
79,545
4,454
390,169
67,936
338,208
80,337
345
486,826
61,604
251,328
63,291
1,316
377,539
46,779
217,108
38,800
5,505
308,192
29,998
139,406
27,994
5,078
202,476
22
107
9
3
143
107,741
22,958
1,046,546
1,177,245
107,741
22,958
1,046,546
1,177,245
97,915
268
893,285
991,468
94,192
30,047
872,645
996,884
67,833
5,673
773,934
847,440
49,317
18,086
511,703
579,106
30,122
374,756
404,878
15
112
127
9,652
562,015
1,119,843
1,691,510
9,652
562,015
1,119,843
1,691,510
9,637
559,717
888,530
1,457,884
9,643
560,406
885,239
1,455,288
9,588
553,512
678,628
1,241,728
9,587
553,457
439,230
1,002,274
9,194
371,849
288,855
669,898
8
248
184
441
3,384,409
3,384,409
2,839,521
2,938,998
2,466,707
1,889,572
1,277,252
712
62
BAA - Income Statement

Retail (incl. World Duty Free)
Airport/traffic charges
Property/op. facilities
Other
Total Airports
Rail
Other
Total Revenues
1,452
50
18
1,520
2004
802
734
282
59
1,877
67
26
1,970
(420)
(167)
(43)
(407)
(1,037)
11
(829)
5
(475)
(176)
(44)
(401)
(1,096)
9
(882)
15
(1,149)
19
813
856
696
883
788
975
(257)
(258)
(191)
(258)
(213)
(280)
556
598
505
625
575
695
Interest Income
Interest Charges
Net Interest
Other Financial Income
Financial Income / (Charges)
34
(134)
(100)
49
(51)
60
(176)
(116)
42
(74)
(66)
2
(64)
52
(143)
(91)
2
(89)
(63)
9
(54)
(88)
9
(79)
EBT
Taxes
Minority Interests
Income (Loss)
505
(152)
(2)
351
524
(161)
(2)
361
441
(137)
(1)
303
536
(162)
(1)
373
521
(153)
(1)
367
616
(178)
(1)
437
Labour Costs
Retail Expenditure
Operating Leases Expenses
Other Operating Costs
Total Costs
Share of operating profit in Joint Venture
Ebitda
Depreciation and Amortization
Ebit
2002
866
677
260
60
1,863
58
51
1,972
2003
755
690
266
49
1,760
64
58
1,882
(443)
(276)
(45)
(401)
(1,165)
6
9M 2003
9M 2004
2004LTM
1,589
51
15
1,655
2,014
68
23
2,105
63
BAA - Balance Shteet
2002
2003
2004
Dec-04
Trade Receivables
Trade Payables
Inventory
Net Working Capital
Other Curren t Ass ets / (Liabilities)
Total Net Current Assets
183
(125)
34
92
(576)
(484)
218
(143)
27
102
(669)
(567)
270
(152)
23
141
(792)
(651)
314
(150)
53
217
(810)
(593)
Tangible Assets
Intangible Assets
Share of Gross Assets
Share of Gross Liabilities
Loans
Investments in JVs
Investments in associates
Othe inves tments
Total Fixed Assets
6,975
10
51
(39)
39
51
6
80
7,122
7,802
10
75
(72)
30
33
7
142
7,994
9,074
10
60
(46)
17
31
49
122
9,286
9,997
10
62
(48)
18
32
42
80
10,161
Other Liabilities
(267)
(971)
(901)
(941)
6,371
6,456
7,734
8,627
Gross Financial Debt

of which Convertible Debt
of which Bonds
of which Bank Loans
other financial debt
Cash & Marketab le Securities
Net Debt
Minority Interest
Total Equity
2,567
311
1,842
350
34
(939)
1,628
6
4,737
3,029
730
1,873
378
48
(1,156)
1,873
8
4,575
3,598
838
2,266
447
47
(890)
2,708
8
5,018
4,169
838
6,371
6,456
7,734
8,627
(849)
3,320
9
5,298
64
ASUR
Income Statement
Revenues:
Aeronautical revenues
Non-aeronautical revenues
Total revenues
Operating expenses:
Cost of services
Technical assistance fee
Concession fee
General and administrative
Depreciation and amortization
Total operating expenses
Operating income
Interest income
Interest expense
Exchange gain/(losses), net
Chages in monetary position
Comprehensive financing cost
EBT
Provision for asset tax
Income tax and profit sharing
Income before extraordinary items
Contract termination fee
Other special items
Net income
EBITDA
1999
2000
2001
2002
2003
2004
94.2
15.8
110.1
112.6
19.4
132.0
107.8
19.1
127.0
92.7
22.1
114.8
102.8
27.7
130.5
132.9
44.4
177.2
25.4
6.6
5.6
12.6
29.9
80.1
30.0
3.8
(1.8)
(0.1)
(0.1)
1.7
31.8
0.0
(13.4)
18.3
0.0
0.0
18.3
30.8
6.0
6.6
11.5
33.1
87.9
44.1
6.0
(1.8)
(0.4)
(5.5)
(1.6)
42.4
0.0
(18.6)
23.9
0.0
0.0
23.9
31.4
4.2
6.3
10.9
33.0
85.8
41.1
8.6
(0.1)
(0.6)
(4.1)
3.8
44.9
0.0
(16.7)
28.3
(0.7)
0.0
27.6
31.8
3.5
5.7
9.9
31.0
81.9
32.9
4.5
(0.1)
1.1
(2.9)
2.5
35.4
(2.9)
(11.3)
21.2
(0.4)
(0.3)
20.4
32.9
4.1
6.5
10.8
31.6
85.9
44.7
4.8
(0.1)
0.5
(3.1)
2.2
46.8
(4.0)
(16.6)
26.2
(1.5)
(0.1)
24.6
41.9
6.0
8.9
9.5
35.8
102.1
75.1
0.0
0.0
0.0
0.0
(2.6)
72.6
0.0
(16.5)
56.0
0.0
(1.6)
54.4
59.9
77.1
74.2
63.9
76.2
111.0
Balance Sheet
Cash and marketable securities
Trade receivables
Recovarable taxes and other current
assets
Total current assets
Property, plant and equipment
Airport concessions, net of amortization
Right to use airport facilities, net
Total assets
Trade accounts payable
Accrued expenses and other payables
Total current liabilities
Long term debt
Other
Deferred income tax and profit sharing
Total liabilities
Capital stock
Legal reserve
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
63.7
10.9
95.8
14.1
46.0
15.4
63.2
15.2
102.8
19.0
2.1
76.7
30.7
827.9
233.6
1,169.0
1.3
7.3
8.6
0.0
0.0
24.2
32.8
1,082.2
1.4
52.5
1,136.2
1,169.0
6.7
116.6
65.4
806.1
225.1
1,213.3
0.1
8.7
8.8
0.0
0.0
40.7
49.5
1,082.2
7.3
74.2
1,163.7
1,213.3
5.5
66.9
79.4
703.4
194.4
1,044.0
0.2
11.1
11.4
0.0
0.1
36.0
47.4
970.6
3.6
22.5
996.7
1,044.0
12.5
90.9
103.8
683.8
187.8
1,066.3
0.9
13.0
13.9
0.0
0.1
42.6
56.5
970.6
4.6
34.6
1,009.8
1,066.3
2.8
124.6
149.4
704.2
192.7
1,170.9
1.0
14.9
15.9
0.0
1.3
48.1
65.3
1,029.0
20.5
56.0
1,105.5
1,170.9
Appendix II
Analysis if returns - Ryanair
Compounded Annual Return
Market Index Compounded Annual Return
Beta
Risk-free Rate
Stock Treynor Measure
Market Treynor Measure
(Under) /Outp erfo rmance
1-Year
Horizon
19.8%
4.61%
1.34
2.07%
13.2%
2.54%
10.68%
2-Year
Horizon
-3.1%
10.96%
1.16
2.52%
-4.9%
8.45%
-13.33%
5-Year
Horizon
20.22%
-5.70%
0.73
5.20%
20.6%
-10.90%
31.48%
10-Year
Horizon
n.a
n.a
n.a
n.a
n.a
n.a
n.a .
2-Year
Horizon
12.6%
10.96%
0.32
4.52%
25.3%
6.45%
18.89%
5-Year
Horizon
9.4%
-5.70%
0.35
4.73%
13.2%
-10.44%
23.66%
10-Year
Horizon
3.3%
8.99%
0.23
5.71%
-10.4%
3.28%
-13.72%
2-Year
Horizon
59.0%
13.71%
3.54
4.25%
15.5%
9.46%
6.00%
5-Year
Horizon
-21.21%
-4.36%
4.67
5.11%
-5.6%
-9.47%
3.84%
10-Year
Horizon
-3.03%
8.49%
2.02
5.57%
-4.3%
2.92%
-7.18%
2-Year
Horizon
65.3%
12.4%
0.87
4.2%
70.6%
8.2%
62.4%
5-Year
Horizon
21.4%
-4.8%
0.81
4.3%
20.9%
-9.2%
30.0%
10-Year
Horizon
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Source: Bloomberg, Ryanair's's annual report, Eurostat
Analysis of returns - BAA

Beta
Risk-free Rate
(Under)/Outperformance
1-Year
Horizon
12.8%
4.61%
0.2
4.83%
39.7%
-0.22%
39.95%
Source: Bloomberg, BAA's annual report, Bank of England
Analysis of returns - American Airlines

Beta
Risk-free Rate
Stock (Under) /Outp erforman ce
1-Year
Horizon
-18.3%
2.34%
4.71
4.27%
-4.8%
-1.93%
-2.87%
Source: Bloomberg, AA's annual report, Fed reserve bank
Analysis of returns - Asur

Beta
Risk-free Rate
Stock (Under) /Outp erforman ce
1-Year
Horizon
52.5%
2.5%
0.82
4.2%
59.0%
-1.7%
60.8%
Source: Bloomberg, Asur's annual report, Mexican Central Bank
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Corporate Finance

EXECUTIVE SUMMARY ................................................................................................... 3

CORPORATE GOVERNANCE ANALYSIS ...................................................................... 8

STOCKHOLDER ANALYSIS .......................................................................................... 14

INVESTMENT RETURN ANALYSIS............................................................................... 27

CAPITAL STRUCTURE CHOICES................................................................................. 33

OPTIMAL CAPITAL STRUCTURE ................................................................................. 37

MECHANICS OF MOVING TOWARDS THE OPTIMAL................................................. 43

DIVIDEND POLICY ......................................................................................................... 48

DIVIDEND POLICY: A FRAMEWORK ........................................................................... 51

Corporate Governance and Stockholder analysis

Introduction and the companies

Figure 1 Summary company information

Throughout the report

analysis has been

information gathered from various sources, including statutory filings with

deregulation act of 1978. In

destinations in North America, the Caribbean, Latin America, Europe and

management. The business specializes in luxury brands and operates

64 stores across the UK

The companys main

airport is the Cancun International Airport, which generates over 70% of

60% were international passengers and 40% were domestic passengers.

A private consortium, ITA, led by

Non-aeronautical services are divided into retail

While the aeronautical revenues are heavily

Corporate Governance Analysis

1. Balance of power between management and shareholders

We believe that the interests of shareholders are relatively well

These last two factors could suggest a dynamic leadership

with intimate knowledge of the challenges and opportunities facing their

Although the balance of power seems to tilt in favor of

shareholders, it is interesting to note that 3 out of the 4 companies have

This could indicate a

All firms, with the

exception of Asur, use stock options as a mean to align managements

none of the CEOs own a significant stake in their companies.

Years at the Company

* Compensation to all 5 executive officers including the

Source: Annual reports, Bloomberg, various public sources

In the case of Asur, its shares are more

heavily traded in the NYSE than in its home market of Mexico.

Figure 7 Market coverage

The company has been named as a potentially responsible party for

environmental damage. In addition, its policy to operate from remote

substantial public scrutiny. Recently the debate over the

The Mexican Airport Law of 1995 established the

general framework regulating the construction, operation, maintenance and

environmental regulation in Mexico has increased in recent years, and the

This contrasts sharply with an

Moreover, the top 5 institutional shareholders in all

vote at the general shareholders meeting.

However, holders of series BB

Directors and senior management do not

Inst it ut ional 87%

Figure 10 Institutional Holdings

Number of shares held

Inst it ut ional 69%

Legal & General

Capital Group Company

First State Investment

Source: Bloomberg, Statutory filings

Figure 11 Insiders holdings

JanisKong (Exec. D ir.)