AIRBERLINCase By Jordan Mitchell

Financial Management Professor David Duffill July 17, 2011

Table of Contents
TABLE OF CONTENTS---------------------------------------------------------------------------------------------------------------2 EXCUTIVE SUMMARY---------------------------------------------------------------------------------------------------------------3 STRATEGIES OF AIR BERLIN, EASYJET AND RYANAIR ----------------------------------------------------------- 4 QUATITATIVE ANALYSIS BETWEEN AIRBERLIN, EASYJET AND RYANAIR---------------------------- 7 WHY AIRBERLIN WANTS TO GO PUBLIC IN 2006---------------------------------------------------------------------10 ESTIMATION OF NET PRESENT VALUE (NPV) -------------------------------------------------------------------------11 REFERENCES / BIBLIOGRAPHY

Executive Summary Air Berlin was first established in 1978 by former PanAm captain, Kim Lundgren in the U.S. Air Berlin was converted into a limited partnership under German law in 1990 after the treaty that enabled them to fly into West Berlin. The founders were Lundgren and Joachim Hunold. In 1997 the company flights appeared on international reservation systems through its
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membership of International Air transport association (IATA). Air Berlin began to set a standard for itself in the industry by offering single-seat one-way tickets sales, fixed commissions for travel agents which later helped in the expansion of the airline services to establish Mallorca Shuttle (daily flights around Germany and Spain) and later city shuttle. Air Berlin strategy uniquely positions it between low-cost carrier (LCC) and full-service airlines. The airline operates an extensive semi-low-cost network; in essence the company prides itself in on the ability to server 3 segments of the market which are leisure, holiday and business travelers respectively. This conveniently places them between LCC and tradition carriers and makes them attractive to business and corporate travelers. They offer good customers to their customers and entice them with basic. In order for them to maintain their standards, they have resolved to do initial public offering (IPO) so they can use the inflow to finance business expansion, purchase of 55 new planes and pay off debt. ISSUES WITH THE IPO

One of the IPOs most prominent detractors felt the shares are over-priced. Analysts point out that the fact that AIRBERLIN hasnt made profit in last two years with increase in fuel cost there is no likelihood that the company will be cash-positive before 2008 and also believed that the purchase of new aircraft may lead to overcapacity and increased competition on several routes

RECOMMENDATION

Delaying the IPO would not have effect on Investors however I think AIRBERLIN should reduce the price of the IPO. If the IPO is successful, AIRBERLIN should reduce the numbers of planes they intend to buy to prevent overcapacity.

1. STRATEGIES OF AIR BERLIN, EASYJET AND RYANAIR.

There is a widespread growth of low-cost carriers in the industry. The concept of the lowcost airlines was based on the model from Southwest Airlines in the U.S which combined making short homogenous trip, medium-haul point-to-point flights to and from secondary

airports with a stripped-down no frills flying experiences and also offer reduced fare rates. Low cost carriers generally focus on point to point flying. Airlines strive to position themselves in the low-cost continuum. We will be reviewing the AIRBERLIN, EASYJET and RYANAIR Airlines operating strategies 1.1. STRATEGY OF AIR BERLIN. Air Berlin prides itself as the best low-cost carrier. The company has established itself firmly on the European aviation market. Apart from offering their customers a reduced price rate and some frills on-board. They have also looked for means to maintain their standards in terms of the following:

Increase in revenues by introducing new routes. Introducing single-seat ticket sales to all routes. Expansion in the business line in terms of other smaller airlines acquisition. Breaking the edge by offering more early and late afternoon return flights to accommodate business travel. Forming alliance with other airlines to get connection to more customer base. They provide frills onboard. Their strategy was based on their efficient cost structure.

1.1.1. HOW AIRBERLINS STRATEGY AFFECTS THEIR OPERATION.

This strategy affects their operations in terms of the following: Routes and Fares: New routes and airport terminals for landing and connection flight. Fleet: More airplanes to satisfy the business demands Sales and distribution: Sales of tickets and proper distribution Marketing: Marketing of Airline services, low fares premium service and extensive route network has helped to create awareness for the company. Alliance: AIRBERLIN alliance with NIKI offered joint services from Austria to eastern European destination and also negotiated with Airbus to secure lower prices.
1.2. STRATEGY OF EASYJET

EASYJET entered the low-cost airline segment in the mid 1990s offering connections between the United Kingdom and destinations around Europe. Their strategies include the following;
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Their strategy is to provide customers with inexpensive services.

The company attempts to drive down cost to the absolute minimum e.g. selling directly to its customers rather than via agents and middle men. They dont provide any frills onboard as flights are short haul.

The airline is ticketless as customers buy their tickets online in return for booking reference.

The strategy is based on commitment to safety and customer service.

1.1. HOW THEIR STRATEGY AFFECTS THEIR OPERATION. This strategy affects their operations in terms of the following: Aircraft and Routes: They fly out of low cost airports. Reduced Cost: Fewer cabin crews are required per trip, cabin crew doubles as cleaner on board Sales and Distribution: Tickets are sold online and customers can book early for low prices. Marketing: Marketing of airline services onboard. Alliance: Multi-base network allow point to point services mainly between major European airports

1.3. STRATEGY OF RYANAIR

RYANAIR changed its business model to follow the southwest approach in the early 1990s. The Airlines is also low-cost carrier (LCC). One of their strategies is to provide low-cost fare and using secondary airports which gives them the efficiency to offer reliable and dependable services which is in high demand. Their turnaround time on ground is minimized. They also focus on after sales profit in terms of ancillary revenues. 1.3.1. HOW THEIR STRATEGY AFFECTS THEIR OPERATION. This strategy affects their operations in terms of the following: Aircraft and Routes: They fly out of low cost airports and use secondary airports Reduced Cost: Fewer cabin crews are required per trip, cabin crews doubles as cleaners on board and do not offer cargo services and frills. Sales and Distribution: They offer ticketless boarding with no refund policy.
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Marketing: They do in-house marketing and cost on advertising is greatly reduced when compared to AIRBERLIN. Alliance: Multi-base network allow point to point services mainly between major European airports

COMPARISON BETWEEN AIRBERLIN, EASYJET AND RYANAIR AIRBERLIN ANCILLARIES (%) LABOUR MINIMUM FARES COMPENSATION FOR LUGGAGE CONNECTING TICKET LABOUR UNION 3% 10% 86 YES YES NO EASYJET 7% 9% 65.10 NO NO NO RYANAIR 15% 10% 48.80 NO NO NO

TABLE 1: DATA IS BASED ON CASE STUDY (AIRBERLIN BY Jordan Mitchell)

2. QUATITATIVE ANALYSIS BETWEEN AIRBERLIN, EASYJET AND RYANAIR

TABLE 2: OPERATIONAL ANALYSIS BREAKDOWN ***ALL FIGURES IN MILLIONS RYANAIR and EASYJET: Growth in Passenger and Passenger revenue are quite inline while for AIRBERLIN Passenger forecast growth is 15.4 and 17.6 respectively for 2006 and 2007 and revenue per passenger is higher and stands at 99. This might be because AIRBERLIN offers not only low-cost flights like RYANAIR and EASYJET it also offers full services. FUEL In 2005 the percentage of fuel for RYANAIR AND AIRBERLIN stands at 20% while EASYJET stands at 19% while in 2006 both RYANAIR and EASYJET increase their percentage to sales of fuel by above 25% but in 2007 EASYJET dipped slightly to 24%and AIRBERLIN was 25% in 2007. RYANAIR Fuel usage increased from 265.3 in 2005 to 614.1 in 2007, AIRBERLIN Fuel usage increased from 239.5 in 2005 to 437.3 in 2007 while EASYJET Fuel usage increased from 379.9 in 2005 to 641.8 in 2007. AIRBERLIN generates a better fuel / sales ratio. AIRPORT CHARGES RYANAIR airport charges were constant at 13% but for EASYJET and AIRBERLIN it was higher at 27% respectively for year 2005 with no major difference in 2006 and 2007. AIRBERLIN airport charges will be high because of increase from ancillary services. MAINTENANCE

With AIRBERLIN hoping to acquire more aircrafts I think their forecast for 2006 and 2007 should be higher factoring in the maintenance cost of the aircrafts but being that the aircrafts will be new they may not really spend much on maintaining the aircrafts. AIRBERLIN has 56 aircraft of which 25 are owned by them and 31 are on lease. OPERATIONAL Passengers revenue for RYANAIR in 2005 = 27.6 with forecast growth of 26.89% in 2006 and 20.3 in 2007. Passengers for EASYJET in 2005= 29.6 with forecast growth of 15% in 2006 and stable at 15% for 2007. Passengers for AIRBERLIN in 2005= 13.5 with forecast growth of 14% in 2006 and stable at 14% for 2007. ADVERTISING Advertising cost for AIRBERLIN is higher than for EASYJET and RYANAIR because of the IPO and the expansion plans. Intensive advertisement have to be done to for awareness of their new status and capacity to their customers, thereby increasing on an average of 5% revenue on adverts while RYANAIR and EASYJET spends an average of 2%. TOTAL OPERATING COST RYANAIR incurs lesser operating cost than EASYJET and AIRBERLIN. AIRBERLIN operating cost is the highest but dropped from 87.4% in 2005 to 83.3% in 2007E

FINANCIAL ANALYSIS REVENUE ANALYSIS: GROWTH / DECLINE

IN MIL IONS L E IT AR B D %S les a AIR R TR NT S C AF E AL %S les a E IT A B D %S les a D PR CIAT E E ION OPE AT R ING INCOME(E IT B ) MAR GIN R ANAIR Y 20 20E 05 06 20E 07 461 533 612 34% 315 30% 33.5 45.2 51.8 2.50% 2.70% 2.50% 428 488 560 32% 29% 27% 98.7 110.5 143.2 328.8 377.3 416.5 24.60% 22.20% 20.20% F INANCIALANAL IS YS E YJE AS T AIR E L B R IN 20 20E 05 06 20E 07 20 20E 05 06 20E 07 301 339 451 153 250 291 15% 15% 17% 13% 17% 17% 180.6 182.5 197.7 96.2 85.9 67.8 9.20% 8.00% 7.40% 7.90% 5.80% 3.90% 121 156 253 57 164 223 6% 7% 10% 5% 11% 13% 13 24.2 49.1 57.3 62.6 82.9 119.7 96.6 107.2 196 -5.5 81 103.7 4.90% 4.70% 7.40% -0.40% 5.50% 6.00%

TABLE 3: REVENUE ANALYSIS EBITDAR

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For RYANAIR it was 34% in 2005, 31% in 2006 and 30% in 2007. For EASYJET it was at 15% in 2005 and 2006 but 17% in 2007. For AIRBERLIN it was at 13% in 2005 and increased in 2006 and 2007 to 17%. This is because the operating cost incurred by AIRBERLIN is lower than that of EASYJET and AIRBERLIN.

YEAR 2005 2006E 2006 2007E

AIRBERLIN 18.8% 36%

EASYJET 28.9% 62.2%

RYANAIR 14% 14%

TABLE 4: EBITDA DEPRECIATION Depreciation charge was highest for RYANAIR at an average of 7% and lowest for EASYJET at an average of 1.7% while for AIRBERLIN it was at an average of 6%. MARGIN Margin = Revenue Total Margin for RYANAIR is highest because they incurred lesser cost to revenue followed by EASYJET and AIRBERLIN which has the lowest. AIRBERLIN could cut down on some cost for example advertising to improve margin.

3. WHY AIRBERLIN WANTS TO GO PUBLIC IN 2006

AIRBERLIN as at 2006 is Germanys largest low cost carrier and the countrys second largest airline. The IPO of AIRBERLIN is viewed as highly priced and that the risk is too high for investors that may want to purchase because of factors such as Ascending price of fuel. High capital expenditure. Absence of profit for the last two years.

Therefore because of these reasons investors might be skeptical about buying into the shares. Analysts are also not throwing their weights behind the IPO. Underwriting charges seems too high at E60. AIRBERLIN wants to go public in 2006 to raise gross proceeds especially to fund growth of the business and pay off debt. 50% will be applied to equity, 10% will be used to pay off debt and 40% will be used to fund organic growth. AIRBERLIN has placed emphasis on cost saving by reducing on-board catering cost, airport handling expenses and fees paid to agencies. An analyst from Morgan Stanley talked about Air Berlins route network: As Air Berlins main service base is concentrated out of Germany and Spain (Palma), there is limited overlap in direct competition with Ryanair and easyJet. The cross-over in German flights is relatively low, as Ryanair only serves seven airports in Germany (base only in rankfurt Hahn) and easyJet only serves six German airports with the most overlap in Berlin Schonefeld, Bremen and Dortmund. (AirBerlin, 2007)

4. ESTIMATION OF NET PRESENT VALUE (NPV)

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TOTAL REVENUE TOTAL COST DEPRECIATION

1220 (1225.5) 62.6 1162.9

NET CASHFLOW WACC(8.3%) OR 8% NPV

57.1 0.857 48.93

2005 is 2nd Year Therefore 8% annuity for year two is 1.783 (-) D. Factor for year one is 0.926 1.783 0.926=0.857

Bibliography
Books Peter Atrill & Eddie McLaney, 2010, Accounting: An Introduction, 5th Edition. 11

Jordan Mitchell, 2007, AirBerlin, Case Study Internet Resources

http://www.air-scoop.com/downloads/SWOT_Air-Berlin_Air-Scoop.pdf http://www.duncanwil.co.uk/pdfs/easyjet.pdf http://www.palgrave.com/business/burns/students/pdf/12%20easyJet.pdf http://www.rapid-business-intelligence-success.com/ryanair-business-strategy.html http://www.slideshare.net/The_E_group/Ryanair-Study-version-7

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