Ryanair

MAJOR ISSUE

From the perspective of Ryanair, the major issue facing the firm is its valuation in the long-term, known as its economic value. Although the firm maintains a bullish outlook, there are diverging opinions regarding the valuation of the firm among investors. The valuations of the firm vary widely, with stock price estimates ranging from Ђ3.05 to Ђ7.57. This range reflects discrepancies on whether Ryanair has solid business model and fundamentals as well as numerous issues that plague not only Ryanair, but the airline industry as a whole. These issues are as follows:

* Competition: Regulation permitted the entrance of start-up carriers, which, when combined with the excess capacity and the potential for high returns, has led to increased competition. Increased competition has and will continue to force Ryanair to reduce fare prices.

* Costs: Regulation, although beneficial in some regards (cut-price deals), has also been costly for Ryanair. An unfavorable ruling by the EU in February 2004 put pressure on Ryanair's stock price and raised uncertainty among investors. Of more concern are rising costs associated with labor and fuel, which could increase fares and reduce margins and overall profitability.

* Macroeconomic environment: The airline industry has proven particularly sensitive to phenomena such as terrorist attacks, wars, outbreaks (SARS), drastic currency fluctuations, and the like. These phenomena tend to have a significant impact on the cost of fuel, overall demand for air transportation, tourism, etc.

To determine the economic value of Ryanair, these issues must be assessed with an appropriate time frame, passenger capacity, and discount rate.

ANALYSIS

To calculate the valuation of Ryanair, the firm's future revenues and costs, as well as the firm's current accounting value must be calculated. To account for a range of possibilities, three different valuations have been calculated through 2012. These are called Annual Report, Valuation 1, and Valuation 2. Descriptions of each of these valuations will develop as the revenue and cost modeling are discussed. A description of the valuations will conclude the Analysis portion of this document.

FUTURE REVENUES

Revenues on Per-Passenger Basis: For simplicity, and clarity, all models were generated using per-passenger revenue information. Using this marginal revenue calculation as opposed to a disaggregated marginal and total revenue model offered the advantage of compensating for data that was not fully contained within the case. This allows assumptions to be made about continuous and linear marginal revenue curve. In addition, it is assumed that the per-passenger revenue cited in the case ($49/Ђ42.61 per passenger) is the basis for this marginal revenue model.

Currency Conversion: One complication is the nominal per-passenger value is in U.S. Dollars, and the rest of the financial statements are in Euros. It is assumed that the exchange rate on March 31, 2004, when the only U.S. Dollar calculation provided was $1/.85Ђ. This was the only necessary conversion and thus simplified the valuations.

Passenger Traffic & Capacity: The other variable aside from revenue per passenger is the number of passengers. This number was approximated at 24.5 million in 2004 based upon the graph in Exhibit 3. The model also follows the assumptions outlined in Ryanair's 2004 annual report, where passenger traffic is predicted to increase 20% annually. In a separate note, Ryanair estimates passenger traffic will triple by 2012, which is inconsistent with the 20% annual growth estimate.

Given the number of aircraft currently operated (91) and the load they currently carry (80%), it can be determined that the maximum passenger traffic after increasing overall capacity (140 new planes) will be approximately 70-90 million passengers annually. The estimate of tripling 2004 passengers by the end of 2012 is consistent with maximum capacity. The 20% annual increase in passenger traffic is not consistent with maximum capacity Ryanair will have in 2011 or 2012, but more planes could be ordered to meet demand. For the purposes of this valuation, it is assumed more planes could be ordered to accommodate the increased demand forecasted for 2011 and 2012.

The annual report based valuation model incorporates the 20% assumption across the time series in a linear fashion, ending in 2012. This linearity, while not necessarily representative of the actual increases Ryanair will experience year after year, is based upon clear information provided by the firm. This is paired with a decrease in per-seat price as dictated in the annual report as well. This per-seat decrease is represented by a decrease in the price per seat of five percent annually.

Load Factor: The two other valuations performed, one with assumed load factor of close to 90% and one with a lower load factor of 80%, which is closer to the current load level. Both of those valuations begin with a high increase in passenger traffic that tapers off in future periods.

Revenue Per Passenger: Valuations 1 and 2 assume a consistent per-passenger revenue. It is possible to assume, given current trends, and desire to reduce fares, that a larger portion of the revenues come from ancillary sources, such as food and beverage sales. This makes constant per-passenger revenue possible, while still adhering to the stated objective of reducing fares.

Valuation Summary for Revenues: The descriptions of the three different valuations regarding revenues (this does NOT include costs) are as follows:

* Annual Report: This valuation maintains assumptions set forth in Ryanair's 2004 annual report, which are: 20% increase in passenger traffic annually, 5% reduction in fares annually, and 20% increase in profit margin annually. The increased passenger traffic is a result of lower fares and fair macroeconomic conditions. This creates a discounted future revenue stream, throughout the time horizon of approximately Ђ10.9 billion.

* Valuation 1: This valuation model utilizes an increase in passengers in line with the stated capacity. This model also assumes the fares are constant. For this reason, a lower discounted future revenue stream is present, at Ђ10.6 billion.

* Valuation