Will SAS continue to fly? - A valuation of a company in crisis -

Will SAS continue to fly? - A valuation of a company in crisis -

Supervisor: Jens Borges

Authors: Maren Emilie Birkeland

Christian Emanuel Friedrich Christ

Study Line: Applied Economics and Finance

STU: 118 pages 1 Hand in Date: 29/10/2009 Will SAS continue to fly? - A valuation of a company in crisis -

Executive Summary

The main objective of this thesis is to analyse the strategy of the SAS Group and its current competitive environment in order to value the share price of the SAS Group as of the 30th of June 2009, and discuss whether the group is able to overcome its current crisis. To evaluate this, an analysis of the company’s macro- and microenvironment has been undertaken and its internal strategy has been analysed. Additionally financial statements have been forecasted and a share value has been estimated via the use of DCF, economic profit, multiple and liquidation analysis.

Scandinavian System Group (SAS Group) is Scandinavia’s leading Airline; it operates various hub’s in the region and has a market share of around 50%. The company is currently in a crisis due to high competition coupled with falling demand.

The SAS Group is mainly affected by economical factors, high competition as well as deregulation. Preferences of passenger have changed from being service orientated to being more price conscious. Consequently it has been recognised, that the airline industry is a highly competitive industry with extremely tight profit margins. Additionally, the airline is performing poorly compared to its competitors in key areas, but has some unrealised competitive advantages.

Based on our forecasted financial statements, supported by findings from our strategic analysis as well as industry reports, it has been found that the airline will experience financial difficulties until 2011. The performance of the group is expected to improve from 2012 onwards.

The liquidation value has been estimated to be SEK 1.16. To compare the SAS Group’s financial performance with its comparable companies and to check the results from the DCF and economic profit approach, a multiple analyses has been undertaken; this analysis yielded a share price of SEK 3.26.

The Capital Asset Pricing Model (CAPM) has been used to estimate the after Tax cost of capital. The cost of capital has been estimated to be 8.54%, which results in a share price estimation of SEK 4.02. This is a 17.9% deviation from the published share price of the 30th of June 2009. As a result we have found that the share price is slightly undervalued by the market.

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Table of Contents:

Part 1: Introduction ...... 8 1.1 Motivation: ...... 8 1.2 Problem identification: Thesis Statement ...... 9 1.3 Limitations ...... 10 1.3.1 General Limitation ...... 10 1.3.2 Strategic analysis limitations ...... 10 1.3.3 Financial analysis limitations ...... 10 1.3.4 Forecasting ...... 10 1.3.5 Valuation ...... 11 1.4 Methodology ...... 12 1.4.1 Research philosophy ...... 12 1.4.2 Research approaches ...... 12 1.4.3 Research strategy ...... 13 1.4.4 Data collection method ...... 13 1.4.5 Reliability and validity of sources ...... 13 1.4.6 Structure of the paper ...... 14 1.4.7 Definition of terms: ...... 16 Part 2: Introduction of the SAS Group ...... 17 2.1 Company presentation and overview ...... 17 2.1.1 History ...... 17 2.1.2 Recent Development ...... 18 2.2 Group Structure ...... 19 2.3 Core activities ...... 20 2.4 Other activities ...... 20 2.5 Ownership and share performance ...... 20 2.6 Main markets ...... 21 Part 3: Strategic analysis ...... 23 3.1 Analysis of the macro environment: PEST ...... 23 3.1.1 Political factors ...... 24 3.1.2 Economic factors ...... 25 3.1.3 Socio-cultural factors ...... 26 3.1.4 Technological factors ...... 28 3.1.5 Implications of the PEST analysis ...... 28 3.2 Micro environmental analysis: Porter’s 5 forces ...... 30 3.2.1 Threat of entry ...... 30 3.2.2 Threat of substitutes ...... 31 3 Will SAS continue to fly? - A valuation of a company in crisis -

3.2.3 Power of suppliers ...... 32 3.2.4 Power of buyers ...... 33 3.2.5 Competitive rivalry ...... 33 3.2.6 Implications of Porter’s five forces ...... 34 3.3 Airline comparison ...... 35 3.3.1 Introduction to the competitors ...... 35 3.3.2 Performance comparison ...... 37 3.4 Internal strategic analysis ...... 41 3.4.1 SAS Group’s current strategy ...... 41 3.4.2 SAS Group’s resources and capabilities ...... 46 3.4.3 Value chain analyses ...... 50 3.5 SWOT analysis ...... 58 3.6 Conclusive remarks on the strategy part ...... 58 Part 4: Framework of the Valuation ...... 60 4.1 Cash flow approaches: Structure ...... 60 Part 5: Discussion of accounting practices ...... 62 5.1 Key accounting policies ...... 62 5.1.1 Auditor ...... 63 5.1.2 Consolidation of the accounts ...... 63 5.1.3 Goodwill ...... 64 5.1.4 Operating leases ...... 64 5.2 Adjustments to the financial statements ...... 65 5.2.1 Adjustment to the Income Statement (NOPLAT) ...... 66 5.2.2 Adjustment to the Balance Sheet (Invested Capital) ...... 68 5.2.3 Operating Current assets ...... 69 5.2.4 Current liabilities ...... 69 5.2.5 Invested Capital ...... 69 5.2.6 Total funds invested ...... 70 5.3 Adjustment to the Cash Flow (FCF) ...... 70 Part 6: Financial Analyses ...... 72 6.1 Analysing historical revenue ...... 72 6.1.1 Revenue discussion: ...... 73 6.2 Analyses of Value Drivers ...... 74 6.2.1 Return on invested capital ...... 74 6.2.2 Capital efficiency ...... 75 6.2.3 EBITA margin ...... 76 6.3 Conclusive remarks on financial analysis...... 78

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Part 7: Forecasting...... 79 7.1 Revenue forecast: General ...... 79 7.1.1 Short term (2009)...... 79 7.1.2 Medium and Long term (2010-2018) ...... 79 7.2 Traffic Revenue (Other Items) ...... 81 7.2.1 Charter and Other traffic revenue ...... 81 7.2.2 Mail and Freight ...... 82 7.2.3 Other operating Revenue ...... 82 7.3 Income Statement Forecasting ...... 83 7.3.1 Payroll expenses ...... 83 7.3.2 Other operating expenses ...... 84 7.3.3 Leasing cost for aircraft ...... 84 7.3.4 Other income lines ...... 85 7.3.5 Financial income & expenses ...... 85 7.3.6 Depreciation, amortization & Impairment ...... 85 7.3.7 Tax ...... 86 7.3.8 Income from discontinued operations...... 86 7.4 Balance Sheet forecasting ...... 86 7.4.1 Intangible Assets ...... 86 7.4.2 Tangible Fixed Assets ...... 87 7.4.3 Financial fixed Assets ...... 87 7.4.4 Current receivables ...... 88 7.4.5 Short-term investments, cash and bank balances...... 88 7.4.6 Shareholders’ equity ...... 88 7.4.7 Long-term liabilities ...... 89 7.4.8 Current liabilities ...... 89 7.5 Comments on the forecasted accounts ...... 90 Part 8: Multiple Analyses and Liquidation Value ...... 92 8.1 Multiple analyses ...... 92 8.2 Liquidation Value ...... 94 8.2.1 Introduction ...... 94 8.2.2 Estimation of assets in case of liquidation ...... 96 8.2.3 Value of liquidation ...... 97 Part 9: Cost of capital ...... 99 9.1 Capital structure ...... 99 9.2 Cost of equity ...... 101 9.2.1 Risk free rate ...... 102

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9.2.2 Equity beta ...... 102 9.2.3 Market risk premium...... 105 9.3 Cost of debt ...... 106 9.4 Calculation of WACC ...... 108 Part 10: Cash flow valuations & sensitivity ...... 110 10.1 Valuation of non core operating assets ...... 110 10.1.1 Associates ...... 110 10.1.2 Excess cash ...... 110 10.1.3 Assets held for sale ...... 111 10.1.4 Tax Assets ...... 111 10.2 Valuation of non - core operational liabilities and capital claims ...... 112 10.2.1 Value of Debt ...... 112 10.2.2 Unfunded Pension liabilities ...... 112 10.2.3 Capitalised operating leases ...... 113 10.3 Valuation of core operating items ...... 113 10.4 Midyear timing adjustment...... 113 10.5 Continuing Value ...... 113 10.6 Discounted Cash Flow ...... 115 10.7 Economic Profit ...... 115 10.8 Cash flow based estimation of the equity value ...... 116 10.9 Sensitivity analyses ...... 117 10.9.1 RPK and Load factor assumptions...... 117 10.9.2 Cost of capital assumptions ...... 118 10.9.3 Terminal Value assumptions ...... 118 10.9.4 Conclusive remarks on sensitivity analyses ...... 119 10.10 Conclusive remarks on the valuation of the SAS Group ...... 119 Part 11: Conclusions ...... 121 References ...... 124 Appendix ...... 130

Tables: Table 1: No. of Passengers by region ...... 22 Table 2: Summery table ...... 40 Table 3: SAS Group resources Table 4: SAS Group capabilities ...... 56 Table 5: VRIO Analyses ...... 57 Table 6: NOPLAT Calculation ...... 66 Table 7: Cash Taxes on EBITA ...... 67 Table 8: Invested Capital Calculation...... 68 Table 9: Free cash flow calculation...... 71 Table 10: Revenue Growth ...... 72

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Table 11: SAS Group ROIC, EBITA & Asset turnover ...... 75 Table 12: Airlines pre tax ROIC ...... 75 Table 13: Airlines Asset turnover ...... 76 Table 14: Airlines EBITA margin, revenue & cost ...... 77 Table 15: Load factor of Airlines ...... 81 Table 16: Payroll expenses ...... 83 Table 17: Selected forecasted accounts ...... 90 Table 18: Multiples ...... 93 Table 19: Asset of SAS Group ...... 96 Table 20: Capital Structure of SAS Group ...... 101 Table 21: SAS Group Betas ...... 103 Table 22: Iboxx Bonds ...... 107 Table 23: WACC estimated inputs ...... 108 Table 24: RPK & Load factor (sensitivity) Table 25: RPK & Load factor (deviation) ..... 117 Table 26: Risk premium & Beta (sensitivity) Table 27: Risk premium & Beta (deviation) . 118 Table 28: ROINC & Growth (sensitivity) Table 29: ROINC & Growth (deviation) ...... 118 Table 30: Valuation Results (all approaches / models) ...... 119

Figures: Figure 1: Structure of the Thesis ...... 14 Figure 2: Group Structure...... 19 Figure 3: Share performance SAS (Nov 2007- Oct 2009) ...... 21 Figure 4: SAS Group’s environment ...... 23 Figure 5: Price of oil per barrel ...... 26 Figure 6: Household spending on Air travel (NOK/DKK) ...... 27 Figure 7: Forces driving the industry ...... 30 Figure 8: No. employees per ASK...... 37 Figure 9: Labour cost / total operating cost...... 38 Figure 10: Airlines load factor ...... 39 Figure 11: Airlines yield ...... 40 Figure 12: SAS Group Strategy...... 42 Figure 13: SAS Group capabilities ...... 47 Figure 14: SAS Group Value Chain ...... 50 Figure 15: SAS Group marketing strategy ...... 52 Figure 16: SAS Group Strength, Weaknesses, Opportunities and Threats ...... 58 Figure 17: Discounted cash flow estimation ...... 115 Figure 18: Economic Profit estimation...... 116

Equations: Equation 1: Discounted cash flow ...... 61 Equation 2: Economic Profit ...... 61 Equation 3: Asset Value ...... 65 Equation 4: Invested Capital ...... 68 Equation 5: Free cash flow ...... 70 Equation 6: Weighted cost of capital ...... 99 Equation 7: CAPM Regression ...... 103 Equation 8: Continuing value DCF approach ...... 114 Equation 9: Continuing value economic profit approach ...... 114 7 Will SAS continue to fly? - A valuation of a company in crisis -

Part 1: Introduction

1.1 Motivation:

The airline industry has always been a fascination to us. This is because of the meaning of air transportation in our society and the recent developments in this industry. It is one of the fastest moving industries enabling trade and with it economic growth. Consequently the airline industry is acting as a catalyst for globalisation.

Until recently, before deregulation, the SAS Group has been a successful player in this industry. It is now in its third cost cutting period since the early 2000. It has been struck by misfortunes such as increased competition and malfunction planes. Despite this the company has always managed to grow at acceptable rates.

Our personal motivation for conducting a valuation is twofold; firstly it enables us to apply the tools which we have acquired during our studies at Bachelor and Master Level. It gives us the opportunity to use the most interesting theories we have come across, ranging from strategy to finance. Secondly it also provides us with the opportunity to explore a company and industry and by this giving us a deeper understanding of the dynamics in this particular industry.

Due to the nature of the thesis it may be interesting for academics and students alike, as it shows how to apply the framework of valuation to a particular company in practice. During our research we found that most books are of a theoretical nature, and we believe this thesis can be a useful addition to the available literature by providing a real life example.

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1.2 Problem identification: Thesis Statement

The thesis takes the view from an outside investor. Based on an analysis of the company, it attempts to value the equity of the SAS Group in order to evaluate whether the share of the SAS Group is fairly priced by the stock market. As a result the main thesis problem is:

What is the fair value of SAS AB?

The main objective has been to conduct a valuation and establish a fair price of the share SAS AB, which is listed on the stock exchanges in Stockholm, Copenhagen and Oslo. In order to determine the fair value we also decided to look deeper into the value drivers determining the price of the company. We realised that the price of the company depends on its strategy, return on invested Capital and the ability to grow.

After initial research it has been noticed that the company is currently in a deep crises which has been invoked by the occurrence of two events; the current financial crisis and increased competition from so called low cost airlines. As a result we have broadened the research to incorporate the following hypotheses:

Can the SAS Group survive its current crisis?

As a result, this thesis will address the two questions stated above, and a conclusion will be drawn in the final part of the thesis.

9 Will SAS continue to fly? - A valuation of a company in crisis -

1.3 Limitations

1.3.1 General Limitation

This thesis is a case study based on a single company and the industry it operates in. It seeks to apply strategic and financial theories to answer the two problem statements. The reader is required to have a basic understanding of business strategy and corporate finance, as well as some understanding of portfolio management. Therefore, the underlying theories which are used in the discussion are applied, but the theoretic background is not discussed in detail.

Further it has to be pointed out, that the view taken to evaluate the SAS Group is from the perspective of an outside, minority investor and that information is only collected until the 30th of June 2009, as this is the chosen day for valuing the company.

1.3.2 Strategic analysis limitations

The SAS Group is operating various airlines in different markets. In the strategic analysis, the focus has been on the SAS branded airlines; SAS Denmark, SAS Norway, SAS Sweden and SAS international. We have chosen this focus as the mentioned airlines make up the bulk of the revenue and consequently are responsible for the main shareholder value. Other operations and airlines of the SAS Group’s portfolio have been considered but not as detailed as the SAS branded airlines. This is because we assume that the other operations have similar external and internal pressures as the SAS branded airlines.

1.3.3 Financial analysis limitations

The financial analysis takes into account the period from 2005 – 2008, as the SAS Group has been changing its accounting policies to IFRS on the 1st of January 2004. As a result the picture of our analyses may be distorted by short term developments, and may not give an accurate picture of the company’s long term development.

1.3.4 Forecasting

The forecasting is mainly based on three drivers, which are characteristic to the airline industry; yield, demand and efficiency to use capacity. The Income Statement and Balance Sheet items are tied to these three drivers, which makes the forecast model sensitive to inaccuracies in the forecast of those three drivers. Even though due care has been taken while forecasting these three drivers it cannot be ruled out that we might not have forecasted these drivers accurately.

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To offer a solution to this limitation, we have undertaken a scenario analysis which shows the effect on the share price.

A further limitation while forecasting was that we only had four years of past accounts been available to us as mentioned above. As a result the forecasts are based only on four years of observations. As a result we may have only taken into account the period when the company has not been performing well. In this case ten years of past data may have been more appropriate when forecasting the future as the company is currently in a crisis.

1.3.5 Valuation

1. DCF and Economic profit The main valuation process has been undertaken with models well known and discussed in financial literature (discounted cash flow and economic profit). Based on the extensive discussion in the financial literature, it has been assumed that these models yield sensible results.

Further, due to constrain of this thesis and availability of data, only cash flows resulting from core operations have been valued with the two approaches mentioned above. Non operational assets and claims against the firm value have been discussed and valued based on more simplistic assumptions.

2. Multiples and Break – up value When using multiples in order to value a company, the different capital structures of the comparables should be taken into account. Due to the nature of the industry, where leasing of equipment for operations is common place, it has been difficult to estimate the true capital structure of comparable companies. As a result we have ignored differences in the capital structure when valuing the SAS Group by multiples.

Further, the liquidation value estimation is flawed to the extent that it is impossible to estimate the true market prices for some assets and liabilities due to the lack of discloser of assets. As a result, percentages of book values have been used when estimating the liquidation value.

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1.4 Methodology

1.4.1 Research philosophy

The research philosophy is an important part when research is undertaken. The reason for this is threefold, firstly it helps the researcher’s to clarify their assumptions about the view of the nature of science, secondly to offer a way of understanding the researcher’s approach and finally to help the researcher to find his own route through the research1.

All research in our paper is derived from the functionalist paradigm. This paradigm is derived from objectivism in the ontological stance. The key assumption within this paradigm is that “organisations are rational entities, in which rational explanations offer solutions to rational problems”2.

We have acknowledged this paradigm in our thesis as it is concerned with a problem oriented approach to offer a practical solution. We also acknowledge that entities and its stakeholders are of rational nature. In our paper we will discuss the future of the SAS Group and its share price as of the 30th of June 2009, based on analyses of data available. The result will be based on rational thoughts and assumptions and we will provide a valid conclusion based on our research paradigm.

1.4.2 Research approaches

In our thesis we will mainly use the deductive approach which is concerned with testing data through theory, as opposed to the inductive approach which develops theory through collected data.

We will apply strategic and financial theory in order to gain an understanding of the dynamics of the SAS Group, and project a future outcome (whether SAS AB is correctly priced by the stock market and whether it can survive in the short term). This empirical investigation will be both based on qualitative and quantitative information and analyses. Qualitative information will be mostly used to find the SAS Group’s strategic position; quantitative information will be used to establish the price of the share and estimate the liquidation value. It will be characterised by collecting data and information and as a result we will be devising an answer to the research question.

1 Saunders et al (2007) p.113 2 Saunders et al (2007) p.113 12 Will SAS continue to fly? - A valuation of a company in crisis -

1.4.3 Research strategy

For answering the research questions, we have decided to conduct a case study on the SAS Group to evaluate its strategic and financial position. The financial position will be derived by conduction a valuation to determine whether the market valuates the SAS Group’s share correctly with its current problems. As this is a very complex study it has been found that we cannot make a general model for the industry which may also fit other airlines.

In order to understand the dynamics related to the SAS Group better and to solve the research problem, our research will be limited to information and data around the company and related markets. The company is currently in crises and the investor needs to think about his potential returns and whether the company is accurately priced in the market. Therefore we need to address and discuss how much the company is worth as a going concern and the value of a possible liquidation.

1.4.4 Data collection method

We have tried to evaluate the problem with as much data as it was possible for us to collect in order to broaden our view on the SAS Group.

Our main sources of data have been from the annual accounts, the SAS Groups website, various industry related books, publications and journals. Financial data relating to developments of the financial markets for our quantitative model have been acquired from electronic sources such as DataStream, Oanda, Reuters, Bloomberg and relevant stock exchanges.

We have chosen not to interact with the SAS Group and trying to acquire internal and confidential information via offering our thesis to the SAS Group, as we thought the best possible way to answer the research problem was to evaluate the company from an outsider’s perspective. Consequently only publicly available information has been gathered. As a result we have not conducted any primary data collection.

1.4.5 Reliability and validity of sources

As we have only used published information and data, we assume that all of the data throughout this thesis is correct, starting from the annual accounts of the SAS Group. The Auditors have given an unqualified opinion and have expressed that the SAS Group is in line with prevailing laws and regulation according to IFRS and the Swedish stock exchange.

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Further we have only used published sources such as books and journals. If information has been found on the internet, we have disregarded information from non official and not recognised sources, such as Wikipedia. We have used a wide array of sources so we believe that there is no influence of a possible bias of any of the authors towards their expressed opinion.

As we have not conducted primary data collection, any bias or errors from this kind of source can be ruled out.

1.4.6 Structure of the paper

We have decided to split up the paper into different parts, the reason for this is threefold, first it gives an overview to the reader, secondly it ensures harmonisation throughout the paper in reaching the common goal, and thirdly to ensure no overlapping between parts as we have been two authors.

Figure 1: Structure of the Thesis

Part 1: Introduction

What is the SAS Group’s Value and is the group able to survive the crisis?

Part 2 : Part 3: Part 4: Part 5: Part 6: Introduction to Strategic Valuation Adjustments Financial the SAS Group Position Framework to accounts Analysis

Part 7: Part 8: Multiples Part 9: Cost Part 10 :DCF & Economic Profit and Forecasting and Liquidation of Capital Sensitivity

Part 11: Conclusion & Outcome

Source: Own creation

Part 1: In this part the motivation behind choosing this topic will be given followed by the methodology of writing and researching this thesis. Further, the problem will be identified and the hypothesis be introduced which has been used throughout the paper. Theories used in this paper will be introduced in the relevant sections.

Part 2: This section starts by introducing the SAS Group. History, recent development and the group’s structure will be presented. In addition, the markets where the Group is active and performance of the SAS AB share will be presented.

14 Will SAS continue to fly? - A valuation of a company in crisis -

Part 3: The Strategic position of SAS is found with the help of widely used strategic analyses tools. In this section the strategic position and current problems of the SAS Group will become apparent.

Part 4: In this section the general valuation framework and methodology for the cash flow based valuations are introduced. Treatment of special items will also be discussed.

Part 5: For the Cash flow based valuations, the accounts have to be adjusted in order to reflect core operations. This will be done it this part.

Part 6: In par the key value drivers of the SAS Group will be introduced. With the help of those, the revenue, the Income Statement and the Balance Sheet will be forecasted. There will be a discussion on the different line items under considerations.

Part 7: This part forecast the revenue, Income Statement and the Balance Sheet of the group from 2009-2018. The section will finish with comments on the forecasted annual accounts.

Part 8: The SAS Group is valued using two alternative approaches to the cash flow based models; namely multiple analyses and liquidation value.

Part 9: In this section the weighted average cost of capital for the SAS Group is discussed, which entails estimating the group’s cost of equity and its cost of debt.

Part 10: The group is valued using the commonly used discounted cash flow and the economic profit approach. Further a sensitivity analyses is undertaken with the purpose of evaluating the assumptions made in the process. The result is discussed with a view of the other two valuation approaches.

Part 11: In this part the findings of the paper are presented and conclusions will be drawn. The research question will be answered in detail here.

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1.4.7 Definition of terms:

i. ASK: refers to available seat kilometre; it is a measure of how many seat kilometres the SAS Group has produced in a year. The ASK is determined by management and it is a measure of capacity.

ii. RPK: refers to revenue passenger kilometre; it is a measure of how many kilometres have been flown by revenue passengers. It also includes bonus trips.

iii. Yield: is a measure of price; it is calculated by dividing revenue by RPK. It is the price per kilometre charged per passenger. The yield has been found higher on domestic and intrascandinavian routes due to the nature of the routes; on shorter routes the SAS Group is able to charge higher yields in comparison to long routes, otherwise long distance travel would not be affordable and short routes are more costly to operate then long routes.

iv. Seat Load factor: is a measure of airline efficiency. It is calculated by dividing RPK by ASM, which gives the percentage of seats filled in an airplane. Due to the nature of the industry (e.g. peak time and off peak time) the seat load factor can never be 100%. A load factor in the region of the early 80% is a remarkable achievement. For example an early morning flight form Oslo to Copenhagen is most likely to be booked out resulting in load factor of 100%, but on its return to Oslo it is mid-morning, which is an off-peak time, resulting in lower seat factors.

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Part 2: Introduction of the SAS Group

2.1 Company presentation and overview

Carrying over 29 million passengers in 2008, the SAS Group is the 5th biggest airline in Europe.3 As net income for the group amounted to MSEK -6.321 the company find itself in deep financial problems and need for restructuring. Apart from airline activities, the company is also involved in the supply of technical aircraft maintenance, cargo and ground services. The main market for the SAS Group is Scandinavia but the group also operates European and Intercontinental routes.

2.1.1 History

Scandinavian Airlines System is one of the oldest airlines in Europe. Its origins traces back to 1918 when the forerunner airline Det Danske Luftsselskab (DDL) was founded in Denmark. The Swedish and Norwegian flag carriers, AB Aerotransport (ABA), and Det Norske Luftsselskap (DNL) were formed in 1924 and 1927 respectively.4 In 1946 the three airlines started combining their operations within Scandinavia and in 1951 SAS was formally founded as a merger of these three Scandinavian flag carriers.5

Since then, the SAS Group has been a very successful airline with many innovations in the industry as the company has always tried to be at the forefront of developments. In 1952 it was the first airline in the world to fly a commercial trans-arctic route when flying from Los Angeles to Copenhagen and the first airline to offer a tourist class.

In 1968 it was the first airline to offer entertainment onboard and in 1969 the company was the first to employ a female pilot. Concerning technological development SAS has also been a forerunner as it was the primary introducer of an electronic reservation system (SASCO) in 1965. In 1987 it formed the information and reservation system Amadeus together with

3 SAS Annual report 2008 p.2 4 The Swedish flag carrier ABA merged with Svensk Interkontinental Lufttrafik (SILA) in 1948 and formed a new airline called ABA. 5 http://www.SASGroup.net 17 Will SAS continue to fly? - A valuation of a company in crisis -

Lufthansa, AirFrance and Iberia.6 Moreover, in 1997, SAS was one of the five founding members of the , the first and as of today, the biggest in the world.7

During the1980s and until 2003, the SAS Group has acquired parts or gained full control of airlines (, , British Midland, , Air Baltic, , , , Air, Widerøe, Lan Chile, ) around the world in order to expand their global network.

The company also diversified its operations during this period in other travel related industries by investing in hotels (SAS Rezidor) in order to provide for accommodation for their customers. The reason for this has been that the SAS Group wanted to diversify its risk and also to be able to forecast demand better, as demand for airplane tickets is a function of demand for hotel rooms. The remaining stake in these hotels was sold in 2007.8

2.1.2 Recent Development

The SAS Group has been fighting in order to survive since the economic downturn in 2001 and the September 11th which caused demand for air travel to fall sharply. In that year the SAS Group reported a net loss for the year of almost SEK 1.1 billion, which has been, until then, the worst year in the airline’s history.9

As a result, the group has employed different strategies since 2002 with the attempt to become profitable again. In 2003, “Turnaround 2005” was introduced, a restructuring program with the overall aim of achieving long-term profitability.10 This strategy was successful and the group archived to cut costs by SEK 14.2 billion and reported a profit for the year 2005 of SEK 255 million.11

In 2007, “Strategy 2011” was launched as a means of continuing cutting costs and to increase total number of passengers by 20% by 2011.12 However, in 2008 the market for air travel changed considerably again when the financial crisis became present and the group reported a net loss for the year of more than SEK 6 billion, forcing the company to restructure again. As a

6 http://www.flysas.com/en/Media-center/Media-kit/ note: go to innovations 7 SAS annual report 2008 p.22 8 SAS annual report 2007 p.4 9 SAS annual report 2001, p. 2 and 76 10 SAS annual report 2003, p. 9 11 SAS annual report 2005, p. 57 12 SAS annual report 2007, p. 6 18 Will SAS continue to fly? - A valuation of a company in crisis - result it was decided to implement a new strategy “core SAS” which is building on “Strategy 2011” in order to get back on track.

The SAS Group is still concerned with innovations around air travel to facilitate the customers experience and cutting costs. The group’s most recent advancement has been to introduce biometric fingerprints, thus making identification of passenger’s baggage more efficient.

Currently the SAS airlines is divided into four different companies, SAS Denmark, SAS Sweden, SAS Norway and SAS international, where all of the companies are in charge of handling their own traffic, but from the beginning of 2009 the group will merge into one company in order to cut costs.

2.2 Group Structure

The SAS Group A/S is a limited liability company listed on the Scandinavian stock exchanges. In the first quarter of 2009, the group has changed its company structure. Its new current structured is shown below. Prior to this new structure, , which under the new structure comprises SAS Sweden, SAS Norway, SAS Denmark and SAS International, were operating as separate airlines.13

Figure 2: Group Structure

Source: SAS Group.net

13 SAS Annual report 2008, p. 2 19 Will SAS continue to fly? - A valuation of a company in crisis -

2.3 Core activities

Resulting from the recent launch of the “core SAS” strategy, the group is trimming its operations in order to become profitable again. Minority stakes of other airlines will be divested. Additionally SAS Cargo has stopped all cargo flight operations in order to focus solely on belly capacity for passenger operations. Further SAS Ground handling services will be sold and then outsourced at non-Scandinavian airports.

As a result the new core activities will focus on providing passenger air travel from, to and via Scandinavia with its three individually branded airlines; Scandinavian Airlines, Widerøe and Blue1.

2.4 Other activities

Apart from its core activities, the group also provides cargo capacities services on its existing schedule passenger routes. It further provides ground handling services for other airlines as well as technical maintenance; combined other activities amount to about 28 % of revenue.

2.5 Ownership and share performance

57.6% of the shares are in control and in the hands of only four shareholders, the three Scandinavian governments and the Wallenberg foundation. The remaining 42.4% of the shares are held by various smaller shareholders and are traded on the stock exchanges in Copenhagen, Stockholm and Oslo.

The three Scandinavian governments combined hold 50% of the group’s outstanding shares; Sweden being the biggest shareholder owning 24.3% and Denmark and Norway holding an equal amount of 14.3% of the share capital. The remaining 7.6% of the share is held by the Wallenberg Foundation which is as a result the largest private share holder.

The share price has been highly volatile in the past 12 month due to the changing market conditions of the airline industry. Further the high oil price (Summer 2008) and the Spanair crash (October 08) have had an negative effect on the stock price.

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Figure 3: Share performance SAS (Nov 2007- Oct 2009)

Source: SAS Group.net, supplied by Euroland.com

The above graph has been adjusted for the recently launch of the right issue, which has increased the number of shares outstanding from 164.5 million shares to 2467.5 million shares. The rights issue did not have an effect on the distribution of majority shareholders as all of them have participated in the rights issue.

As it can be seen from the graph above, the SAS Group’s share has not been performing well compared to other airlines as it has seen the highest drop in its share price. Nevertheless, all airlines are affected by the financial crises which started in October 2008 and the high oil prices in the summer of 2008. Other airlines have shown a sign of recovery, while the SAS Group’s share has not. The share price of the SAS Group is highly sensitive to the market portfolio, as its historic beta value of July 2001 was estimated at 1.3314. Therefore the SAS share is significantly vulnerable to market movements.

The SAS Group has a dividend policy stating that only if the company is profitable a dividend is paid. This resulted in the fact that the SAS Group has not paid any dividends since 2001.15

2.6 Main markets

Defining a market in terms of air travel is very ambiguous especially for a flag carrier, as by definition its main market is its home market. This is because all of the flag carrier’s flights are origin in its home market. To present the markets served by the group we have decided to compile the table below; it shows the number of passengers carried in each region.

14 SAS Annual report 2008, p.25 15 http://www.SAS Group.net/SAS Group/default.asp note: Investor relations - shareholders – dividend policy 21 Will SAS continue to fly? - A valuation of a company in crisis -

Table 1: No. of Passengers by region

in million 2004 2005 2006 2007 2008 Domestic Denmark 835 864 805 775 795 Norway 8,277 8,484 8,669 8,978 8,643 Sweden 3,831 3,717 3,182 3,209 3,063 Intrascandinavian 3,684 3,532 3,731 3,745 3,758 Europe 9,774 10,199 11,069 11,116 11,382 Intercontinetal 1,525 1,539 1,407 1,341 1,366 Source: The SAS Group’s own webpage www.SAS Group.net

From the table it can be seen that in terms of passengers, the Norwegian domestic and the European market are the two single most important areas served by the SAS Group as approximately 70% of passengers are carried in those two areas. This is mainly due to the geographic nature of Norway, where there is only a limited amount of alternatives to air travel; also destinations in Europe are usually further away than domestic destinations, making flying more viable for the consumer.

Nonetheless, Scandinavia accounts to 60% of air passenger carried by the group; hence it reflects the most important region of operation for the SAS Group. The Scandinavian market is served by all SAS airlines (except SAS international) and Widerøe.

Blue 1 is only accounted for at European destinations, as (blue 1 home country) is not part of Scandinavia.

22 Will SAS continue to fly? - A valuation of a company in crisis -

Part 3: Strategic analysis

The previous section gave a short introduction to the company, its activities and recent developments. In this section the strategic environment in which the SAS Group is operating will be analysed and discussed.

Figure 4: SAS Group’s environment

Source: adapted from De Wit, B. (2004) p. 421

The macro environment will be analysed by conduction an analysis of external factors with the help of the PEST framework. This will be followed by a micro environmental analysis examining the industry of which the SAS Group is operating in (Porter’s five forces).

Finally the SAS Group’s strategy will be analysed and discussed whether the group is able to cope with the macro and micro environmental factors it is exposed to. The SAS Group will be compared to its competitors and resources and capabilities will be analysed and discussed. The section will end with a SWOT analyses and conclusive remarks.

3.1 Analysis of the macro environment: PEST

It is important for an investor to understand the external environment the company under consideration is operating in. This way, the investor is able to evaluate future risks and threats towards the company and can evaluate whether the strategy the company is employing is adequate, achievable and not subject to forces beyond the company’s control.

In order to analyse the many different factors in the company’s environment, the PEST framework will be used. It refers to political, economic, social-cultural and technological factors affecting the industry. As a result, factors most likely to change the airline industry will be

23 Will SAS continue to fly? - A valuation of a company in crisis - identified in order to gain a deeper understanding of the group’s future risks and threats.16 The fact that a strategy is congruent with PEST in the home environment does not mean that it will match other geographic areas. As the SAS Group’s main operating environment is Scandinavia and Europe, the focus will be on the Scandinavian and European environment17.

3.1.1 Political factors

The airline industry is subject to a composite system of national and international regulations even though it has been deregulated in terms of traffic rights. For the SAS Group and other European airlines, it is mostly rules formulated at the EU level that needs to be followed.

In March 2008 the open skies agreement between EU and the US came into force, allowing all transatlantic routes to be opened up to European and American companies. It further allows European airlines to have more than 50 percent ownership in American carriers and vice versa but not to gain overall control.18 Although this is a big step in the EU-US cooperation, the agreement is favouring of the US based carriers, as US airlines are permitted to serve intra- European routes as well, while European airlines are not permitted to do so in the US.19 The effect of this agreement already became apparent in 2007, when European air carriers were hit by an increased American competition as several US carriers moved capacity from their domestic route network to cross Atlantic routes. As a result, the load factor for European airlines across the Atlantic has decreased by 0.3 percentage points while traffic only increased by 4.4%.20 As the open skies agreement only came into effect in 2008, European airlines can expect even stronger competition from US carriers in the future, as it is no longer necessary to negotiate with governments to open a new route as it had been before.

Besides increased competition, the European airline industry is increasingly under scrutiny to reduce environmental damage. In July 2008 the EU decided that civil aviation should be included in the EU carbon dioxide emission trading system. Consequently, European airlines are now required to cut emissions by 3% until 2012 and a 5% until 2013.21 Further, airlines will have

16 Carpenter and Sanders (2007) pp.133; It has been decided to use PEST and not PESTEL as the last two factors (environmental and legal) easily can be fit into the other four categories. 17 SAS Annual report 2008, note: SAS international share of total group revenue was 12,7% in 2008 and SAS only serve 9 intercontinental routes. 18 http://europa.eu/scadplus/leg/en/lvb/l24483.htm Note: Europeans cannot hold 50% voting shares in the US and the same holds for Americans in the EU. 19 http://euobserver.com/9/28189 20 SAS Annual report 2007, p. 15 21 http://news.icm.ac.uk/leisure/airline-industry-in-scheme-to-cut-co2-emissions/554/ 24 Will SAS continue to fly? - A valuation of a company in crisis - the opportunity to trade the special permits to emit CO2, which is likely to translate into an increased cost for airlines. It is still uncertain how costly this new environmental rule will be for the SAS Group, but according to the group’s own estimates, an extra yearly cost of MSEK 300 to 400 is expected from the year 2013 onwards when the scheme is fully implemented.22

Furthermore, the Environmental Change Institute recommends that air travel should become more expensive. As a result the United Kingdom has doubled their air tax duty.23 This trend is likely to follow to other European countries.

Additionally, the “Single European Sky” (SES) came into force in 2004 with the main purposes of enhancing safety and efficiency of air transport, to reduce delays and stop the fragmentation of the air traffic management in Europe.24 However this initiative did not deliver as expected, and as a consequence a new proposal of the SES will go into force in 2012. The optimized air traffic management in Europe has the potential to reduce fuel consumption and emissions by about 10%.25

3.1.2 Economic factors

According to the International Air Transport Association (IATA), air travel growth is highly leveraged to the economic cycle. Growth in air travel is expanding and contracting at approximately twice the rate of the overall economy. 26 As Europe is currently in a financial crisis, the airline industry will be affected as the EU-27 GDP has decreased by 2.4% in the first quarter of 2009 compared to the previous quarter and by 4.5% if compared to the first quarter of 2008.27 In line, traffic figures for European airlines show a negative growth of 9.7% over the period January to March 2009 compared to the previous year and of 9.9% in March 2009 compared to March last year. 28

Additionally, the unemployment rate for the EU-27 has increased from 6.9% in June 2008 to 8.6% in April 2009. This represents a 1.7% point increase in less than one year.29 As unemployment increases, the demand for air travel is likely to decrease further than outlined

22 SAS Annual report 2008, p 18 23 Graham & Shaw (2007) page 1439-1451 24 http://www.skybrary.aero/index.php/Single_European_Sky_(SES) 25 http://www.eubusiness.com/Transport/single-european-sky.2/ 26 IATA Economic briefing 2008 27 EUROSTAT, news release euroindicators 82/2009, 3 June -2009 (Norway: -0.4%, Sweden: -0.9%) 28 AEA (association of European airlines) Traffic update 05.05.2009 29 EUROSTAT 25 Will SAS continue to fly? - A valuation of a company in crisis - above. Consequently airlines have been forced to cut capacity to respond to the falling demand.

In addition to economic factors affecting demand, airlines are also vulnerable to an increase in costs, especially Jet fuel. Jet Fuel is a major expense for airlines as it accounts to approximately 28% of operating costs. The price of jet fuel is closely tied to the oil price and as a result the airline industry is heavily dependent on oil. Consequently an increased oil price results directly in higher operating costs for airlines.

As can be seen from the table below, the oil price was relative stable up until mid 2004 when it started increasing rapidly towards its peak in July 2008, where the price was almost USD 140 per barrel. Since then, the price has decreased to a lower level, but it is expected that the oil price will remain higher than the 2004 level. Due to the current crises it is unlikely to increase as rapidly as it has in end 2007 to mid 2008 over the next 3-4 years.

Figure 5: Price of oil per barrel

140

120

100

80 Europe 60 Brent Spot 40 (USD) 20

0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Source: US Energy Information Administration, www.eia.doe.gov

3.1.3 Socio-cultural factors

Over the period from 1995 to 2008, net disposable income in the EU-15 has increased by 73%.30 As a result, most consumers have more disposable income to spend on leisure activities such as travelling. Further as statistics from Denmark and Norway show, the amount of money spent on air travel per household has increased steadily in the last decade. This can be seen on figure 6.31

30 EUROSTAT, not adjusted for inflation. 31 Unfortunately data for Sweden was not available but we expect the same trend as for Norway and Danmark. 26 Will SAS continue to fly? - A valuation of a company in crisis -

Figure 6: Household spending on Air travel (NOK/DKK)

Source: www.statistikbanken.dk and http://www.ssb.no

The figure shows the increase of absolute money spent on air travel in the respective local currency. It indicates that in Denmark the amount of money spent by households has tripled over the last decade. In Norway on the other hand the money spent on air travel also has increased but not as rapidly as in Denmark. Further there has been a fall in 2002-2004. Most likely this reduction can be related to entering the market in September 2002, as the entrance of a low cost carrier on the market which has previously been controlled by the SAS Group may have driven down ticket prices.32 Additionally it is no longer permitted for airlines in Norway to offer bonus points on domestic routes to customers. This may have caused loyal SAS customers to turn away from SAS to low-cost Norwegian. Nonetheless this figure shows that Danes and Norwegians are spending more money on air travel then before.

On the other hand, it has been found that a larger share of air travel consumers have become more price conscious. This contributes to a higher popularity of low-cost carriers as opposed to traditional flag carriers. According to the Barclaycard Business travel survey in 2008, businessmen gradually shift from premium air travel to economy class and low cost airlines. 14% of UK business travellers use a low cost airline most of the time and only 11% of business travellers use first and business class service regularly. The great majority (55%) still uses traditional flag carriers in economy class. This is may be due to better scheduling of the traditional airlines compared to low cost airlines. The survey does not represent all parts of Europe. Congruent with the discussion above, Mason (2005) found that both business and

32 Dagens Næringsliv, 23.05.2007 “Vil forlenge euro bonus-forbud” 27 Will SAS continue to fly? - A valuation of a company in crisis - leisure travellers choose economy class products to a greater extent.33 This indicates a trend to an emergence of a more price conscious group of business travellers in favour of cheaper alternatives. This trend is clearly in favour of the low cost airlines. Traditional flag carriers may lose market share as airline customers have become less concerned about service on board, but more about price. As a result airlines are forced to cut costs in order to compete in a highly competitive and increasingly low cost market.

3.1.4 Technological factors

There have been numerous technological changes in the past which have resulted in airlines becoming more efficient.

The increasing use of the internet has made it easier and less costly to purchase plane tickets for the customer as well as for the airline to sell those tickets. In the European Union, 61.4% of the population are using the internet. This represents a 218% growth over the period 2000- 2008.34 As a result it is likely that this sales channel will become the prominent way to purchase plane tickets. Additionally passengers are not able to only book their travel requirements online, but also to check in. In line with that development, boarding card and baggage tag can also easily be obtained from self serving machines at the airport, so passengers can save time as they don’t have to stand in the check-in cues at the airports and the airline can save personnel cost

It is also likely that new technological development will occur in the commercial aircraft manufacturing market. For example a new turbofan engine (LEAP-X) has been developed and is expected to be in service in 2012. This advanced new turbofan will reduce the engine contribution to aircraft fuel burn by up to 16% compared to current technology.35 Hence airline companies can in the nearest future be able to both spend less on jet fuel and respond to the environmental pressure when buying or leasing new aircrafts.

3.1.5 Implications of the PEST analysis

Different factors which have an influence on the airline industry have been pointed out and discussed above. The question remains as to how these will affect the SAS Group operating environment. Consequently we will address this below:

33 Mason (2005) p. 19-25. 34 www.Internetworldstats.com 35 http://www.cfm56.com/press/news/cfm+unveils+new+leap-x+engine/441 28 Will SAS continue to fly? - A valuation of a company in crisis -

The EU carbon emission scheme will have a negative cost effect for the group, estimated to be around MSEK 300-400 from 2013 onwards. On the other hand, other political factors such as the “single European sky” and the open skies agreement between the EU and the US are more difficult to evaluate. The single European sky has the potential to increase efficiency so that fuel consumption can be reduced, whereas the open skies agreement will increase competition from US carriers while at the same time make it easier for SAS Group to start new routes to the US. However as the “core SAS” strategy is focusing on the home market it is not likely that the company would be able to benefit from the single sky agreement, as it is not in line with strategy to open more intercontinental routes in the nearest future. Consequently the open skies agreement will have a negative effect on the SAS Group as it may increase competition on the group’s network.

The finding that the GDP has had a negative growth in Europe will affect the group, but it will hurt all European carriers alike. Unemployment and less disposable income will cause people to spend less on leisure activities such as travel. As a result, demand for airlines will be reduced during the recession and will force airlines to cut capacity to respond to the recession. However, GDP growth is likely to recover when the economy has recovered from the crisis, therefore, this negative effect will be a short-term concern for the SAS Group.

The fact that Norwegians and Danes spend more money on travelling is a positive sign. However, increasing competition from low cost carriers and the change in people’s preferences as to be more price sensitive is not advantageous. The group’s focus on attracting more business passengers might be difficult to achieve as this customer group has become more price sensitive.

On the other hand, that people are increasingly purchasing their plane tickets via the Internet may have a positive effect on the cost of selling for the SAS Group.

Technological factors such as new and more fuel-efficient engines will have the potential for the SAS Group being able to cut costs in the future, as its current fleet is aging and will need replacement when new technology becomes available.

Conclusively it has to be said, that the SAS Group is faced with new challenges emerging from changes in the above mentioned factors. These changes need to be addressed by the management and will be influencing the forecast.

29 Will SAS continue to fly? - A valuation of a company in crisis -

3.2 Micro environmental analysis: Porter’s 5 forces

In this section, the competitive state of the airline industry will be analysed using Porter’s five forces framework. 36 The idea behind this framework is that the intensity of competition differs between industries and is dependent on five basic competitive forces as shown in figure 7. The ultimate profit potential in an industry is thus determined by the combined strength of these forces. The stronger the five forces on the industry, the more competitive is the industry and as a result potential to earn a high profit is lower.

Figure 7: Forces driving the industry

Source: Markintell

3.2.1 Threat of entry

In 1978, the American congress passed the Airline Deregulation Act and since then Europe has followed suit by deregulating the industry in the 1990’s. Furthermore, on 30th March 2008, the Open skies agreement came into force with the attempt to open the aviation market to foreign access and remove barriers to enter the industry in favour of competition (see section 3.1.1).

The most important European step towards deregulation was the single sky agreement, which permits European airlines to carry passengers on any route within Europe. This agreement emerged out of the single European Market Act from 1992 and came into force in 1997.37 This meant that during the European post deregulation period, low cost airlines have been able to enter an industry previously being protected by country governments which gave the flag

36 Porter (1980) 37 www.europa.eu 30 Will SAS continue to fly? - A valuation of a company in crisis - carriers a monopoly or duopoly on their respective routes. As a result, the barriers to enter the industry is low from a regulation point of view

But on the other hand, there is a high cost to enter the industry as aircraft need to be purchased, resulting to high capital cost for a new airline. Capital markets and leasing companies have reduced this barrier, aircraft and all related equipment needed for flight operation can be leased to circumvent the high capital cost. For example, when Easyjet started domestic operations in the UK in 1995, it started out with wet leased aircrafts and an initial capital of GBP 5 million.38 Now it is Europe’s 4th largest airline, carrying 44 million passengers to 27 countries with 170 planes.39

The biggest barrier to entry apart from acquiring aircrafts and related equipment is obtaining landing rights and slots at the busiest and most popular airports. Continental airline for example has paid a reported GBP 100 million in order to receive four slots at .40 The picture is similar but not as drastic on other London airports; according to Deloitte, airlines have started to include landing slots as an asset on their Balance Sheet41.

Brand identity is an important part of an airline’s assets. This is true as the brand of an airline stands for safety and punctuality, especially if the air carrier has been long established; this maybe a further hindrance for an airline to enter the market. On the other hand there is a trend towards travellers choosing the cheapest option and becoming less concerned with the brand of the airline as found in the PEST analyses. This is because some flag carriers have also adopted a “no frills” model in their economy class to be able to compete with low cost carriers. This may have led to a damage of their brand as the customer cannot perceive a difference in the service of a flag carrier to be higher than a low cost carrier.

3.2.2 Threat of substitutes

The threat of substitutes is closely connected to money, time and personal preference in this particular industry. Substitute products for air travel include cars, busses, trains, boats and other means of transport. Consequently if the cost of flying becomes too high, leisure

38 Robison, P. Sky's the limit for easyJet fly, The independent, 05.10.1997 http://www.independent.co.uk/news/business/skys-the-limit-for-easyjet-fly-1234049.html 39 Easyjet’s corporate webpage: http://corporate.easyjet.com/about-easyjet.aspx 40 Robertson, D., Heathrow landing slots are airline’s best asset 16.7.2008, the times online http://www.timesonline.co.uk/tol/travel/news/article4340478.ece 41 Ouvry, J., UK airlines start to value landing slots as assets on Balance Sheets 12.05.2008, http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2834%2526cid%253D205472,00.html 31 Will SAS continue to fly? - A valuation of a company in crisis - customers have alternatives in most situations. The alternative to air travel further depends on distance to the destination, resulting in the fact that a customer is more likely to travel with an airline if the destination is further away. If the desired destination is on another continent passengers are left with few alternative transport options.

It should be mentioned that passengers have become more concerned of air travel after the terrorist attack of September 11th, leading to the situation that some consumers would prefer other modes of transport than air travel despite it being more time consuming.

Business customers are usually under time pressure when travelling, so there is no perceived threat of substitutes for this customer group. Conversely, information technology such as video conferencing and internet communication is becoming increasingly commonplace in the workplace suggesting that some travelling can be substituted by technology.

3.2.3 Power of suppliers

Scarcity of airplane manufacturers in the world leads to limited competition between them and leave little space for bargaining power for the airlines to negotiate prices. There are only seven commercial aircraft manufacturers in the world with Boeing and Airbus being by far the biggest among them.42 Additionally there are 3 manufactures of regional jets, and two Russian aircraft manufactures. Russian commercial aircrafts tend to have higher fuel consumption and a smaller maintenance network in the western world and consequently are not popular with western airlines43. Therefore, a small number of suppliers can influence the cost of new aircraft.

Other suppliers include oil and gas suppliers and these also have large bargaining power. The only ways airlines can affect the price for fuel is by entering into future hedging contracts to protect against increases in oil and gas prices.

Additional suppliers with high bargaining power are the suppliers of airport gates. This is especially important in the group’s main market; Scandinavia. This is because the majority of the cities served by the group do not have more than one airport to choose for a location of operations. Consequently the suppliers of gates can change the price without interruption.

Suppliers with little bargaining power include suppliers of food and drinks etc., as they are unlikely to influence the price of these raw materials.

42 Boeing, Airbus, Embraer, Bombardier, United Aircraft Corporation, Antonov, Saab 43 Holloway et al (2008) 32 Will SAS continue to fly? - A valuation of a company in crisis -

3.2.4 Power of buyers

To discuss the buyer power of airplane tickets purchasers, the purchasers of air travel have to be divided into leisure travellers, business travellers and consolidators.

Leisure travellers have increasingly more bargaining power as the internet has made the comparison among air travel providers easier. As a result, customers have a direct influence on the price, because prices can easily be compared for any destination between airlines and different routes.44 Additionally switching costs are low as it is only limited by the frequent flyer loyalty programs. But unless a certain status level is reached which provides complimentary services such as upgrades and lounge access, it is difficult to evaluate the effect on customer loyalty toward an airline.

Business travellers usually do not purchase the tickets themselves as this is usually handled by their company. Professionalism in corporate purchasing has increased as companies have taken greater control of their travel expenditures. Consequently, the role of travel manager in many companies has changed from a general administrative role responsible for booking travel, to a manager which is finding himself of managing travel expenditure.45 However, the amount of purchasing power of business customers is highly dependent on the size of the company. A small company will not be in a position to negotiate volume discounts with traditional airlines, as the amount of business they generate will not be sufficient. Thus, the larger the cooperation in need of business travel arrangements the higher the purchasing power.

The third kinds of customers the airline are dealing with are Consolidators. These are companies that negotiate with airlines to buy up seats that would otherwise not be sold.46 These companies purchase seats in large blocks at discounted prices and as a result offer their customer’s tickets at a lower price than the airlines do. As consolidators are negotiating with the airlines they clearly have bargaining power.

3.2.5 Competitive rivalry

Since the entry of low-cost carriers in the airline industry, competition has been very intense. Low demand and falling profitability has shown an effect on airlines as flag carriers such as the SAS Group and are reducing capacity. On the other hand, low cost airlines such as the

44 Teichert et al. (2007) p. 227-242 45 Mason (2002) 46 Carpenter and Sanders (2007) p. 151 33 Will SAS continue to fly? - A valuation of a company in crisis -

Norwegian Air shuttle and are expanding at the same time, due to customers preferences.47 Hence competition can be described as intense based on price competition as low-cost carriers has entered the market.

3.2.6 Implications of Porter’s five forces

The threat of entry into the airline industry has changed in the post deregulation period. During pre - deregulation it was impossible for an airline to start up a business in Scandinavia as the SAS Group used to have monopoly on Scandinavian routes. Now the regulation has changed and leasing of operating equipment has removed the high capital cost which had lead to a high entry barrier. As a result it has been possible for low cost carriers such as Norwegian Air Shuttle to start operations.

However obtaining landing slots at the busiest airports is difficult and costly and the SAS Group’s well-established brand name in Scandinavia lowers the threat of entry in Scandinavia. Nonetheless the threat of entry of a company to enter the Scandinavian air travel marker has changed from very high to medium/low in group’s main market.

Threat of substitutes is low in the Norwegian air travel market due to poor infrastructure and long distances. Air travel is still the most feasible and convenient form of transport in that region. In Denmark and Sweden however, where the infrastructure is superior to Norway other modes of transport may be more attractive to passengers than in Norway. Consequently the threat of substitutes is low in Norway, but somewhat higher in Denmark and Sweden. For European routes the threat of substitutes is also low, but it has to be pointed out that the competition is higher on those routes as there are more airlines competing in the market

The suppliers of airplanes are powerful as there are only a limited number of aircraft manufacturers. Further the suppliers of airport gates at the main Scandinavian airports have power, as there is usually only one airport in each capital city. In total, the suppliers of the SAS Group are perceived to have medium bargaining power.

The power of buyers has changed as the Internet has made it convenient and easy to compare prices among airlines for leisure passengers. Also, business customers have more power now than in the past as more emphasis has been put on travel managers. Consolidators are the most powerful customers as they can affect the prices the most. Consequently the power of buyers is

47 Dagens Næringsliv 21.07.2009 “På innsiden: Lavpris vinner” 34 Will SAS continue to fly? - A valuation of a company in crisis - estimated to be high as they can put on more pressure on the group at present than ever before, as more airlines have entered the market resulting in more choices for the customers.

Conclusively it can be said, that the airline industry is a highly competitive industry with low profit potential for SAS Group. In order to become competitive again it is essential that the group manages to cut costs and move closer to the cost level of Norwegian.

3.3 Airline comparison

After having examined the SAS Group’s external environment, we have decided that it will be useful to compare the group with other European airlines. This way it is possible to evaluate how the SAS Group is performing relative to its competitors. Five airlines have been identified to be close competitors to the SAS Group; namely Ryanair, Norwegian Air Shuttle, Finnair, and AirFrance-KLM. The reason for having chosen the mentioned airlines is twofold, firstly because Norwegian Air Shuttle, Finnair and Ryanair operate hubs in the Nordic region (as the SAS Group), and secondly because all five airlines are serving many of the same routes as the SAS Group does.

As the airlines are not reporting their financial statements in the same currencies we chose to undertake the comparison in euro.48

This section will start by giving a short introduction to the competitors, continue with comparing various performances measures and end by concluding how SAS is performing relative to these.

3.3.1 Introduction to the competitors

Ryanair was established in 1985 and has since the beginning of the 1990’s been operating as a low cost airline. Carrying 51 million passengers in 2008 it is the third biggest airline in Europe.49 Ryanair is included in the comparison as it is the most successful airline in Europe since it has the lowest operating cost and the highest growth rates. Further, it is a direct competitor to the SAS Group, as one of its main hubs is located in Stockholm. Additionally, the company is expanding in Norway by opening seven new routes in late 2009 at Rygge airport in Moss (close

48 The currency euro has been chosen , as three out of the five airlines report in this currency, the currency conversion approach is discussed in appendix No.17 49 Ryanair’s webpage, www.ryanair.com 35 Will SAS continue to fly? - A valuation of a company in crisis - to Oslo)50. Despite its success, the Irish airline reported its first pre-tax loss in 2008 of EUR 181.51

Norwegian Air Shuttle was established in 2002 and has become very successful within a short period52. The airline is included as it is the group’s closest competitor since it operates hubs in Copenhagen and Oslo. Together with Lufthansa, Norwegian was the only airline among the five identified to report a profit for 2008. Although the profit has been modest, Norwegian Air Shuttle´s share has increased its market capitalisation by approximately 300% since the end of 200853.

Finnair was founded in 1923 and carried more than 8 million passengers yearly from its main hub in Helsinki in 2008.54 The airline is a competitor to the SAS Group on long haul routes to Beijing, Tokyo and Bangkok. Further the SAS Group’s airline Blue 1 is in direct competition on virtually all routes, as Blue 1’s main hub is located in Helsinki as well. On a further note, Finnair has reported a pre-tax loss of EUR 59 millions.

Lufthansa is Europe’s second biggest airline carrying around 70 million passengers in 2008.55 It operates from hubs in Frankfurt, Munich and Zurich and has been very successful in recent years. The SAS Group themselves does not consider Lufthansa as a competitor as it shares many code share agreements and check in desks with Lufthansa. Lufthansa handles sales and ticketing for the SAS Group in Germany and so does the group for Lufthansa in Scandinavia56. However, as Lufthansa operates various routes between Germany and Scandinavia, we consider Lufthansa as a competitor. In addition, Lufthansa has announced to start operations from Copenhagen to various European destinations in March 2010.57 This is routes currently served by the SAS Group and competition has not been expected previously. The company reported a pre-tax profit of EUR 804 millions in 2008.

Airfrance-KLM is perceived to be the largest airline operator in Europe, carrying more than 74 million passengers in 2008. The Airline was established as a result of a merger between

50 Aftenposten 20.07.09 “Ryanair vil ha flere ruter fra Rygge” 51 The Independent, 03.06.09 “Ryanair plunges to first ever loss following Aer Lingus writedowns” 52 Norwegian’s webpage, www.norwegian.no 53 Dagens Næringsliv 16.10.09 “Full fres på børsen” 54 Finnair’s webpage, www.finnair.com 55 Lufthansa’s own webpage, www.lufthansa.com 56 SAS’s annual report 2008, p.16 57 Dagens Næringsliv 20.09.09 “Tar opp kampen mot SAS” 36 Will SAS continue to fly? - A valuation of a company in crisis -

Airfrance and KLM in 2004.58 Airfrance - KLM operates hubs in Amsterdam and Paris and can be considered a competitor to SAS as it services Scandinavia with routes from Amsterdam and Paris. The company reported in 2008 a pre-tax loss of EUR 1,204 millions.

3.3.2 Performance comparison

When comparing the performance of the airlines, selected key drivers affecting operating income will be used. By evaluating the operating income drivers, the financial spreads among competitors can be explained59. It is possible to calculate numerous ratios for comparison purposes, but we have decided to focus on four important ratios which are widely used in the industry. The focus will lie on number of employees per ASK, the share of labour costs of total operating costs, the seat load factor and revenue RPK as well as ASK.60

3.3.2.1 Number of employees per ASK (in millions) This is a measure of the productivity of employees, as it shows the relationship between number of employees per ASK. As can be seen from the figure below, the SAS Group and Lufthansa score lower than its competitors. As expected, low cost airlines are more efficient in the use of its workforce61.

Figure 8: No. employees per ASK

Number of employees per ASK (millions)

Source: own creation, annual reports of Airlines

This gives an indication as to why competitors are more successful than the SAS Group, but the above statement has to be considered with caution, as this figure only considers the total

58 Airfrance KLM investors webpage, http://www.airfranceklm-finance.com 59 Koller et al. (2005) p.188 60 Chopra and Lisiak (2006) 61 Data on ASK for Ryanair are not available, as the company does not publish it. 37 Will SAS continue to fly? - A valuation of a company in crisis - workforce and does not take into consideration the differences in activities between the airlines.

Norwegian Air Shuttle for example follows a strategy of extensive outsourcing, whereas the SAS Group and Lufthansa have their own employees handling these activities, requiring a higher number of employees.62 A further possible reason behind the large differences could result from the length in working hours of the workforce at the different airlines.

3.3.2.2 Share of labour costs to total operating costs A well known fact is that the SAS Group is faced with high payroll costs63. As can be seen from the figure below, the SAS Group has the highest labour cost amounting to almost 34% of total operating costs in 2008; this is higher than any of the airlines under consideration.

Figure 9: Labour cost / total operating cost

Source: own creation, annual reports of Airlines

The SAS Group’s employees are represented by 39 different labour unions. Currently the group is negotiating further reductions in pay after the management and the unions agreed in February 2009 on cutting staff costs by SEK1.3 billion and by a further SEK1 billion in 2010. However, due to the financial crisis, management is forced to cut the mentioned SEK1 billion before 2010, negotiations broke down in June 2009.64 A small agreement between the two parties has been reached before the negotiations broke down; a six percent decrease in salary for the Danish and Norwegian cabin crew taking affect from august 2009.65

62 Norwegian, Lufthansa and SAS’s web pages 63 Dagens Næringsliv 07.07.2009 ”Milliardsmell for SAS” 64 Dagens næringsliv 25.07.2009 “Mot nye SAS-forhandlinger” 65 Dagens næringsliv 06.07.2009 “SAS forhandlingene brutt” 38 Will SAS continue to fly? - A valuation of a company in crisis -

3.3.2.3 Load factor The load factor is an important measure, indicating how effective an airline is to fill its seats as it measures capacity utilization. It is represented by the relationship between ASK and RPK66. This factor is good indicator for efficiency as it is independent of flight length. Hence it is possible to compare the load factor of an airline flying short routes such as Ryanair to an airline also flying longer routes such as Lufthansa.

Figure 10: Airlines load factor

84.00% 82.00% 80.00% Load factor 78.00% 2008 76.00% Load factor 74.00% 2007 72.00% 70.00% 68.00% 66.00%

Source: annual accounts of airlines

Airlines have large fixed costs when operating their aircrafts, thus it is important that the aircrafts are used as effectively as possible. From the above figure it can be seen that the SAS Group is performing poorly compared to its competitors. Consequently, the group has the poorest asset utilization among these five airlines. However, it should be noted that the load factor does not consider the pricing of the tickets, as a result the airlines yields also have to be examined.

3.3.2.4 Revenue per RPK and per ASK RPK is a measure of market share served.67 However, RPK alone only indicates the amount of market served, but RPK’S are not directly comparable among airlines as airlines differ in size and route length. A better comparison is comparing yields (Revenue/RPK) as it compares earned revenue per RPK flown. In the table below we have estimate the yields of the airlines under consideration.

66 Wells (1999) p. 214 67http://www.airfranceklm-finance.com/aeronautical-financial-glossary.html#R 39 Will SAS continue to fly? - A valuation of a company in crisis -

Figure 11: Airlines yield

Source: own calculation, based on Airlines annual reports

The table indicates that the SAS Group has been able to charge a higher price per kilometre than its competitors. As expected, Norwegian has the lowest RPK as it is a low cost airline; hence it has to sell its services cheaper than any other airline in the comparison. A limitation to this figure is that the flag carriers earn their revenue from different activities and not only from operating aircrafts and transporting passengers. As a result the above figure might be misleading as revenues are not clearly distinguished in the airlines annual accounts.

The first bar represents revenue per ASK. This is a combination of the yield and the load factor and indicates the revenue generated on an airlines network of flights. The difference between ASK and RKP is thus resources wasted, as the airline could potentially earn that revenue as they are having spare capacity on their aircraft. As the SAS Group has the largest difference it indicates that it is the less efficient airline of the sample.

3.3.2.5 Concluding remarks on airline comparison The following table summarises the findings from the above section.

Table 2: Summery table Airlines

Norwegian SASgroup Finnair Airfrance - KLM Ryanair Lufthansa Employees/ASK ++ - - + + - n/a - - L. cost / op. Cost + - - +- - ++ +- Seat Load factor + - - - + ++ + Yield - - ++ +- +- n/a +

Source: own creation

As it can be seen from the table, the SAS Group is not performing well compared to its competitors; the airlines under consideration which are performing best are Ryanair, Lufthansa

40 Will SAS continue to fly? - A valuation of a company in crisis - and Norwegian Air Shuttle. This is reflected in their respective Income Statements, as Lufthansa and Norwegian reported profits in 2008, and Ryanair only reported losses because of the attempted takeover of Air Lingus68. As a result we expect that the SAS Group has to improve its performance on the key areas highlighted above. This expectation will be considered in the forecast.

3.4 Internal strategic analysis

In this section the group’s strategy will be discussed as well as evaluated if it can overcome the challenges found by the analysis above.

3.4.1 SAS Group’s current strategy

In the recent past, three different strategies have been launched by the SAS Group. All of these strategies are concerned with cost cuts in order to enable the company to report a profit.

In 2002, Turnaround 2005 was initiated and has been successfully implemented as the group was able to reduce costs by SEK 14 billion as planned.

The second strategy implemented, strategy 2011 (S11), was introduced in 2007. This has not yielded to be as successful as the group anticipated, as it did not deliver achieve the planned cost reduction of SEK 2.8 billion or become profitable again as planned.

Core SAS is the current strategy that the SAS Group is implementing and builds on the S11 strategy. It has been launched in 2009 with the purpose of responding to the difficult current global operating environment, to solve internal challenges and to strengthen the long term competitive positioning and profitability.69 The figure below describes the new strategy, which focuses on five main areas. These main areas will be presented and discussed in this section with the intention of evaluating whether or not it is possible for group to achieve its strategic goals. Successful implementation of this strategy is crucial for the SAS Group to survive and avoid repeating the SEK 6 billion loss from 2008.

68 Ryanair Annual report 2008 p.12 69 SAS Annual report 2008, p 8-13 41 Will SAS continue to fly? - A valuation of a company in crisis -

Figure 12: SAS Group Strategy

Source: SAS annual report 2008

3.4.1.1 Focus on Nordic home market The SAS Group already has a strong position in the Nordic market and is the market leader within Scandinavia serving approximately 59% of the Norwegian, 46% of the Danish and 35% of the Swedish market.70 In order to uphold this strong position, the group will divest all companies that are not a part of their core operations. Furthermore the company will outsource more of its support businesses such as parts of SAS Tech (maintenance) and SAS Ground Services.

The SAS Group successfully divested its holdings in AeBal S.A (a company operating flights for Spanair) and sold 81% of its stake in Spanair in 2009.71 The company will remain a minority shareholder in Spanair with a stake of 19%.72 Later the same year, Lufthansa bought the group’s 20% stake in British Midland73 and ground services in Finland were outsourced to ISS Palvelut as part of the plan of outsourcing services to others. 74

Although some divestments have been made, not all of the planned sales have been undertaken. The group has started the process of selling its minority stake in Air Greenland, airline and Estonian Air but has not yet been able to finish the process successfully at time of writing. As of the 30th of June, SAS owns minority shares in companies amounting to

70 SAS Annual report 2008, p.9 (16% market share in Finland) 71 SAS Group-Press 14.01.2009 “SAS Group divests its share in AeBal to Proturin” 72 SAS Group-Press 31.03.2009 “Sale of Spanair completed” 73 SAS Group-Press 01.10.2009 “Sale of SAS shares in bmi to Lufthansa” 74 SAS Group-Press 02.06.2009 “Operations of SAS Ground Services (SGS)Finland transferred to ISS Palvelut Oy” 42 Will SAS continue to fly? - A valuation of a company in crisis -

MSEK 622 in book value, which still needs to be divested. This element of the strategy will most likely be successfully implemented, as finding buyers for these stakes should be achievable.

However, the strong position in the Scandinavian countries could be difficult to uphold even though the company will concentrate its focus on this market. Increasing competition from low cost carriers Norwegian and Ryanair will be difficult for the group to handle as Norwegian Air shuttle is planning to open eight new routes in Scandinavia in the second quarter of 201075. Additionally, Ryanair also sees great potential in Scandinavia and has promised to expand on this market.76 Currently only 12% of Ryanairs route network starts or ends in Scandinavian but as this company is likely to expand more, the SAS Group does not only have to respond to the challenges from Norwegian Air Shuttle but also to increased competition from Ryanair.

Competition in the SAS Group’s home market is intense and it seems like the only way SAS can uphold its strong position is by lowering fares. Thus, the company has to reduce its cost by a great scale to operate profitable. Especially labour costs need to be addressed to come closer to the level of rival airlines.

3.4.1.2 Focus on business travellers and strengthened commercial offering The business customers are the most profitable customer segment and will be the SAS Group’s main focus. Accordingly, the SAS Group will reduce the number of leisure routes and concentrate on the more profitable business routes. In addition, the group strives to position itself differently. Instead of being viewed as a network carrier the vision is to be “the obvious choice” between network carriers and low-cost carriers with network carriers being high in service and low in simplicity and low cost carriers being low in service and high in simplicity. The groups new brand strategy is to be high in both, service and simplicity.

Business travel is highly sensitive to changes in the economy and fell fast as the financial crisis came into play. In early 2009, the rate of decline in premium traffic exceeded 20% and evidence indicated that many business travellers shifted to economy class if not cutting travel altogether.77 In the long term, the effect of the financial crisis will eventually disappear, but the business travellers’ opinion concerning premium tickets has changed fundamentally. Therefore, the group’s strategy to focus on premium travellers may not be appropriate if most businesses

75 Norwegian presserom 15.10.2009 “ Norwegian åpner åtte nye ruter I Skandinavia” 76 Dagens Næringsliv 06.08.2009 “Ryanair vil ha mer I Norge” 77 IATA Annual report 2009, p. 13 43 Will SAS continue to fly? - A valuation of a company in crisis - will buy economy class tickets in line with leisure travellers. However, the SAS Group recently was able to sign the largest air travel agreement ever made in Norway with Statoil. The deal has been valued at 3 billion over five years and is ensuring that Statoil will only use the SAS Group on routes supplied by the airline; if none of the SAS Group’s airline is available on the chosen route then one of the group’s alliance partners will provide the air travel.78 As SAS has made this deal with Norway’s largest company it is a good start on attracting premium travellers.

The brand positioning of being high in both service and simplicity is difficult to evaluate. Recently, the group has been voted the world’s third most punctual airline and the most punctual airline in Europe.79 This adds value to the “high in service” brand positioning. Consequently the airline sends a good signal to business customers who presumably put great value on punctuality. It is not mentioned in SAS’s strategy which improvement the group will undertake to be seen as the obvious choice; but it we consider it to be naïve to expect that the company can increase service while at the same time lowering its costs.

The low cost carrier’s main competitive advantage is being able to offer cheap tickets as a result of greater capital efficiency and lower operating costs. The SAS Group is currently cutting costs, but it remains to be seen whether the company will be able to achieve a similar cost base as low cost carriers while offering higher service at the same time. It seems that the SAS Group wishes to be similar to low cost carriers and premium airlines at the same time, which in our view is unlikely to be achievable.

3.4.1.3 Improved cost base In order to become profitable over the long term and to reduce its cost gap relative to competitors, the group is trying to reduce its cost by approximately SEK 4 billion by 2011. Half of these cuts will be undertaken in 2009, the majority of the other half in 2010 and the remainder in 2011. Of these SEK 4 billions, SEK 1.3 billion comprise savings within collective agreements with staff such as salaries and pensions while the remaining SEK 2.7 billion represents SAS’s new cost program where savings in all operational areas are included.

Around midyear 2009, the SAS Group announced that the cost cutting part of core SAS was being implemented ahead of schedule. It further announced that another SEK 2 billion in cost

78 SAS Group-press 19.01.2009 “SAS Group signs Norway’s largest air travel agreement” 79 SAS Group-press 07.10.2009 “SAS is the world’s third most punctual major airline” 44 Will SAS continue to fly? - A valuation of a company in crisis - cuts were necessary in order to reach the cost base of its competitors.80 Of these SEK 2 billion, SEK 1.4 billion shall be achieved through further changes in the collective agreements.81 Thus the company aims to cut approximately SEK 6 billion in yearly operating costs whereby SEK 2.7 billion are supposed to be achieved through a reduction in collective agreements.

As 39 different unions represent the employees of the SAS Group, cost reductions through collective agreements will be difficult to achieve, even though all categories of the group’s employees shall contribute to the savings in personnel cost. Management has cut 6% of their basic salaries, but an agreement has not yet been reached with the labour unions concerning the scale of salary cuts and other employee costs.

Pilots in Scandinavia have already accepted a 10% decrease in salaries over the coming two years, thus SAS has managed to come to some agreement with one group of employees. However, the management refuses to discuss the negotiation progress concerning ground and crew personnel before agreements have been made.82

Savings of SEK 3.3 billion in all other operational areas are likely to be less complicated than coming to an agreement with the labour unions, as the group has decided to downsize operations by 20%. A large part of this cost saving will be a result in a smaller scale of operations. Further, a less volatile and less expensive oil price will contribute to the cost saving (see figure 5). Needless to say, it is difficult to evaluate whether or not SAS will successfully reduce the cost savings part of its core SAS strategy, but as they are currently ahead of schedule, it seems reasonable to argue that the company can implement this part of its current strategy program successfully.

3.4.1.4 Efficient organization with a customer-oriented culture The SAS Group has decided to change the organizational structure of the group by streamlining its operations. Only SAS Tech, SAS Cargo, Blue 1 and Widerøe will continue to operate as separate business units. SAS Norway, SAS Sweden, SAS Denmark and SAS International will be transferred to a new organization and no longer serve as separate airlines. By reorganizing, SAS is able to reduce 400 full time employees. The group further hopes that the improved

80 https://www.avanza.se/aza/press/news.jsp?newsArticleId=1303261 81 SAS Group-press 09.10.2009 “The process regarding the union negotiations” 82 Business.dk 09.10.2009 “SAS tavs om forhandlinger med medarbejdere” 45 Will SAS continue to fly? - A valuation of a company in crisis - organization will make easier to be in contact with customer and other stakeholders. This part of the SAS core strategy will translate in SEK 400 million of the cost savings program.

Complex company structure usually leads to unnecessary bureaucracy and as a result company structure should be streamlined when possible. This is currently the case for the SAS Group which prior to core SAS operated as various separate business units. Whether or not the current streamlining will deliver the predicted results is difficult to evaluate. However, reduction of workforce will certainly add to the cost saving, but the predicted simpler customer and stakeholder contact will depend on the level of streamlining to be achieved. The organization will not automatically be more efficient by gathering separate business units together as one but it will depend whether the group is able to implement the changes successfully.

3.4.1.5 Strengthened capital structure In order to place the company in a better financial position, the SAS Group offered a SEK 6 billion rights issue in March 2009 to its existing shareholders. Further the company succeeded in renegotiating the terms of outstanding credit to mature in 2012 instead of 2010. The intention is to give the SAS Group a stronger Balance Sheet and help the group deal with the current crisis and successfully implementation of the core SAS.

The rights issue was oversubscribed by approximately 23%. The reason behind the high interest was likely the extremely low price of the issue. Shares were issued at SEK 2.63, almost 90% below the share’s closing price of the previous day.83 Consequently, the group’s management succeeded in raising the SEK 6 billion to add to the equity which should lead to a healthier Balance Sheet in 2009.

In addition, the lengthening of the company’s outstanding credit is beneficial for the company as they plan to be profitable within 2011 and thus debt payments will be less hurtful.

3.4.2 SAS Group’s resources and capabilities

In the section above, the current strategy of the SAS Group has been discussed and it has been found that the SAS Group is aware of the challenges found in the PEST and Porters 5 forces analyses.

83 www.forbes.com 04.08.2009 “SAS’ dirt-cheap rights issue” 46 Will SAS continue to fly? - A valuation of a company in crisis -

In this section, resources and capabilities of the airline will be analysed and discussed with the purpose of evaluating whether or not the SAS Group can succeed with its core strategy.

First, resources under the airline’s possession will be discussed and secondly, the SAS Groups capabilities will be analysed. The second part will be done with the help of a value chain analysis, as we believe it will best show the capabilities of the SAS Group.

A company can have three kinds of resources; tangible resources, intangible resources and human resources.84Human resources will not be discussed, as the SAS Group is not in our view in possession of those.85 Tangible resources refer to resources which have physical attributes, intangible resources refer to resources which cannot be easily seen such as brand names, patents or knowledge. Usually all firms have access to tangible resources and consequently those resources are not a source of competitive advantage.86

The following shows where the group’s capabilities coming from:

Figure 13: SAS Group capabilities

Source: own creation

3.4.2.1 Tangible Resources Location:

The SAS Group’s location of operating bases at the four biggest Nordic airports (Copenhagen, Oslo, Stockholm and ) is very important to fulfil the SAS Group’s strategy discussed above. It gives the airline the possibility to focus on the region and give the business traveller a good service due to its facilities at the mentioned airport. It further has an extensive

84 Carpenter and Sanders (2007) p. 100 85 The current crises of the company stems from inadequate management as it will become apparent; further the group is currently in arguments with labour union. 86 Grant (2008) p.130 47 Will SAS continue to fly? - A valuation of a company in crisis - maintenance presence throughout the Nordic region as well as lounges and other important facilities.

Additional resources are the webpage and sales resources of the SAS Group. The webpage has won awards in the past, and now it is one of the 16 airline websites which comply 100% with EU regulation and has been praised for easy access and transparency so that the customer feel safe during the booking process87.

Aircraft:

SAS operates a number of different types of planes which are mainly leased. SAS’s strategy is to lease as much as 90% of its fleet in order to secure flexibility for its operations88. Further the MD series aircraft are running low on their commercial life of usefulness, which makes the lease cheap, even though they are less efficient in terms of fuel; according to the annual report 200889, the unit cost of these aircraft is comparable to other aircraft even if fuel prices double to the favourable leasing terms. Thus, the SAS Group has the advantage of lower leasing costs than their competitors.

Further the age of the aircraft gives SAS the opportunity to upgrade its fleet as soon as new technology is available which is expected to be in the next foreseeable future90.

3.4.2.2 Intangible resources Brand name:

One of the most important intangible resources is the SAS brand. It is not only a well known and a respected brand name among Nordic consumers, but it is also known worldwide. This is because of the hotel chain it used to operate in addition to its early advancements in long distant flights. The value of the group’s brand name becomes apparent in section 3.3.2.4 where it has been found that SAS is able to charge the highest price for its services.

87 SAS Group press release, 15.05.2009 88 SAS Group annual report 2008, p.29 89 SAS Group annual report 2008, p. 29 90 SAS Group annual report 2008, p. 29 48 Will SAS continue to fly? - A valuation of a company in crisis -

Airport slots:

Airport slots at the main big hubs in Scandinavia are important assets for SAS. This is because they can be used to operate flights in their focus region. Further it might prove difficult for competitors to obtain similar slots due to airport constraints.

Discount on transfer passengers / airport stands

At Copenhagen airport there is a 65% discount on airport charges for transferring passengers arriving from international flights. This discount can only be taken advantage of if the passenger travels on the same ticket. This is means that star alliance partners have an advantage as well as the SAS Group as it is the airline with the most transferring passengers at Copenhagen airport91.

Euro Bonus

The group has established one of the best frequent flier programs. This has been shown as it frequently wins the prestigious Freddie award in the category. The last time the SASgroup won in the awards was in 2003, but has been scoring lower since then. The reason why it is scoring lower now, is that since 2003 Norwegian authorities do not allow the distribution of frequent flier awards any longer on domestic flights.92 Nonetheless, this is an important resource of the group as it is an incentive for travellers to use one of the group’s airline whenever possible. This results in a larger customer base that is loyal to the SASgroup and its alliance partners.

Membership in airline alliances

The SAS Group has been one of the founding members of the Star Alliance93; resulting in the SAS Group being the preferred partner for travel to the Nordic region by its partner airlines, resulting in passengers delivered by partner airlines. Coupled with the discount transfer passengers receive, this is a further advantage for group as it makes the SAS airlines more attractive.

91 Copenhagen Airport, charges regulations, 03.03.2009 92 SAS press release Oktober 2008, http://www.flysas.com/upload/International/SKI/Media- center/Mediakit/Oct08/SAS%20EuroBonus.pdf 93 Star Alliance: 10 years Star Alliance from “The airline network for Earth” to “The way the Earth connects” http://www.staralliance.com/int/press/facts_figures/star_backgrounder_history_chronological.doc.

49 Will SAS continue to fly? - A valuation of a company in crisis -

3.4.3 Value chain analyses

After having analysed the current strategy and resources of the SAS Group, the capabilities of the SAS Group have to be examined in order to evaluate whether this brings a source of further competitive advantages to the SAS Group. Consequently its operations have to be analysed in order to establish whether the group has a competitive edge over its rivals. The figure below shows the perceived value chain of the airline industry.

Figure 14: SAS Group Value Chain

Procurement Management

ctivities Technology Development

Support a Human Resources

Sales & Logistics Service

ctivities Marketing

Primary a

Source: adapted from De Wit, B. (2004) p. 241

Due to the scope of the Thesis, we have focused on, in our opinion, the most important activities an airline must undertake in order to deliver air travel.

3.4.3.1 Primary activities Primary activities are activities that are noticeable by the consumer when he or she is using the airlines services. These tasks are vitally important as these are activities where the company is in contact with its customers.

Sales and Marketing

1. Sales

Sales are an important activity in the airlines value chain, simply because it is the first contact the customer has with the airline. Further, if the customer is of the perception of having made a good deal, he or she is likely to return and use the airline again. As all airlines use a similar sales channel (direct online or offline, travel agency) we have focused on direct sales and its form.

50 Will SAS continue to fly? - A valuation of a company in crisis -

Sales strategies differ among airlines. The SAS Group is trying to be as transparent and simple as possible in its sales process as opposed to some of its competitors94. Ryanair and other low cost carries are known to engage in the opposite to boost revenues.95 Which of the two sales strategies will be more successful remains to be seen as the advent of low cost carriers is still relatively new. However, there is no information available indicating that Ryanair has lost customers due to their new sales strategy96.

2. After Sales

After Sales services are as essential as everything else along the value chain, as it provides the company a possibility to maintain a good reputation even if things went wrong.

The SAS Group promises to deliver luggage within 24 hours at the preferred address at no cost. In addition, if a customer has a complaint, the company promise to reply within 21 days and to take any complaint seriously. This is a good step in the right direction, but we see that the Group has still scope to improve its services to the customer.

3. Marketing

An airlines reputation is the most valuable asset an airline can have, as providing flight services is a in our view a generic product. As a result the brand recognition is very important for an airline.

The SAS Group is used to have a very strong brand in our opinion, but it has diluted itself by not serving free food & drink onboard its domestic and European flights any longer. As a result the product the SAS Group is offering in its economy class is perceived to be no different from its rivals, such as Norwegian Air Shuttle or Ryanair, which have different brand values than the SAS Group.

We assume that the latest effort of the SAS Group as part of the group’s core strategy to re - brand its product is an answer to that situation. As it can be seen in the figure below, the airline is trying to establish itself to be the obvious choice for travellers. The management hopes that

94 Can be observed as the airlines webpage complies 100% with EU regulation and has been praised for easy access and transparibility; SAS Group press release, 15.05.2009 95 Garrod (2008) 96 Ryanair charges for bags, check-in and other: see: http://www.ryanair.com/site/EN/faqs.php?sect=CHARGES 51 Will SAS continue to fly? - A valuation of a company in crisis - this will enable the SAS Group to distinguish itself from its competitors, so the consumer perceives the SAS Group to be high on service and high in simplicity.

Figure 15: SAS Group marketing strategy

Source: SAS Group annual report 2008, p. 10

To reach its consumer base, the SAS Group is highly engaged in marketing efforts to further fight the threat of low cost carrier Norwegian Air Shuttle and Ryanair. Since 1991, the SAS Group has been the main sponsor for the Danish football super league, which officially is called the SAS league. Also, the group is the main sponsor of the yearly SAS Master, a golf tournament as the company has discovered that many of their customers’ are passionate about golf.97

Whether or not this new branding and marketing strategy will work is not possible to evaluate as of now, as this was only introduced in the beginning of 2009 as part of core SAS. But so far it can be commented, that the service level is not different than any of its low cost competitors which provide similar service at least in the economy class. Lufthansa is perceived to offer a higher service as food & drinks are served also in its economy class98.

Logistics

In this analysis logistics refers to the SAS Group’s operations and infrastructure. We have decided to name it logistics as we believe operations of an airline are generic (task of business units and processes), but the logistics that all units work together are important. This shows that the airlines processes are optimal working together in order to give the customer the best service possible.

97 SAS Group press 23.04.2008 “SAS is the new sponsor of the Scandinavian masters” 98 www.lufthansa.com 52 Will SAS continue to fly? - A valuation of a company in crisis -

The SAS Group is very good in this segment, as it has achieved to be the third most punctual airline in the world99. We believe it is a good measure in terms of operational performance, as this is a good indicator for how efficient the airline manages its activities along the value chain and between business units. Thus it can be argued, that even though the airline may not be efficient to use its inputs resources section (see section 6.2.3), the airline has competitive advantage in operations / logistics along the value chain.

Service

The service while delivering a service based product is very important for a company, as this is the point where the airline has the most contact with the customer, and thus viable for the success of an airline operation.

Airlines have a different focus on service, for example low cost airlines as opposed to network carriers are famous for offering low service quality in order to remain cheap and cheerful.

The SAS Group has made service a part of its vision and a fundamental part of its strategy in order to deliver the best possible product to its customer. This is an area, where the SAS Group may be able to create a competitive advantage.

3.4.3.2 Support activities Supporting activities are back offices task the customer is not likely to be aware of or notice while he or she is consuming the service of the group. Nonetheless these types of activities are equally important as they can contribute to the success or failure of the group.

Procurement

Strategic Procurement has recently become more important due to an increase on cost based competition.100 Improved procurement processes can translate directly into a lower cost base for a company.

The single most important input item the SAS Group purchases on a regular basis is jet fuel. The price of jet fuel correlates highly with the price of oil and as a result is very difficult to predict due to the high volatility in the oil price. Consequently the SAS Group uses swaps and capped options in order to minimise risk and control costs. With this strategy, the group can ensure a

99 SAS Group-press 07.10.2009 “SAS is the world’s third most punctual major airline” 100 Bernard and Rajagopal (2006) p. 12-20 53 Will SAS continue to fly? - A valuation of a company in crisis - maximum price to pay for the fuel, as the group normally hedges on a monthly basis.101 The SAS Group has been able to hedge 53% of its fuel consumption which directly translated into lower operating costs by MUSD 155.6. This has been a success, but the SAS Group should consider make procurement a strategic goal in the future as raw materials are an important part of their cost base.

Management

1. Operational management

Operational management we define as the ability to use capacity as efficient as possible. As it can be seen on figure 10 the group’s load factor has been lower than its competitors load factors. This directly leads to higher costs and lower revenue. This is due to the group’s poor management in terms of scheduling and routes, as a low load factor simply mean that the airline is poor in forecasting demand. This is an area the airline has to improve on in order to become competitive.

2. Cost management

The cost structure in terms of EBITA has been discussed in section 6.2.3, where it became apparent that the SAS Group’s cost structure is higher compared to other airlines in Europe. This is a considerable disadvantage for the SAS Group as it is not able to stay competitive with a higher cost structure. This is due as it has to charge higher prices for its services. Core SAS is a step in the right direction, but the group has to improve its cost management in the future so it will not be faced with costs which have spiralled out of control.

Technological development

The two main areas of technological developments the industry is currently undertaking are linked to either improving the service offered or to reduce cost102. As a result many advancement have been made in terms of ease of service (online booking, online check in) which also have resulted in lower costs.

The SAS Group has been able to influence these developments as discussed in section 2.1.1 and section 3.4.1 in the past. Currently it also is introducing new developed technology such as

101 SAS annual report 2008, p.31 102 Merten and Teufel (2008) p. 3 54 Will SAS continue to fly? - A valuation of a company in crisis - finger print identification. Due to these examples it can be argued that this is an area, where the SAS Group posses a competitive advantage.

Human resources

Human resources management is a key area in any cooperation to find the right people to do a defined task with the right amount of compensation. This is also very important in the Airline industry as low cost and motivate staff is a key component for success.

The SAS Group has been struggling to perform well in this area. This can be seen as its payroll expenses has spiralled out of control as discussed in section 3.3.2.2. Further as pointed out in section 3.3.2.1 the SAS Group is employing more employees per ASK than any other airline under consideration (except Lufthansa). As a result the SAS Group will have to become more efficient in this area.

Corporate social responsibilities

An important part of the SAS Group’s activities is its engagement in corporate social responsibility. We have not added this part in the value chain diagram, as its effect on producing value added is very difficult to measure, as it is difficult to evaluate whether consumer and stakeholders are rewarding the group for this activity yet.

The SAS Group was the first airline to publish a sustainability report in 2002103. The objective behind this was that the SAS Group is hoping to become the most efficient and environmental friendly airline and gaining a competitive advantage of this situation in two ways, firstly in attracting “green” conscious consumers and secondly to save cost via reducing wastage.

The airline is viewed to be an industry leader in this segment104. As a result we consider this maybe a source of a competitive advantage.

3.4.3.3 Conclusive remarks on Resources and value chain of the SAS Group The tables below summarise the areas and the potential sources of competitive advantages of the SAS Group according to the discussion in the previous sections.

103 SAS Annual report (2002), p. 22 104 SAS Annual report (2008), p. 102 55 Will SAS continue to fly? - A valuation of a company in crisis -

Table 3: SAS Group resources Table 4: SAS Group capabilities

Resources Location ++ Capabilities Sales and Marketing + Aircraft + Logistics + + Brand name + Service + Airport Slots + Procurement + - Airport Discount +- Management -- Euro Bonus + Technology Development + Alliance Membership + Human Resources --

Source: own creation Source: own creation

Against prior expectations, the group has resources and capabilities which are potentially a source of competitive advantage and can help the group to compete with its competitors. The achievability of these advantages is up to management which to this part has not been able to turn these advantages into a profit.

Wheter these advantages are competitive advantages translating into a profit will be evaluated in the next section via a VRIO analysis.

3.4.3.4 VRIO analysis In order to evaluate whether the resources and capabilities of the SAS Group mentioned above area a potential competitive advantage, the VRIO framework formulated by Barney105 will be used. The analysis is structured in four questions106:

1. The Question of Value: Do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?

2. The Question of Rareness: Is the particular valuable resources and capabilities rare?

3. The Question of Imitability: Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?

4. The Question of Organization: Is a firm organized to exploit the full competitive potential of its resources and capabilities?

105 Barney (1997) p. 145 106 Adapted from Barney (1997) p. 145 56 Will SAS continue to fly? - A valuation of a company in crisis -

In order for a resources or a capability to be a competitive advantage the answer to all the question has to be yes. If there is one, or two no’s than the SAS Group is at comparative parity with its competitors; only capabilities where the company is perceived to be performing have been included. The table below summarises the analyses:

Table 5: VRIO Analyses

Resource or capability V R I O Competitve implication Economic performance Location YES NO NO YES competitive parity Aircraft NO NO NO YES non Brand Name YES NO NO YES competitive parity Aiport Slots YES YES YES YES competitve advantage potential for profit Airport Discount YES NO NO YES competitive parity Euro Bounus YES NO NO YES competitive parity Alliance membership YES YES YES YES competitve advantage potential for profit Sales and Marketing YES NO NO NO non Logistics YES YES YES YES competitve advantage potential for profit Service YES NO NO YES competitive parity Technological devlop. YES YES YES YES competitve advantage potential for profit Source: own creation

It has been found, that the SAS GROUP has four competitive advantages: Airport slots, Alliance membership, Logistics and Technological development. Two out of the four advantages are resources while the other two are capabilities. As the SAS Group posses these competitive advantages, the group has potential to earn a profit and compete successfully.

On the other hand it has been found in the sections above, that the SAS Group has to high costs, especially in terms of payroll expenses. As a result, these competitive advantages are not sufficient for the group to earn profits unless the core SAS Group is successfully implemented.

57 Will SAS continue to fly? - A valuation of a company in crisis -

3.5 SWOT analysis

Based on the preceding sections, an analysis of SAS’s strengths, weaknesses, opportunities and threats has been undertaken. The results have been presented in the table below:

Figure 16: SAS Group Strength, Weaknesses, Opportunities and Threats

Strengths Weaknesses  Brand / Brand Awareness  Customers are price sensitive  Slots / Schedule on big airports  Expensive Payroll /strong unions  Market Leader in Scandinavia  Financial weakness of the group  Star Alliance membership  Credit rating from BB- to B  Old planes, so they can renew planes when  Highly sensitive to state of the economy new technology becomes available in 2015  Operating in a low profitable industry /  Strengthened capital structure mature industry  No clear strategic view, strategy has been changed 3 times in 4 years  Not reporting a profit  Old planes, less fuel efficient than competitors planes  No trust from investors (low share price)

Opportunities Threats  Outsourcing of employees  Even more competition from low cost  Core SAS airlines  Renewing planes to become more efficient  Terrorist attack  Maintain market leader position in home  Malfunction of plane (plane crash) market.  War  Reduce costs and ticket prices  Increase in oil price will increase costs  Stricter environmental rules  Business customers become more cost conscious  Deepening of recession Source: Own creation

The SWOT analysis sums up the findings of the strategic analyses and highlights the strength, weaknesses, opportunities and threats the SAS Group is faced with. Weaknesses and threats have to be overcome by the new core strategy, by exploiting the group’s opportunities and strengths.

3.6 Conclusive remarks on the strategy part

In the above section, the macro and micro environmental factors of the airline industry and thus the SAS Group has been analysed. Further the group has been compared to other European airlines which can be considered as competitors. Finally the company’s strategy, resources and capabilities have been evaluated and potentially sources of competitive advantages have been outlined.

58 Will SAS continue to fly? - A valuation of a company in crisis -

According to our analyses the SAS Group has some important resources and capabilities to follow through with their strategy, but the strategy only answers some of the challenges outlined in the PEST & Porter’s five forces. The problems become apparent in the section of the airline comparisons, where it has been found, that the airline is performing poorly compared to its competitors, in terms of load factor, payroll expenses and employee per ASK.

The airline has not addressed the fact that it is employing too much staff (employee per ASK) (staff costs have been considered by management, but not the headcount) and that it does not achieve the level of efficiency (Load factor) other airlines are achieving.

However, the airline has addressed its operating costs and is trying to lower them with its new core SAS strategy, which has been successful so far, as a result we are confident that the group will successfully overcome its costs problem

The main problem arises when the new focus of the SAS Group is considered (focus on business travellers). It has been found that business travellers have become more price sensitive towards air travel and started using low cost carries as well as economy class. The focus, well intended & sensible (as business travel offer higher margins) may have adverse effect in the future.

Conclusively it can be said, that if the SAS Group manages to cost and lower its prices it is well positioned to use its competitive advantages to earn profits for the shareholder. Further the above findings will be used to forecast the income statement and balance sheet. As a result the strategic position will be reflected in the share price.

59 Will SAS continue to fly? - A valuation of a company in crisis -

Part 4: Framework of the Valuation

In this section the valuation approach, structure and methodology will be discussed. The reason for discussing this before the accounting analyses is that treatments of ‘line items’ in the valuation are different for different purposes and depending on the focus of the valuation.

Three different approaches to estimate the value of the SAS Group have been used; Cash flow based approaches, multiples and estimation of a liquidation value of SAS. The cash flow approach is the most complex model, as it is forward looking, and therefore requiring forecasting and being based on numerous of assumptions when the value is estimated.

Multiples and a possible liquidation approach will be discussed later in the thesis, as the two models do not need adjustments of the financial accounts to be estimated.

4.1 Cash flow approaches: Structure

In order to find the cash flow estimated equity value of the SAS Group, it has been decided to value core and noncore items separately. As a result the value of SAS Group’s equity is estimated indirectly, by estimating the value of the SAS Group’s assets and then deducting all debt and equity claims from the estimated market value of those assets. This is based on the assumption that the SAS Group is only able to create value for its shareholders from its core operations. As a result it is assumed that the SAS Group cannot create value through financial transactions. This assumption is realistic as it has been shown by Koller et al that if an efficient market exists, value for shareholders is only created by operations107.

The main point of the cash flow approach lies in the valuation of the SAS Groups’s core operating assets. This can be done by various approaches; the two models used in this thesis are the discounted cash flow model and economic profit models. The basis on both of the models lies in a theory formulated by Miller & Mogliani. This theory describes that the cash flow associated to the value of a company’s assets must equal the value of claims against those assets.108

107 Koller et al (2005) p. 21 108 Adapted from Koller et al (2005) p. 103 60 Will SAS continue to fly? - A valuation of a company in crisis -

In order to calculate the value of the operations, the two following formulas have been used. Non - operating assets and debt will be added or deducted from this value. This will be discussed later in the thesis (see part 10).

Equation 1: Discounted cash flow

∞ 퐹퐶퐹푡 퐶푉 푉푎푙푢푒 = + 0 (1 + 푊퐴퐶퐶)푡 (1 + 푊퐴퐶퐶)푡 푡=1

Equation 2: Economic Profit

∞ (푅푂퐼퐶 − 푊퐴퐶퐶 ) × 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙 퐶푉 푉푎푙푢푒 = 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙 + 푡 푡 푡 + 0 0 (1 + 푊퐴퐶퐶)푡 (1 + 푊퐴퐶퐶)푡 푡=1

Both approaches value the cash flow from operations and yield the same result if applied consistently109. The main differences in the two models are the way value is considered. The DCF has the advantage that it relies only on the flow of cash through the company, meaning that it will not be influenced by accounting practices and standards which can differ around the world. It further provides information of cash available to the investors independently of whether they are bond or stock holders110. However the DCF does not provide any information of the performance of the company, as decreasing free cash flow does not distinguish between lower profits or investments for future activities111.

On the other hand economic profit shows year by year whether the company manages to earn its cost of capital, as it is defined ‘Invested capital’ multiplied by the spread of ROIC and WACC. It therefore is closer linked to economic theory and hence gaining popularity among practitioners112.

As a result both approaches have been used, as both of the methods have advantages as highlighted above and yield the same result. The continuing value (CV) is discussed later in the thesis.

109 Koller et al (2005) p. 101 110 Koller et al (2005) p. 103 111 Koller et al (2005) p. 101 112 Koller et al (2005) p. 116 61 Will SAS continue to fly? - A valuation of a company in crisis -

Part 5: Discussion of accounting practices

Before the statements can be analysed and forecasted, accounting practices need to be considered.

The SAS Group has prepared consolidated financial statements according to the current IFRS standard since the 1st of January 2004, but the SAS Group only started reporting in accordance to the IFRS since January 1st 2005. This is because IFRS requires that one year is restated for comparison purposes, so 2004 was chosen by the SAS Group for restatement. This meant that the accounts of 2004 may not be entirely correct as 2004 was restated to comply with IFRS as opposed to be recorded under IFRS rules. Due to this it has been decided to exclude the year 2004 from the analysis. Further it has also been decided not to restate the accounts for 2005 because some restatement activities needs the previous year (e.g. change in working capital) so only the accounts from 2006 – 2008 have been analysed and restated.

Besides following the guidelines set by IFRS, the SAS Group also fulfils the requirements of the Swedish government Act and the Stockholm stock exchange.

As a result we assume that during the period under consideration (2005 – 2008) the accounting practices of the SAS Group have been applied consistently and no changes have been found. Due to that, we assume that the statements published by the SAS Group are correct and follow all the necessary legal requirements. We also assume that book values in the statement are of fair value as prescribed by IFRS.

5.1 Key accounting policies

Accounting principles sometimes over or understate the true economic performance of a company due to the possibility for managers to act with certain discretion towards the statement. Further, managers have the possibility to take strategic choices in order to influence the Balance Sheet positively.

In financial literature it has been argued that the market follows short term results, but this is only partly true as it can be seen on biotech stocks for example, where profits have not been materialised yet113. On the other hand, managers have seen that missed earning targets have a

113 Koller et al (2005) 62 Will SAS continue to fly? - A valuation of a company in crisis - negative effect on stocks. Koller et al argues that this is not the case. He suggest that the reason for the movement in the stock is that the company has not met investor’s expectations and moreover that earnings targets often are the only information available for the investor’s to spot long term opportunities114. Nonetheless, managers are afraid of missing the earning per share targets; hence it has been found that “managers would forgo economic value creation to avoid missing earning targets and suffering the associated market reactions”115.

The problem is, that if managers change accounting policies or forgo economic value, it is next to impossible to detect from an outside perspective, so we have to assume that management of the SAS Group does not involve in such practices and has the long term growth of SAS Group in mind.

Finally published accounts are not designed for valuations, but more to give a broad picture of the companies’ complete situation, leading to distortion between operating and non operating items. In order to prepare the accounts for an analyses and valuation the statements have to be reorganised in order to reflect these difference better.

Based on our analyses of the industry and business strategy we have found three issues which need further investigation; consolidation, the treatment of goodwill and the use of operating leases.

5.1.1 Auditor

The Groups auditor is Deloitte AB, which has conducted its audit in accordance with the generally accepted auditing standard in Sweden. The auditors have concluded that all the accounts give a true and fair view of the company’s dealings; it further assures that the accounts are in accordance with the IFRS and the annual accounts act. Hence we assume that the Income Statement and the Balance Sheet are in accordance with the prevailing rules and legislation and are correct116.

5.1.2 Consolidation of the accounts

The SAS Group reports its activities consolidated accounts. The accounts for 2008 included SAS Denmark, SAS Sweden, SAS Norway, SAS International, SAS Cargo, SAS Tech, SAS Ground

114 Koller et al (2005) 115 Graham (2005) 116 SAS Group Annual account 2008, p. 91 63 Will SAS continue to fly? - A valuation of a company in crisis -

Services, Widroe and Blue 1. This makes the analyses more difficult due to the diverse operations. Asset held for sale which included Spanair and Estonian Air are not consolidated; nor are affiliated companies, which are those where the SAS Group holds less than 50% of equity117.

Further it has to be noted, that intra – group sales are eliminated from the consolidated statements as they would lead to double counting in the accounts. This is not the case for affiliated companies and asset held for sale118.

In 2008 there has been no company who has minority interest in the SAS Group.

5.1.3 Goodwill

Goodwill is recorded when a company buys another operation and pays more than the value of the net asset. This has been the case with the SAS Group in the past where growth has been driven by acquisition (see history of SAS). In the current situation and according to our analyses of the business, the SAS Group will not grow through acquisition, currently the group is downscaling and growth will be of organic nature, hence it is not expected that the treatment of goodwill makes a difference in the value of SAS.

5.1.4 Operating leases

The airline industry requires a lot of investments in fixed assets, due to its nature. When a company needs an asset it usually has three possibilities to acquire assets, it can either do so via a purchase, a finance lease or an operating lease.

Operating leases are the most flexible choice for a company, but it may be more expensive as the company can return the asset when it is no longer needed. Operating leases also do not show as an asset or a liability on the Balance Sheet. In order to be able to compare companies with a different capital structure and operational lease policy, operational leases have to be treated specially in order to take them into account when valuing a company and forecasting the accounts.

We have used the following formula to capitalise operating leases to be able to adjust the statements accordingly.

117 SAS Group Annual report 2008, p. 67 118 SAS Group Annual report 2008, p. 87 64 Will SAS continue to fly? - A valuation of a company in crisis -

Equation 3: Asset Value119

푅푒푛푡푎푙 퐸푥푝푒푛푠푒푡 퐴푠푠푒푡 푉푎푙푢푒 = 푡−1 1 푘 + 푑 퐴푠푠푒푡 퐿푖푓푒

kd: implied interest rate paid for the asset

In order to find out whether the operating leases have a significant effect, the lease has to be capitalised. Since lease payments are usually secured by the lease (e.g. the lessor can demand the return of the asset) an interest rate for secured bank loans can be used as an assumption for the interest rate input. The average rate for financial lease was 4% and 5,81% for other loans in 2008120, interest rates on comparable unsecured bond issues amounted to 8.27%. (see section 9.3)

We believe that those three interest are two low, as they do not necessary reflect the flexibility of the terms of the operational lease, hence we decided to use 8.6% for operational leases. This is also corresponding of the SAS Groups own operational lease capitalisation calculations which multiplies the leasing cost times 7. This results in a present value of MSEK 16,014 which the invested capital has to be adjusted for.

Further when capitalised operation leases are modelled, it is assumed that the operational leased aircraft is reflected by the average fleet age of the SAS Group and that the economic life time of the Aircrafts is 30 years, even though the group is depreciating its aircrafts over 20 years. We believe that the economic life time of aircrafts is around 30 years is realistic as approximately 50% of commercial jet fleets is above 20 years old121.

5.2 Adjustments to the financial statements

Rather than reorganising the financial statements first and then forecasting the reorganised statements, we have decided to forecast the statements first and then calculate adjusted indicators such as NOPLAT, Invested Capital (IC) and free cash flow (FCF) separately.

119 Koller et al (2005) p. 198 120 SAS Group Annual report 2008, p. 81 121 Stepan and Hillinger (1995) 65 Will SAS continue to fly? - A valuation of a company in crisis -

The reason why we calculate those three items is simple and twofold. The public accounts are mixing operational and non operational items in different groups, but we are only interested in the operational value items, as non operational items will be valued separately. Secondly we have to adjust for the accounting in order to eliminate differences in the debt structure, the aim is to gain indicators which are independent from equity and debt financing, as the cash available to equity and debt holder is valuated122.

As a result, only the core cash flows and invested capital values are of interest and being evaluated, and so the Balance Sheet and Income Statement have to be adjusted to be able to calculate NOPLAT, IC and FCF statements. When reorganising the financial statements we have followed suggestions and recommendations by Koller et al123.

5.2.1 Adjustment to the Income Statement (NOPLAT)

In order to gain an insight to the SAS Group’s performance, the Income Statement has to be adjusted to reflect economic performance rather than accounting performance. The reason is that when valuing a company, only operational items of the cash flow are of interest. Further it is important / useful to make income independent of financing, hence NOPLAT (Net operating profit less adjusted Taxes) has to be calculated. The table below shows the calculation of NOPLAT.

Table 6: NOPLAT Calculation

MSEK 2006 2007 2008 Revenues kr 51,301 kr 50,598 kr 53,195 Total revenues kr 51,301 kr 50,598 kr 53,195 less: Salaries kr -16,229 kr -16,897 kr -18,153 less: Cost of goods sold (CGS) kr -18,794 kr -18,163 kr -20,693 less: Selling, General and Administrative (SG&A) kr -10,030 kr -10,519 kr -11,098 less: Operating lease interest kr -2,481 kr -2,342 kr -2,282 EBITDA kr 3,767 kr 2,677 kr 969 less: Depreciation kr -1,623 kr -1,416 kr -1,552 add: Operating lease interest kr 2,481 kr 2,342 kr 2,282 Adjusted EBITA kr 4,625 kr 3,603 kr 1,699 less: Operating cash taxes kr -890 kr -28 kr -1,687 NOPLAT kr 3,735 kr 3,575 kr 12 Source: own creation

122 Koller et al (2005) p.160 123 Koller et al (2005) 66 Will SAS continue to fly? - A valuation of a company in crisis -

For easier view we have grouped the SAS Group’s expenses in CGS124 and SG&A125

In order to estimate NOPLAT, all non operating items have been removed as shown above. There have been two main adjustment; removing non operating revenue items such as ‘share of income in affiliated companies’, ‘income from the sale of aircraft and buildings’ and ‘Income from the sale of share in subsidiaries and affiliated companies’. Further all financial income and expenses have been excluded in the previous calculation.

In addition, the ‘Operating lease interest’ which has been expensed in EBITDA, has been added back on, as operating lease interests are treated as an expense according to IFRS but for the purpose of valuation it will be treated as an off Balance Sheet debt. Capitalised operating leases are valuated differently as explained in section 5.1.4.

5.2.1.1 Adjustments of Operating cash taxes on EBITA Non operating items which have been excluded above also affect the tax on EBITA, hence the taxes have been adjusted in order to properly reflect the taxes incurred by operations. To do so we have done the following calculation.

Table 7: Cash Taxes on EBITA

Operating taxes 2006 2007 2008 Reported taxes kr -35 kr 273 kr -28 less: Tax on interest income kr -164 kr -222 kr -183 add: Tax shield on interest expense kr 396 kr 291 kr 261 add: Tax shield on lease interest kr 695 kr 656 kr 639 Operating taxes on EBITA kr 892 kr 998 kr 689 add: Decrease (increase) in deferred taxes kr -2 kr -970 kr 998 Operating cash taxes on EBITA kr 890 kr 28 kr 1,687 Source: own creation

Reported Taxes have been adjusted to only reflect the taxes from operation. This has been done by subtraction the tax rate on ‘interest income’ and adding back the ‘tax shield of interest expenses’ and ‘operating lease interest’. To adjust for taxes actually paid, the increase / decrease of deferred taxes have been taken into account to improve the NOPLAT. In the calculation, the marginal (published) Swedish corporate tax rate has been used which between

124 Cost of goods sold 125 Selling, General and Administrative expenses 67 Will SAS continue to fly? - A valuation of a company in crisis -

2006 and 2008 has been 28%. The tax rate was lowered by the government to 26.3% from the 1st of January 2009 onwards. This has been taken into consideration when forecasting.

5.2.2 Adjustment to the Balance Sheet (Invested Capital)

In order for the Balance Sheet to reflect the economic value of the company it has to be adjusted. By rearranging the fundamental accounting rule (Assets = Equity + Liabilities) we gain a better understanding of the operational performance of the company. We have followed the recommendations by Koller et al to rearrange the Balance Sheet according to the following formula126:

Equation 4: Invested Capital

푂퐴 − 푂퐿 푁푂퐴 푇표푡푎푙 퐷 + 퐷퐸 퐸 + 퐸퐸 퐼푛푣푒푠푡푒푑 + 푁표푛표푝푒푟푎푡푖푛푔 = 퐹푢푛푑푠 = 퐷푒푏푡 푎푛푑 + 퐸푞푢푖푡푦 푎푛푑 퐶푎푝푖푡푎푙 퐴푠푠푒푡푠 퐼푛푣푒푠푡푒푑 퐼푡푠 퐸푞푢푖푣푎푙푒푛푡푠 퐼푡푠 퐸푞푢푖푣푎푙푒푛푡푠

The reformed Balance Sheet has been presented below:

Table 8: Invested Capital Calculation

MSEK 2005 2006 2007 2008 Working cash kr 1,419 kr 1,686 kr 1,583 kr 1,911 add: Current receivables kr 11,828 kr 8,176 kr 6,168 kr 6,000 add: Current assets kr 1,065 kr 996 kr 850 kr 820 Operating current assest kr 14,312 kr 10,858 kr 8,601 kr 8,731 less: Current liabilities kr 15,316 kr 14,045 kr 13,340 kr 12,734 Operating working capital kr -1,004 kr -3,187 kr -4,739 kr -4,003 add: Net property, pant and equipment kr 19,457 kr 14,941 kr 13,436 kr 14,132 add: Capitalized operating leases kr 17,362 kr 16,389 kr 16,014 kr 16,254 Invested capital (ex. Intangibles) kr 35,815 kr 28,143 kr 24,711 kr 26,383 add: Intangible assets kr 3,862 kr 2,932 kr 1,226 kr 1,092 add: accumulated amoritzation kr 1,352 kr 1,387 kr 1,164 kr 1,202 Invested capital kr 41,029 kr 32,462 kr 27,101 kr 28,677 add: Fixed financial assets kr 11,329 kr 11,384 kr 11,419 kr 11,201 add: Assets for sale kr - kr - kr 6,198 kr 3,921 add: Short term investments kr 9,056 kr 11,049 kr 7,890 kr 4,287 Total funds invested kr 61,414 kr 54,895 kr 52,608 kr 48,086

Historical Invested capital Long term debt kr 19,991 kr 14,374 kr 7,519 kr 14,802 add: Capitalized operating leases kr 17,362 kr 16,389 kr 16,014 kr 16,254 add: short term debt kr 3,828 kr 2,043 kr 421 kr 1,189 add: Liabilites Assets held for sale kr 5,323 kr 2,465 add: Current portofolio of long term loanskr 3,183 kr 841 kr 1,263 kr 504 Debt and debt equivalents kr 44,364 kr 33,647 kr 30,540 kr 35,214 Deferred taxes kr 3,617 kr 3,473 kr 3,755 kr 2,988 add: Equity kr 12,081 kr 16,388 kr 17,149 kr 8,682 Equity and equity equivalents kr 15,698 kr 19,861 kr 20,904 kr 11,670 add: Reversal of accumulated amoritziationkr 1,352 kr 1,387 kr 1,164 kr 1,202 Total funds invested kr 61,414 kr 54,895 kr 52,608 kr 48,086 Control kr - kr - kr - kr - Source: own creation

126 Koller et al (2005) p.161 68 Will SAS continue to fly? - A valuation of a company in crisis -

5.2.3 Operating Current assets

This line item consists of working cash (‘cash and bank balances’), ‘current receivables’ (as reported by the SAS Group) and ‘current assets’ (as reported by SAS). No adjustments have been made to the mentioned items; only ‘assets held for sale’ and ‘short term investments’ have been taken out of the current assets as reported by the SAS Group, as both of them are non operational.’ Assets held for sale’ will be sold and are valued separately.

Further ‘short term investments’ are assumed to be excess cash which has been invested as it is not needed for the operation of the business. This has been done, as ‘cash and bank balances’ amount to approximately 12 % of revenue in 2006 to 2008, this seems to be high as Koller et al suggest an amount of ca. 2%127. On the other hand, Opler et al128 has found that companies with a higher volatility in their cash flow do hold a higher amount of cash for their operations. As a result it has been assumed that the calculated amount of cash is required by on- going operations as SAS has a very volatile cash flow due to the nature of the industry (highly depending on the season).

5.2.4 Current liabilities

It is assumed that most of the liabilities are operational liabilities. The line items have been adjusted by three entries, ‘liabilities attributable to assets held for sale’, ‘short term debt’ and ‘current portfolio of long term loans’. This has been done to be consistent with the above discussion, as it is assumed, that these line items are debt equivalents and hence not relating to operations but to financing of the operations.

5.2.5 Invested Capital

Invested Capital now reflects all the assets needed for operations. In addition to Operating working capital (Operating ‘current Assets’ - Operating ‘current liabilities’), it also includes ‘fixed assets’ and ‘capitalised operating leases’. Operating leases have been treated as off Balance Sheet debt, and hence have been capitalised as discussed above. ‘Fixed Assets’ are clearly a part of invested capital as those assets are needed for operations.

To complete invested capital, recorded ‘goodwill’ and ‘accumulated amortization’ has to be added as well. This is because these are assets which have been acquired for the purpose of the

127 Koller et al (2005) 128 Opler et al (1999) 69 Will SAS continue to fly? - A valuation of a company in crisis - current operations. Having said that, the SAS Group does not disclose in detail why the ‘goodwill’ has been acquired, as a result it is assumed to be in relation to current operations, and thus be a part of invested capital.

5.2.6 Total funds invested

Total funds invested are consisting of, as described in the formula above, ‘Invested Capital’ (‘Operating Asserts’ minus ‘Operating Liabilities’) and non operating assets. Non operating Assets are ‘Fixed financial assets’ (‘Equity in affiliated companies’, ‘Pension funds’, net’ & deferred tax assets‘), ‘Assets held for sale’ and ‘Short term investments’ (‘Other holdings of securities, ‘other long term receivables’& ‘short term investments’). The before mentioned items are assumed to be non operational items, and therefore excluded from invested capital.

To check whether the total funds invested estimation is correct, ‘equity and equity equivalents’ and ‘debt and debt equivalents’ have been calculated as by definition (according to the formula above) the sum should add up to invested capital, which is the case .

5.3 Adjustment to the Cash Flow (FCF)

The published cash flow of the company has to be adjusted to just reflect operations as well. This is because when the DCF is estimated, it only takes into account the value of equity relating to operations. However, the published cash flow mixes operational and non operational items and is not independent of financing. As a result, FCF is estimated as defined below129:

Equation 5: Free cash flow

퐹퐶퐹 = 푁표푝푙푎푡 + 푁표푛푐푎푠푕 푂푝푒푟푎푡푖푛푔 퐼푡푒푚푠 − 퐼푛푐푟푒푎푠푒 푖푛 퐼푛푣푒푠푡푚푒푛푡푠 푖푛 퐼푛푣푒푠푡푒푑 퐶푎푝푖푡푎푙

The estimation of the FCF can be found in the table below:

129Koller et al (2005) p. 164 70 Will SAS continue to fly? - A valuation of a company in crisis -

Table 9: Free cash flow calculation

MSEK 2006 2007 2008 NOPLAT kr 3,735 kr 3,575 kr 12 add: Depreciation kr 1,623 kr 1,416 kr 1,552 Gross cash flow kr 5,358 kr 4,991 kr 1,564 Increase (Decrease) in : Investment in operating working capital kr -2,183 kr -1,552 kr 736 Net capital expendures kr -2,893 kr -89 kr 2,248 Investment in capitalized operating leases kr -973 kr -375 kr 239 Investment in intangibles kr -895 kr -1,929 kr -96 Gross investment kr -6,944 kr -3,945 kr 3,127 Free cash flow (FCF) kr 12,302 kr 8,936 kr -1,563 FCF (Control) kr 12,302 kr 8,936 kr -1,563 Source: own creation

In order to be consistent with the above discussion, NOPLAT is the appropriate starting point for the free cash flow calculation and not net income as it is the case in the SAS Group’s financial statement cash flow. This is because when NOPLAT has been calculated, the non operating items have already been taken care of. As a result, only few adjustments have to be made to NOPLAT. There has only been one non cash operational item, ‘depreciation’ which has been added back; the sum of the two items is defined ‘gross cash flow’.

In order for companies to grow, a portion of ‘gross cash flow’ has to be reinvested in the business130. The above items have been estimated by taking the net year to year changes and if necessary subtracting deprecation (Net capital expenditure) to not distort the flows by non cash items. Further, the change in investments in intangibles is the change of the sum of intangibles and accumulated amortization between the years. The sum of these items has been defined as ‘gross investment’.

In order to calculate free cash flow, ‘gross investments’ have been subtracted from ‘gross cash flow’. By definition the NOPLAT less the change in invested capital should be equal to estimated free cash flow, which is the case as can be seen above (FCF = FCF (control)). The FCF figure is the cash available to all investors irrespectively whether the investor holds cash or debt.

130 Koller et al (2005) p. 178 71 Will SAS continue to fly? - A valuation of a company in crisis -

Part 6: Financial Analyses

In this section the revenue growth of the SAS Group’s EBITA margin and the return on invested capital will be discussed. The reason to do so is to find appropriate forecast drivers for forecasting the Balance Sheet and the Income Statement of the SAS Group.

It has to be noted, that passenger revenue will be discussed with an intention for forecasting, this is resulting from the situation, that this is the group’s main revenue stream. Other revenue items will be discussed in section 7.2.

6.1 Analysing historical revenue

To facilitate the analysis we have decided to split up the revenue streams by the various geographical segments served by the SAS Group. This has been done, as we expect that the revenue is a function of the same drivers, but the value of the drivers may differ from region to region. As a result we have compiled the following table:

Table 10: Revenue Growth

MSEK 2004 2005 2006 2007 2008 Historical Domestic 12,779 12,239 11,370 12,471 12,546 Revenue Growth -4.23% -7.10% 9.68% 0.60% Passenger Growth 0.95% -3.14% 2.42% -3.55% yield (SEK) 2.22 2.08 1.99 2.10 2.20 RPK Growth 2.28% -2.65% 3.65% -4.07% ASK Growth -4.47% -6.40% 1.37% 0.32% Load factor 59.95% 64.19% 66.75% 68.25% 65.26% Intrascandinavian 2,946 3,360 3,601 4,002 4,211 Revenue growth 14.05% 7.17% 11.14% 5.22% Passenger Growth -4.12% 5.63% 0.39% 0.34% yield (SEK) 1.64 1.96 1.99 2.19 2.25 RPK Growth -4.90% 5.92% 0.65% 2.39% ASK Growth -5.04% -1.60% -0.17% 11.72% Load factor 61.27% 61.36% 66.04% 66.59% 61.03% Europe 15,836 18,072 16,857 14,427 15,077 Revenue growth 14.12% -6.72% -14.42% 4.51% Passenger Growth 4.35% 8.53% 0.43% 2.39% yield (SEK) 1.50 1.68 1.43 1.21 1.20 RPK Growth 1.69% 9.70% 1.47% 5.26% ASK Growth -9.43% 3.78% 2.64% 9.01% Load factor 60.10% 67.47% 71.32% 70.51% 68.08% Intercontinental 5,389 5,675 6,060 5,914 6,269 Revenue growth 5.31% 6.78% -2.41% 6.00% Passenger Growth 0.92% -8.54% -4.70% 1.86% yield (SEK) 0.50 0.52 0.59 0.61 0.64 RPK Growth 1.52% -6.25% -5.61% 1.38% ASK Growth 1.10% -5.78% -5.74% 0.72% Load factor 82.90% 83.25% 82.83% 82.94% 83.48% Total passenger revenue 36,950 39,346 37,888 36,814 38,103 Revenue growth 6.48% -3.71% -2.83% 3.50% Source: SAS annual accounts, own calculation 72 Will SAS continue to fly? - A valuation of a company in crisis -

On the group level, the company has been able to increase its revenue between 2004 and 2008, although, 2006 and 2007 have been tough years. The group’s reduction in revenues in 2006 have been due to strikes and a change of management resulting in internal disputes131; in 2007 the airline had strong earnings in the first three quarters but it demand lowered in the fourth quarter due to three aircraft accidents132. The earnings improved in 2008, even though the SAS Group had introduced a fuel surcharge133.

6.1.1 Revenue discussion:

6.1.1.1 Domestic The domestic market relates to the SAS Group’s domestic operations in Norway, Sweden and Denmark. Revenue growth has been under a strain in this sector of operation in the period under consideration, this was mainly due to increasing competition on the Norwegian domestic market when competition from the Norwegian Air Shuttle first became noticeable. As a result, SAS has cut capacity in order to improve its seat load factor, which it has achieved. Surprisingly SAS did not reduce their price as a result of competition, but decided instead to reduce capacity on the market.

6.1.1.2 Intrascandinavian The intrascandinavian market refers to traffic between the three Scandinavian countries. In this sector, revenue has grown dramatically over the period under consideration even though the SAS Group has cut capacity up to 2007 due to lower demand in earlier years. The main reason for the large revenue increase of nearly 42% over the time period is due to the increase in yields instead of growth of capacity. This had lead to the result that the SAS Group has increased ASK in 2008 which had a result on the load factor.

6.1.1.3 Europe The European market is next to the Norwegian domestic market more competitive than the intrascandinavian routes, this can be seen as the SAS Group’s revenue has not been growing over the period under consideration; the revenue level of 2008 was as high as it was in 2004. In the early period the SAS Group had cut its capacity due to the low load factor and achieved a reasonable load factor from 2005 onwards. On the other hand the yield has been under

131 SAS annual report 2006, p. 6 132 SAS annual report 2007, p. 5 133 SAS annual report 2008, p. 35 73 Will SAS continue to fly? - A valuation of a company in crisis - pressure and has been reduced by approximately 20%, which is a sign of an increased level of competition.

6.1.1.4 Intercontinental Intercontinental is the SAS Group’s third biggest segment in terms of revenue. It refers to all the flights operated outside of Europe. SAS archived a stable growth in revenue and a stable Load Factor and in line was able to increase prices. The reduction in demand was offset by the increase in yield and so did not have an effect on revenue. The only inconsistency here is that SAS reduced its ASK even though the load factor was relatively high, but it is assumed that SAS has anticipated a reduction in demand and so adjusted its capacity in time, to match the reduction in demand.

6.2 Analyses of Value Drivers

The value of a company depends on one fundamental value driver, return on invested capital ROIC. This can be seen from the economic profit (ROIC > WACC creates value) and discounted cash flow model (terminal value estimation), as both of them use the ROIC in the method of valuation (see equation 1, 2, 8 & 9).

6.2.1 Return on invested capital

Return on invested capital (ROIC) measures the return on capital invested in operations. It is defined as NOPLAT divided by invested capital.134 Naturally, a high ROIC is preferable and in order to investigate the drivers of ROIC it will be separated into its underlying drivers, operating margin and asset turnover.135

As can be seen from the table below, SAS Groups’ ROIC decreased by 0.17 % points over the first period from 2006 to 2007 while it decreased by a further 4.83% points from 2007 to 2008. To investigate why the ROIC has decreased, we will discuss the group’s EBITA margin (EBITA/revenue) and its asset turnover (revenue/invested capital)136 as ROIC is a composition of both137.

134 Koller et al. (2005) p. 182 135 A third ROIC driver is the company’s ability to minimize taxes but this driver will not be considered in this discussion as taxes are left out. This is because pre-tax ROIC facilitates comparison between companies. 136 Note: Invested capital beginning of the year has been used e.g. IC 2005/revenue 2006 137 See Koller et al. (2005) p. 185 for more information 74 Will SAS continue to fly? - A valuation of a company in crisis -

Table 11: SAS Group ROIC, EBITA & Asset turnover

2006 2007 2008 ROIC Pre-tax 11.27% 11.10% 6.27% EBITA margin 9.02% 7.12% 3.19% Asset turnover x 1.25 x 1.56 x 1.96 Source: Own creation

Both, the EBITA margin and the asset turnover have been presented in the table above. As it can be seen, the EBITA margin has been decreasing over the three years which partly explains the decrease in ROIC. However, group’s asset turnover has increased indicating improvement in capital efficiency.

The SAS Group’s performance has been compared to the performance of Lufthansa and Finnair as the two companies have comparable operations to that of the SAS Group. In the table below, pre-tax ROIC has been calculated and presented. Pre-tax ROIC is used so that differences in tax rates and financing do not distort the comparison.

Table 12: Airlines pre tax ROIC

ROIC (pre Tax) 2006 2007 2008 SAS 11.27% 11.10% 6.27% Lufthansa 10.69% 17.13% 12.52% Finnair 3.33% 8.49% 1.53% Source: Own creation, based on airlines annual report

Apart from 2006, Lufthansa has been able to achieve a superior ROIC to that of the SAS Group. This indicates that Lufthansa has been able to generate a higher return on its assets. Also in 2008, the year when the financial crisis developed, Lufthansa was able to earn a high return although less than the previous years. Finnair’s ROIC on the other hand has been less promising and has been lower than the SAS Group’s over the whole period. This finding is not surprising as Finnair was not able to report a profit in 2008. The losses have been on a smaller dimension than the SAS Group’s though.

6.2.2 Capital efficiency

Before the EBITA margin is discussed, the asset turnover of the SAS Group will be analysed. Asset turnover measures the revenue over invested capital thus indicating how effectively the invested capital is used to create revenues. A higher asset turnover indicates that the company under consideration is more efficient to use its assets to produce revenue, and with it better the capital management of the company. The findings have been presented in the table below.

75 Will SAS continue to fly? - A valuation of a company in crisis -

Table 13: Airlines Asset turnover

Asset turnover 2006 2007 2008 SAS x 1.25 x 1.56 x 1.96 Lufthansa x 1.79 x 2.22 x 1.96 Finnair x 0.75 x 0.82 x 0.86 Source: Own creation, based on airlines annual reports

The table shows, that the companies under considerations were able to improve its capital management. The findings for the Lufthansa group have been expected, as asset turnover has been behaving similar to its ROIC (it increased, it decreased, it increased). The SAS Group and Finnair on the other hand show unexpected results, as it has been expected that a change in asset turnover would be similar to a change in ROIC. The Finnair asset turnover has not changed much in the period under consideration, whereby the SAS Group was able to improve its asset turnover to the current level of Lufthansa.

When looking at the appendix no. 10 it becomes apparent that the asset turnover of the SAS Group has changed due to a decrease in operating working capital and a decrease in net property and plant as revenue has slightly increased. Net property and plant largely decreased due to a reduction in aircraft (2005-2006). Further, operating working capital has decreased due to a decrease in current receivables. This indicates that the management is trying to increase its cash by expecting faster payments by trading partners138.

6.2.3 EBITA margin

As capital efficiency has improved and ROIC has decreased over the period, the EBITA margin must have been performing poorly, as a result it needs to be analysed. The EBITA margin measures a company’s ability to maximize profitability. An increasing EBITA margin indicates that a company either has been able to decrease its operating costs or increase its revenue.

138 There has been no note concerning receivables policy; but since the company is in a crisis it seems sensible to assume that payment periods have been shortened. A second explanation maybe that due to the advent of internet booking, receivables from travel agencies were reduced, leading in an overall lower requirement for working capital. 76 Will SAS continue to fly? - A valuation of a company in crisis -

Table 14: Airlines EBITA margin, revenue & cost

2006 2007 2008 2006-2008 EBITA margin 9.02% 7.12% 3.19% 5.83% Revenues (kr) 51,301 50,598 53,195 1,894 %change -1.37% 5.13% 3.69%

SAS groupSAS Operating costs (kr) 47,534 47,921 52,226 4,692 %change 0.81% 8.98% 9.87% EBITA margin 9.95% 11.40% 9.89% -0.06% Revenues (€) 21,400 24,484 27,017 5,617 %change 14.41% 10.35% 26.25%

Lufthansa Operating costs (€) 19,271 21,694 24,345 5,074 %change 12.57% 12.22% 26.33% EBITA margin 4.45% 10.36% 1.78% -2.67% Revenues (€) 2,011 2,236 2,291 280 %change 11.19% 2.46% 13.92%

Finnair Operating costs (€) 1,917 1,983 2,234 317 %change 3.44% 12.66% 16.54% Source: Own creation

The EBITA margins have been presented above. The SAS Group’s EBITA margin has decreased from 9.02% to 3.19% over the period from 2006 to 2008. Given that revenues have increased by approximately 3.7% over this period, the decrease in the group’s EBITA margin is solely related to increasing operating costs. Total operating costs have increased by approximately 10%, primarily driven by a 12% increases in payroll expenses and a 21% increase in fuel costs over this period.

Disturbingly, the SAS Group has the largest overall EBITA margin decrease of the peer group. Lufthansa had approximately the same margin in 2008 as in 2006 as the increase in revenues was offset by an approximately equal increase in operating costs. It should be noted however that the only single cost item in Lufthansa’s accounts increasing disproportionally to the increase in revenue from 2007 to 2008 was the cost of jet fuel, which increased by 39% reflecting the high oil price over this period.

Finnair has also experienced decreasing EBITA margin over the period in question. However, the spread between the increase in revenue and the increase in operating costs is smaller than for the SAS Group and the reason for the pressured EBITA margin is the same as for Lufthansa.

As a result it should be highlighted again; the main cost problem of the SAS Group is its payroll expense as pointed out above. The analysis has shown that the SAS Group performs similarly to its competitors, and maybe even more efficient in fuel purchasing.

77 Will SAS continue to fly? - A valuation of a company in crisis -

6.3 Conclusive remarks on financial analysis

The SAS Group’s revenue growths, as well as underlying drivers have been discussed. It has been found, that it does not only depend on the growth of capacity supplied to the market. A reduction in capacity (ASK) or demand (RPK) does not directly translate into a reduction of revenue. There are two other factors that play a role; the yield and the load factor are important drivers.

Further, key drivers which drive ROIC and with it the value of the company have been discussed and it has been found, that the group is increasing efficiency but its EBITA margin is under pressure due to high labour costs. As a result its ROIC is performing poorly.

There are two options now to which drivers can be used to forecast revenue, Income Statement and the Balance Sheet. Due to the nature of the industry it has been decided to use the drivers found in the revenue growth analyses; namely yield, load factor and ASK, as we believe this is easier forecasted accurately than forecasting EBITA margin, asset turnover and revenue directly.

78 Will SAS continue to fly? - A valuation of a company in crisis -

Part 7: Forecasting

7.1 Revenue forecast: General

We expect that revenue will decline due to less RPK’s demanded, we further expect deterioration in load factors archived and a reduction in yields, as the SAS Group has to adjust for a lower demand. Based on our researched and forecasts by IATA139 regarding observations of last crises, we expect that the industry takes approximately three years to recover up to its previous levels. Yield, Load factor and growth of RPK as well as passenger revenue can be found in appendix 1.

7.1.1 Short term (2009)

For the year 2009, we have used the midyear published SAS Group traffic figures to model a starting point; we have assumed that the last two quarters of 2009 will see the same developments as the first two quarters and that traffic figures will not improve until 2010. The traffic report can be found in appendix 3

7.1.2 Medium and Long term (2010-2018)

7.1.2.1 Revenue passenger kilometre growth In order to forecast demand for the SAS Group the Industry forecast of IATA has been used, as we expect the SAS Group is faced by similar demands as its competitors. It predicts on the basis of last crises that it will take about three to four years for the industry to recover to pre crises levels140; hence we have modelled the groups’ growth accordingly.

IATA further suggests that air travel usually grows at twice the rate of GDP.141 As a result we have estimated future GDP growth for the region / routes served by the Group. Details of the GDP estimation can be found in appendix 4. Long term growth (2013 onwards) has been modelled accordingly by multiplying GDP growth with multiplier of two to estimate the RPK growth by every region.

139 IATA Economic Briefing December 2008, p.1 www.iata.org/economics 140 IATA Economic Briefing December 2008, p.1 www.iata.org/economics 141 IATA Economic Briefing December 2008, p.3 www.iata.org/economics 79 Will SAS continue to fly? - A valuation of a company in crisis -

7.1.2.2 Yield The yield for airlines have been under pressure since the start of deregulation in the mid 1970’s and have been falling to its current levels, which have been reached in the early 2000142. It is not expected that the yield airlines can achieve will improve significantly nor will they fall further with current technologies143. In our forecast we have assumed that yield will be falling in the medium term due to the current crisis and will recover to its 2008 level from 2012 onwards, we do not expect that the SAS Group will be able to improve its yield over the 2008 levels, for the following reason:

In the section competitor analyses (see section 3.3.2.4) we have found that the SAS Group is charging higher yields than its competitors. We are not able to make an assumption for why this is but we can speculate that maybe the SAS Groups majority of the routes are shorter than its competitor’s routes due to the nature of the operations; most of the SAS Groups operations are in Scandinavia connecting city pares on a domestic route network. Yields are dependent on the length of the routes, as airlines are able to charge more per kilometre on shorter routes then on longer routes144.

Secondly it is well known that Scandinavia is one of the most expensive regions in the world, as a result the Group may be able to charge higher fares as it is also faced with higher costs than its competitors.

As a result we assume that the 2008 yields are a good indicator of a price level the airline can charge its customer.

7.1.2.3 Load factor Forecasting the seat load factor is difficult as it is highly dependent on the efficiency of the company’s schedule and fleet management. Load factor is not driven by demand, as it can be managed by the group by cutting flights and/or using smaller planes. To facilitate a discussion seat load factors of selected European airlines are presented again below:

142 Mason (2005) p. 20 143 Keith (2005) p. 25 144 Keith (2005) p. 22 80 Will SAS continue to fly? - A valuation of a company in crisis -

Table 15: Load factor of Airlines

Load factor 2007 2008 SAS 74.50% 72.30% Norwegian 80.00% 79.00% Finnair 75.50% 75.20% Airfrance KLM 80.80% 79.70% Ryanair 82.00% 82.00% Lufthansa 79.80% 78.90% Source: own creation; annual reports of Airlines

As it can be seen, the group’s load factor is the lowest in its peer group. As a result we found that the SAS Group will have to improve its scheduling and fleet management operations.

In our model we estimate that improvements in the Load factor will be archived in the different segments until 2013 and then will be on a stable level from this point onwards at 76% for the Group.

The reason why we assume that the SAS Group is not able to achieve better load factors and catch up with its competitors is twofold; firstly many of the domestic Norwegian routes are public service obligation (40% of Widerøe’s routes are PSOs)145 resulting in lower load factors by definition, and secondly intrascandinavian traffic will remain a high frequency operation, as it links the Scandinavian hubs together for passengers needing to fly onwards from there. Feeder traffic is found to archive lower seat factors than trunk routes146.

7.2 Traffic Revenue (Other Items)

7.2.1 Charter and Other traffic revenue

We have modelled charter revenue as part of the forecasted passenger revenue of the respective area under consideration. The percentage is the average of the 2007 and 2008 part of the revenue as we believe that this operation will stay stable (due to a lack of disclosure by the SAS Group of expansion plans). To be more concise the two year average has been taken. Further there is has been no charter operations in intrascandinavian and intercontinental markets in the years 2007 and 2008.

The same has been done with the line other traffic revenue as it is not disclosed what it referrers to. The percentages can be found in appendix no. 2.

145 Wideroe’s webpage : https://www.wideroe.no/modules/module_123/proxy.asp?D=2&C=418&I=3162&U=Y 146 Graham et al (2007) 81 Will SAS continue to fly? - A valuation of a company in crisis -

7.2.2 Mail and Freight

Mail and freight is a small part of revenue in the Domestic, Intrascandinavian & European market, varying between 1,2 % and 1,7 % of revenue. We do know that due to the financial downturn freight amounts will be affected, but as we also modelled a decrease in revenue via the forecast drivers (ASK) we believe that is sufficient and also we think that these percentages are accurate. This is not the case for the international market, as there has been a significant decrease in freight.

This is due to that SAS Group has cancelled all cargo flights and agreements with other cargo flight operators. Since the SAS Group will only focus on belly capacity, we believe that there is a significant reduction of freight and mail revenue modelled as a lower percentage of revenue. We still estimate that freight and mail will be approximately 10% of international revenue.

7.2.3 Other operating Revenue

There is no disclosure of what single operating items exactly include, but we have made the following assumptions in order to model other operation revenues.

7.2.3.1 In flight Sales These sales refer to when customers purchase food, drinks and duty free items on board. We assume that demand per customer and price of purchases will stay similar to previous levels and we have tied it to RPK as only customers who fly will purchase products.

7.2.3.2 Ground handling services, technical maintenance service, terminal forwarding services These revenues relates to when other airlines purchase services from the SAS Group. We expect that existing market share of the SAS Group and other airlines will not deviate significantly from the past. Hence the ground handling service has been tied to ASK since we assume that other airlines demand for these services will grow by about the same as the SAS Group’s ASK growth.

7.2.3.3 Sales commissions and charges We assume that these charges are referring to the ticket charges SAS Group has levied on when purchasing a ticket, so we have modelled it to RPK, as the SAS Group receives it when tickets are actually purchased.

82 Will SAS continue to fly? - A valuation of a company in crisis -

7.2.3.4 Other operating revenue There is no disclosure of what this line item includes, so we tied it to RPK, as we expect that it is somehow depending on passenger demand.

7.3 Income Statement Forecasting

7.3.1 Payroll expenses

The SAS Group is due to reduce its workforce by approximately 8600147, of which will translate in 3000 direct job losses and 5600 to be outsourced or sold off. We assume that the reduction in workforce will take place evenly across income levels. Secondly it is difficult to predict the outcome of current negotiations between management and labour unions and therefore direct cuts in pay are impossible to model, consequently we have tied payroll to ASK. This is because we assume that the majority of the job losses will be a result of SAS Group’s smaller scale of operations (decrease of ASK), which has already been modelled in ASK. Furthermore we expect that the SAS Group’s employees have to become more efficient over time to a level comparable to other airlines in the industry (Lufthansa & AirFrance – KLM).

Table 16: Payroll expenses

SASgroup AirFrance -KLM Lufthansa Payroll Expenses (MEUR) 7,317 5,692 Payroll expense (MSEK) 18,153 70,451 54,805 ASK (mill) 41,993 262,309 195,311 ratio (Payroll / ASK) 43.2% 26.9% 28.1% source: Annual reports, own calculations

In the table above we have calculated the ratio between payrolls148 and ASK supplied, it clearly can be seen that the SAS Group has the highest payroll in relation to ASK. This picture can be misleading as different wage level and different composition of labour are not adjusted for, but it shows that the SAS Group has to reduce its payroll expenses.

As a result we have modelled that SAS Groups payroll will have to reduce its payroll expenses ASK ratio by 0.5% every year to reach the level of its comparable companies in the future. We assume that this efficiency gain will be possible for the SAS Group.

147 SAS reducing its workforce by 40%, http://news.bbc.co.uk/2/hi/business/7866754.stm 148 Payroll expenses have been converted by the average EUR / SEK exchange rate of 2008 83 Will SAS continue to fly? - A valuation of a company in crisis -

7.3.2 Other operating expenses

Most of these expenses have been tied to ASK, as we assume that these expenses occur from operations of the company even without any passenger on the aircraft. To model this better, we have taken the historic relations between the expense and the ASK into consideration and took the three years average of these ratios, as we believe that this will smooth out and high or lows in previous years, so we assume that these expenses remain constant as they are mostly outside of the SAS Group’s control.

The above discussion also includes ‘Jet fuel’. We realize that ‘Jet Fuel’ is a major expense for an airline as it amounted to approximately 28% of total expenses for the SAS Group in 2008. The reason behind tying ‘Jet fuel’ to ASK is twofold. Firstly, we believe that due to the current recession jet fuel prices will not increase dramatically over the period of the next three to four years. Afterwards the SAS Group is planning to purchase new, more fuel-efficient planes149 when these become available. Further the introduction of a harmonized air traffic system is expected to increase fuel efficiency by a further 10% in the future. We expect that this will offset any price hikes in Jet fuel, which may occur in the medium to long term. Secondly forecasting the price of Oil is outside the scope of this thesis.

When modelling operating expenses three exceptions have been made that are not tied to ASK, these are: ‘selling cost’, ‘catering cost’ and ‘handing cost’. We assumed that ‘selling cost’ occurs when a service is sold, so it has been tied to revenue. Catering and handling costs only occur when a passenger is on board of the airplane and so they have been tied to RPK.

In the annual statement the SAS Group expects that its cost will increase by an extra MSEK 300- 400 due to cutting need CO2 emissions, this has been modelled in an extra line item from 2013 onwards150.

7.3.3 Leasing cost for aircraft

‘Leasing costs’ for aircraft have been tied to ASK. It is not disclosed which aircrafts are under operating leases, financial leases or are purchased. The line ‘leasing cost for aircraft’ refers to operational leases. We assume that the portion of the three different financing options will not

149 SAS annual report 2008, p. 28 150 SAS annual reportt 2008 84 Will SAS continue to fly? - A valuation of a company in crisis - change over time, leading to the assumption that the SAS Group will continue with its current plane purchasing strategies

7.3.4 Other income lines

These refers to ‘share of income in affiliated companies’, ‘income from the sale of shares in subsidiaries and affiliated companies’ and ‘income from the sale of aircraft and buildings’. Due to a lack of disclosure of detailed plans for assets, we cannot model sales of assets or affiliated companies, consequently the line item will be set to zero. A more detailed discussion for affiliated companies can be found in section 10.1.1 As we assume the affiliated companies will be sold, income from affiliated companies will not be modelled either.

7.3.5 Financial income & expenses

‘Financial income’ and ‘financial expenses’ have been tied to the relating lines on the Balance Sheet (‘financial income’ to ‘bank balances’ and ‘short term investments’ and ‘financial expenses’ to ‘debt’). We have used 2% and 9% respectively; even though from our analysis it has been shown that the SAS Group has been receiving and paying higher rates in the past. We believe the lower rates are justified due to the current situation on the capital markets and the low interest rates which are not expected to increase much in the near future.

The reason we believe that the SAS Group is faced with higher cost is that due to its financial rating and distress it may be difficult for the SAS Group to raise money. A more detailed discussion can be found in section 9.3.

7.3.6 Depreciation, amortization & Impairment

‘Depreciation’ has been tied to ‘fixed assets’ on the Balance Sheet. Instead of depreciating every item separately, we decided to take the average depreciation charges in the past three years. ‘Depreciation’ is tied to only the first four line items in ‘fixed assets’ (‘Land and buildings’, ‘Aircraft’, ‘Spare engines and spare parts’, ‘Workshop and aircraft servicing equipment’, ‘other equipment and vehicles’), as we believe that the remaining items are not depreciated over time. ‘Amortization’ has been treated similarly and has been tied to ‘goodwill’. It is not possible to model ‘impairment’, as ‘impairment’ is an adjustment of fair market value of ‘goodwill’.

85 Will SAS continue to fly? - A valuation of a company in crisis -

7.3.7 Tax

The tax structure of the SAS Group is very complex and difficult to examine. This is due to the fact that the group has different operations in different countries, which are subject to different tax laws. A full exploration as an external analyst is not possible and it is beyond the scope of this thesis. The average Tax rate has been varying highly in the past, due to different sales of sub companies and write offs such as Spanair related items. Some more explanations of Tax effects will be given when the Balance Sheet is forecasted, as it contains the lines ‘Tax Liabilities’, and ‘Tax assets’. For the purpose of modelling the Income Statement, the current Swedish cooperation Tax rate is used, which amounts to 26.3% of net income.

7.3.8 Income from discontinued operations

‘Income from discontinued operations’ is not forecasted explicitly, as we expect that these operations are sold off in the in 2009. As an adjustment to statement we have included 75% of the income of 2008 as we believe that these assets will be sold in the second or third quarter 2009 and achieve a similar income as in 2008.

7.4 Balance Sheet forecasting

In order to forecast the Balance Sheet we have decided not to discuss every single line item, as most of them are tied to a specific driver calculated from our forecast driver. According to Koller et al, there are two possibilities to forecast Balance Sheet items.151 Either, items can be forecasted directly in stocks, or forecast the change in the items (flows). We have decided to forecast items directly as stocks, tying it to the relevant Income Statement item which are either revenue or ASK. This is because Koller et al suggest that the relationship between Balance Sheet accounts and forecast drivers is more stable then the changes in Balance Sheet items and changes in forecast drivers.152 A full list of forecast drivers for each line item can be found in appendix no. 6.

7.4.1 Intangible Assets

This refers to ‘goodwill’ from past transactions. We will depreciate ‘goodwill’ by the amount stated in the Income Statement forecast. We will not model any ‘impairment’ or ‘goodwill’

151 Koller et al (2005) p.243 152 Koller et al (2005) p.243 86 Will SAS continue to fly? - A valuation of a company in crisis - increases, as we will not model acquisitions given the current environment in the financial markets and the SAS Group’s financial situation. Therefore no capital transactions are expected during the forecasted period.

7.4.2 Tangible Fixed Assets

‘Aircraft’ and related parts are tied to ASK, as we assume that these assets are needed for operations. We further assume that ‘depreciation’ in the accounts will not show, as SAS Group will have to buy & sell assets for their operation at the end of useful lifetime of the asset. That means that old assets will be removed and new assets will be added, so that the depreciation effect will cancel out.

Further it has been considered that ‘fixed tangible’ assets are not increasing completely in line with ASK. This is due to the fact, that if ASK increases by 1 and full capacity has been reached, the SAS Group has to buy a new aircraft which would mean that assets would be higher than projected by ASK. We have not modelled this scenario explicitly as it would make the model too complicated, we just assume that assets will increase in line with ASK in order to simplify the model.

Further we also realise that the ‘tangible fixed assets’ should be lagged as it takes time to purchase new assets, but this would overcomplicate the model.

There are two exceptions to the above; for ‘Land and buildings’ and ‘constructions in progress’ a different method has been used. We assume that ‘Land and buildings’ are providing sufficient capacity for the current business plan and growth strategy of the operations; hence no new items will be needed. As a result this item line will be depreciated over time by the average depreciation rate.

‘Construction in progress’ has been tied to revenue as we expect that the company will invest more money on that line item when revenue grows; it also has to be pointed out that construction in progress is not a critical component in the forecasting in the Balance Sheet due to its relative small size.

7.4.3 Financial fixed Assets

This Line Item includes items related to ‘long term investments’ (‘affiliated companies’ & ‘share holdings’), ‘Pension funds’, ‘deferred taxes’ and ‘other long term receivables’.

87 Will SAS continue to fly? - A valuation of a company in crisis -

Items referring to ‘affiliated companies’ and ‘share holdings’ have been set to 0 as it is expected that those will be sold to raise cash for operations. The ‘pension fund’ will stay a similar level over the forecasted period as no significant changes have been found in the past.

‘Deferred taxes’ are tax assets resulting from net income losses in previous periods and are carried forward. It is impossible to model if and when the SAS Group will use these tax credits to pay for taxes as this would need an in-depth analysis of tax law, which is beyond the scope of this Thesis. As a result it has been decided to model them as in the year of 2008 with the adjustments of new Tax credits in the event that a loss is forecasted in the Income Statement.

There is no note discussing what ‘other long term receivables’ refer to, so it has been decided to set them to the same level as of 2008.

7.4.4 Current receivables

It has been decided to forecast current receivables in days in order to model changes in receivables policy better, but we do not expect that the SAS Group will change its sales policy over time; hence we set the all current receivables items to the same days as in 2008.

7.4.5 Short-term investments, cash and bank balances

‘Cash and bank balances’ have been tied to revenue, as it is cash the SAS Group needs to pay for its ongoing operations. We do not expect that this ratio will change.

‘Short-term investment’ is the plug, to make the Balance Sheet balance. It has been chosen, as it is the account which we assume that the SAS Group finances its losses and books income from the rights issue to. This has been done as short-term investments are usually carried out at flexible terms.

7.4.6 Shareholders’ equity

We have modelled the increase in share capital from the rights issue in 2009. Further all profits from operations are booked to ‘retained earnings’, as we do not expect SAS to pay dividends during the forecasted period due to two reasons; firstly the SAS Group has not paid any dividends in the past 5 years and secondly we assume that SAS will need all the profits to finance short term losses and future expansions.153

153 SAS Group Annual report 2008, p. 53 88 Will SAS continue to fly? - A valuation of a company in crisis -

There has not been any minority interest in 2008 and we do not expect that to change in the foreseeable future.

7.4.7 Long-term liabilities

We expect the SAS Group will not pay down its ‘long-term liabilities’ over time nor will it increase it. In the short term the SAS Group does not have surplus funds to down pay ‘long- term liabilities’ and in the medium term SAS Group is expected to undertake investments in a new fleet. Hence we do not expect long-term liabilities to change, and it will remain the same of the 2008 level during the forecasted period. We further assume that the SAS Group will not have any problems to refinance their debt once the debt contract expires. This is despite the current situation in the financial markets, which may lead to difficulties to raise credit, but we believe that due to the ownership structure of the SAS Group (governments being major shareholder), the SAS Group should be able to refinance its financial obligations.

Finance lease is part of ‘other loans’, but we have decided to split them up. This is because finance lease refers to leasing of aircrafts. Hence we have tied finance leases in the Balance Sheet to ASK. The rest of ‘other loans’ will be retired on schedule.

‘Deferred tax liabilities’ refer to the fact that depreciation of assets is different for tax purposed and accounting purposed. These liabilities relate to the difference of the depreciation methods for depreciation of the assets. This is due that the SAS Group depreciates its assets faster for tax purposes, and hence may have to pay taxes when the assets are sold, as the ‘real’ (taxable, sale value) maybe higher than the book value when the asset is sold. Since we do not have further information on that item, we assume that it will remain on the 2008 level.

7.4.8 Current liabilities

Most of ‘current liabilities’ have been tied to revenue, as we do not expect creditors to change their payment policy over the forecasted period. The exception here being, that ‘short term loans’ are forecasted to be on the same level as of 2008, and ‘accounts payable’ is forecasted as part of ‘cost of goods sold’. ‘Current portfolio of loans’ refers to the retirement on schedule of other loans, and current portion of finance lease has been tied to the finance lease liability of aircraft in the Balance Sheet (9%).

89 Will SAS continue to fly? - A valuation of a company in crisis -

7.5 Comments on the forecasted accounts

The detailed forecasted accounts can be found in appendix no. 6 and 7. In order to comment on the performance on the SAS Group, selected line items have been presented in the table below. ‘Short term investments’ and ‘retained earnings’ have been included in the table, as those two line items build the connection between the Income Statement and the Balance Sheet.

Table 17: Selected forecasted accounts

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Revenue 51,301 50,598 53,195 40,975 41,482 43,646 46,477 48,908 51,514 54,267 57,170 60,231 63,459 66,865 Adjusted EBITA 4,625 3,603 1,699 -1,368 -773 1,533 3,792 4,265 4,685 5,091 5,526 5,990 6,487 7,018 NOPLAT 3,735 3,575 12 -1,619 -1,144 1,115 2,801 3,149 3,459 3,758 4,078 4,421 4,787 5,178 Profit 5,889 636 -6,321 -5,712 -1,628 -59 1,591 1,831 2,061 2,301 2,562 2,843 3,147 3,474 Adjusted Ebita margin 9.0% 7.0% 3.3% -2.7% -1.5% 3.0% 7.4% 8.3% 9.1% 9.9% 10.8% 11.7% 12.6% 13.7% Noplat margin 7.3% 7.0% 0.0% -3.2% -2.2% 2.2% 5.5% 6.1% 6.7% 7.3% 7.9% 8.6% 9.3% 10.1% Profit margin 11.5% 1.2% -12.3% -11.1% -3.2% -0.1% 3.1% 3.6% 4.0% 4.5% 5.0% 5.5% 6.1% 6.8% Short term investments 9,117 7,308 3,872 6,282 3,723 -538 92 1,793 2,578 4,545 6,884 9,485 12,371 15,563 Retained earnings 13,239 13,849 7,585 1,873 245 187 1,777 3,608 5,670 7,971 10,533 13,376 16,523 19,997 Source: SAS Group annual report 2008, own calculations

As can be seen, we have modelled the effect of the year financial crises in 2009 drastically; it is expected that the SAS Group will have an equally poor year as it did in 2008. However, it should be noted that the loss in 2008 and 2009 mostly steamed from ‘asset held for sale’ (MSEK -5,305 in 2008 & MSEK – 3,979 in 2009).

We have estimated that the current crises in the industry will have an effect for approximately 3 to 4 years154 and that the implementation of the core SAS will show effect after a similar period. This can be seen on the low revenue increase and the poor margins the SAS Group is achieving from 2009 to 2012. The profit margin will improve from the year 2013 onwards.

The losses the SAS Group will occur are mainly reflected in, and financed by, the two Balance Sheet items: ‘short term investments’ and ‘retained earnings’. It can be observed, that hose two accounts will decrease in the period while the SAS Group is making losses. ‘Short term investments’ are increasing from 2008 to 2009, as the SAS Group obtained cash due to the rights issue in early 2009.

According to the table above, the SAS Group has been able to save some cash in ‘retained earnings’ and ‘short term investments’ in the past. As a result, the company is able to cover its expected losses in 2009 – 2011. The issue will arise in 2011 whether the SAS Group is able to raise additional cash via credits or other financing options to cover its “negative” ‘short term

154 As suggested by IATA: IATA Economic Briefing December 2008, p.1 www.iata.org/economics 90 Will SAS continue to fly? - A valuation of a company in crisis - investments’. As the industry currently predicts a good outlook for 2012 onwards, it is likely that the SAS Group is able to meet its liquidity requirements in 2011.

91 Will SAS continue to fly? - A valuation of a company in crisis -

Part 8: Multiple Analyses and Liquidation Value

8.1 Multiple analyses

An alternative to the two main valuation methods used in this Thesis, the DCF and the economic profit, is to do a multiple analysis. Whereas the DCF and economic profit model rely on forecasts and hence a lot of assumptions, a multiple analysis can be based solely on historical data found in the accounts of the respective companies. The idea is to identify comparable companies, calculate the ratios for these comparables and use the average of their ratios in order to find the value of SAS.

Widely used ratios are the price to sales ratio (P/S), the price to earnings ratio (P/E) and the price to the book value of equity ratio (P/B). However, as all of the comparable airlines apart from Lufthansa reported negative earnings in 2008, the P/E ratio cannot be used as it would yield negative share prices. Consequently the price to EBITA (P/EBITA) ratio will be used instead as all four airlines including SAS had positive EBITA.155 It is not sensible to use negative multiples, as it would suggest a negative share price for SAS. It should be noted that the analysis is very simplistic and does not take into account differences in leverage between the companies.

In order to account for leverage one would have to restate the financial statements to separate operational and non operational capital claims and liabilities, to estimate a commonly defined debt equity ratio. This is usually not a major problem, but the airline industry is highly capital intensive and thus makes heavily use of operational leases which are difficult to value from an outside perspective. The estimated debt would then need to be taken into account when levering and delivering the multiples.

Further, forward looking multiples would be the most valuable method but we find this outside the scope of this thesis and will only consider trailing multiples and levered P/S and P/EBITA multiples.

Although this analysis is very basic, difficulties occur as to finding comparable companies. Emphasis should be placed on equality in operations, size, growth prospects and accounting

155 Penman (2010) 92 Will SAS continue to fly? - A valuation of a company in crisis - practices.156 Norwegian and Ryanair, although identified as competitors in section 3.3 are not included at this point as they are both low cost airlines having different operations than the SAS Group. In addition these two are currently experiencing a high growth although Ryanair had a net loss in 2008 due to the crisis.

Consequently no low cost carrier has been considered and thus the following companies have been taken into account for the multiple approach; Austrian Air157, Finnair, and Lufthansa. These flag carriers are assumed to have little differences in operations. When considering the size issue, Austrian Air and Finnair are smaller than SAS whereas the remaining two are bigger suggesting it would equal out the size issue. The 30th of June 2009, the average market capitalization of these four in MSEK was 20,969, 2.5 times larger than SAS but other airlines we considered either were not publicly listed or used different accounting practices than our chosen comparables so we considered these to be the best available.158 Also it should be noted that all these airlines follow the IFRS in reporting their financial statements meaning operating and non-operating activities can be assumed to be reported equally on their Income Statement giving higher credibility to the P/EBITA multiple than if the opposite was true.

Table 18: Multiples

Share price Total shares June 30th Market Book value of (Mill) outstanding 2009 capitalization equity SAS 2,469 3.41 8,370 8,682 88 4.26 375 256 Finnair 128 3.76 481 773 AirFrance KLM 300 9.10 2,732 5,676 Lufthansa 458 8.96 4,103 6,919 P/S P/B P/EBITA SAS 0.16 0.96 4.93 Austrian airlines 0.15 1.47 1.52 Finnair 0.21 0.62 13.87 AirFrance KLM 0.11 0.48 2.93 Lufthansa 0.16 0.59 2.48 Average (excl. SAS) 0.16 0.79 5.20 Valuation of SAS by multiples: P/S P/B P/EBITA AVERAGE Market value 8,475 6,869 8,832 8,058 Share price 3.43 2.78 3.58 3.26 Source: Annual accounts and the stock exchanges listing the shares159

156 Palepu et al (2007) 157 Lufthansa bought Austrian air the 10th of September 2009 but as we consider the share price of the 30th of June and the 2008 Financial statements we can still use Austrian Air as a comparable separate company. 158 Mainly due to Lufthansa being more than 5 times larger than SAS in terms of market capitalization in SEK 159 Exchange rate conversion see appendix no. 17 93 Will SAS continue to fly? - A valuation of a company in crisis -

The table above represents the four multiples both separately and as an arithmetic average. As can be seen, the different multiples suggest different share prices for SAS. However, the method of multiples assumes that the market prices companies correctly but as can be seen from the table none of the multiples neither the average gives the quoted share price of 3.41.

The P/S multiple come closest, only slightly overestimating the quoted value by 1.18%. As this revenue multiple only considers the revenues and market capitalization it cannot become negative meaning it is available even for the most distressed firms. Further, earnings multiples like P/EBITA are much more sensitive to economic changes and heavily influenced by accounting decisions on for example depreciation and extraordinary charges as opposed to revenue multiples which are hard to manipulate.160 Nevertheless one should use revenue multiples with caution as it can assign high value to a company creating large revenues while at the same times losing money.

The P/EBITA multiple value the SAS share higher than the market while the contrary is true for the P/B multiple. Summing up this analysis suggests a high price of 3.58 per share, a low price of 2.78 per share and an average of 3.26 per share. As the average multiple recommend a share price lower than the quoted one, it can be suggested that the market overvalues the SAS Group share, as the Groups share is traded at a premium compared to the SAS Group.

8.2 Liquidation Value

8.2.1 Introduction

The SAS Group reported an enormous loss in 2008 and has been forced to cut costs and limit its operating areas to core operations in order to become profitable again. In the DCF and multiple analyses it has been assumed and budgeted, that the SAS Group can sell its obsolete assets ‘asset held for sale’ and can meet its short - term obligations. If this is not the case it has to be considered how much the company is worth if its assets are sold on the market.

Further it can provide a picture on the market expectations of the share; if the share price drops lower than the asset per share level, a voluntary liquidation can be considered. This way the company could avoid a possible bankruptcy. It should be noted that there is also a possibility that another airline will buy SAS. Lufthansa has shown interest in the past but this

160 Damodaran (2007) 94 Will SAS continue to fly? - A valuation of a company in crisis - will not be considered in this analysis as looking into strategic buyers is outside the scope of this thesis.161

Liquidation or breakup value is the projected price of the firm’s assets sold separately less its liabilities.162 It involves selling the assets, paying off existing debt and distributing the remainder to the shareholders. If the owners believe the company is worth more in liquidation than as a going concern they can impose a voluntary liquidation. This may occur when management view the growth prospects of the company as limited. Otherwise, if the creditors file a petition for liquidation, a firm is considered to be bankrupt as a result of an involuntary liquidation.

When estimating the liquidation value of a company, analysts often assume that the assets can be sold in an “orderly fashion” meaning it will take between 9-12 months and that the assets can be sold for 80-90% of the book value. However, if the liquidation needs to be more rapid typically only 60-65% of the book value will be recovered. Hence a bankruptcy will be very costly not only because of fees and charges but also because the company must sell the assets cheaply.

When finding the liquidation value of the SAS Group, comparable assets to those listed in the company’s Balance Sheet should be researched as real market value of the assets can differ considerably from those listed in the books. Also the amount of recovery from the company’s receivables and prepaid accounts depends on their clients and customers and are thus difficult to foresee. However, as the group does not disclose much information regarding their assets and liabilities it has been necessary to make a number of assumptions regarding the company’s assets. Moreover, instead of using the book values from 2008 the forecasted ones for 2009 will be used as it will give the current liquidation value and can thus be compared to the calculated market value. In this way it is possible to find whether the company is worth more liquidated than as a going concern.

161 “Lufthansa in talks to buy SAS: http://www.reuters.com/article/innovationNews/idUSWEA920720080912 162 Depamphilis (2003) p.365 95 Will SAS continue to fly? - A valuation of a company in crisis -

8.2.2 Estimation of assets in case of liquidation

Table 19: Asset of SAS Group

MSEK BASE WORST BEST Land and buildings 498 453 544 Aircrafts 7,553 6,609 8,497 Other tangible fixed assets 1,680 1,470 1,890 Pension funds, net 9,658 9,658 9,658 Other long-term receivables 369 328 410 Inventories and prepayments to suppliers 585 512 658 Prepaid expences and accrued income 629 550 707 Current receivables 3,368 3,368 3,368 Short term investments 6,355 5,720 6,991 Cash and bank balances 1,367 1,367 1,367 Total assets 32,061 30,034 34,089 Total liabilities 29,185 29,185 29,185 Liquidation value 2,876 848 4,903

Shares outstanding (million) 2468.5 2468.5 2468.5

Liquidation value per share (SEK) 1.16 0.34 1.99 Source: own creation, annual report 2008

Full list can be found in appendix no. 14

As can be seen from the above table, the assets have been grouped and three different liquidation values have been estimated; a base value where the percentage of book value varies depending on the assets, a worst case scenario where all assets are projected to sell for 10 percentage points less than the base scenario and a best case scenario where all the assets sell for 10 percentage points above the base scenario.163 10 percentage points was chosen as it covers the “orderly fashion” range of 80-90%. Further it has been assumed that all the liabilities of the company will be paid in full at book value. Most of the assets have been valued according to the “orderly fashion” method of 80% of book value but some assets are valued differently.

‘Land and buildings’ are typically valued below market value in the Balance Sheet; therefore we set the base to 110% of book value. The company does not enclose information meaning it is not possible to find the true market value; hence the assumption of 110% of book value seems to be reasonable enough.

163 If the base value is 80% of book value, the worst case will be 70% and the best case 90%. 96 Will SAS continue to fly? - A valuation of a company in crisis -

‘Short-term investments’ are assumed to be collected in full and hence are assigned a base value of 100% of book value. A worst and best-case scenario is calculated in case the company cannot get back its short-term investments in full.

‘Cash and bank balances’ will remain at 100%. Further it has been assumed that the company is able to collect the whole value of its ‘current receivables’ and ‘accrued income’. In addition, the ‘pension fund net’ amount reported in the company’s books is a gain from the insurance funds that the pension fund is put in, meaning it will also be collected in full. No worst and best case scenarios are assumed for these asset classes.

‘Other long term receivables’, ‘inventory’ and ‘prepayments to suppliers’ are assumed to recover 90% of its book value. Possibly some suppliers could require compensation for cancellation if they for example started producing some of the supplies already paid for by the SAS Group.

8.2.3 Value of liquidation

Assets less the liabilities give a probable liquidation value for the SAS Group of MSEK 2,876. In the worst case scenario the value has been estimated to be MSEK 848 and in the best-case scenario to be MSEK 4,903.

The base scenario is believed to be the most likely to occur giving a liquidation value per share of 1.16. By this is meant that SAS should liquidate if its share price falls below that estimated share price. As of the 30th of June 2009 we found the market value of SAS to be SEK 4.02. Thus the company is yet worth more as a going concern than liquidated and should continue its operations.

Having estimated the above value, it has to be considered, that some ‘intangible assets’, not disclosed in the Balance Sheet could also fetch a value. The two main intangibles not captured by the Balance Sheet are the brand names of the group and the landing slots at the airport164. To fully valuate those non disclosed value is difficult and outside the scope of this Thesis.

On the other hand, we found building up a brand name for a start - up airline not to be very costly. Further we found that airport slots at the majority of airports served by SAS are not

164 Robertson, D., Heathrow landing slots are airline’s best asset 16.07.2008 http://www.timesonline.co.uk/tol/travel/news/article4340478.ece 97 Will SAS continue to fly? - A valuation of a company in crisis - scarce. Hence it has been assumed, that those intangible assets will have no significant effect on the above estimation.

98 Will SAS continue to fly? - A valuation of a company in crisis -

Part 9: Cost of capital

When valuing SAS, the weighted average cost of capital (WACC) should be used to discount the free cash flow. The WACC represents the opportunity cost faced by investors for investing their funds in one particular business instead of others with similar risk.165 The following section will discuss SAS Group’s current and future capital structure and determine the company specific WACC.

The weighted cost of capital is defined and calculated as follow:

Equation 6: Weighted cost of capital

 D C   E  WACC   kd  kc   1 Tm   ke   V V  V 

As it can be seen from the formula, the cost of debt, equity and operating leases have to be estimated before the WACC can be calculated. The following discussion is concerned with the calculation of those parameters.

9.1 Capital structure

The SAS Group has different types of debt outstanding including subordinated loans, regular bank debt, operational leased equipment and other unspecified loans. As only the book value of the debt is listed in the Balance Sheet, the market value has to be estimated, as the components of WACC should be weighted at their respective market values and not their book values.166

The ‘subordinated loan’ has an outstanding value of MCHF 127 and was valued at MSEK 953 in the company books. The interest rate of the loan is fixed at 2.375% and no maturity date is set for this loan. As this bond is listed on the Basel, Geneva and Swiss stock exchange its market value can be estimated.167 The corresponding value as of the 30th of June has been quoted at 37CHF; 63CHF below par giving a market value of approximately MCHF 47, or MSEK 336. Hence the market value is 65 percent below book value.

165 Koller et al. (2005) p. 291 166 Pratt (2005) P.194. 167 http://www.six-swiss-exchange.com/marketpulse/bonds/security_info_en.html?id=CH0006125253CHF4 99 Will SAS continue to fly? - A valuation of a company in crisis -

Besides the subordinated loan, company has 7 different bonds outstanding, 5 of which are traded on the Oslo stock exchange and 2 that are not traded.168 The non-traded bonds are in Euros and Swedish kroner and have a floating interest rate set every three-month. The traded bonds are all in Norwegian kroner and comprise three bonds with a fixed interest of 7% and two with a floating interest rate.

The 7% coupon bonds are traded together and are valued at MNOK 332 or MSEK 368 in the Balance Sheet. On the 30th of June the bond was quoted to be NOK 84; NOK 16 below par resulting in a market value of MNOK 279 (MSEK 336). Consequently 7% coupon bond is valued at approximately 9 percent below book value taking into account currency effects169.

The two remaining traded bonds are shown in the company accounts with slightly different interest rates, 9.86 and 9.856 percent. But only two bonds are listed at the Oslo exchange and as one of the listed bonds we found is the 7% coupon bond it seems reasonable to assume that two floating interest rate bonds are grouped together as well. Also, when looking at these bonds in earlier accounts they are shown with the same interest rate so it seems reasonable to assume that this might be a minor typo.

Combined the two floating rate bonds have a book value of MNOK 485.5 (MSEK 505). The 30th of June the price of the bond was NOK 95.50 hence trading NOK 4.50 below par, which gives a market value of MNOK 464 (SEK 558). Although the bond is trading below par, the market value is higher than the book value as the Swedish krona has weakened against the Norwegian krone.170

The bonds discussed above will be valued at market value but the two remaining non-traded bonds cannot be valued like the others meaning we assume the book value to equal the market value totalling MSEK1,339 for the two.

Other loans are a mixture of finance leases and unspecified loans. The average interest rate on the end of 2008 amounted to 4% for financial leases and 5.81% for other unspecified loans. As

168 Oslo Stock exchange, http://www.oslobors.no/ob_eng/markedsaktivitet/bondOverview?newt__ticker=SASCO02&newt__menuCtx =1.2.20 169 See appendix no.17 170 See appendix no.17

100 Will SAS continue to fly? - A valuation of a company in crisis - the maturity of these loans is not disclosed in the accounts we assume the book value to be equal to the market value.

‘Short-term loans’ are a mixture of commercial papers and bank loans. The average interest on commercial paper amounted to 5.92% on the end of 2008 but the interest on bank loans are not disclosed. As with the other loans, ‘short-term loans’ are assumed to equal its market value.

SAS has unfunded pension liabilities that should be treated as a debt equivalent. The assumed after Tax market value of MSEK 1,579 is added to net debt. In addition, the capitalized operating lease interest should be added to net debt.

The company has excess cash and marketable securities, which carry little risk and can be used to repay debt; so in order to reflect this in the WACC calculation it has been deducted from total net debt. The current capital structure of SAS can be seen in the table below, suggesting a debt equity ratio of 3.84 percent meaning SAS is financed mainly by debt.

Table 20: Capital Structure of SAS Group

MSEK Book value Market value % of total Total Equity 8,682 8,414 23%

Subordinated loans 953 336 1% Bonds 2,212 2,233 6% Other Loans 10,535 10,535 29% Current portfolio of long term loans 872 872 2% Short term loans 1,189 1,189 3% Unfunded pension liability net 1,579 1,579 4% Excess cash and marketable securities -4,287 -4,287 -12%

Total Net debt 13,053 12,457 34% Capitalized operating leases 16,014 16,014 43% Total capital 37,749 36,885 100% D/E Ratio 3.35 3.38 Source: own creation, SAS Group annual report 2008

The market value of equity is simply the market capitalisation of the SAS Group on the 30th of June 2009 and amounted to MSEK 8,414

9.2 Cost of equity

The Capital asset pricing model (CAPM) is used to estimate the cost of the group’s equity, but a number of assumptions have to be made before developing the model. The assumptions and a discussion of those can be found in appendix no. 13.

101 Will SAS continue to fly? - A valuation of a company in crisis -

As a result, although the CAPM is widely used in practice, it should be treated with caution as it fits better in theory than in practice. The CAPM is defined as follows:

Formula 1: CAPM

RE = RF + E (RM – RF)

Where RE is the required return on equity, RF is the risk free rate, E is the equity beta and RM is the expected return on the market. Hence the model gives the relation between the risk and return of an investment.

9.2.1 Risk free rate

As the name suggest, the risk free rate is the rate of return an investor would receive if he or she does not want to be exposed to any risk. It represents an investment where the actual return equals the expected return meaning there is no variance around the expected return. The risk free rate should be measured by the yield of a government bond that covers the duration on the forecasted period.171 In this case the Swedish 10 year government bond (Staten RB 1052, 4.25%, 2019) as a proxy for the risk free rate has been used. The yield, and thus the risk free rate, was 3.62% on the 30th of June 2009.172

9.2.2 Equity beta

The equity beta of the SAS Group measures how much its stock and the market move together and must be estimated, as it is not directly observable. Usually a stock market index is used as a proxy for the market portfolio although in theory it should include all assets.

Koller et al. (2005) recommend that for a European company, stock returns should be regressed against a well-diversified portfolio such as the MSCI world index as local market indexes are heavily weighted in only a few industries. Further it is recommended to use monthly returns and a minimum of 60 observations when beta is estimated, as using shorter periods can lead to systematic biases.

Damodaran (2009) states that in order to find a good indicator one should look at the largest holders of stock in the company and the markets where the trading volume is heaviest.173 The

171 Penman p.111 172 ISIN:SE0002241083, Date of maturity: 13th of March 2019 (Bond number) 173 Damodaran (2009) http://pages.stern.nyu.edu/~adamodar/ 102 Will SAS continue to fly? - A valuation of a company in crisis - marginal investor, a representative investor whose actions reflects the investors currently trading the stock, should determine which index to use as a proxy. As the three Scandinavian governments own the SAS share and the remaining shareholders are mainly Scandinavian174 it seems reasonable to use the Nordic 40 index following the suggestions of Damodaran. However, following the suggestions of Koller et al the MSCI index should be used. This is because the OMX Nordic 40 index consists of the 40 most traded shares of the stock markets in Stockholm, Helsinki and Copenhagen. As the Oslo stock exchange is not a part of the OMX group, Norwegian stocks are not included in this index.

In addition, two different local Swedish indexes have been used, the OMX Stockholm 30 and the OMX Stockholm P1. The first of which is a weighted average of the 30 most traded stocks and the latter being a weighted average of all the stocks trading at the Stockholm stock exchange.

Table 21 below gives the different betas, and key statistics, estimated using the following regression:

Equation 7: CAPM Regression

∆푆푕푎푟푒 푃푟푖푐푒푖 = 훼 + 훽푖 ∆퐼푛푑푒푥푖 + 푢

Table 21: SAS Group Betas

Beta R2 Observations Lower 95% Upper 95% OMX Nordic 40 1.27 0.34 92 0.9 1.64 OMX Stocholm 30 0.97 0.24 120 0.65 1.29 OMX Stockholm PI 0.98 0.25 120 0.67 1.29 MSCI world 1.71 0.38 104 1.28 2.14 Reuters 1.02 Bloomberg (asjusted) 1.31 SAS own beta 1.33 Source: own estimation based on data from DataStream, Reuters, Bloomberg, SAS annual 2008

For comparison purposes, regressions have been run using all the above-mentioned indexes.

During the beta estimation via OLS regression analyses, it has been assumed that the CAPM model is specified correctly and fulfils the assumption of a Classical Linear Regression Model175.

174 Holdings in Scandinavia amount to approximately 90%, SAS Annual report 2008, p.25 175 Gujarati, 2004, “Basic Econometrics”, page 335, Gujarati, “Basic Econometrics”, McGraw-Hill Education - Europe, 4th edition, 2003 103 Will SAS continue to fly? - A valuation of a company in crisis -

As a result it is assumed that the estimated estimators are BLUE176. Testing these assumptions would have been outside the scope of the thesis.

Even though beta has been estimated by a number of different indexes, only one can be used as a proxy for the market portfolio; the most reasonable one among the four estimations has to be decided on.

First, the two Swedish indexes have to be excluded as they are too narrow and only represent the Swedish market, second, the Nordic index might also be too narrow as it only include 40 companies and excludes Norwegian companies. As a result we have choose the MSCI world index as it is the broadest one of the four in addition indexes and as an extra benefits it has the highest correlation to the SAS Group’s share (R2).

As can be seen from the above table, the MSCI world index gives the highest beta followed by the OMX Nordic 40 index. Since the SAS Group themselves, Reuters and Bloomberg estimate the beta in the range 1.02 to 1.33 it seems reasonable to use the beta of 1.27 given by the OMX Nordic 40 index at first glance as it is very close to the analytical estimates.

However, the Bloomberg index is adjusted towards the mean and the SAS Group beta reported by group has not been revised since 2001. It seems reasonable to assume that the SAS Group stock has become more volatile over the years since 2001 resulting in a possible understatement of the beta by the group. Thus we stick to the choice above and use the MSCI world index as a proxy for the market portfolio.

The R2 of the beta estimated with the MSCI index is 0.38. This can be interpreted that only 38 percent of the risk associated by holding the SAS share is systematic/market risk for the investor, the remaining risk can be reduced by investors by diversifying their investment portfolio. However, the true beta lies with a 95% certainty in the range from 1.64 to 2.14 and this is by no means narrow.

Accordingly, smoothing techniques exist as to improve the historical beta estimates. Bloomberg use a smoothing technique that smooth beta estimates towards 1. This method is related to

176 Best Linear Unbiased estimation 104 Will SAS continue to fly? - A valuation of a company in crisis -

Blume´s observation that betas revert to the mean over time; the mean in this case is the market, which has a beta of 1177

This has been done accordingly:

Adjusted = (0.33) + (0.67) Raw  Adjusted = (0.33) + (0.67) 1.71 = 1.48

As a result the estimated adjusted beta for the SAS Group’s share takes the value of 1.48 and will be used in the CAPM to estimate the return of the share. It shows that the share of the SAS Group is more volatile (risky) then the market.

9.2.3 Market risk premium

The market risk premium is the reward investors’ demand for taking the risk of investing in shares rather than investing non risky assets such as treasury bills and government bonds.

The opinion of the size of the appropriate risk premiums differ wildly between academics and investment professionals. Koller et al (2005) suggest that a market risk premium of around 4.5% to 5.5% to be an appropriate range, but on the other hand, Damodaran (2009) finds the historical equity risk premium in Sweden to be 7.51%178; further, Dimson et al (2002) estimate that the appropriate risk premium in Sweden is 7.1%179 and Maginn (2007) suggests 7.5% as reasonable.180

As the suggested historical risk premiums for Sweden range from 7.1 to 7.51 percent, we assume that the risk premium is equal to 7.5%. This is because we believe due to the current situation of the financial markets that the risk premium is on the upper side of the suggested range.

Having estimated all the input data needed for the CAPM, the cost of equity has been estimated by the model:

RE = RF + E (RM – RF)  RE = 3.62 + 1.48(11.12-3.62)  RE = 14.72%

177 Koller et al. (2005) p. 314 178 Damodaran (2008) 179 Dimson et al (2002) 180 Maginn (2007) 105 Will SAS continue to fly? - A valuation of a company in crisis -

As a result of the CAPM we have estimated that the cost of equity of the SAS Group amounts to 14.72%. This number seems reasonable especially as the company is in distress and thus investors require a much higher expected return then holding riskless assets.

9.3 Cost of debt

The cost of debt is usually lower than the cost of equity as debt holders hold less risk than shareholders as debt is prioritized in the case of a bankruptcy.

To estimate the cost of debt it is common practice to use the yield to maturity of the company’s long-term debt. It has to be taken care to consider that there should be no options attached to the debt, as attached options such as callability or convertibility will affect the price of the bond.

However, as the yield is a promised return it only seems sensible to determine the cost of debt by the yield if the company has a investment graded debt rating; that is debt rated at BBB or above. This is due to the fact that companies with poorer debt ratings have higher probability of defaulting on their debt and as a result the price of the bonds will be much lower than par value, resulting in an unreasonable high yield. Further the lower price can be a result of a change in the rating since the bond has been issued, reflecting the new, higher risk of defaulting. Consequently the yield of non investment grade bonds is not a suitable proxy.

To illustrate the problematic, we have estimated the yield of the SAS Group’s bonds, which amounted to 33.4% for the 7% coupon bond and 13.4% for the floating interest bond as of the 30th of June 2009. Both of these yields appear to be high and we are confident that if SAS Group would be able to issue bonds at lower yields in the future as those two rates suggest. Thus the yield on the SAS Group’s long-term option free bonds cannot be used to determine the company’s cost of debt.181

To reflect the cost of debt for the SAS GROUP better than the Groups bonds do, a newly issued bond with the duration matching the investment period should be chosen. Unfortunately the SAS Group has not issued any debt recently which reflects their current rating. Also the SAS Group’s rating by Standard & Poor has been downgraded from BB with a negative outlook to B.

181 SAS annual report 2008, p. 32; Note: SAS’s only long term bond is callable, the others mature in 2010. 106 Will SAS continue to fly? - A valuation of a company in crisis -

As an approximation to the cost of debt of the SAS Group, Koller et al (2005) offers a reasonable solution as he suggest that the yield of comparable bonds should be used, such as the yield of a BBB corporate bond index. To adjust for any grading less then BBB, 50 Basis points (bps) should be added to the yield to better reflect the higher cost and the risk of the debt.

To calculate the cost of debt for SAS we have followed this suggestion, and we used the Markit Iboxx bond indices182. The bonds under consideration for use are summarised in the table below.

Table 22: Iboxx Bonds

Years to Yield maturity BBB 1-3 5.99 2.06 BBB 3-5 5.97 4.12 BBB 5-7 7.75 5.95 BBB 7-10 7.77 8.06 BBB 10+ 7.35 16.99 Source: Markit Iboxx

Using the average yield for the 7-10 year portfolio and adding 50bps to take into account the higher cost of debt for B rated bonds the cost of debt for SAS is estimated to be 8.27 percent. On the other hand, as SAS is B-rated, it seems unreasonable to add only 50bps to the average yield on long-term investment grade debt.183 If this had been done then we would assume that all companies rated below investment grade would have the same cost of debt.

Arguing that Koller et al’s suggestion is unreasonable, we add another 50bps the yield of the 10 year bond, increasing the yield from 7.77% to 8.77%.

As a future adjustment it has to be considered that operating lease interest has been estimated to be 8.6%. We assume that cost of debt of the group should be higher than the operating lease interest, as operating lease interest should not take into account the SAS Group’s credit rating, as operating leases are secured by the equipment leased under the lease agreement and so carry less risk to the lessor than debt to a bond investor.

182 For more information of the Iboxx bond indices, visit their webpage www.iboxx.com 183 BBB, BBB-, BB+, BB, BB-, Bmany downgrades from investment grade to SAS’s B 107 Will SAS continue to fly? - A valuation of a company in crisis -

As a result we decided to add another 100 bps to the Iboxx 7-10 year bond yield; so the cost of debt as been estimated to be 9.77%, so it reflects the higher risk of debt compared to operating lease interest.

9.4 Calculation of WACC

In the above discussion the following values have been estimated:

Table 23: WACC estimated inputs

WACC MSEK risk free rate 3.62% beta 1.48 market risk premium 7.50% Cost of equity 14.72% Equity 8,414 Capitalised Cost of leases 8.60% oper. leases 16,014 Cost of Debt 9.77% Net Debt 12,457 Tax rate 26.30% Sum 36,885 Source: own creation

When the estimated values are used in the above mentioned WACC formula, then the following result is calculated.

12,457 16,014 8,414 푊퐴퐶퐶 = × 9.77% + × 8.6% × 1 − 26.3% + × 14.72 36,885 36,885 36,885

푊퐴퐶퐶 = 8.54%

The WACC has been estimated to be 8.54 %. This weighted average cost of capital takes into account all sources of financing available to the SAS Group, but it seems very low, especially considering that the company is in crises.

The low cost of capital is mainly due to the high level of leverage when capitalised operating leases are added to debt. Debt and capitalised operating leases make out to be 77% of the company’s sources of finance. As a result the SAS Group enjoys a large Tax shield and so a very low cost of capital, as interest payments for both, debt and operating leases are Tax deductible. Financial theory predicts that if the company is leveraged highly, the cost of debt should reflect that and offset any tax shield advantages184, but this does not seem to hold in the case of the SAS Group, as the cost of capital is still reasonable. A possible explanation for this is, that if

184 For further reading see: Brealey and Myers (2003) 108 Will SAS continue to fly? - A valuation of a company in crisis - banks are lending to a company, off Balance Sheet debt, such as capitalised operating leases are not considered when the interest rate is determined.

109 Will SAS continue to fly? - A valuation of a company in crisis -

Part 10: Cash flow valuations & sensitivity

The cash flow based valuation models value the core operating parts of the company only. This implies that non core operating assets and liabilities as well as capital claims not included in the DCF or economic profit valuation have to be valued separately and added / deducted from the estimated market value of the firm

10.1 Valuation of non core operating assets

The non core operating assets which have not been included in the two valuation approaches mentioned above are namely associates, excess cash and assets held for sale.

10.1.1 Associates

Associates are defined where SAS has an ownership of less than 50% in other companies. A first approach would have been to find the market capitalisation of associated companies if listed on the stock exchange; but due to the complex ownership and limited trading of all of the companies of which the group has an interest in, it has been decided to use the fair value of the equity as published in the annual reports by the SAS Group as of the year ending December 2008.

We realised that due the timing of our valuation (midyear 2009, as profits/ losses might have occurred during the first two quarters of 2009) and due to the financial crises, the value of the equity may have changed and as a result the book equity values in the financial statement of 2008 are the best approximation. But we have decided that the change of value of associated companies would have no significant effect on the estimation on the market price of the SAS Group, as the associated companies are such a small portion compared to the estimated value of the SAS Group. Consequently it has been decided to use the equity value published year ending 2008 as it will be a reasonable approximation to the current market value.

The list of associated companies can be found in the appendix no. 12.

10.1.2 Excess cash

As earlier mentioned in the thesis, ‘excess cash’ is cash which is not needed in the running of the operation; as a result this line item had not been included in the valuation models before. The main item in ‘excess cash’ are ‘short term investments’, which have a term of no more than

110 Will SAS continue to fly? - A valuation of a company in crisis - three month185 and a valued at fair value in the accounts; as a result we have decided that the remaining amount of ‘excess cash’ is on similar terms. Consequently we assume that the values given in the financial statements are a reasonable approximation of current market values.

10.1.3 Assets held for sale

‘Assets held for sale’ are assets, the SAS Group is currently divesting. ‘Assets held for sale’ have been netted with ‘liabilities from asset held for sale’. From the financial accounts of the SAS Group it is not to clear which assets this line item corresponds to, but we assume that the line item is related to the companies currently held for sale and Spanair.

In the media it has been stated that Spanair has been sold for 1 euro (5.5 SEK) and as a result the ‘asset held for sale’ figure should have been adjusted to reflect the lower value. But as we cannot estimate Spanair portion out of the ‘asset held for sale’ value, we have decided against it. As the SAS Group is not disclosing exactly what relates to the ‘asset held for sale’ line item, we assume that the book value is a fair approximation of the asset held for sale value.

10.1.4 Tax Assets

The tax assets are resulting from losses in the previous periods and can be used to pay for taxes occurring in the future. In the SAS Group accounts it is not specified where these tax assets come from and which taxes can be paid with them, hence it is difficult for us to model the value of those. Additionally it is not disclosed how long the tax assets are valid to be used before they have to be written down.

We realise that IFRS only allows tax assets to be recognised in the Balance Sheet if it is likely that those can be used in the future, however as mentioned before, it is not possible to estimate the value as we have a limited amount of information available and limited knowledge of tax law to assume that the tax assets are of any current value for the SAS Group and its shareholders.

Consequently we have only adjusted NOPLAT for a change in the account, (increases and decreases) have been accounted for, but the value (as of yearend 2008) is not included in the valuation.

185 SAS Group Annual report 2008, p. 80-81, note 22 111 Will SAS continue to fly? - A valuation of a company in crisis -

As a result we assume that for valuation purposes that the tax assets have no value to the SAS Group.

10.2 Valuation of non - core operational liabilities and capital claims

The following items have to be subtracted from the estimated value of the firm in order to estimate the value of equity, as they represent claims against the market value of the firm.

10.2.1 Value of Debt

The market value of debt was established in section 9.3, but for simplicity we still decided to use the book value of debt to be subtracted. This is due to the fact, that the SAS Group is not able to repurchase any of the debt at market value, but has to pay pack the debt in full. As a result it does seem more reasonable to subtract the book value of debt claims against SAS instead of its market value.

10.2.2 Unfunded Pension liabilities

The SAS Group is using both, defined benefit and defined contribution plans. Defined contribution plans are mostly used in Denmark, whereby defined benefit plans are used in the rest of Scandinavia186. The difference between the two plans is, that for defined contribution plans, the SAS Group has to contribute to the pension plan of the employee over the time of his / hers employment; defined benefit plans however require the SAS Group to provide benefits for the employee after retirement. As a result, contribution plans are included in the valuation already as part of payroll expenses, as they are expensed within NOPLAT and the risk lies with the employee for their pension fund to provide.

Valuation for defined benefit plans is somewhat more challenging, as it is difficult to estimate future pension fund shortfalls and gains. As a result we have used the current after tax pension shortfall of the SAS Groups which can be estimated are subtracting pension liabilities from pension assets multiplying it times 1 – the marginal Tax rate.

The Balance Sheet item however includes ‘unrecognised gains’ from pension plans. As those gains are unrecognised, we assume that they have currently no future value. Including these

186 SAS Group Annual account 2008, p. 79 112 Will SAS continue to fly? - A valuation of a company in crisis - gains can lead to misleading results, as these gains can be lost in the future as companies usually recognise them only over time.

10.2.3 Capitalised operating leases

Capitalised operating leases have been discussed at length in section 5.1.4, consequently this item will not be discussed here. Nonetheless, the equity value of the group has to be adjusted for it, as we have treated capitalised operating leases as an off Balance Sheet debt. As a result it has to be deducted from the firm value as well.

10.3 Valuation of core operating items

The following results are based on the preceding parts and section in this paper, and answer the first research question. It has been pointed out, that we have used two different cash flow approaches, which yield the same results. The main difference between the two valuation approaches lie in the estimation of the operating value which amounted to MSEK 36,365. The differences are discussed in the two proceeding sections. Afterwards the estimated equity value is discussed. Detailed calculation can be found in Appendix No. 15 and 16.

10.4 Midyear timing adjustment

The operating value has to be adjusted for the fact that the SAS Group has been valued on the 30th of June 2009. Interim reports should have been used to factor in profits earned for the first six month of 2009, but as the SAS Group’s interim report does not included a Balance Sheet it has been impossible for us to account for the profits this way.

Consequently we have decided to adjust the operating value with a midyear timing adjustment and assume the profits of the SAS Group are evenly earned throughout the year. This has been done by multiplying the operating value by (1+WACC)^1/2 to capture the first six month of profits in the valuation.

10.5 Continuing Value

When valuing SAS we used two methods based on discounted cash flow; the enterprise DCF model and the economic profit model. Both methods separate the company’s cash flow into two periods, the present value of cash flow during the forecasting period and the present value

113 Will SAS continue to fly? - A valuation of a company in crisis - of cash flow after the forecasting period. The second one is called continuing value and is defined differently for the two models.

Equation 8: Continuing value DCF approach

 g  NOPLATt1 1   RONIC  CVt  WACC  g

Where NOPLATt+1 is the normalized level in the first year after the explicit forecasting period, g is the expected growth rate of NOPLAT in perpetuity and ROINC is the expected return on new invested capital.187

Equation 9: Continuing value economic profit approach

 g  NOPLATt1  RONIC WACC EPt 1  RONIC  CV   t WACC WACCWACC  g

Where EPt+1 is the normalized economic profit in the first year after the explicit forecast period and the remainder as defined above in equation 1.188

Continuing value parameters such as RONIC and g should be consistent with the expected competitive condition and the growth rate of the economy respectively. It is suggested that SAS will not earn above normal return meaning the RONIC are set to equal WACC after the explicit forecasting period. If RONIC is set higher than the WACC we would believe that SAS has a competitive advantage and thus earning above normal return which is unreasonable to assume in the long term.

Further, the growth rate for companies not earning above normal returns should be set a little above expected long-term inflation and it should not exceed the growth rate of the economy. The Riksbank of Sweden’s target is to limit the annual change in the consumer price index to two percent189 meaning we expect the long-term inflation in Sweden to be equal to two percent. The average GDP growth in Sweden over the period from 1997 to 2007 was 3.24 percent. Hence we assume that the SAS Group grows slightly above inflation at 2.2 percent during the terminal period.

187 Koller et al (2005) p. 273 188 Koller et al (2005) p. 276 189 Hansson et al. (2009) 114 Will SAS continue to fly? - A valuation of a company in crisis -

10.6 Discounted Cash Flow

The following graph shows the result of the calculation when the DCF- formula has been applied and all capital claims have been deducted from the market value of the group.

Figure 17: Discounted cash flow estimation

16,495 4,287 1,456 44,252

1,521 37,887 622 26,710 36,366

1,579 16,254

9,719 9,924

PVof PV of Operating Mid year Adjusted Market Excess Assets Firm Debt unfunded Capitalized Estimated FCF terminal Value timing Operating Value of Cash held Value Pension Operating equity value adjustment Value associates for Sale liablility Leases Value

Source: Own creation, adapted from Koller (2005) p.104

As it can be seen the most value of the company is the present value of the terminal value and the present value of the free cash flow, which has been expected, as those two values correspond to the core operations of the SAS Group which have been pointed out in section 4.1. The terminal value amounts to 60% of firm value; this reflects that value is still created after the initial forecasted period.

10.7 Economic Profit

The following graph shows how the economic profit valuation model has been applied. As pointed out the difference is how the operating value is estimated.

115 Will SAS continue to fly? - A valuation of a company in crisis -

Figure 18: Economic Profit estimation

kr 1,456 kr 44,252 16,495 kr 4,287 kr 1,521 kr 37,887 kr 622 kr 10,722 kr 36,366 kr 28,677 kr 3,032 1,579 16,254

9,924

Invested PV of EP PV of Operating Mid year Adjusted Market Excess Assets Firm Debt unfunded Capitalized Estimated Capital (negative in terminal Value timing Operating Value of Cash held Value Pension Operating equity forecasted value adjustment Value associates for Sale liablility Leases Value period)

Source: Own creation, adapted from Koller (2005) p.104

Invested Capital is the capital which had been invested by the SAS Group by December 2008 and is equal to the invested capital amount for beginning of the year 2009; the starting point of the economic profit valuation. The present value of the economic profit appears to be negative in the forecasted period; this is because the SAS Group cannot cover its cost of capital with its return on investments until 2012. From 2013 the SAS Group is creating value from its operations.

10.8 Cash flow based estimation of the equity value

Both of the cash flow estimation models yield the same result. After adding and subtracting all non operating assets and capital claims, the estimated equity value has been estimated to be MSEK 9,923, which corresponds with a share price of SEK of 4.02, as there are 2,467.5 million shares outstanding.

The reported share price on the 30th of June 2009, the date of the valuation, has been SEK 3.41. As a result the estimated share price is 17.9% higher than the reported share price of the company.

Due to the numerous assumptions which have been made while estimating the share price it is difficult to argue that share price of the Group has been undervalued by the market.

116 Will SAS continue to fly? - A valuation of a company in crisis -

10.9 Sensitivity analyses

As mentioned, numerous assumptions have been made while estimating the value of the equity of the SAS Group; as a result, the main value drivers of the SAS Group have been used to create different scenarios in order to test the assumptions

Further it has to be mentioned that we do not expect any technological changes or a surge in demand of air travel which may affect the SAS Group’s performance significantly. As a result we have not developed a model which is based on different value drivers as the once mentioned thought the thesis. We believe that our base case is the most accurate and reliable scenario.

10.9.1 RPK and Load factor assumptions

Revenue passenger kilometre and the load factor have been forecasted with the help of industry forecast and our own assumptions. The base case are growth and load factors modelled in the forecast190; see appendix No.1. In the sensitivity analyses, the yield has been assumed to be constant, as we expect that our forecasted yield is accurately forecasted. Further it has been found that deviations from the yield have only a slight effect on revenue, RPK and the load factor have a higher influence on the share price then yield, as RPK is the growth of the company and load factor describes the efficiency of the group (the relation between revenue and costs).

Table 24: RPK & Load factor (sensitivity) Table 25: RPK & Load factor (deviation)

Revenue Passanger Kilometer growth Revenue Passanger Kilometer growth 4.02 -3% -2% -1% 0% 1% 2% 3% -3% -2% -1% 0% 1% 2% 3% -3% -4.04 -3.90 -3.73 -3.54 -3.32 -3.06 -2.77 -3% -200% -197% -193% -188% -183% -176% -169% -2% -1.97 -1.67 -1.33 -0.95 -0.52 -0.05 0.48 -2% -149% -141% -133% -124% -113% -101% -88% -1% 0.05 0.50 1.01 1.57 2.19 2.88 3.65 -1% -99% -87% -75% -61% -45% -28% -9% 0% 2.01 2.62 3.28 4.02 4.84 5.74 6.73 0% -50% -35% -18% 0% 20% 43% 67%

1% 3.88 4.63 5.46 6.37 7.37 8.47 9.69 1% -3% 15% 36% 58% 83% 111% 141% Loadfactor 2% 5.70 6.59 7.57 8.65 9.83 11.13 12.56 Loadfactor 2% 42% 64% 88% 115% 144% 177% 212% 3% 7.47 8.50 9.63 10.87 12.23 13.72 15.35 3% 86% 111% 139% 170% 204% 241% 282% Source: Own creation Source: Own creation

In the table above it can be seen, that a 1% change of growth and load factor can have a significant effect on the share price. If both value drivers are 1% higher or lower than forecasted, the share price is found to be respectively 83% higher or 75% lower than our base case. We further have found that a slight deviation from our base case of -0.2% points of the

190 The average RPK growth has been approx. 2.75% and the average load factor approx. 74.65 % during the forecasted period 117 Will SAS continue to fly? - A valuation of a company in crisis - load factor and – 0.17% points of the RPK growth would yield the closing price of the Group’s share on the 30th of June 2009.

10.9.2 Cost of capital assumptions

As the cost of capital is difficult to estimate due to the reliance on historical data in terms of market risk premium and the companies better, we also decided to test the assumptions here, while referring to our base case pointed out above. Only the cost of equity is under observation here, as the cost of debt has been observed by data highly comparable to the SAS Group. The results are presented in the table below:

Table 26: Risk premium & Beta (sensitivity) Table 27: Risk premium & Beta (deviation)

Market risk premium Market risk premium 4.02 4.50% 5.50% 6.50% 7.50% 8.50% 9.50% 10.50% 4.50% 5.50% 6.50% 7.50% 8.50% 9.50% 10.50% 1.63 6.96 5.58 4.37 3.29 2.34 1.48 0.71 1.63 73% 39% 9% -18% -42% -63% -82% 1.58 7.16 5.80 4.60 3.53 2.58 1.72 0.95 1.58 78% 44% 14% -12% -36% -57% -76% 1.53 7.37 6.02 4.83 3.77 2.82 1.97 1.19 1.53 83% 50% 20% -6% -30% -51% -70%

1.48 7.58 6.25 5.07 4.02 3.08 2.22 1.45 1.48 89% 55% 26% 0% -23% -45% -64% Beta 1.43 7.80 6.49 5.32 4.28 3.34 2.49 1.72 Beta 1.43 94% 61% 32% 6% -17% -38% -57% 1.38 8.02 6.73 5.58 4.54 3.61 2.76 1.99 1.38 99% 67% 39% 13% -10% -31% -50% 1.33 8.25 6.97 5.84 4.81 3.89 3.04 2.28 1.33 105% 73% 45% 20% -3% -24% -43% Source: Own creation Source: Own creation

As can be seen from the table, the Beta and the market risk premium both have an effect on the share price. A slight change in the assumptions (e.g. changing the beta by 0.05 and the market risk premium by 1% point) leads to a range of SEK 3.34 to SEK 4.83 for the share.

10.9.3 Terminal Value assumptions

The terminal value of both models are important parts of the value; in the DCF model, the terminal value amounts to 60% of the value and in the economic profit model it makes up around 21% of the value. Therefore the growth and ROINC assumptions are very important. The base case of growth in NOPLAT after the terminal period has been estimated to be 2% and the return on new invested capital has been set equals to WACC, 8.54%.

Table 28: ROINC & Growth (sensitivity) Table 29: ROINC & Growth (deviation)

Return on new Invested Capital Return on new Invested Capital 4.02 7% 8% 8.54% 9% 10% 11% 12% 7% 8% 8.54% 9% 10% 11% 12% 0% 4.02 4.02 4.02 4.02 4.02 4.02 4.02 0% 0% 0% 0% 0% 0% 0% 0% 1% 3.69 3.92 4.02 4.10 4.24 4.36 4.45 1% -8% -3% 0% 2% 5% 8% 11% 2% 3.26 3.79 4.02 4.20 4.52 4.79 5.02 2% -19% -6% 0% 4% 13% 19% 25%

3% 2.68 3.61 4.02 4.33 4.91 5.39 5.78 3% -33% -10% 0% 8% 22% 34% 44% Growth 4% 1.83 3.35 4.02 4.53 5.47 6.24 6.88 Growth 4% -54% -17% 0% 13% 36% 55% 71% 5% 0.52 2.94 4.02 4.83 6.34 7.58 8.61 5% -87% -27% 0% 20% 58% 88% 114% 6% -1.84 2.22 4.02 5.38 7.91 9.97 11.70 6% -146% -45% 0% 34% 97% 148% 191% Source: Own creation Source: Own creation 118 Will SAS continue to fly? - A valuation of a company in crisis -

As it can be seen no value is created if the ROINC is equals to WACC, as the growth rate does not change the WACC, the same is true if NOPLAT does not grow. Nonetheless it can be seen that when the ROINC is less then WACC the share price is lower than base case (the company is destroying value).

10.9.4 Conclusive remarks on sensitivity analyses

As discussed in the previous section the share price which has been estimated by the DCF and by the Economic Profit Model depends on various assumptions which have in impact on the estimated share price. Due to the sensibility of our assumption to estimate the share price we conclude that the published share price as of the 30th of June is within a fair range.

10.10 Conclusive remarks on the valuation of the SAS Group

In order to value the SAS Group’s share, four different valuation approaches / models have been used. The findings are presented in the table below.

Table 30: Valuation Results (all approaches / models)

share price 30/6/2009 Deviation % Published 3.41 0% Multiples 3.26 -4.4% Liqudiation Value 1.16 -66.0%

Discounted cash flow 4.02 17.9% Estimated Estimated SharePrice Economic Profit 4.02 17.9% Source: Own creation

The table shows all the share value’s which have been estimated based on different approaches used and assumptions made in the process. As it has been expected, the Liquidation value has found to be the lowest. This is in line with expectation as we had anticipated that the SAS Group should be worth more as an operating organisation then as broken up parts where the assets are to be sold.

Surprisingly, the SAS Group is trading at a premium compared to its comparable companies. This can be seen as the share price estimated by the multiple analyses is lower than its published share price; as a result, it could be argue that the group’s share price is overvalued based on the multiple analyses. This is contradicting with prior expectation (see section 2.5), as we have pointed out that the SAS Group’s share performance has been lower than its

119 Will SAS continue to fly? - A valuation of a company in crisis - comparable airlines. But it has been pointed out before, that the analysis has been done without taking into account the different capital structures.

The approach which seems to be the most appropriate to reflecting the market value is the cash flow based models, even though the approach seems to overvalue the stock. But this can be due to multiple reasons.

Firstly this could be due to the sensitivity of the assumptions as discussed in the sensitivity analysis. Secondly it could be depending on the ownership structure of the SAS Group. Research has shown191, that companies which have a large majority shareholder usually trade at a discount. This is a result as there is a risk that the majority share holders can expropriate the minority shareholders via its higher level of voting rights. Also a majority shareholder can influence the price when he / she sell a large chunk of the outstanding shares.

This situation is certainly true for the SAS Group, as four shareholders are controlling 57.6% of the outstanding share, as a result it can be argued that this may be the reason that the SAS Group’s share is trading at a discount compare to our valuation. This is because this discount is very difficult to evaluate and include in a valuation model, but the analyst needs to be aware of this possibility. Having said the previous, it needs to be pointed out; that it is unlikely that the majority investor expropriate the minority share holder (majority shareholder being the government) or sell the share, but the market might think differently.

As a result we conclude that the share is slightly undervalued by the capital market, even though not as much as we suggest (~ 17.9%) for the above reasoning.

191 Cho, Myeong-Hyeon (1998) p. 103-121 120 Will SAS continue to fly? - A valuation of a company in crisis -

Part 11: Conclusions

The objective of this Thesis has been to analyse the value of the SAS Group and its ability to overcome its current crises. Firstly, the SAS Group and its history has been outlined and introduced. Secondly, the SAS Group’s strategic position has been found, thirdly, the SAS Group’s financial statements have been forecasted and fourthly, the share price based on our perceived outlook has been estimated. The conclusion will give an overview of the main findings and discuss them as well as answering the research questions.

In order to follow the structure of the thesis the second research question will be addressed first:

Can the SAS Group survive its current crisis?

To be able to answer this question we have analysed the company’s macro and micro environment as well as its internal strategy. From the analysis of the environment it became evident that the airline industry is struggling because of falling demand resulting from the financial crisis. Also, agreements such as the “single European sky” and the open skies agreement between the EU and the US will affect the SAS Group. The single European sky has the potential to increase efficiency so that fuel consumption can be reduced, whereas the open skies agreement will increase competition and thus not be beneficial to the SAS Group. Further, the development that customers, both leisure and business, have become more price sensitive is challenging for the SAS Group as this will intensify competition from low cost carriers.

After analysing the micro environment, the main conclusion is that the airline industry is a highly competitive industry with tight profit margins. Leisure and business customers have become more powerful as the Internet makes it easy to compare fares and also businesses have increased their emphasis on travel managers. Further, the threat of entry is high resulting from deregulation in addition to the lower capital start-up costs as airlines can lease planes and equipment. Beneficial for the SAS Group is the finding that the threat of substitutes is low in Norway although it is somewhat higher in the rest of Scandinavia and Europe.

The internal strategy analysis yielded the following results. The SAS Group has the possibility to successfully implement its core strategy but it is highly dependent on the company coming to agreement with the unions considering payroll cuts. The SAS Groups payroll expenses are very

121 Will SAS continue to fly? - A valuation of a company in crisis - high compared to its competitors resulting in a clear competitive disadvantage. Also poor management in terms of cost, fleet and scheduling processes is a disadvantage for the SAS Group. This can be seen as the groups load factors are lower than the industry average. On the other hand, the SAS Group have the advantages of being at the forefront with logistics as the airline is Europe’s most punctual airline, it has access to preferable slots at the main Scandinavian airports and it has a strong brand name.

The findings from the strategic analysis have been used to forecast the accounts of the firm. The forecast predicts, that the airline is having sufficient funds to finance its operation until 2011, whereby 2011 is going to be a very difficult year, which will determine whether the airline can survive or not. It mainly depends on whether or not the airline can raise additional cash for its operation to cover its losses until 2011. This is because the restructuring efforts from the core SAS strategy are expected to be implemented by 2011 and the airline is expected to improve its performances from 2012 onwards. Consequently, we expect that the SAS Group will overcome its current crisis and turn profitable again in 2012 resulting from successful implementation of the core SAS strategy and a recovered economy.

In addition, a possible liquidation of the SAS Group has been discussed and the liquidation value was found to be SEK 1.16 per share. The reasoning is that as long as the value of SAS as a going concern is higher than its liquidation value, SAS should continue its operations.

Addressing the first research question,

What is the fair value of SAS AB?

The share price has been estimated via four different approaches, the main emphasis has been on the DCF and economic profit approach, which yielded a result of SEK 4.02 per share, a 17.9 % deviation from the published share price of SEK 3.41. On the other hand, the multiple approach was estimated to be SEK per share 3.26, which is 4.4% lower than the published result as of the 30th of June 2009. The liquidation value has been stated above.

A sensitivity analysis of the most important forecasting assumptions, RPK and the load factor, has been undertaken with the purpose of testing how sensitive these are to deviations from our findings. We find the assumptions to be highly sensitive to changes. If both value drivers are 1% higher or lower than forecasted; the share price is found to be 83% higher and 75% lower than the base case of SEK 4.02 per share respectively. 122 Will SAS continue to fly? - A valuation of a company in crisis -

As this valuation suggests a share price higher than the one listed at the stock exchange the 30th of June 2009, we consider the stock to be undervalued by the market. However, it should be kept in mind that 57.6% of the company is controlled by only four shareholders, which could explain a portion of the discount we found. Overall it can be said, based in our analyses that the SAS Group trades at or around the fair value.

123 Will SAS continue to fly? - A valuation of a company in crisis -

References

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Brealey, Richard A and Myers, Stewart C, Principles of Corporate Financ,McGraw Hill, 7th edition, 2003

Carpenter, Mason A. and Sanders, Wm. Gerard, Strategic Management, A Dynamic Perspective, Concepts and Cases, Prentice Hall, 2nd edition 2009

Damodaran, Aswath, Investment valuation, tools and techniques for determining the value of any asset, John Wiley and Sons, 2nd edition, 2002

De Wit, Bob, Strategy, Process, Content, Context, Thomson, 3rd edition, 2004

Depamphilis, Donald M., Mergers, acquisitions, and other restructuring activities, Elsevier Academic Press, 2nd edition, 2003

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Gujarati, Damodar., Basic Econometrics, McGraw-Hill, 4th edition, 2003

Holloway, S., Straight and Level: Practical Airline Economics, Ashgate, UK, 2008

Koller, Tim, Goedhart, Marc and Wessels, David, Valuation, Measuring and Managing the Value of Companies, John Wiley & Sons, 4th edition 2005

Maginn, John L., Tuttle, Donald L., Pinto, Jerald E. and McLeavey Dennis W., Managing investment portfolios: a dynamic process, John Wiley and Sons, 3rd edition, 2007

Palepu, Krishna G., Healy, Paul M., Bernard, Victor L. and Peek, Erik, Business analysis and valuation, Thomson, IFRS edition, 2007

Penman, Stephan H., Financial statement analysis and security valuation, 4th edition, 2010

Porter, Michael E., Competitive Strategy-Techniques for analyzing industries and competitors, New York, The Free Press 1980

Pratt, Shannon P., Business valuation and taxes, John Wiley & Sons, 2005

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Saunders, M., Lewis, P and Thornhill, A., Research Methods for Business Students, Prentice Hall, 4th edition 2007

Wells, Alexander T., John G. Wensveen, Air Transportation, a management perspective, Wadsworth publishing company, 4th edition 1999

Academic articles:

Barney, J.B., 1997, Gaining and Sustaining Competitive Advantage, Addison-Wesley, Reading,

Bernard K., Rajagopal, S., 2006, Strategic Procurement and Competitive Advantage, Journal of Supply Chain Management, Volume 29, Issue 4, p 12-20

Dimson, Marsh and Staunton, 2002, Global evidence on the equity risk premium, forthcoming in Journal of applied corporate finance.

Cho, Myeong-Hyeon, 1998, Ownership structure, investment, and the corporate value: an empirical analysis, Journal of Financial Economics 47 (1998) 103-121

Chopra, S, Lisiak, R, 2006, How should Airlines structure? A comparison of low cost and legacy carriers

Damodaran, Aswath, 2008, Equity risk premiums (ERP): Determinants, estimation and implications, Stern School of Business.

Francis, Graham, Dennis, Nigel, Ison, Stephen and Humphreys, Ian, 2007, The transferability of the low-cost model to long-haul airline operations, tourism management, Science direct

Garrod, L., 2008, Price Transparency and Consumer Naivety in a Competitive Market, ESRC Centre for Competition Policy and School of Economics, CCP Working Paper No. 07-10

Grahama, John R., Harvey Campbell R., Rajgopal, Shiva, 2005, The economic Implications of Corporate Financial reporting, Journal of Accounting and Economics

Graham B., Shaw J. 2008, Low cost airlines in Europe: reconciling liberalization and sustainability, 2007 Geoforum, volume 39, Issue 3, pages 1439-1451, may 2008

Hansson, Jesper, Johnson, Andreas and Tägtström, Sara, 2009, How persistent is inflation in Sweden, Economic Commentaries no 5 2009, Sveriges Riksbank

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Mason K. J. 2002, Future trends in business travel decision-making, Journal of Air Transportation Vol 7, no 1-2002.

Mason, K. J. 2005, Observations of fundamental changes in the demand for aviation services, Journal of Air Transport Management 11, 19-25.

Merten, P and Teufel,. S., 2008, Technological Innovations in the Passenger Process of the Airline Industry: A Hypotheses Generating, international institute of management in technology, University of Fribourg

Opler, T., Pinkowitz, L., Stulz R., Williamson, R, 1999, Determinants and Implication of corporate cash holdings, Journal of Financial Economics, 52(1), p.3-46

Stepan, A., Hillinger, C., 1995, The optimal lifetime of capital goods and pricing policies for replacement components and repair costs, Institute of Managerial Economics and Industrial Organizations, University of Technology, Vienna

Teichert T., Shehu E., Wartburg I., 2007, Customer segmentation revisited: The case of the airline industry, Science Direct, Transportation Research Part A

Databases:

Datastream Accessed through CBS Library

Stock exchanges:

Copenhagen Stock Exchange: www.cse.dk

Euronext Paris: www.euronext.com

Frankfurt Stock Exchange: www.deutsche-boerse.com

Helsinki Stock Exchange: www.nasdaqomxnordic.com

Oslo Stock Exchange: www.oslobors.no

Swiss Stock Exchange: www.six-swiss-exchange.com

Vienne Stock Exchange: www.en.wienerborse.at

Annual reports and briefings: 126 Will SAS continue to fly? - A valuation of a company in crisis -

AEA Traffic update 05.05.2009

Air France KLM Annual Report 2005-2008

Austrian Airlines Annual Report 2006-2009

IATA Annual Report 2009

Economic briefing 2008

Finnair Annual Report 2005-2008

Lufthansa Annual Report 2005-2008

Norwegian Annual Report 2005-2008

Ryanair Annual Report 2005-2008

SAS Annual Report 2001-2008

Internet sides:

www.airfranceklm-finance.com www.iata.org

Damodaran online: www.iboxx.com http://pages.stern.nyu.edu/~adamodar/ www.internetworldstats.com www.eia.doe.gov www.lufthansa.com www.europa.eu www.norwegian.no www.euobserver.com http://euobserver.com/9/28189) www.oanda.com

www.eubusiness.com www.reuters.com http://www.eubusiness.com/Transpor www.ryanair.com t/single-european-sky.2/ www.SAS Group.net www.finnair.com www.staralliance.com www.flysas.com www.wideroe.no

Statistics:

127 Will SAS continue to fly? - A valuation of a company in crisis -

EUROSTAT 03.06.2009 news release euro indicators

Newspaper and articles:

Dagens Næringsliv: 23.05.2007 “Vil forlenge euro bonus-forbud” 21.07.2009 “På innsiden: Lavpris vinner” 16.10.2009 “Full fres på børsen” 07.07.2009 ”Milliardsmell for SAS” 20.09.2009 “Tar opp kampen mot SAS” 25.07.2009 “Mot nye SAS-forhandlinger” 06.07.2009 “SAS forhandlingene brutt” 06.08.2009 “Ryanair vil ha mer I Norge”

Aftenposten: 20.07.2009 “Ryanair vil ha flere ruter fra Rygge”

The Independent: 05.10.1997 ”Sky’s the limit for easyJet fly” 03.06.2009 “Ryanair plunges to first ever loss following Aer Lingus writedowns”

The Times: 16.07.2008 “Heathrow landing slots are airline’s best asset”

Reuters: 12.09.2008 “Lufthansa in talks to buy SAS: sources”

BBC News: 03.02.2009 “SAS reducing its workforce by 40%”

Deloitte News: 05.09.2008 “UK airlines start to value landing slots as assets on Balance Sheets”

Forbes News: 04.08.2009 “SAS’ dirt-cheap rights issue”

Business.dk 09.10.2009 “SAS tavs om forhandlinger med medarbejdere”

Press releases: SAS Group-press: 19.01.2009 “SAS Group signs Norway’s largest air travel agreement” 07.10.2009 “SAS is the world’s third most punctual major airline” 01.2009 “SAS Group divests its share in AeBal to Proturin” 31.03.2009 “Sale of Spanair completed” 01.10.2009 “Sale of SAS shares in bmi to Lufthansa” 19.01.2009 “SAS Group signs Norway’s largest air travel agreement” 07.10.2009 “SAS is the world’s third most punctual major airline” 23.04.2008 “SAS is the new sponsor of the Scandinavian masters” 15.05.2009 “EU praises Scandinavian Airlines’ websites”

128 Will SAS continue to fly? - A valuation of a company in crisis -

02.06.2009 “Operations of SAS Ground Services (SGS)Finland transferred to ISS Palvelut Oy” 09.10.2009 “The process regarding the union negotiations” SAS press release Oktober 2008,

SAS othern news: http://www.flysas.com/upload/International/SKI/Mediacente r/Mediakit/Oct08/SAS%20EuroBonus.pdf

Norwegian pressroom 15.10.2009 “ Norwegian åpner åtte nye ruter I Skandinavia”

Avanza Bank 12.08.2009 “New 2 billion cost program to generate sustainable development” (https://www.avanza.se/aza/press/news.jsp?newsArticleId=1 303261) News releases: CFM 13.07.2008 “CFM unveils new LEAP-X engine” (http://www.cfm56.com/press/news/cfm+unveils+new+leap- x+engine/441)

EUROPA EU legislation http://europa.eu/scadplus/leg/en/lvb/l24483.htm

ICM 09.07.2008 “Airline industry in scheme to cut CO2 emmisions” Link: (http://news.icm.ac.uk/leisure/airline- industry-in-scheme-to-cut-co2-emissions/554/ )

SKYbrary Link: (http://www.skybrary.aero/index.php/Single_European_Sky_ (SES))

129 Will SAS continue to fly? - A valuation of a company in crisis -

Appendix

Appendix No. 1: Passenger revenue forecast i

Appendix No. 2: Other traffic revenue forecast ii

Appendix No. 3: SAS Group traffic figures June 2009 iii

Appendix No. 4: Long term growth iv

Appendix No. 5: Assumption: Income Statement vii

Appendix No. 6: Assumption: Balance Sheet 1/2 viii

Appendix No. 7: SASgroup Income Statement x

Appendix No. 8: SASgroup Balance sheet (1/2) xi

Appendix No. 9: NOPLAT calculation xiii

Appendix No. 10: Invested Capital calculation xiv

Appendix No. 11: Free Cash Flow calculation xv

Appendix No. 12: List of Associated Companies xvi

Appendix No. 13: Assumption for the CAPM xvii

Appendix No. 14: Breakup value estimation xviii

Appendix No. 15: Discounted Cash Flow Valuation xix

Appendix No. 16: Economic Profit Valuation xx

Appendix No. 17: Exchange rates xxi

130 Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 1: Passenger revenue forecast

2.20

0.64

1.20

2.25

1.26

2019

8,875

5,534

5.33%

6.83%

6.83%

6.83%

4.75%

4.75%

4.75%

5.10%

5.10%

5.10%

5.28% 5.28%

5.28%

49,466

18,878

16,178

84.00%

75.00%

67.00%

69.00%

76.07%

2.20

0.64

1.20

2.25

1.26

2018

8,308

5,266

5.32%

6.83%

6.83%

6.83%

4.75%

4.75%

4.75%

5.10%

5.10%

5.10%

5.28%

5.28%

5.28%

46,964

18,022

15,367

84.00%

75.00%

67.00%

69.00%

76.03%

2.20

0.64

1.20

2.25

1.26

2017

7,777

5,011

5.32%

6.83%

6.83%

6.83%

4.75%

4.75%

4.75%

5.10%

5.10%

5.10%

5.28%

5.28%

5.28%

44,590

17,205

14,597

84.00%

75.00%

67.00%

69.00%

75.99%

2.20

0.64

1.20

2.25

1.26

2016

7,280

4,768

5.31%

6.83%

6.83%

6.83%

4.75%

4.75%

4.75%

5.10%

5.10%

5.10%

5.28%

5.28%

5.28%

42,338

16,425

13,865

84.00%

75.00%

67.00%

69.00%

75.95%

Long term forecast

2.20

0.64

1.20

2.25

1.27

2015

6,815

4,537

5.31%

6.83%

6.83%

6.83%

4.75%

4.75%

4.75%

5.10%

5.10%

5.10%

5.28%

5.28%

5.28%

40,202

15,680

13,170

84.00%

75.00%

67.00%

69.00%

75.91%

2.20

0.64

1.20

2.25

1.27

2014

6,380

4,317

5.30%

6.83%

6.83%

6.83%

4.75%

4.75%

4.75%

3.53%

5.10%

5.10%

5.28%

5.28%

5.28%

38,175

14,969

12,510

84.00%

75.00%

67.00%

69.00%

75.87%

2.20

0.64

1.20

2.25

1.27

2013

5,972

4,107

5.30%

5.55%

6.83%

6.83%

3.35%

4.75%

4.75%

3.50%

5.10%

5.10%

3.75%

5.28%

5.28%

36,253

14,290

11,883

84.00%

75.00%

66.00%

69.00%

75.75%

2.20

0.64

1.20

2.25

1.28

2012

5,590

3,908

7.26%

2.75%

4.00%

9.11%

0.22%

3.00%

7.48%

2.40%

4.00%

6.36%

2.47%

4.00%

6.42%

34,428

13,642

11,287

83.00%

74.00%

65.00%

68.00%

74.70%

2.15

0.61

1.15

2.20

1.23

2011

5,123

3,674

6.08%

3.00%

4.72%

2.00%

6.64%

1.39%

3.00%

7.90%

1.46%

3.00%

5.45%

-0.77%

-0.83%

32,097

12,693

10,607

82.00%

72.00%

64.00%

67.00%

73.26%

2.10

0.60

1.10

2.10

1.19

2010

4,893

3,405

1.60%

0.73%

2.00%

2.00%

1.00%

1.00%

1.64%

2.00%

2.00%

1.63%

2.00%

2.00%

-0.83%

30,259

11,903

10,058

79.00%

70.00%

63.00%

66.00%

71.29%

Short term Forecast

2.10

0.60

1.10

2.10

1.19

2009

4,797

3,338

9,861

29,781

11,785

78.02%

68.73%

62.78%

65.76%

70.39%

-21.84%

-12.42%

-18.15%

-23.49%

-15.78%

-14.97%

-21.83%

-17.34%

-14.97%

-20.72%

-18.13%

-17.50%

-21.40%

2.20

0.64

1.20

2.25

1.27

2008

6,269

4,211

3.50%

0.72%

1.38%

1.86%

6.00%

9.01%

5.26%

2.39%

4.51%

2.39%

0.34%

5.22%

0.32%

0.60%

-4.07%

-3.55%

38,103

15,077

12,546

83.48%

68.08%

61.03%

11.72%

65.26%

71.27%

2.10

0.61

1.21

2.19

1.25

2007

5,914

4,002

2.64%

1.47%

0.43%

0.65%

0.39%

1.37%

3.65%

2.42%

9.68%

-2.83%

-5.74%

-5.61%

-4.70%

-2.41%

-0.17%

36,814

14,427

12,471

82.94%

70.51%

66.59%

11.14%

68.25%

73.36%

-14.42%

1.99

0.59

1.43

1.99

1.28

2006

6,060

3,601

6.78%

3.78%

9.70%

8.53%

5.92%

5.63%

7.17%

-3.71%

-5.78%

-6.25%

-8.54%

-6.72%

-1.60%

-6.40%

-2.65%

-3.14%

-7.10%

37,888

16,857

11,370

82.83%

71.32%

66.04%

66.75%

73.51%

Historical

2.08

0.52

1.68

1.96

1.35

2005

5,675

3,360

6.48%

1.10%

1.52%

0.92%

5.31%

1.69%

4.35%

2.28%

0.95%

-9.43%

-5.04%

-4.90%

-4.12%

-4.47%

-4.23%

39,346

18,072

12,239

83.25%

67.47%

14.12%

61.36%

14.05%

64.19%

71.36%

2.22

0.50

1.50

1.64

1.28

2004

5,389

2,946

36,950

15,836

12,779

82.90%

60.10%

61.27%

59.95%

66.99%

Group LF

Group yield

Revenue Revenue growth

Load factor

ASK Growth

RPK Growth

yield (SEK)

Passenger Growth

Revenue Revenue growth

Load factor

ASK Growth

RPK Growth

yield (SEK)

Passenger Growth

Revenue Revenue growth

Load factor

ASK Growth

RPK Growth

yield (SEK)

Passenger Growth

Revenue Revenue growth

Load factor

ASK Growth

RPK Growth

yield (SEK)

Passenger Growth

Revenue Revenue Growth

Total passenger revenueTotal

Intercontinental

Europe

Intrascandinavian

Domestic MSEK i Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 2: Other traffic revenue forecast

0

94

42

394

888

-

844

319

126

900

196

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2019

10.0%

12.0%

2,264

2,302

1,496

8,875

2,260

5,534

55,528

49,466

18,878

16,178

0

89

40

369

831

-

806

304

120

855

186

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2018

10.0%

12.0%

2,149

2,197

1,411

8,308

2,157

5,266

52,721

46,964

18,022

15,367

0

85

38

345

778

-

769

290

114

812

177

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2017

10.0%

12.0%

2,040

2,098

1,330

7,777

2,060

5,011

50,058

44,590

17,205

14,597

0

81

36

323

728

-

734

277

109

771

168

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2016

10.0%

12.0%

1,937

2,002

1,254

7,280

1,966

4,768

47,532

42,338

16,425

13,865

0

77

34

Long term forecast

302

682

-

701

265

103

733

160

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2015

10.0%

12.0%

1,839

1,911

1,183

6,815

1,877

4,537

45,135

40,202

15,680

13,170

0

98

73

33

283

638

-

669

253

696

152

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2014

10.0%

12.0%

1,746

1,825

1,115

6,380

1,792

4,317

42,862

38,175

14,969

12,510

0

94

70

31

265

597

-

639

241

661

144

4.4%

0.0%

6.8%

4.5%

1.7%

4.8%

2.3%

1.7%

5.1%

5.6%

0.3%

1.2%

5.3%

2013

10.0%

12.0%

1,658

1,742

1,052

5,972

1,711

4,107

40,705

36,253

14,290

11,883

0

89

66

29

248

559

-

992

610

230

628

137

4.4%

9.1%

4.5%

1.7%

7.5%

2.3%

1.7%

6.4%

5.6%

0.3%

1.2%

6.4%

2012

10.0%

12.0%

1,575

1,663

5,590

1,633

3,908

38,658

34,428

13,642

11,287

0

84

62

28

227

512

-

917

567

214

590

128

4.4%

4.7%

4.5%

1.7%

6.6%

2.3%

1.7%

7.9%

5.6%

0.3%

1.2%

5.5%

2011

10.0%

12.0%

1,468

1,547

5,123

1,520

3,674

36,030

32,097

12,693

10,607

0

78

58

26

217

489

-

870

532

201

560

122

4.4%

2.0%

4.5%

1.7%

1.0%

2.3%

1.7%

2.0%

5.6%

0.3%

1.2%

2.0%

2010

10.0%

12.0%

1,386

1,451

4,893

1,425

3,405

33,966

30,259

11,903

10,058

Short term Forecast

0

76

57

26

213

576

-

951

527

199

549

119

4.4%

4.5%

1.7%

2.3%

1.7%

5.6%

0.3%

1.2%

2009

12.0%

12.0%

1,364

1,436

4,797

1,411

3,338

9,861

-23.5%

-21.8%

-20.7%

-21.4%

33,533

29,781

11,785

Forecasted Growth /Assumptions

62

20

-

-

284

233

116

753

140

6.0%

6.7%

1.5%

4.5%

5.2%

6.0%

0.2%

1.1%

0.6%

2008

2008

4.53%

0.00%

10.9%

2.75%

1.47%

2,159

1,663

1,509

1,074

6,269

1,006

1,643

4,211

17.13%

43,434

38,103

15,077

12,546

72

77

45

-

-

257

327

264

639

163

2.3%

1.8%

5.1%

0.4%

1.3%

9.7%

2007

2007

-2.4%

4.35%

0.00%

13.0%

1.80%

1.92%

11.1%

1,295

1,927

1,700

1,196

5,914

1,882

4,002

-14.4%

20.22%

41,736

36,814

14,427

12,471

55

70

28

-

-

269

835

275

526

303

Historical

6.8%

5.0%

1.6%

7.2%

4.6%

0.2%

2.7%

2006

2006

-6.7%

-7.1%

4.44%

0.00%

10.3%

1.53%

1.94%

1,685

1,772

2,102

1,454

6,060

1,744

3,601

23.99%

43,447

37,888

16,857

11,370

9

67

72

26

-

251

315

246

305

6.7%

1.7%

2.0%

0.2%

2.5%

2005

2005

4.42%

0.16%

23.5%

1.99%

2.14%

1,767

4,280

2,127

1,435

5,675

1,203

4,245

3,360

25.29%

47,520

39,346

18,072

12,239

Historical Growth Historical

% of% revenue

% of% revenue

% of% revenue

revenue growth revenue

% of% revenue

% of% revenue

% of% revenue

revenue growth revenue

% of% revenue

% of% revenue

% of% revenue

revenue growth revenue

% of% revenue

% of% revenue

% of% revenue

revenue growth revenue

Total

Total

Total

Total

% of% revenue

% of% revenue

% of% revenue

Driver based forecast Driver

% of% revenue

% of% revenue

% of% revenue

Driver based forecast Driver

% of% revenue

% of% revenue

% of% revenue

Driver based forecast Driver

% of% revenue

% of% revenue

% of% revenue

Driver based forecast Driver

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Intercontinental

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Europe

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Intrascandinavian

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Domestic

Assumptions

Total traffic revenue traffic Total

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Total

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Intercontinental

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Europe

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue

Intrascandinavian

Other Traffic revenue

Charter revenue

Freight and Mail

Passenger Revenue Domestic ii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 3: SASgroup traffic figures June 2009

INTERCONTINENTAL ROUTES Jun 09 Jun 08 CHANGE Jan-Jun 09 Jan-Jun 08 CHANGE ASK (Mill.) 909 1 041 -12,7% 5 168 5 802 -10,9% RPK (Mill.) 761 907 -16,2% 3 939 4 852 -18,8% Passenger load factor 83,7% 87,2% -3,4 p u 76,2% 83,6% -7,4 p u Total no. of passengers (000) 107 127 -16,0% 551 678 -18,7% EUROPEAN ROUTES Jun 09 Jun 08 CHANGE Jan-Jun 09 Jan-Jun 08 CHANGE ASK (Mill.) 1 470 1 724 -14,7% 8 093 9 340 -13,3% RPK (Mill.) 1 115 1 285 -13,2% 5 362 6 326 -15,2% Passenger load factor 75,8% 74,5% +1,3 p u 66,3% 67,7% -1,5 p u Total no. of passengers (000) 973 1 132 -14,1% 4 854 5 799 -16,3% INTRA-SCANDINAVIAN ROUTES Jun 09 Jun 08 CHANGE Jan-Jun 09 Jan-Jun 08 CHANGE ASK (Mill.) 231 278 -17,0% 1 330 1 567 -15,1% RPK (Mill.) 164 185 -11,3% 814 959 -15,1% Passenger load factor 71,1% 66,5% +4,6 p u 61,2% 61,2% +0,0 p u Total no. of passengers (000) 325 369 -11,9% 1 625 1 944 -16,4% DANISH DOMESTIC ROUTES Jun 09 Jun 08 CHANGE Jan-Jun 09 Jan-Jun 08 CHANGE ASK (Mill.) 20 29 -32,7% 120 146 -18,1% RPK (Mill.) 12 21 -40,7% 73 94 -21,9% Passenger load factor 62,2% 70,6% -8,4 p u 61,0% 64,0% -3,0 p u Total no. of passengers (000) 59 73 -19,1% 349 413 -15,5%

NORWEGIAN DOMESTIC ROUTES Jun 09 Jun 08 CHANGE Jan-Jun 09 Jan-Jun 08 CHANGE ASK (Mill.) 495 564 -12,3% 2 737 3 135 -12,7% RPK (Mill.) 360 406 -11,5% 1 743 2 108 -17,3% Passenger load factor 72,7% 72,0% +0,6 p u 63,7% 67,2% -3,5 p u Total no. of passengers (000) 764 845 -9,6% 3 919 4 564 -14,1% SWEDISH DOMESTIC ROUTES Jun 09 Jun 08 CHANGE Jan-Jun 09 Jan-Jun 08 CHANGE ASK (Mill.) 165 190 -13,4% 1 004 1 270 -20,9% RPK (Mill.) 111 132 -15,9% 665 840 -20,9% Passenger load factor 67,6% 69,7% -2,1 p u 66,2% 66,1% +0,0 p u Total no. of passengers (000) 216 260 -16,8% 1300 1665 -21,9%

iii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 4: Long term growth

IATA suggests a long term growth of 2 times GDP. As a result we have estimated the real yearly future GDP for each region by calculating the average of the past 7 to 10 years (depending on data availability) and using this figure as our forecasted GDP. The year 2008 has been excluded due to the financial crises, as we believe that this would influence the estimate yearly GDP rate negatively. To estimate RPK growth, regions have been weighted according to the level of operation of the SASgroup. We realise that this approach is simplistic and limited, but we believe that this is sufficient for our purposes. The calculations are found below:

Domestic GDP estimation

Norway Growth Sweden Growth Denmark Growth NOK SEK DKK 1997 1,369,346 1984795 1,198,093 1998 1,406,083 2.68% 2060494 3.81% 1,219,207 1.76% 1999 1,434,567 2.03% 2155182 4.60% 1,252,811 2.76% 2000 1,481,241 3.25% 2249987 4.40% 1,293,964 3.28% 2001 1,510,720 1.99% 2273786 1.06% 1,303,085 0.70% 2002 1,533,412 1.50% 2328614 2.41% 1,310,705 0.58% 2003 1,548,954 1.01% 2373151 1.91% 1,316,490 0.44% 2004 1,608,807 3.86% 2471092 4.13% 1,347,851 2.38% 2005 1,652,876 2.74% 2552597 3.30% 1,378,994 2.31% 2006 1,690,576 2.28% 2660992 4.25% 1,424,558 3.30% 2007 1,743,561 3.13% 2729106 2.56% 1,452,868 1.99%

Average 2.45% 3.24% 1.95% Source: www.statisticsbanken.dk, Norge Bank, Statistics Sweden

Domestic Weights and RPK estimation

Jan-Jul08 revenues weights weighted GDP Growth Danish 82 2.87% 0.06% Norwegian 2042 71.40% 1.75% Swedish 736 25.73% 0.83% sum 2860 100% 2.64%

IATA suggest a growth of twice the size of estimated GDP

2.64% 2 5.28% <- yearly RPK Growth used Source: Own calculation

As it can be seen, we estimate the long term RPK growth to be 5.28% according to our calculations.

iv Will SAS continue to fly? - A valuation of a company in crisis -

Intrascandinavien RPK estimation

Average growth rate GDP Norway 2.45% Denmark 3.24% IATA suggest a growth of twice the size of estimated GDP Sweden 1.95% 2.55% 2 5.10% <- yearly RPK Growth used Average 2.55% Source: www.statisticsbanken.dk, Norge Bank, Statistics Sweden

We have used the simple average as opposed to a weighted average, as we assume that the operations between the 3 countries are approximately evenly distributed. This amounted to a long term yearly RPK growth of 5.10 % from 2013 onwards.

European RPK estimation

EU27 GDP Growth

2000 3.90% Average 2.38% 2001 2.00% 2002 1.20% IATA suggest a growth of twice the size of estimated GDP 2003 1.30% 2 2004 2.50% 2.38% 4.75% <- yearly RPK Growth used 2005 2.00% 2006 3.20% 2007 2.90%

Source: Eurostat, http://epp.eurostat.ec.europa.eu

The average GDP growth of the EU 27 countries has been used as the SASgroup operates flights to most of these countries. Due to the amount of departures and routes it is impossible to calculate weights accurately and hence not considered to be worth the effort. As a result we anticipate RPK growth to be 4.75% per year.

v Will SAS continue to fly? - A valuation of a company in crisis -

International GDP & weight estimation

GDP real growth rate weekly depatures USA India China Thailand Japan Emirates CPH STO 2000 4.10% 5.50% 7.00% 4.00% 0.30% 2.50% USA 21 14 2001 5.00% 6.00% 8.00% 4.20% 1.30% 4.00% India 7 0 2002 0.30% 4.30% 8.00% 1.40% -0.30% 5.60% China 7 0 2003 2.50% 4.30% 8.00% 5.20% -0.30% 2.40% Thailand 6 0 2004 3.10% 8.30% 9.10% 6.70% 2.70% 5.20% Japan 7 0 2005 4.40% 6.20% 9.10% 6.10% 2.90% 5.70% Emirates 7 0 2006 3.20% 8.40% 10.20% 4.50% 2.60% 8.80% 2007 3.20% 9.20% 10.70% 4.80% 2.20% 8.90% sum 69 Average 3.23% 6.53% 8.76% 4.61% 1.43% 5.39% Source: www.flysas.com Source: http://www.indexmundi.com, from the CIA Worldfact book

International RPK estimation

Scandinavia to weight average GDP Weight*average GDP USA 51% 3.23% 1.64% India 10% 6.53% 0.66% China 10% 8.76% 0.89% Thailand 9% 4.61% 0.40% Japan 10% 1.43% 0.14% Emirates 10% 5.39% 0.55%

weight weighted average GDP 4.28% 0.5 2.14% Scandinavian average GDP 2.55% 0.5 1.27% sum 3.41% IATA suggest a growth of twice the size of estimated GDP

3.41% 2 6.83% <- yearly RPK Growth used

The estimated GDP growth for international has been estimated as a weighted average of GDP’s of the countries served and the 3 Scandinavian countries GDP’s. The weight of the Scandinavian and the countries served is 50% each, as we assume that passengers will be half Scandinavians and half citizens of the countries served on a given flight.

As it can be seen from the table the weight of the country’s GDP is depending on the number of weekly departures the Group is operating to the country. As a result the long term yearly RPK growth has been estimated to be 6.83%.

vi Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 5: Assumptions: Income Statement

0.09

0.02

0.02

0.12

0.38

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2019

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.39

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2018

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.39

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2017

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.40

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2016

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

Long term forecast

0.09

0.02

0.02

0.12

0.40

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2015

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.41

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2014

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.41

0.12

0.03

0.04

0.02

0.03

0.02

0.05

0.05

0.06

0.05

2013

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.42

0.12

0.03

0.04

0.02

0.03

0.02

0.07

0.07

0.08

0.07

2012

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.42

0.12

0.03

0.04

0.02

0.03

0.02

0.06

0.07

0.05

0.06

2011

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

0.09

0.02

0.02

0.12

0.43

0.12

0.03

0.04

0.02

0.03

0.02

0.02

0.01

0.02

2010

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

-0.09

Short term Forecast

0.09

0.02

0.02

0.12

0.43

0.12

0.03

0.04

0.02

0.03

0.02

2009

-0.07

-0.18

-0.06

-0.07

-0.07

-0.05

-0.12

-0.19

-0.02

-0.37

-0.14

-0.37

-0.22

0.14

0.02

0.12

0.12

0.03

0.04

0.02

0.03

0.02

0.67

0.04

2008

-0.26

-0.26

-0.07

-1.59

-5.59

-0.06

-0.18

-0.05

-0.07

-0.06

-0.05

-0.10

-0.18

-0.02

-0.43

-0.14

-0.11

-5,305

-5,305

0.03

0.03

0.07

0.03

0.11

0.09

0.03

0.04

0.03

0.03

0.02

0.09

-135

-135

2007

-0.16

-0.40

-0.46

-0.06

-0.17

-0.07

-0.08

-0.06

-0.05

-0.11

-0.20

-0.02

-0.42

-0.23

-0.19

-0.03

Historical

0.31

0.31

0.05

2.18

0.03

0.11

0.11

0.03

0.03

0.02

0.03

0.02

2006

-0.10

-0.22

-0.08

-0.18

-0.07

-0.05

-0.09

-0.06

-0.14

-0.20

-0.01

-0.40

-0.05

-0.59

-0.01

-0.04

4,528

4,528

26,3% ofTAX before income

7% of intrest bearing7% debt of intrest

5% bank & short term. Invest. 5% bank term. & short

% of% intangible assets

% of% fixed (line 8-12) assets

tied to ASKtied

tied to ASKtied

tied to ASKtied

tied to ASKtied

tied to RPK tied

tied to RPK tied

tied to ASKtied

tied to ASKtied

tied to traffic revenue to traffic tied

tied to ASKtied

tied to RPK tied

tied to RPK tied

tied to ASKtied

tied to ASKtied

tied to ASKtied

tied to RKP tied

growth

growth

growth

growth

Financial expenses

Financial Income

Income form holdingsother of securities

Impairment

Amortization

Depreciation

Depreciation amortization and impairment

Other

Computer andComputer costs Telecomunication

Technical aircraft maintance aircraft Technical

Handling costs

Catering Costs

Government user Fees user Government

Jet Fuel Jet

Selling cost

Other operating expenses

Total operatingother revenue

Other operatingOther revenue

Sales and commissions charges

terminal andterminal forwarding services

Technical maintananceTechnical

Ground handling services

In-flight passanger sales per

Other operating Revenue

Other traffic revenue traffic Other

Mail and Freight

Charter

Passenger Growth

Traffic Revenue

Net income for the year

Income form discountinued operations

Net income for the year form operations continuing

Tax

Income Income before tax

Total interest expenses

Total interest income

Operating Income

Income sale from the subsidiaries and affiliated companies

Income sale from the of Aircraft and Buildings

Share of income in affiliated companies

Depreciation amortization and impairment

Leasing costs for aircraft

Payroll expenses

Total Revenue Revenue vii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 6: Assumption: Balance Sheet (1/2)

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2019

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2018

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2017

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2016

12.18

18.00

12.00

Long term forecast

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2015

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2014

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2013

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2012

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2011

12.18

18.00

12.00

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2010

12.18

18.00

12.00

Short term Forecast

0.07

7.00

1.00

0.70

0.01

0.00

0.01

0.01

0.03

0.27

2009

12.18

18.00

12.00

5

-

410

921

622

0.07

6.92

0.69

0.01

0.00

0.01

0.01

0.03

0.26

2008

13.11

18.26

12.70

9,658

5

577

690

170

0.14

7.72

0.70

0.00

0.00

0.01

0.01

0.03

0.27

2007

11.42

19.02

14.07

9,496

1,063

Historical

601

189

0.18

8.07

0.72

0.01

0.01

0.02

0.01

0.03

0.28

2006

12.00

19.69

27.88

1,331

1,378

8,805

1,012

possibly 0

part ofpart revenue

plug

7 days

18 days

0 as beto sold

12 days

stays 2008stays level

percentage of engines spare andpercentage parts spare

stays the same the stays

increase if income is negativeis if income increase

stays the same the stays

0 as beto sold

0 as beto sold

0 as beto sold

tied to ASKto tied

part ofpart revenue

tied to ASKto tied

tied to ASKto tied

tied to ASKto tied

tied to ASKto tied

depreciated by rate average depreciation depreciated

(shares and participations)

Total assets Total

Total currentTotal assets

Assets held for sale

Cash and bank balances

Short term investments Short term

Total

Prepaid expenses and accured income

Other receivables

Receivables from affiliated companies

Accounts receivable

Current receivables

Total

Prepayment to suppliersPrepayment to

Expendable spare parts and inventories

Current assets

Total non currentTotal (fixed assets assets)

Other long receivables term

Deferred taxDeferred assets

Pension funds, net

Other holdings of securities

Long term receivables term Long from affiliated companies

Equity in affiliated companies

Financial fixed assets Financial

Total Total

Prepayment related tangible to fixed assets

Constrution in progress

Other equipment andOther equipment vehicles

Workshop and aircraft servicing equipment

Spare engines and spare parts

Aircraft

Land and buildings

Tangible fixed assets Tangible

Intangeble assets

Non-current assets Assets viii Will SAS continue to fly? - A valuation of a company in crisis -

Assumption: Balance Sheet (2/2)

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2019

-15,563

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2018

-12,371

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2017

-9,485

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2016

-6,884

Long term forecast

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2015

-4,545

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2014

-2,578

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2013

-1,793

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2012

-91.73

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2011

537.58

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2010

-3,723

Short term Forecast

0.75

0.08

0.05

0.20

0.07

0.00

0.10

0.00

0.09

0.01

2.00

0.10

2009

-6,282

-

170

0.08

0.05

0.19

0.06

0.00

0.10

0.00

0.09

0.01

2.05

0.10

2008

1,645

170

0.10

0.03

0.27

0.08

0.00

0.12

0.00

0.09

0.02

0.66

0.10

2007

19.00

1,645

Historical

170

0.09

0.04

0.53

0.07

0.00

0.18

0.00

0.02

1.09

2006

22.00

1,645

0 as beto sold

part ofpart revenue

part ofpart revenue

part of other provisions ofpart other

part ofpart revenue

part ofpart revenue

0 as beto sold

part of cost of of part goods cost sold

part ofpart revenue

stays asstays of 2008

tied to Financeto lease tied

part ofpart revenue

stays the same the stays

stays the same the stays

stays the same the stays

not forecasted

not forecasted

tied to ASKto tied

stays the same the stays

stays the same the stays

retained earnings (t-1) + profits (t) (no (t) earnings profits DIV) retained (t-1) +

not forecasted

not forecasted

stays the same (incrase right issue 2009)issue right (incrase same the stays

Plug

Assumption, Asset held for sale sold ing Autum

Total shareholders equityTotal liabilities and

Liabilities attributable assets to held for sale

Accrued expenses and prepaid income

Other liabilities

Current portion of provisions other

Unearned transportation revenue

tax payable

Liabilities affiliated to companies

Accounts payable

Prepayments from customers

Short term loansShort term

Current portion of Finance lease

Current portofolio of long loans term

Current liabilities

Total

Other liabilities

Other provisions

Deferred taxDeferred liability

Pensions and similar commitments

Other loans

Finance Lease

Bond issues

Subordinated loans loans) (Debenture

Long term liabilities

Total shareholders equityTotal

Minority interest

Total shareholders equityTotal attributable to parent owners company

Retained earnings

Reserves

Other contributed capital

Share capital

Shareholders equity Shareholders equity liabilities and

ix Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 7: Forecasted Income Statement

-21

741

356

741

356

673

-350

-856

2019

3,474

3,474

4,714

3,618

4,605

1,098

1,964

1,201

1,795

2,264 2,302

1,496

-1,240

-1,904

-1,883

-3,380

-9,152

-3,326

-3,539

-2,831

-2,033

-6,159

66,865

11,337

55,528

49,466

-38,275

-10,028

-19,689

-22

717

290

717 290

637

-350

-812

2018

3,147

3,147

4,270

3,263

4,361

1,040

1,861

1,138

1,701

2,149

2,197

1,411

-1,123

-1,808

-1,787

-3,202

-8,672

-3,152

-3,353

-2,681

-1,926

-5,836

-9,502

63,459

10,739

52,721

46,964

-36,284 -18,902

-22

694

230

694

230

985

604

-350

-771

2017

2,843

2,843

3,858

2,933

4,131

1,764

1,078

1,612

2,040

2,098

1,330

-1,015

-1,718

-1,696

-3,035

-8,218

-2,986

-3,177

-2,539

-1,824

-5,530

-9,004

60,231

10,173

50,058

44,590 -34,401

-18,144

-23

673

176

673

176

933

572

-914

-350

-732

2016

2,562

2,562

3,476

2,627

9,638

3,912

1,671

1,022

1,528

1,937

2,002

1,254

-1,634

-1,611

-2,876

-7,788

-2,830

-3,011

-2,405

-1,728

-5,241

-8,533

57,170

47,532

42,338 -32,618

-17,415

-23

653

127

653

127

884

968

542

Long term forecast

-821

-350

-695

2015

2,301

2,301

3,122

2,342

9,132

3,706

1,584

1,448

1,839

1,911

1,183

-1,554

-1,531

-2,726

-7,381

-2,682

-2,854

-2,278

-1,636

-4,967

-8,087

54,267

45,135

40,202 -30,931

-16,714

86

86

-24

633

633

837

918

513

-736

-350

-660

2014

2,061

2,061

2,797

2,078

8,652

3,511

1,501

1,372

1,746

1,825

1,115

-1,479

-1,456

-2,583

-6,995

-2,542

-2,705

-2,158

-1,550 -4,707

-7,665

51,514

42,862

38,175

-29,334

-16,039

68

68

-24

627

627

793

871

486

-654

-350 -627

2013

1,831

1,831

2,485

1,789

8,203

3,326

1,425

1,302

1,658

1,742

1,052

-1,411

-1,387

-2,451

-6,638

-2,412

-2,567

-2,045

-1,469

-4,467

-7,274

48,908

40,705

36,253

-27,848

-15,408

33

33

-25

713

713

752

837

461

992

-568

-596

2012

1,591

1,591

2,158

1,412

7,820

3,151

1,369

1,251

1,575

1,663

-1,363

-1,338

-2,355

-6,377

-2,318

-2,466

-1,937

-1,392

-4,292

-6,988

46,477

38,658

34,428

-26,365

-14,983

21

18

18

-59

-59

-80

-26

713

713

726

824

445

917

-811

-555

2011

7,616

3,043

1,348

1,232

1,468

1,547

-1,348

-1,322

-2,319

-6,279

-2,282

-2,428

-1,871

-1,343

-4,225

-6,880

43,646

36,030

32,097

-25,862

-14,929

-26

581

811

102

811

102

707

825

433

870

-523

2010

7,516

2,966

1,350

1,234

1,386

1,451

-1,628

-1,628

-2,209

-3,122

-1,356

-1,330

-2,323

-6,290

-2,286

-2,432

-1,824

-1,310

-4,233

-6,892

41,482

33,966

30,259

-25,790

-15,135

Short term Forecast

-27

619

153

153

696

823

427

951

-517

2009

1,206

1,206

7,443

2,920

1,346

1,230

1,364

1,436

-5,712

-3,979

-1,733

-2,352

-3,711

-1,360

-1,333

-2,316

-6,272

-2,279

-2,425

-1,795

-1,290

-4,221

-6,872

40,975

33,533

29,781

-25,671

-15,339

0

0

4

28

-12

-27

654

654

668

792

519

-933

-933

-765

-147

-680

2008

9,761

4,601

1,916

1,265

2,159

1,663

1,509

-6,321

-5,305

-1,016

-1,044

-1,591

-2,282

-8,136

-2,282

-3,197

-1,851

-1,346

-4,662

-9,637

-1,552

53,195

43,434

38,103

-31,791

-18,153

5

0

0

41

32

-41

636

771

792

787

834

973

511

-135

-273

-660

2007

1,044

1,293

8,862

3,497

1,592

1,455

1,295

1,927

1,700

-1,041

-1,041

-1,457

-2,342

-7,640

-2,219

-3,144

-1,776

-1,373

-4,316

-7,554

-1,416

50,598

41,736

36,814

-28,682

-16,897

0

35

85

59

-46

-51

-83

585

585

820

493

-641

2006

5,889

4,528

1,361

1,326

2,154

7,854

2,668

1,513

1,147

1,213

1,685

1,772

2,102

-1,413

-1,367

-1,757

-2,481

-6,662

-2,727

-3,164

-1,893

-1,388

-4,396

-7,953

-1,623

51,301

43,447

37,888

-28,824

-16,229

Historical

0

50

41

76

-76

255

577

542

492

677

182

752

588

-322

-246

-129

-997

2005

7,981

3,173

1,020

1,193

1,255

1,767

4,280

2,127

-1,465

-1,465

-2,170

-3,132

-7,296

-2,878

-2,049

-2,709

-1,821

-5,787

-8,121

-2,041

55,501

47,520

39,346

-31,658

-18,163

0 (discountinued)

26,3% ofTAX before income

7% of intrest bearing7% debt of intrest

5% bank & short term. Invest. 5% bank term. & short

not modelled

not modelled

not modelled

not modelled

sum

% of% intangible assets

% of% fixed (line 8-12) assets

tied to ASKtied

annual report

tied to ASKtied

tied to ASKtied

tied to ASKtied

tied to RPK tied

tied to RPK tied

tied to ASKtied

tied to ASKtied

tied to traffic revenue to traffic tied

tied to ASKtied

tied to RPK tied

tied to RPK tied

tied to ASKtied

tied to ASKtied

tied to ASKtied

tied to RKP tied

Revenue forecast

Revenue forecast

Revenue forecast

Revenue forecast

Financial expenses

Financial Income

Income form holdingsother of securities

Impairment

Amortization

Depreciation

Depreciation amortization and impairment

Expected CO2Expected offsetting

Other

Computer andComputer costs Telecomunication

Technical aircraft maintance aircraft Technical

Handling costs

Catering Costs

Government user Fees user Government

Jet Fuel Jet

Selling cost

Total otherTotal operating revenue

Other operatingOther revenue

Sales and commissions charges

terminal andterminal forwarding services

Technical maintananceTechnical

Ground handling services

In-flight sales

Other operating Revenue

Total Traffic Revenue Traffic Total

Other traffic revenue traffic Other

Mail and Freight

Charter

Passenger Revenue

Traffic Revenue

Net income for the year

Income form discountinued operations

Net income for the year operations form con.

Tax

Income Income before tax

Total interest expenses

Total interest income

Operating Income

Income sale subsidiaries & affiliated companies

Income sale from the of Aircraft and Buildings

Share of income in affiliated companies

Depreciation amortization and impairment

Leasing costs for aircraft

Total otherTotal operating expenses

Other operating expenses

Payroll expenses

Total Revenue Total Revenue x Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 8: Forecasted Balance Sheet (1/2)

1

410

611

292

396

282

131

850

2019

2,230

6,778

1,282

3,297

2,198

1,067

1,066

2,141

9,658

1,515

55,700

25,638

15,563

30,062

12,209 17,002

13,777

1

410

579

277

375

267

148

872

2018

2,117

6,433

1,217

3,130

2,086

1,011

1,010

2,141 9,658

1,435

51,147

21,931

12,371

29,216

12,209

16,135

13,054

1

958

957

410

548

263

355

253

168

894

2017

2,009

9,485

6,106

1,155

2,970

1,980

2,141 9,658

1,360

46,978

18,558

28,420

12,209

15,317

12,370

1

908

907

410

520

249

337

240

190

916

2016

1,907

6,884

5,795

1,096

2,819

1,880

2,141

9,658

1,289

43,166

15,494

27,673

12,209

14,547

11,723

1

860

859

410

493

237

319

227

215

940

Long term forecast

2015

1,810

4,545

5,501

1,041

2,676

1,784

2,141

9,658

1,222

39,687

12,716

26,971

12,209

13,822

11,110

1

988

815

814

410

467

225

302

216

243

964

2014

1,718

2,578

5,222

2,540

1,694

2,141

9,658

1,158

36,648

10,334

26,313

12,209

13,141

10,530

1

938

774

773

410

443

213

287

205

275

988

2013

9,156

1,631

1,793

4,958

2,412

1,608

2,141

9,658

1,099

9,992

34,867

25,711

12,209

12,514

1

92

891

743

742

410

426

203

276

196

312

2012

7,097

1,550

4,711

2,292

1,528

2,141

9,658

1,056

9,600

1,013

32,387

25,290

12,209

12,067

1

837

732

731

410

419

190

271

193

353

-538

2011

6,075

1,456

4,424

2,152

1,435

2,141

9,658

1,039

9,451

1,039

31,240

25,166

12,209

11,918

1

796

733

732

410

420

181

272

194

400

2010

1,384

3,723

4,205

2,046

1,364

2,120

9,658

1,041

9,469

1,065

35,274

10,045

25,229

12,188

11,976

Short term Forecast

1

786

731

730

410

419

179

271

193

453

2009

1,367

6,282

4,154

2,021

1,347

1,540

9,658

1,038

9,441

1,092

37,227

12,534

24,693

11,608

11,994

1

5

0

479

820

819

410

921

622

627

232

318

220

513

2008

3,921

1,911

3,872

6,000

1,009

2,661

1,851

9,658

1,185

1,092

43,364

16,524

26,840

11,616

14,132

11,037

1

5

510

850

849

577

690

170

185

172

308

226

568

2007

6,198

1,583

7,308

6,168

1,070

2,637

1,951

9,496

1,063

1,211

1,226

48,770

22,107

26,663

12,001

13,436

10,766

3

357

996

993

601

189

317

378

634

215

684

Historical

2006

1,686

9,117

8,176

1,134

2,767

3,918

1,331

1,378

8,805

1,012

1,383

2,932

51,164

19,975

31,189

13,316

14,941

11,330

27

214

228

422

148

210

2005

1,419

7,265

1,748

3,892

1,620

4,568

1,065

1,038

1,577

1,524

8,363

1,214

1,213

1,526

1,257

3,862

58,016

21,577

11,828

36,439

13,120

19,457

14,681

possibly 0

part ofpart revenue

plug

7 days

18 days

0 as beto sold

12 days

stays 2008stays level

percentage of engines spare andpercentage parts spare

stays the same the stays

increase if income is negativeis if income increase

stays the same the stays

0 as beto sold

0 as beto sold

0 as beto sold

tied to ASKto tied

part ofpart revenue

tied to ASKto tied

tied to ASKto tied

tied to ASKto tied

tied to ASKto tied

depre. by aver. depre. rate depre. by aver. depre.

(shares and participations)

Total assets Total

Total currentTotal assets

Assets held for sale

Cash and bank balances

Short term investments Short term

Total

Prepaid expenses and accured income

Other receivables

Receivables from affiliated companies

Accounts receivable

Current receivables

Total

Prepayment to suppliersPrepayment to

Expendable spare parts and inventories

Current assets

Total non currentTotal (fixed assets assets)

Other long receivables term

Deferred taxDeferred assets

Pension funds, net

Other holdings of securities

Long term receivables term Long from affiliated companies

Equity in affiliated companies

Financial fixed assets Financial

Total Total

Prepayment related tangible to fixed assets

Constrution in progress

Other equipment andOther equipment vehicles

Workshop and aircraft servicing equipment

Spare engines and spare parts

Aircraft

Land and buildings

Tangible fixed assets Tangible

Intangeble assets

Non-current assets Assets xi Will SAS continue to fly? - A valuation of a company in crisis -

Forecasted Balance Sheet (2/2)

7

0

0

-

154

138

455

334

768

953

2019

5,372

3,092

4,346

2,458

1,189

2,988

5,068

2,212

6,169

55,700

17,211

12,323

26,166 26,166

19,997

6

0

0

-

154

131

431

334

768

953

2018

5,099

2,935

4,125

2,328

1,189

2,988

4,802 2,212

6,169

51,147

16,398

12,057

22,691

22,691

16,523

6

0

0

-

154

125

409

334

768

953

2017

4,839

2,785

3,915

2,206

1,189

2,988

4,551 2,212

6,169

46,978

15,628

11,806

19,544

19,544

13,376

6

0

0

-

154

118

387

334

768

953

2016

4,593

2,644

3,716

2,090

1,189

2,988

4,313

2,212

6,169

43,166

14,897

11,568

16,701

16,701

10,533

5

0

0

-

154

112

367

334

768

953

Long term forecast

2015

4,360

2,510

3,527

1,981

1,189

2,988

4,087

2,212

7,971

6,169

39,687

14,205

11,342

14,140

14,140

5

0

0

-

154

107

348

131

334

768

953

2014

4,139

2,382

3,348

1,877

1,189

2,988

3,874

2,212

5,670

6,169

36,648

13,680

11,129

11,839

11,839

5

0

0

-

154

101

330

334

768

131

953

2013

3,930

2,262

3,179

1,781

1,189

1,098

2,988

3,676

2,212

9,777

9,777

3,608

6,169

34,867

14,028

11,062

5

0

0

96

54

-

154

317

334

768

953

2012

3,734

2,149

3,021

1,706

1,189

2,988

1,229

3,532

2,212

7,946

7,946

1,777

6,169

32,387

12,426

12,016

4

0

0

90

-

154

312

334

768

953

187

2011

3,507

2,018

2,837

1,674

1,189

1,085

2,988

1,283

3,477

2,212

6,355

6,355

6,169

31,240

12,870

12,015

4

0

0

86

-

154

313

334

768

953

245

2010

3,333

1,918

2,696

1,668

1,189

4,393

2,988

2,368

3,483

2,212

6,414

6,414

6,169

35,274

15,754

13,106

Short term Forecast

4

0

0

85

-

154

312

443

334

768

953

2009

3,292

1,895

2,663

1,659

1,189

2,988

6,761

3,473

2,212

8,042

8,042

1,873

6,169

37,227

11,696

17,489

0

7

0

-

110

368

504

334

768

953

170

148

-718

2465

2008

2,068

1,189

2,988

6,325

4,210

2,212

8,682

8,682

7,585

1,645

4,274

2,460

3,299

43,364

16,892

17,790

5

94

20

19

-

421

352

120

691

118

693

170

190

5323

2007

2,108

1,263

3,755

3,818

2,079

1,466

1,645

5,149

1,580

3,842

48,770

20,347

11,274

17,149

17,130

13,849

43

57

22

-

169

181

841

178

603

716

170

Historical

318

2006

3,350

2,043

3,473

1,215

4,470

7,135

1,312

1,645

4,744

1,845

3,395

51,164

16,929

17,847

16,388

16,366

13,239

99

73

56

-

183

123

697

771

577

918

658

273

2005

4,358

3,828

3,183

3,617

3,531

7,508

7,355

8,283

1,645

5,326

1,916

3,038

58,016

22,327

23,608

12,081

11,504

0 as beto sold

part ofpart revenue

part ofpart revenue

part of other provisions ofpart other

part ofpart revenue

part ofpart revenue

0 as beto sold

part of cost of of part goods cost sold

part ofpart revenue

stays asstays of 2008

tied to Financeto lease tied

part ofpart revenue

stays the same the stays

stays the same the stays

stays the same the stays

not forecasted

not forecasted

tied to ASKto tied

stays the same the stays

stays the same the stays

retained earnings (t-1) + profits (t) (no (t) earnings profits DIV) retained (t-1) +

not forecasted

not forecasted

stays the same (incrase right issue 2009)issue right (incrase same the stays

Plug

Total shareholders equityTotal liabilities and

Liabilities attributable assets to held for sale

Accrued expenses and prepaid income

Other liabilities

Current portion of provisions other

Unearned transportation revenue

tax payable

Liabilities affiliated to companies

Accounts payable

Prepayments from customers

Short term loansShort term

Current portion of Finance lease

Current portofolio of long loans term

Current liabilities

Total

Other liabilities

Other provisions

Deferred taxDeferred liability

Pensions and similar commitments

Other loans

Finance Lease

Bond issues

Subordinated loans loans) (Debenture

Long term liabilities

Total shareholders equityTotal

Minority interest

Total shareholders equityTotal attributable to parent owners company

Retained earnings

Reserves

Other contributed capital

Share capital

Shareholders equity Shareholders equity liabilities and

xii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 9: NOPLAT calculation

21

-

-

-

-

-94

889

-262

-546

2019

-195

2019

2019

5,178

5,440

2,491

3,496

3,474

1,840

1,840

1,240

5,178

7,018

3,380

5,521

-1,840

-1,883

-3,380

66,865

66,865

-13,684

-24,591

-19,689

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr kr

kr

22

-

-

-

-

-76

842

-214

-528

2018

-189

2018

2018

4,787

5,000

2,360

3,168

3,147

1,700

1,700

1,123

4,787

6,487

3,202

5,071

-1,700

-1,787

-3,202

63,459

63,459

-12,986

-23,298

-18,902

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

22

-

-

-

-

-60

798

-169

-512

2017

-183

2017

2017

4,421

4,590

2,237

2,865

2,843

1,570

1,570

1,015

4,421

5,990

3,035

4,652

-1,570

-1,696

-3,035

60,231

60,231

-12,325

-22,075

-18,144

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

23

-

-

-

-

-46

756

914

-130

-496

2016

-177

2016

2016

4,078

4,208

2,119

2,584

2,562

1,447

1,447

4,078

5,526

2,876

4,261

-1,447

-1,611

-2,876

57,170

57,170

-11,700

-20,918

-17,415

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

Long term forecast

Long term forecast

Long term forecast

23

-

-

-94

-

-

-33

717

821

-481

2015

-172

2015

2015

3,758

3,852

2,009

2,324

2,301

1,333

1,333

3,758

5,091

2,726

3,896

-1,333

-1,531

-2,726

54,267

54,267

-11,108

-19,823

-16,714

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

24

-

-

-63

-

-

-23

679

736

-467

2014

-167

2014

2014

3,459

3,522

1,904

2,085

2,061

1,226

1,226

3,459

4,685

2,583

3,557

-1,226

-1,456

-2,583

51,514

51,514

-10,548

-18,786

-16,039

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

24

-

-

-50

-

-

-18

645

654

-462

2013

-165

2013

2013

3,149

3,200

1,807

1,856

1,831

1,115

1,115

3,149

4,265

2,451

3,200

-1,115

-1,387

-2,451

48,908

48,908

-10,028

-17,821

-15,408

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-9

25

-

-

-24

-

-

991

991

619

568

-526

2012

-188

2012

-991

2012

2,801

2,826

1,736

1,616

1,591

2,801

3,792

2,355

2,775

-1,338

-2,355

-9,291

46,477

46,477

-17,074

-14,983

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-5

26

21

-

-

-14

-54

-21

-59

-21

417

396

610

537

-526

2011

-188

2011

-417

2011

1,115

1,129

1,709

1,115

1,533

2,319

-1,322

-2,319

-9,115

43,646

43,646

-16,746

-14,929

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

26

-

-

-75

-27

371

581

611

-598

-581

2010

-210

-213

-581

2010

-371

-773

2010

26.3%

1,712

2,323

-1,144

-1,068

-2,182

-1,628

-1,144

-1,330

-1,766

-2,323

-9,100

41,482

41,482

-16,691

-15,135

Short term Forecast

Short term Forecast

Short term Forecast

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

27

-

-

-40

252

619

609

-113

-889

-619

2009

-367

-317

-619

2009

-252

2009

1,707

2,316

-1,619

-1,507

-2,325

-1,733

-1,619

-1,368

-1,333

-2,351

-2,316

-9,068

40,975

40,975

-16,603

-15,339

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

Tax rate Tax

12

39

12

-

-28

340

672

998

689

639

261

969

-143

-471

-998

2008

-183

2008

2008

1,643

1,687

1,699

2,282

-1,975

-1,016

-1,687

-1,552

-2,282

53,195

53,195

-11,098

-20,693

-18,153

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

73

41

28

-

-28

750

970

771

998

656

291

273

-570

2007

-970

-222

2007

2007

3,575

4,218

1,686

1,782

3,575

3,603

2,342

2,677

-1,416

-2,342

50,598

50,598

-10,519

-18,163

-16,897

Historical

Historical

Historical

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

2

-2

-

-35

28%

144

134

890

892

695

396

-421

2006

-164

2006

-890

2006

3,735

4,301

1,786

1,017

1,497

1,361

3,735

4,625

2,481

3,767

-1,623

-2,481

51,301

51,301

-10,030

-18,794

-16,229

kr kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

Control

NOPLAT

less Other revenues

After-tax interestAfter-tax income

Total income investors to

After-tax leaseAfter-tax expense

After-tax interestAfter-tax expense

Adjusted income net

Amortization and Impairment

Increase in taxes deferred

Net incomeNet

Reconciliation to net income net Reconciliation to

EBITA

Operating cash taxes on Operating cash

deferred taxes deferred

Decrease (increase) in

Operating taxes on EBITA

Tax shield on lease interest

Tax shield on interest expense

Tax on interest income

Reported taxes Reported

Operating taxes

NOPLAT

Operating cash taxes

Adjusted EBITA

Operating lease interest

Depreciation

EBITDA

Operating lease interest

Administrative (SG&A)

Selling, General and

Cost of goods sold (CGS)

Salaries

Total revenues

Revenues Tax rate Tax xiii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 10: Invested Capital calculation

-

-

850

2019

2019

1,213

2,988

1,189

9,335

1,213

1,067

6,778

2,230

-5,947

65,924

29,154

26,166

35,557

25,033

65,924

15,973

11,799

38,151

36,088

25,033

17,002

16,022

10,075

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr kr

kr

-

-

872

2018

2018

1,212

2,988

1,189

9,069

1,212

9,560

1,011

6,433

2,117

-5,649

60,867

25,679

22,691

33,976

23,718

60,867

12,781

11,799

36,287

34,204

23,718

16,135

15,209

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

894

958

2017

2017

1,211

2,988

1,189

8,818

9,895

1,211

9,073

6,106

2,009

-5,366

56,224

22,532

19,544

32,480

22,473

56,224

11,799

34,529

32,424

22,473

15,317

14,439

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

916

908

2016

2016

1,210

2,988

1,189

8,580

7,294

1,210

8,610

5,795

1,907

-5,098

51,964

19,689

16,701

31,065

21,296

51,964

11,799

32,871

30,744

21,296

14,547

13,708

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

Long term forecast

Long term forecast

-

-

940

860

2015

2015

1,209

2,988

1,189

8,354

4,955

1,209

8,172

5,501

1,810

-4,845

48,061

17,128

14,140

29,725

20,182

48,061

11,799

31,307

29,159

20,182

13,822

13,016

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

131

964

815

2014

2014

1,208

2,988

1,189

8,141

2,988

1,208

7,756

5,222

1,718

-4,604

44,622

14,827

11,839

28,588

19,127

44,622

11,799

29,835

27,663

19,127

13,141

12,360

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

988

774

2013

2013

1,207

9,777

2,988

1,098

1,189

8,074

2,203

1,207

7,363

4,958

1,631

-4,378

42,462

12,765

28,489

18,129

42,462

11,799

28,460

26,265

18,129

12,514

11,741

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

54

-

-

502

743

2012

2012

1,206

7,946

2,988

1,189

9,028

1,206

1,013

7,005

4,711

1,550

-4,177

39,613

10,934

27,473

17,202

39,613

11,799

27,312

25,093

17,202

12,067

11,183

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

732

2011

-128

2011

1,205

9,343

6,355

2,988

1,085

1,189

9,027

1,205

1,039

6,612

4,424

1,456

-3,984

38,376

27,827

16,527

38,376

11,799

26,704

24,460

16,527

11,918

10,596

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

733

2010

2010

1,204

9,402

6,414

2,988

4,393

1,189

4,133

1,204

1,065

6,322

4,205

1,384

-3,850

42,577

31,971

16,271

10,118

42,577

11,778

26,666

24,397

16,271

11,976

10,172

Short term Forecast

Short term Forecast

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

-

443

731

2009

2009

1,203

8,042

2,988

1,189

6,692

1,203

1,092

6,252

4,154

1,367

-3,812

44,667

11,030

32,434

16,301

14,501

44,667

11,198

26,777

24,482

16,301

11,994

10,064

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

504

820

2008

2008

1,202

8,682

2,988

2,465

1,189

4,287

3,921

1,202

1,092

8,731

6,000

1,911

-4,003

48,086

11,670

35,214

16,254

14,802

48,086

11,201

28,677

26,383

16,254

14,132

12,734

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

421

850

2007

2007

1,164

3,755

1,263

5,323

7,519

7,890

6,198

1,164

1,226

8,601

6,168

1,583

-4,739

52,608

20,904

17,149

30,540

16,014

52,608

11,419

27,101

24,711

16,014

13,436

13,340

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

Historical

Historical

841

996

2006

2006

1,387

3,473

2,043

1,387

2,932

8,176

1,686

-3,187

54,895

19,861

16,388

33,647

16,389

14,374

54,895

11,049

11,384

32,462

28,143

16,389

14,941

14,045

10,858

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-

2005

2005

1,352

3,617

3,183

3,828

9,056

1,352

3,862

1,065

1,419

-1,004

61,414

15,698

12,081

44,364

17,362

19,991

61,414

11,329

41,029

35,815

17,362

19,457

15,316

14,312

11,828

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

Control

Total funds invested funds Total

Reversal of accu. amorit.

Equity and equity equivalents

Equity

Deferred taxes Deferred

Debt and equivalentsDebt debt

Current port. loansof lg. term

Liab. of assets held for sale

short debt term

Capitalized operating leases

Long term debt term Long

Historical Invested capital Historical

Total funds invested funds Total

Shrot term invest.Shrot term (Excess cash)

Assets for sale

Fixed financial assets

Invested capital

accumulated amoritzation

Intangible assets

(ex. Intangibles)(ex.

Invested capital

Capitalized operating leases

equipment

Net property, pant andNet

Operating working capital

Current liabilities

Operating current assest

Current assets

Current receivables Working cash xiv Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 11: Free Cash Flow calculation

-21

-298

2019

3,314

3,314

3,746

1,315

2,750

7,060

1,883

5,178

kr

kr

kr

kr

kr

kr

kr

kr kr

kr

-21

-283

2018

3,028

3,028

3,545

1,244

2,604

6,573

1,787

4,787

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-22

-268

2017

2,762

2,762

3,355

1,178

2,466

6,117

1,696

4,421

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-22

-254

2016

2,515

2,515

3,174

1,114

2,336

5,689

1,611

4,078

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

Long term forecast

-23

-240

2015

2,285

2,285

3,004

1,055

2,212

5,289

1,531

3,758

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-23

998

-227

2014

2,084

2,084

2,831

2,082

4,915

1,456

3,459

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-24

926

-201

2013

2,002

2,002

2,534

1,833

4,536

1,387

3,149

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-25

676

-193

2012

2,194

2,194

1,945

1,488

4,139

1,338

2,801

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-25

256

-134

2011

1,077

1,077

1,360

1,264

2,438

1,322

1,115

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-26

-30

-37

186

2010

1,219

1,312

1,330

-1,032

-1,032

-1,144

Short term Forecast

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

1

47

280

280

191

-567

-806

-287

2009

1,333

-1,619

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

12

-96

239

736

2008

3,127

2,248

1,564

1,552

-1,563

-1,563

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-89

-375

2007

8,936

8,936

4,991

1,416

3,575

-3,945

-1,929

-1,552

Historical

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

-895

-973

2006

5,358

1,623

3,735

-6,944

-2,893

-2,183

12,302

12,302

kr

kr

kr

kr

kr

kr

kr

kr

kr

kr

FCF (Control)

Free cash flow (FCF) cash Free

Gross investment Gross

Investment inInvestment intangibles

Investment inInvestment capitalized operating leases

Net capitalNet expendures

Investment inInvestment operating working capital

Increase (Decrease) in : in (Decrease) Increase

Gross cash flow Gross

Depreciation NOPLAT xv Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 12: List of Associated Companies

Equity Value as of SAS's December owner 2008 to Company stake SAS

British Midland PLC 20.0% - Skyways Holding AB 25.0% 58 Air Greenland A/S 37.5% 273 AS Estonian Air 49.0% 161 Commercial Aviation Leasing 49.0% 231 Elimination of intra-Group profit for Commercial Aviation Leasing Ltd -119 Malmö Flygfraktterminal AB 40.0% 15 Other 3 Total market value of SAS owner stake 622

Total Assets in affiliated companies 8,739 Total Liabilities in affiliated companies 8,054 Equity in affiliated companies 685

SASgroup's share of equity in affiliated companies 622 Source: SASgroup annual report 2008

The above values have been used in the Valuation due to a lack of disclosure affiliated companies by the companies themselves and the SASgroup.

xvi Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No 13: Assumption for the CAPM

 Investors are risk averse and seek to maximize their utility wealth

 No individual investor dominate the market for securities

 Investors only care about expected return and standard deviation of securities

 All investors can lend and borrow at the same risk free rate

 No taxes, transaction costs or other imperfections exists and

 Investors have the same perceptions of each security

Assumptions 1-3 are believed to be reasonable, as most people seek to avoid risk and would choose more wealth for less. Further only a few investors dominate a security and investors consider about the expected return and volatility of securities.

Assumptions 4-6 are more problematic; as investors are not able to lend and borrow at the same risk free rate. Further market imperfections clearly exist. Also investors are not Homogenous and hence and different perceptions exist for different securities

Adapted from McLaney, Eddie (2006) “Business Finance: Theory and Practice” 7th edition, Prentice Hall p. 199

xvii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 14: Breakup value estimation

2009 (forecasted) ORIGINAL WORST BEST ORIGINAL WORST BEST Assumption Non-current assets -10% 10% Goodwill 894 0 0 0 - 0% 0% Cannot be sold Capitalized system development costs 198 0 0 0 - 0% 0% Cannot be sold 1,092 0 0 0 Tangible fixed assets Land and buildings: 453 498 453 544 110% 100% 120% Book value lower than market value Aircraft (own=4809, fin lease=6228) 9,441 7,553 6,609 8,497 80% 70% 90% Can be sold for 80% of book value Spare engines and spare parts 1,038 830 727 934 80% 70% 90% Can be sold for 80% of book value Workshop and aircraft servicing equipment 193 155 135 174 80% 70% 90% Can be sold for 80% of book value Other equipment and vehicles 271 217 190 244 80% 70% 90% Can be sold for 80% of book value Construction in progress 179 143 125 161 80% 70% 90% Can be sold for 80% of book value Prepayments relating to tangible fixed assets 419 335 293 377 80% 70% 90% Can be sold for 80% of book value 11,994 9,731 8,532 10,930 Financial fixed assets Pension funds, net 9,658 9,658 9,658 9,658 100% 100% 100% SAS can realise the return now Deffered tax assets 1,520 0 0 0 0% 0% 0% Other long-term receivables 410 369 328 410 90% 80% 100% SAS able to reclaim 90% Total fixed financial assets 11,588 10,027 9,986 10,068

Total non-current assets 24,674 19,758 18,518 20,998

Current assets Expendable spare parts and inventories 730 584 511 657 80% 70% 90% Can be sold for 80% of book value Prepayments to suppliers 1 1 1 1 90% 80% 100% SAS able to reclaim 90% Total Current Assets 731 585 512 658

Current receivables Accounts receivable 1,347 1,347 1,347 1,347 100% 100% 100% SAS able to reclaim 100% Other receivables 2,021 2,021 2,021 2,021 100% 100% 100% SAS able to reclaim 100% Prepaid expences and accrued income 786 629 550 707 80% 70% 90% SAS able to reclaim 80% Short term investments 6,355 6,355 5,720 6,991 100% 90% 110% SAS able to reclaim 100% Cash and bank balances 1,367 1,367 1,367 1,367 100% 100% 100% SAS able to reclaim 100% Total Current recievables 11,875 11,718 11,004 12,432

Total current assets 12,607 12,303 11,516 13,090

TOTAL Assets 37,280 32,061 30,034 34,089

Long term liabilities Subordinated loans 953 Bond issues 2,212 Finance lease 3,473 Other loans 6,761 Deffered tax liabilities 2,988 Other provisions 768 Other liabilities 334 Total Long term liabilities 17,489

Current liabilities Current portion of long-term loans 443 Current portion of finance leases 312 Short term loans 1,189 Prepayments from customers 4 Accounts payable 1,659 Tax payable 85 Unearned transportation revenue 2,663 Current portion of other provisions 154 Other liabilities 1,895 Accrued expences and prepaid income 3,292 Total current liabilities 11,696

Total liabilities 29,185 29,185 29,185 29,185

ORIGINAL WORST BEST Liquidation value 2,876 848 4,903

Shares outstanding 2468.5 2468.5 2468.5

Liquidation value per share 1.16 0.34 1.99

xviii Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No 15: Discounted Cash Flow Valuation

Input Cells: WACC 8.54% Growth: 2.0% RONIC 8.54%

Discounted Free Cash Flow

Year Free cash flow Discount factor PV of Free cash flow 2006 kr 12,302 1.00 kr 12,302 2007 kr 8,936 1.00 kr 8,936 2008 kr -1,563 1.00 kr -1,563 2009 kr 280 0.92 kr 258 2010 kr -1,032 0.85 kr -876 2011 kr 1,077 0.78 kr 843 2012 kr 2,194 0.72 kr 1,580 2013 kr 2,002 0.66 kr 1,329 2014 kr 2,084 0.61 kr 1,274 2015 kr 2,285 0.56 kr 1,288 2016 kr 2,515 0.52 kr 1,305 2017 kr 2,762 0.48 kr 1,321 2018 kr 3,028 0.44 kr 1,334 2019 kr 3,314 0.41 kr 1,345

MSEK % of value Continuing Value PV of FCF in forecast period kr 9,656 22% NOPLAT in year 2019 (T+1) kr 5,178 Present value of Continuing Value kr 26,710 60% Expected RONIC on new investments 9% Expected growth rate in NOPLAT 2% Operating value kr 36,366 82% WACC 9% Mid year and timing adjustment kr 1,521 Operating value (adjusted) kr 37,887 86% Continuing Value kr 60,622 Plus: Market value of associates kr 622 1% Discount factor 0.44 Plus: Excess cash and other financial assets kr 4,287 10% PV of FCF in continuing period kr 26,710 Plus: Assets held for sale (Net) kr 1,456 3% Market value of firm kr 44,252 100%

Less: Debt kr 16,495 37% Less: undfunded pension after Tax kr 1,579 4% Less: Minority interest kr - less: capitalized operating leases kr 16,254 37% Market value of equity kr 9,924

Number of shares outstanding (million) 2,468 Price per share (SEK) kr 4.02

xix Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 16: Economic Profit Valuation

Input Cells: WACC 8.54% Growth: 2.0% RONIC 8.54%

Economic Profit

Year IC beg. of year ROIC WACC Spread Economic Profit NOPLAT Capital charge EP PV of EP (EP*DF) 2006 kr 41,029 9.10% 9% 0.6% kr 231 kr 3,735 kr 3,504 kr 231 2007 kr 32,462 11.01% 9% 2.5% kr 802 kr 3,575 kr 2,773 kr 802 2008 kr 27,101 0.04% 9% -8.5% kr -2,303 kr 12 kr 2,315 kr -2,303 2009 kr 28,677 -5.65% 9% -14.2% kr -4,069 kr -1,619 kr 2,449 kr -4,069 kr -3,749 2010 kr 26,777 -4.27% 9% -12.8% kr -3,431 kr -1,144 kr 2,287 kr -3,431 kr -2,912 2011 kr 26,666 4.18% 9% -4.4% kr -1,162 kr 1,115 kr 2,278 kr -1,162 kr -909 2012 kr 26,704 10.49% 9% 1.9% kr 520 kr 2,801 kr 2,281 kr 520 kr 375 2013 kr 27,312 11.53% 9% 3.0% kr 817 kr 3,149 kr 2,333 kr 817 kr 542 2014 kr 28,460 12.15% 9% 3.6% kr 1,028 kr 3,459 kr 2,431 kr 1,028 kr 629 2015 kr 29,835 12.60% 9% 4.1% kr 1,210 kr 3,758 kr 2,548 kr 1,210 kr 682 2016 kr 31,307 13.03% 9% 4.5% kr 1,404 kr 4,078 kr 2,674 kr 1,404 kr 729 2017 kr 32,871 13.45% 9% 4.9% kr 1,613 kr 4,421 kr 2,808 kr 1,613 kr 771 2018 kr 34,529 13.86% 9% 5.3% kr 1,837 kr 4,787 kr 2,949 kr 1,837 kr 809 2019 kr 36,287 14.27% 9% 5.7% kr 2,079 kr 5,178 kr 3,099 kr 2,079 kr 844

MSEK % of value Continuing Value Invested capital in the beginning of year kr 28,677 65% EP 2019 (T+1) kr 2,079 PV of RI in forecasted period kr -3,032 -7% WACC 9% Present value of terminal value kr 10,722 24% Part 1 kr 24,334

Operating Value kr 36,366 82% NOPLAT 2019 (T+1) kr 5,178 Mid year and timing adjustment kr 1,521 Expected growth rate in NOPAT 2.0% Operating Value adjusted kr 37,887 86% Expected RONIC on new investments 9% plus: Market value of associates kr 622 1% WACC 9% Plus: Excess cash and other financial assets kr 4,287 10% Part 2 - Plus: Assets held for sale kr 1,456 3% Market value of firm kr 44,252 100% Continuing Value kr 24,334 Discount factor 0.44 Less: Debt kr 16,495 37% PV of RI in terminal period kr 10,722 Less: undfunded pension after Tax kr 1,579 4% Less: Minority interest kr - less: capitalized operating leases kr 16,254 37% Market value of equity kr 9,924

Number of shares outstanding (million) 2,468

Price per share (SEK) kr 4.02

xx Will SAS continue to fly? - A valuation of a company in crisis -

Appendix No. 17: Exchange rates

Section 3.3 Airline comparisons: Lufthansa, Finnair and Air France-KLM report in euro, Norwegian Air Shuttle report in NOK and SAS report in SEK We converted SAS and Norwegian´s data to euro at the arithmetic average yearly rate from 2007 and 2008 respectively. The exchange rates collected were weekly data. The reason using the yearly average was because we assume that the companies earn their profit and pay their cost throughout the year.

Section 8.1 Multiple analysis: In this analysis we were interested in converting the comparable companies data to SEK at the specific date of the valuation, the 30th of June 2009We converted the data for Austrian Airlines, Lufthansa, Finnair and Air France-KLM from euro to SEK at the exchange rate of 30th of June 2009. The reason for using the exchange rate from this specific day was that we were interested in the published share price and the market capitalization of the airlines. We could have used the average yearly rate for converting the book value of equity (as above) but we believe that using the same rate for all the data is more consistent.

Section 9.1 Capital structure: We need to convert the market value of the subordinated loan from CHF to SEK and the market value of the two Norwegian bonds from NOK to SEK. As we are interested in the market value as of the 30th of June 2009, the exchange rates for this particular day have been used.

All exchange rates were collected from the following web site: www.oanda.com

xxi