Valuation of Norwegian Air Shuttle ASA Master’s Thesis Copenhagen Business School May 17th 2016 Authors: Morten Aleksander Tauland, CPR: XXXXXX-XXXX Markus Kleppe Gjennestad, CPR: XXXXXX-XXXX Programme: Finance and Strategic Management (FSM) Supervisor: Finn Østrup Number of standard pages: 120 Number of characters: 261 398 1 Executive summary Purpose of this thesis: Norwegian Air Shuttle ASA’s strategic direction is to become the first successful long-haul low-cost airline, with a staggering 267 new aircraft on order (current fleet, 99 aircraft) at year-end 2015. Based on this, we will estimate the fair value of Norwegian Air Shuttle ASA per 12.04.2016. Analytical framework: We will conduct a strategic analysis to assess the external and internal environment that Norwegian Air Shuttle ASA operates in an extract the key value drivers for change. Then we reformulate our peer groups financial statements (e.g. adjust for operating leases) to perform a profitability and financial strength analysis of our peer group. Our findings to this point will be summarized in a SWOT matrix. After that, we use our findings to create a pro forma income statement and a pro forma balance sheet to construct a pro forma cash flow statement. The final valuation will utilize the pro forma statements in a DCF model to obtain a share price estimate. Finally, we conduct a sensitivity analysis to determine key value drivers’ impact on the share estimate. Key findings: The strategic analysis uncovered that the overall airline industry in a historical perspective has destroyed value for its equity investors, which we also found to be evident in Norwegian Air Shuttle ASA history. Possible reasons for this phenomenon were found to be a sum of macro and micro factors. Our findings indicate that airlines are becoming more similar, making it hard to differentiate on other factors than ticket prices (Business Model and Strategy). This was supported by an unprofitable industry structure due to price-sensitive customers and low entry barriers (Five Forces analysis). The airline industry is also highly reactive to macro factors such as oil price and GDP growth (PESTLE-analysis). The profitability analysis showed that Norwegian Air Shuttle ASA is so far underperforming compared to other low-cost carriers, in addition to higher liquidity and insolvency risk. Our DCF valuation indicated a share price of NOK 278, highly sensitive to WACC, fuel and payroll costs. A Monte Carlo Simulation showed the probability of 44 % for a negative equity value. A liquidation value indicated that there would be zero left for the owners in a possible bankruptcy. Conclusions: DCF model estimated a share price estimate of NOK 278, indicating a downside potential of – 21 %. We conclude with a sell recommendation on Norwegian Air Shuttle ASA per 12.04.2016. 1 Contents 1 Executive summary ...........................................................................................................................................1 2. Introduction ..........................................................................................................................................................6 2.1 Problem Statement ......................................................................................................................................7 2.2 Methodology ..................................................................................................................................................8 2.2.1 Data Collection ........................................................................................................................................8 2.2.2 Research Design.......................................................................................................................................8 2.3 Demarcation ...................................................................................................................................................9 3. Norwegian Air Shuttle ASA - A company overview ........................................................................................... 11 3.1 History of the company ............................................................................................................................. 11 3.2 Corporate Structure ................................................................................................................................... 12 3.3 Corporate Governance .............................................................................................................................. 13 3.3.1 Ownership structure .......................................................................................................................... 13 3.3.2 Board of Directors .............................................................................................................................. 14 3.3.3 Management ...................................................................................................................................... 15 3.3.4 Summary ............................................................................................................................................. 16 3.4 Vision and Core Values ................................................................................................................................ 16 3.5 Competitors ................................................................................................................................................. 17 3.5.1 Ryanair .................................................................................................................................................. 17 3.5.2 SAS ........................................................................................................................................................ 17 3.5.3 EasyJet .................................................................................................................................................. 18 4. Strategic Analysis ............................................................................................................................................ 19 4.1 Overall airline and peer group performance in a historical perspective .................................................. 19 4.2 Business Model and Strategy (BMS) ............................................................................................................ 22 4.1 The LCC model vs. The FSC model ........................................................................................................... 23 4.2.1 Recent developments - Convergence ................................................................................................... 24 4.2.2 Business Strategy & Development ....................................................................................................... 25 4.2.3 Partial conclusion - Fit between business model and strategy ............................................................ 27 4.3 PESTLE .......................................................................................................................................................... 28 4.3.1 Political and Legal factors ..................................................................................................................... 28 2 4.3.2 Economic factors .................................................................................................................................. 31 4.3.3 Social factors ......................................................................................................................................... 36 4.3.4 Technological and Environmental factors ............................................................................................ 36 4.4 Porter’s Five Forces Model .................................................................................................................... 38 4.4.1 Bargaining power of customers ......................................................................................................... 38 4.4.2 Bargaining power of suppliers ........................................................................................................... 39 4.4.3 Threat of new entrant......................................................................................................................... 48 4.4.4 Threat of substitutes .......................................................................................................................... 51 4.4.5 Industry rivalry ................................................................................................................................... 53 4.4.6 Summary of Porter’s Five Forces ........................................................................................................ 54 4.5 VRIO-Analysis ............................................................................................................................................... 54 4.5.1 Brand and reputation ........................................................................................................................... 55 4.5.2 Aircraft fleet .......................................................................................................................................... 55 4.5.3 Strong position in key markets and first mover advantage ............................................................... 56 5.0 Financial Analysis .........................................................................................................................................