European Airlines

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08 January 2013

Europe

Equity Research

Airlines

European Airlines STRATEGIC ANALYSIS

Structural shifts override macro developments

■ Competitor retrenchment remains encouraging – reiterating OP on

Focus List stock RYA but downgrading EZJ to Neutral: In this note we

use detailed analysis of Ryanair and easyJet networkwide fares to support

our continuing view that further retrenchment by competitors is key to each

carrier driving pricing higher. We raise our estimates by 1-6% and reiterate

our Outperform rating for RYA (TP up 3% to €6.05) but we downgrade EZJ

from OP to Neutral (TP up 21% to 884p) given our view that recent share

price strength makes it increasingly difficult to surprise raised market

expectations.

■ In-depth fare analysis emphasises competitor retrenchment and

management execution overriding macro concerns: We highlight: (i)

RYA/EZJ pricing performances across respective networks are more

determined by competitive dynamics at individual bases than national macro

developments, assuaging concerns on Spanish exposure for RYA in

particular, (ii) route maturity does not necessarily equate to higher fares, as

the market expects, with competitor retrenchment proving the key to recent

pricing surprises, (iii) active capacity management is playing a significant

role in continued fare strength, and (iv) RYA is succeeding in reducing lead-

in discount levels, while fare tiering suggests route management to close off

lower fare buckets can structurally raise average fares.

Figure 1: RYA constant currency revenue per seat vs competitor retrenchment

-15%

-10%

-5%

0%

5%

10%

15%

20%

4Q11A 1Q12A 2Q12A 3Q12 4Q12

RYA RPS yoy at CC RYA competitor seats yoy

Source: Company data, Diio Mi data, Credit Suisse analysis (4Q RPS estimated)

■ RYA valuation significantly more attractive than EZJ: Following a 78-

54% EZJ outperformance on a 12-24M basis, we consider Ryanair’s

valuation more attractive than that of easyJet on EV/EBITDAR, EV/IC, NAV,

and FCF metrics, given superior returns and FCF profiles (2014E lease-

adjusted ROIC 18% vs 15% equivalent at EZJ, FCF yield 15% v 11%) but

slight discounts on 2014E EV/EBITDAR and EV/IC multiples (5.6x vs 5.8x,

2.1x vs 2.2x).

Research Analysts

Neil Glynn, CFA

44 20 7883 6929

[email protected]

Tim Ramskill, CFA

44 20 7883 7361

[email protected]

Julia Pennington

44 20 7888 0157

[email protected]

08 January 2013

European Airlines 2

European LCCs key charts

Figure 2: RYA CC RPS versus competitor retrenchment Figure 3: EZJ CC RPS versus competitor retrenchment

-15%

-10%

-5%

0%

5%

10%

15%

20%

4Q11A 1Q12A 2Q12A 3Q12 4Q12


-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

4Q11A 1Q12A 2Q12A 3Q12 4Q12

EZJ RPS yoy at CC EZJ competitor seats yoy

Source: Company data, Diio Mi data, Credit Suisse analysis

(calendarised)

Source: Company data, Diio Mi data, Credit Suisse analysis

(calendarised)

Figure 4: RYA Spanish pricing firm relative to other

regions (one-month forward bookings)

Figure 5: as competitor withdrawals override macro

(yoy competitor seat growth at RYA bases 4QCY12)

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

Spain Portugal Germany Italy UK Ireland

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%


Source: Company website, Credit Suisse analysis (€ per kilometre) Source: Diio Mi data, Credit Suisse analysis

Figure 6: 3Y ROIC versus Mar 2014E adj EV/IC multiples Figure 7: 3Y FCF yield versus Mar 2014E P/E multiples

Ryanair

easyJet

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

0% 5% 10% 15% 20%

03/13E adj

EV/IC (x)

2013E-2015E ROIC

Ryanair

easyJet

10.3

10.5

10.7

10.9

11.1

11.3

11.5

11.7

11.9

5% 7% 9% 11% 13% 15%

03/14E P/E

multiple (x)

2013E-2015E FCF yield

Source: Credit Suisse estimates(Note: EZJ figures based on financial

year to September – we use Y/E 6-months prior to Ryanair’s to ensure

common summer season)




08 January 2013

European Airlines 3

Indepth fare analysis illustrates competitor

retrenchment and management execution key to

improving returns

We utilise our extensive analysis of easyJet and Ryanair networkwide fare structures to

provide differentiated insight into the prospects for each carrier to continue to drive pricing

higher in the pursuit of superior medium term returns. We use fare data from the majority

of easyJet’s c600 and Ryanair’s c1500 routes from summer 2011, winter 2011/2012 and

summer/winter 2012 to focus on two key areas which we expect to impact the

development of LCC average fares over the medium term as follows:

Competitor retrenchment driving structural change and resultantly higher fares:

Micro competitive dynamics overriding macro developments – peripheral

European exposure a positive: In Ryanair’s case, its pricing performance

across the network is demonstrably more dependent on competitive capacity

developments at each base than developing macro conditions. We think our

detailed fare analysis should assuage persisting market concerns regarding

Ryanair’s Spanish exposure in particular, with Spanish bases contributing some

of RYA’s highest lead-in pricing levels. We highlight the close relationship

between competitor retrenchment at RYA’s Spanish bases and firm fares. EZJ’s

pricing more closely matches regional macro developments (Germany,

Switzerland strength) but nonetheless also benefits significantly from competitor

retrenchment. Our analysis suggests that peripheral Europe exposure, while

prompting initial concerns, may actually prove a positive given Ryanair and

easyJet’s abilities to undercut competitor pricing (given lower cost bases) and

prompt peer retrenchment with positive short and medium term consequences for

pricing.

Route maturity does not mean necessarily higher fares – but easing

competition does: Per our analysis, the level of correlation between route age

and fares at EZJ/RYA is very low, illustrating the danger of market reliance on the

seemingly logical theory that routes afforded a blend of time and management

attention should contribute at a higher level than “start-up” routes. Rather we think

recent history emphasises that competition is the key driver of pricing

developments for a commoditised short haul product, and we expect market

structure developments to hold the key to the medium term outlook for EZJ/RYA

pricing and returns. In our view, many competitors should continue to avoid EZJ

and RYA, further clearing the path to higher average networkwide pricing, and we

remain constructive on the outlook for fares primarily due to competitive comfort

rather than a simple assumption that longer (presence) equals higher (fares).

Management execution should continue to drive structurally higher fares:

Management action is contributing strongly to fare improvements: We

consider both Ryanair and easyJet approaches to network management to have

developed a significantly firmer focus on short term profitability as the businesses

have emerged from high growth phases to more mature states. Ryanair has

effectively grounded 40-80 aircraft in the past three winter seasons, while easyJet

has restrained capacity growth to 3.5% this winter following an underlying flat

winter 2011/2012. Successful capacity management is driving higher fares, in

combination with peer retrenchment, and an increasing focus on higher pricing,

profitability and returns is a clear positive for the short and medium term.

Route segmentation and fare tiering suggests further opportunities: Ryanair

and easyJet remain focussed on driving average fares/revenue per seat. We

highlight below signs that Ryanair in particular is achieving success in closing off

08 January 2013

European Airlines 4

its lowest pricing buckets, to structurally raise average fares. Further, route

restructuring can structurally improve the fare mix as underperforming routes are

cut to raise average prices/margins. Per our in depth analysis, we outline that

dropping the bottom fare tiers could add 3% to average revenue per seat,

boosting earnings by 17-25% at RYA, EZJ respectively, without the need to raise

prices.

Capacity developments more important than regional concerns

We outline base by base average fare levels on a sector length-adjusted basis to illustrate

the variation between base performances within key European countries at Ryanair and

easyJet. Per Figures 8-11 below, base-level pricing performance is not necessarily

explained by macro dynamics as pricing levels vary from base to base within Spain, Italy

and the UK.

Despite prevailing Spanish macro headwinds which have been a concern for investors,

Ryanair has been generating its highest pricing levels from some Spanish bases (three of

the top four in sumer 2011 and summer 2012 – though pricing does not necessarily

translate to profitability). However, Spain also contributes one of its lowest pricing points

(Madrid). Ryanair’s underperforming bases were primarily located in the UK in 3QCY11

(July), however 2012 seems to have experienced a relative improvement in the UK and

seven of Ryanair’s lowest thirteen pricing levels were in Italy in 4QCY12 (October).

Figure 8: RYA regional pricing dispersion 3QCY11 Figure 9: RYA regional pricing dispersion 4QCY12

0.000

0.010

0.020

0.030

0.040

0.050

0.060

Spain Italy Ireland Portugal UK Germany

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035


Source: Company website, Credit Suisse analysis (€ per kilometre) Source: Company website, Credit Suisse analysis (€ per kilometre)

easyJet’s base by base pricing performance looks more in line with macro developments,

with Germany and Switzerland leading the way (even adjusting for CHF strength). We

point out that per our analysis Madrid screens well for EZJ on a pricing only perspective,

however easyJet has highlighted its MAD base as its poorest performer on a PBT basis

and it has now been closed. Consistent with RYA’s experience, EZJ’s UK bases lagged

the pack in 2011 but have been largely replaced by French bases at the lower end of the

scale in 2012.

08 January 2013

European Airlines 5

Figure 10: EZJ regional pricing dispersion summer 2011 Figure 11: EZJ regional pricing dispersion summer 2012

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.160

Germany Switzerland Italy UK Spain France

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

Germany Switzerland Spain UK Italy France

Source: Company website, Credit Suisse analysis (£ per kilometre) Source: Company website, Credit Suisse analysis (£ per kilometre)

easyJet’s strongest performing bases from a pricing perspective, in Germany and

Switzerland, have been helped by competitor seat reductions per Figure 12, whereas

competitor seat growth in Lyon and Paris (Orly) would seem to have driven lower pricing

levels. The key yoy improvements across Ryanair bases have come at Lanzarote, Cagliari,

Tenerife, Kaunas, Glasgow Prestwick, Bremen, Dusseldorf Weeze, London Luton,

Frankfurt Hahn, Leeds Bradford and Bournemouth. This has largely been a function of

competitor capacity reductions at these airports. Deteriorations at Brussels Charleroi,

Bologna, Malta and Barcelona Girona have been accompanied by significant competitor

capacity increases.

Figure 12: EZJ competitor seat growth summer 2012 Figure 13: RYA competitor seat growth 4QCY12

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%


Source: Diio Mi data, Credit Suisse analysis Source: Diio Mi data, Credit Suisse analysis

Route maturity not the answer to higher fares – easing competition the driver

In our view, developing route maturity is a key part of the market’s investment case for

easyJet and Ryanair over the medium term, as capacity growth slows at each carrier.

However, our analysis suggests a very weak relationship between route age and fare

levels.

Considering the strength of pricing performance through calendar 2011-2012 with EZJ

revenue per seat up 10% (11% at constant currency), and RYA 20% (18% constant

currency), we think our analysis suggests route/market-level competition has a

significantly greater bearing on fare levels than route maturity and we expect this theme to

gain more weight over the medium term.

Note: this analysis is impacted by survivorship bias as underperforming routes may be cut

to allocate aircraft to more attractive bases.

08 January 2013

European Airlines 6

Figure 14: EZJ fares seem uncorrelated to route maturity Figure 15: RYA fares present a similar picture

R² = 0.004

0

50

100

150

200

250

300

0 2 4 6 8 10 12 14 16

Fa

re (

£)

Route age

R² = 0.0104

0

20

40

60

80

100

120

140

160

180

200

0 1 2 3 4 5 6 7 8

Fa

re

(€

)

Route age

Source: Company website, Credit Suisse analysis Source: Company website, Credit Suisse analysis

easyJet and Ryanair fares have performed strongly in recent years as their own rates of

capacity growth have slowed from double-digit to single-digit rates, emphasising an

encouragingly strong element of self-determination to fare development.

Figure 16: EZJ RPS versus seat growth FY04A-FY12A Figure 17: RYA RPS versus seat growth FY05A-FY12A

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0%

5%

10%

15%

20%

25%

2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A

Seat growth (LHS) Revenue per seat growth (RHS)

-15%

-10%

-5%

0%

5%

10%

15%

0%

5%

10%

15%

20%

25%

30%

2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A

Seat growth (LHS) Revenue per seat growth (RHS)

Source: Company data Source: Company data

The withdrawal of capacity from easyJet and Ryanair bases in calendar 2011-2012, in a

continued soft demand environment, illustrates the benefit of easing competition on

respective pricing levels. In our view, intuitive peer retrenchment from the lowest cost

operators in the market has been the most crucial driver of successive pricing surprises at

each LCC over recent years and we expect this theme to continue in the short and

medium term at current fuel prices and particularly with continued EURUSD weakness.

We find our regular base-by-base easyJet and Ryanair competitor capacity analysis to

have strong explanatory power, below.

08 January 2013

European Airlines 7

Figure 18: Capacity growth at EZJ bases (calendar qtrs) Figure 19: Capacity growth at RYA bases (calendar qtrs)

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Seat Growth (YoY) Seat Growth ex EZJ (YoY)

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Seat Growth (YoY) Seat Growth ex RYA (YoY)


Note: EZJ reported 1.8% competitor seat declines on EZJ routes for 1H13 with FY12

results.

Figure 20: EZJ CC RPS versus competitor retrenchment Figure 21: RYA CC RPS versus competitor retrenchment

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

4Q11A 1Q12A 2Q12A 3Q12 4Q12

EZJ RPS yoy at CC EZJ competitor seats yoy

-15%

-10%

-5%

0%

5%

10%

15%

20%

4Q11A 1Q12A 2Q12A 3Q12 4Q12


Source: Company data, Credit Suisse analysis (calendarised) Source: Company data, Credit Suisse analysis (calendarised)

Active capacity management instrumental to driving pricing upwards

easyJet’s 4QCY12 (its own 1Q13) capacity management includes a 6% cut in Madrid

(over 20% in December) but growth at multiple other bases as it seeks to capitalise on

challenges faced by peers including Air Berlin, Swiss, and Air France (albeit via bottom-up

decision making). In 4QCY12 to December, Ryanair aggressively cut capacity in various

(but certainly not all) Spanish (including Madrid, Seville, Alicante, Lanzarote, Tenerife,

Gran Canaria), UK (including Edinburgh, Liverpool) and Italian (including Rome, Brindisi)

bases. In line with competitor capacity actions, this seems to have supported pricing levels

in Spain in particular.

Figure 22: EZJ own capacity mgt 3QCY12 (seats) Figure 23: RYA own capacity mgt 4QCY12 (seats)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%


Source: Diio Mi data Source: Diio Mi data

08 January 2013

European Airlines 8

Route segmentation – ongoing efforts to close low fare buckets

In our view, we have entered a new, likely prolonged, era of more tightly managed

capacity at the LCCs in Europe given i) the sluggish development of pan-European

consumer discretionary spending in combination with ii) higher fuel prices and iii)

continued inflationary pressures on infrastructure costs.

easyJet is planning to limit capacity growth to 3.5% yoy in winter 2012/2013 while

limiting fleet expansion from 214 aircraft at September 2012 to 217 by September

2013.

Ryanair growth is likely to be limited to low single digits annually until another

future aircraft order begins to deliver (timing uncertain).

This is partially a function of slowing rates of new aircraft deliveries (RYA’s Boeing orders

have now fully delivered), however it is also the recognition of a potentially more

challenging outlook for returns in our view as seasonality has heightened. We think

investors should welcome this disciplined approach to capacity management in a new

phase for European LCC development, and 12M share price performances (EZJ +107%,

RYA +33%) suggest a high level of appreciation has already developed.

With that, we illustrate further portfolio management opportunities at easyJet and Ryanair

to drive fares structurally higher given:

Signs of reducing discount levels at Ryanair in particular.

Scope to raise the yield curve by closing the lowest fare buckets.

By analysing the tiering of fare levels at easyJet and Ryanair, the opportunity for each

carrier to manage underperforming routes to structurally boost the average fare (without

having to raise individual prices) becomes apparent. Simplistically, our analysis suggests

that each carrier can raise revenue per seat by 3% by either a) cutting the bottom 15-20%

of routes from the network, or b) finding more profitable opportunities as the market

develops with competitors continuing to retrench. This adds another dimension to the well-

exercised argument that Ryanair in particular can raise its average fares by slowing

growth.

We see more scope for easyJet to achieve a parrallel shift in its network-wide booking

curve i.e. raising pricing points at each stage/segment along the curve, given its network of

primary airports. Ryanair’s airport portfolio is more likely to see it flatten the slope of its

yield curve by eliminating lower fare buckets as it will likely be more challenging to boost

higher fares equivalently.

RYA seems to be succeeding in reducing its heaviest levels of discounting, with

every €1 average fare increment worth 15% of earnings (each €1 in revenue per seat

is worth 18%): At Ryanair, with 6% of fares under €10 in July 2011, 12% in November

2011 and only 2% in October 2012 (using a one-month forward booking window), this

suggests that RYA’s implementation of an effective floor price of €10 in its 3Q13 to

December 2012 would have boosted fares by c1% (using a midpoint €5 increment as our

average boost to bottom tier fare levels, at 10%). In our view, Ryanair has succeeded in

driving a higher pricing point over recent years by reducing its level of lead-in booking

discounting (sale prices now generally start at €10-plus versus regular 1c offerings in 2009

for example). If RYA were ultimately able to push the 19-32% of under €15 fares up to

implement a €15 price floor, using a midpoint average increment of €7.50 (at 20% of total

fares) would add a further €1.50 to average fares (3% based on our FY13E estimate).

Every €1 fare fluctuation at Ryanair represents 2% of the carrier’s average fare, and

results in a €79m earnings swing absent offsetting factors (15% of our FY13E net income

forecast).

08 January 2013

European Airlines 9

Figure 24: RYA fare tiering 3QCY11, 4QCY11 and 4QCY12 (one month forward booking period)

0%

5%

10%

15%

20%

3QCY11 4QCY11 4QCY12

Source: Company website, Credit Suisse analysis – pricing reflects month of departure (as opposed to month of booking)

EZJ lead-in fares start higher but each £1 in revenue per seat worth 25% of

earnings: At easyJet, consistent with its higher cost base and network encompassing

many major primary airports, pricing is structurally higher. In August 2011 with a one

month forward booking window, only 3% of fares sat below £20, 7% in January 2012 and

5% in August 2012 based on our analysis. As such, there is significantly less scope for

EZJ to unwind lower fare discount levels than at RYA. That said, potentially ultimately

closing fare buckets below £25 would produce a £1.88 per passenger benefit,

representing 3% of FY13E seat revenue per passenger per our estimates (using a £12.50

average complement at 15% of total fares per August 2012 data).

Figure 25: EZJ fare tiering 3QCY11, 1QCY12, and 3QCY12 (one month forward booking period)

0%

5%

10%

15%

20%

3QCY11 1QCY12 3QCY12

Source: Company website, Credit Suisse analysis – pricing reflects month of departure (as opposed to month of booking)

We must balance this argument against the success of the use of bargain basement fares

as a marketing tool, by Ryanair in particular.

Note: Our fare analysis includes each outbound route from each easyJet and Ryanair

base. We take the lowest fare on each flight date used (excluding additional charges

including baggage, and check-in, but including administration/payment fees and taxes and

in RYA’s case including the web check-in and EU 261 fees), with a forward booking period

of roughly one month to approximate the average price paid by each EZJ/RYA passenger.

08 January 2013

European Airlines 10

Structural change to continue to ease competition

In 2007, easyJet and Ryanair together operated 15% of short haul seats in Western

Europe. In 2012, they operated 22% following a combination of 45% seat growth at EZJ,

and 52% at Ryanair, compared to a total market down 1% over the five year period as

competitors have retrenched.

Figure 26: European SH market structure 2007 Figure 27: European SH market structure 2012

Ryanair8%

easyJet7%

Lufthansa group11%

Air France KLM10%

SAS6%

Iberia4%

Alitalia4%

BA4%

Air Berlin4%

Other42%

Ryanair13%

easyJet9%

Lufthansa group13% Air France KLM

11%

IAG6%

SAS6%

Air Berlin5%

Other37%


While differences exist between US and European market structures which complicates

like-for-like comparison (including national interests at EU country level, and

language/cultural barriers), it is worth highlighting that in 2012, Southwest held 22% of US

domestic seats (including its AirTran acquisition) compared to 17% in 2007. In 2007,

seven major players held 82% of the US domestic market, whereas consolidation in the

interim has seen five major players now account for 84% (leaving only 16% of the market

in the hands of an array of smaller LCCs such as JetBlue, Spirit, Virgin America and

Allegiant, and niche carriers). Note: Regional airlines such as ExpressJet and SkyWest

fully sell capacity to the US majors.

Market consolidation has significantly helped the US majors, with the exception of AMR

currently under Chapter 11 bankruptcy protection; Delta and United Continental look set to

generate operating margins of 7% and 4% respectively for 2012 according to Reuters

consensus estimates. This compares highly favourably with our forecast of -1% at AF, 0%

at IAG and 2% at Lufthansa group.

Figure 28: US domestic market structure 2007 Figure 29: US domestic market structure 2012

Southwest17%

American13%

Delta13%

United8%

US Airways9%

Continental7%

Northwest6%

Regional feeders9%

Other18%

Southwest22%

Delta17%

American13%

United Continental10%

US Airways10%

Regional feeders12%

Other16%


We expect continued restructuring at each European carrier mentioned above i.e.

Lufthansa, Air France KLM, IAG, SAS and Air Berlin (holding a combined 41% of the

market), to drive further market concentration, while the 37% of the market held by

second/third tier airlines is likely to be gradually further ceded to Ryanair and easyJet in

particular. We expect the European network carriers, and Air France, Iberia and Lufthansa

in particular, to continue to at least trim cost bases beyond currently planned restructuring

08 January 2013


initiatives, which may result in further streamlining of loss making short haul operations.

Peripheral European players will remain pressurised in our view, driving further downsizing

for many and potential market exit for the most vulnerable.

We re-iterate below the recent trends of competitors pulling away from easyJet and

Ryanair. With the combination of high fuel pricing and soft market demand likely to persist

for some time, we see no reason why this dynamic should not broadly continue into the

medium term.

Figure 30: Capacity growth at EZJ bases (calendar qtrs) Figure 31: Capacity growth at RYA bases (calendar qtrs)

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Seat Growth (YoY) Seat Growth ex EZJ (YoY)

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Seat Growth (YoY) Seat Growth ex RYA (YoY)


08 January 2013


RYA valuation continues to look more attractive on

multiple metrics

easyJet’s stock price has continued to significantly outperformed Ryanair’s over recent

months – it has gained 33% on a 3M basis relative to a 10% gain at RYA, representing a

23% outperformance. In our view, easyJet’s valuation relative to Ryanair has become

more stretched and we are doubtful that this outperformance can continue given a more

attractive Ryanair valuation on EV/EBITDAR, EV/IC, NAV, and FCF metrics. Accordingly,

we re-iterate our preference for Ryanair.

Figure 32: RYA v EZJ share pricing – 1M, 3M, 6M, 12M Figure 33: RYA v EZJ share pricing – 1Y-5Y

0%

20%

40%

60%

80%

100%

120%

1M 3M 6M 12M

RYA EZJ

0%

20%

40%

60%

80%

100%

120%

140%

12M 2Y 3Y 5Y

RYA EZJ

Source: Thomson Reuters Source: Thomson Reuters

We outline current Ryanair and easyJet multiples below, drawing particular attention to

Ryanair’s 2014E adjusted EV/EBITDAR of 5.6x, which is 0.2 turns below EZJ’s 5.8x for

the 12 months to March 2014. Further, Ryanair’s 2014E EV/IC multiple of 2.1x lies just

below easyJet’s 2.2x. We view these slight discounts to be unjustified given a superior

ROIC outlook at RYA as we outline below.

Figure 34: Ryanair and easyJet multiples at current prices (as at 4 January 2013)

RYA at current price €4.96 easyJet at current price 821p

x FY13E FY14E FY15E FY13E FY14E FY15E

Adj EV/EBITDAR 7.0 5.6 4.4 6.8 5.8 4.9

P/E 13.2 11.6 10.1 12.3 10.8 9.5

Adj EV/Invested Capital 2.2 2.1 2.1 2.3 2.2 2.1

Adj EV/Sales 1.6 1.3 1.1 0.8 0.7 0.6

Source: Credit Suisse estimates (note: easyJet multiples based on March year ends in line with Ryanair’s financial year)

Adjusted EV/EBITDAR multiple relative discount looks unjust given superior returns

On our numbers, Ryanair currently trades on a March 2014 adjusted EV/EBITDAR

multiple of 5.6x, behind easyJet at 5.8x for the equivalent 12-month earnings period. When

comparing returns (ROIC) from 2013E-2015E, we see RYA’s ROIC for the period at 18%,

outstripping easyJet’s at 14%. This suggests RYA’s current adjusted EV/EBITDAR

multiple is low relative to easyJet. Note: Ryanair’s ROIC averaged 11.1% between March

2008A and March 2012A, versus 9.4% at EZJ in the four years to September 2012E.

08 January 2013


Figure 35: 7Y ROIC development – RYA, EZJ Figure 36: 7Y ROIC versus Mar 2014E adj EV/EBITDAR

0%

5%

10%

15%

20%

25%

2009A 2010A 2011A 2012A 2013E 2014E 2015E Average 2009A-2015E

Ryanair easyJet

Ryanair

easyJet

5.0

5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.8

5.9

6.0

0% 5% 10% 15% 20%

03/14E adj

EV/EBITDAR

(x)

2013E-2015E ROIC

Source: Company data, Credit Suisse estimates (Note: EZJ figures

based on financial year to September – we use Y/E 6-months prior to

Ryanair’s to ensure common summer season)

Source: Credit Suisse estimates (Note: EZJ figures based on financial



Adjusted EV/IC and NAV estimates provide further support for undervaluation

argument

Looking towards EV/IC, Ryanair also looks more attractive when considering current

multiples relative to prospective 3Y ROIC and EBITDAR margin development. For a

marginally lower multiple, at 2.1x in FY14E, Ryanair generates an additional four points of

ROIC. Further, on our analysis, Ryanair trades at a 55% premium to its prevailing NAV,

compared to a 135% premium at easyJet which also suggests relative value in support of

our ROIC/EVIC analysis.

Figure 37: 3Y ROIC versus Mar 2014E adj EV/IC multiples Figure 38: Premia to CS NAV estimates

Ryanair

easyJet

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

0% 5% 10% 15% 20%

03/13E adj

EV/IC (x)

2013E-2015E ROIC

0%

20%

40%

60%

80%

100%

120%

140%

160%

Ryanair easyJet

Premium (discount) to September 2012E NAV

Source: Credit Suisse estimates (Note: EZJ figures based on financial



Source: Company data, Credit Suisse estimates, AVAC

Distinctly superior FCF yield insufficiently rewarded

In FCF yield terms, we forecast an average of 13% at RYA over FY13E-FY15E compared

to 8% at easyJet. With Ryanair trading on a March 2014E P/E multiple of 11.6x, 7% ahead

of easyJet on 10.8x for the equivalent period (average of EZJ’s FY12E and FY14E

multiples), this suggests relative value in Ryanair. However, we highlight that in EV/Sales

terms, Ryanair trades at double EZJ’s 0.6x multiple, partially due to a 2013E-2015E

EBITDAR margin forecast of 23.8% that is 1.7x that of EZJ (at 14.3%).

08 January 2013


Figure 39: 3Y FCF yield versus Mar 2014E P/E multiples Figure 40: 7Y EBITDAR mgn versus Mar 2014E EV/Sales

Ryanair

easyJet

10.3

10.5

10.7

10.9

11.1

11.3

11.5

11.7

11.9

5% 7% 9% 11% 13% 15%

03/14E P/E

multiple (x)

2013E-2015E FCF yield

Ryanair

easyJet

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0% 5% 10% 15% 20% 25%

03/14E adj

EV/Sales (x)

2013E-2015E EBITDAR margin







Narrowing RYA P/E premium given marginally more favourable EZJ earnings

growth outlook

On our numbers, Ryanair currently trades on a March 2014E P/E multiple of 11.6x, above

EZJ’s 10.8x for the equivalent 12-month earnings period. This represents a premium of

7% compared to a historical average premium of 18%. Comparing our expectations for

earnings growth over the 3Y period to March 2015E, which average 13% at RYA and 16%

at EZJ (to September 2014E), suggests EZJ should trade on a narrow premium to RYA on

a P/E basis.

Figure 41: 7Y EPS growth – RYA, EZJ Figure 42: 3Y EPS growth versus Mar 2014E P/E multiples

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2009A 2010A 2011A 2012A 2013E 2014E 2015E Average 2009A-2015E

Ryanair easyJet

Ryanair

easyJet

10.3

10.5

10.7

10.9

11.1

11.3

11.5

11.7

11.9

0% 5% 10% 15% 20%

03/14E

P/E multiple (x)

2013E-2015E EPS growth

Source: Company data, Credit Suisse estimates(Note: EZJ figures

based on financial year to September – we use Y/E 6-months prior to

Ryanair’s to ensure common summer season)




08 January 2013


Europe / Republic of Ireland

Airlines

Ryanair (RYA.I) FOCUS LIST STOCK

Competitor cuts driving earnings growth

■ Easing competition to drive double-digit earnings growth: We remain

confident that Ryanair can grow earnings by double-digits over FY14E-

FY16E (3Y CAGR 15%), beyond 8% growth in FY13E, as competitors

continue to retrench across its network. Our regular competitive capacity

analysis suggests competitor seats will be down 8-11% yoy at RYA bases

this winter, which should help RYA fares grow 3% yoy. We nudge our

FY13E-FY15E net income forecasts up by 1%-2% to reflect continued

competitive capacity encouragement, and raise our TP by 3% to €6.05

suggesting 22% potential upside on a 12m view. Ryanair remains our top

pick in the European Airlines sector and we re-iterate Outperform.

■ Indepth fare analysis illustrates pricing opportunity: Our analysis

suggests i) competitor retrenchment should override macro concerns to

continue to firm fares – each annual 1% average fare movement is worth

c€38m (7% of FY13E earnings), ii) competitor actions are more important

than route maturity in developing RYA fares – we expect continued

retrenchment given the combination of current fuel price/USD rates and soft

market demand levels, iii) aggressive management of RYA’s own network, in

line with a firmer focus on pricing, bodes well, and iv) RYA is achieving

success in closing its lowest fare buckets, with the opportunity to boost fares

by further reducing discount levels as competitors further retrench.

■ Catalysts: (i) 3Q13 results on 28 January.

■ TP of €6.05 (up 3%) suggests 22% 12m upside potential: RYA trades on

a 2013E adj EV/EBITDAR of 7.0x with a lease-adjusted ROIC of 16% (18%

discount to 3Y avg with ROIC of 14%). We continue to see the combination

of attractive double-digit earnings growth, and a 2014E FCF yield of 15%

(with capex at €100m, given difficulties in agreeing acceptable terms for the

next aircraft order in the short term) as suggesting a compelling investment

case. In our view, RYA’s valuation screens favourably relative to that of

easyJet given marginally lower EV/EBITDAR and EV/IC multiples despite

superior ROIC and FCF outlooks.

Share price performance

2

3

4

5

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Price Price relative

The price relative chart measures performance against the

ISEQ OVERALL IDX which closed at 3506. on 04/01/13

On 04/01/13 the spot exchange rate was €1./Eu 1. -

Eu .77/US$1

Performance Over 1M 3M 12M Absolute (%) 2.3 9.4 32.8 Relative (%) -2.4 2.1 11.5

Financial and valuation metrics

Year 03/12A 03/13E 03/14E 03/15E Revenue (Eu m) 4,324.9 4,804.7 5,130.7 5,401.4 EBITDA (Eu m) 927.10 1,025.80 1,105.15 1,209.31 Adjusted Net Income (Eu m) 502.6 546.4 623.5 715.5 CS adj. EPS (Eu) 0.34 0.38 0.43 0.49 Prev. EPS (Eu) — 0.37 0.42 — ROIC (%) 18.08 19.23 25.45 31.63 P/E (adj., x) 14.58 13.16 11.50 10.02 P/E rel. (%) — — 31.1 52.5 EV/EBITDA 7.9 6.9 5.4 4.0

Dividend (03/13E, Eu) — IC (03/13E, Eu m) 3,594.82 Dividend yield (%) — EV/IC 2.0 Net debt (03/13E, Eu m) -105.4 Current WACC 10.0 Net debt/equity (03/13E, %) -2.8 Free float (%) 100.0 BV/share (03/13E, Eu) 2.6 Number of shares (m) 1,446.70

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.

Rating OUTPERFORM* Price (04 Jan 13, Eu) 4.96 Target price (Eu) (from 5.85) 6.05¹ Market cap. (Eu m) 7,175.63 Enterprise value (Eu m) 7,070.2

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Neil Glynn, CFA

44 20 7883 6929

[email protected]

Tim Ramskill, CFA

44 20 7883 7361

[email protected]

Julia Pennington

44 20 7888 0157

[email protected]

08 January 2013


Ryanair RYA.I Price (04 Jan 13): Eu4.96, Rating: OUTPERFORM, Target Price: Eu(from 5.85) 6.05

Income statement (Eu m) 03/12A 03/13E 03/14E 03/15E

Sales revenue 4,325 4,805 5,131 5,401 EBITDA 927 1,026 1,105 1,209 Depr. & amort. (309) (331) (331) (340) EBIT (CS) 618 695 774 870 Net interest exp. (65) (71) (74) (66) Associates — — — — Other adj, 15 (0) — — PBT (CS) 568 624 701 804 Income taxes (73) (78) (77) (88) Profit after tax 495 546 623 716 Minorities — — — — Preferred dividends — — — — Associates & other 8 — — — Net profit (CS) 503 546 623 716 Other NPAT adjustments 58 — — — Reported net income 560 546 623 716

Cash flow (Eu) 03/12A 03/13E 03/14E 03/15E

EBIT 618 695 774 870 Net interest (64) (73) (76) (68) Cash taxes paid (14) 0 — — Change in working capital 95 192 208 219 Other cash & non-cash items 385 332 331 340 Cash flow from operations 1,020 1,146 1,238 1,360 CAPEX (290) (379) (100) (320) Free cash flow to the firm 730 767 1,138 1,040 Acquisitions — — — — Divestments — — — — Other investment/(outflows) — — — — Cash flow from investments (290) (379) (100) (320) Net share issue/(repurchase) (118) (67) — — Dividends paid — (483) — — Issuance (retirement) of debt — — — — Other (13) (2) — — Cash flow from financing activities

(131) (552) — — Effect of exchange rates — — — — Changes in Net Cash/Debt 599 215 1,138 1,040 . Net debt at start 709 110 (105) (1,243) Change in net debt (599) (215) (1,138) (1,040) Net debt at end 110 (105) (1,243) (2,284)

Balance sheet (Eu m) 03/12A 03/13E 03/14E 03/15E

Assets Cash and cash equivalents 3,516 3,789 4,926 5,967 Accounts receivable 52 67 67 67 Inventory 3 3 3 3 Other current assets 306 220 222 224 Total current assets 3,876 4,079 5,218 6,261 Total fixed assets 4,815 4,973 4,742 4,723 Intangible assets and goodwill 47 47 47 47 Investment securities — — — — Other assets 264 170 170 170 Total assets 9,001 9,269 10,177 11,200 Liabilities Accounts payable 181 697 905 1,123 Short-term debt — — — — Other short term liabilities 1,632 890 967 1,056 Total current liabilities 1,814 1,587 1,872 2,179 Long-term debt 3,257 3,335 3,335 3,335 Other liabilities 623 647 647 647 Total liabilities 5,693 5,568 5,854 6,161 Shareholders' equity 3,308 3,700 4,324 5,039 Minority interest — — — — Total equity & liabilities 9,001 9,269 10,177 11,200 Net debt (Eu m) 110 (105) (1,243) (2,284)

Per share data 03/12A 03/13E 03/14E 03/15E

No. of shares (wtd avg) 1,477 1,449 1,446 1,446 CS adj. EPS (Eu) 0.34 0.38 0.43 0.49 Prev. EPS (Eu) — 0.37 0.42 — Dividend (Eu) — — — — Dividend payout ratio — — — — Free cash flow per share (Eu)

0.49 0.53 0.79 0.72

Key ratios and valuation

03/12A 03/13E 03/14E 03/15E

Growth(%) Sales 19.2 11.1 6.8 5.3 EBIT 19.7 12.4 11.4 12.3 Net profit 25.4 8.7 14.1 14.8 EPS 26.5 10.8 14.4 14.8 Margins (%) EBITDA margin 21.4 21.3 21.5 22.4 EBIT margin 14.3 14.5 15.1 16.1 Pretax margin 13.1 13.0 13.7 14.9 Net margin 11.6 11.4 12.2 13.2 Valuation metrics (x) EV/sales 1.7 1.5 1.2 0.9 EV/EBITDA 7.9 6.9 5.4 4.0 EV/EBIT 11.8 10.2 7.7 5.6 P/E 14.6 13.2 11.5 10.0 P/B 2.2 1.9 1.7 1.4 Asset turnover 0.48 0.52 0.50 0.48 ROE analysis (%) ROE stated-return on equity

17.9 15.6 15.5 15.3 ROIC 18.1 19.2 25.4 31.6 Interest burden 0.92 0.90 0.90 0.92 Tax rate 11.5 12.4 11.0 11.0 Financial leverage 1.1 1.0 0.9 0.7 Credit ratios (%) Net debt/equity 3.3 (2.8) (28.8) (45.3) Net debt/EBITDA 0.1 (0.1) (1.1) (1.9) Interest coverage ratio 9.5 9.8 10.5 13.3

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities

(EUROPE) LTD. Estimates.

2

3

4

5



The price relative chart measures performance against the ISEQ OVERALL IDX

which closed at 3506. on 04/01/13

On 04/01/13 the spot exchange rate was €1./Eu 1. - Eu .77/US$1

08 January 2013


Europe / United Kingdom

Airlines

EasyJet (EZJ.L)

D/G to Neutral on high market expectations

■ Raising estimates to reflect continued momentum, but running out of

upside: The key themes for 2013 look set to be continued marketwide

capacity discipline to support pricing, and progress with the business

traveller on an enhanced platform. We expect positive pricing developments

to continue, given market capacity discipline, and we anticipate execution on

business traveller initiatives (including allocated seating) to be part of the

next tier of momentum at EZJ. Following strong December traffic, we raise

our FY13E-FY15E earnings estimates by 5-6% (FY13E PBT now £366m)

and raise our TP by 21% to 884p on higher multiples. However, following a

97% 12M market outperformance, we downgrade to Neutral with our TP

suggesting a 10% 12M TSR (including a 3% dividend yield).

■ Base by base capacity developments bode well for pricing: Per our

analysis, easyJet competitors have removed 6% of capacity across EZJ

bases in 1H13 (2-3% on EZJ routes). We expect this to have helped EZJ

produce constant currency RPS up c5% in 1Q13 (3% reported). From 2Q13,

Amadeus functionality enhancements should facilitate a stronger business

traveller sales performance and in combination with allocated seating and

progressing corporate sales efforts, we see 2013 as a big year for business

traveller traction. We think it feasible that EZJ may generate £40m-plus of its

£100m 2015 business traveller PBT contribution target in FY13.

■ Catalysts: (i) 1Q13 IMS on 24 January.

■ TP up 21% to 884p but downgrading to Neutral following a 97% 12M

outperformance: EZJ trades on a 2013E adj EV/EBITDAR multiple of 6.3x

on our numbers, representing a 12% discount to its 3Y average. However,

trading on a marginal premium to RYA in EV/EBITDAR and EV/IC terms,

with lower returns, and FCF generation in prospect, we see RYA as offering

superior value. Trading momentum has remained strong into the winter

period, likely aided by the introduction of allocated seating. Yet with limited

scope for disappointment and only 8% upside to our TP before a 3%

dividend yield, we downgrade to Neutral.

Share price performance

311

511

711




FTSE ALL SHARE INDEX which closed at 3183.47 on

04/01/13

On 04/01/13 the spot exchange rate was £.81/Eu 1. -

Eu .77/US$1

Performance Over 1M 3M 12M Absolute (%) 12.2 34.4 106.7 Relative (%) 9.2 29.5 96.8

Financial and valuation metrics

Year 09/12A 09/13E 09/14E 09/15E Revenue (£ m) 3,854.0 4,122.9 4,332.5 4,550.5 EBITDA (£ m) 436.00 489.11 537.32 604.01 Pre-tax Profit Adjusted (£ m) 317.0 365.8 407.4 469.5 CS adj. EPS (p) 61.74 72.14 80.35 92.60 Prev. EPS (p) — 68.24 76.19 88.22 ROIC (%) 19.72 23.08 26.31 30.60 P/E (adj., x) 13.30 11.38 10.22 8.87 P/E rel. (%) 122.0 96.9 93.1 88.7 EV/EBITDA 7.3 5.9 4.9 3.8

Dividend (09/13E, p) 23.82 IC (09/13E, £ m) 1,625.09 Dividend yield (%) 2.9 EV/IC 1.8 Net debt (09/13E, £ m) -360.1 Current WACC 10.0 Net debt/equity (09/13E, %) -18.1 Free float (%) 62.7 BV/share (09/13E, £) 5.0 Number of shares (m) 395.99

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.

Rating (from Outperform) NEUTRAL* Price (04 Jan 13, p) 821.00 Target price (p) (from 733.00) 884.00¹ Market cap. (£ m) 3,251.06 Enterprise value (£ m) 2,891.0

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Neil Glynn, CFA

44 20 7883 6929

[email protected]

Tim Ramskill, CFA

44 20 7883 7361

[email protected]

Julia Pennington

44 20 7888 0157

[email protected]

08 January 2013


EasyJet EZJ.L Price (04 Jan 13): 821.00p, Rating: (from Outperform) NEUTRAL*, Target Price: (from 733.00) 884.00p

Income statement (£ m) 09/12A 09/13E 09/14E 09/15E

Sales revenue 3,854 4,123 4,333 4,550 EBITDA 436 489 537 604 Depr. & amort. (105) (107) (114) (119) EBIT (CS) 331 382 423 486 Net interest exp. (14) (16) (16) (16) Associates — — — — Other adj, — — — — PBT (CS) 317 366 407 470 Income taxes (62) (80) (90) (103) Profit after tax 255 285 318 366 Minorities — — — — Preferred dividends — — — — Associates & other — — — — Net profit (CS) 255 285 318 366 Other NPAT adjustments — — — — Reported net income 255 285 318 366

Cash flow (£) 09/12A 09/13E 09/14E 09/15E

EBIT 331 382 423 486 Net interest (9) (9) (9) (9) Cash taxes paid (28) (29) (33) (37) Change in working capital 45 133 132 152 Other cash & non-cash items 118 107 114 119 Cash flow from operations 457 584 627 710 CAPEX (391) (195) (249) (306) Free cash flow to the firm 66 389 378 404 Acquisitions — — — — Divestments 1 — — — Other investment/(outflows) — — — — Cash flow from investments (391) (195) (249) (306) Net share issue/(repurchase) (13) — — — Dividends paid (196) (85) (94) (105) Issuance (retirement) of debt — — — — Other — — — — Cash flow from financing activities

(209) (85) (94) (105) Effect of exchange rates 9 — — — Changes in Net Cash/Debt (134) 304 284 299 . Net debt at start (190) (56) (360) (644) Change in net debt 134 (304) (284) (299) Net debt at end (56) (360) (644) (943)

Balance sheet (£ m) 09/12A 09/13E 09/14E 09/15E

Assets Cash and cash equivalents 645 949 1,233 1,532 Accounts receivable 241 234 228 221 Inventory — — — — Other current assets 441 441 441 441 Total current assets 1,327 1,624 1,902 2,194 Total fixed assets 2,307 2,394 2,530 2,717 Intangible assets and goodwill 456 456 456 456 Investment securities — — — — Other assets 205 205 205 205 Total assets 4,295 4,680 5,093 5,572 Liabilities Accounts payable 1,021 1,163 1,306 1,474 Short-term debt — — — — Other short term liabilities 243 295 352 418 Total current liabilities 1,264 1,458 1,658 1,892 Long-term debt 828 828 828 828 Other liabilities 409 409 409 409 Total liabilities 2,501 2,695 2,895 3,129 Shareholders' equity 1,794 1,985 2,198 2,443 Minority interest — — — — Total equity & liabilities 4,295 4,680 5,093 5,572 Net debt (£ m) (56) (360) (644) (943)

Per share data 09/12A 09/13E 09/14E 09/15E

No. of shares (wtd avg) 413 395 395 395 CS adj. EPS (p) 61.74 72.14 80.35 92.60 Prev. EPS (p) — 68.24 76.19 88.22 Dividend (p) 21.50 23.82 26.53 30.57 Dividend payout ratio 34.82 33.02 33.02 33.02 Free cash flow per share (p)

15.98 98.37 95.60 102.20

Key ratios and valuation

09/12A 09/13E 09/14E 09/15E

Growth(%) Sales 11.6 7.0 5.1 5.0 EBIT 23.0 15.3 10.9 14.7 Net profit 13.3 11.9 11.4 15.2 EPS 18.8 16.8 11.4 15.2 Margins (%) EBITDA margin 11.3 11.9 12.4 13.3 EBIT margin 8.6 9.3 9.8 10.7 Pretax margin 8.2 8.9 9.4 10.3 Net margin 6.6 6.9 7.3 8.0 Valuation metrics (x) EV/sales 0.83 0.70 0.60 0.51 EV/EBITDA 7.3 5.9 4.9 3.8 EV/EBIT 9.7 7.6 6.2 4.8 P/E 13.3 11.4 10.2 8.9 P/B 1.8 1.6 1.5 1.3 Asset turnover 0.90 0.88 0.85 0.82 ROE analysis (%) ROE stated-return on equity

14.6 15.1 15.2 15.8 ROIC 19.7 23.1 26.3 30.6 Interest burden 0.96 0.96 0.96 0.97 Tax rate 19.6 22.0 22.0 22.0 Financial leverage 0.53 0.48 0.44 0.39 Credit ratios (%) Net debt/equity (3.1) (18.1) (29.3) (38.6) Net debt/EBITDA (0.1) (0.7) (1.2) (1.6) Interest coverage ratio 23.6 23.9 26.5 30.3

Source: FTI, Company data, Thomson Reuters, Credit

Suisse Securities (EUROPE) LTD. Estimates.

311

511

711




FTSE ALL SHARE INDEX which closed at 3180.95 on

04/01/13

On 04/01/13 the spot exchange rate was £.81/Eu 1. -

Eu .77/US$1

08 January 2013


TP up 21% to 884p on higher multiples

Our new TP suggests 8% potential upside from the current share price before a 3%

dividend yield. With a 10% suggested 12-month return, we downgrade our rating to

Neutral from Outperform.

Figure 43: easyJet 12-month target price 884p

£p

Historical multiple-derived fair value (previously 732p) 934.8

DCF-derived fair value (previously 733.8p) 833.3

Target price (average) 884.0

Current price as at 4 January 2013 821.0

Potential upside (downside) 8%

2012A dividend yield 3%

Potential total 12-month return 10%

Source: Credit Suisse estimates

Multiples-based fair value of 935p

We now use a P/E multiple of 13x (up from 11x), and an adjusted EV/EBITDAR multiple of

7.0x (up from 6.0x) applied to FY13E earnings, producing a multiples-based fair value of

935p (previously 732p). Our higher multiples reflect 2011A, 2012A earnings growth and

margin/returns enhancement, in combination with an attractive earnings outlook (which we

think is near to priced in by the market).

Figure 44: easyJet multiples-based valuation 935p in pence, unless otherwise stated

P/E methodology Adjusted EV/EBITDAR methodology

FY13E diluted earnings 72.1 FY13E EBITDAR (£m) 588.2

Midcycle multiple 13.0 Midcycle multiple 7.0

FY13E adj enterprise value (£m) 4,117.3

FY13E net cash (debt) (£m) 360.1

FY13E capitalised leases (£m) (792.6)

Equity value (£m) 3,684.7

Equity value per share 937.8 Equity value per share 931.7

Average 934.8

Source: Credit Suisse estimates

DCF-based fair value 833p

Our easyJet DCF model suggests a fair value of 833p for the stock (previously 734p).

08 January 2013


Figure 45: easyJet DCF fair value 833p in £ millions, unless otherwise stated

Stage 1

2013E 2014E 2015E 2016E 2017E Midcycle performance T. value

Revenue 4,122.9 4,332.5 4,550.5 4,756.3 4,971.5 4,332.5

EBIT margin 9.3% 9.8% 10.7% 11.1% 11.5% 10.5% 3,285.8

EBIT 381.8 423.4 485.5 526.7 570.2 454.9

Depreciation/amortisation 107.4 113.9 118.5 123.3 128.3 132.1 Terminal

Working capital/other 132.6 132.4 151.8 164.7 178.3 183.6 growth

Operating cashflow 621.7 669.7 755.8 814.7 876.7 770.7 rate

Taxation (28.5) (32.9) (36.7) (42.3) (46.0) (47.3)

Capex (194.8) (249.4) (305.6) (500.0) (500.0) (500.0) 3%

Disposals 0.0 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0

Free cashflow 398.4 387.4 413.5 272.4 330.8 223.3

PV of FCFs 362.2 320.2 310.7 186.1 205.4

Sensitivity analysis: WACC

9.0% 9.5% 10.0% 10.5% 11.0%

NPV Stage 1 1,384.5 5.0% 1,277.4 1,150.7 1,049.2 966.0 896.5

Midcycle performance NPV 1,854.8 Terminal 4.0% 1,081.4 995.2 923.2 862.1 809.7

Growth 3.0% 950.9 887.6 833.3 786.0 744.6

Enterprise value 3,239.3 2.0% 857.8 808.9 765.9 727.9 694.1

1.0% 788.1 748.7 713.6 682.1 653.7

2012A net cash (debt) 56.0 Sensitivity analysis: EBIT margin

9.5% 10.0% 10.5% 11.0% 11.5%

Equity value (£m) 3,295.3 5.0% 919.4 984.3 1,049.2 1,114.2 1,179.1

Terminal 4.0% 816.0 869.6 923.2 976.8 1,030.4

Fair value per share (£p) 833.3 Growth 3.0% 742.3 787.8 833.3 878.8 924.3

2.0% 687.1 726.5 765.9 805.3 844.8

1.0% 644.2 678.9 713.6 748.3 783.0

WACC 10.0% -12.5% -12.0% -11.5% -11.0% -10.5%

Capex as % of revenue

Source: Company data, Credit Suisse estimates

08 January 2013


Companies Mentioned (Price as of 04-Jan-2013)

Air Berlin (AB1.DE, €1.56) Air France-KLM (AIRF.PA, €7.66) EasyJet (EZJ.L, 821.0p, NEUTRAL, TP 884.0p) International Airlines Group (ICAG.L, 195.1p) Deutsche Lufthansa (LHAG.DE, €14.98) Ryanair (RYA.I, €4.96, OUTPERFORM, TP €6.05)

Disclosure Appendix

Important Global Disclosures

Neil Glynn, CFA and Tim Ramskill, CFA, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for EasyJet (EZJ.L)

EZJ.L Closing Price Target Price

Date (p) (p) Rating

18-Jan-10 378.94 486.00 O *

21-Jan-10 385.77 492.00

07-Oct-10 434.22 530.00

11-Oct-10 456.64 R

13-Dec-10 432.71 530.00 O

14-Dec-10 431.71 482.00 N

20-Jan-11 383.96 464.00

25-Mar-11 326.17 330.00

23-Jun-11 355.22 360.00

08-Aug-11 327.07 380.00

24-Aug-11 322.55 340.00

06-Oct-11 348.78 414.12 O

16-Nov-11 360.74 465.38

05-Mar-12 441.40 503.00

09-May-12 527.50 619.00

19-Jun-12 523.50 665.00

31-Aug-12 531.00 653.00

20-Nov-12 692.00 733.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

REST RICT ED

N EU T RA L

08 January 2013


Price and Rating History for Ryanair (RYA.I)

RYA.I Closing Price Target Price

Date (€) (€) Rating

18-Jan-10 3.39 4.50 O *

01-Feb-10 3.57 4.70

01-Apr-10 3.97 4.90

12-Oct-10 4.11 5.30

14-Dec-10 3.80 4.15 N

01-Feb-11 3.71 4.00

25-Mar-11 3.27 3.30

23-Jun-11 3.60 3.85

24-Aug-11 3.09 3.35

06-Oct-11 3.16 3.95 O

08-Nov-11 3.56 4.40

30-Jan-12 4.19 4.90

10-May-12 4.38 5.07

24-May-12 4.04 4.82

19-Jun-12 3.98 4.89

10-Aug-12 4.04 4.75

05-Nov-12 4.82 5.85

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attrac tive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as Europea n ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevan t country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analys t may cover multiple sectors.

08 January 2013


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (53% banking clients)

Neutral/Hold* 39% (47% banking clients)

Underperform/Sell* 15% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Ple ase refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Ryanair (RYA.I)

Method: We value Ryanair using a blend of historical multiple and discounted cash flow (DCF) methodology designed to capture the potential for, and the sustainability of, earnings recovery, in combination with the outlook for the strength of long-term cash generation. We blend our historical multiple-derived fair value of Eur5.71 and our DCF-derived fair value of Eur6.44 to produce a target price of Eur6.05. Our DCF model uses a midcycle EBIT margin of 16.0%, a weighted average cost of capital (WACC) of 10.0% and a terminal growth rate of 3%.

Risk: 1) Macro-economic cycles will heavily impact Ryanair, despite the defensive nature of its business model. Every 1% movement in 2H13E average fares would impact our FY13E earnings by Eur11m (1c). 2) Fuel price volatility: the airline hedges against fuel price risk in the short term however we estimate that every $50/mt jet fuel price movement around $1,000/mt impacts earnings by Eur1m (0.2c) in FY13E. This fuel price sensitivity rises to Eur39m (3c) in FY14E as hedging unwinds. 3) Other risks include: difficulties in raising average fares as the network grows, and cost-cutting challenges given a lowest-in-industry cost base and increasing sector lengths.

Price Target: (12 months) for EasyJet (EZJ.L)

Method: We value easyJet using a blend of historical multiple and discounted cash flow (DCF) methodology designed to capture the potential for, and the sustainability of, earnings recovery, in combination with the outlook for the strength of long-term cash generation. We blend our historical multiple-derived fair value of 935p and our DCF-derived fair value of 833p to produce a target price of 884p. Our DCF model uses a midcycle EBIT margin of 10.5%, a weighted average cost of capital (WACC) of 10% and a terminal growth rate of 3%.

Risk: 1) Macro-economic cycles will heavily impact easyJet, despite the defensive nature of its business model. 2) Fuel price volatility: the airline hedges against fuel price risk however we estimate that every $50/mt jet fuel price movement from $1,000/mt impacts PBT by £20m in FY13E (3p per share) while every 1% in revenue per seat represents £41m (7p). 3) Other risks include: USD strength, EUR weakness, capacity ill-discipline in the market, the loss of ancillary revenue momentum, cost-cutting challenges and continued shareholder activism by Stelios Haji-Ioannou.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (RYA.I, EZJ.L, AIRF.PA, LHAG.DE, AB1.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (AIRF.PA, AB1.DE) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (RYA.I, EZJ.L, AIRF.PA, LHAG.DE, AB1.DE) within the past 12 months

Credit Suisse has received investment banking related compensation from the subject company (AIRF.PA, AB1.DE) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AIRF.PA, LHAG.DE, AB1.DE) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (RYA.I, EZJ.L, AIRF.PA, LHAG.DE, AB1.DE) within the past 12 months

08 January 2013


As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (RYA.I, AIRF.PA, ICAG.L).

Credit Suisse has a material conflict of interest with the subject company (AB1.DE). “Credit Suisse is acting as sole financial advisor to Air Berlin in the potential sale of a majority interest in Air Berlin’s frequent flyer programme “Topbonus”.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (RYA.I, EZJ.L, AIRF.PA, LHAG.DE, AB1.DE) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (RYA.I, EZJ.L, AIRF.PA, LHAG.DE).

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (Europe) Limited........................................................................ Neil Glynn, CFA ; Julia Pennington ; Tim Ramskill, CFA

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.

08 January 2013


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