Contents Page:

Letter of Authentication 1Acknowledgments 2Executive Summary 3Research Proposal 4

Introduction 6Methodology 6

Main Results & Findings 7Current Market Position 7

Analysis and Evaluation 9Investment Appraisal 10Investment Project I 11Investment Project II 12Non-finacial Analysis 13

SWOT Analysis 13PEST Analysis 13

Conclusions and Recommendations 14

Bibliography 15Appendices 16

1

Acknowledgments

I would like to acknowledge and thank:

Mr Giannis Dardoufas, easyJet Athens Station General Manager for his

time and important data he offered during the interview.

2

Executive Summary

The management and main shareholders of easyJet plc. have recently expressed

interest in growing their business considering the increased demand for private

healthcare and more specifically diagnostic services in Greece. As the operational

core of the business focuses on this market segment, the report analyses: “Should

easyJet plc. further penetrate the Greek market? If yes, should the expansion plan be

organic or via a takeover?”

The first part of the report deploys the research proposal which presents the research

rational, the theoretical framework as well as the methodology followed. Following,

an introductory note outlines details of the company as well as sketches the

hypothesis of the research.

The analysis part is based on both primary and secondary research in the form of

personal interviews with the top management (Figure 3), collection of financial

reports, and independent sector analysis from the largest market research company in

Greece. These data allowed for a detailed evaluation on a financial level (Investment

Appraisal and Corporate Financial Analysis) and on a non-financial level (SWOT,

PEST).

The conclusions part deploys an assessment of the two possible investment options

for easyJet plc. On the one hand, there is a long term, heavy investment project of

investing on a large competitor while on the other hand; there is the option of

launching a new diagnostic centre anew.

Although the ‘new location’ project returns a positive NPV compared to the ‘Equity

Purchasing’ which returns a lower NPV, it is important to consider the long term

strategic plan of the company and the non-financial analysis. The discussion part

suggests that the second option forms a more attractive investment opportunity of

easyJet.

3

Research Proposal

Research Question

“Should easyJet further penetrate the market for air travel between the UK and

Greece? If yes, should the expansion plan be organic or via a takeover?”

Rationale

An investment dilemma is explored whereby easyJet Ltd. UK’s largest low-cost

carrier assesses two investment opportunities. On the one hand, the firm examines the

possibility of launching a new route between London and Volos in mainland Greece.

On the other hand, the firm estimates the possibility of purchasing a majority stake in

a Greek competitor who operates charter flights from the UK to Chania airport in

Crete. The aim is for easyJet to expand its network to leisure destinations around

Greece.

Theoretical Framework

The analysis of this report is based on a twofold approach. Both financial and non-

financial considerations will evaluate the potential feasibility of each investment

project.

Key Areas of Syllabus

Growth and Evolution

Company Analysis

The external Environment

Investment Appraisal

Methodology

The procedure of the study was carried-out at primary and secondary level. Primary

Research was conducted with the general manager of easyJet’s station in Athens

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International Airport (AIA). The company’s representative in Greece was interviewed

in order to identify company’s future strategic and financial plan. The interview also

contributed to the author’s knowledge and appreciation related to the industry’s

structure in Greece, as well as its operating procedures, venture risks and the structure

of the company.

Secondary Research was carried-out as well in order to collect data and information

related to the industry, the market and the environment (internal and external) within

the company is operating. The data were collected from various sources such as an

industry report and insight on cost structure and market analysis in Greece for year

2009, company’s specific information on strategy and future expansion plans of

easyJet plc. and several other resources libraries referring to the Greek legal

framework and its characteristics related to the subject.

Possible Problems: Solutions:

Biased interview questions because of vested interests

Verification of data by using other secondary resources

Limited point of view as only two interviews have been carried out

Complementary information from independent sources

A degree of risk associated with the company’s unwillingness to provide confidential data

Ensure data availability in advance

5

Introduction

EasyJet plc. Was " first in February 1994 serving domestic routes in the UK. It has

been a product of the deregulation in the airline industry and Sir S. Hadji-Ioannou’s

entrepreneurial will. In 2010, sixteen years afterwards, the number of city pairs served

by the airline have increased to 254 and competition has been continuously increasing

by the emergence of a large number of competing low-cost carriers. Traditional

airlines such as British Airways and Olympic Air have been fully adapted to the new

challenge, offering simpler and lower cost airfares on routes served by easyJet. The

company under examination has gained a unique selling point by providing point-to-

point services and by removing onboard and airport frills such as free cabin service

and pre-assigned seating. Moreover, the heavily invest in growing their network from

secondary airport in order to achieve more efficient, on-time and lower cost flights.

The financial performance is depicted in the two figures below.

Figure 1: “easyJet plc.” financial performance

Years Revenue (€)

Cost of Sales

Operating Costs Net Profit

(€) (€) (€)2006 129.200.000 90.440.000 15.504.000 23.256.000 2007 191.300.000 133.910.000 22.956.000 34.434.000 2008 123.100.000 86.170.000 14.772.000 22.158.000 2009 43.700.000 30.590.000 5.244.000 7.866.000 2010 188.300.000 131.810.000 22.596.000 33.894.000

Figure 2: “easyJet plc.” financial performance graph

0

50.000.000

100.000.000

150.000.000

200.000.000

250.000.000

2006 2007 2008 2009 2010

Revenue (€)

Net Profit (€)

Source: easyJet Financial Analysis

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This thesis aims at carrying out a feasibility study investigating two investment

alternatives for easyJet plc. The first investment opportunity relates to launching a

new route between Gatwick, London’s second largest Airport and the city of Volos

which features an emerging tourist destination for many UK travelers during summer

months. The second investment opportunity relates to an institutional investment of

easyJet Charters plc., a subsidiary of easyJet plc., to acquire a small Greek charter

operator called HellasJet. The company currently operates charter flights from major

EU airports to holiday destinations in Greece with a greater emphasis to Chania

airport, west of Herakleion, Crete’s main airport. The second project refers to a

purchase of 22% of equity via collecting shares from the stock exchange. Despite

increased controversy from the ownership of easyJet plc. The management of both

airlines will create synergistic benefits to both parties and will lead to increase in the

value of both companies.

Main Results and Findings

Current Market Position

In many ways 2010 could be seen as a defining year for the low-cost carrier model..

In contrast to traditional airlines, low-cost carriers have achieved a relatively smooth

weathering of the recession and a lot better than the fuel-driven crisis of 2008. The

following table gives a clear indication that the profitability of the sector has held up

relatively well. It is evident that only two of the top 20 carriers under examination

(Flight, 2010), lost money in their financial years ending during 2010. This marks an

improvement on the six that were in the red at an operating level in 2009. It is

important to mention that the data below are estimated in US Dollars and account for

the entire group of companies easyJet and other carriers hold; hence a discrepancy

between the two tables. At net level, the 27 carriers for which figures were available

(Flightglobal, 2010) generated a combined profit of more than $1 billion in 2010.

Contrast this with the small net loss they incurred in 2008 and the $9.4 billion the

International Air Transport Association (IATA) estimates its members lost

collectively in 2010, and the picture of a robust performance emerges.

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Table 1: Airline Revenues

Airline  2010 Revenues  Change in $

Southwest Airlines  $10.4bn   -6.1%

Air Berlin  $4.6bn  -9.2% 

Ryanair  $4.1bn  6.9% 

EasyJet   $4.1bn  -11.8%

 JetBlue Airways $3.3bn   -3.0

 Gol  $3.1bn  -12.9%

 AirTran Airways $2.3bn  -8.3% 

 WestJet Airways $2.0bn   -15.8%

Virgin Blue Airways   $1.9bn  -10.2%

Aer Lingus   $1.7bn -15.7% 

Source: Flight Global, 2010

Mature Industry

Growth has always been central to the profitability of low-cost carriers, but the

reduction on capacity being evident in more mature low-cost markets such as the

European and North American, has required the creation of different ways to raise

revenues. This has been the lead for airlines to aggressively target cost-conscious

business travelers who wish to trade down, to increase co-operation efforts and take

immediate measures to gain more ancillary revenues from onboard sales and other

services not provided on the fare.

Low-cost carriers give greater attention to revenues then they have had in the past,

due to their need to raise revenue per passenger flown. The fact that competitive

forces combined with increasing fuel costs reduce the potential for high profit

margins, airlines wish to cross-sell to the captive market they control. Without the

growth effect these carriers have worked on other ways to improve their revenues,

lifting top-fare limits and moving into the Global Distribution Systems.

A more cautious capacity approach has also been evident in Europe, but consolidation

has helped individual carrier growth. Vueling's merger with fellow Barcelona budget

operation Clickair enabled the former to grow its share, but both carriers had

markedly scaled back capacity prior to the tie-up. Elsewhere carriers have moved into

gaps created by low-cost carriers casualties, for example central Europe's Wizz Air

benefiting from the collapse of SkyEurope and Ryanair moving into former MyAir

bases in Italy (FlightGlobal, 2010). They also continue to heap pressure on

retrenching network carriers, where Association of European Airline members carried

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20 million fewer passengers in 2009, expanding in key markets. By contrast,

passenger numbers across European Low Fares Airline Association members were

8.7% higher at 162.5 million in 2009 (FlightGlobal, 2010). European low-cost

operators continue to push the envelope on ancillary revenues, growing in a diverse

range of directions. But Ryanair's ambitions to use mobile telephony as the platform

for a range of additional future services have taken a hit by the recent decision of its

service provider OnAir to walk away from a deal to equip its full fleet (FlightGlobal,

2010).

Analysis/Evaluation

Having explored the environment in which easyJet plc. operates and despite several

challenges it faces on the external environment, it is a well established, successful and

profitable organization, that now faces the opportunity for further development and

market penetration. This penetration is to be achieved by following one of two

obvious courses. The first project opportunity, involves organically launching the new

route from London to Volos. The second option represents investing into another,

existing, major player in the Greek market, HellasJet. Specifically, the latter option

would correspond to the purchase of 22% of the larger company’s equity, on the stock

exchange.

In order to further evaluate which course of action would prove to be the most

beneficial, it is necessary to carry out an assessment of the financial as well as the

non-financial factors that influence such a decision.

Investment AppraisalInvestment appraisal is the planning process used to determine a firm's long term

investment such as new and replacement machinery, new plants, new products, and

research and development projects.

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For the purposes of this report, the NPV and payback period methods have been used

in order to evaluate the two investment options that faced by the firm. The NPV

analysis has been carried out to assist the author’s estimations of the inflows received

by the firm in the first three years of operations, net of the effect of inflation and

opportunity cost. Additionally, the payback period has been used in order to estimate

the time required for the return on the two different investment options to "repay" the

sum of the original investments. The formulas for the Net Present Value and for the

payback period are shown below:

Net Present Value

Payback period

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Investment Project I:

‘Investment in a new route from London Gatwick to Athens International Airport.

Table 1 depicts the investment appraisal calculations, projected over a 5 year

investment period, in the event that the option of launching the newroute is chosen.

Table 1: Financial Analysis & Investment Appraisal of ‘Route London - Athens’

Initial costs € (thousand)   Administation 60Marketing 800Facillities 118Council taxes 180Compliance costs 550Aircraft 4200Total 5,908

Expected Inflows Revenues Costs

Profits (FV)

Discounting Factor

Present Value

Year       Interest: 2%  1 50620 46570 4050 0,98 39692 151859 139711 12149 0,961 116753 455578 419132 36446 0,942 343324 1366733 1257395 109339 0,924 1010295 4100200 3772184 328016 0,906 297183

        PV= 448,187      489999 Initial cost 5,908        NPV= 442,279

Source: Author

The cost of sales and operating costs are estimated at 92% of total revenue, whereas

the discount rate of 2% represents the interest rate charged by the European Central

Bank currently set for as Euribor. In this case the discount rate reflects the opportunity

costs incurred by investing in the launch of the new diagnostic centre as opposed to an

alternative, perhaps safer investment such as government bonds.

The project’s Present Value is anticipated to generate a positive NPV of 442.279€.

Table 1.1.: Payback Period of ‘Route London – Athens’

    Years

Payback Period ‘New Route’1 year and

56 daysSource: Author

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It is estimated that if easyJet plc. decides to invest in launching the new route will

break even in 1 year and 56 days.

Investment Project II:

‘Investment through Equity purchasing in HellasJet S.A.’

Table 2 similarly portrays the respective calculations for the second project scenario

of investing in HellasJet via purchasing 22% of the company’s equity on the stock

exchange.

Table 2: Financial Analysis & Investment Appraisal of ‘Equity Purchasing’ in

HellasJet S.A.

Initial costs € (thousand)   Administation 62Marketing 680Facillities 118Council taxes 220Compliance costs 550Aircraft 2100Total 3,730

Expected Inflows Revenues Costs

Profits (FV)

Discounting Factor

Present Value

Year       Interest: 2%  1 39115 35986 3129 0,98 30672 117344 107957 9388 0,961 90213 352032 323870 28163 0,942 265294 1056097 971610 84488 0,924 780675 3168292 2914829 253463 0,906 229638

        PV= 346,322      378630 Initial cost= 3,730        NPV= 342,592

Source: Author

In this circumstance, the initial outlay (22% of the company’s market value)

comprises the single majority stake in the company as the second largest investor

holds nearly 16% of the company. This results in a lower NPV over the short term

period, which at first glance means that such an investment does not appear

favourable. However, this may not depict this investment’s full potential, unless it is

projected over a medium-long term basis or quantified by other means and measures.

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Interestingly, despite the larger initial outlay involved in buying equity in the

established airline, the Pay-Back period for the second investment opportunity is a

little shorter, signifying that the investment is expected to be paid back faster than

project 1.

Table 2.1.: Payback Period of ‘Equity Purchasing’ in HellasJet S.A.

    Years

Payback Period‘Hellas Jet Acquisition’

1 year and 23 days

Source: Author

Non-finacial Analysis

In order for easyJet plc. to decide the best path to its future development, it is

necessary to explore also the non-financial factors that influence this decision making

process and evaluation. This is facilitated with the SWOT analysis.

SWOT1 Analysis

EasyJet offers a high quality service at rock bottom prices and offer a number of

features including ticketless travel, internet booking and assisted travel services for an

additional cost over and above the initial travel fare. They have a highly distinctive

orange colour on all of their fleet of aircraft in order to make them easily recognisable

and provide free of charge advertising of their airline’s way to book tickets. They

have a simple and functional website which deploys the price breakdown of the

passenger’s travel plan. Offering a full breakdown of the price plan prevents any

hidden charges when the customer confirms there booking and reduces inconvenience

and stress. EasyJet offers an online promotion alert which is e-mailed to existing

customers and contact on the company’s database that informs potential customers of

the ongoing offers, discounts and coupon rates. It has been an increasingly

recognizable brand in the UK. Moreover, it operates a fast and efficient service with

an average turnaround time of 30 minutes or below which allows for an increased use

of aircraft and cabin crew. Also, this enables the airline to maintain a reliable and

hassle free service to their passengers. As far as weaknesses are concerned, easyJet’s

main competitors being Jet2, BMI Baby, Ryan Air plus a host of smaller independent

competitors can restrict and shape pricing policy on some of its less profitable routes

1 Interview with Mr Dardoufas13

as they seek to compete with their competitors. Furthermore, they do not offer a free

food service on longer flights of 2 hours plus which may reduce the interest of some

passengers to other airlines. The possible opening of additional routes to major

business and tourism destinations in Europe may provide the sole important

opportunity for future growth. In addition, purchasing fuel in advance may reduce the

risk of the airline paying more in the future. Finally, pressure from trade unions and

employee relations may drastically impact on the daily operations with potential

strikes proving to be very costly to the company’s survival. The economic downturn

may lead to a decrease in frequent flyers and corporate travel as companies will seek

to cut less necessary expenditure leading to less business trips.

PEST2 Analysis

As far as external political factors are concerned, an EU east-enlargement may

provide access to viable, new markets with relatively increasing income to spend on

short trips. The economic factors consider the likelihood of increasing fuel costs,

congestion and other environmental restrictions, as well as the prospect of higher

security and insurance costs to reflect the risk of terrorism. Moreover, as the recession

is likely to last for a considerable period, business travellers will become increasingly

conscious of their travel expenses. The socio-cultural factors entail winning over the

French and German publics and causing problems as there appears still to be a general

unwillingness to use credit cards over the phone or Internet. The public is general

quite friendly to the prospect of cheap flights. However they may feel begrudged

where they see promotions found in newspapers where flight are for €10 only to find

that the actual cost is much higher for the specific time or day they wish to fly on. A

key issue will be the extent to which technological advancements – such as the use of

the Internet on distribution and cost synergies from industry consolidation – can offset

upward pressures on prices and costs.

2 Flight Flobal, 200914

Conclusions and Recommendations

According to the findings, the corporate management of easyJet plc. will make a

decision according to the business strategy that has formed for the company’s future.

More precisely, if the management wishes to proceed with a long term and relatively

higher investment, then the optimal choice would be the organic growth option. This

is due to the fact that it requires a substantially higher start up cost and is expected to

return that investment in a longer term period. On the other hand, if the management

wishes to make a relatively shorter term investment, acquiring a stake in rival

HellasJet S.A., requires a lower amount of money, a shorter term return for the

investment. Consequently, launching a new operation would be more favourable. The

non- financial analysis illustrates that easyJet plc. may be better off purchasing the

competitor since it will also eliminate competition and assist in gaining a higher share

of the market.

The findings of the financial analysis (investment appraisal) somewhat conflict the

findings of the non-financial factors. It would therefore be beneficial to carry out a

more extensive financial analysis for each scenario, covering a longer investment

period and providing a greater amount of cost data. This would enable a more

accurate comparison of the two investment options, as they each contain a very

different initial outlay. Also, it may be helpful to adopt other methods of investment

appraisal such as the Accounting Rate of Return, which are less sensitive to

fluctuations in future Cash Inflows. This way, with more information that contains

more detail, the management of easyJet plc. can weigh the advantages and

disadvantages of each project in a clearer and a more precise way.

15

Bibliography

Hall, D. et al (2007) Business Studies, 3rd edition, Waring Collins, Essex, UK

ICAP Management Consultants (2008) Healthcare Industry Analysis, Athens,

Greece

Dunn, G., (2010) Low-Cost Carriers – coming of age, FlightGlobal, accessed

on 8/2/2011

Websites

www.hellasjet.com

http://www.easyjet.com

www.elfaa.com

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Appendix 1: Interview Questions

Q1.Which is the core market segment that easyJet aims at?

Q2. Is there a considerable market growth on the core target market?

Q3.What is the forecasted trend of the UK to Greece tourism model in the future?Is

there a significant growth potential that would allow the company to profitably invest

in expansion?

Q4. What are the expansionary alternatives that the company is currently considering

in its business plan?

Q5. What are the potential advantages and disadvantages of launching a new route?

Q6 What are the potential advantages and disadvantages of buying equity on a

potential competitor’s business?

Q7. Is there a different level of risk associated with launching a new route compared

to investing on an existing airline with established business?

Q8. Would there be any diffusion of the corporate strategy?

Q9. Which are the areas that the company considers expanding at in terms of

geographic region?

Q10. Which are the strengths of the company?

Q11. What other weaknesses does the company have?

Q12. Which are the opportunities of the company?

Q13. Which are the threats of the company?

Q14. Do you consider the current austerity measures taken in Greece to be a deterring

factor to the growth of the airlines network in the specific area?

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