Contents Page:

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

Introduction 6
Methodology 6

Main Results & Findings 7

Current Market Position 7

Analysis and Evaluation 9

Investment Appraisal 10
Investment Project I 11
Investment Project II 12
Non-finacial Analysis 13
SWOT Analysis 13
PEST Analysis 13

Conclusions and Recommendations 14

Bibliography 15
Appendices 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
International Airport (AIA). The company’s representative in Greece was interviewed
4
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 Verification of data by using

because of vested interests
Limited point of view as only
two interviews have been
carried out
A degree of risk associated
with the company’s
unwillingness to provide
confidential data
other secondary resources
Complementary information
from independent sources
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

Cost of Operating
Sales Costs Net Profit
Years Revenue (€) (€) (€) (€)
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

250.000.000
Revenue (€)
Net Profit (€)
200.000.000

150.000.000

100.000.000

50.000.000

0
2006 2007 2008 2009 2010

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

8
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 Appraisal
Investment 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 60
Marketing 800
Facillities 118
Council taxes 180
Compliance
costs 550
Aircraft 4200
Total 5,908

Expected Profits Discounting Present

Inflows Revenues Costs (FV) Factor Value
Year Interest: 2%
1 50620 46570 4050 0,98 3969
2 151859 139711 12149 0,961 11675
3 455578 419132 36446 0,942 34332
4 1366733 1257395 109339 0,924 101029
5 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
1 year and
Payback Period ‘New Route’ 56 days
Source: 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 62
Marketing 680
Facillities 118
Council taxes 220
Compliance
costs 550
Aircraft 2100
Total 3,730

Expected Profits Discounting Present

Inflows Revenues Costs (FV) Factor Value
Year Interest: 2%
1 39115 35986 3129 0,98 3067
2 117344 107957 9388 0,961 9021
3 352032 323870 28163 0,942 26529
4 1056097 971610 84488 0,924 78067
5 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
‘Hellas Jet 1 year and
Payback Period Acquisition’ 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 Dardoufas
13
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, 2009
14
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?

17