Interview question: How do you compare the two following companies
IB
(Baboon, 136
Points)
on 9/11/11 at 11:59am
Hi,
I was asked how I would quickly compare two air plane companies (ie Air Canada, Air Transat, etc). One company owned there fleet and the other rented their fleet.
I suggested comparing the Company who owned their fleet's EV/EBITDA to the other Company's EV/EBITDAR.
Now I was a little confused how I would actually go about doing this. I am not sure how I would calculate the rental Company's EV value... should I capitalize their rent expense?





Maybe it has to do with rent
Maybe it has to do with rent expense being an actual cash outflow while depreciation on the fleet would be a non-cash expense=different EBITDA numbers. Could you try removing the value of the fleet from EV and determine the cost to rent a comparable fleet? I would be interested in an answer to this question as well...
chan.kw wrote: Hi, I was
Hi,
I was asked how I would quickly compare two air plane companies (ie Air Canada, Air Transat, etc). One company owned there fleet and the other rented their fleet.
I suggested comparing the Company who owned their fleet's EV/EBITDA to the other Company's EV/EBITDAR.
Now I was a little confused how I would actually go about doing this. I am not sure how I would calculate the rental Company's EV value... should I capitalize their rent expense?
Yes, your goal in comparing the two companies is putting them on the same footing - regardless of which you choose. Capitalization is preferred because planes aren't "easily traded" and once leased, are generally used for the life of the air plane (more like a financing arrangement than short-term rent). Once converted to capitalized basis, you could also determine how old the assets are (by how much accumulated depreciation is), which would help to tell you if there is a large amount of maintenance/CAPEX incoming.
Essentially, you want to capitalize the rental planes to arrive at comparable EVs. This would include looking at the lease agreements (if possible) to see when they were signed, and essentially mapping out the expenditures associated with interest and depreciation over the length of the contracts to determine accumulated depreciation, current interest costs, etc.
Your analysis was reasonably correct through - EBITDA and EBITDAR would be the same for both companies (assuming holding everything else constant) because they exclude all plane costs associated with either renting or using a capital lease.