Valuations: HY or FY Fins?
Currently doing a valuation of an airline. At first I spread half year fins (for the last seven half year periods) to account for seasonality, however in this case the airline is so well diversified there is very little ASK deviation between 1H and 2H periods (only seems significant on domestic routes, even then it's only about 10% lower in the off season).
It would be far easier to work with full year fins: annual reports go into so much more detail than interims. Could I get away with just spreading full year periods?
If I do this, how many (full year periods) should I spread? Five? And how far into the future should I project? Another five years?
Thanks!
Airline valuation is as much about the market value of the aircraft they own as about the expected cash flows, so you should do:
A sum of part based on their fleet and the estimated market value (you may need access to certain specific datasites for datapoints or depending on the models you could find some research on the internet)
A 5 year DCF (although that is likely to be wildly dependent on your assumptions on things like traffic, gross margin per seat, fuel which, unless the airline has a cargo segment, will have to be swallowed by the airline, and of course FX as my guess is all the debt will be USD and so is fuel but the revenues will be in whatever currency is the company using most)
A peer analysis (easy given how many airlines are listed, e.g. Easyjet, Ryanair etc.) based on P/E, EV / EBITDA minus Capex etc.
Good luck! BTW, arlines are a VERY tricky business, very Capex intensive and very sensitive to oil price movements, FX movements and 'exogenous' events such as 9/11 etc. Most of the American airlines which are now investment-grade rated where all technically bankrupt 10 years ago (e.g. United Airlines)
sorry, other big points in your analysis if you do a DCF are going to be fleet maintenance and fleet renewal..... can bring MASSIVE Capex swings...
Thanks for the advice! So just to confirm: you think I can get by with just spreading the FY fins? And how far back historically would you suggest?
For what its worth:
It's tricky to do H1 and H2 as seasonal season while Winter/Summer are not really scaled on the same 6 months.
Also some airlines do stupid fuel hedging policies, you may look into the % they hedged for each Q or full year if you want to had some risk factors. Look at ABS/EETC they issued as well because these (ie. aircrafts) should be treated differently on the fleet valuations, make sure they are clear on fin/op leased aircrafts.
But hklevfinbanker summed it up pretty nicely - also as much as it is a tough sector to cover (due to its swings) it's pretty cool
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