An Analysis and Assessment of EasyJet's Strategy and Options: A Case Study

Abstract

This analysis describes, analyzes, and assesses easyJet and the market it operates in. It proves a statistically relevant and strong relationship between the highly regulated and capital-intensive airline industry’s (and its individual companies’) top-line (i.e. revenues) growth and the condition of the overall economy (i.e. the GDP growth rate). It also shows how in an extremely competitive market, that nevertheless has a tendency for oligopolies on a specific route, an individual carrier’s bottom-line (i.e. the profit margin) is largely a function of (i) finding the right place in the value chain, (ii) differentiating services, and (iii) building comparative (cost) advantages. The analysis of easyJet’s strategy and options, furthermore, reveals that its business has relative to peers to cope with (i) weak non-seat revenues and (ii) higher costs, meaning easyJet is facing issues with respect to both top- and bottom-line. The assessment of easyJet’s theoretical value follows a present value approach, based on models looking at discounted cash flows and the economic value added. The results being challenged by multiple sensitivity analyses. As per reference date (November 15, 2016) and based on the analyses and assessment of strategy and options, the theoretical value of easyJet comes in at 1,766.44 pence per share, indicating a premium of 62.5% relative to the corresponding London Stock Exchange closing price (1,087 pence), however, it is approximately only 14% above easyJet’s pre-BREXIT level, and 6.6% below the shares’ all-time high (April 13, 2015). Consequently, the analysis and assessment of easyJet’s strategy and options c.p. indicate: easyJet is better suited relative to its peers than market price suggests and/or that investors on average assume higher uncertainty and/or make more conservative assumptions regarding its prospective top- and bottom-line development.