Strategic Analysis and Valuation of Scandinavian Airlines: A company in financial turmoil

Mikkel Allen Kjærsgaard

Student thesis: Master thesis


The central objective of the thesis has been to determine which models were most suitable in order to carry out a valuation of Scandinavian Airlines (SAS) as per 1 May 2013. The decision of which model is the most optimal to apply, does among other things depend on, whether SAS is assumed to continue as going concern or not - which have been analyzed thoroughly. Before being able to conduct the valuation, a strategic and financial analysis was conducted, in order to understand the historical performance, and to estimate future financial performance of SAS, which obviously lays the foundation for the value creation in a company. Through the strategic analysis it has been concluded that the airline industry is characterized by high competition among the different operators. Specifically after the 00’s with the IPO of Norwegian in 2003, SAS has experienced an increasingly competition, which have resulted in a loss of market share of 7 percentage points from 2008 to 2012. This negative trend is assumed to continue in the realistic scenario, unless something dramatic happens in SAS. Among the important initiatives that SAS has in their strategy, is to decrease the level of unit costs. These are of big importance in the industry, as they decide the competitiveness of the company, in terms of e.g. offering cheap tickets to passengers. Unfortunately SAS has the highest unit costs in their peer group, 47 % higher than Norwegian, its biggest competitor. As of 1 November 2013, SAS has to adapt to new changes to IAS 19, regarding actuarial losses/gains from future discounted pension obligations. This will cause a loss of SEK 7.9 billion on shareholders’ equity from next year, which corresponds to a loss of 70.1% of SAS’s equity. As a consequence SAS will likely be forced to raise additional capital – which may be a difficult task after having asked investors for additional capital in both 2009 and 2010. After defining three different scenarios for SAS’s future performance, the share price was determined. The optimistic and realistic scenarios were based on going concern and were valued by applying the DCF model. The worst case scenario was liquidation, which was supported by Altman’s Z-score, indicating a high probability of default within the next 12 months. Also credit default swaps with different maturities indicated high probability of default. The price was determined to SEK 11.26 against a price of SEK 12.10 observed in the market. In order to test the valuation methods, a sensitivity analysis was carried out. It clearly indicated that the share price is very sensitive to the different input factors, such as changes in the assumptions to the development in e.g. payroll expenses, different levels of the growth rate in the terminal period and the WACC. Hence, the valuation should be evaluated with prudence. In order for SAS to continue as going concern, management has, as a minimum, to succeed with the current strategy, otherwise liquidation may be just around the corner, and the company which we have all known for years, will suddenly belong to the past.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2013
Number of pages95