Valuation of Norwegian Air Shuttle ASA: A Case Study of How to Estimate the Value of an Airline Company holding Aircraft Purchasing Rights

Runar Bakken

Student thesis: Master thesis


The main objective of this thesis is to consider which valuation approaches are most adequate for airline companies holding purchasing rights, like Norwegian Air Shuttle ASA (NAS). In 2012 NAS placed the largest order in European airline history, and obtained 150 purchasing rights. The airline industry is volatile, growing with a higher rate than the overall world economy, and is known to be highly competitive. This makes considerations about the value of strategic flexibility purchasing rights very interesting. Many theorists argue that the traditional present value (DCF) approach does not consider the value of active management (Brealey et al., 2014), and thereby might disregard value. To consider which approaches are most suitable in the case of NAS, how models copes with uncertainty and flexibility is considered. Theory suggests that a DCF valuation will incorporate most essential strategic and financial factors, and considers downside risk potential through discounting static cash flow estimates. As NAS obtains assets of strategic flexibility, a real options valuation is applied, to test if it will contribute value to the valuation. The B&S model is chosen as the most suitable model for pricing the purchasing options, as each option represents a one-time opportunity to expand their business. The DCF valuation considered the essential strategic and financial factors, and obtained an estimated value of the stock of NOK 301.4 as of 31.03.2016. This is driven by NAS’ ability to maintain low cost from active management and a modern fleet, resulting in lower expected turnover rates. NAS is expected to have major advantages in long-haul operations the next years, as the only major European LCC in this segment. As theory argues, the DCF model is able to incorporate most risk through the discount rate. However, it is not able to incorporating the upside risk potential of the purchasing rights. The real options model applied, B&S, captures the value of upside potential from the strategic flexibility the purchasing rights NAS possesses give. Through a normal distribution of outcomes, based on volatility of the underlying assets, the value of the options was estimated to NOK 62.05 per share. This shows that implementing a real options valuation approach might help quantify more of the company value. In the case for NAS it is even essential to do so. The sensitivity of the model must however be noted, as the estimated value hereby will be affected by how inputs are estimated and assumptions handled. In conclusion, this thesis illustrates that the DCF approach equips the applicant with a tool that allows for consideration of most fundamental value drivers of a valuation of an airline like NAS. However, implementing a real options valuation may help quantify more of the company value. In the case of NAS this is essential, to not disregard a major value source, which might lead to undervaluing the firm. The estimated value of the whole company is NOK 363.45, with real options contributing a significant part of the value.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2016
Number of pages129