In the valuation of airline assets, projected cash flow forecasts provide only a starting point. The difference between what the shares of the company are selling for on the open market and what they might fetch in a takeover may be a function of the following factors, which are not all necessarily well captured in discounted cash flow projections:
Economic forecasts on a regional, national, or global basis Brand-name value
Prospective reservation-system and frequent-flyer program capabilities Amount of prospective competition
Age of equipment and facilities
Demographic and income profiles of business and leisure travelers in territories covered
Current and prospective rights to fly routes Number and quality of gates at airports served
Number and time of day for current and prospective acquisitions of landing slot rights92
Eventual size of potential carbon-emissions fee charges.93
92In recent years, the value of gates, routes (especially long-haul), and landing slots (such as those at London’s Heathrow) has increased enormously as airlines have tried to increase the frequency and reach of their services. As of 2008, according to Michaels (2008c), a pair of takeoff and landing slots at Heathrow had cost more than $50 million, at least double the price 10 years earlier.
Control of a large percentage of gates and slots at an airport can give the airline a predominant, almost monopolistic, position that would usually translate into greater pricing power and therefore higher valuation. In the early 1990s United bought Pan Am’s Heathrow landing rights for $400 million and American bought TWA’s for $445 million. At around the same time, Delta bought Pan Am’s Atlantic routes for $1.3 billion. And in the mid-1980s, United bought Pan Am’s Asia routes for $750 million. However, as Murphy (2001) notes, federal legislation (AIR-21) requires airports to submit competition plans; airports that are found by the DOT to operate in an anticompetitive manner may lose improvement grants. Strategic importance of the control of gates is discussed in McCartney (2005b).
93The amount of environmental impact from aircraft engines releasing heat and particles at high- altitudes is debatable but there’s no doubt that there is some affect. In Mouawad and Davenport (2015, 2016) the estimate is that aviation contributes 2 % of global emissions. Aviation activity releases of carbon dioxide may—depending on future political, economic, and scientific assess- ments of climate change—result in various new taxes and fees being imposed on the industry. See Lee (2009) in G€ossling and Upham (2009), Davenport and Mouawad (2015), European Parliament (November 2015), “Emission Reduction Targets for International Aviation and Shipping,” IP/A/
2.5 Valuing Airline Properties 113
For the financial analyst, the objective is to take all of these factors into account and to then compare such private market acquisition-value estimates to public share price valuations. In this regard, computation of the enterprise value (EV) of a company is a related and helpful concept.
EV¼(number of shares outstanding x price of the shares) + outstanding value of net debt
where net debt¼long-term debt + current liabilities minus cash and cash equivalents
This EV is often further modified by deducting the estimated value of off-balance sheet, nonoperating, assets to arrive at an adjusted enterprise value (AEV);
AEV ¼ EV minus off-balance sheet assets
These AEV estimates, which reflect public market prices, are then in turn used to compute a ratio to cash flow (or EBITDA, that might further add in a term for aircraft rental) and that allows for relatively clean and simple comparisons to be made among similar firms in an industry (be it airlines, hotels, or media):
valuation ratio¼ AEV EBITDA
In the airline industry, for example, such valuation ratios will often cluster around 5–6 times EBITDA. But private market values, which include an implicit control premium, are usually much higher than are seen in public market trading of shares. The securities of a company would become attractive for purchase when the public share price is at a sizable discount (perhaps 20 % or more) to such private value estimates.94
For many such assets, private market multiples would typically range between 8 and 15 times the cash flow that isprojectedfor the next year (Table2.8). This multiple could also be more precisely determined by comparing to cash-flow multiples on similar, recently traded, airline properties and to estimates of the potential for generating new revenue streams—economic value added (EVA)—
on already invested capital. In such EVA models, share valuations key off of the difference between the weighted-average cost of debt and equity capital (WACC) and the returns in excess of the WACC.95
ENVI2015-11, Sivak (2015), Mouawad and Cardwell (2015) on biomass fuel, Fountain (2016), and Mouawad and Davenport (2016).
94Anything less than a 20 % discount to estimated value typically does not provide enough leeway for the uncertainty of a transaction occurring and for the possibility that costs of mounting an acquisition campaign could be quite high. Availability of pooling versus purchase accounting and additional tax-related issues had also often had a bearing on the size of the trading discount.
95See Sect.2.4.
Major selected airline company mergers are shown in Table2.9and suggest that antitrust regulation in the US has shifted from concern about a merged carrier’s overall market share to emphasis on whether a combination would decrease com- petition on specific routes.96
Table 2.8 Public and private market valuation methods: examples Public market values
Price per share 11.50
Shares outstanding 60
Total market value of equitya 690
Plus
Total long-term debt 1.200
Total less 1.890
Cash 150
Other off-balance sheet assets 250
Adjusted enterprise value (AEV) 1.490
EBITDA 165
Cash flow multiple (AEV/EBITDA) 9.0
Private market values
EBITDA 165
Times assumed multipleb 10
Unadjusted value plus 1.650
Cash 150
Other off-balance sheet assets less 250
Long-term debt 1.200
Net asset value 850
Shares outstanding 60
Net private market asset value per share $14.17
aPreferred stock market value must also be included
bDerived by comparison with recent transfer-price multiples for similar assets
96See Mouawad (2013e), Lubben (2013), Porter (2013), and Crandall (2013). As of 2014, some major airlines and/or airline groups (including recent merger partners) by region are as follows:
North America: American (US Airways), Delta (Northwest), United (Continental), Southwest (AirTran).
Europe: Air France (KLM), British Air (Iberia), Lufthansa (Austrian, Brussels, Swiss) Other (Aer Lingus, Alitalia, Air Berlin).
South America: Avianca (Taca), Azul, GOL, LATAM.
Middle East: Emirates, Etihad
Asia/Pacific: Cathay, China Air, Quantas, Singapore. Thai.
As of early 2015, the four largest shares of European air traffic in percent were Lufthansa Group (13.0 %), Ryanair (9.9 %), International Airlines Group (8.1 %), and Air France-KLM (8.1 %).
Shares in the US were: Southwest Airlines (21.2 %), Delta (21.2 %), United (15.6 %), and American (13.5 %).
2.5 Valuing Airline Properties 115