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Low-cost and Traditional Airlines: Ratio Analysis and Equity Valuation by the Residual Earnings Model
Umeå University, Faculty of Social Sciences, Umeå School of Business.
2007 (English)Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

Fundamental analysts use basic fundamentals, which generally based on available public information, to determine a firm’s intrinsic value. Forecasting future performance is one of the key elements for doing fundamental analysis, and historical results are the foundation for future forecast.

The analysis of this study is conducted into two sections with case studies in the airline business. Firstly, financial ratios are analyzed to examine whether low-cost or traditional airlines better perform their operations during a certain period. The other section is undertaking fundamental analysis of the case studies to evaluate current stock prices of representative airlines based on the potential future forecast. The model using for this valuation is the Residual Earnings Model. Key assumptions of future forecasts are mainly based on their historical ratios. Other related factor such as the gross domestic product (GDP) is included in forecasting sales growth rate because it is one of the key influences in the airline business.

For ratio analysis, the findings suggest that low-cost airlines perform better operations based on five years average. However, the traditional airlines improve their performances significantly in the latest fiscal year. For equity valuation, the findings show that estimates of equity values of the airlines yield inconsistent results comparing to their stock prices. Possible reasons of the difference might be the improvement in key financial ratios of the airlines.

Place, publisher, year, edition, pages
Umeå: Handelshögskolan vid Umeå universitet , 2007. , 71 p.
Keyword [en]
Fundamental analysis, ratio analysis, equity valuation, residual earnings, airline
National Category
Business Administration
URN: urn:nbn:se:umu:diva-1203OAI: diva2:140486
Available from: 2007-06-18 Created: 2007-06-18Bibliographically approved

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