Finance for International Business: Euro Jet's UK Strategy

This report provides a comprehensive financial analysis of Euro Jet, an airline facing challenges due to Brexit. The report examines the airline's contingency plans, focusing on leasing aircraft and establishing a UK subsidiary. It delves into key financial aspects, including the Net Present Value (NPV) and Weighted Average Cost of Capital (WACC) calculations, assessing the profitability of the proposed investments. Furthermore, the report addresses the Foreign Exchange (FOREX) risks associated with the project, explaining relevant theories such as Balance of Payment, Interest Rate Parity, International Fisher Effect, and Purchasing Power Parity. The analysis includes data on yield rates, share prices, and corporate tax rates in both the UK and Ireland. The report concludes with recommendations on the best financial strategy for Euro Jet's expansion and offers insights into the challenges and opportunities in the international business landscape, particularly in the context of Brexit and the airline industry. This document, contributed by a student, is available on Desklib, a platform offering AI-based study tools.

Finance for International
Business

TABLE OF CONTENTS
INTRODUCTION..............................................................................................................1
Overview of Euro jet and its financial proposal........................................................1
Advising the board:..................................................................................................2
FOREX and its theories:..........................................................................................3
Analysing the NPV measurements for Euro jet plc..................................................5
Analysing the WACC for Euro jet UK plc.................................................................7
CONCLUSION................................................................................................................. 8
REFERENCES...............................................................................................................10

INTRODUCTION
Euro jet is a registered airline in Ireland and is listed in Dublin Stock Exchange
and was founded in the year 1980 and is a small airline. Euro jet is having very
ambitious future growth plan for coming years and relatively it is low cost no frill
airline. The present report will be covering how this airline will be growing in the
coming year and is having the future plan of year 2028. There are number of issues
which are related to future development of the airline and this require making
decisions. After UK's decision to leave the European Union by early 2019, Euro jet is
likely to lose right to free access to UK and its aviation market.
Overview of Euro jet and its financial proposal
Euro jet is facing many problems and issues regarding the future development
of the airline and board of directors of the airline need to make certain important
decision about it (Euro Jet, 2017). This was set up in 1980 and till the time, it is the
largest European airline in terms of seat miles flown per annum and is serving about
200 destinations of EU and North Africa. The major cities which the airline is
operating in are Dublin, Milan, Brussels, Stansted and Düsseldorf. Among these
cities, Stansted is the most important as 40% of the total aeroplanes are travelling
here only. Euro jet is very low-cost and low-price airlines by attracting a larger
customer base and higher market share to firm. The service quality of Euro jet is
very good and all the rivals are wanting to defend its market share. In the year 1992,
Europe deregulated the airspace giving the airline companies right to operate in
other countries of Europe (Ilushchenko and Onashchenko, 2017). After this
deregulation of airspace in Europe, many small and low-cost airline in Europe was
set up. But none of them can give challenge or defend Euro jet in terms of low price
and good quality of services.
Euro jet was earning about 40% of its revenue from passengers of UK and
this was certainly affected by UK's decision to leave EU till mid of 2019. However,
Euro jet lost the access of free market in the UK's aviation market and this greatly
risked 40% of total revenue of the company from UK (Euro Jet, 2017). Once UK
leave EU by mid of 2019, Euro jet and its revenue would be very hardly hit by this
decision as UK can have restricted the access to market of UK. At present time, the
airline is working under the European regulation having airworthiness certificate,
aircraft maintenance schedule, aircrew licences and airline operator certificate are
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issued by EU only. EU also check that 50% of ownership of any airline must be with
citizen of Europe and once UK is separated from the union, it will be having its own
rules and regulation of airline operations.
To avoid all sorts of risk and uncertainty, board of Euro jet has prepared two
possible contingency plans (Agnihotri, Hu and Krush, 2016). The aim of these plans
is to secure its business in UK and to avoid the outcome of EU-UK relationship on
their business.
Contingency plan 1
According to this plan, Euro jet would be leasing out 10 Boeing 737 aircraft
and creating a mini UK airline which would be called Euro jet (UK) plc. All the rules
and regulations of this airline will be regulated by UK only (Euro Jet, 2017). The
regulations include airworthiness certificate, aircraft maintenance schedule, aircrew
licences and airline operator certificate which are presently under EU.
Contingency plan 2
If the scenario relationship between UK and EU became the worst then Euro
jet would be buying the ready-made UK airlines. This will be helping the airline in
rapidly expanding its business in UK and handling all Euro jet business in UK.
Advising the board:
From both these plans, Euro jet will be preferring the contingency plan of
leasing out Boeing 737 aircraft and creation of mini UK airline known as Euro jet
(UK) plc (O'Halloran, Robinson and Brock, 2017). Now the question in front of board
of Euro jet is whether this plan is best suited for growing business in UK or not. The
company is planning to come under the agreement to lease out 10 Boeing 737
aircraft for almost 10 years starting from 2019 to 2028. $403 million is estimated as
the fixed annual cost for each year from 2019 to 2028. This aircraft will be situated in
Stansted and at the end of 2024, Euro jet (UK) plc will be renovating all its 10 Boeing
737 aircraft at the cost of £12 million per aircraft. As per the annual cost and revenue
projection for the year 2019 which will be the first year of its operations as Euro jet
(UK) plc is estimated to £676 million (Euro Jet. 2017). The expected annual growth
after 2019 till 2028 in schedule revenues will be about 1.02%. At the starting of the
contingency plan of leasing out 10 Boeing 737 aircraft, initial establishment cost will
be about £60 million to start the business in 2019.
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In the year 2016, Euro jet (UK) plc was set as inactive business organisation
and thereafter Euro jet will be holding 55% of shares which is offered by financial
institution of UK. The initial public offer of shares was raised to £780000 with the
share capital and sale of 156 million shares each at 0.5 pence. Euro jet (UK) plc
issued £320 million maturing in 2026 at par of 4% loan stock. And this share of Euro
jet (UK) plc is now trading at £9.68 per share and the loan stock trading value is
£100.51 on the London Stock Exchange (Zablah and Brown, 2016). The yield of the
stock of Euro jet (UK) plc at London stock exchange are:
 1.6% on UK Treasury Bond,
 12.5% on Corporate tax rate in Ireland,
 19% on Corporate tax rate in UK, and
 β by bank is around 0.947.
According to the meeting of the board of directors of Euro jet (UK) plc, the above
said proposal is very convenient and profitable for the company. The next coming
year of 2018 will be full of challenges for the company so, it must quickly decide what
should be done in reference to UK. As per the financial perspective and looking at
the upcoming year, the proposal of leasing out 10 Boeing 737 aircraft for 10 years is
regarded as the best contingency plan (Matthews, 2018). But there is some forex
risk of above said project which have been explained in next section with the help of
relevant theories and calculations.
FOREX and its theories:
Forex is the acronym which is popularly known as Foreign exchange market
or the trading or exchange of foreign currency in market. This is that type of market
which is decentralized global market and all currency of countries are traded in the
market according to set global currency (Economic theory found in Forex market,
2017). This is the best and most liquid market for currency trading where about $5
trillion is traded on an average basis. If the value of the currency in which the trader
is trading goes down then they can sell out that currency and if value in market is
been increased then it could be bought. US dollar is regarded as the base for
exchange of all currency in market and all the other country's currency are traded
according to it only. As Euro jet is about to lease out its 10 Boeing 737 aircraft for
about 10 years, there are also some forex risk which concern with the project. For
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taking out the risk in forex aspect of contingency plan theory of forex must be clear
which are as follows:
Balance of Payment In this theory, there are two types of transaction which are
taking place in between two countries which are import and export of capital and
current account (Pizam, Shapoval and Ellis, 2016). If any of these two countries are
trading with each other and current account of any of country is deficit or surplus
then this is known as disequilibrium of the balance of payments. And this adjustment
is then made by monetary exchange rate of country.
Interest rate parity states that there is a difference between the interest rate of two
countries who are trading with each other (Economic theory found in Forex market,
2017). And this difference is equal to difference between forward and spot exchange
rate of country. This will be affecting the profit and loss of Euro jet as the difference
in interest rate of UK and that of EU.
International fisher effect (IFE) tells that if there are any changes in currency rate
of two countries, then this will be subjected to difference in nominal interest rate of
those two countries.
Purchasing power parity (PPP) Once the adjustment of the exchange rate of two
countries are done thereafter the general price level of these countries must be
equal. The price of one commodity or identical goods must be equal globally is also
suggested by this theory.
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Analysing the NPV measurements for Euro jet plc
NPV:
These measurements represent the current or present value of the investments
which are made in the project. Thus, with the help such calculations the business will
make estimation that in the upcoming time the project will be beneficial for the
organisation or not. However, there will be requirement of total inflows and outflows of
the cash in premises on which total estimation will be made. Euro jet plc will be
beneficial in terms of analysing the profitability of the funds which are invested in the
operations (Parker and Fedder, 2016). However, this technique will be helpful for the
business as it considers the total inflows and outflows during the period and the
expenses made by organisation during such years will help in evaluating the adequate
estimation for the net present value. Hence, here are some measurements which will be
fruitful for the business in terms of making suitable assumptions as well as determining
the NPV for Euro jet UK Plc
1 2 3 4 5 6 7 8 9 10
Year
2018 (initial
investment) 2019
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
60 million
Scheduled
Income 528.69
534.
08
539.
53
545.
03
550.
59
556.
21
561.
88
567.
61
573.
40
579.
25
Ancillary Income 148
149.
55
151.
12
152.
71
154.
31
155.
93
157.
57
159.
23
160.
90
162.
59
Total Income 676.69
683.
636
638
690.
654
597
907
6
697.
744
612
101
4
704.
907
420
481
5
712.
143
770
547
1
719.
454
417
474
4
726.
840
124
195
2
734.
301
661
477
1
741.
839
808
003
4
5

Fuel and oil 152.47
154.
07
155.
69
157.
32
158.
98
160.
64
162.
33
164.
04
165.
76
167.
50
Staff costs 35.15 35.5 37.3 39.2 41.1 43.2 45.3 47.6 50.0 52.5
Airport and
handling charges 49.37
49.8
7
50.3
8
50.9
0
51.4
2
51.9
4
52.4
7
53.0
0
53.5
5
54.0
9
Maintenance and
repairs 9.78 9.9 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7
Marketing &
administration
costs 1 16
16.1
6
16.3
3
16.5
0
16.6
7
16.8
4
17.0
1
17.1
9
17.3
7
17.5
5
Route charges 39.2
39.6
0
40.0
0
40.4
1
40.8
2
41.2
4
41.6
6
42.0
9
42.5
2
42.9
5
Refurbishment 120
Lease cost 310 310 310 310 310 310 310 310 310 310
Total expenses 611.97
615.
101
928
619.
676
172
890
5
624.
368
256
198
8
629.
182
918
697
4
754.
125
126
243
5
639.
200
080
909
2
644.
413
232
666
2
649.
770
291
655
655.
277
241
064
3
Profit (Income -
expenses) 64.7 68.5 71.0 73.4 75.7
-
42.0 80.3 82.4 84.5 86.6
0.978
0.95
7
0.93
7
0.91
7
0.89
7
0.87
8
0.85
9
0.84
0
0.82
2
0.80
4
63.33
65.6
2
66.4
9
67.2
6
67.9
2
-
36.8
4
68.9
1
69.2
6
69.5
0
69.6
3
Total revenue 571.07
Initial investment 60
NPV 511.07
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Interpretation: In consideration with the above-mentioned report, the business
will be beneficial in terms of making suitable assumption that the NPV of Euro jet is
511.07 million. Thus, it can be said that the project will be beneficial for the company in
terms of obtaining satisfactory profits. However, in the year 2018 the business has made
initial investments for 60 million which was the capital for the respective years in the
project till 2028. Thus, these 10 years of investment will be helpful for this aviation
industry in terms of attaining the adequate profits each year. Thus, the payment for
refurbishments of aircraft in the year 2024 amounted to 120 million which in turn
negatively affect the revenue gathering of the business and present the deficit balance
for -42.0 million.
Analysing the WACC for Euro jet UK plc
To analyse the WACC the concept lies over the method on which the company is
making adequate assumptions on with the debts will be payable. The focus is over
making adequate payments to their shareholders, debenture holders or the bonds
issues to such individuals (Blut, Mittal and Mothersbaugh, 2015). Therefore, these are
the debts of the corporation which are needed to be paid by them in required period.
Here, all the values of such assets are to be weighted and the suitable assumptions will
be made by the firm in context with analysing the WACC or the cost of capital.
Particulars UK
Republic of
Ireland
Yield on UK treasury bonds 1.60%
Rate of ordinary shares 9.68
Beta 0.947
Loan stock is currently trading @ 100.51
issued loan stock @ 4% mature in 2026 320
Issued share capital (1560000*0.5) 780
Corporate tax rates 19.0% 12.50%
7

Interpretation: In accordance with the above-mentioned table, there has been
various rates which are presented by government of UK and Ireland. Hence, there has
been determination of various rates such as Yield on UK treasury bonds at 1.60%, the
price of Ordinary shares which are currently trading at the rate of 9.68 per share. The
beta rate of the UK as 0.947 while the Loan stock which are currently trading is at
100.51. However, the organisation is operating the business in both the countries than
there will be legislation of corporate taxes from both the countries such as 19.0% and
12.50%.
Data entry area
Enterprise Value
(EV)
Market Price 10
Diluted stocks 156
CAPM Assumptions Market Capital
1,51
0
K(e) 1.98% Long Term debts 320
RFR 1.6% Less: Cash
Beta 0.95
Enterprise Value (in
lacks)
1,83
0
R(m) 2%
Report area
Debt Equity Weightage
Enterprise Value @ E/(D+E) 82.51%
Enterprise Value @ D/(D+E) 17.49%
Tax Rate (@) 19%
Interest Rate (%) 4%
Calculations for WACC
WACC 2.20%
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Interpretation: By considering the above tables, it can be said that the firm is
having adequate WACC such as 2.20% which in turn reflects that the project will be
beneficial for the business in terms of making satisfactory revenue gathering. If the rate
of WACC is higher than there will be increments in the risks and reduction in the market
value of the corporation. Thus, it will be suggested to the managers of this organisation
that they must apply this technique as it reflects that the project will be fruitful for them.
However, the interest will be payable at the rate of 4% while the taxes were made at
19%.
CONCLUSION
To determine the profitability of this project that the business is being able to
make operations in UK and Europe it can be said that there have been positive impacts
of such investment. Euro jet will be beneficial in terms of NPV and WACC measurement.
Thus, it represents that the business will be fruitful for the organisation as it will facilitate
the beneficial returns. Further, the report also has elaborated various Forex theories
which is necessary to be determined by the international organisations as to understand
various policies and procedure of such operational tasks.
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REFERENCES
Books and Journals:
Agnihotri, R.,Hu, M.Y. and Krush, M.T., 2016. Social media: Influencing customer
satisfaction in B2B sales. Industrial Marketing Management. 53. pp.172-180.
Blut, M., Mittal, V. and Mothersbaugh, D.L., 2015. How procedural, financial and
relational switching costs affect customer satisfaction, repurchase intentions,
and repurchase behavior: A meta-analysis. International Journal of Research in
Marketing. 32(2). pp.226-229.
Ilushchenko, A. F., and Onashchenko, F. E., 2017. Flame spraying of coatings of self-
fluxing alloys. Welding International. 31(11). pp.887-891.
Matthews, R., 2018. European Collaboration in the Development of New Weapon
Systems. In The Emergence of EU Defense Research Policy (pp. 111-130).
Springer, Cham.
O'Halloran, C., Robinson, T. G. and Brock, N., 2017. Verifying cyber attack properties.
Science of Computer Programming. 148. pp.3-25.
Parker, R. and Fedder, G., 2016. Aircraft engines: a proud heritage and an exciting
future. The Aeronautical Journal. 120(1223). pp.131-169.
Pizam, A., Shapoval, V., and Ellis, T., 2016. Customer satisfaction and its measurement
in hospitality enterprises: a revisit and update. International Journal of
Contemporary Hospitality Management. 28(1). pp.2-35.
Zablah, A.R., and Brown, T.J., 2016. A cross-lagged test of the association between
customer satisfaction and employee job satisfaction in a relational context.
Journal of Applied Psychology. 101(5). p.743.
Online
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