Analysis of Capital Structure of Skyeuope Airlines

1. INTRODUCTION TO SKYEUROPE

Operations

SkyEurope Airlines is one of Europe's fastest growing low-cost and low-fare passenger airlines, focusing on services to and from Central Europe. It was the first such airline in Europe. SkyEurope Airlines has five bases located in Budapest, Warsaw, Krakow, and Prague, with its main base located in Bratislava, Slovakia. SkyEurope offers short-haul scheduled services to 37 cities in 19 European countries over a network of 70 scheduled routes. Additionally, it offers scheduled and chartered passenger as well as cargo services. Besides that, SkyEurope Airlines owns the subsidiary airline SkyEurope Airlines Hungary. In November 2001, SkyEurope Airlines was established and started its operations few months later. In addition, the company employed an estimate of 700 staffs.

History

Its founders were Alain Skowronek (Chairman) and Christian Mandl (Chief Executive) and were financed by ABN-Amro, EBRD and the EU funds. The founding of SkyEurope Holding AG in Vienna in 2005, which is the holding company for Sky Europe's entire operational unit, in 27th September 2005, SkyEurope prepared the initial public offering for autumn whereby the shares of SkyEurope were listed for the first time. As to reflect on its Central European anchorage, SkyEurope went for a dual listing on the Vienna Stock Exchange together with the Warsaw Stock Exchange. As a consequence, EUR 60m of new equity capital has been raised in the IPO (Initial Public Offering); a total of EURO 87m invested to SkyEurope to date.

Strategy

SkyEurope Airlines targets;

* Business and leisure travelers

* Travelers who visit friends and relatives.

In addition, SkyEurope Airline's network, have been developed by using a business model that seeks to stimulate local market demand for flights to other destinations that has already been served by existing bases in its network. It is referred as the "joining-the-dots" in its network.

Fleet

To date, SkyEurope Airlines operates a leased fleet of 16 aircraft

in total comprises of;

* 4 Boeing 737-700 aircraft

(149 seats, Next Generation)

* 7 Boeing 737-500 aircraft

(133 seats, Classic) and,

* 5 Boeing 737-300 aircraft

(149 seats, Classic)

In addition, SkyEurope have recently ordered 16 new Boeing 737-700 aircraft

(149 seats, Next Generation). 12 of the 16 aircraft

will be acquired by

GECAS and leased to SkyEurope under operating leases (term of 8 years for each aircraft). The 12 aircraft

will be delivered between March 2006 and May 2007 while the remaining 4 aircraft

are expected to arrive between July and November 2007. SkyEurope have obtained purchase rights for a further 16 Boeing 737-700 aircraft

from Boeing for delivery preceding the end of 2010.

Passenger Volumes

There was a significant growth in SkyEurope Airline's passenger volume due to the expansion of its fleet and network. On the other hand, SkyEurope Airlines continues to be driven by the demand for low-cost and low-fare airline services in Central Europe. Refer to Figure (1).

Figure (1)

Year Ended Passenger Volume

31 December 2002 52,286

31 December 2003 167,535

31 December 2004 955,933

31 December 2005 1,850,101

First 3 Months in Year 2006 456,897

As shown in Figure (1), years ended 31 December 2002 and 2003, SkyEurope Airline's volumes of passengers were 52,286 and 167,535 respectively. While in the year ended 31 December 2004, there was a volume of 955,933 passengers, showing a significant growth in the year-end of 2004. The volume of passengers in the year-end of 2005 was doubled to 1,850,101 compared to year-end 2004. In July and August 2005, it recorded a strong volume of passengers with 240,649 and 240,653 respectively.

All the information above has been compiled from the website www.skyeurope.com.

2. LITERATURE REVIEW ON CAPITAL STRUCTURE

It is not easy to understand what Capital Structure is but they 'refer to the type and amount of financial capital (debt and equity) used to finance the hospitality firm's assets: the right hand side of the balance sheet' (Andrew and Schmidgall, 1993:453). There is a strong relationship between Asset and Capital Structure:

Asset Structure Capital Structure

OCF

Assets Debt

(EBIT) Interest

ROE kE Principal

NPV 0

Government

RE0 Taxes

Dividend

Decision Equity

CFAT

W0 = DIV0 + V0 [DIVt] (NI, EPS)

With,

OCF: Operating Cash Flow EBIT: Earning Before Interest and Taxes

ROE: Return of Equity NPV: Net Present Value

kE: Required Rate Of Return CFAT: Cash Flow after Tax W0: The Owner's Value

DIV0: The Current Dividend

V0 [DIVt]: Value Today Of Future Dividend

(Andrew and Schmidgall, 1993:16)

For small businesses, capital is quite expensive and important because it is the way the owners determine a target capital structure for their companies or firms. Moreover,