The Fuqua School of Business

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1 Teaching Notes Synopsis Despegar.com is an Internet based start-up in Latin America addressing the growing tourist and traveling markets. The company is preparing their business plan to look for the first round of financing. Despegar.com, wanted to become the most important web -based travel agency in the region. Less than three years ago, Expedia effectively kicked off the e-travel model throughout US and was soon followed by Travelocity, and a number of similar companies. None of them seemed to be interested in replicating their business in Latin America. However, it wouldn t take long before somebody would try it. The management team believed that Despegar.com was ready to fill that vacuum, but they needed to claim the e-travel throne with speed Internet speed. The company scheduled several presentations to potential Venture Capitalist Funds. The management team knew that in order to raise the necessary capital, they had to mitigate the perceptions of Latin American risks, the Internet risks and the project risks. At the same time show that the expected returns would be attractive once adjusted for these risks. Pedagogical Objectives This case serves as an interesting learning vehicle, combining the exposure of a business plan with the early stages of capitalization through Venture Capitals. The case puts particular emphasis on the risks associated to emerging markets, both Internet during 1999 and Latin America Region. This case is intended for students that have had at least one Finance course. The case has two main objectives: It illustrates the entrepreneur process of crafting the business idea into a Business Proposal necessary to raise capital, the Venture Capital role, and the Latin American region risks. It shows some of the adequate financial analysis necessary to value a risky business. There is an excel file with this case that allows students to adjust original cash flows and develop sensitivity analysis on the project s value. Nelson Dao, Alexander Streubel, Sergio Morales, Santiago Bellasi and Emilio del Rio prepared this case under the supervision of Professor Campbell Harvey of at Duke University as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 2003 by the Fuqua School of Business. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of the Fuqua School of Business.

2 Analysis I - Why Venture Funds Financing? Early stage firms are unable to obtain debt financing. Firms in this phase, as Despegar.com is, have very little hard collaterals and may be very risky in nature. Therefore, firms must find other ways of raising funds and sharing risks. Angels, wealthy individuals who contribute seed capit al, and/or Venture capital funds are the main source of financing to innovative entrepreneurs. Venture capitalists are intermediates between investors (also called limited partners) and private equity markets, typically high growth companies. They tend to share the risks of the venture and in return obtain part of the equity, usually as preferred stocks. The annual return on investment of a Venture Capital portfolio could be around 25% on average. Despegar.com not only could access the necessary capital through venture capitalists, but also rely on their experience to grow the business and find the best exit strategy (IPO or Strategic partner). Analysis II Risks Identification This project is by its mere nature a very risky project. Not only because Despegar.com is a startup in Latin America where there have been few internet startups, but also because the whole business model is based upon leveraging a new sales channel based on a new technology from which there is a lot of uncertainty; especially in regard to the speed with which it will be adopted by the mass public. This project is a lot riskier than the average project. Operational Risks 1. - Pre-Completion (to be included in Cash flows) - Resources Availability. The main constraint for these type of projects is the amount of money that will be available. Since the pre-completion stage does not require any major investments in hard assets because the founders of the company committed the required capital until start of operations, there are no major risks during this stage. Adjustment: No adjustment necessary. - Technology Risks. The Internet is a new technology. However, the particular user interface and support systems needed to establish a travel related website have already been tested in the US and proven reasonably reliable. Adjustment: No adjustment necessary. - Timing. Timing is essential in this kind of environment. Speed to market is extremely important to establish a brand name and a prevalent position in the market. The project is ambitious because it envisions the start of operations in various countries according to a very tight schedule. Any failure to meet the milestones and execute according to plan may result in a reduction of market share in that particular market. Adjustment: Delay the projected opening dates in the different countries and reduce the projected market share accordingly. 2

3 - Completion. Aside from potential delays, which have already been discussed, there does not seem to be any further risks on being able to start operations in the planned countries. Adjustment: No adjustment necessary Post-Completion (to be included in Cash flows) - Market Risks. The travel retail market in general has been facing pressure by travel service suppliers to reduce their commissions. This trend is more pronounced in Latin America because there are few big chains of travel retailers, most players are small and their bargaining power is extremely limited. Despegar.com is one more of these retailers and it is unlikely that their novel sales channel, at least in their first years of operation, will generate a significant enough volume that they can leverage. Therefore, it is very likely that they see their commissions reduced over time. On the other hand, the main risk of this new technology is the uncertainty of its adoption patterns. There is all kind of optimist forecasts, but these vary greatly depending on the source. This accuracy of those forecasts is more questionable in Latin America where adoption of the technology is dependent on external factors such as telecommunications infrastructure, and government regulations. Adjustment: Reduce the base of Internet users. Decrease the expected commission percentage per sale. - Supply / Input Risks. There are no significant risks regarding supply. However, the business model requires a strong investment in marketing and promotions. Therefore, this is somewhat risky because the company does not have deep pockets, and the competitive landscape might obligate the company to increase their marketing budget by an amount substantially beyond the original projections just to defend their market share. Despegar.com would be hard pressed to come about with these resources. Adjustment: Decrease the expected market share and increase the media expenses. - Throughput Risks. Most Internet ventures have faced significant infrastructure problems when they become successful. The experience shows us that over and over again the existent bandwidth and server sizes are dwarfed by the enormous surge in demand. Moreover, in the initial period of operations, every systems present bugs that have to be cleared, no matter how thorough the testing is. Capacity and functionality problems are likely to disrupt the online experience and cause a very unfavorable impression on users. Adjustment: Decrease the expected adoption rate. - Operating Costs. The Despegar.com team markets the venture s management team as one of its strongest assets. However, no one in the management team has any experience in the travel industry. It is possible that some industry experience management could be necessary to run the business. Adjustment: Increase the expected corporate cost. 3

4 Analysis III Determining the Cost of Capital / Adjustments for Risks To obtain the cost of equity capital for the project we suggest using the Cost of Equity Capital Calculator developed by Prof. Campbell Harvey. The underlying principle is that CAPM, which is the most accepted model to calculate cost of equity, does not work well in emerging markets since CAPM assumes that markets are perfectly integrated, which is not the case in those markets, and Harvey s study (1995) of emerging markets returns suggests that there is no relation between expected returns and betas measured with respect to the world market portfolio. A regression of average returns on average betas produces an R-square of zero. Harvey documents that the country variance does a better job explaining the crosssectional variation in expected returns. 1 The process is the following: 1. Calculate cost of equity capital using the risk calculator for each country 2. Perform a risk analysis for each country and adjust the cost of capital as appropriate. 3. Weighted average the adjusted cost of capital of each country by 5-year company gross bookings. 1. Cost of Equity: a. Risk free rate: Annualized US 10-year T-bill December 1999: % b. Market premium: 10-year cumulative market premium: % c. Credit rating: September 1999 from International Country Risk Guide: Argentina Brazil Chile Colombia Mexico Venezuela d. Optional beta adjustment (leisure & travel industry Dec. 1999): e. Results anchored to the US cost of capital: ICRG US: 93.1 f. Unadjusted cost of equity: Argentina Brazil Chile Colombia Mexico Venezuela 22.80% 25.45% 16.36% 22.10% 20.53% 26.81% 2. Risk Analysis: Argentina: a. Operating Risks (to be included in the discount rate): i. Sovereign Risk (macroeconomics): It is a highly vulnerable country with substantial ups and downs in the 1990s. In terms of exchange rates it has maintain a strictly oneto-one rate to the dollar. In this case we presume that the recently events and contagion from overseas crisis suggest that this cannot be preserved, thus devaluation can be expected. Currency devaluation would incidentally affect the inflation rate. Since the foreign exchange and inflation contributes 55% to the ICRG we suggest increasing the cost of equity by 230 bp. We don t see convertibility and transferability problems in the future. 1 The International Cost of Capital and Risk Calculator. Campbell R. Harvey, Ph.D. 4

5 ii. Sovereign Risk (political/legal): Regarding this type of risks the only one that can affect our project is creeping. The government has increased taxes whenever deficits arise. We consider that the cost of equity should be increase by 63 bp. On the subject of the legal system, we do not think the project has any different sensitivity to this risk than the average project in Argentina. No adjustment. iii. Sovereign Risks (force majeure): There is no evidence that this project has different sensitivities than the average project in the country. No adjustment. b. Financial Risks (to be included in the discount rate): As the case for the entire countries in this analysis, the project in each country is going to be financed entirely with equity, so no default risk is estimated. Additionally, the IRR is consistent with the financial risks. Since no default is at risk we recommend decreasing the cost of equity by 70 bp, due to the fact that the loan default contributes with 5% to the ICRG index. Brazil: Chile: a. Operating Risks (to be included in the discount rate): i. Sovereign Risk (macroeconomics): Although Brazil has had instability in its economy, the recent macroeconomic measures taken by the government tends to stability. We do not think that major crisis can occur that can hammer the project. No adjustments. ii. Sovereign Risk (political/legal): As well as other countries in the region, the risk that can affect the project in this country is creeping. The government has increased tax rates whenever deficits in the central government arise. We consider that the cost of capital should be increased by 42 bp. On the subject of the legal system, we do not think the project has any different sensitivity to this risk than the average project in Argentina. No adjustment. iii. Sovereign Risks (force majeure): There is no evidence that this project has different sensitivities then the average project in the country. No adjustment. b. Financial Risks (to be included in the discount rate): Idem Argentina - Since no default is at risk we recommend decreasing the cost of equity by 70bp, due to the fact that the loan default contributes with 5% to the ICRG index. a. Operating Risks (to be included in the discount rate): i. Sovereign Risk (macroeconomics): We think that a project of this nature has no other sensitivities than the average project in Chile. No adjustment. ii. Sovereign Risk (political/legal): We think that a project of this nature has no other sensitivities than the average project in Chile. No adjustment. iii. Sovereign Risks (force majeure): We think that a project of this nature has no other sensitivities than the average project in Chile. No adjustment. b. Financial Risks (to be included in the discount rate): Idem Argentina - Since no default is at risk we recommend decreasing the cost of equity by 70bp, due to the fact that the loan default contributes with 5% to the ICRG index. Colombia: a. Operating Risks (to be included in the discount rate): i. Sovereign Risk (macroeconomics): The increasing instability in this country affects its macroeconomic results. For example, the currency has increased against the dollar because of pressures from other countries crisis. Moreover, it is expected a heavy decline of GDP in the subsequent months, which led us to think that new measures should need to be taken. Thus, it is recommended that the cost of equity must be 5

6 adjusted upwards by 223 bp. We don t expect convertibility and transferability problems in the future because the government has been committed to maintain the openness of the economy. ii. Sovereign Risk (political/legal): Consistent with the fact that in Latin American countries the main problem in this regard is creeping. The government could be willing to increase taxes to control deficits, which it has done in the past. We consider that the cost of equity should be increase by 84bp. On the subject of the legal system, we do not think the project has any different sensitivity to this risk than the average project in Argentina. No adjustment. iii. Sovereign Risks (force majeure): This is a risky country, embedded in a war against the Marxist guerrilla and the drug cartels for decades. We consider that this is a problem with no upcoming solutions, and is going to be intensified since there are internal pressures to deal with it. We suggest an increase in the cost of equity of 49 bp. In terms of natural catastrophes we don t see a different sensitivity compared to an average project in the country. b. Financial Risks (to be included in the discount rate): Idem Argentina - Since no default is at risk we recommend decreasing the cost of equity by 70bp, due to the fact that the loan default contributes with 5% to the ICRG index. Mexico: a. Operating Risks (to be included in the discount rate): i. Sovereign Risk (macroeconomics): Although in 1990s the government has implemented several economic plans in order to stabilize the economy, the recent evidence suggests that finally the country has found the right track. Moreover, the inclusion of Mexico in the NAFTA agreement determines a steady flow of the macroeconomic figures. This country has been able to repay part of its external debt, GDP is growing, and, consequently, exchange rates should follow its normal course, low inflation is expected, and convertibility and transferability cannot be changed because of the agreement. We consider that the cost of equity should be lowered by 278bp. ii. Sovereign Risk (political/legal): We think that a project of this nature has no other sensitivities than the average project in Mexico. No adjustment. iii. Sovereign Risks (force majeure): In the decade there has been evidence of political turmoil due to the Chiapas problem and the assassination of a presidential candidate. But, we consider that the government dealt effectively with these problems, thus no adjustment should be done to the cost of capital. b. Financial Risks (to be included in the discount rate): Idem Argentina - Since no default is at risk we recommend decreasing the cost of equity by 70bp, due to the fact that the loan default contributes with 5% to the ICRG index. Venezuela: a. Operating Risks (to be included in the discount rate): i. Sovereign Risk (macroeconomics): Venezuela is still dependent on oil exports. Recently the prices reached a 12-year low. We think that the government needs to take further macroeconomic measures to deal with the deficit produced by lower oil prices. In terms of the exchange rate, and inflation there is no evidence that they have been controlled. Moreover, the country recently had and exchange and price controls that limited the transferability of foreign capitals. We consider that the cost of equity should be increased by 278bp. ii. Sovereign Risk (political/legal): Recently a self-proclaim leftist wan the elections in this country. There is an uncertainty about the political and economical implications 6

7 of that situation. Moreover, because of the extreme powers that the Venezuelan Congress gave the president, it is expected that the legal system can be challenged. Although we don t expect direct expropriation, creeping can increased substantially the risk of the project. We recommend an increase of the cost of capital of 104 bp. iii. Sovereign Risks (force majeure): Again there is an increase uncertainty because of the new government. Although war and/or terrorism are not likely, certain events such as changes in laws and labor strikes can be possible. We suggest an increase in the cost of capital of 35bp. b. Financial Risks (to be included in the discount rate): Idem Argentina - Since no default is at risk we recommend decreasing the cost of equity by 70bp, due to the fact that the loan default contributes with 5% to the ICRG index. Adjustment to the Cost of Equity Capital: Cost of Equity Capital ( calculator ) Argentina Brazil Chile Colombia Mexico Venezuela 22.80% 25.45% 16.4% 22.10% 20.53% 26.81% Industry beta adjustment % % % % % % Operational - Sovereign Risks Macroeconomics % % % % % % Political/Legal % % % % % % Force Majeure % % % % % % Financial Risks % % % % % % Adj. Project Cost of Equity: 23.99% 24.76% 15.25% 24.54% 16.64% 29.88% The detail calculations of the cost of equity per country are shown in exhibit Weights average of the countries cost of capital by 5-year company gross bookings peer country: Bookings Cost of Equity Weighted Ave. Argentina 374, % 3.87% Brazil 860, % 9.18% Chile 176, % 1.16% Colombia 468, % 4.96% Mexico 383, % 2.75% Venezuela 57, % 0.74% Total: 2,320, % The resulting cost of equity capital of the project is: 22.65% Analysis IV Valuation & Monte Carlo Simulation Considering that Venture Capitalists believed that the revenue projections could be somewhat overstated and that because it relied so much on Internet expansion to Latin America, several assumptions in the cash flows (cash flow shown in exhibit 2) would be challenged. 7

8 For the valuation we used the discounted cash flow technique for the projection of 5 years, and a terminal value thereafter. We used Re as the discount rate, because the entire project is going to be financed with equity. No debt financing is expected to be used. Additionally, we considered net income as cash flow since non-cash transactions, such as depreciation and/or amortizations, are projected in the income statement. Before the Monte Carlo simulation we did a sensitivity analysis using a Tornado chart (shown in exhibit 3) to identify those variables that most affect the projection of net income. The idea is to see which of those variables are going to be modified in the Monte Carlo simulation. In order to test the strength & stability of the investment project, we built a model that captures the various risks and assumptions that we ve been describing throughout this write-up. To measure the uncertainty factor to this representation, we also affected the calculations with what we considered the main risks (variables from the Tornado chart). These risks (which were describ ed before) were modeled using Crystal Ball software. The valuation and variables used to affect the model are also shown in exhibit 2. (i) Revenue Risks: Captures the uncertainty in five main variables (Internet penetration, Online Ticket sales, spending per person, Market Share and Commissions) by factoring them with a value that follows a certain probability distribution Log Normal skewed left. - Internet Penetration and Market Share with Mean: 90% and SD: 10%. Factor: Internet users 64% 79% 94% 110% 125% - % Online Ticket sales, spending per person and Commissions with Mean: 95% and SD: 5%. 81% 89% 96% 104% 111% (ii) Timing Risks: Captures the ability to reach (or not) the launching targets. The Untapped Market variable in the first year was affected by factoring them with a value that follows a Log Normal distribution skewed left with Mean: 95% and Std. Dev.: 5%. This timing risk obviously affects the potential revenues of the first year of operations. Factor: Untapped Market 81% 89% 96% 104% 111% 8

9 (iii) Corporate Costs and Marketing Expenses Risks: Captures the probability of underestimating the corporate expenses and the media expenses to achieve the market share. Because we thought that the management team did not have specific expertise in Tourism and Internet, it could be necessary to include leadership from the industry. Therefore we decided to affect the management prediction by a factor with log normal distribution but this time skewed to the right. 91% 98% 106% 113% 121% (iv) Terminal Value Sensitivity: Captures the sensitivity of the project to the terminal value growth rate. We decided to affect the terminal growth rate with a uniform probability distribution between 2% and 3%. We represent this variation by the following distribution. 2% 2% 2% 3% 3% With this model, we ran a 1000-trial simulation that gave us a NPV distribution with a mean value of the project of: $23.8 Millions. Additionally, the project gives a positive NPV with a probability of 90%. Main report of the Monte Carlo simulation is shown in exhibit 4. Forecast: Net present value 1,000 Trials Frequency Chart 988 Displayed , ,448 49,859 75,271 Certainty is 10.30% from -Infinity to 0 9

10 Conclusion - What happened? Facts Despegar.com successfully raised 11 M$ in the first round, and some years later was able to raise another 10$M in a second round. Unlike similar ventures, the company was able to deploy the business model in 5 countries in less than a year. In January 23, 2002, Despegar.com merged with Viajo.com and became the Latin America's largest online travel company with more than 2 million registered users and annual projected online and offline sales of US$150MM. The combined company is now the reference for online travel in Latin America, which, according to the Boston Consulting Group, is the third largest e- commerce sector in the region and experienced a 160 percent growth in In 2002, they company registered positive cash flows and will break even in the short-term. In fact, some of the company s branches are already profitable. One of the major successes of the company was that the Business Model is still the same. The organization was able to reach the projected milestones and now Despegar has increased substantially its operating margins by increasing its negotiating power with the suppliers and generating their own tourism packages. Customers embraced the online model and now the majority of Despegar transactions are done through internet (and less through phone). Key Achievements Despegar created a new business concept in Latin America: a tour ism one-stop-shop. Now, the company is the leading tourism brand in the region and is the biggest player in sector. Despegar outraced all its competitors. Their success allowed them to acquired their biggest competitor Viajo.com, a company the had entered the market earlier and had bigger cash reserves. They were able to obtain financing when nobody was investing the region. They are one of the few Latin American online ventures that still operate. Despegar was selected as strategic partner for companies like Accor and Yahoo. Future Challenges World and Regional crisis are affecting their current revenues stream. War scenarios take a big toll on the tourism industry and are pushing them to focus on the core activities of the company. Travelocity and Expedia are huge players and they are going to enter the region in the near future. Market crisis and downturn economy eliminates huge retention and motivational incentives. Keep creating value to the consumers and shareholders. Success Factors Strong management team Flawless execution Flexibility Low Cost structure 10

11 Teaching Plan Suggested Assignment Questions Why despegar.com depends on Venture Capital financing? What are the costs and benefits of financing through venture capital funds? Which are despegar.com most important risks? How can they mitigate some of these risks? How you evaluate regional risk in a multi-countries project? Is there diversification effect (Latin America)? Why not? Suggested Teaching Plan 15 minutes 1.- Describe the project and Despegar.com s business strategy. Sources of financing for early stage companies: Angels, Venture Capital funds. How different is Latin America? 20 minutes 2.- Project Risks analysis. Determine the most important risks and how they could be mitigated. Analyze the pre-completion, post-completion, sovereign and financial risks. 20 minutes 3.- Determine the Cost of Capital by analyzing the country risks in Latin America using the Harvey calculator, developing a weighted average by projected revenues or GDP and finally adjusting by the corresponding risk analysis. 15 minutes 4.- Describe the valuation using Monte Carlo simulation for key variables and describe what was the outcome of the first round of financing. 11

12 Exhibit 1: Detail calculations of the cost of equity per country. Argentina Brazil Mexico Chile Colombia Venezuela Risk Premium Calculation Risk Premium Calculation Risk Premium Calculation Risk Premium Calculation Risk Premium Calculation Risk Premium Calculation Category Inputs Output Inputs Output Inputs Output Inputs Output Inputs Output Inputs Output U.S. risk free in % U.S. risk premium in % Current U.S. Credit Rating Institutional Investor country credit rating (0-100) Anchored Cost of Equity Capital Country Risk Premium Industry Adjustment Industry Adjustment Industry Adjustment Industry Adjustment Industry Adjustment Industry Adjustment Beta (Industry) Sector adjustment Project Risk Mitigation 1 Project Risk Mitigation 1 Project Risk Mitigation 1 Project Risk Mitigation 1 Project Risk Mitigation 1 Project Risk Mitigation 1 Impact on Country Premium Weights Score Impact on Country Premium Weights Score Impact on Country Premium Weights Score Impact on Country Premium Weights Score Impact on Country Premium Weights Score Weights Score Sovereign Currency (convertibility) Expropriation (direct, diversion, creeping) Commercial International partners Involvement of Multilateral Agencies Sensitivity of Project to wars, strikes, terrorism Sensitivity of Project to natural disasters Operating Resource risk Technology risk Financial Probability of Default Political Risk Insurance Real Options Project impacts other projects Other options that are difficult to value Sum of weights (make sure = 1.00) Cost of Capital Cost of Capital Cost of Capital Cost of Capital Cost of Capital Cost of Capital : (-10 to 10; where 10=risk completely eliminated, 0=average for country) Company gross bookings (5 years) ($ k) 374, , , , ,729 57,144 Total company gross bookings (5 years) ($ k) 2,320,128 Weighted average cost of capital (%) Despegar.com Cost of Capital Calculator Impact on Country Premium 12

13 Exhibit 2: Cash flows E-Travel Market Argentina Population (k) 36,648 37,124 37,607 38,096 38,591 39,093 39,601 % internet users 2.0% 3.6% 4.9% 6.2% 7.6% 9.3% 11.0% Internet users (k) 722 1,330 1,838 2,354 2,928 3,631 4, % % online ticket buyers 0.5% 1.5% 3.8% 8.6% 12.9% 16.8% 100% Online ticket buyers (k) Spending per person ($) % Ticket bookings ($ k) 4,788 19,849 63, , , ,884 Total Airline Ticket Bookings ($ k) 2,500,000 2,680,000 2,872,960 3,079,813 3,301,560 3,539,272 3,794,100 Online spending as % total 0.2% 0.7% 2.1% 5.5% 9.6% 13.9% Share of e-market 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 100% Untapped market potential 25.0% 0.0% 0.0% 0.0% 0.0% 0.0% 100% Company gross bookings ($ k) 1,185 6,550 20,971 60, , ,872 Brazil Population (k) 174, , , , , , ,881 % internet users 2.2% 2.8% 3.6% 4.2% 4.8% 5.9% 7.0% Internet users (k) 3,825 4,994 6,521 7,793 9,032 11,336 13,728 % online ticket buyers 1.0% 3.0% 6.9% 11.7% 16.4% 21.3% Online ticket buyers (k) ,059 1,862 2,931 Spending per person ($) Ticket bookings ($ k) 32, , , ,622 1,210,039 1,904,978 Total Airline Ticket Bookings ($ k) 6,280,000 6,732,160 7,216,876 7,736,491 8,293,518 8,890,651 9,530,778 Online spending as % total 0.5% 1.8% 4.5% 8.3% 13.6% 20.0% Share of e-market 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Untapped market potential 33.0% 0.0% 0.0% 0.0% 0.0% 0.0% Company gross bookings ($ k) 4,350 25,430 69, , , ,996 Mexico Population (k) 98, , , , , , ,356 % internet users 1.6% 2.2% 3.1% 4.3% 5.1% 6.1% 7.1% Internet users (k) 1,537 2,205 3,148 4,465 5,479 6,680 7,927 % online ticket buyers 1.0% 2.5% 5.0% 8.5% 12.8% 16.6% Online ticket buyers (k) ,314 Spending per person ($) Ticket bookings ($ k) 14,329 51, , , , ,035 Total Airline Ticket Bookings ($ k) 5,139,000 5,509,008 5,905,657 6,330,864 6,786,686 7,275,327 7,799,151 Online spending as % total 0.3% 0.9% 2.3% 4.5% 7.6% 11.0% Share of e-market 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Untapped market potential 33.0% 0.0% 0.0% 0.0% 0.0% 0.0% Company gross bookings ($ k) 1,920 10,231 29,025 60, , ,807 Chile Population (k) 15,211 15,515 15,826 16,142 16,465 16,794 17,130 % internet users 2.2% 3.0% 3.9% 5.0% 6.2% 7.4% 8.6% Internet users (k) ,019 1,241 1,471 % online ticket buyers 0.4% 1.2% 3.0% 6.0% 10.2% 15.3% Online ticket buyers (k) Spending per person ($) 1,200 1,200 1,200 1,200 1,200 1,200 Ticket bookings ($ k) 2,268 8,866 28,825 73, , ,076 Total Airline Ticket Bookings ($ k) 2,088,000 2,238,336 2,399,496 2,572,260 2,757,463 2,956,000 3,168,832 Online spending as % total 0.1% 0.4% 1.1% 2.7% 5.1% 8.5% Share of e-market 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% Untapped market potential 33.0% 0.0% 0.0% 0.0% 0.0% 0.0% Company gross bookings ($ k) 501 2,926 9,512 24,209 50,126 89,125 Colombia Population (k) 37,822 38,578 39,350 40,137 40,940 41,759 42,594 % internet users 1.8% 2.3% 2.9% 3.6% 4.4% 5.5% 6.4% Internet users (k) ,155 1,450 1,822 2,276 2,747 % online ticket buyers 0.4% 1.2% 3.0% 6.0% 9.0% 12.6% Online ticket buyers (k) Spending per person ($) Ticket bookings ($ k) 2,283 9,005 28,265 71, , ,979 Total Airline Ticket Bookings ($ k) 1,671,000 1,791,312 1,920,286 2,058,547 2,206,762 2,365,649 2,535,976 Online spending as % total 0.1% 0.5% 1.4% 3.2% 5.6% 8.9% Share of e-market 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% Untapped market potential 33.0% 0.0% 0.0% 0.0% 0.0% 0.0% Company gross bookings ($ k) 505 2,972 9,328 23,447 43,938 74,243 Venezuela Population (k) 24,170 24,653 25,146 25,649 26,162 26,686 27,219 % internet users 1.5% 1.8% 2.3% 2.8% 3.3% 4.1% 5.1% Internet users (k) ,085 1,379 % online ticket buyers 0.4% 1.2% 3.0% 6.0% 9.0% 12.6% Online ticket buyers (k) Spending per person ($) Ticket bookings ($ k) 1,156 4,469 13,796 33,322 63, ,940 Total Airline Ticket Bookings ($ k) 975,000 1,045,200 1,120,454 1,201,127 1,287,608 1,380,316 1,479,699 Online spending as % total 0.1% 0.4% 1.1% 2.6% 4.6% 7.6% Share of e-market 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Untapped market potential 50.0% 0.0% 0.0% 0.0% 0.0% 0.0% Company gross bookings ($ k) 144 1,117 3,449 8,330 15,868 28,235 Total 6 Countries Population (k) 387, , , , , , ,782 % internet users 1.9% 2.6% 3.4% 4.3% 5.1% 6.2% 7.3% Internet users (k) 7,464 10,324 13,849 17,570 21,134 26,249 31,603 % online ticket buyers 0.8% 2.4% 5.3% 9.5% 13.8% 18.1% Online ticket buyers (k) ,999 3,612 5,721 Spending per person ($) Ticket bookings ($ k) 57, , ,087 1,350,892 2,450,388 3,893,893 Total Airline Ticket Bookings ($ k) 18,653,000 19,996,016 21,435,729 22,979,102 24,633,597 26,407,216 28,308,536 Online spending as % total 0.3% 1.0% 2.7% 5.5% 9.3% 13.8% Share of e-market 22.3% 22.3% 22.6% 23.3% 23.4% 23.6% Untapped market potential 32.7% 0.0% 0.0% 0.0% 0.0% 0.0% Company gross bookings ($ k) 8,606 49, , , , ,278 13

14 Exhibit 2 Cont d: Cash flows and valuation Revenue Mix ($ K) Ticket System Income Company gross bookings (total) ($ k) 8,606 49, , , , ,278 Price per ticket ($) Amount of tickets (k) ,436 2,293 % commission (paid to travel agents) 8.0% 7.0% 6.0% 5.0% 4.0% 4.0% 100% Net revenues from tickets 688 3,446 8,531 15,713 22,971 36,691 Other Travel Income (hotel, pack., etc.) Company gross bookings (total) ($ k) 8,606 49, , , , ,278 Other sales as % of co. gross book. 10% 20% 30% 40% 50% 60% Other sales 861 9,845 42, , , ,367 % commissions 15% 13% 11% 10% 9% 8% Net revenues from other sales 129 1,280 4,692 12,570 25,842 44,029 Other Advertising Income Company gross bookings (total) ($ k) 8,606 49, , , , ,278 Other sales as % of co. gross book. 3% 3% 2% 2% 2% 2% Net revenues from advertising 221 1,235 3,202 7,523 12,766 20,663 Income Statement ($ k) Revenues Ticket bookings 688 3,446 8,531 15,713 22,971 36,691 Other Travel bookings 129 1,280 4,692 12,570 25,842 44,029 Advertising 221 1,235 3,202 7,523 12,766 20,663 Total gross revenues 1,039 5,960 16,426 35,806 61, ,383 Gross income tax (1.5%) ,521 Total net revenues 1,023 5,871 16,180 35,269 60,656 99,863 Cost of revenues (fulfillment) Bookings commissions 910 4,680 11,734 23,236 35,737 57,354 Bookings fulfillment cost (%) (travel agency) 50% 25% 0% 0% 0% 0% Bookings fulfillment cost (%) (Inhouse Sol.) 0% 10% 20% 20% 20% 20% Total cost of revenues (fulfillment) 455 1,638 2,347 4,647 7,147 11,471 Gross profits 584 4,322 14,079 31,159 54,432 89,913 Corporate Operative % Personnel ,014 1,248 1, % IT / website ,088 1, % Total corporate expenses ,486 2,038 2,509 2,934 Countries expenses Argentina Brazil ,041 1,260 1,375 Mexico ,127 1,222 Chile Colombia Venezuela Total countries expenses 1,537 2,607 3,316 4,001 4,707 5,112 Marketing expenses Media advertising 2,909 5,575 7,919 10,032 12,347 14, % Banners Strategic alliances expenses ,881 3,192 5,166 Income sharing expenses ,322 2,828 4,881 8,072 Total marketing expenses 3,087 6,528 10,432 15,231 20,988 28,465 Total expenses 5,338 10,130 15,234 21,270 28,204 36,510 EBITDA -4,754-5,808-1,155 9,889 26,228 53,402 Interest Depreciation & amortization Income before taxes -4,754-5,808-1,155 9,889 26,228 53,402 Taxes (35%) ,691 Net income -4,754-5,808-1,155 9,889 26,228 34,711 Valuation Cash flows -4,754-5,808-1,155 9,889 26,228 34,711 Cost of capital 22.65% 22.65% 22.65% 22.65% 22.65% 22.65% Present value cash flows -3,876-3, ,370 9,449 10,196 Sum of present values 15,653 % growth (terminal value) 2.5% Uniform (2-3) Terminal value 176,554 Present value terminal value 51,860 Net present value 67,512 14

15 Exhibit 3: Sensitivity analysis: Tornado Chart SensIt - Sensitivity Analysis - Tornado Internet users (k) 60% 100% Share of e-market 80% 105% % online ticket buyers 80% 100% Spending per person ($) 90% 110% Media advertising % commission (paid to travel agents) % growth (terminal value) Corporate Personnel Expenses Corporate IT Expenses Corporate Operative Expenses Untapped market potential 120% 95% 2.0% 110% 110% 100% 105% 3.0% 90% 90% 90% 110% 95% 105% -20,000-10, ,000 20,000 30,000 40,000 50,000 60,000 Net present value 15

16 Exhibit 4: Main report Monte Carlo simulation Crystal Ball Report Simulation started on 2/28/03 at 14:54:18 Simulation stopped on 2/28/03 at 15:00:08 Forecast: Net present value Cell: B191 Summary: Display Range is from -26,375 to 75,271 Entire Range is from -32,942 to 90,387 After 1,000 Trials, the Std. Error of the Mean is 607 Statistics: Value Trials 1000 Mean 23,760 Median 22,030 Mode --- Standard Deviation 19,205 Variance 368,844,484 Skewness 0.52 Kurtosis 3.28 Coeff. of Variability 0.81 Range Minimum -32,942 Range Maximum 90,387 Range Width 123,329 Mean Std. Error Forecast: Net present value 1,000 Trials Frequency Chart 988 Displayed , ,448 49,859 75,271 Forecast: Net present value (cont'd) Cell: B191 Percentiles: Percentile Value 0% -32,942 10% % 7,245 30% 12,898 40% 17,178 50% 22,030 60% 26,969 70% 31,978 80% 38,864 90% 49, % 90,387 16

17 Exhibit 4 Cont d: Main report Monte Carlo simulation. Assumption: Factor: Internet users Mean 90% Standard Dev. 10% Cell: J8 Factor: Internet users 64% 79% 94% 110% 125% Assumption: Factor: Online Ticket Buyers Mean 95% Standard Dev. 5% Factor: Online Ticket Buyers 81% 89% 96% 104% 111% Cell: J9 Assumption: Factor: Share of e-market Mean 90% Standard Dev. 10% Factor: Share of e-market 64% 79% 94% 110% 125% Cell: J16 Assumption: Factor: Untapped Market Mean 95% Standard Dev. 5% Factor: Untapped Market 81% 89% 96% 104% 111% Cell: J17 Assumption: Factor: Untapped Market Mean 95% Standard Dev. 5% Factor: Untapped Market 81% 89% 96% 104% 111% Cell: J116 Assumption: Factor: Price per ticket Mean 95% Standard Dev. 5% Factor: Price per ticket 81% 89% 96% 104% 111% Cell: J11 17

18 Exhibit 4 Cont d: Main report Monte Carlo simulation Assumption: Factor: Commission Cell: J118 Mean 95% Standard Dev. 5% Factor: Commission 81% 89% 96% 104% 111% Assumption: Factor: Operative Cost Cell: J153 Mean 105% Standard Dev. 5% Factor: Operative Cost 91% 98% 106% 113% 121% Assumption: Factor: Personnel Cost Cell: J154 Mean 105% Standard Dev. 5% Factor: Personnel Cost 91% 98% 106% 113% 121% Assumption: Factor: IT Costs Cell: J155 Mean 100% Standard Dev. 10% Factor: IT Costs 74% 89% 104% 119% 134% Assumption: Factor: Media advertising Cell: J168 Mean 105% Standard Dev. 5% Factor: Media advertising 91% 98% 106% 113% 121% Assumption: % growth (terminal value) Cell: B188 Uniform distribution with parameters: Minimum 2.0% Maximum 3.0% % growth (terminal value) 2.0% 2.3% 2.5% 2.8% 3.0% 18