Operation of British Belting & Asbestos Aviation Plc - Term Paper Example

Running Head: BBA AVIATION PLC: INDIVIDUAL ESSAY IN INTERNATIONAL MONEY AND FINANCE BBA Aviation Plc: Individual Essay in International Moneyand Finance in APA Style by Student's Name International Money and Finance University I. Introduction This report aims to conduct a quantitative and qualitative analysis on the operation of BBA Aviation Plc. The first section offers a brief overview of the business organization followed by the identification of its major markets. In order to fully understand the financial performance of the company, a five year trend analysis is also conducted. This is followed by an evaluation of the company's corporate strategy and analysis of risk management. The report concludes with the future outlook and recommendation for BBA Aviation Plc. II. Company Overview BBA Aviation Plc (BBA Aviation) traces its roots from the establishment of a textile manufacturing company named W. Wilson Cobbett Ltd during 1870s (Yahoo Finance 2007). With this humble beginning, the business organization has risen to become one of the world's recognized aviation companies capitalizing on its leading market position and strong growth potential. BBA Aviation reports annual sales of 1 million, employs approximately 10, 700 individuals, and operates in 11 countries. The company's major markets include the United States, Asia, the United Kingdom and Europe, while maintaining its headquarters in London, England (BBA Aviation Plc 2007). BBA Aviation Plc focuses on the provision of flight support services and aftermarket services and systems. The company's Annual Report 2006 states that it focuses on extending primary services such as "providing flight support to business and commercial aircraft at almost 150 locations worldwide; overhauling turbine engines together with the supply and repair of related components; licensing components from OEM s [Original Equipment Manufacturers] and assuming responsibility for their support in the Aftermarket; designing, manufacturing, and repairing of aircraft landing gear and hydraulic systems; and training pilots and the provisions of other services at Oxford airport." During 2006, BBA Aviation reports a total turnover of 950.1 million, 556.4 million (59%) of which is shared by its flight support division while the remaining 393.7 million (41%) is accounted for by its aftermarket services and systems (Annual Report 2006). Figure 1 further divides the company's total turnover in 2006 among its business units. Figure 1. Shares of Business Units in BBA Aviation's Total Turnover (2006, in million) III. The Global Aviation Market Armed with its commitment in the provision of excellent products and services to its customers and its cultivated expertise gained through its experience in the market, BBA Aviation is recognized as one of the leaders in the global aviation market. Based on the total value of its turnover in 2006, BBA Aviation's biggest market is the business and general aviation market which accounts for 65% of its total revenue. The company also captures a large share in the commercial aviation primarily on flight support as this segment provides 30% of its turnover. The business organization has a very limited presence in the military market which shares a meager 5% to its gross earnings (Annual Report 2006). Figure 2. The Markets of BBA Aviation (based on sales percentage) A. General and Business Aviation The company's operation in the general and business aviation market has been challenged by the historically high crude oil costs coupled with the rise in average retail jet fuel prices. Amidst these threats in the market environment, BBA Aviation Plc reports a generally "robust growth" as "business aircraft utilization recovered and remained strong" after the "temporary softening in flying hours during the early 2006" (Annual Report 2006). The business organization's outlook for this market segment is bright as demand for its products and services are expected to rise driven by "the continued growth of traditional corporate flight departments and fractional operations, the popularity and accessibility of jet card programmes, the strong interest in the new class of very light jet aircraft (VLJs), and potential impact of security issues on the commercial airlines" (Annual Report 2006). Above all these opportunities, BBA Aviation is very much optimistic on the continued profitability of its operation especially due to the huge potentials of the expected wide acceptance and popularity of VLJs. The company is looking forward in extending more flight support services in this segment. B. Commercial Aviation The company's performance in the commercial aviation market is aided by the favorable trends and developments in the external environment. It should be noted that BBA Aviation has been showing strength in generating turnover largely because of the growing popularity of business process outsourcing in Northern America and other parts of the world. The past two years saw the rapid increase in the demand for outsourced fuelling and groundhandling services among commercial airline which enables them to have huge savings on operating costs. ASIG is particularly benefited from this as it opens high skill and high margin opportunity for it specifically on ground support equipment maintenance (Annual Report 2006). IV. Summary Financials The stability of the operation of a business organization is often mirrored in its financial statements. It should be noted that international players like BBA Aviation Plc which caters to different market are exposed to various financial risks and trends that are, in turn, reflected in their annual reports. The financial situation of BBA Aviation will be assessed through the utilization of a trend analysis highlighting the five-year-financial performance of the business organization. Table 1 shows the selected accounts of BBA Aviation derived from their websites and annual reports. It should be mentioned that the comparability of the figures presented in the table is adversely affected by the change in the accounting standard from UK GAAP to IFRS as necessitated by the international market since 2003. Thus, data for fiscal years 2002 and 2003 are reported using UK GAAP while the succeeding years are presented using IFRS. It should also be noted that financial statement during 2006 is also affected by the demerger of BBA Group Plc. There has been a slump in total revenue in 2005 relative to the previous levels. The company managed to recover during 2006 but it failed to reach the amount of total turnover recorded from 2002-2004. BBA Aviation's is in an uptrend from 2002-2003 indicating the company's efficient management of costs and resources. However, the fiscal year 2006 reports net losses due to the demerger. Loss on discontinued operations amounts to 76.2 million resulting to a total net loss of 10.2 million. The years before the demerger of BBA Group Plc shows the company's ballooning total resources. During 2005, the company's pool of assets totaled 2, 785.2 million. This is almost halved as Fiberweb is taken out from its portfolio. The same is true with total liabilities and shareholders' equity. Table 1. Selected Financial Accounts and Ratios for BBA Aviation Plc (2002-2005) The escalating gearing of the business organization indicates its increasing preference in the utilization of long-term debt in financing its resources. There has been a steady increase of liabilities in proportion to total shareholders' equity. In fact, from a capital structure of 71:29 in favor of debt in 2002, BBA Aviation now has an 80:20 financing structure. Before 2006, earnings per share have been in an uptrend simultaneous with the increase in the company's net income. Thus, the net losses reported during 2006 can be directly traced to the acquisition of net losses during the fiscal. This also affected the company's distribution of dividends as it was not able to sustain the previous levels of more than 10 pence per ordinary share. BBA Aviation has been forced to revamp its dividend policy distributing only 8.5 pence per ordinary share during 2006. In terms of the attractiveness of the company's stock as an investment, BBA Aviation's beta has always remained more than one which means that the company generally moves with the industry in terms of gains and losses at a larger extent. The decreasing beta factor indicates that the company offers larger profit potential than the market albeit at a declining rate. In terms of risk, the company also faces more risk than the industry but this has also been reduced relative to the past years. Figure 3. BBA Aviation's Historical Share Price (2002-2005) Figure 3 shows BBA Aviation's historical share price for the past five years. It should be noted that after reaching its peak in 2002, the company's share price slumped deeply during 2003. However, stock prices recovered and continued to escalate until it reached its peak in 2006 simultaneous with the announcement of the demerger. Share prices have declined and stabilized at a range of 260-280 pence. V. Corporate Strategy As mentioned above, the company traces its origins from a textile manufacturing firm which eventually focuses on the provision of products and services geared for the aviation market. The company has developed through the acquisition of small and large business organizations with particular participation in the airline industry. In its Annual Report for the fiscal year 2006, BBA Aviation states its corporate strategy as follows: "Our strategy is to maintain a balanced portfolio of aviation services and aftermarket businesses which have clear barriers to entry, a focus on the business and general aviation sector, producing above average growth rates and attractive returns" (Annual Report 2006). The company then further elaborates this strategy by specifying its key elements which includes: further diversification and expansion of products and services in different markets globally; strengthening strategic alliances with OEMs through securing new aftermarket licenses; expansion of component and repair capability to support ERO, landing gear, landing gear, and licensing opportunities; productivity improvements; efficient exploitation of business synergies; and focusing on the improvement of operational performance (Annual Report 2006). This corporate strategy has been possible by the developed strengths and core competencies of the business organization. Supporting this corporate strategy is the company's developed leadership in its market. For instance, Signature Flights is currently the world's leading Freight on Board network located in 81 locations worldwide. ASIG is the largest independent refueller in the United States and United Kingdom and number two globally. Because of its acquired expertise and efficient strategic alliances within the industry which has barred potential entrants in competing with the sector. BBA Aviation also boasts of its top caliber management team which is recognized for their knowledge and skills in managing acquisitions. Through its existence in the industry, acquisition has been a primary growth strategy pursued by BBA Aviation. During 2001, the business organization acquired ASIG for 97 million which transformed the entire aviation industry by doubling the sales generated by the company. The year 2002 further saw the company's aggressive acquisition of FOBs in the US together with freight and ground service businesses. The following years all document BBA Aviation's quest of beefing up its portfolio through the addition of Premier Turbines, Arnoni Aviation Services, and Ontic Engineering and Manufacturing. With the increasing globalization and the need to widen its geographical market, the company has enhanced its geographic position with eight acquisitions in aviation services (BBA Aviation Plc 2007). The company has also recognized the need to focus on its core business and competence. It should be noted that BBA Aviation is the by-product of the demerger of BBA Group Plc into BBA Fiberweb and BBA Aviation. This move shows the company's commitment in focusing on the aviation industry. With the rapid integration in the aviation industry, BBA hints its prospect of continuing its acquisition strategy in order to improve its portfolio. VI. Risk Analysis As with any business organization, BBA Aviation is exposed to different risks in the environment. With BBA Aviation, this is even more pronounced as it operates internationally including markets which are highly volatile and it is not fully familiar with. The trends and developments as well as the probable business cycles in the markets on the company can have a strong and direct impact on its operations. It is stated above that the largest revenue generator of BBA Aviation is the general and business aviation segments. Thus, movements in this section will have the largest impact in the operation of the business organization. Thus, operational risks for BBA Aviation includes factors which can slow down the frequency of air travel like terrorists attacks and threats that can paralyze air travel thus hampering the growth of flight support services. Other operational risks also includes the return to $80 per barrel of crude oil and rise in jet fuel prices in a prolonged period which can consequently slow down flying hours. Even though BBA Aviation operates in 11 countries worldwide, bulk of its operation is concentrated in the United States. In fact, the company reports that 60% of its after-tax profit comes from this single geographic location (Annual Report 2006). The rationale in operating in the United States is apparent: the country is the largest consumer of air travel products and services. However, with the current situation of the United States, BBA Aviation is exposed to specific country risks. After its economic hegemony for the longest period, it is expected that economic growth in the US will slowdown. In fact, economists forecast that US will be faced with a recession later this year (Greenspan 2007). This irrefutably dampens business and consumer confidence which can harm air travel in the long run. US is also faced with the problems of trade deficits which weakens the dollar. In terms of financial risks, BBA Aviation admits the risks of funding and liquidity, interest rate, and foreign exchange rate. Being a multinational, the business organization's revenues are denominated in the currencies of the countries where it operates primarily US dollars. BBA Aviation is largely exposed to the detrimental effects of the continuous depreciation of the $ against the . The company incurs huge foreign exchange losses when its revenue in United States is converted and reported in the UK. It is expected that the continuous depreciation of the US dollar will further necessitate the efficient foreign exchange rate risk management. VII. Outlook, Conclusion, and Recommendation The recent demerger of the BBA Fiberweb from the company's portfolio is a strategic move of BBA Aviation to focus on its core competence and strengthen its position in the global aviation industry. This direction has been consistent with the company's corporate strategy of building its strength in the industry and creating focus only in aviation services. It is also recommended that BBA Aviation take its role on the integration of the global aviation industry by continuing its strategy of acquiring and developing small aviation companies which needed financial muscle and exemplary management skills in order to efficient compete in the industry. Through its acquisition strategy, BBA Aviation will benefit from the strengths and clientele built by the acquired organization and further beef up its portfolio of efficient entities. With the various risks faced by BBA Aviation, it needs an efficient strategy to manage and minimize the risks that it faces. Since it has no direct control in its external environment, it is recommended that the business organization focus on controlling its internal organization in order to counter the detrimental effects and risks present in its environment. Some of the measures that the company can take is minimizing country and exchange rate risk through further geographical expansion in order to minimize the adverse effect of the probable recession in the United States. This will also enable the business organization to take advantage of the opportunities in rapidly developing economies like China. With the increasing growth of China, it is poised to become one economic giant which will also necessitate the products and services offered by BBA Aviation. The business organization can also lessen operational risks through forging strategic partnerships with airline organizations and OEMs. References Annual Report, 2006. BBA Aviation Plc Website. Retrieved 24 April 2007, from http://www.bbaaviation.com/pdf/2006annualreport.pdf BBA Aviation Website, 2007. Retrieved 24 April 2007, from http://www.bbagroup.com Greenspan: "Recession 'possible' by end of year" 2007. USA Today Website. Retrieved 24 April 2007, from http://www.usatoday.com/money/economy/2007-02-26-greenspan_x.htm Yahoo Finance, 2007. BBA Aviation Profile. Retrieved 24 April 2007, from http://uk.finance.yahoo.com/q/prs=BBA.L Bibliography Fraser, L. & Ormiston A 2004, Understanding Financial Statements, Pearson-Prentice Hall: Upper Saddle New Jersey Horngren , C. et. al..2000, Accounting.4th ed. New Jersey: Prentice Hall Keown, A.J., Martin, J.D., Petty, J.W., and Scott Jr., D.F, 2005, Financial Management principles and applications, Pearson/Prentice Hall International Edition, 10th Edition. Thompson, A. & Strickland , J 2002,Strategic Management.3rd ed. New York McGraw- Hill Read More