Earning Projection and Growth in Easyjet - Research Paper Example

Financial Accounting Statements Executive Summary Financial Statement comprises of balance sheet, income statement and statement of retained earnings and cash flows. Earning projection and growth is better for Easyjet. British airways have international presence where as Easyjet is in short hauling segment. British Airways is ahead of other competitors in social responsibility. Due to the presence in premium segment and cargo, the decline in earning in the next fiscal year is expected in the aviation industry. Unstable capital structure is more prominent in Easyjet. Easyjet is getting ahead in ancillary services. Share price for British Airways and Easyjet is below FTSE index showing low level of confidence among the investors. Introduction The formal record of the business activities is represented in a report, which is known as financial report of the business or the financial statements. The components of financial statements are generally, the balance sheets, the income statement (P&L account), the statements of retained earnings and cash flows. The financial reports are very useful and essential in accessing the business activities of any company and hence, every company issues their yearly financial report at the end of each financial year. The objective of the project is to analyze the financial strength and weakness of a financial statement by comparing two companies’ financial statement. We are using financial statements of Easyjet and British Airways to fulfill our objective. Data are collected mainly using Annual reports, websites and books and windows excel is used for the analysis. Mainly the report is about the European market so the extensive search is from the books and annual reports of British airways and competitors in this region for short to long haul service. Overview of the two companies Easyjet The operation of Easyjet is in short haul aviation, serving 114 airports and 422 routes with 181 aircrafts. The board of Easyjet comprises of ten members, eight non-executive including Chairman and two executive directors. The chairman performs almost same operation, which is defined by Easyjet’s code of listing. To achieve the target, the internal control acts to manage the risk but not to eliminate it by formal process of identification, evaluation, management, and reporting. This process is enhanced by creating reporting function, whistleblower (external specialist third party operates the system). (Easyjet’s Annual report, 2009) The acquisition of GB Airways by Easyjet helped them to gain a capacity of around 12% at Gatwick. Easyjet protected itself from the revenue loss during recession by providing services in primary airports and performing business from inside and outside. To optimize the routes, Easyjet expanded their services in new routes and closed the services in the underperforming routes. The business routes are oriented to the peak slots, ahead of the leisure routes, which are oriented to the later part of the day. The company won the competitive battle on traditional sun routes with excellent load factors despite of weak market pricing. Easyjet has also benefited from the legacy competitors after withdrawing on key business routes. Additional capacities on few routes are added to improve the business appeal to travelers. Easyjet is growing with marginal improvement by focusing on all three drivers, cost, yield, and ancillaries. The drivers of industry leading revenue performance are hands-on aircraft distribution into stronger market, good commercial management particularly in pricing, promotion, and route selection. Easyjet is benefiting from its efforts of targeting the business travel market with around 15% of business passengers who are now originating through business orientated distribution channels. (Easyjet’s Annual report, 2009). Customers are ready to pay 20% premium is good sign of getting chance in to premium segments. Per seat basis ancillary revenue income grew from checked bag charge and the other ancillary revenues grew per seat. Introduction of selling on board electronic point, food offering and web design to attract more consumers and higher conversion rates for hiring car and hotel, helped in-flight revenue jump. (Easyjet’ Annual report, 2009; pp 35-40) British Airways British Airways, who is one of the partners of a group of ten airlines named ‘oneworld’, operates in the high geographical area including short haul and long haul. They also operate in worldwide cargo business with 245 aircrafts flying 300 plus destination. (BA’s Annual report, 2009). The Board of British Airways consists of chairman, two executive directors and non-executive directors who directs the risk associated assessment, strategic, financial, resource and operational management for ensuring the obligations to shareholders along with stakeholders. They meet eight times in a year, and in addition whenever required to solve any emergency matters related to, business performance, strategy, overall control and planning. The main functions of board of British Airlines are providing proper solution to shareholders problem, scrutinizing performance to roll out proper financial and operational management, integrity, control, risk management and planning. The Four committees in BA are Audit, Safety Review, Nominations, and Remuneration. They assemble regularly to meet the responsibility and if required, take external advice. British Airways has no expenditure for political donation or expenditure for any political intention, which reflects the good conduct of codes and ensures the quality governance. (BA’s Corporate Governance, 2009) British Airways provides service to individuals, business travelers, cargo, and other premium services. They also have extended their business in ancillary service, acquired new slots, and made support plans for the improvement of services in terminals by making alliance with BAA. British Airways has ancillary services like third party engineering, in flight entertainment, sales, and online retail, which aim at reinforcing of brand and growing mileage. (BA’s Annual report, 2009, pp 42-47) British Airways have clear organizational structure, responsibility control and extensive line of authority, professionalism, properly maintained competence of staff, rigorous policies of recruitment, training, performance appraisal system, reinforcing accountability, identifying gap and developing and maintaining skills to achieve the set target. (Hamel& Prahalad, 1994, p.164) Analysis of Financial statement of the two companies to determine the strengths and weakness Now we analyse the strengths and weakness of the two companies that comes up from their financial reports. BA’s main social responsibilities are carbon reduction, reducing and recycling of waste and noise pollution control. They also work closely with communities around UK for education, youth development, organization for conservation of tourism and cargo, education programs under UNISEF, workshop for customer services, business language championship awards, partnership with museum and charitable donations by fundraising from employees. (BA’s Annual report, 2009, pp. 48 - 50) Easyjet in contrast, maintains its high efficiency level by lowering the rate of pollution in both air and ground. Other traditional airline emits 27% more carbon in air than Easyjet because Easyjet uses new flying fuller planes, which are just 3 to 4 years old. To control the pollution on ground, Easyjet maintains shorter time period of turnaround to empty the planes and boarding again with passengers by using minimum service and resource of airports. For the sake of waste management, Easyjet do not supply free food and use bio products in their services. Easyjet is transparent in carbon offsetting system by maintaining UN approved scheme to keep the level of carbon emits 95.7 g/Km in comparison to 121 g/KM for other average airline. (Easyjet’s Annual report, 2009) In comparison to BA, to get advantage in air pollution control, Easyjet operates their flights in short haul. A flight for short haul emits carbon 10 times lower than medium haul and 28 times lower than long haul. Avoidance of busy hubs offers quick turnarounds and holding patterns with minimal taxiing, results in less use of fuel and less carbon emission. British Airways undergoes different varieties of charity program, which is significantly lagged in Easyjet. From environmental perception both BA and Easyjet follow their own way in reduction of pollutants and assign their efforts to pace ahead of other average competitors. (Harrison, 2009) British Airways used to exercise buyback of shares in the past for the interests of shareholders but not at present. This signifies the liquidity and cost effectiveness of assets under British Airways as these shares can be sold quickly in the market if the permission and rules follow the insider dealing mechanism. This gives the British airways extra flexibility and opportunities in the management of capital because the shares in treasury can be treated as cancelled and no dividend or voting rights are issued to them. Numbers of fully paid floated ordinary shares were increased in BA, which reflects, issuing of new ordinary shares to exercise share options. These are considered as award to employees from British Airways. (BA’s Annual report, 2009, p. 48) (Ref: Exhibit 1) Revenue for both companies grew in last two fiscal years but not at same rate. British Airway’s revenue growth is only 2.67%, where as for Easyjet the revenue growth is 12.87%. The growth in cargo segment is higher than average but other premium service growth was negative for British Airways whereas, Easyjet’s growth in ancillary service was exceptionally good. For BA revenue generation is mainly from passenger, cargo, in flight entertainment, third party engineering, in flight sales and online retail but for Easyjet the revenue generation is mainly from passengers. Result of revenue level for Easyjet was marginal but for British Airways it was below expectation. (Ref: Exhibit 2) Operating profit and profit before tax have dropped mainly due to increase in fuel cost and less amount of revenue growth for British airways. The main reasons for 125% negative growth for British Airways was for fuel derivative loss and currency differences. Fuel cost increase and interest income reduction was the main pre tax profit drop of Easyjet but Easyjet was quiet successful to hedge the change in fuel cost and operating profit and ultimately came up with positive growth in comparison the British Airways. In case of Easyjet, the increase in fuel price of about 14% has solo impact on revenue growth of £86.1million. (Ref: Exhibit 3) Easyjet maintained a constant growth of passengers whereas in case of British Airways that had declined over the last fiscal year 2009 by around 3%. Capacity and passenger flown is the greatest concern for the next financial growth and it is expected that the number of passenger will increase for both BA and Easyjet. Premium customers and customers of long haul had significantly dropped during winter for British Airways. Easyjet has eaten out the competitors share and also anticipated to continue in near future to maintain its growth at same pace. Even in this regard, the unemployment factor has more impact over BA rather than Easyjet, which confirms bookings well above 45% for the first half in comparison to the last year. BA and Easyjet showed low operating costs per seat after excluding fuel efficiency programs, by optimizing route profitability and aircraft allocation, which may help further to cartel down the effect of low interest rate. (Easyjet’ Annual report, 2009) Gearing ratio for both British Airways and Easyjet increased due to the increase in debt financed capital expenditure for continuing replacement and optimization of flights and routes. (Ref: Exhibit 4). BA is trying to increase the profit earning ratio and growth of market shares through merger and acquisition of other companies who are playing in the same market but they are waiting for the legal permission from government. Due to the fuel price hike BA lost huge amount in the last fiscal year but in this year the fuel price is at marginal level and can even experience a fall. At the same time currency gain has supported it last time but this time the chances of support from currency gain is almost impossible. EasyJet uses the hedging instruments only to hedge market risk and to keep away from the risk exposure by mixing of floating and fixed interest rate and re pricing the floating rate. On the other hand, British Airways has notable exposure and investment outset of hedging purpose. Future funding requirements of Easyjet, especially for future aircraft deliveries are met up from bank facilities and special arrangements. This is a good sign for EasyJet to prepare them from financing side to incorporate the operational management. By investing in short term liquid instruments or in bank deposits the fund in surplus can get better return. (BA’s Annual report, 2009, pp.77-91; Easy Jet’ Annual report, 2009, pp.23-32). We present a table for better understanding of the strengths and weaknesses of both the companies, which comes out from the analysis of their financial statements. Strength Weakness British Airways M&A plan for making synergies presence in global market and improvement in Asian market will impact positively in earning Strong in social responsibility resulting good brand. Demand reduced in premium segment Star with 35% and Skyteam with 28% market share dominate traffic between the EU -US Lower demand in fuel is bad for cargo segment Deregulation has significant impact in long haul segment International route the fares are regulated Easyjet Derivatives only to hedge anticipated risk exposure short haul based operation policy, instruments and time followed by treasury is robust and suitable to overcome better fuel price volatility Substantial USD cash holding to offset USD liability in balance sheet Operating leases are a mix 60% fixed and 40%floating rates better mix from last year and loans are in floating rate Financial assets under Easyjet has good liquidity in market or have capability to generate cash inflow Industry leading revenue performance Easyjet has eaten out the competitors share and also expecting to continue in near fiscal to maintain its growth in same pace Increase of debt for financing fleet optimization process overall capacity in the European short-haul market is shrinking Changing capital structure with increasing debt Market perception Now we see the effects of the financial statements of the companies, British Airways and Easyjet, on the market price of their shares. In comparison to FTSE index, the share price during the fiscal year had underperformed for British Airways. Unclear guidelines and weak possibility of revenue earning may be the reason for this. For EasyJet, the share performance was also below index value but better than British airways. Overall the investors have better expectation in earning from EasyJet than British Airways. Conclusion At this point of recession, the economic scenario of aviation industry is hugely affected but to optimize the effect they can focus on utilization of capacity, optimizing efficiency, gaining market share and reducing cost. They can also use leveraging business model and service based approach, which will ensure the ability of taking advantage of the current phase. British Airways and Easyjet can earn better post tax profit in the next fiscal year, by lowering the fuel price and strengthening the dollar price but the profit will still depend on the hedging range. For success in hedging, the financial engineers should properly maintain the upper band of the level. Being in short hauling, Easyjet has significant future potential and clear target where as the British Airway’s group for business synergies and merger acquisition plan can produce inorganic future growth. From the investor’s point of view, share price of British Airways will decline more in comparison to Easyjet. British Airways and Easyjet are highly accountable to their shareholder for dividend distribution but Easyjet has better scope of growth, especially comparing the segments of the companies. Operating in the short haul gives advantage to Easyjet in growth of demand, air pollution control and carbon emission. Aviation industry is capital intensive and risky, so proper utilization of capital and operational risk management is essential for the going concern. Capital structure is not fixed for both the companies and Easyjet has aggressive flow with increasing debt. British Airways and Easyjet both can help the stakeholders to reach the set target but the guidelines provided by Easyjet are clearer and investor oriented. Revival of Asian market has good impact on British Airways and merger and acquisition effect for both companies will have positive aspects in the aviation industry. Thus, the financial strength of the two companies shows the relative prospects of future growth if they overcome the weaknesses that are analyzed in the above discussion. Appendix 1: British Airways     easyJet     Fiscal 2008 2009 Fiscal 2008 2009 revenue 8758 8992 revenue 2362 2666 Operating Profit 878 -220 Operating Profit 91 61 PBT 922 -401 PBT 110.2 54.7 PAT 726 -358 PAT 83.2 71.2             Non CA 8181 8142 Non CA 1686.4 2190.8 CA 2346 3111 CA 1414.1 1482.2 CL 3492 4142 CL -914.8 -1062.2 Non CL 4538 4500 Non CL -907.5 1303.5 Equity 3262 1846 Equity 1307.3 1278.2 (BA’s Anuual report, 2009); ( easyJet’s Annual report, 2009) Appendix 2: Exhibit1 British Airways       easyJet       Fiscal 2008 2009 Fiscal 2008 2009   revenue 8758 8992 2.67% revenue 2362 2666 12.87% Passenger 7,600 7,836 3.11% Passenger revenue 1995 2150 7.77% Cargo 615 673 9.43% Ancillary revenue 367 516 40.60% Other revenue 543 483 -11.05% (BA’s Anuual report, 2009) ( easyJet’s Annual report, 2009) Exhibit 2 British Airways       easyJet     Fiscal 2008 2009 2008 2009 Total revenue 8758 8992 2.67% 2363 2667 12.87% Operating profit 878 -220 -125.06% 60 91 51.67% (Loss)/profit before tax 922 -401 -143.49% 110 54 -50.91% EPS 61.6p -32.6 19.8p 16.9p (BA’s Anuual report,2009; easyJet’s Annual report, 2009) Exhibit 3: British Airways  2008  2009   easyJet  2008  2009 operating margin 10 -2.4 5.20% 1.60% ROE - - 6.80% 5.50% passenger carried 34.6 33.1 43.7 45.2 Debt/total capital 28.7 56.3 29 38 (BA’s Anuual report,2009; easyJet’s Annual report, 2009) Exhibit 4: British Airways           Fiscal 2008 2009 2010 2011 EPS 61.6 -32.6 -37.67 -2.98 P/E -5 -62.9 13.7 (Forbes’s earning estimates, 2010) Appendix 3: REFERENCE 1. Annual reports, (2009), Results for the year ended 30 September 2009, Easy Jet plc. Available from: http://corporate.easyjet.com/~/media/Files/E/easyJet/pdf/investors/result-center/FINAL-16_11_09.pdf [Accessed 15th Jan 2009]. 2. Harrison. A, (2009), Full year results. EasyJet plc. Available from: http://corporate.easyjet.com/~/media/Files/E/easyJet/pdf/investors/presentations/Full-Year-final-presentation.pdf [Accessed 15th Jan 2009]. 3. Annual report, (2009), Financial Statements, British Airways. Available from: http://www.britishairways.com/cms/global/microsites/ba_reports0809/pdfs/BA_AR_2008_09.pdf [Accessed 15th Jan 2009]. 4. Forbes. (2010). Earnings Estimates, British Airways. Available from: http://finapps.forbes.com/finapps/jsp/finance/compinfo/Earnings.jsp?tkr=BAY-LN [Accessed 15th Jan 2009] 5. Hamel, G & Prahalad, C. K., (1994), Competing for the future, Harvard Business Press, Boston. Available from: http://books.google.com/books?id=PlML2w8dhJ0C&printsec=copyright&source=gbs_pub_info_s&cad=2#v=onepage&q=&f=false[Accessed 15th Jan 2009] Read More