Ryan Air Transactional, Operational and Translational Exposures - Essay Example

? Ryan Air – Transactional, Operational and Translational Exposures Ryan Air – Transactional, Operational and Translational Exposures While reviewing the annual report and the financial statements of Ryan Air, there are various issues which are faced by the company and the resulting exposures can be understood from such issues. These exposures, i.e. Transactional, Operational and Translational Exposures are presented as follows: Transactional Exposure Availability of Finance / Capital Raising Sources Apart from fuel costs related risks, the company aims at expanding its existing fleet size by acquiring new aircrafts; however, any occurrence of an unfavourable event in relation to the availability of the credit could have an unfavourable impact on the company’s ability to generate the required finance for the expansion project and as a result the continued growth of the company may be hampered (Ryan Air 2011, Kevin 2009). Significant Hedging in relation to Debt Obligations Owing to the debt obligations which are related to the acquisition of the new aircrafts by the company, there have been considerable derivative transactions being carried out by the company in order to hedge its financial obligations. Such derivative transactions have exposed the company to greater market risks and can pose unfavourable effects on the operational and financial position of the company (Ryan Air 2011, Madura 2009). Operational Exposure (Economic / Competitive / Strategic Exposure) Increased Competitiveness in Market One of the most significant areas of concern for Ryan Air is the increasing competition in the airline industry across Europe. Considering the need to be proactive in this scenario, the Ryan Air aims at competing in a robust manner with its competitors in the industry in relation to pricing and attracting more passengers. However, in such a scenario it is possible that the competitors of the company may compete in price and acquire the company’s passengers and thereby reducing the overall revenue of the company and thus a lower profitability. Apart from this type of competition, the company also faces competition from other forms of transportation which include railways and travelling by sea (Ryan Air 2011, Madura 2009, Koller and Goedhart 2010). Effects of Variations in Fuel Costs and Availability The company’s ability to generate profits is largely dependent on its ability to control costs and in turn maintain itself a low-fare airline. In this regard, it is pertinent to consider that in case the fuel prices rise in future, there is a possibility that the company’s operating profits may decline. In order to reduce its exposure to volatile and potentially rising fuel costs, Ryan Air places hedges on the jet fuel prices on a regular basis (Ryan Air 2011, Madura 2009). The forward contracts for the last three years for jet fuel are as follows: At March 31, 2011 2010 2009 €M €M €M Jet fuel forward contracts – fair value 383.8 42.6 (106.7) Source: (Ryan Air 2011) In addition to controlling fuel costs, ensuring the timely availability of fuel is also an area on which the operations of Ryan Air are dependent and therefore there is always an operational risk that in case fuel is not readily available, the operations of the company will be significantly affected (Ryan Air 2011, Kevin 2009). Launching of New Routes The company plans to commence its operations on new routes in the days to come and in this regard it is expected that apart from the increase in turnover of the company, there will be more costs involved. The launch of new routes will involve the conduct of marketing activities to attract passengers on board. These costs will definitely lower down the profits of the company and it is also not assured that the policy of low fares of Ryan Air will be successful on new routes or not. In addition to these areas of concern, owing to the launch of new routes, the company will require additional cash reserves in order to finance the acquisition of new aircrafts. The volatile fluctuations in the exchange rates are expected to be a problem in this regard, since the purchase of aircrafts will constitute an international deal (Ryan Air 2011). Interest Rates Forward Contracts Ryan Air also makes forward contracts including cross currency interest rate swaps in order to maintain a particular borrowing cost and avoid fluctuations in it and also to hedge its operating and financing risks. The hedging in this regard takes place particularly for the funds raised for the acquisition of new aircrafts by the company. In addition to the interest rate fluctuation risks, the company also has an operational exposure to the risks related to creditworthiness of the company’s counterparts in derivative financial instruments (Moles, Parrino and Kidwell 2011). Translational Exposure Since the business and operations of Ryan Air are widespread in the European region and America, there is a translational exposure risk involved. This translational exposure is presented as follows: Currency Rate Fluctuations Affect Company’s Results Apart from the fact that the company is based in Ireland, the major part of its activities is conducted in the United Kingdom. Consequent to this, the majority of the operational activities of the company which require payments and receipts and recording thereof are expressed in the UK currency, i.e. pounds. Apart from these activities, there are some financial statements related items which are denominated in USD, which relate to the financial obligations of aircrafts acquired, fleet maintenance, jet fuel, insurance, etc. Due to these various denominations used by the company, there is a possibility that on case of exchange rate fluctuations, Ryan Air’s operational and financial results may be influenced significantly while converting different items into a single currency denomination. In this regard, there are major risks faced by the company because a very high portion of its operational expenditures are incurred in terms of USD and Euro and on the other hand, none of its revenues are denominated under USD or Euro. Apart from the fact that the company is engaged in the hedging of its transactions in foreign currency to minimize risk by way of entering into forward contracts, but such hedging transactions are no guarantee of eliminating the risks associated with dealing in foreign exchange (Ryan Air 2011). References Kevin, S., 2009. Fundamentals Of International Financial Management. New Delhi: PHI Learning Private Limited. Koller, T. and Goedhart, M., 2010. Valuation: Measuring and Managing the Value of Companies. McKinsey & Company Inc. Madura, J., 2009. International Financial Management. 10th ed. Mason: Cengage Learning. Moles, P., Parrino, R. and Kidwell, D.S., 2011. Fundamentals of Corporate Finance. West Sussex: John Wiley & Sons Limited. Ryan Air, 2011. Annual Report 2011. Financial Statements. Ryan Air. Read More