British Airways Annual Account - Report Example

British Airways Financial Analysis Introduction Four activities based on accounts of British Airlines for 2006, 2007, and 2008 have been taken up in this write up. In activity I, operational and financial environments in airline industry being faced by BA have been discussed. Activity 2 contains various ratio analyses on performances of BA. Activity 3 analyzes the trends and one- off events, if any, concerning different items of profit and loss and the balance sheet. Activity 4 points out significance of negative or positive effects of analyzed performances. Activity 1 Operational Environment “Air transportation is much a part of life as telephone or computer. Speed, efficiency, comfort, and safety- these are the symbols of both modern civilization and modern air transportation.” (Zsolt Kelemen, page 1)i Airline industry is highly regulated and exposed to certain out of control risks, and BA is no exceptions to these environments. BA is a state owned airline created by the merger of BOAC (British Overseas Airways Corporation) and British European Airways (BEA) in 1974. Airline industry is currently going through a highly competitive environment wherein most airlines are cutting and discounting the fares. Competitors are cash rich and using irrational technique to put other airlines out of the industry. Amidst fierce competition BA has to maintain its brand reputation at any cost. This may affect future revenue and profits. Moreover, airline industry is government regulated and survival is matter of strict adherence to framed rules connected with passengers’ safety. Many times this affects the market potential and creates restrictions on growth opportunities. BA annual report of 2008/09ii describes clearly the operational environments in the industry in which BA operates. It states that “The operational complexities inherent in our business, together with highly regulated and commercially competitive environments of airline industry, leave us exposed to a number of risks. Many of these risks- for example changes in governmental regulations, acts of terrorism, pandemics and the availability of funding for of financial markets- can be mitigated to a certain degree but cannot remain outside of our control.” Financial Environments Airline industry is facing financial risks that heavily impact the returns and profitability of the airline. These risks basically are from fuel prices, interest rates, and currency risks. There is trend of mergers and alliances in order to beat the financial and other risks. Though debt financing is the trend in aviation industry, but BA has been able to put some sort of control over such financing. The interest bearing long term borrowings as at March 31, 2008 came down to £2751m from £2929m as at 31 March, 2007. Air line industry suffered heavily in 2008-09 recession, but it has been reported that “airline industry has been steadily recovering after it was battered by the global downturn in 2008-09 to the extent IATA upgraded its forecast in June to predict a collective annual net profits of $2.5bn this year up from $2.8bn loss it had forecast in March.”(Pilita Clark, 30Aug.2010)iii Activity 2 Activity 3 Amount in millions of £ Year 2006 2007 2008 Turnover 8213 8494 8753 Analysis: The trend is positive over three years. Cost of Sales 7519 7936 7878 Analysis: There is fluctuating trend in cost of sales despite increase in revenue. It may be noted that BA is a service rending company, and therefore recurring operating expenses have been taken as cost of sales. Gross Profit 694 556 875 Analysis: Operating profits are taken as Gross profits as BA is a service company. Figures for sales of material being mostly promotional and also very marginal are not available for computation. The trend is fluctuating. Operating expenses 7519 7892 7878 Analysis: Operating expenses are fluctuating providing fluctuating operating profits despite rising trend in turnover. Operating Profits 694 602 875 Analysis: The trend is fluctuating because of fluctuating operating expenses. Retained Profits 589 903 1583 Analysis: The trend is rising over three years. Investments 390 376 491 Analysis: The fluctuating trend is due to valuation of investments on reporting date. Available for sale investments are valued at fair value. For quoted investments market price has been taken as fair value. Stock 83 76 112 Analysis: Though the trend is rising but stocks have no importance in the business of BA. Debtors due within one year 685 654 683 Analysis: Debtors due within one year are more or less static reflecting the efficient control of BA over recoveries. Cash 398 713 683 Analysis: It is fluctuating trend with rising emphasis, may be an effort to control dwindling liquidity presented by current ratio. Creditors payable within one year 2822 2126 2590 Analysis: It is a fluctuating trend, though BA tried hard to reduce this liability as much as possible. Creditors payable for more than one year 232 188 168 Analysis: A decreasing but encouraging trend as the fall is constant keeping in view the rising business. Activity 4 Significance of performances Positive trend of turnover is a sign of appropriate marketing policies adopted by the BA. Fluctuating cost of sales reflects the effect of unpredictable nature of fuel costs, and finance costs.. Gross profits reflect the effects of changes in cost of sales as the revenue is otherwise rising. Fluctuating operating expenses are impacting directly the cost of sales and thereby resulting into fluctuating gross profits. Operating profits have a fluctuating trend but it is not negative. This is because of the effects of certain non – recurring operating expenses. Retained profits are increasing providing strength to equities. Investments are valued fairly on market prices on reporting date. Stocks, as already stated, are not considerable in the business of BA. Debtors declining over the period provide a positive and encouraging sign of the performance of the management. Cash is increasing but has an overall fluctuating trend. Creditors payable within years are also declining in an effort to improve current ratio. The current asset ratios indicate financial tightness for short period, but overall there are no negative trends that undermine the efficiency of the management of BA over a period of three years. Conclusion Under prevalent operational and financial environments in airline industry, BA is performing well to keep up its brand name alight amidst regulated but competitive atmosphere. Rising revenue and fluctuating operating costs are main trends that has provided incremental retained profits. Significant performances are providing index of future growth of British Airways. Word Count: 1104 References Read More