Financial Analysis for Air Berlin Plc and Iberia Plc - Example

A comparative analysis between Air Berlin Plc and Iberia Plc

Table of Contents

Terms of reference3

Executive summary4

Analysis of Iberia PLC4

Analysis of Air Berlin PLC13

Comparison between Iberia PLC and Air Berlin PLC20

Conclusion and recommendations22

Reference list23

• Terms of reference

The assignment deals with the detailed analysis of the business performance for two reputed airlines company Iberia PLC and Air Berlin PLC Apart from the individual assessment, the report has also performed a comparative study between these two firms. The comparison between these two firms has been framed based on both the financial and non-financial aspects. In the case of financial performance evaluation, the primary focus has been given on the ratio analysis. Profitability, liquidity, gearing and efficiency ratios of both the firms has been calculated and compared for the three years, 2012, 2013 and 2014. Therefore, the report provides a through view of both the cross sectional and time series analysis for the above mentioned airlines companies. In the case of non-financial measurement, corporate social responsibility and corporate governance of both the firms have been discussed. Moreover, the working environment of both the firms has been investigated with the help of additional non-financial information such as employee attrition rate. Hence, it can be stated that the assignment serves the purpose of reflecting a thorough comparative evaluation between the renowned airlines companies to understand their business position.

However, there are also certain limitations in this assignment. Firstly, in this assignment business environment of the two companies has not been estimated. As these two companies operate in separate regions, the tools such as PESTEL or Porters’ five forces could have been used to analyse the condition of the market in a better manner. It may help in supporting the financials of the companies. In addition, the report has focused only a few financial ratios. Analysis of more rations may further improve the quality of the report. For analysing the financial performance only the three years financial data has been considered. In order to conduct a proper trend analysis, last ten years financial data could have been investigated.

• Executive summary

This assignment conducts financial performance analysis of two airlines companies namely Air Berlin PLC and Iberia PLC. From the non-financial point of view the corporate social responsibilities of both companies was analysed. It was found that both Air Berlin PLC and Iberia PLC are trying to minimise air pollution through adopting eco-friendly business technologies that will reduce carbon emission. The time series analysis of financial ratios (including profitability, efficiency, liquidity and gearing) reveals that the profitability of Air Berlin is concerning because in the past two years the company reported losses. The profitability of Iberia PLC on the other hand is better than its counterpart and also the debt ratio of the company is low implying low solvency risk. The liquidity of assets of both companies is less than 1 suggesting that the current liabilities are exceeding the current assets. This could create problems for managing working capital. The interpretation of efficiency ratios indicates that Air Berlin PLC’s sales revenues per employee is better while the asset turnover ratio of Iberia PLC shows that its assets are more efficiently utilised. Overall, the financial health of Iberia PLC is better than Air Berlin PLC.

• Analysis of Iberia PLC

Non-financial analysis

Iberia PLC is part of International Consolidated Airlines Group, SA (also known as IAG) and it is headquartered in London, United Kingdom. It was formed by merger of Iberia and British Airways. The airlines company is the 6th largest airlines company in the world and it is 3rd largest in Europe in terms of sales revenues. The airlines company is listed in the London Stock Exchange and specialises in passenger air transport and air freight services. Studies show that passenger load factor of Iberia PLC is 83 percent in 2015 which increased from 80.78 percent from previous year (ADVFN, 2015). The passenger load factor is a measure of total occupancy of all passenger seats offered by the company (Planespotters, 2016). Iberia PLC operates with fleet of 288 planes of Airbus in tourist, economy class and business class cabins (Iberia PLC, 2016).

The global financial crisis of 2008 created trade imbalance in the entire Eurozone and some Northern countries like Germany have been facing large current account deficits (or CAD). Countries in the South including Portugal, Greece and Spain lost their competitive position due to lower exports which also widened their CAD.

(Source: Pettinger, 2013)

(Source: Financial Times, 2016)

The economic recession following the global financial crisis of 2007-08 has also affected the service sector like the rest of the economy. This is the most important contributor to the GDP of UK and statistical data shows that the sector will start to attain some momentum in upward movements from 2012 (Financial Times, 2016). The effect of slowdown in service sector in EU and UK can be understood by the volatility of oil prices in the international markets is forcing the airlines industry to attain greater economies of scale. As a result the market participants of airlines industry are scouting for strategic partnerships. There is also a chance for the company to be in midst of uncertainty after the exit of United Kingdom from Euro Zone (Pettinger, 2013).

As on date, Iberia PLC and British Airways have been able to maintain leadership in the main cities including Madrid and London. In recent times Iberia PLC also managed to increase the market share in Europe-to-Africa route as it introduced new Airbus 330 in this route (IAG, 2014).

The breakdown main operating divisions of Iberia PLC are as follows:

• Aer Lingus (the company owns 98.05% stake)
• British Airways (fully owned)
• BA CityFlyer (fully-owned)
• OpenSkies (fully owned)
• IAG Cargo (fully-owned and it is merger between Iberia Cargo and British Airways World Cargo)
• SUN-AIR (franchise)
• Vueling Airlines, SA (97.5% owned)
• Air Nostrum (franchise and traded under Iberia Regional)

Iberia PLC also contributes to global economic development by maintaining Corporate Responsibility programs. The strategic implementation of CSR (or Corporate Social Responsibility) is under the supervision of Vice President of Iberia PLC, Sergio Turrion.

Figure 1: Corporate Social Responsibility

(Source: IAG, 2014)

The key non-financial sustainability aspects of Iberia PLC are:

• The total carbon emission of the airlines company at the end of 2013 was 23.7 million tonnes and in order to contain greenhouse effect the airline is now focusing on improving fuel efficiency. This is done by investing in low carbon fuels and technologies that support positive economic development.
• Iberia PLC is proactive in following best practices to continuously improve and promote recycling.
• In order to minimise air quality, noise and emissions produced from airline operations the airline group has collaborated with industry partners to achieve technological and operational innovation. The group notes the useful life of every aircraft and ensure total replacement of old aircrafts with cleaner and quieter models.

Financial analysis

Profitability analysis

The profitability ratios help to analyse the financial performance of the company in terms of generating surplus earnings for the shareholders. The net profit ratio and the Return on Equity (also known as ROE) have been used in this study to analyse the performance of Iberia PLC.

Table 1

Profitability

2012

2013

2014

1

Net profit

-13%

-12%

4%

2

ROE

-28%

-30%

12%

(Source: Author’s creation)

Net profit margin – The above table 1 shows that the airline company suffered net losses till 2014 due to which its net profit ratio was negative for the year. However, Iberia PLC reported net profit of 4% in 2014. The average profitability of the group during 2012 to 2014 was -7%. This ratio provides clue regarding cost structures, product-mix pricing policies and production efficiencies. The general concept is, higher the profitability higher would be the company’s returns to the shareholders. The net profit margin shows how efficiently Iberia PLC has been operating. Given, the global economic slowdowns in the developed markets, a 4 percent growth in profitability in 2014 is a good sign for the airline company.

Another important indicator of profitability is the ROE which reveals how the company generates profit with the money invested by the shareholders. The ROE of the company was -28% in 2012 which shows that the airline company generated negative earnings for the shareholders. In other words, there were net cash outflows for the shareholders of Iberia PLC in 2012. The company was able to improve its ROE in the consequent years to 12% in 2014 as the net income of the airline company improved in the following years.

Efficiency analysis

The efficiency ratios analyses the performance of the management in generating profit by efficient utilisation of assets. The two efficiency ratios used in this study to measure the performance of Iberia PLC are asset turnover ratio and sales revenue per employee ratio.

Table 2

Efficiency

2012

2013

2014

1

Asset Turnover

0.80

0.69

0.73

2

Sales revenue per employee

€81,088

€68,549

€30,99,248

(Source: Author’s creation)

The asset turnover ratio of Iberia PLC was 0.80 in 2012 and it decreased to 0.73 in 2014 mainly due to lower than expected growth in sales in 2014. This trend of asset turnover ratio for the company is declining and could become a matter of concern for the management. In order to improve the efficiency of utilisation of asset it is important for the management at Iberia PLC to get rid of non-core assets which are not generating adequate profits. The disposal of non-core assets is a good strategy for the airlines company because it will help the company to monetise unproductive business segments.

Another important indicator of efficiency is the sales revenues per employee and the time series analysis shows that the value of this ratio was very high during 2012 to 2014. Ideally, the value of this ratio should be high because contribution per employee increases with the increase of this ratio. This could happen in two possible scenarios,

• When the company decides to cut cost and reduce the number of workers the sales revenues per employee will automatically increase
• When the company’s net sales actually increases, assuming the total number of employees remaining constant, the value of this ratio will increase

In case of Iberia PLC it has been observed that while the net sales of the company have been falling, it is trying to manage cost by reducing the number of employees. Hence, the cost cutting strategies of the company is improving this ratio.

Liquidity analysis

The liquidity of assets signifies how quickly the assets can be converted into cash and cash equivalents. In the balance sheet current assets represents those assets which can be converted into cash within one year. The most liquid current asset is the cash and the least liquid current asset is inventory. The important indicator of liquidity is the current ratio and the quick ratio.

Table 3

Liquidity

2012

2013

2014

1

Current ratio

0.88

0.73

0.90

2

Quick ratio

0.75

0.61

0.78

(Source: Author’s creation)

The current ratio of Iberia PLC was 0.88 in 2012 and it increased to 0.90 in 2014 at a compounded annual growth rate of 1.3%. This was mainly due to the reason that the company has reduced relying on credit purchases and hence the trade payables have been reduced. On the other hand the company is also selling off its inventories which are allowing it to generate cash and improve the position current assets.

As discussed previously, the inventories are least liquid and hence a more accurate measure for liquidity of assets is the acid-test or quick ratio. This ratio does not consider inventories in computation of current assets and hence all the items included can be easily converted into cash and cash equivalents. The quick ratio of Iberia PLC increased from 0.75 in 2012 to 0.78 in 2014 at annual growth rate of 2.1% which shows that there is not much difference in current ratio and quick ratio. In other words, most of the inventories of Iberia PLC can be converted into cash in less than one year.

Gearing analysis

The gearing ratios reveal the solvency risk of the airlines company in terms of its constitution of capital structure. The debt-ratio and the debt-to equity ratios are two major gearing ratios which help to analyse the solvency of Iberia PLC.

Table 4

Gearing

2012

2013

2014

1

Debt ratio

0.64

0.72

0.77

2

Debt-equity ratio

1.74

2.63

3.25

(Source: Author’s creation)

The time series analysis of the company shows that the debt ratio of the firm increased from 2012 to 2014. The value of this ratio is less than one (0.77 in 2014) suggesting that 77 percent of total assets of the firm are funded using borrowed money. Again, the debt-to-equity ratio of the company is very high. In 2012, the debt-equity ratio was 1.74 which increased to 3.25 in 2014 which although is not a good sign. The high debt value is concerning for the firm because it will increase the borrowing cost of firm.

• Analysis of Air Berlin PLC

Non-financial analysis

Air Berlin PLC is considered as Germany’s second largest airlines company after Lufthansa. It is also the ninth largest airlines of Europe with respect to the number of passengers. The airline company has been founded on 1979 and headquartered in Berlin, Germany. It had total 170 fleets of air craft covering almost 114 destinations at the end of 2011 (Air Berlin, 2011a). It further reduced to 140 at the end of 2013.

Figure 2: Passenger details

(Source: Air Berlin, 2014)

The passenger load factor of Air Berlin was 84.2 percent which is slightly higher than Iberia PLC (Air Berlin, 2011). The effect of exit of United Kingdom from Euro Zone could restrict access of the airline company in EU. This will affect the profitability and passenger volume in short term. As of March 2014, the Air Berlin Group has a fleet of total 149 aircrafts including Airbus, Boeing 737 and Saab 200 (Air Berlin, 2014; Air Berlin, 2013; Air Berlin, 2012). The breakdown of different divisions of the group is shown below:

Figure 3: Breakdown of different divisions of Air Berlin PLC

(Source: Air Berlin, 2011b)

The products and services of the company are catered to the needs of the market and continuously updated with changing requirements of the customers. The airline allows its customer book flights from anyplace in the world via ticket counter, holiday agents or travel agents. The company also has 24/7 customer support centres which allows customers to book flights through simple phone call. In the world of 21st century people have become more dependent on mobile devices and hence the airline company also has a dedicated website which can be accessed through smart phones and tablets (Air Berlin, 2014).

The airlines company has been operating in losses and at the end of 2014 the company announced losses over € 446 million. One of the main reasons for the airlines company to report bad earnings is excess leverage of balance sheet. The group has consolidated debt of over € 800 million. According to the annual report of the company there is an urgent need to re-think its strategic positioning in the market and change operational focus into more economically feasible plane routes (Air Berlin, 2014).

The airlines company pursues the principles of all-inclusive sustainability into the business model. This encourages its employees and other internal stakeholders to be a responsible member of the society and foster community development through positive business culture and activities. The main focus of the airlines company is people and in order to promote equal opportunities the airline’s management strongly opposes any type of discrimination. The company provides employment to over 8,400 people represented by over 67 different nationalities. In order to contribute to social development in the society the airline has initiated eco-efficient flying standards through which it continuously improves flight-related processes. The eco-efficient process helps the firm to improve emission standards and increase fuel efficiency (Air Berlin, 2014).

After the global financial crisis of 2008, the EU has been experiencing prolonged recession and economic slowdowns. This resulted in rising unemployment, sluggish growth in domestic market consumptions and lower credit growth.

Figure 4: The economic growth in United Kingdom

(Source: Pettinger, 2013)

Due to the economic slowdown in the Euro Zone the revenues of Air Berlin PLC has declined in 2013 compared to that of the 2012. However, from the financials of the company, it can also be seen that the firm has experienced a 0.3% growth in revenues in 2014 compared to that of 2013.

However, due to the increase in the operational cost and hike of fuel prices has hugely affected the profitability for the company in both 2013 and 2014. In both these years the firm has experienced huge losses. In order to analyse the financial performance of the company, ratio analysis has been performed over the three financial years (Air Berlin, 2014; Air Berlin, 2013).

Profitability analysis

Table 5

Profitability

  Time series analysis

2012

2013

2014

1

Net profit

0.2%

-7.6%

-9.1%

2

ROE

5.2%

NA

NA

(Source: Author’s creation)

The time series analysis of Air Berlin PLC shows that the net profit margin of the company has been steadily declining from 0.2% in 2012 to -9.1% in 2014 mainly due to net loss incurred by the company. As a result, the return on equity of the company has been declining as well and at present the shareholders are experiencing negative cash flows. It is important for the firm to focus on strategies that will assist it to utilise assets efficiently.

Efficiency analysis

Table 6

Efficiency

  Time series analysis

2012

2013

2014

1

Asset Turnover

1.94

0.22

2.23

2

Sales revenue per employee

464.42

465.67

492.91

(Source: Author’s creation)

The asset turnover ratio of Air Berlin PLC increased from 1.94 in 2012 to 2.33 in 2014 due to the fact that the company has been disposing off its non-core fixed assets and fleet of old aircrafts to generate earnings. This strategy has helped the airline company to improve the efficiency of using assets. The sales revenue per employee ratio of the company is better than Iberia PLC and this shows that the company is able to utilise its workforce efficiently.

Liquidity analysis

Table 7

Liquidity

  Time series analysis

2012

2013

2014

1

Current ratio

0.94

0.65

0.67

2

Quick ratio

0.90

0.61

0.63

(Source: Author’s creation)

The current ratio and quick ratio of Air Berlin PLC is less than one indicating that the current liabilities exceed current assets. Further, a critical analysis reveals that the company’s trade payables have been increasing which also increased the overall current liabilities. The inventories of the firm also increased from €53 million in 2012 to €64.9 million in 2014. As a result the quick ratio of the company was affected. The increases in short-term borrowings and trade payables have also decreased the value of liquidity ratios.

Gearing analysis

Table 8

Gearing

  Time series analysis

2012

2013

2014

1

Debt ratio

0.9412

0.1098

1.4277

2

Debt-equity ratio

16.035

-11.13

-6.4022

(Source: Author’s creation)

The debt ratio of the company was 0.94 in 2012 and increased to 1.4 in 2014 because the company has increased interest bearing long-term loans from €605.2 million in 2012 and €639.9 million in 2014. In contrast, the total assets of the company marginally increased from €185 million in 2012 to €186 million in 2014.

The debt-equity ratio of the firm turned negative in 2013 and 2014 because there was negative stockholders’ equity reported in annual reports of the firm. A negative stockholders’ equity implies negative net worth or actual cash outflows. In other words, the owners owe more to the creditors than what they own.

• Comparison between Iberia PLC and Air Berlin PLC

The relative financial strengths and weakness of the firms can be analysed using the cross-sectional ratio analysis of Iberia PLC and Air Berlin PLC:

Table 9

Cross-sectional analysis of profitability

2012

2013

2014

Iberia PLC

-13%

-12%

4%

Air Berlin PLC

0.2%

-7.6%

-9.1%

Cross-sectional analysis of efficiency

Iberia PLC

0.80

0.69

0.73

Air Berlin PLC

1.94

0.22

2.23

Cross-sectional analysis of liquidity

Iberia PLC

0.75

0.61

0.78

Air Berlin PLC

0.94

0.61

0.63

Cross-sectional analysis of gearing

Iberia PLC

0.64

0.72

0.77

Air Berlin PLC

0.9412

0.1098

1.4277

(Source: Author’s creation)

The above table compares and shows the cross-sectional ratio analysis of the two companies under observation. On the basis of the information provided by published reports of both companies and the ratio analysis conducted earlier, the following financial strengths and weaknesses are evident:

Table 10: Financial Strength and Weakness Analysis

Iberia PLC

Air Berlin PLC

Strengths

• Strong cash flows and the company generated €418 million cash and equivalents at the end of 2013.
• Airline company was able to generate positive earnings for the shareholders
• Low debt ratio helps to maintain interest expenses

Weaknesses

• Low net profit margin
• Low ROE but there are signs of improvement due to improvement in net earnings

Strengths

• The cash and equivalents of the group at the end of 2014 was €0.25 million only.
• The average liquidity ratio (quick ratio) of the company during past three years was higher than Iberia PLC
• High asset turnover ratio suggests efficient utilisation of fixed assets

Weaknesses

• Very high interest bearing expenses
• Cash flows are not adequate to expand operations
• Low profitability ratios
• Negative stockholder’s equity

(Source: Author’s creation)

• Conclusion and recommendations

The financial and non-financial analysis aspects of Air Berlin PLC and Iberia PLC show that the airlines industry is adversely affected from the economic slowdown in the global markets. Both the companies have reported lower growth in sales volume and in case of Air Berlin PLC it was found that the company reported negative earnings or losses. Hence, in terms of profitability and solvency position Iberia PLC is better alternative. Under these circumstances it is very difficult for struggling airline companies such as Air Berlin PLC to improve their profitability and returns to the shareholders. One strategy that the firm could follow is to diversify operations in global markets. The organisation should focus on air routes where the flow of traffic is very high and abstain from further investments in air routes where the cost of operations exceeds operating revenues. This strategy will help the company to improve profitability and financial health in long-term.

• Reference list

ADVFN, 2015. Iberia October Passenger Load Factor 83% Vs 80.7% Year Ago. [online] Available at: <http://www.advfn.com/nyse/StockNews.asp?stocknews=AMR&article=45195908> [Accessed 29 June 2016].

Air Berlin, 2011a. Annual Report 2011. [online] Available at: <https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjak4nov9HNAhXBvY8KHfGKBJQQFggbMAA&url=http%3A%2F%2Fir.airberlin.com%2Fdms%2Finvestor-relations%2FEN%2FPublication-and-Financial-reports%2FInterim-and-Annual-Reports%2F2011%2FAB_GB11_E.pdf&usg=AFQjCNFbECP5boi-6i42EquWwkadePJ1ig&bvm=bv.126130881,d.c2I> [Accessed 01 July 2016].

Air Berlin, 2011b. AIR BERLIN PLC SHAPE & SIZE ANALYSTS & INVESTORS PRESENTATION. [online] Available at: < https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwipr-DQxtHNAhWEv48KHYxFDfEQFggbMAA&url=http%3A%2F%2Fir.airberlin.com%2Fdms%2Finvestor-relations%2FDE%2FShape-Size%2F2011-09-21_Analyst-Call-S-S%2F2011-09-21_Analyst%2520Call%2520S%26S.pdf%3F1323876636&usg=AFQjCNHuribPD4-ux4mgjqK144ljvpCk0g&bvm=bv.126130881,d.c2I > [Accessed 29 June 2016].

Air Berlin, 2012. Investor relations: 2012. [online] Available at: <http://ir.airberlin.com/en/ir/financial-reports/interim-and-annual-reports/2012> [Accessed 01 July 2016].

Air Berlin, 2013. Air Berlin Annual Report: 2013. [online] Available at: <https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0ahUKEwid3tG1wdHNAhUVTo8KHRCmB3oQFgguMAM&url=http%3A%2F%2Fir.airberlin.com%2Fdms%2Finvestor-relations%2FEN%2FPublication-and-Financial-reports%2FInterim-and-Annual-Reports%2F2013%2Fairberlin_GB2013_En.pdf&usg=AFQjCNF0NzLXOcKytaPqjW4irOHM1RALcA&bvm=bv.126130881,d.c2I> [Accessed 01 July 2016].

Air Berlin, 2014. Air Berlin PLC: Investor relations 2014. [online] Available at: <http://ir.airberlin.com/en/ir/financial-reports/interim-and-annual-reports/2014> [Accessed 28 May 2016].

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Financial Times, 2016. The UK economy at a glance. [online] Available at: <https://ig.ft.com/sites/numbers/economies/uk> [Accessed 04 July 2016].

IAG, 2014. Annual accounts and management report for the full year 2013. [online] Available at: <http://www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-reportsannual> [Accessed 28 May 2016].

Iberia PLC, 2016. The Iberia fleet. [online]. Available at: <http://www.iberia.com/web/program.do?menuId=FICAVD&plane=4500130748922&category=8100007447707> [Accessed 01 July 2016].

Pettinger, T., 2013. The great recession 2008-13. [online] Available at: <http://www.economicshelp.org/blog/7501/economics/the-great-recession/> [Accessed 04 July 2016].

Planespotters, 2016. Iberia Fleet Details and History. [online] Available at: < https://www.planespotters.net/airline/Iberia> [Accessed 29 June 2016].