Easy Jet Plc and Ryan Air Plc Finances - Essay Example

x TABLE OF CONTENTS PAGE NO. Introduction…………………………………………………………………..` 2 Part An Overview of the industry Environmental overview……………………………………… 1.2 governmental regulations……………………………………… 2 1.2 competition……………………………………………………. 2 2. External forces 2.1 Economy…………………………………………………………. 3 3. Company profile 3.1 Ryan Air plc………………………………………………… 5 3.2 Easy Jet, Plc…………………………………………………… 6 Part 2. Financial performance 2.1 Growth ratio…………………………………………………………. 6 2.2 Price ratio…………………………………………………………… 7 2.3 Profit margin………………………………………………………. 8 2.4 Financial condition………………………………………………… 8 2.5 Return on investment………………………………………………. 9 2.6 Management efficiency…………………………………………… 10 2.7 Share Price Development………………………………………….. 10 Discussions and conclusion……………………………………………………… 11 Annex………………………………………………………………………….. 13 References……………………………………………………………………… 16 Report on Easy Jet Plc & Ryan Air Plc Finance Analysis INTRODUCTION This report is done to provide information to stakeholders in their decision for investments. The companies under review are the Easy Jet Plc and Ryanair, Plc. These airlines provide low budget fares in UK. Industry outlook will be reviewed to know the perspectives of the industry, its competition, economic environments and the growth prospects of the industry itself. Study uncovers the problems that led to losses of the airline industry. Tools of analysis are financial ratios which will be compared against their historical data to measure growth of performances in sales and income. The ratios will provide variants that will reflect any changes during the year covered. Variants are problems that need the attention of management. Ratios are also meaningful when compared with the closest competition to see relative position of the company Limitation of the study is that 2009 annual report of Easy jet is not yet available. Part 1 An overview. 1. Environmental overview. a. Government regulations. Falle, della Gonzrague, et al (2004) said in their report that the airline industry in UK has always been filled with restrictions to protect their own airlines. For instance, the airline industry in UK is protected by regulations of the European Union and that of bilateral agreements entered into by the British government with other countries. Bilateral agreements put tariff protection on their products and are barriers for foreign entry. b. Competition The globalization and liberalization have invited competition to the airline industry in UK. In UK, the airline industry players are the flag carriers, independent airiness, franchises and charters. Flag carriers are either state-owned or designated carriers and enjoy privileges from the government. Independent airlines are Ryan Air, Easy Jet, Aer Lingus and British Airways. Each of these airline companies has a market share of airline passengers in UK . 2. External forces 2.1. Economy Even in economic crisis, air travel remains to be an important factor in everyday life of everyone. Air travel spurs the economy by bringing in international investment trade and tourism, and is therefore very important in the globalization movement of industries The Airline Industry report stated air travel in the past decade grew by 7% per year wherein travel for business and leisure grew strongly worldwide. Airline travel is dependent on the growth of economy, as in the years of recession; the industry is not spared... Several analysts agree that the airline operations have experienced hard times during the past years of 2007 an 2008 As a result of the slow travel growth, Woods (2008) said the airline revenue is expected to decline by £239bn in 2009 as per estimate gathered from the International Air Transport Association (IATA) and considered to be the worst decline in 50 years of the travel industry. Industry losses, Woods said that there will be about $2.5bn loss due to passenger decline and increase of fuel costs. Tourism Review (2008) reported that World Travel & Tourism Council projected that the world tourism and travel will generate revenue of US$15 trillion over the next ten years. Tourism Review cited the report of WTTC that stated the annual growth of travel experienced a 3% slowdown in 2008, which is lower than the 3.7% of 2007. GTN further said that the industry faced the challenges of rising oil prices and climate change that affected the airlines operations. However, Tourism Review stated that the Chairman of WTTC is optimistic on industry’s growth because of the “continued strong expansion in emerging countries as tourist destinations and a source of international visitors”. The long term forecasts dispels the effect of the cyclical downturn as GTN said WTTC predicts world trade travel and tourism to grow at the rate of 4.4% between 2009 and 2018, that in turn will support 297 million jobs and provide a 10.5% global GDP by 2018.Regions like Africa, Asia Pacific and Middle East have outpaced mature markets like America and Europe. These regions are experiencing higher growths of 5.9%, 5.7% and 5.2% respectively; this growth is much higher than 2.1% and 2.3% of America and Europe respectively that have fallen below the world’s growth average. The WTTC is hopeful that the growing economies of the emerging countries like China and India will increase business and leisure travel, while many countries in the Middle East are “undertaking massive tourism related investment programs. The United States, which as a major travel group, has been affected by the economic crisis, and will most likely have a slow growth in travel and tourism. On the other hand, China, Japan and Germany are forecasted to have an annual growth rate of 8.9% while Macau comes as the fastest grower with a lead of 22% The good news to airlines according to Tourism Review is that even in countries with slow economic growth, analysts believe there will be a switch from international travel to domestic travel that would result to demand for tourism. 3. Company profile 3.1 Ryanair Plc Money Central describes Ryanair Plc as a company with business model of low-fares, passenger scheduled airline serving short-haul, point to point routes in Europe and Morocco. It has bases at Dublin, London (Stansted and Luton), Glasgow (Prestwick), Brussels (Charleroi), Frankfurt (Hahn), Milan (Bergamo), Stockholm (Skvasta), Rome (Ciampino), Barcelona (Girona), Nottingham East Midlands, Liverpool, Shannon, Pisa, Cork, Marseille, Madrid, Bremen, Dusseldorf (Weeze), Bristol, Alicante, Belfast, Bournemouth, Birmingham, Kerry, Edinburgh, Reus, Alghero, Cagliari, Trapani, Bologna and Pescara airports,As of June 30, 2009, the Company offered over 1,200 scheduled short-haul flights per day serving 145 locations throughout Europe and Morocco, with an operating fleet of 196 aircraft flying approximately 845 routes. Ryan Air’s strength is based on its brand and 24 years of successful operation in UK. Its low-fare cost, internet site booking service and high density seats use of Boeing aircraft, high aircraft utilization, fuel and risk hedgings and low over heads. Its weaknesses have been shown as people’s skills, restricted expansion possibility, distance of airport to passenger’s destination which passengers find inconvenient. The economic downturn became an opportunity as passengers look for budget fares to economize. Other opportunities are EU’s expansion of destinations trade liberalization and investments that encourage travelers. Threats to operations are the high costs of fuel, dependence of economy, low fare competition, and limited growth 3.2 Easy Jet Plc Easy jet has an atmosphere of an easy-come-easy go’ for customers. It is a low fare airline that serves more than 100 destinations in about 30 countries in Europe. North Africa and the Middle East. It has a fleet of about 175 Airbus and Boeing jets. The airline has 20 crew bases on the European continent and in the UK, including London’s Gatwick, Luton and Sensed airports. The airlines keep costs down thru a marketing program of on line ticketing service, no meals served on board, paperless operations – company depends on it for operations. It maintains a casual culture wherein employees dress informally, and layers of management are considered wasteful. Airline was established in 1995, and has a bright orange colored headquarters in Litton Airport as a status symbol and embodiment of low fares standards. Easy Jet ha bases all over UK and mainland Europe. Part 2. .Financial performances 2.1 Growth rates – Sales 2009 2008 2007 2006 2005 Ryan Air 0.078 0.175 0.24 0.22 n/a Easy Jet N/A 0.24 0.09 0.17 0.181 The sales growth of both companies reflects the effect of downturn of the economy. Each had a considerable decline of airline passenger sales in 2007. Ryanair continued to have low sales until 2009, while surprisingly Easy Jet had a higher sales growth in 2008, at the time of economic crisis. Growth of sales of Ryanair in 2009 has been slow, at a rate of 8%, as compared to its previous year’s growth. Easy Jet had a higher sales growth than Ryan Air in 2008 but had a hard year in 2007 (see Annex 1, Tables 1 and 2) Net income growth 2009 2008 2007 2006 Ryan air -0.11 0.295891 0.420234 0.082213 Easy Jet N/a -0.83 0.38 0.37 The effect of decline of sales is felt by both companies. Ryanair suffered the losses in 2009 having a negative income growth of 0.11%, while Easy Jet felt the economic crunch in 2008 on a much higher scale of negative 0.83. %. Both had comfortable net income growth in 2007 and 2006. Dividend yield. Both companies did not declare dividends for the period covered. 2.2 Price ratios – P/E ratio Price per share EPS P/E ratio Div. Easy Jet 5.65 0.2 28.7 0 Ryanair 28.05 0.52 53.9 0 In 2008 Ryanair had a higher P/E than Easy Jet and at the same time commanding a higher price per share. The P/E ratio gives a rough idea of the price investors are paying for a stock relative to its underlying earnings. It is an easy way to see how expensive a stock or how low it is. New Investor Center (NIC) describes relation of P/E ratio as” “Generally, the higher the P/E ratio, the more investors are willing to pay for a dollars worth of earnings from a company. High P/E stocks (typically those with a P/E above 30) tend to have higher growth rates and/or the expectation of a profit turnaround” This situation holds true in Ryan Airr that showed higher growth rates except in 2009. Meanwhile, low P/E stocks (typically those with a P/E below 15) tend to have slower growth and/or lesser future prospects. NIC suggested a way to find out if a stock is expensive or not is to compare its EPS with the bond yield of the Bureau of Treasury. From the Treasury Table (we found the yield for 10 year period to be 3.28 and 4.14 for 20 year period. 2.3 Profit margins % 2008 PROFITABILITY RATIOS Easy Jet Ryanair Operating margin 30.4173 12.288 Net profit Margin 3.521 14.397 Sales growth of Easy Jet has been higher for 2007 and is able to generate an operating margin of 30 percent as against 12 percent of Ryanair. However, when we compare with what is left after deducting all expenses, Easy Jet has a lower net profit margin than Ryanair. This means that Ryanair has been more efficient in controlling its costs of operations, and has more income left to pay stockholders and debtors. 2.4 Financial condition Liquidity ratios Ryan Air 2009 2008 2007 2006 2005 Current ratio 1.84 1.53 2.02 2.42 2.54 Quick ratio 1.84 1.53 2.02 2.42 2.54 Cash ratio 1.48 1.25 1.68 3.33 2.205 Easy Jet 2009 2008 2007 2006 2005 2004 Current ratio n/a 1.5 1.87 2.10 2.14 2.175 Quick ratio n/a same same same same same Cash ratio n/a 1.257 1.805 2.00 2.00 2.02 The liquidity ratios of Ryanair are almost consistent from 2005 to 2007, with certain fluctuations in its cash ratios. It shows a healthy financial condition wherein the ratios are greater than 1 meaning company has the ability to pay its maturing obligations quickly. Again its liquidity ratio is lower in 2008 as a result of sales and operating performances. The liquidity ratio of Easy Jet and Ryanair are almost parallel with each other for the year 2008 differing slightly in their cash ratios The current ratio and quick ratios are measures to gauge profitability of the company. The higher the ratio provided in the operation, the better for the company and a ratio of 1 or higher means company has no liquidity problem. Debt Ratios 2009 2008 2007 2006 2005 2004 Easy Jet n/a 1.42 1.18 1.22 0.88 0.678 Ryanair 1.634 1.63 1.52 1.26 1.32 Ryanair has a higher debt/equity meaning it has used more debts in financing its capital assets and operations. Its D/E went up from 2005 to 2008 A higher debt financing is risky for operations because of costs of interests that pull down profitability of the company. 2.5. Return on investments % 2008 investment returns Easy Jet Ryan Air Return On Equity 3.7 4 Return On Assets 1.2 1.7 Return On Capital 1.9 2.1 For 2008, Ryanair has given stakeholders 4% return on equity in 2008 and much higher ROE and ROC than Easy Jet. The Financial Dictionary explains that a positive variance arrived from ROE, ROA and ROE, means the company had used its resources efficiently and optimally. 2.6. Management efficiency MANAGEMENT EFFICIENCY Easy Jet Ryan Air Income/Employee 6,645 23,642 Revenue/Employee 654,403 628,540 Receivable Turnover 10 64.9 Inventory Turnover 1,046.90 Asset Turnover 0.8 0.4 Here, we see that Ryanair is more efficient in using its employees to generate income as the company has 28% higher Income/employee. However, Easy Jet generates more sales per employee on the same year. Easy Jet shows a collection problem as shown in low receivable turnover. A low collection of accounts receivable affects the cash flow position of the company. There is no inventory data in the financial statement, and it is more efficient in using its assets to generate revenues. . 2.7 Share Price Development 1-Year Chart Stock performance from 2008 to 2009 is above Dow Jones Industrial Indexes showing continued confidence of stockholder to Easy Jet Plc. Latest price is 5.65. Reuters Analysts recommendation is a “Buy’ position. Ryan Air’s stock performance from 2008 to 2009, as compared to Dow Jones industry average shows under performance. Chart also shows it is much lower than Easy Jet. Latest price is 28.05 The stock price of Ryan Air and Easy Jet is compared with each other and to the industrial average of Dow Jones on a one year period. Dow Jones is one of several stock market indices used for comparison of stock performances. Discussions and conclusion Information gathered shows the following: The airline industry is dependent on the economy, and it has been affected by the economic crisis. The projected growth in 2008 was not realized as airline sales and revenues declined consequently. Future growth will rely on the emerging countries and regions that will revive leisure travel and business investments. UK has been preparing for this expansion. Emerging countries are China, India and the middle east countries. Mature travel markets of U.S. and Europe will decline as a result of economic crisis, while middle east countries are preparing for expansion. The increased fuel costs and operations have been the major problems of the industry because of the fluctuation of oil prices. The only way for airline companies to become profitable is by being innovative, cost conscious and controlling its cost of operation. Both Easy Jet and Ryanair have introduced on line ticketing service that lessened administrative costs. In terms of management and financial performances, Ryanair Plc has been shown to have an edge in performance effectiveness and management efficiency. Ryan Air and Easy Jet had an upward trend of sales development, but Ryan Air has higher sales. Easy Jet’s operational variants show internal problems that must be solved by the company like low receivable turnover. Problem started in 2008 as both went through a sales decline due to the worldwide economic crisis. Ryan Air was able to cushion its effect as its negative growth is lesser than Easy Jet. Stock market analysts of Reuters recommend a strong buy for Ryanair and a moderate buy for Easy Jet. I go along with the Analysts recommendation favoring Ryanair Plc, as it has established its strength in management and financial performances. However, I would like to recommend to investors to wait and hold investing until the economy is set clear to avoid risks in investments. w.c. 2485 Annex 1 Table 1. Ryan Air Sales Development Table 2. Easy Jet Sales Development 2008 2,362.80 2007 1,797.20 2006 1,619.70 2005 1,341.40 2004 1,091.00 Table 3. Calculation. (Data from financial statements) Source of data: Money Central. Easy Jet current ratio 2009 2008 2007 2006 2005 2004 Total Current Assets n/a 1,415.00 1,166.40 1,101.10 890.9 684.7 Total current liabilities 909.8 621.3 522.9 414.5 314.7 Current ratio 1.555287 1.877354 2.105756 2.149337 2.175723 Quick ratio Total current assets N/A 1,415.00 1,166.40 1,101.10 890.9 684.7 Total inventory N/A 0 0 0 0 0 Debt/Equity Total lia. N/A 1,817.60 1,364.00 1,206.50 766.4 535.5 Total equity N/A 1,278.20 1,152.40 982.9 863.4 789.4 Debt/equity ratio 1.422 1.183617 1.22749 0.887653 0.678363 Current ratio 1.555287 1.877354 2.105756 2.149337 2.175723 Quick ratio same same same same same Debt/equity ratio 1.422 1.183617 1.22749 0.887653 0.678363 Cash ratio Cash equiv. plus cash divided by current liab. Cash equivalents n/a 728.7 733.5 861.7 673.1 510.3 Notes receivable 417.5 386.8 186.3 158.2 128.2 1146.2 1120.3 1048 831.3 638.5 Current lia. 909.8 621.3 522.9 414.5 314.7 cash ratio 1.257 1.805 2.007 2.0059 2.026 Ryanair Total Current asset 2,543.08 2,387.12 2,409.27 2,053.63 1,653.42 Total current liabilities 1,379.19 1,557.15 1,190.17 845.87 649.3 Current ratio 1.84389 1.533006 2.024307 2.427832 2.546465 1 1 Total current asset 2,543.08 2,387.12 2,409.27 2,053.63 1,653.42 Inventory 2.08 2 2.42 3.42 2.46 2541 2385.12 2406.85 2050.21 1650.96 Current liabiliies 1,379.19 1,557.15 1,190.17 845.87 649.3 Quick ratio 1.8423 1.531721 2.022274 2.423789 2.542677 . Debt/equity Total liabilities 3,962.80 3,825.36 3,223.91 2,642.23 2,083.65 Total equity 2,425.06 2,502.19 2,539.77 1,991.99 1,734.50 Debt/equity ratio 1.634 1.528805 1.273308 1.326427 1.201297 Ryanair financial strength . . Current ratio 1.84389 1.533006 2.024307 2.427832 2.546465 Quick ratio 1.8423 1.531721 2.022274 2.423789 2.542677 Debt/equity ratio 1.634 1.634104 1.528805 1.269371 1.326427 . . Cash ratio (Cash equiv./current liab. Cash and short term notes 1,986.60 1,877.12 1,939.19 1,767.93 1,401.67 Notes receivable 65.66 82.2 61.87 44.7 30.07 1988.68 1959.32 2001.06 1812.63 1431.74 Current liabilities 1,379.19 1,557.15 1,190.17 845.87 649.3 Cash ratio 1.48801833 1.258273 1.681365 3.338976 2.205 Net income growth Ryanair Net income -169.17 390.71 435.6 306.71 283.41 n/a -0.11 0.294513 0.075968 Share Price development Easy Jet Comparison of share prices, EPS, P/E and Dividend Yield Share Price 5.65 EPS 0.14 P/E 42.2 Dividend yield 0 Revenue per share 5.82 Net income Easyjet 83.2 152.3 94.1 59 outstanding shares 422.7 419.1 410.5 400.4 eps 0.19683 0.363398 0.229233 0.147353 Net income growth -69.1 58.2 35.1 Easyjet n/a -0.83053 0.382141 0.373007 Easy Jet price-earning ratio share price divided by eps 5.65 EPS 0.19683 0.363398 P/E 28.70497 EPS P/E ratio Div. Market cap Easy Jet 0.2 28.7 0  1523.97 Ryanair 0.52 53.9 0 8.29billion .. Reference List Daily Treasury yield curve. 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