British Airways: Analysis of Financial Performance - Case Study Example

Introduction to British Airways: British Airways is the largest Airline Company of the Great Britain and one of the leading airlines among others in the world. It offers its airline services that include air cargo, business travel and regular passengers to more than 300 destinations across the globe. Heathrow is one of the most focused airports of British Airways because it has a major contribution in firm’s total business operations and activities. The airline’s major source of revenue is its Passenger Traffic that accounted for nearly 87% in 2008/2009 followed by 7.5% cargo share and remainder was generated through other activities. Analysis of Financial Performance, Statements and ratios: The company generated a healthy revenue of 8, 758£ millions and earned a record profit before tax of 922£ millions (10% gross margin) in the last fiscal year 2007/2008 (from 1st April to 31st March) because of the company’s strategy to offer high quality services to business travelers, individuals, households and investors so that it could be able to create a pool of loyal and highly satisfied customers. The airline aimed to become a world-class airline service provider through innovation and improvement in all the operations including its fleet, management, service-quality, technology and others etc. to become cost-efficient and competitive against low-cost carriers such as easy jet and others. However, the changes in international business environment made things difficult for all the airlines across the world. The global economic downturn, credit crunch (that resulted in devastating financial crises) and extremely high oil and commodity prices in the international market affected everything such as sales, revenue and income forecasts, growth prospects and future business expansion, existing organizational policies, strategies and business plans. Inflation and unemployment compelled the customers to tighten their belts and save their valuable money in an unstructured, unpredictable, unclear, uncertain and an insecure environment. Airlines and auto-manufacturers were greatly affected from these changes. Consumers reduced their air travel programs and postpone their leisure trips whereas businesses that have relatively inelastic air travel demand for overseas operations also started devising ways to gain maximum from a short business trip to minimize their escalating expenditures. In fact, they started demanding more value for their money and became less loyal to air brands. They were willing to travel through a new travel service if it offered less than a brand like British Airways. Changes in foreign exchange rates and in British Pound also added to the miseries of British Airways. The above scenario adversely affected British Airways’ business, which performed reasonably well in the first half of the year when it managed to increase sales revenue by 6.4% and reaped a healthy operating profit of £140 million. However, the challenging business conditions and intensifying financial crises that had gained momentum in the second half greatly affected the business and resulted in a 13% decline of premium traffic and loss before tax of around 400£ millions that reduced by 1323 millions year-on-year basis. Surprisingly, the revenue observed a growth of 2.7% but it was mainly from the changes in currency rates rather from a genuine growth in passenger traffic or in air cargo service. Fuels costs surged to nearly 3 billions amid high oil prices that touched record peak of 147$ a barrel. Other major expenses such as administrative and selling, depreciation, engineering and aircrafts, currency differences, accommodation, handling and operating also went up resulting in a total considerable increase of around 17%. The company served more than 33 million passengers and carried 777,000 tons of cargo (5% less than previous year) to their respective places all across the globe. The cargo yield (per tonne) increased by 15.3% because of fuel surcharge from higher oil prices. The airline had to reduce its fleet size and capacity along with retrenchment to bring in-line the corporation with the prevalent international demand. Taking the above into consideration, the company didn’t disburse any dividend to its shareholders and ended up with loss per share of 32.6 pence compared to earning per share of around 62 pence in the preceding year. (Company annual report, 2009) As revealed in the company’s annual report 2009, the cash, cash equivalents and other current interest-bearing deposits totaled £1,381million in 2009 that decreased by £483 million from 2008. The reduction could be attributed to poor financial performance that resulted in a loss and simultaneously in cash outflows. ‘The long-term financing facilities were nearly $3,248 million, further committed general facilities of $269 million and ¥68 billion, undrawn uncommitted overdraft lines were £20 and €4 million, and undrawn, uncommitted money market lines of £25 million.’ The above mentioned figures show the liquidity position of British Airways. (Company annual report, 2009) The total current assets including receivables were £2,346 million, compared to £3,111 million (restated) in 2008. The total current liabilities were £4,142 million in 2009 up by £650 million. This is primarily attributed to lower consumer response and higher fuel prices. The airlines’ current ratio is 0.566 (means 0.566 highly liquid assets for every current liability) which is alarming because normally a ratio between 1.25 to 1.75 is considered as good for a company and represents the financial strength. The quick ratio is nearly 0.53 that means excluding inventories, British Airways was still left with only 0.53 highly liquid assets than debts due in near future. Together, these ratios show a weak financial position of the company, which faced tough economic environment in which already some small and medium size airlines either went out of their businesses or merged with other firms that survived and assimilated the financial shocks. The airline’s Fixed Assets Turnover Ratio was reasonably well as recorded as 1.243 that shows that British Airways made sales of over 1.2GBP for each pound of fixed asset it owned last year. In addition, the total assets turnover ratio was around 0.86 showing that nearly 0.86£ was generated for each 1£ asset. This shows that company had enjoyed relatively higher sales revenues even though its passengers and cargo demand were reduced. The debt ratio is around 0.82 that shows the company has the capability to finance its long term commitments and expenditures. The Days Sales Outstanding figure showcases the fact that company receives its trade receivables in 21 days approximately. Literature Review: Before starting this section, I would like to highlight the fact that British Airways was facing stiff competition in both Shorthaul (from alternative transport facilities like buses and trains) and Longhaul markets (because of deregulation and potential new entrants especially at Heathrow airport) so it has to come up with different strategies to retain its customers and market share. In addition, the stringent regulatory controls by governments on airlines regarding safety/security of environment and carbon emissions as well as security of customers, assets, operations and staff are also among bigger challenges that have immense potential in affecting the airline’s present and future performance. They have to be considered in devising any policies, strategies and forecasts. The company started the fiscal year 2009 with different aims such as to become more cost-efficient, to improve service quality, to engage in business expansion and growth, to focus on corporate philanthropy and social responsibility programs; however, the company failed to accomplish its above major plans mainly because it was hit-hard by external factors completely out of their control. Dan Milmo (2009) quoted Willie Walsh, Chief Executive Officer of British Airways who said that he didn’t see any signs of improvement in the current business outlook that still appeared to be bleak and would remain for some time period. This highlights the fact that British Airways was facing a threat of weak consumer demand that would become weak further in the fiscal year of 2010 like it was in 2009. The negative changes in all the financial ratios of the company can be justified from the above statement of the chief officer. As mentioned by Dan Milmo (2009), the airline boss then decided that his company would not raise any fares to attract more customers and to retain the existing ones. Also, it was highlighted that airline would freeze the employee pay rates and most probably would avoid disbursing any bonuses and management allowances to cut down its costs and improve its financial position from the current level. Bibliography Company Annual Report 2008/2009. Milmo, Dan (2009). "British Airways makes worst ever loss". Available at http://www.guardian.co.uk/business/2009/may/22/british-airways-record-loss. No author (2009). “British Airways reports GBP401m loss for 2009 financial year.” Available at http://www.allbusiness.com/company-activities-management/financial-performance/12340606-1.html No author. (2010) “British Airways-Nine Month Interim Management Statement 2009 -2010 - Period April 1, 2009 (Unaudited)” Available at http://www.mynewsdesk.com/uk/view/pressrelease/nine-month-interim-management-statement-2009-2010-period-april-1-2009-december-31-2009-unaudited-369949 (2009). "British Airways biggest loss sends shares up as a glimmer of hope appears; “Permanent changes” ahead". Available at http://www.centreforaviation.com/news/2009/11/09/british-airways-biggest-loss-sends-shares-up-as-a-glimmer-of-hope-appears-permanent-changes-ahead/page1 (2009). "British Airways traffic and capacity statistics - November 2009". Available at http://www.breakingtravelnews.com/news/article/british-airways-traffic-and-capacity-statistics-november-2009/ Company’s Report 2008/2009. “Strategy”. Available at https://www.britishairways.com/cms/global/microsites/ba.../Strategy.pdf “British Airways reports GBP401m loss for 2009 financial year” Available at http://www.tradingmarkets.com/.site/news/Stock%20News/2341304/ Branson, Richard (2008). "British Airways has no environmental strategy - we do” Available at http://www.guardian.co.uk/commentisfree/2008/mar/19/britishairwaysbusiness.theairlineindustry No author. “Management” Available at https://www.britishairways.com/cms/global/microsites/.../Management.pdf Appendix Ratio Analysis (figures in millions) Loss margin: 358 / 8992 = 0.0398 * 100 = 3.98 nearly 4% Loss on total assets 358 / 10448 = 0.0318 * 100 = 3.18% Current Ratio 2346 / 4142 = 0.566 Quick Ratio: 2219 / 4142 = 0.5357 Fixed Assets Turnover Ratio 8992 / 7233 = 1.243 Total Assets Turnover Ratio 8992 / 10488 = 0.857 Debt Ratio 8642 / 10488 = 0.823 Times Interest Earned 220 / 182 = 1.208 Annual Sales per day 8992 / 360 = 24.97 pounds Days sales Outstanding 530 / 24.97 = 21.22 Loss Per Share = 32.6 p Read More