Group Assignment

MBA Group Project: Financial Decision Making
Module Code ACF731: December 2009
FINANCIAL DECISION MAKING: 2000-2010 GROUP ASSIGNMENT You have just joined the management team of Easyjet plc on successful completion of your MBS/MSC at Ulster Business School. The Board of Directors is concerned about the recent downturn in the economy and the potential impact of this on the companys long-term viability. The Directors are particularly concerned that Ryanair plc may be perceived to be a more successful company than Easyjet plc. As you first major task, the Finance Director of Easyjet plc has asked you to prepare an analysis of the financial performance and position of Easyjet plc in comparison with that of Ryanair plc (see conversion table). The Finance Director has specifically stated that he wants you to undertake your analysis by drawing heavily on the CORE (Moon and Bates, 1993) analysis. Your analysis, which should be presented in REPORT FORMAT, should focus on the relative performance of both organisations (for both 2008 and 2007) using the published Annual Reports and Accounts (Note Easyjets annual accounts have a year ended 30 th September 2007/08 while Ryanairs accounts have a year ended 31st March 2007/08). All materials used in the preparation of your analysis should be clearly referenced (for example, reference to academic articles, books or analyst reports). All ratio definitions and assumptions used in your report should be clearly stated. Marks will be awarded for evidence of research carried out, calculation and interpretation of relevant financial ratios and relevancy of conclusions reached. In addition, you are also required to submit the following at the end of each group assignment: 1. an individual learning log for each group member; 2. a group learning log for the entire group.
Module Leader : Professor Joan Ballantine
Page 1 of 42
Deadline: Word format and limit:
Tuesday 1st December 2009, 4pm Typescript, Arial font, size 12, double line spacing: Maximum 5,000 words (excluding appendices) Group number to identified on front page of report
Submission:
Hardcopy to be submitted to: Department of Management School Office, Room 1K20 by 4pm Electronic copy to be submitted to: My WebCT by same date
Reference: Moon, P. and Bates, K., (1993), Core analysis in strategic performance appraisal, Management Accounting Research, Vol 4, pp.139-152. Conversion Table:
Convert Euros into Pounds please use the following rates: Dollars into Pounds please use the following rates: 0.80: 1 Euro 0.66: 1 Dollar
Joan Ballantine 3rd October 2009
Page 2 of 42
Financial Decision Making Assignment 2009-2010
EXECUTIVE SUMMARY The purpose of this report is to prepare an analysis of the financial performance and position of Easyjet plc in comparison with that of Ryanair plc.
The CORE model approach was used in preparing a review of each airlines annual accounts with selected ratios applied to evaluate compare, contrast their financial performance. An analysis of Easyjet plc performance and position against Ryanair plc confirms the following key findings.
The principal finding from this report is that the current finance strategy for Ryanair plc is not sustainable in the long term. Easyjet plc diversification into ancillary activities has incurred costs which will be recouped over a period of time and reflect a positive investment strategy during and after the economic downturn. Furthermore, Easyjet will achieve additional savings if an optimum hedging policy is implemented during the current economic downturn.
INTRODUCTION An appreciation of the European airline industry was considered in relation to Easyjet plc current financial positioning and brand recognition as the preferred low cost airline provider. The financial performance and position of Easyjet plc
Page 3 of 42
was appraised against Ryanair plc through application of the CORE (CONTEXT, OVERVIEW, RATIO, EVALUATION) model.
Context
establishes
the
market
share
and
European
airline
environment from an internal and external perspective that the two plcs operate and compete within. Overview is an appraisal of the financial performance between the two Plcs in relation to similar operational activities and qualifying their accounts and strategic approach during the current economic downturn. Ratio analysis establishes the relationship between stated totals within the Balance Sheet, Cash Flow Statement and Income Statement to establish the base of Evaluation for financial performance between Easyjet plc (Easyjet) and Ryanair plc (Ryanair). Evaluation of the two accounts is an integrative component of the CORE approach based upon the three previous stages to assist with identifying an overall conclusion from the analysis.
The overall conclusion may then be drawn as to the degree of success of the organisation in terms of the implementation of the corporate strategy for customer, competitors and suppliers according to the specific focus of the analysis (Moon & Bates, 1993).
Page 4 of 42
Context (Internal): Each airline as their primary activity provides international and regional low cost airline fares within the European airline industry. Both airlines are recognised within the market and operationally focussed towards a low-fare strategy. Sustainability and success of providing low cost airline fares is critically dependent upon retaining a low cost base especially during the current economic downturn to protect long-term viability.
The global duopoly of Boeing and Airbus within the European airline industry influences the high fixed costs relative to variable costs that is inherent to airline pricing and generates the operational focus towards retaining a low cost base. Reducing operational costs provides each airline with flexibility to offer lower ticket fares, issue dividend shares or retain earnings for future investment as part of their competitive advantage over a rival ( Brassinton & Pettit, 1997).
From a media perspective and operational approach, Ryanair has successful introduced a low cost base through staff optimisation and promoting www.ryanair.com for online ticket sales. Application of the airlines website can provide an integrated marketing communications strategy as well as introducing an effective management information system to co-ordinate revenue activities. Ryanair is reputed to have achieved 22 million pounds in reduced sales and distribution costs through application of their web-based management information system (Done, 2008).
Page 5 of 42
Additional operational savings to establish a low cost base have been generated through Ryanairs standardisation of their airline fleet to Boeing 737s. Standardisation provides lower staff training and maintenance costs due to familiarity and inventory considerations. Both airlines target the European short-haul city break market segment and utilise a system termed yield management to allow seats to be priced according to supply and demand (Ryanair Plc, 2008).
Ryanair and Easyjet focus upon an optimum turnaround time at each due to empty planes being non-revenue generating. To maximise profits, fixed and variable costs are regularly challenged to introduce further savings which establishes the rationale as a low cost airline provider not to be forthcoming with compensation to passengers for flight cancellations. It is therefore an operational priority to ensure service delivery with minimal lost baggage claims and flight reliability exceeds the industry standard in relation to key performance indicators.
Dependent upon the size of the aircraft purchased or leased from Boeing and Airbus, economies of scale can be achieved to increase the operating profit margin of the airline. Establishing a sustainable low cost base can increase the projected operating profit, increasing the airlines purchasing power to negotiate preferential commercial arrangements with suppliers. Furthermore financial success in one industry sector provides opportunity to develop activities in another sector using ancillary partners. In relation to each airline generating ancillary revenue, Easyjet activities have diversified into various
Page 6 of 42
market segments and achieved higher revenue returns beyond that of Ryanair, as detailed within each airlines Income Statement.
Both the airlines have expanded their ancillary activities with Easyjet achieving a 115% improvement for ancillary services including Car rentals, Hotels, apartments, Travel Insurance and Airport Parking as recorded within their respective company accounts.Ultimately, Easyjet is expanding the portfolio of activities during the economic downturn to develop the brand and establish complimentary ancillary services to mitigate against revenue loss in a specific sector such as Passenger flights. In contrast, Ryanair has generated a 23% improvement in their ancillary services with passenger service the primary focus to achieve revenue (Easyjet Plc, 2008).
As a short term strategy, this has possibly generated the concern that Ryanair performance has improved over Easyjet, yet as a long term approach the approach is not sustainable. This is due to all operational activities having a specific cost threshold and in a fare war contest it may become necessary to subsidise activities from other more profitable ancillary activities. The current approach by Ryanair in the economic downturn is therefore considered prejudicial against their long-term viability.
Each airline primary assets are detailed within the Income statement that reflects the substantial capital outlays in relation to the purchase of aircraft fleet for both providers. In the long term this approach can be beneficial due to reduced future costs associated with leasing as well as minimising
Page 7 of 42
interference from external financing companies concerning pricing tactics with possible withdrawal of finance due to perceived negative publicity of the airline.
Ownership of aircraft establishes a tangible asset and brand platform that can be applied to increase shareholders and investors confidence. The accumulation of assets establishes a long-term investment strategy that requires operational maintenance and management depreciation
consideration. Ownership of the asset ultimately provides each airline with the opportunity to select without constraint their service partners for maintenance, cleaning and insurance coverage. As previously mentioned both airlines target the short-haul city break markets and utilise the yield management system to allow seats to be priced according to supply and demand therefore exercising full control of their marketing mix to the consumer (Airlines , 2006).
Recorded revenues of 2,171 million was achieved by Ryanair during the financial year ended on March 2008, representing an increase of 21.3% over 2007 and generating 37.6% of the total revenues in 2008( Ryanair, 2008) in comparison recorded revenue was 2,362.8 million in September 2008 generating an increase of 31.5% compared to their performance in 2007 and reflective of a sustainable corporate strategy to protect the viability of Easyjet during the economic downturn(Easyjet Plc, 2008).
Easyjet completed the acquisition of GB Airways in January 2008 with Ryanair attempting a similar corporate acquisition that was rejected by Aer
Page 8 of 42
Lingus. Currently no progress has been achieved from the Aer Lingus rejection of the offer yet the collapse of buget airlines Sky Europe in 2009 with previous budget airlines also going into administration does not provide the consumer with confidence in low cost fare providers ( PIGNAL, 2008).
Context (External) According to DATAMONITOR (2008) by 2011 the airline industry is forecast to have a value of 89 billion with 773.5 million passengers anticipated to use airline travel on an annual basis. Competition amongst the two airline providers is increasingly focused towards cost and brand marketing. Various management cost reduction initiatives with provision of only one class of service have developed each airlines reputation as a no-fill providers due to costs being charged for all non-essentials.
To assess the external profile of Easyjet in comparison to Ryanair a SPECTACLES approach is applied with consideration towards the various categories as well as applying Porters five forces model (1980).
SOCIAL considerations include recognition of both airlines as market leaders with strong brand identification for low cost fares. Furthermore, both airlines have developed a reputation for reliability through punctuality of flight times, minimal flight cancellations and reduced lost luggage claims.
Page 9 of 42
POLITICAL considerations include all regulatory constraints that may apply to both providers such as airport charges which are generally levied through regulation rather than commercial negotiation.
ECONOMIC considerations include the economic downturn, reduced disposable income and expenditure of customers together with increasing fuel costs due to global conflict and fear of terrorism attacks. In addition, global events have increased insurance provisions and requirements within the airline industry.
CULTURAL considerations include the perception that low cost airlines provide an inferior service in comparison to traditional flag carrier and charter airlines that concentrate upon a differentiation competitive advantage.
TECHNOLOGICAL considerations include the recognition that safety is a main consideration and cost aspect with all aircraft parts have a defined life-span before replacement is required. The replacement of prop aircraft to jet engines as part of fleet modernising as well as increasing safety requirements requires airlines to a continual review of their projected capital and maintenance allowances.
AESTHETIC considerations include the preference for one airline over another with Easyjet achieving a global focus due to broader activities in comparison to Ryanair. Both airlines provide the same class of service on all flights with emphasis upon low costs.
Page 10 of 42
CUSTOMER considerations include ease of on-line booking together with ticket costs combined with reliability of each airline operating the prescribed flights and minimal loss baggage claims. Against Easyjet, Ryanair has achieved significant short-term success in this category at the expense of generating a love/hate relationship with the public.
LEGAL considerations include the regulatory constraints for passenger safety, security provisions, noise reduction, and environmental issues. In addition, to employment and aviation law, there is competition and liability legislation that restricts the operating activities of each airline.
ENVIRONMENTAL considerations include all regulatory constraints that may apply such as noise reduction, emissions and fuel efficiency, reduced energy, water and material consumption and air traffic congestion.
SECTORAL considerations include review of competitors and future regulatory considerations to enable a competitive advantage to be developed over rival airlines. In many respects review and implementation of Porters (1980) competitive forces provides the sector framework for analysing the intensity of competition to the profitability and attractiveness within an industry. The below five forces diagram illustrates the relationship between the different competitive forces (Porter, 1980).
Page 11 of 42
Adapted from Porter (1980) Five Forces Model
Threat of new entrants - low The preference for lower air fares generated the business opportunity for Easyjet and Ryanair to compete against traditional flag carrier and charter airlines. A high capital investment and legislation requirement combined with competition for additional airport slots/positions creates physical and financial barriers for new operators within the airline industry.
Bargaining power of customers - increasing Availability of constant information through the World Wide Web provides information of which airline has the cheaper fare and within an economic
Page 12 of 42
depression, the preference of the customer is generally towards the cheaper service provider.
Bargaining power of suppliers strong but limited The price of aviation fuel is directly related to the cost of oil, as an individual company Easyjet and Ryanair does not have the power to alter this. The impact of the supplier depends on the availability of alternative suppliers and product substitutes (Dibb & Simpkin, 2001). The more these airlines expands the more power it will possess over its suppliers
Threat of the substitute products or services - low There are no tenable threats from other modes of transport as distances are too great except from London to Paris, which can be reached by Euro Star.
Current competitors Easyjet and Ryanair sustain a cost leadership advantage over all other operators including traditional flag carrier and charter airlines that utilise a differentiation rather than a low cost base.
OVERVIEW: Both Ryanair and Easyjet have membership of the European Low Fares Airline Association (ELFAA) to assist with their equal representation within the airline industry. According to ELFAA (2009) statistics Ryanair provides 1,200 daily flights in contrast to the 1,000 daily flights provided by Easyjet. As a consequence of providing a higher volume of daily flights than Easyjet, the
Page 13 of 42
passenger load factor for Ryanair is lower at 81.4% according to the June 2009 ELFAA statistics. The passenger load factor of 85.2% for Easyjet identifies on average their passenger occupancy per flight which can be compared to the break-even point to identify the profitability of a specific flight (ELFAA, 2009).
The below table provides an insight of each organisation in relation to their operations and company profile.
ESTABLISHED ANNUAL TURNOVER OWNERSHIP STRUCTURE NO OF AIRCRAFT MAJOR FLEET TYPE MAIN HUB H/Q NO OF ROUTES
RYANAIR 1985 2171 million Ryanair Holdings Plc 220 BOEING LONDON, STANSTED
EASYJET 1995 2,362 million Easyjet Plc 165 A320 ;BOEING LONDON, LUTON AIRPORT LONDON,
DUBLIN, IRELAND UNITED KINGDOM 950 400 28 COUNTRIES 6107 43 million 3.53 million 80% ACQUIRED GB
COVERED NO OF COUNTRIES 147 COUNTRIES COVERED EMPLOYEES PASSENGER VOLUME PASSENGERS PUNCTUALITY FLIGHTS ON TIME ACQUISITION & 5920 60 MILLION 5.12 million 88% FAILED TO ATTEMPT
Page 14 of 42
MERGERS EXTERNAL
AER LINGUS KPMG
AIRWAYS PRICEWATER COOPERS
AUDITORS AIRLINE PASSENGERS PER 9679
6772
EMPLYOEE Source : Easyjet plc 2009 & Ryanair plc 2009.
Both the airlines follow the going concern basis in preparing their financial statements which have been certified by independent respective external auditor as being a true and fair status of the companys financial overview. The financial statements are prepared in accordance with the International Financial Reporting standards (IFRS) as adopted by European Union (EU) and effective from March 2008; as applied in accordance with the prevailing Companies Act legislation. Both airlines amended their accounting policy in 2005 from UK GAAP to International Financial Reporting Standard ( Ryanair Plc, 2008 & Easyjet Plc, 2008).
Both airlines are successful in strategising for revenue generation with Ryanair maximising its profit through effective control of operating expenses in comparison to Easyjet. An example is Ryanairs effective fuel hedging policy which allows the airline to allocate fixed fuel costs without surcharge to the customer whereas Easyjet varies their fuel surcharge to the customer.
Page 15 of 42
The turnover for Easyjet is 2,362 million (2008) from 1,797 million (2007) which is a 20% increase in the turnover. Unfortunately due to the increased administration expenses incurred profit margins have not been maximised due to staff, marketing and fuel costs. These costs cumulatively represent a total cost increase of 28% in 2008. The final outcome was a decrease in profit margin from 11.23% from 4.66%, which trails far behind Ryanairs profit margin (Easyjet plc, 2008).
Ryanair in comparison to Easyjet has increased its turnover to 2,171 million (2008) from 1,789 million (2007) which is a 13% increase whereas their administration costs increased by 13% from last year. This has led to Ryanair capitalising on the increase in turnover to profit ( Ryanair plc, 2008). Airline passenger per employee for Ryanair is greater in comparison to Easyjet and reflects an optimum utilisation of resources. Ryanairs punctuality of flights on time is 88% when compared to 80% of Easyjet which demonstrates the operational efficiency of staff. The customer base has increased for both airlines with Ryanair achieving greater customer retention through market domination of the short haul flights. The addition of 16 more aircrafts through Easyjets acquisition of GB airways to 165 aircrafts amounted to a capital expenditure of 118 million ( Easyjet plc, 2008). Ryanair took the delivery of 30 new aircrafts bringing its total to fleet of 220 aircraft which amounted to 97.1 million towards capital expenditure incurred for the year. Both the airline has an expansion plan which clearly shows in their adding of more aircrafts to their existing fleet. Ryanair has raised finance through the mortgage of their aircraft, with a book value of
Page 16 of 42
3,061.5 million as collateral security for finance generated through loans for purchase of next generation 737-800 Boeing aircrafts ( Ryanair plc, 2008).
RATIOS The calculated ratio analysis establishes the relationship between stated totals within the Balance Sheet, Cash Flow Statement and Income Statement to establish the base of Evaluation for financial performance between Easyjet plc (Easyjet) and Ryanair plc (Ryanair). The three main areas of Strategic analysis include Profitability, Liquidity and Efficiency as well as Gearing and Investment. Consideration of the ratios reflects the performance of Easyjet in achieving strategic goals in comparison to Ryanair and other rivals. The ratios are in the table format and the implications are discusses below ( Moon & Bates, 1993).
Ratios Profitability ROCE Net Profit Margin Goss profit margin ROSF Liquidity Current Ratio Acid Test Ratio Gearing Ratio
RYANAIR 2008 2007 9.20% 16.17% 19.79% 15.61% 1.53 Times 1.53 Times 47.55% 9.86% 20.16% 21.09% 17.15% 2.02 Times 2.02 Times 44.47%
EASYJET 2008 2007 5.78% 4.66% 3.85% 6.51% 1.56 Times 1.56 Times 41.53% 12.08% 11.23% 9.57% 13.22% 1.88 Times 1.88 Times 39.19%
Page 17 of 42
Interest Cover Ratio Efficiency Ratio Earnings per share Wage Cost (%) Other ratios Debtors Collection days Creditors Payment days
5.53 Times
5.09 Times
3.36 Times
6.70 Times
20.67 10.51% 4.6 days 17.39 days
22.56 10.13% 3.82 days 8.94
19.84 11.14% 21.55 days 11.97 days
36.61 11.36% 34.2 days 8.04 days
days Source: Easyjet Plc.2008 & Ryanair Plc, 2008. The financial ratios provide a quick and relatively simple means of assessing the financial health of the organisation (Atrill & Eddie, 2006).
EVALUATION: To complete the CORE model an evaluation of the two airlines has been prepared with a succinct summary of the main findings of the report including key recommendations identified.
Both airlines have reduced profit margins with Easyjets profit margin gap is significant in compared to Ryanair. The decline in the profit is mainly due to an increase in administration cost as previously reported. The main contributing factor is 66% increase in the fuel cost when compared to 2007 whereas Ryanair had only 14% in increase in fuel cost due to its effective (73%) hedging policy on fuel charges. Neither airline released dividend payments for 2008.
Page 18 of 42
To reduce short-term earnings volatility Easyjet has put the following fuel and currency hedging positions in place: A. 66% of anticipated 2009 funding requirement is hedged at 1.96/,an additional 5% of requirement are hedged with collars with average floors of 1.73/ (of what Shinde per sq metre); B. 56% of 2009 capital expenditure relating to aircraft deliveries hedged at 1.97/; C. 81% of anticipated 2009 euro surplus hedged at 1.24/. (Easyjet plc, 2008).
Easyjet has also achieved a positive trend through reduced wage costs in comparison to Ryanair, which is a consistent consideration to maintain during an economic downturn to ensure competiveness with Ryanair. The operating profits for Easyjet were lower due to incurred advertising costs which were high in comparison to minimal advertising costs incurred by Ryanair and recorded as zero within the Income Statement. Online booking for Ryanair is greater than 90% which results in a small operating expense towards marketing. In contrast to Ryanair, Easyjet is applying a long term strategic approach to maximise revenue through advertising in the media and other channels to inform customers of their service value with competitive low fares.
The acquisition costs for integrating GB Airways costed at 12.9 million in 2008 which is going to reflect as an expense on next years income statement will assist Easyjet to increase profit margins. Easyjet has also increased
Page 19 of 42
ancillary revenue which will assist the company to mitigate its corporate risks through diversification of activities.
Both airlines use the straight line method for calculating depreciation due to which Easyjet is showing 33% increase in its depreciation cost versus Ryanair 22% increase in depreciation. In relation to Easyjet the depreciation cost is high due to the acquisition of GB Airways with additional assets to be depreciated.
The interest cover ratio, which is used to determine how easily either airline can pay interest on outstanding debt, was calculated by dividing each airlines revenue before interest and taxes with ratio. The interest cover ratio has declined dramatically for Easyjet by 3.34 times when compared to Ryanair which increased by 0.44 times. Thus the decline in Easyjets interest cover ratio can be explained through an increase in borrowing and combined with a dramatic decline in profitability in 2008.
The lower the level of operating profit coverage, the greater the risk to lenders that interest payments will not be met, and the greater the risk to the shareholders that the lenders will take action against the business to recover the interest rate. Whilst Ryanair has its maintained a preferable interest cover ratio in comparison to Easyjet due to the profit 429,664 achieved despite high borrowings. Easyjets Interest cover ratio was not as favourable due to their profit margins of 910,000 despite achieving a preferred gearing ratio in comparison to Ryanair.
Page 20 of 42
The gearing ratio refers to the relationship between the amount of fixed interest capital and the amount of equity within each airline. Ryanair has increased from 44% (2007) to 47% (2008) primarily due to an increase of long term debts at 13% in 2008. When the value of debt capital is more than the value of equity as in Ryanairs situation the organisation is highly geared due to significant borrowings of 1,814.57 increasing the risk of becoming insolvent in the medium to long term particularly if the economic downturn continues.
Ryanair is raising finance for operational activities at the expense of an increased gearing ratio from 9.32% in 2007 compared to 39.96% in 2008 due to a decrease in profit margins (Ryanair Plc, 2008). Whilst, the gearing ratio for Easyjet increased to 41.53 % (2008) from 39.19 % (2007) this is primarily attributed to the acquisition of GB Airways. The future gearing for Easyjet will reduce due to consolidation of activities whereas Ryanair increased gearing is attributed to the intended acquisition of Aer Lingus, purchase of market shares and investment within operational activities.
It would therefore appear that Ryanair have exhausted the potential to achieve future funding due to their current gearing ratio whereas Easyjet focus is towards consolidation of activities with an increase in profit margins anticipated in 2009/10.
Page 21 of 42
Easyjet have increased current liabilities in terms of aircraft maintenance cost and derivative financial instruments (hedging losses) that have generated a reduction in the current ratio combined with the acquisition of GB Airways. Whilst Easyjet can access significant cash and liquid investments to mitigate the risk of business disruption events of approximately 863 million as at 30 September 2008 this excludes restricted cash of 66 million for short-term liabilities. Whereas the cash balance for Ryanair has improved it is only through analysis of the ratios that a downward trend is developing due to an increase in current liabilities within derivative financial instruments.
Ryanair utilises derivative financial instruments to hedge against losses by anticipation of future price increases concerning predicted variability in cash flows of an asset, liability or a highly probable forecasted transaction. A significant contribution for an increase in the current ratio for Ryanair is the increase in maturity of debts. Both Ryanair and Easyjet have a similar acid ratio due to absence of stock or inventories within their published balance sheets. The sales revenue per employee ratio identifies how each airline is utilizing their employee productivity with an increase generally reflective of efficiency with management establishing additional key performance indicators for staff to achieve. As previously detailed on the ratio comparison table, Ryanair has increased sales revenue per employee.
Return on capital employed identifies the relationship between the operating profit and average long term capital invested and is significantly reduced for
Page 22 of 42
Easyjet due to long term liabilities yet this is recognised as a temporary phase following the GB Airways acquisition as well as undertaking airline operations within a competitive market. Achieving a profit within an economic downturn combined with adjustment of the hedge reserve will enable Easyjet to improve their effectiveness in 2009/10.
In contrast, the capital redemption reserve for Ryanair has increased due to purchasing previously released equity shares as well as increasing long term liabilities with various financial institutions and established primarily on the basis of guarantees granted by Export-Import Bank of the United States to finance the acquisition of 107 Boeing 737-800 as a next generation aircraft.
Whilst having less favourable ratios than Easyjet the funding provided by the Export-Import Bank of the United States for Ryanair is attributed to the bank emphasis to support the financing of U.S. goods and services ( Trade Finance, 2004). It could also be suggested that the purchase of previously released shares by Ryanair was implemented to prevent another airline purchasing Ryanair shares due to their perceived vulnerability since the continued reduction of operational costs is not a sustainable activity.
The Debtors Ratio identifies the effectiveness of a debt collection routine and within the competitive low fare airline industry, efficient ratios would be anticipated especially when the focus is towards cost reduction measures and borrowing finance is a chargeable activity. Ryanair has an excellent debtor collection policy with a minimal increase 0.78 days in 2008. This could also be
Page 23 of 42
reflective of the absence of available liquid reserves within a business to increase the availability of working capital and reduce finance borrowings. In contrast, Easyjet debtor ratio can be optimised from 12.65 days in 2008 to improve the availability of working capital within the business and limit borrowings. In comparison of the two airlines, Easyjet could improve their debtor ratio to seven days for efficiency purposes whereas Ryanair requires a constant focus on their debtor ratio analysis due to availability of working cash and requirement to minimal all non-essential costs.
The Creditors Ratio provides an alternative perspective on how the two airlines consider their debt considerations. Ryanair creditor payment period is 8.45 days and therefore due to the volume of activities there is the availability of finance for other activities for an average of 8.45 days until payment/settlement is issued. Through utilising the credit payment period as a temporary borrowing option there is the perceived high risk that funds for payment could become committed and rather than generating revenue growth, funds are being juggled. In contrast the creditor payment period for Easyjet is 3.93 days restricting the availability of working capital to be paid to creditors rather than using it for day to day operations.
In summary of the ratios selected for comparison the creditor and debtor ratios is reflective in general of how each airline is approaching their activities. Ryanair is quick to require settlement from debtors due to their restricted borrowing availability and uses a period of 8.45 days as an opportunity to generate additional revenue prior to settlement. Depending upon the volume
Page 24 of 42
of finance available within this period, Ryanair is anticipating the generation of additional revenue through hedging activities and received interest returns. In contrast, Easyjet is quick to make settlement as a creditor and less efficient in seeking settlement from debtors. This is similar to the Easyjet approach to strengthen their brand image and also diversify into other activities.
Succinct summary of the main findings of the report including key recommendations identified.
The Profit and Loss statement for Easyjet appears robust as confirmed through review of the selected ratios in comparison to Ryanair. In addition, whilst the purchase of GB Airways by Easyjet on January 31 st of 2008 could disguise discrepancies within their accounts, it is worthy of note that despite this acquisition their accounts still remain favourable in comparison to Ryanair.
Easyjet in comparison to Ryanair is expanding and diversifying their activities as well as strengthening their brand recognition. The Easyjet brand has a separate value to the airline through selective marketing enabling the separate sale of the brand through an acquisition or management buyout; in contrast Ryanair brand has become devalued and linked to cost cutting initiatives.
The 2008 accounts for Easyjet includes the 12.9 million integration of GB Airways as an integration cost specific to this year and in future
Page 25 of 42
years should generate profit to recoup the initial expenditure. The profit for Easyjets financial performance in 2008 has declined by 6.57% when compared to 2007 although it retains strong liquidity with cash and money market deposits of 863 million. (Easyjet Plc, 2008).
The ancillary revenue generated by Easyjet is increasing as evident from the cash flow statement. Through diversification a wider market segment is being targeted in comparison to Ryanair. The overall Easy brand has a high level of recognition and customer advocacy in all selected key markets as confirmed by the Family Brands Poll in 2009; in contrast Ryanair is recognised, as the least preferred family brand (Telegraph, 2009).
The credit and debt collection ratios for Easyjet though not a necessity can be improved whereas Ryanair is maximising their efficiency to facilitate the availability of working capital having mortgaged their airline fleet to raise finance. Both airlines have distributed their risk against rising fuel prices and dollar fluctuation through adoption of hedging initiatives.
Ryanair in their attempt to purchase Aer Lingus have generated an impairment loss of 51 million. In attempting to purchase Aer Lingus, Ryanair is potentially vulnerable to a reverse acquisition challenge, furthermore the value of Aer Lingus shares is predicted to reduce
Page 26 of 42
further generating an additional reduction on the 2009/10 profit margins (Ryanair Plc, 2008).
The concentration of passenger service revenue by Ryanair as their primary operation is subject to industry fluctuations, whereas Easyjet have ancillary revenue and a marketable brand value to hedge against industry fluctuations.
The policy of Ryanair to absorb the fuel surcharge to permit a low fare offering to the customer is not sustainable in the long term airfare due to predicted fuel increase costs.
The corporate culture of the two airlines is evident through Ryanair Chief Executive Michael OLeary decree that there is no point in continuing to grow rapidly in a declining yield environment, where our main aircraft partner is unwilling to play its part in our cost reduction program by passing on some of the enormous savings which Boeing have enjoyed both from suppliers and more efficient manufacturing (Ruddick,2009).This is also reflective of the possibility that Ryanair will not be able to generate additional finance to enable expansion following recognition and review of the selected ratios.
In summary of the evaluation between the two airlines it would appear that Ryanair could be assumed to be the market leader for the uninformed due to their current activities for 2008 only. The strategic planning within Easyjet has
Page 27 of 42
developed a special brand with opportunity to use available finances as well as capacity for increased borrowings to enter into a price war with Ryanair.
CONCLUSION It is highly probable that with the acquisition of GB Airways in 2008, predicted consolidation of activities in 2009 and possible creation of a price war with Ryanair in 2010, Easyjet will establish recognition as the market leader instead of a rival low cost airline operator to Ryanair.
The current economic downturn has increased the competitiveness between airlines with a requirement to establish a low cost base to ensure survival. Ryanair has already implemented this with their current activities due to high gearing not considered sustainable. Easyjet has the availability to introduce additional savings, generate additional finance and introduce further brand diversification during the economic downturn. The availability to undertake additional acquisitions during the economic downturn whilst other
organisations suffer reduced market values will increase the future profit margins for Easyjet after consolidation of the new assets.
The financial operations within Ryanair restrict the availability to generate additional financing during the economic downturn whereas Easyjet has opportunity to raise finance if considering the acquisition for Aer Lingus in 2011. Although it may be preferable not to enter into a determined bidding war with Ryanair intended purchase of Aer Lingus that should be challenged only
Page 28 of 42
to increase the acquisition costs applicable for Ryanair. This approach will financially exhaust Ryanair if the market value of Aer Lingus is contested.
It is probable that Easyjet will be in a position to purchase Ryanair or Aer Lingus from 2011 onwards, if the projected profit margins of Easyjet remain consistent.
-The End-
References (1) Atrill.P & Eddie.M., (2006).Accounting and Finance for Non-Specialists.5 Th ed: Essex: Pearson Education Limited.
(2) Brassington.F. Pettitt.S.(2007) Essentials of Marketing.2 nd ed: Essex :Pearson Education Limited.
(3) Porter.E.M (1985) Competitive Advantages: Creating and Sustaining Superior: Upd Exp edition (September 1, 2008),Harvard Business School Press.
(4)
Moon,
P.,
Bates,
K.
(1993), Accounting
"Core
analysis
in
strategic
performance", Management
Research ,
Kidlington: Jun
1993. Vol. 4, Iss. 2; pg. 139, 14 pgs.
Page 29 of 42
(5) Dibb.S and Simkin.L. (2001).The Marketing Casebook. 2nd ed: London. Thomson Learning.
(6) Ryanair Plc, 2008. Annual report 2008. [Online], Available at: http://www.ryanair.com/doc/investor/2008/Annual%20report %202008%20web.pdf[Assessed November 21 2009].
(7) Easyjet Plc, 2008. Annual report 2008. [Online], Available at: http://corporate.easyjet.com/~/media/Files/E/easyJet/pdf/investors/resultcenter/easyJet_ar081.pdf. [Assessed November 21, 2009].
(8)
AIRLINES:
Heat
is
on
for
short-hauls. 2006. Marketing
Week, November 9, 20-21. Available at: http://www.proquest.com/ [Accessed November 21, 2009].
(9)
STANLEY
PIGNAL.
2008. The
Week: [LONDON
1ST
EDITION]. Financial Times, February 23, http://www.proquest.com/ [Accessed November 21, 2009].
(10) Done, K., 2000. Web prompts 'huge' savings for Ryanair TRANSPORT PRE-TAX LINE AHEAD 54%: [London edition]. Financial Times, November 8, http://www.proquest.com/ [Accessed November 21, 2009].
(11) ELLFA, (2009). ELFAA condemns UK Governments further smash and grab on Passengers. (Online)(Updated 30 October 2009) Available at:
Page 30 of 42
http://www.elfaa.com/ELFAA_Press_Release_UKAPD_301009.pdf [Assessed November 1 2009].
12)
Lloyds
TSB
closes
Ex-Im
loan
for
Ryanair. 2004. Trade
Finance, October 1, 21-22. Available at: http://www.proquest.com/ [Accessed November 21, 2009].
(13)Ryanair Holdings plc, (2009) Company Profiles Data monitor (online) Available at : http://web.ebscohost.com/ehost/pdf? vid=99&hid=6&sid=ae8119cb-7824-4419-b32ce89f80cd4ca0%40sessionmgr12[Accessed November 12, 2009]. Easyjet plc, (2009) Company Profiles, Data monitor (online), Available at: http://web.ebscohost.com/ehost/pdf?vid=98&hid=6&sid=ae8119cb-78244419-b32c-e89f80cd4ca0%40sessionmgr12[Accessed November 12, 2009].
(15) Telegraph.2009.Easyjet set to hit profit targets.[Online] (Updated 14 Nov 2009)Available at: http://www.telegraph.co.uk/finance/newsbysector/transport/6570145/EasyJetset-to-hit-profit-targets.html) [Assessed November 21, 2009].
(16) Ruddick, G.2009. Ryanair and Easyjet row after Irish airline says it could scrap `plans to buy 200 more aircraft :Telegraph.co.uk: Nov 2 2009.(Online) Available at: http://www.telegraph.co.uk/finance/newsbysector/transport/6488871/Ryanair-
Page 31 of 42
and-easyJet-row-after-Irish-airline-says-it-could-scrap-plans-to-buy-200-moreaircraft.html [Assessed on November 21, 2009].
(17) Telegraph 2009. Ryanair named worst 'family brand'. [Online] (Updated 23 Nov 2009) Available at: http://www.telegraph.co.uk/travel/travelnews/6641220/Ryanair-named-worstfamily-brand.html [Assessed November 21, 2009].
Appendix:
Ryan air Consolidated Balance Sheet Items 2008 Non-current assets Property, plant and equipment... 2865.70 Intangible assets... 37.47 Available for sale financial assets... 249.17 Total non-current assets... 3152.34 Current assets Inventories ... 1.60 Other assets ... 135.66 Current tax ... 1.27 Trade receivables... 27.34 Derivative financial instruments... 8.18 Restricted cash... 233.94 Financial assets: cash > 3 months... 325.02 Cash and cash equivalents... 1176.68 Total current assets ... 1909.70 Total assets... 5062.04 Current liabilities Trade payables... 103.43 Accrued expenses and other liabilities... 735.48 Current maturities of debt... 293.44 Derivative financial instruments... 113.37 Current tax... 0.00 Total current liabilities... 1245.72 Non-current liabilities
Module Leader : Professor Joan Ballantine Page 32 of 42
2007 2321.20 37.47 324.86 2683.54 1.94 106.16 0.00 18.73 42.19 207.05 474.22 1077.14 1927.41 4610.95 101.79 645.71 143.13 44.84 16.66 952.14
Provisions... Derivative financial instruments... Deferred income tax ... Other creditors... Non-current maturities of debt... Total non-current liabilities... Shareholders equity Issued share capital... Share premium account ... Capital redemption reserve... Retained earnings ... Other reserves... Shareholders equity ... Total liabilities and shareholders equity ...
34.23 60.55 118.47 81.56 1519.76 1814.57 7.57 474.21 18.75 1600.34 -99.11 2001.76 5062.04
22.98 46.93 120.83 89.74 1346.52 1626.99 7.86 485.95 0.00 1524.17 13.85 2031.82 4610.95
Conversion value of Euro into Pound of .080 pounds
Ryanair Consolidated Income Statement Items Operating revenues Scheduled revenues ... Ancillary revenues... Total operating revenues - continuing operations... Operating expenses Staff costs ... Depreciation ... Fuel & oil... Maintenance, materials & repairs... Marketing & distribution costs... Aircraft rentals... Route charges ... Airport & handling charges ... Other... Total operating expenses... 2008 2007
1780.554 1499.83 390.504 289.68 2171.058 1789.52 -228.274 -140.759 -633.062 -45.3672 -13.7344 -58.136 -207.424 -317.061 -97.576 -1741.39 -181.26 -114.80 -554.66 -33.64 -19.04 -46.55 -159.39 -218.89 -83.89 -
Page 33 of 42
Operating profit - continuing operations... Other finance income/(expenses) Finance income... Finance expense... Foreign exchange (losses)... Loss on impairment of available for sale financial asset ... Gain on disposal of property, plant and equipment ... Total other income/(expenses) ... Profit before tax... Tax on profit on ordinary activities ... Profit for the year - all attributable to equity holders of parent. Basic earnings per ordinary share euro cent... Diluted earnings per ordinary share euro cent... Number of ordinary shares (in 000s)... Number of diluted shares (in 000s) ...
429.664 67.1656 -77.6704 -4.4848 -73.2552 9.7224 -78.5224 351.1416 -38.5752
1412.12 377.40 50.39 -66.30 -0.72 0.00 0.07 -16.57 360.83 -12.35
312.5664 348.48 0.020672 0.02 0.020496 0.02 1209.61 1235.57 1219.948 1246.00
Conversion value of Euro into Pound =0.80 pounds
Page 34 of 42
Easy jet Consolidated income statement Items Passenger revenue Ancillary revenue Total revenue Ground handling charges Airport charges Fuel Navigation charges Crew costs Maintenance Advertising Merchant fees and commissions Aircraft and passenger insurance Other costs GB Airways integration costs EBITDAR Depreciation Amortization of other intangible assets Aircraft dry lease costs Aircraft long-term wet lease costs Operating profit Interest receivable and other financing income Reversal of prior year impairment losses on financial assets Interest payable and other financing charges Net finance income Share of profit of associate Profit before tax Tax Profit for the year Earnings per share, pence Basic Diluted (Note: All figures taken from Annual Report 2008) 2008 1995.7 367.1 2362.8 -212.2 -397.2 -708.7 -195.7 -263.2 -147.5 -46.5 -33.7 -9.1 -87.5 -12.9 248.6 -44.4 -2.5 -110.7 0 91 53.2 2007 1626 171.2 1797.2 -156.1 -305.8 -425.5 -141.8 -204.1 -98.1 -38 -20.6 -12.2 -96.9 0 298.2 -33.3 -0.9 -91 -1 172 54.6 10.6 -35.4 29.8 0.1 201.9 49.6 152.3 36.6 35.6
-34 19.2 110.2 27 83.2 19.8 19.4
Page 35 of 42
Items Non-current assets Goodwill Other intangible assets Property, plant and equipment Derivative financial instruments Loan notes The Airline Group Limited Restricted cash Other non-current assets Investments in associates Deferred tax assets Total Non Current assets Current assets Assets held for sale Trade and other receivables Derivative financial instruments Restricted cash Money market deposits Cash and cash equivalents Total Current assets Current liabilities Trade and other payables Borrowings Derivative financial instruments Current tax liabilities Maintenance provisions Net current assets
Easyjet Consolidated Balance Sheet 2007 359.8 80.6 1102.6 21.3 12.0 42.9 61.1 0.5 1680. 8 195.8 236.9 96.5 23.3 230.3 632.2 1415.0 653.0 56.7 76 75.1 49 -909.8 505.2 223.6 14.4 15.9 193.4 719.1 1166.4 461.7 40.5 26.6 89.7 2.8 -621.3 545.1 309.6 1.8 935.8 11.1 32.9 58.1 0.3 0.4 1355
2008
Page 36 of 42
Non-current liabilities Borrowings Derivative financial instruments Other non-current liabilities Maintenance provisions Deferred tax liabilities Net assets Shareholders funds Share capital Share premium Hedging reserve Translation reserve Retained earnings Total liabilities and shareholders equity ...
570.2 0.3 68.8 160.4 108.1 -907.8 1278.2 105.7 640.2 27.6 0.1 504.6 1278.2
478.6 6.3 86.8 136 35 -742.7 1152.4 104.8 633.9 -13.7 427.4 1152.4
Ratio Calculation of Ryanair
Page 37 of 42
Ryanair Ratio Calculation

Profitability ratio
ROCE Formulas Profit Before Interest & Tax Sh. Equity (+) Total non cr. Lib. Profit Before Interest & Tax Total Revenue 2008 351.1416 2001.7552 1814.57 351.1416 2171.0576 2007 9.2% 360.83 2031.82 360.83 1789.52 9.86% 1626.99 20.16%
Net profit margin
16.17%
Gross profit margin
Opt. Profit Total Revenue
429.664 2171.0576
19.8%
377.4 1789.52
21.09%
ROSF
Profit for Year Sh. Holder Equity
312.5664 2001.7552
15.6%
348.48 2031.82
17.15%
Liquidity
Current ratio Formulas Current Assets Current Liabilities 1909.7 1245.72 2008 1.53 times 1927.41 952.14 2007 2.02 times
Acid Test ratio
Cr. Assets (-) Inventories Cr. Liabilities
1908.1 1245.72
1.53
times
1925.47 952.14
2.02
times
Gering Ratio Total non cr. Liabilities

sh. Capital+Reserves+long tern non cr. Lib.
1814.57 3816.33 429.66 77.67
47.55%
1626.99 3658.81 times 337.39 66.3
44.47%
interest cover ratio Profit Before Interest & Tax Interest Payable
5.53
5.09
times
Efficiency Ratio
Formulas Earning per share Earnings aval. to ord. share holders No. ord. share issued Wage Cost % 2008 312566400 X 100 1512012000 2007 20.67 348480000 x 100 1544457000 22.56
10.51% 181.264 Staff cost 228.2744 Total operating revenue 2171.0576 1789.516 (Note: All figures taken from Annual Report 2008)
10.13%
Ratio Calculation of Easyjet
Page 38 of 42
EasyJet Ratios Calculation

Profitability ratio
Formulas ROCE Profit Before Interest & Tax Sh. Equity (+) Total non cr. Lib. Net profit margin Profit Before Interest & Tax Total Revenue 2008 110.2 1278.2 110.2 2362.8 5.0% 907.8 4.7% 201.9 1152.4 201.9 1797.2 2007 10.65% 742.7 11.23%
Gross profit margin
Opt. Profit Total Revenue
91 2362.8
3.9%
172 1797.2
9.57%
ROSF
Profit for Year Sh. Holder Equity
83.2 1278.2
6.5%
152.3 1152.4
13.22%
Liquidity
Current ratio Formulas Current Assets Current Libilities 1415 909.8 2008 1.56 times 1166.4 621.3 2007 1.88 times
Acid Test ratio
Cr. Asets (-) Inventries Cr. Libilities
1415 909.8
1.56
times
1166.4 621.3
1.88
times
Gearing Ratio Total non cr. Libilities Sh. Capital+Reserves+long tern non cr. Lib. interest cover ratio Profit Before Interest & Tax Interest Payable
907.8 2186 114.2 34
41.53%
742.7 1895.1 times 237.3 35.4
39.19%
3.36
6.70
times
Efficiency Ratio
Formulas Earning per share Aval. to Ord. Share Holders Earnings No. Ord. Share Issued 83200000 419400000 2008 X 100 19.84 152300000 416000000 2007 x 100 36.61
Wage Cost %
Staff Cost Total Operating Revenue Fuel Cost Total Operating Revenue
263.2 2362.8 708.7 2362.8
11.14%
204.1 1797.2 425.5 1797.2
11.36%
Fuel Cost %
29.99%
23.68%
(Note: All Figures Taken From Annual Report 2008)
Page 39 of 42
Graphs of Ryan Air and Easyjet
Page 40 of 42
Page 41 of 42
Page 42 of 42

Group Assignment

Transféré par

Informations du document

Description originale:

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Group Assignment

Transféré par

Droits d'auteur :

Formats disponibles

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Deadline: Word format and limit:

Joan Ballantine 3rd October 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Financial Decision Making Assignment 2009-2010

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Adapted from Porter (1980) Five Forces Model

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

AER LINGUS KPMG

AIRWAYS PRICEWATER COOPERS

AUDITORS AIRLINE PASSENGERS PER 9679

EMPLYOEE Source : Easyjet plc 2009 & Ryanair plc 2009.

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

Module Leader : Professor Joan Ballantine

MBA Group Project: Financial Decision Making

Module Code ACF731: December 2009

20.67 10.51% 4.6 days 17.39 days

22.56 10.13% 3.82 days 8.94