Financial Analysis: British Airways plc
British Airways, plc is the largest airline company in United Kingdom. It was the first company in the world to provide scheduled international service for travelers (between London and Paris), transport passengers in airplanes equipped with jet engines and offer commercial flights at supersonic speeds. The organization is a leader in commercial aviation as well, as it presently flies to more than 300 destinations around the globe (British Airways 2008, p. 2). To ensure that British Airways recovered from the slump experienced since 1998, the management announced a new strategy in 2005 with three key elements.
They are: “to ensure BA is prepared for the move to Terminal 5 in 2008 (‘Fit for 5’), targeted investment in BA’s product and people and a continued focus on building a competitive cost base” (British Airways 2005, p. 7). BA has also forged ahead using technology. They have adapted online ticketing service for their customers. The “manage my booking” facility, which allows customers to select a seat, choose a special meal, add their Executive Club details to their booking and e-mail their itinerary to friends, has won a Business Innovation Award.
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After Go was sold to EasyJet, the British Airways decided to concentrate on market differentiation. The reason that Eddington chose differentiation as the new strategy of BA was that BA already had an image of quality and it was a simple matter to match this quality with prices perceived as offering good value over no-frills airline offerings (McDonald 2005,p. 5). In the next sections, a financial analysis on the three-year performance of the company is conducted. This determines the company’s financial condition and provides investors information pertaining to liquidity, profitability and sustainability of current business strategies.
Horizontal Common Size Analysis Table 1 represents the horizontal common size analysis for the three consecutive years of consolidated statement of income. When examining the source of revenue for the airline, there passenger traffic was increasing after fiscal year 2006. However, revenues from cargo declined. Another significant value seen is the decline of operating lease costs of the airline. If this continues, this would imply some savings or the management strategies to curb operational expenses are effective. Fuel cost remained high.
This is coincides with the extremely high and volatile costs of petroleum products globally. With the prices of fuel going down, an expected reduction in fuel spending could be seen in the next few years if the trend continues. Looking at the profit taking of the company, significant improvements are observed. By 2007, the operating profit increase by 26. 08% while profit after tax almost doubled at 48. 61%. Despite the difficult times, British Airways is gradually recovering from the decline observed in the late 90’s to the years before 2006.
A significant weakening of currencies from 2006 to 2008 is seen in the recorded 131. 58% decline in currency value. This may affect the overall earnings of the company if this continues to escalate. Vertical Common Size Analysis Table 2 shows the vertical common size analysis using total assets as base. The non-current assets in relation to the total assets of the company comprised 65. 30% in 2007. In all the three years, it appeared to have no significant increases.
For the year 2008, total non-current assets is at 71. 70% while the total current assets and receivables is at 28.3% of the company’s total assets. The total shareholder equity in 2008 was at 29. 07%. Comparing the total shareholder equity from 2006-2008, the airline recorded increases in the years 2007 and 2008. The total non-current liabilities for 2008 are at 41. 77% of the company’s total assets while the total current liabilities are at 29. 16%. The company has managed to reduce its debt exposure as seen in the declining figures. This implied that the company is able to meet its obligations. Cash liquidity may be a problem because it only comprises 6.
14% of the total assets. The liquidity ratios of the company for three consecutive years are below one and slightly above one. The computation results for current ratio for 2007 and 2008 indicated that the company had less than a dollar of current assets for every dollar of liabilities. From 2006 to 2007, the current ratio decreased. With a current ratio below 1, this implied that the company might have some difficulty paying-off its debts if they become due at any point. The quick ratio is increasing for two consecutive years from 2006.
The results of the quick ratios are lower than the current ratios. The gap between the current ratios indicated the extent of current asset that is comprised of stocks. The debt ratio measures the financial strength of the company. This indicated the proportion of the capital that was funded by debt including preference shares. In the calculations made for the company’s debt ratio for three consecutive years, they indicated that the company might not be giving its creditors the security required. The results also predict the inability of the company to raise capital from external funding.
However, from 2006 to 2008, it could be seen that the company managed to decrease debt ratio. This also indicates that the company is doing everything to reduce its debts and increase liquidity. The debt to equity ratio of the company is also high. In 2006, it showed that for every pound/dollar of shareholder funds, there was an equivalent of 4. 87 in debt. In the next two years, the situation improved with the company decreasing the debt to equity ratio by almost 56 percent. However, the debt to equity ratio remained high, which indicates some financial weakness in the business.