Accounting project

Analysis of the Aviation Industry

By

Tahir Iqbal

A project submitted in partial fulfilment of the requirements for the degree of

BA Accounting and Finance

at the

University of Northampton

2009

Accounting & Finance Field Front Sheet

NB. This sheet must be attached to any submission of Accounting & Finance field module coursework made to the Student Assessment Office. No assignment will be accepted without it.

Name of Candidate __Tahir Iqbal________________________________

Title of Module __ Accounting Project____________________

Title of Coursework __Final Project___________________________________

Marking Tutor __Julie Williams__________________________________

Hand in Date __7th May 2009__________________________________

Extension Granted to _______________________________________________

Checklist before submission

1. Have you read, understood and acted in accordance 3with the referencing guidelines set out in the appropriate Accounting & Finance Module Guide.

2. Where you have quoted directly from or where you have paraphrased the work of others, have you acknowledged and appropriately referenced the source of your quotation in the body of the text?

3. Have you placed all direct quotations in inverted commas?

4. Have you listed and correctly cited all your sources in your bibliography?

Declaration by the candidate named above

1. I confirm that this is my own work (or, in the case of a group assignment, the work of my group) and that, although I may have consulted others in the course of assembling material for the work, the finished article has been completed without help or participation of any other person (other than, in group assignments, other members of the same group).

2. The work contains no material drawn from unattributed sources.

Signed ________________________

Date __07/05/2009_____________

PROJECT GRADING SCHEME

Student Name:

Title:

Marking Criteria-Please note word limit of 6000 words (excluding bibliography and any appendices)

Weight AA

B C D F G

Aim and Objectives to include:Introduction and rationale for Industry and firm choice. Clear aims/objectives/layout

10

Overall Grade for Aims and Objectives 10

Environmental Scan/PEST to include:

Detailed and comprehensive environmental scan of relevant industry with reference to published works

10

Ratio analysis to determine the financial strength of the company in areas such as profitability, liquidity, investor ratios and share price performance

10

Summary findings in form of SWOT interrelationship of PEST and strength/weakness of Companies (Template format)

10

Overall Grade for Literature review 30Discussion to include:

Results on the research. Analysis of results with reference to existing published works where appropriate

20

A discussion of the relative performance of each of the chosen companies in relation to the template above and information from group report and accounts.

20

Overall Grade for Discussion 40

Presentation format referencingPresentation including style formatting, use of English, tables and diagrams

10

Correct referencing with comprehensive bibliography

10

Overall Grade for Presentation 20

Final Grade for dissertation

First Marker overall comments.

Second Marker overall comments.

Supervisor: GradeSecond Marker: GradeOverall Agreed grade

The Project ReportACC4003

What are the key factors that can make companies in the UK airline industry fail or succeed?

Tahir Iqbal 08254684

Table of Contents

Chapter Page

i. List of Abbreviations 4

1.0 Introduction 5

2.0 Rationale for Industry Choice 5

3.0 Rationale for Chosen Companies 6

4.0 Prior Research (PEST) Analysis 7

4.1 Political 7

4.2 Economical 9

4.3 Social 10

4.4 Technological 11

5.0 Ratio Analysis 12

5.1 Liquidity Ratios 12

5.2 Efficiency Ratios 12

5.3 Profitability Ratios 13

5.4 Solvency Ratios 13

5.5 Investment Ratios 13

5.6 Industry Specific Ratios 14

6.0 Ratio Analysis 15

6.1 Current Ratio 15

6.2 Quick Ratio 16

6.3 Asset Turnover 16

Chapter Page

6.4 Net Profit Margin 16

6.5 ROCE 17

6.6 Gearing 18

6.7 Earnings per Share 18

6.8 Industry Specific Ratios 19

7.0 Determining the Best and Worst Company 19

8.0 Conclusion 24

9.0 Appendix 26

10.0 References 37

i. List of Abbreviations

CAA – Civil Aviation Authority

IATA – International Air Transport Association

ATOL – Air Travel Organisers’ Licensing

EU – European Union

UK – United Kingdom

COGS – Cost of Goods Sold

ROCE – Return On Capital Employed

EBIT – Earnings before Interest and Tax

EPS – Earnings per Share

1.0 Introduction

There are a wide variety of factors in the airline industry which affect companies within

the industry. Companies have to deal with changes within the industry and external

environment. The way they adapt to these changes can have a major effect on their

profitability and eventual failure or success. This project will look at the key factors

affecting the aviation industry and analyse five companies. The project shall focus on

how the companies differ from each other and look at factors which make certain

companies more successful than others. The report shall cover the rationale for the

chosen industry and companies. Furthermore there will be an environmental scan of

the industry and I will decide which ratios to use in order to determine which

companies are more successful than others.

2.0 Rationale for Industry Choice

The airline industry is one of the biggest industries in the UK. From October 2007 to

November 2008 there have been a total of 238,912,000 passengers flying from UK

airports (CAA 2008). Over recent years there has been an increase in the number of

airlines going into liquidation. Most recently XL Leisure, which was the UK’s third

largest travel operator, went into liquidation in the summer of 2008. This left tens of

thousands of passengers stranded at home and abroad.

Since the start of the 21st century there have been many events which have affected

the industry. According to Doganis (2006) the downturn which some airlines were

feeling in 2000 turned into disaster in 2001. The attacks in the USA in September 2001

had affected the industry globally. This brought about a lot of changes in the way the

general public flew. This crisis was followed by a major increase in the price of fuel in

2004. According to Doganis (2006) this had a major effect on airlines, some worse off

than others. Many airlines lost millions of dollars, some collapsed and some had to be

rescued by their governments.

I am a keen traveller and am constantly using different airlines to travel to different

parts of the world. When asked to choose an industry to research I felt it best to

research an industry which I am interested in. I had also been affected when XL airlines

went into liquidation and was stranded in Egypt. Therefore the opportunity to analyse

the industry is one which I believe I should take.

3.0 Rationale for Chosen Companies

British Airways PLC – The UK’s largest international scheduled airline, taking off and

landing at over 300 central destinations. Their main area of business is London

Heathrow Airport, which is one of the busiest principal airports in the world.

easyJet PLC – Based at London Luton Airport it is one of the leading low cost airlines in

Europe flying to over 250 different locations. Their aim is to be the best low fare airline

in the world.

Flybe – One of Europe’s largest and most profitable airlines. Their business model is

unique and differs from low cost airlines. They view themselves as a niche airline and

fly over 470 flights each weekday.

Virgin Atlantic Airways Ltd – The UK’s second largest long haul carrier. Its main base is

at London Heathrow Airport and it flies over 6 million people to over 100 destinations.

Ryanair – was founded in 1985 by the Ryan family, flying a single route with one

aircraft. They are now one of the biggest low cost airlines in the world. Their aim is to

be the Wal-Mart of the airline industry and to never be beaten on price.

These companies that have been selected are the leading airline companies in the UK

and Europe. I have decided to choose both low cost carriers and long haul carriers to

provide a wide view of the market. The companies vary in size but in all are very

similar. This will allow me to see why one company is performing better than the

other, which is my aim from this project. Due to the size of the companies I should not

have trouble obtaining information on them. This is a great advantage and will allow

me to analyse them in great detail.

4.0 Prior Research (PEST Analysis)

There are a wide variety of factors which can influence certain companies within an

industry. These factors can be external or internal. A PEST analysis can be used to

analyse the external environment of an industry. It also allows users to look at certain

factors which are affecting the industry and subsequently the companies within that

industry. According to Sloman and Scutliffe (2004) PEST analysis is used by a large

majority of businesses to review their environment and to help them create a positive

approach to their business decisions. This therefore means that businesses can look at

factors which are affecting their industry and from these factors they can then make

business decisions which will lead the business forward. In order to conduct a PEST

analysis for the airline industry it is imperative that research is undertaken.

4.1 Political

Political decisions taken by the government will no doubt have a direct effect on

companies. Sloman and Scutliffe (2004) stated that these can be large decisions

affecting businesses in general or smaller decisions affecting certain industries.

One of the major political factors which affected the airline industry was deregulation

of the EU airline industry. The EU started to create a deregulatory aviation policy

towards the end of the 80’s. However complete liberalization of the industry was not

fulfilled until 1993 (Schipper and Reitveld [n.d.]). Before this the industry was highly

regulated mainly because governments wanted to provide protection to their own

national flag carriers. The effect of liberalization was to minimise barriers to entry for

new airlines and open up new routes. Due to this liberalization two companies have

successfully exploited the market opportunities: Ryanair and easyJet.

Another major political factor facing the aviation industry is the expansion of airports

and building of new runways. This is obviously directly connected to airlines as the

building of new runways means that more flights can take off. Very recently Heathrow

opened its new Terminal 5. This was a £4.3 billion project and is estimated to take an

additional 35 million passengers per year (Heathrow Airport 2008). The government

also plans further expansions at different airports. This is very important for airlines

but at the same time also receiving a lot of negative press. All expansion means

increased pollution at a time when most people are environmentally aware.

One major project which the government has approved is the building of a third

runway at Heathrow Airport. However this has been met with huge criticism from

environmentalists. They believe that the building of a third runway will increase the air

and noise pollution in the local area. Anti-expansion protestors have bought up land

the size of half a football pitch where the expansion is set to take place. This land has

been divided up and pieces of the title to the land have been shared amongst a large

number of people in order to complicate any attempt to force the owners to sell.

Political factors like this place pressure on airlines and the aviation industry.

Since the attacks on the USA on September 2001 airlines have an active role to play in

the threat of terrorism. Terrorists are actively looking to use hijacked commercial

planes as their weapon of choice. This threat is well publicised and airlines must work

with local governments to ensure passenger safety. This threat has lead to airlines

paying increased security and insurance costs. Furthermore this could lead to a

reduction in passenger numbers as people are scared of the threat. The tragic events

of September 11th have placed airlines in the most vulnerable position according to

Guzhva (2008).

Established by Parliament in 1972, the (CAA) is the independent specialist aviation

regulator. It also provides air traffic services. The CAA has many roles including

economic regulation, airspace policy and safety regulation. The CAA is not funded by

the government and meets its costs by charges put on those whom they regulate. The

CAA also has a consumer protection group section. Here they regulate the finances

and fitness of travel organisers and manage ATOL. This is the UK’s largest consumer

protection for travellers (CAA 2008). Airlines that carry passengers must have an

operating license; in the UK this is provided by the CAA.

4.2 Economical

Economic factors come in all shapes and sizes such as increasing costs and increasing

exchange rates. These factors are of great importance to companies and industries.

The success and failure of an airline can be linked to oil prices. An airline with huge

debt has an increased chance of failure if the price of oil is increased. With the price of

oil at record high, the CEO of Southwest Airlines, Gary Kelly, (2008) cited in Seaney,

(2008) stated no airline can make money at $123 a barrel. Fuel is one of the major

costs to airlines and as it increases airlines are at risk. The fuel bill which accounts for

around 22% of industries total costs has jumped by $39 billion in 2 years (Seaney

2008). Airlines around the world are finding it difficult to survive with oil prices which

have increased the cost of aviation fuel to record highs. This has squeezed the industry

despite continuous efforts by increasing fares, cutting jobs and adding fees to services

that once were free.

All businesses around the world have had to deal with the global recession. With

record job losses and companies going into liquidation people have less disposable

income. Most people view air travel as a luxury and would therefore cut back on it at a

time when money is low. The IATA director general Giovanni Bigignani said by far the

biggest threat facing the airline industry is recession. Revenues are expected to be

dramatically reduced with more companies expected to go into liquidation. In the

summer of 2008 XL airlines went into liquidation along with low cost carrier Zoom and

this trend is set to continue. The IATA expects overall traffic to drop by 3% and is also

expecting falls in profits. The managing director of Monarch Airlines Jeans, T (2008)

cited in Ezard, K (2008) is expecting a grim 2009.

Exchange rates are the rates at which currencies may be converted into another.

Airlines are international businesses and deal with a whole load of different currencies.

Due to the internet tickets can be bought from anywhere in the world and in nearly

every currency. Income received in another currency can create problems with the

exchange rate due to uncertain fluctuations especially in today’s economic climate.

When valuing assets abroad there can also be exchange rate problems. Arnold (2005)

said when purchasing and selling abroad, companies must stay aware and vigilant.

Britain has announced and reduced VAT by 2.5% to 15%. This is a cut passed down in

order to help consumers. This cut has been passed down by airlines to their customers.

4.3 Social

When conducting an analysis of an industry or company one must evaluate social and

cultural attitudes (Sloman and Scutliffe 2004).

In recent years social aspects were boosting the airline industry. There is better

healthcare within the UK. This means that on average people are living longer. Large

numbers of senior citizens are taking to the skies for leisure because of the low cost

seats. But this has now changed. Due to the recession people are struggling to find

money for luxuries. George Osborne, (2008) cited in Winnett (2008), the Shadow

Chancellor said that the recession has been devastating on seniors. The senior citizens

were once a major market for airlines but now this trend has gone.

Furthermore more UK citizens have bought holiday homes in the EU. Nearly ¼ million

Britons have bought homes abroad within the past decade (Wallop 2007). This is a life

style choice as many Britons want to get away when they feel like it. This is a positive

for airlines as it means more air travel.

Consumer behaviour is changing and with the recession now most consumers have

changed from how they were at the beginning of 2008. Consumers now do not have

money to spend on air travel. Most consumers are looking for ways to reduce their

expenditure in order to save money due to the recession. This is having an adverse

reaction on the airline industry.

The UK population is currently 60,975,000 (National Statistics 2008). The population

has been growing in recent years and there has been an increase in the number of

senior citizens in the UK. This is mainly due to advances in medical assistance.

Companies within the industry must acknowledge these facts and look to provide

services to the ever changing population and different age groups.

4.4 Technological

Due to advances in technology airlines have been able to offer new services such as

buying tickets online. Customers can buy tickets direct from the airlines via their

websites. This has proved to be a highly lucrative advancement because it comes at a

minimum cost to the airlines. At some periods easyJet have made 71.5% of all sales

online (easyJet [n.d.]). This has helped them to save money and save the environment.

Some airlines have gone as far as not providing any paper tickets. easyJet for example

are now a paperless airline.

Furthermore airlines now offer online check in services. This means passengers do not

have to queue for long hours at check in desks. Passengers can now check in up to 36

hours before flights, pre select their seats and avoid airport queues. In addition, due to

technological advancements airlines now offer mobile and broadband services

onboard UK registered aircrafts (ThreeG [n.d.]). Passengers will be provided with the

opportunity to receive and make phone calls while onboard the aircraft. Furthermore

they will also have the opportunity to access the internet. This is a boost for airline

companies as they can provide extra ancillary products onboard to increase total

revenue.

There have also been advancements in aircraft technology. Aircraft suppliers are also

striving to develop new and more efficient aircrafts. This means fewer emissions into

the environment and less noise pollution.

5.0 Ratio Analysis

When conducting my report I shall be analysing the performance of my chosen

companies. In order to do this is shall use a wide variety of ratios. I shall analyse areas

such as liquidity, efficiency, profitability, solvency, investment and industry specific

ratios.

5.1 Liquidity Ratios

Current Ratio = Current Assets/ Current Liabilities

This is a liquidity ratio which measures a firm’s ability to meet its short term debt. The

higher the ratio means the firm is more capable of meeting its obligations. This ratio

will help me determine which company is more capable of meeting its obligations.

Quick Ratio = Current Assets – Inventories / Current Liabilities

This ratio is an indicator of a company’s short-term liquidity. It measures a company’s

ability to pay its short term obligations with its most liquid assets. This ratio will also

help me determine which company is better suited at meeting its obligations.

5.2 Efficiency Ratios

Asset Turnover = Revenue/ Assets

This is a simple measure of the amount of sales generated for every pound’s worth of

assets. It is a good measure of a company’s efficiency at using its assets to generate

revenue. This ratio will help me compare which company is best utilising its assets.

5.3 Profitability Ratios

Net Profit Margin = Net Profit/ Net Revenue

Expressed as a percentage this is an indication of cost control and can also provide

clues to production efficiency. It is a good way to compare businesses within the same

industry.

ROCE = EBIT/ Total Assets – Current Liabilities

This is a measure of the returns a firm is receiving from its capitals. ROCE should be

more than the rate at which a firm borrows.

5.4 Solvency Ratios

Gearing Ratio = Total Liability/ Shareholders Equity

A measure of how much of the firm’s assets is financed by debt. The higher the level of

leverage the more the firm is considered risky. I can compare which companies have

more leverage than others and whether that affects profitability.

5.5 Investment Ratios

EPS = Net Income – Dividend on Preferred Stock/ Average Outstanding Shares

A measure of a firm’s profit made on a single share basis. This is widely used by

companies to show how well they are performing. I will use this ratio to see the

performance of each company from a shareholder’s point of view.

5.6 Industry Specific Ratios

Revenue per Passenger Mile = No of Revenue Paying Passengers x No of Miles Flown

This ratio will measure revenue on the basis of the number of seats sold on each

company’s flights.

Available Seat Miles = No of Miles Flown x Total No of Seats Available

This ratio looks to establish an airlines operating capacity. This is done by calculating

the total number of available seats and by working out the number of seats actually

purchased.

Load Factor

The load factor ratio combines available seat miles ratio with revenue passenger mile

ratio. It determines how many seats must be filled in order for revenues from

operations to meet the costs.

The ratios I have chosen are a wide variety of ratios covering different aspects of the

chosen companies. Each ratio will show me something different about each firm. I

have chosen these ratios as they are good for comparison. They will help show me the

strength and weaknesses of each firm.

6.0 Ratio Analysis

Ratio analysis is a very common way of analysing the performance of companies. It

allows the users to compare companies from within the same industry. The majority of

companies prepare their own ratios in order to aid the users of their accounts and to

direct their attention to certain areas of the company. Elliot and Elliot (2008) said that

companies attempt to identify areas of good performance and areas which are subject

to change.

In order to determine the strength and weaknesses of each company, a ratio analysis

of each company has been conducted over the past five years.

6.1 Current Ratio

The industry average current ratio is 1.09 for 2008. Over the past five years British

Airways Plc has had an up and down ratio. In 2006 there was a significant increase in

the ratio but in the past couple of years it has stayed steady. However, their ratio has

been consistently below 1, which suggests that they cannot meet their obligations.

Flybe Ltd has had an inconsistent ratio. Their ratio fell in 2006 only to rise steeply in

2007. The increase may have been due to improved cash flow however the ratio fell

again in 2008. Ryanair Plc and easyJet Plc are both low cost carriers. They both started

with high ratios but both have decreased with Ryanair decreasing slightly more.

Although they have suffered decreases, they still have the highest ratios. Virgin

Atlantic Airways Ltd has increased consistently, but suffered a small decrease in 2008.

Flybe Ltd has the lowest ratio from all the companies. This suggests the company may

be suffering from liquidity problems.

6.2 Quick Ratio

This ratio is similar to the current ratio. It measures a firm’s ability to meet its

obligations, but does not include inventories in its calculations. Because of this it is

more conservative than the current ratio

(http://www.investopedia.com/terms/q/quickratio.asp). The results for all the

companies are very similar to that of the current ratio. This ratio shows us more clearly

that easyJet and Ryanair are best equipped to meet their obligations.

6.3 Asset Turnover

The asset turnover ratio for the majority of the companies remained fairly consistent.

However Flybe are the only company who suffered a relatively steep increase or

decrease in their ratio every year. Ryanair was the most consistent company but still

maintained a gradual increase. Virgin and British Airways increased over the five years

whereas easyJet remained stable. When current assets increase at a steeper rate than

turnover, this will cause the ratio to fall. (Biz Ed, 2007) This must mean that British

Airways, Virgin and Ryanair must be generating higher levels of sales from their assets

as their ratio grew over the 5 years. However British Airways and Ryanair may still be

struggling to utilise their assets as their ratios were relatively low. Flybe in 2008 had

the highest asset turnover of 1.6 times and Virgin closely behind with 1.48 times. In

this industry asset utilisation is extremely important as the majority of assets are very

expensive. The industry average asset turnover is 0.8 times. Therefore the majority of

the chosen companies are above the industry average with Flybe double the industry

average.

6.4 Net Profit Margin

Elliot and Elliot (2008) stated that net profit margin is a commonly used ratio to

measure a firm’s performance. Furthermore they stated it is also very good to

compare companies from the same industry.

Over the past five years all the companies have had different results in their ratios.

British Airways is the only company which increased over the five years, although their

ratio is relatively low. Flybe has also increased. In 2007 their net profit margin was -

5.41% and this increased to 6.51% in 2008. This shows that the company is improving.

Ryanair has the highest net profit margin out of all the companies. Their margin

remained relatively stable; however they suffered a decrease of 5% in 2008. easyJet’s

ratio has also been increasing over the years but they also suffered a decrease in 2008.

Virgin has had an inconsistent margin over the 5 years. They have suffered in the last

year, with their ratio below 1 at 0.82%. This is also the lowest margin from all the

companies. The industry average net profit margin is -10.61%. This shows that the

whole industry suffering and this is mainly due to the current economic climate.

Compared to the industry average all our companies are performing well, especially

Ryanair.

6.5 ROCE

Return on capital employed is commonly used when looking at a company’s

profitability. British Airways has had a steady increase every year. They are also the

only company to show an increase in their ROCE every year. Flybe has got the highest

ROCE of 21.10% in 2008. Ryanair is the most consistent company but suffered a

decrease in 2008. Virgin’s ROCE has been up and down over the five years and in 2008

had the worst ROCE of 0.98%. easyJet’s ROCE has also been increasing over the years

but they have also suffered a decrease in 2008. Although Flybe had the highest ROCE,

Ryanair is the best performing company over the five years. They were also the best

performing company when comparing net profit margin. This shows in terms of

profitability Ryanair is the most efficient company when generating profits from

capital.

6.6 Gearing Ratio

In the current economic climate all businesses have been affected. If a company has a

lot of debt then this may prove to be very risky. Over the years British Airways have

reduced their gearing levels. Ryanair has very low gearing levels which have been

consistent over the past five years. This is also the same with easyJet. Virgin’s gearing

levels are relatively low but higher than easyJet and Ryanair. All the companies have

low gearing, which suggests they are well suited to deal with the credit crunch. The

only exception being Flybe. Their gearing ratio has been very volatile over the past five

years and was very high in 2008. Therefore a drop in sales would affect them greatly as

they would still have to meet their repayments. Low gearing levels are also important

because investors use this when considering investment in a company, more so in the

current economic climate.

6.7 Earnings per Share

Atrill (2005) stated it is not very useful comparing the EPS of one company with

another. The reason for this being differences in capital structure, which therefore

make comparisons weak. However he said that it can very handy to monitor changes

in EPS for a company over time.

British Airways has the highest EPS of 59.2p in 2008. Over the past five years British

Airways has shown gradual growth. This is similar to Ryanair who have also shown

gradual growth over the past 5 years expect 2006, where their EPS fell. Furthermore

easyJet have also shown gradual growth, however their EPS fell in 2008. Virgin has the

lowest EPS in 2008 of 3.65p but did have an EPS of 14.59p in 2006. Flybe has had a

volatile EPS over the five years. The company also reported a loss for 2006 and 2007.

6.8 Industry Specific Ratios

In order to aid comparison the industry specific ratios are expressed as a percentage.

British Airways available seat miles have been consistent over the five years. This is

also the case for their revenue per passenger mile. Their revenue per passenger mile is

low which is reflected in their load factor, which is also relatively low. This suggests

that their planes are not at capacity when in the air. This is similar to Virgin and Flybe.

However Flybe has a lower available seat mile and revenue per passenger mile ratio,

but a similar load factor.

easyJet and Ryanair both have similar available seat miles over the past five years.

However easyJet has higher revenue per passenger mile ratio than Ryanair resulting in

a higher load factor. These two companies are by far the better performing companies.

Both these companies are low cost carriers and have a high load factor. On the other

hand the two long haul carriers have a low load factor. This suggests the low cost

carriers fill each plane with more paying customers than the long haul carriers.

7.0 Determining the Best and Worst Company

In order to determine the best and worst company, an evaluation of the industry must

be conducted. Furthermore the state of the economy and economic conditions must

also be looked at. Around August 2007 the world went into an economic crisis. It

started in America where payments on sub-prime mortgages could not be met. This

turned into a global epidemic because sub-prime mortgages were sold to hedge funds

and investments banks looking to make huge profits. Many UK banks, along with

banks across the world had invested in sub-prime backed investments. All these banks

faced huge losses and had to write them off. All this meant lenders tightening up their

purses and resulted in the credit crunch. The credit crunch has resulted in the UK going

into recession.

A recession can bring about many problems. One of these is a drop in consumer

confidence. Monaghan (2009) states that the consumer confidence index was at -37 in

January 2009. This has meant that consumer spending has decreased. This has

affected the airline industry as people believe air travel is a luxury and have made cut

backs. Millward (2009) stated there was 1.5 percent fewer flights in 2008. It is

expected that passenger numbers will continue to drop in 2009. With passenger

numbers plummeting and more than 30 airlines going bankrupt across the world in the

past 12 months, costs must be reduced across the board.

After looking at the economic climate that the airlines are trading in and with the

recent recession, I must analyse the economic position of each company. In the ratio

analysis I have compared the companies on an individual basis. Now I must compare

the companies against one another. I have compared the five companies against one

another and have given them a score of 1-5 for each ratio, where 5 is the best

performing company and 1 is the worst performing company. (Figure 12)

In terms of liquidity Ryanair is the best performing company. easyJet is the second

best performing company in terms of liquidity. British Airways is the worst performing

company. This shows to me that the low cost carriers are better at employing their

current assets to cover their current liabilities. Ryanair is the best company in terms of

liquidity but it is the worst performing company when looking at efficiency. Flybe, a

low cost carrier is the most efficient at using its assets to generate revenue. The

second best performing company was Virgin. When looking at efficiency there is no

trend between the low cost carriers and long haul carriers. The reason for this maybe

that one airline has a small fleet, there utilising it fully.

Ryanair is also the strongest company when looking at profitability. It has the highest

net profit margin and ROCE. Virgin is the worst performing company in this area. Its

net profit margin is well below the other companies. The other two low cost carriers

are also relatively strong in terms of profitability. This can be linked to the recession,

where consumers are looking for the cheapest option. When considering solvency it is

clear that Flybe is the weakest company. This means that it is the most risky company

as more of its assets are financed by debt. Ryanair is one of the strongest companies

again; however it is their main competitor easyJet who is the best performing

company in this area. This may be due to the fact that in the recession they believe

that it is best to preserve cash and build margins, rather than go for growth financed

by debt. (Accounting and Business, 2009) Out of the two long haul carriers British

Airways is less risky in terms of gearing.

Flybe is the worst performing when looking at gearing and this can be related to their

EPS, where they are also the worst performing company. The company must pay off its

liabilities before paying money to its shareholders in dividends. Flybe recently stated

their desire to go public, however with a low EPS this would make them unattractive to

investors. Both Ryanair and easyJet have strong EPS but British Airways is the best

performing company in terms of investment. This may be due to the fact that it is the

largest long haul carrier in the UK.

When analysing companies from within the same industry it is important that industry

specific ratios are looked at. Ryanair, the low cost carrier has the most available seats

for purchase. However it is the other low cost carrier easyJet who generates the most

revenue per passenger. It is interesting that the third low cost carrier is the worst

performing company in terms of available seat miles and revenue per passenger mile.

This may suggest that they cannot compete with their rivals. British Airways revenue

generated per passenger mile has decreased.

After analysing all the individual ratios it can be seen that easyJet is the best

performing company. This is backed up by the scoring method which I have

implemented. easyJet scored a total of 205 points when comparing all the ratios

against all the other companies. However it is closely followed by its rival Ryanair with

199 points. This shows a clear divide between the two large low cost carriers and the

two large long haul carriers. The reason for this may be because customers are looking

for the cheapest deal and it is provided by the low cost carriers. However it can also be

seen that Flybe, another low cost carrier is the worst performing company. Although it

is a low cost carrier, Flybe cannot compete with Ryanair and easyJet in terms of prices.

Furthermore Ryanair and easyJet are two very large companies therefore their costs

would be lower than Flybe because of economies of scale. These savings in costs can

then be passed on to customers in the form of cheap prices.

The ratio analysis has shown me that easyJet and Flybe are the best and worst

performing companies respectively. However it is not enough for me to use ratios

alone to determine who the best and worst company is. I will need to use a non-

financial method as well to further backup my findings. The best method to use would

be a SWOT analysis.

A SWOT analysis is a useful method of analysing the strategic position of a business

and its internal and external environment. A SWOT analysis focuses on the strengths

and weaknesses of a company. Furthermore it also looks at the opportunities and

threats a company faces.

The two long haul carriers are the largest and second largest carriers in the UK. This is

a great advantage as they offer a long list of routes and destinations. Furthermore they

are both worldwide recognised brands and renowned for their top quality service.

British Airways has one of the best services and its Club World service offers fully flat

beds on its long haul flights. This is the same for Virgin. easyJet and Ryanair are also

very famous brands and their main strength is very cheap flights. This is a massive plus

in the current economic climate and has proven to be a big positive in the past.

The main weakness for British Airways and Virgin is they cannot compete with Ryanair

and easyJet in terms of pricing. The same must be said for Flybe. Ryanair and easyJet

are the two large low cost carriers and they are able to undercut other low cost

carriers. However, the low cost carriers do not offer a transatlantic service. This is a

very lucrative market and is provided by British Airways and Virgin. The low cost

airways only fly to the Euro zone and this can be a disadvantage.

However the best opportunity for Ryanair and easyJet is to enter the transatlantic

market. If they could provide a low cost version of transatlantic travel then they will

take a huge chunk of that market. British Airways and Virgin have the opportunity to

increase their revenue with the plans for the third runway at Heathrow given the go

ahead. Both these companies are serving this main airport and should look to

capitalise on this opportunity. Flybe is in talks with BMI about acquiring their

subsidiaries, BMI baby and BMI regional. This is a great opportunity for them to

expand.

The airline industry as a whole is faced with an active terrorist threat. Since the tragic

events on September 11th 2001, all airlines must now be more vigilant and play an

active role in preventing global terrorism. Airlines have a duty to their customers to

ensure their safety at all times. Furthermore the recession is also a major threat to all

airlines. As people look to cut back on luxuries, airlines have and will continue to suffer.

However the low cost airlines will see this as an opportunity to reduce costs and gain

market share. People who travel will want to spend less and this will benefit the low

cost airlines.

After putting both types of analysis together I would say that Ryanair and easyJet are

the best performing companies. They have the strongest financial positions and the

most opportunities in the market to improve and gain further market share. It can

clearly be seen that Flybe is the worst performing company when putting both types of

analysis together. They have fewer opportunities than the other companies and are

unlikely to beat Ryanair and easyJet on price.

8.0 Conclusion

The industry is one of the most profitable and growing industries within the UK and the

world. However there are many problems which the industry faces. With people

growing more environmentally aware there is pressure on all the companies within the

industry to help ease their concerns. There are also other issues such as the terrorist

threat which the industry faces. With the global recession now in full force, the airline

industry must brace its self. All companies must look to reduce their costs in order to

ride out the recession because passenger numbers are expected to fall in the coming

years.

British Airways and Virgin are long haul carriers. They have experience in the market

and offer a transatlantic service. However they are at risk. In terms of finance they are

not as strong as the two large low cost carriers. They face the biggest threat from the

recession as their prices are very high. They provide a high quality service however in

the current economic climate consumers are more concerned with price. These two

companies must use their experience in the market and look to reduce costs if they

want to hold on to market share.

Ryanair and easyJet are both financially sound and are best suited to ride out the

recession. It is Flybe that I believe is at the greatest risk. They are a low cost carrier but

cannot compete with other low cost carriers. This is a great disadvantage. They are

thinking of going public; however they are not an attractive company to invest in. I

believe they must look at the current economic climate and seriously think about how

it is best for them to compete with their competitors. If they do not have competitive

prices their future does not look very positive.

9.0 Appendix

Figure 1.

British Airways Plc2008 2007 2006 2005 2004

Current Ratio 0.97 0.95 1.07 0.84 0.92Asset Turnover 0.78 0.72 0.69 0.65 0.6Net Profit Margin 7.79% 4.99% 5.45% 4.85% 1.72%ROCE 11.21% 7.87% 7.09% 4.97% 2.52%Gearing Ratio 2.04 3.05 3.9 2.97 3.82EPS (p) 59.2 37.2 40.1 35.2 12.1Quick Ratio 0.87 0.87 0.98 0.72 0.82Available Seat Miles 74.43% 75.80% 76.70% 76.30% 74.91%Revenue Per Passenger Mile 56.55% 55.40% 55.80% 55.50% 66.48%Load Factor 75.98% 73.09% 72.75% 72.74% 88.75%

Figure 2.

Flybe Ltd2008 2007 2006 2005 2004

Current Ratio 0.91 1.22 0.75 0.91 0.89Asset Turnover 1.6 0.96 1.58 1.2 1.41Net Profit Margin 6.51% -5.41% -2.59% 4.64% 1.68%ROCE 21.10% -8.88% -18.83% 7.90% 3.36%Gearing Ratio 24.55 -14.15 -14.64 11.55 10.42EPS (p) 16.62 -9.48 -3.76 5.9 1.95Quick Ratio 0.87 1.18 0.7 0.86 0.83Available Seat Miles 63.07% 61.30% 63.30% 67.70% 67.28%Revenue Per Passenger Mile 43.09% 41.90% 35% 37.70% 48.23%Load Factor 68.32% 68.35% 55.29% 55.69% 71.69%

Figure 3.

Ryanair Plc2008 2007 2006 2005 2004

Current Ratio 1.53 2.02 2.43 2.55 2.71Asset Turnover 0.45 0.43 0.4 0.39 0.4Net Profit Margin 14.40% 19.47% 18.12% 21.23% 19.23%ROCE 8.25% 10.30% 9.68% 10.65% 10.54%Gearing Ratio 1.53 1.27 1.33 1.2 1.02EPS (p) 31.81 25.99 9.83 17.64 14.95Quick Ratio 1.26 1.73 2.17 2.19 2.63Available Seat Miles 80% 82.40% 83.80% 81.80% 79.21%Revenue Per Passenger Mile 64.50% 67.50% 69.70% 68.70% 65.60%Load Factor 80.63% 81.92% 83.17% 83.99% 82.82%

Figure 4.

easyJet Plc2008 2007 2006 2005 2004

Current Ratio 1.56 1.88 2.11 2.15 2.18Asset Turnover 0.84 0.76 0.85 0.91 0.89Net Profit Margin 3.52% 8.47% 5.81% 4.40% 3.77%ROCE 4.92% 10.65% 8.00% 5.60% 6.16%Gearing Ratio 1.42 1.18 1.23 0.89 0.68EPS (p) 22.1 34.8 23.18 14.76 14.64Quick Ratio 1.26 1.8 2 2.01 2.05Available Seat Miles 82.07% 81.40% 81.50% 81.40% 80.74%Revenue Per Passenger Mile 77.84% 77.40% 78.00% 79.30% 77.43%Load Factor 94.85% 95.09% 95.71% 97.42% 95.90%

Figure 5.

Virgin Atlantic Airways Ltd2008 2007 2006 2005 2004

Current Ratio 1.29 1.35 1.33 1.03 1.08Asset Turnover 1.48 1.43 1.35 1.38 1.15Net Profit Margin 0.82% 1.13% 4.12% 1.58% 0.22%ROCE 0.98% 5.17% 10.68% 7.37% 2.61%Gearing Ratio 3.38 3.41 3.44 4.17 4.52EPS (p) 3.65 4.58 14.59 4.71 0.49Quick Ratio 1.25 1.32 1.29 0.97 1.03

Available Seat Miles 76.88% 76.50% 72.80% 74.30% 78.67%Revenue Per Passenger Mile 57.58% 55.90% 57.90% 54.60% 62.27%Load Factor 74.90% 73.07% 79.53% 73.49% 79.15%

Figure 6.

Industry Ratios

Current Ratio 1.09Quick Ratio 0.79Asset Turnover Ratio 0.8Net Profit Margin -10.61%Gearing Ratio 6.8

Ratio results were derived from: Global Business Browser (2009), CAA (2009), Ryanair

(2009) and This Is Money UK (2009).

Figure 7.

British Airways Plc

Strengths Weaknesses

The UK’s largest long haul carrier Sole rights to the slots at Terminal 5 Appealing and attractive ‘Club World’ class Have been in the market for a long time and

has experience in the market Member of the airline alliance One World

Punctuality 58% (Ryanair, 2008) Only two main aircraft suppliers, so not much

choice when buying aircrafts Cannot compete with the low cost carriers on

price Not many opportunities in terms of

diversification into new markets Low customer loyalty due to consumers

buying package holidays

Opportunities Threats

Expansion to main hub airport, London Heathrow

Advances in technology means new service can be offered on board such as internet

Active terrorist threat to international airlines Low cost carriers are able to undercut them Global credit crunch and economic downturn

means consumers flying less Threat of substitutes as environmentally

conscious consumers look at more environmentally friendly forms of travel

Low cost airlines moving into the transatlantic market

Figure 8.

Virgin Atlantic Airways Limited

Strengths Weaknesses

The UK’s second largest long haul carrier Has been in the market for a long time and

has experience in the market Offers first class service with fully flat beds Offers onboard laptop seat power service

which is attractive for business travelers Member of Airline Partners

Low customer loyalty due to consumers buying package holidays

Only two main suppliers of aircrafts so not much choice when buying aircrafts

Cannot compete with the low cost airlines on price

Opportunities Threats

Third runway at Heathrow Future technology advancements means they

can offer more ancillary products Opportunity to become the UK’s largest long

haul carrier Establish new bases in different countries to

increase market share In talks with BMI about possible takeover to

keep pressure on British Airways (This Is Money, 2009)

Active terrorist threat to international airlines Threat from low cost carriers offering same

routes but cheaper Credit crunch means people are focusing on

fares rather than quality Direct competitor British Airways is growing

with rights to Terminal 5, whereas Virgin are not growing at the same rate

Low cost carriers moving into transatlantic market

Figure 9.

Ryanair Plc

Strengths Weaknesses

Paperless airline saving money on ticket costs Offer customer online check in service They have on average a 20 minute aircraft

turnaround time. (Ryanair, 2008) On time flight punctuality is 95% (Ryanair,

2008) Serves secondary airports to save costs One of the biggest low cost carriers in Europe

Does not serve the main airports Biggest market UK, where the weak Sterling

makes Ryanair’s euro destinations unattractive

Hedged fuel prices but lost out as they dropped in 2009 (This Is Money, 2009)

Opportunities Threats

79 new routes planned for 2009 (Accounting and Business, 2009)

Recession gives opportunities to reduce costs further in 2009 (Accounting and Business, 2009)

Can tackle the transatlantic market b introducing a low cost alternative

Opportunities in Italy as Alitalia has gone bankrupt (Accounting and Business, 2009)

Active terrorist threat to international airlines Threat of losing customers as plans to charge

for toilet use is unveiled Credit crunch means consumers are cutting

back on luxuries and flying less

Figure 10.

easyJet Plc

Strengths Weaknesses

Aggressive advertising Company colors and logo make them a

recognized brand Paperless airline saving money on ticket

printing and improves environmental image One of the market leaders in low cost air

travel Has a strong contingent of business travelers Revenue increased by 31% to £550m during

the Christmas quarter

Does not serve the main central airports Does not offer transatlantic service Boardroom disputes between founder and

other directors (This Is Money, 2009) The fall in the sterling against the dollar is a

problem as they have a lot costs in dollars but no revenue in dollars (This Is Money, 2009)

Opportunities Threats

Can enter the transatlantic market Internal aeronautical team within easyJet

designed ecoJet, saving on emissions and noise (Flyer, 2007)

Opportunities to tackle other EU markets as many airlines struggle

Active terrorist threat to international airlines Credit crunch means consumers are reducing

expenditure on luxuries such as air travel The board want to buy more planes but

current fleet is not being utilized efficiently (This Is Money, 2008)

Figure 11.

Flybe Ltd

Strengths Weaknesses

In 2008 it received the title of Most Environmentally Responsible Budget Airline award at the annual British Travel Awards (Hot World Plus, 2009)

Established in 1979 it has experience in the market

Has executive lounges in some airports unlike its low cost rivals

Fuel cost per seat rose 44% in 2008 (Independent, 2009)

Does not serve main central airports Cannot compete with direct competitors

Ryanair and easyJet on price

Opportunities Threats

Looking to expand and is currently in talks with BMI about acquiring BMIbaby and BMI regional

Looking at the option of floating its shares

Active terrorist threat to international airlines Credit crunch means consumers are cutting

back on luxuries such as air travel Possible decrease in sales in 2009 due to weak

sterling against the Euro

Figure 12. Ratio Comparison of All the Companies

1 = Worst Performing, 5 = Best Performing

British Airways Plc2008 2007 2006 2005 2004 Total

Current Ratio 2 1 2 1 2 8Quick (Acid Test) Ratio 1 1 2 1 1 6

Asset Turnover Ratio 2 2 2 2 2 10Net Profit Margin 4 3 3 4 3 17Return On Capital Employed 4 3 2 1 1 11Gearing Ratio 3 3 2 3 3 14Earnings Per Share 5 5 5 5 3 23Available Seat Miles 2 2 3 2 2 11Revenue Passenger Miles 2 2 2 3 4 13Load Factor 3 3 2 2 3 13 Total 28 25 25 24 24 126

easyJet Plc2008 2007 2006 2005 2004 Total

Current Ratio 5 4 4 4 4 21Quick (Acid Test) Ratio 5 5 4 4 4 22

Asset Turnover Ratio 3 3 3 3 3 15Net Profit Margin 2 4 4 2 4 16Return On Capital Employed 2 5 3 2 4 16Gearing Ratio 5 5 5 5 5 25Earnings Per Share 3 4 4 3 4 18Available Seat Miles 5 4 4 4 5 22Revenue Passenger Miles 5 5 5 5 5 25Load Factor 5 5 5 5 5 25 Total 40 44 41 37 43 205

Flybe Ltd2008 2007 2006 2005 2004 Total

Current Ratio 1 2 1 2 1 7Quick (Acid Test) Ratio 1 2 1 2 2 8

Asset Turnover Ratio 5 4 5 4 5 23Net Profit Margin 3 1 1 3 2 10Return On Capital Employed 5 1 1 4 3 14Gearing Ratio 1 1 1 1 1 5Earnings Per Share 2 1 1 2 2 8Available Seat Miles 1 1 1 1 1 5Revenue Passenger Miles 1 1 1 1 1 5Load Factor 1 1 1 1 1 5 Total 21 15 14 21 19 90

Ryanair Plc2008 2007 2006 2005 2004 Total

Current Ratio 4 5 5 5 5 24Quick (Acid Test) Ratio 5 4 5 5 5 24

Asset Turnover Ratio 1 1 1 1 1 5Net Profit Margin 5 5 5 5 5 25Return On Capital Employed 3 4 4 5 5 21Gearing Ratio 4 4 4 4 4 20Earnings Per Share 4 3 2 4 5 18Available Seat Miles 4 5 5 5 4 23Revenue Passenger Miles 4 4 4 4 3 19Load Factor 4 4 4 4 4 20 Total 38 39 39 42 41 199

Virgin Atlantic Airways Ltd2008 2007 2006 2005 2004 Total

Current Ratio 3 3 3 3 3 15Quick (Acid Test) Ratio 3 3 3 3 3 15

Asset Turnover Ratio 4 5 4 5 4 22Net Profit Margin 1 2 2 1 1 7Return On Capital Employed 1 2 5 3 2 13Gearing Ratio 2 2 3 2 2 11Earnings Per Share 1 2 3 1 1 8Available Seat Miles 3 3 2 3 3 14Revenue Passenger Miles 3 3 3 2 2 13Load Factor 2 2 3 3 2 12 Total 23 27 31 26 23 130

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