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British Airways Plc. is the flag carrier airline of the United Kingdom. It is headquartered in Waterside near its main hub at London Heathrow Airport and is the largest airline in the UK based on fleet size, international flights and international destinations. Its second hub is London Gatwick Airport. British Airways has discontinued all direct overseas flights from UK airports other than Heathrow, Gatwick and London City Airport. (www.fundinguniverse.com)
The British Airways Group was formed on 1 September 1974 through nationalization by the Labor Government of the time. BA was formed from two large London-based airlines, BOAC and BEA, and two much smaller regional airlines, Cambrian Airways Cardiff and Northeast Airlines Newcastle upon Tyne. All four companies were dissolved on 31 March 1974 to form British Airways (BA) and almost thirteen years later, in February 1987, the company was privatized. The carrier soon expanded with the acquisition of British Caledonian in 1988 and Gatwick-based carrier Dan-Air in 1992. Despite being a primarily Boeing customer, British Airways placed a major order for Airbus aircraft in November 1998 with the purchase of 89 A320 Family aircraft. In 2007, the carrier placed its next major order, marking the start of its long-haul fleet replacement, ordering Airbus A380s and Boeing 787s. The centerpiece of the airline's long-haul fleet is the Boeing 747-400; with 54 examples, British Airways is the largest operator of the type in the world. (en.wikipedia.org)
I will be analyzing the BA from an investor point of view. The main idea is to show a path and a clear view to the investors before they make any step forward of making a decision. For this purpose the report will use the Balance sheet, Cash flow statements. As an investor point of view the Profability, Efficiency and the Investor ratios will be analyzed and a general look and an advice will be found at the later pages of my report. Finally a conclusion will be given about the final thoughts.
The Company is committed to high standards of corporate governance. The Board's primary aim is to assure the Company's shareholders for good corporate governance. The code of best practice, set out in Section 1 of the Combined Code as amended from time to time and appended to the Listing Rules of the Financial Services Authority (the 'Combined Code'), has been adopted as the Company's corporate governance statement.
The Company is required to report firstly on how the applications of the main principles of the Combined Code and secondly to confirm that it has applied the Code's provisions or, where it has not, to provide an explanation.
The Boards main aim is the Company's risk assessment; resource management, strategic planning and financial and operational management that allow ensuring the obligations to shareholders and other stakeholders are understood and met carefully. Some functions are given to committees consisting of non-executive directors. The Board generally meets eight times a year, and additionally when necessary, to consider all matters relating to the overall control, business performance and strategy of the Company and in succession planning. For these purposes a schedule of matters reserved for Board decisions has been established. The Board has also drawn up a schedule of matters which must be reported to it. These schedules are reviewed at least annually.
"The Chairman leads the Board and the Chief Executive leads the executive management of the Company. The non-executive directors are drawn from a range of business and other backgrounds. This diversity is identified by the members as one of the strengths of the Board. Maarten van den Bergh is the Board's senior independent director. In this role he is available to the shareholders should they have any concerns that they have been unable to resolve through normal channels." (www.britishairways.com)
Analysis per Category
Return on Capital Employed will give an evaluation of the amount of profit in relation to the amount of money invested into the business. Total capital employed was used to obtain this figure, directing attention to how well British Airways utilizes the total amount of resources they have at their disposal. ROCE decreased by 18% from 2008 to 2009 meaning that the figure for profit decreased in relation to the amount of money invested.
Return on Equity indicates what return a company is generating on the owners' investment. The value in 2008 was 22% and it went down 16% in 2009 compare to year to the previous year. This clearly shows that the shareholders of British Airways didn't get paid well. Much like ROCE, the values of ROE decreased over the years, amounting to a decrease by 41%
The net profit margin is expected to decrease in line with the level of sales. From 2008 to 2009 the sales increased by 3% both in passenger and cargo data. Overall net profit was 11% in 2008 whereas it went down to -5% in 2009 showing the fact that the profit is strongly decreasing even though the sales increased by 3% compare to previous year.
Gross profit kind of gives the same result as the net profit but the only slight difference is it was 11% in 2008 and became -3% in 2009. Basically this also shows us great loss in profits of the company.
Since asset turnover is meant to measure the company's efficiency in using its assets, a higher number is considered better. Asset turnover has increased from 0.78 in 2008 to 0.86 in 2009. As a result of this we can get this conclusion that the company uses its assets efficiently. The non current asset turnover ratio shows an increase in efficiency in using the noncurrent assets. This change can also be clearly seen from the increase in net asset turnover by year 2009 compare to 2008.
Net asset ratio measures the ability of management to use a firm's net assets to generate sales revenue. The net asset turnover was 2.52 in 2008 and it increased to 4.61 in 2009 showing the company is efficient enough. If the ratio would have been too low we could have concluded an inefficient management.
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Earnings per share are generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. From our calculations EPS has gone down from 0.6 to - 0.3 in 2009. This clearly shows us the price of the shares gone significantly down from 2008 to 2009.
Dividend cover ratio is also an important indicator to shareholders and investors of the performance of a company. The company wasn't able to pay and dividends in year 2008 but was able to pay some in 2009. The difference is not much but it increased by a small margin. Although 2008 was more profitable year than 2009 I believe the board decided not to pay dividend and kept the money for harder days. The reason for this could be the fact that the board already expected the upcoming global crisis.
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. The calculations show us the P/E ratio is lower in 2009 than 2008 to a value of -691 to 345. This clearly shows that the investors don't expect high earnings from the company in 2009.
The efficiency ratios show that the company is efficient. The asset turnover, non-current asset turnover and the net asset turnover is increasing compare to 2008. This is a good sign that the company uses the assets in the right direction. On the other hand the profitability of the company is in big doubts! The money invested in business (ROCE) and return on equity is going down sharply. At this condition the amount of an investment does not worth compare to the profit you receive after. Basically in 2009 it is a big loss. Return on equity shows the shareholders are not well paid compared to the amount of their investment.
Once we take a look at the investment ratios which is the main topic of our assignment than we figure out how badly the share prices and price per earnings go down. Currently British Airways is not a good investment. The reason for this can be the current global crisis and shrinking of the passenger traffic all over the world. I recommend waiting a little bit more time and watching the upcoming developments in the airline traffic. Even though in year 2009 the dividends were paid but the amount is too little and does not give much hope. My personal opinion is to avoid BA shares. Later on it may be a profitable company but currently it is not worth putting your money on it.