Financial statement analysis of british airways and emirates
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Published: Mon, 5 Dec 2016
British Airways plc (BA) is the flag carrier airline of the United Kingdom. BA has its headquarters in Waterside near its main hub at London Heathrow Airport and based on fleet size, international flights and international destinations is the largest airline in the UK. 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. BA’s UK passengers originating at non-London airports must now connect via London or use other airlines with direct services.
The British Airways Board was established in 1971 to control the two nationalized airline corporations, BOAC and BEA, and two much smaller regional airlines, Cambrian Airways from Cardiff and Northeast Airlines from Newcastle upon Tyne. On 31 March 1974 all four companies were dissolved to form British Airways (BA). After almost 13 years as a nationalized company, British Airways was privatized in February 1987 as part of the privatization plan by the Conservative Government of the time. The carrier soon expanded with the acquisition of British Caledonian (BCAL) in 1987 and Gatwick-based carrier Dan-Air in 1992.
Despite being a primarily Boeing customer, British Airways placed a major order for Airbus aircraft in August 1998 with the purchase of 59 Airbus A320 family aircraft. In 2007, the carrier placed its next major order, marking the start of its long-haul fleet replacement, ordering 12 Airbus A380s and 24 Boeing 787s. The centre piece of the airline’s long-haul fleet is the Boeing 747-400; with 57 examples in service, British Airways is the largest operator of the type in the world.
The formation of Richard Branson’s Virgin Atlantic Airways in 1984 began a tense relationship with BA. In 1993, the fierce rivalry led to British Airways apologizing “unreservedly” for a “dirty tricks” campaign against Virgin leading to them paying damages and legal costs after “one of the most bitter and protracted libel actions in aviation history”.
Until 2008, British Airways was the largest airline based in the UK in terms of passenger numbers. The airline carried 34.6 million passengers in 2008 but rival UK low-cost carrier easy Jet carried 44.5 million passengers in the same year, taking the title from British Airways.
On 12 November 2009, British Airways confirmed that it had reached a preliminary agreement to merge with Iberia. The merger between the two carriers will create the world’s third-largest airline in terms of annual revenue and the second largest airline group in Europe. The merger was confirmed on 8 April 2010, and it is expected to be completed by the end of the year. On 14 July 2010, the European Commission gave the two carriers permission to merge and also agreed to allow American Airlines to co-operate with the merged entity on transatlantic routes to the United States of America. (Wikipedia, 2010)
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Emirates Airline is the largest major airline in the Middle East. It is the national airline of Dubai, United Arab Emirates and operates over 2400 passenger flights per week, from its hub at Dubai International Airport Terminal 3, to 108 destinations in 60 countries across 6 continents. The company also operates four of the world’s longest non-stop commercial flights from Dubai to Los Angeles, San Francisco, São Paulo and Houston, with all except San Francisco on the Boeing 777-200LR. The flight to San Francisco is currently served by a Boeing 777-300ER. Emirates is a subsidiary of The Emirates Group, which has over 50,000 employees, and is wholly-owned by the Government of Dubai directly under the Investment Corporation of Dubai. Cargo activities are undertaken by the Emirates Group’s Emirates SkyCargo division.
During the mid-1980s, Gulf Air began to cut back its services to Dubai. As a result Emirates was conceived in March 1985 with backing from Dubai’s royal family, who’s Dubai Royal Air Wing provided two of the airline’s first aircraft. It was required to operate independent of government subsidies, apart from $10 million in start-up capital. The airline became headed by Ahmed bin Saeed Al Maktoum, the airline’s present chairman. In the years following its founding, the airline expanded both its fleet and its destinations. In October 2008, Emirates moved all operations at Dubai International Airport to Terminal 3, a new terminal exclusively dedicated to Emirates to sustain its rapid expansion and growth plans.
Emirates operate a mixed fleet of Airbus and Boeing wide-body aircraft and are one of only nine airlines to operate an all wide-body aircraft fleet. The centerpiece of the airline’s fleet is the Boeing 777. Emirates also have orders for 90 Airbus A380s with 11 of them already in service and became the second operator of the Airbus A380-800 after Singapore Airlines when their first aircraft was delivered on 28 July 2008. Emirates have won numerous awards and are an industry bellwether for aircraft purchases, purchasing over 130 aircraft in 2007 alone.
The airline ranks amongst the top 10 carriers worldwide in terms of revenue, passenger kilometers, and has become the largest airline in the Middle East in terms of revenue, fleet size, and passengers carried as of 2007. In 2010 the airline was the sixth-largest airline in the world in terms of international passengers carried and largest in the world in terms of scheduled international passenger-kilometers flown. The airline was also the seventh largest in terms of scheduled freight tone – kilometers flown.
Emirates have built up a strong brand name as a trendsetter in the aviation industry, particularly in terms of service excellence, coupled with consistent profitability. In 2010, Emirates was voted the eighth best airline in the world by research consultancy firm Skytrax. (Wikipedia, 2010)
Increase or Decrease
Non Current Assets
Property, plant and equipment
Investments in subsidiaries
Available for sale financial Assets
Advance lease rentals
Loans and other receivables
Derivative financial instruments
Held to maturity financial assets
Derivative financial instruments
Short term bank deposits
Cash and cash equivalents
Equity and Liabilities
Non Current Liabilities
Interest bearing long term borrowing
Deferred income tax liability
Trade and other payables
Derivative financial instruments
Trade and other payables
Income tax liabilities
Borrowing and lease liabilities
Derivative financial instruments
Current Ratio = Current Assets / Current Liabilities
GRAPH SHOWING CURRENT RATIO FOR THE YEAR 2009-2010
Current Ratio of both Emirates and British Airways is not ideal. For both the companies, the current assets position should be improved and it should be ideally two times its current liabilities. This situation will be very uncomfortable for the creditors. Both Emirates and British Airways must improve the current ratio to maintain a balance between liquidity and profitability.
2. QUICK RATIO
Quick Ratio = Quick Assets / Quick Liabilities
GRAPH SHOWING QUICK RATIO FOR THE YEAR 2009-2010
Quick ratio for both Emirates and British Airways just fall short of the standard ratio, i.e. 1:1. Both the companies must improve its liquidity which will satisfy its creditors.
3. ABSOLUTE LIQUID RATIO
Absolute Liquid Ratio = Absolute Liquid Assets / Current Liabilities
Absolute Liquid Assets
Absolute Liquid Ratio
GRAPH SHOWING ABSOLUTE LIQUID RATIO FOR THE YEAR 2009-2010
The standard Absolute Liquid Ratio is 1:2 or 0.5:1. The Absolute Liquid Ratio for Emirates is 0.6:1 and that of British Airways is 0.5:1. This is considered to be quite satisfactory and up to the norm. This shows the short term financial position is just not satisfactory in term of absolute liquid assets.
4. NET PROFIT/LOSS RATIO
Net Profit/Loss Ratio =Net Profit or loss / Net sales*100
Net Profit/Loss Ratio (%)
GRAPH SHOWING NET PROFIT/LOSS RATIO FOR THE YEAR 2009-2010
Net Profit/Loss Ratio shows the operational efficiency of the business. The Net Profit Ratio of Emirates is 8.33% showing a better performance when compared to British Airways which incurred a loss indicating the managerial inefficiency and excessive selling and distribution expenses.
5. RETURN ON INVESTMENT(ROI) RATIO
Return on Investment Ratio = (Net Profit before interest and tax / capital employed)*100
Net Profit before interest and tax
Capital Employed (Net Fixed Asset + Working Capital)
GRAPH SHOWING RETURN ON INVESTMENT RATIO FOR THE YEAR 2009-2010
This ratio measures the operational efficiency and borrowing policy of the enterprise. The ROI of Emirates (10.23%) shows that the capital employed is used quite efficiently and indicates the earning capacity of the net assets of the business is satisfactory whereas ROI of British Airways is very much below par incurring a loss at 0.03% indicating the ineffective use of capital employed.
6. WORKING CAPITAL TURNOVER RATIO
Working Capital Turnover Ratio = Net sales /Working Capital
Working Capital Turnover Ratio (times)
GRAPH SHOWING WORKING CAPITAL TURNOVER RATIO FOR THE YEAR 2009-2010
This ratio shows the number of times the working capital results in sales. It reflects the efficiency in the utilization of working capital. The Working Capital Turnover Ratio of Emirates is very abnormal showing that 270.55 times working capital results in sales. Excessive ratio shows overtrading which indicates the weakness of enterprise. But the Working Capital Turnover Ratio of British Airways is 7.50 times showing a satisfactory situation which reflects its efficiency in the utilization of working capital.
7. PROPRIETORY RATIO
Proprietory Ratio = Net Worth/Total Assets
PROPRIETORY RATIO (times)
GRAPH SHOWING PROPRIETORY RATIO FOR THE YEAR 2009-2010
It indicates the relationship between proprietors’ funds and total assets. It shows the general financial position of the company. 50 % or 0.5 times is said to be satisfactory proprietory ratio for the creditors. But in the case of Emirates, the proprietory ratio is 0.31 and for British Airways it is 0.20 times which are below the norm, indicating that their loans are not secured which is a sign of risk for creditors.
8. CURRENT ASSETS TURNOVER RATIO
Current Assets Turnover Ratio = Net sales /Current Assets
Current Assets Turnover Ratio (times)
GRAPH SHOWING CURRENT ASSET TURNOVER RATIO FOR THE YEAR 2009-2010
This ratio establishes the relationship between Current Assets and Net Sales. The Current Asset Turnover Ratio of Emirates is 2.27 and of British Airways is 2.99 times which is quite satisfactory reflecting the efficiency in the utilization of Working Capital.
9. FIXED ASSETS TURNOVER RATIO
Fixed Assets Turnover Ratio = Net sales /Fixed Assets
Fixed Assets Turnover Ratio (times)
GRAPH SHOWING FIXED ASSET TURNOVER RATIO FOR THE YEAR 2009-2010
The effective utilization of fixed assets will result in increased production and reduced cost. It also ensures whether investment in assets have been judicious or not. In the case of both Emirates and British Airways having a Fixed Assets Turnover Ratio of 1.22 and 1.11 is not very satisfactory. It indicates that the firms have not been able to utilize its fixed assets judiciously.
SUMMARY AND FINDINGS
After the detailed analysis of the financial statements of Emirates and British Airways for the period from 2009-2010 by financial analysis, it is found that
The decision with regarding to working capital is arrived at by taking into consideration number of factors like nature of business, manufacturing cycle, and credit policy and collection procedure.
It is evidentiary through the financial analysis that the current ratio of both Emirates and British Airways is not in favor of both the companies. It is still not beyond the ideal ratio stating that the short term financial position of these companies is not very sound.
It has been found out that in the financial year 2009-2010, British Airways has incurred loss probably due to managerial inefficiency and excessive selling and distribution expenses. The company has significant burden of depreciation and amortization which is a major driver of these losses.
The shareholders’ funds for both the companies have been raised for the year 2010.
Finance is of vital importance for every organization’s success. Finance is the life blood of the business. Working Capital management is regarded as an important subject of financial management. Working capital management is an integral part of over all corporate management. The twin objectives of the working capital management are profitability and liquidity. Working capital management establishes the best possible trade off between the profitability of net current assets employed and the ability to pay current liabilities as they fall due.
From the data analysis, it is found that the performance of Emirates is satisfactory due to the internal and external factors. From the various techniques it is found that the company’s management is quite effective when compared o British Airways.
From the above analysis, it is clear that Emirates is an effective fast growing high profit seeking company whereas British Airways is undergoing a difficult financial period.
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