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Free «PLC» Essay Sample

It is notable that the business environments for most organizations have drastically changed owing to the prevailing difficulties in the state of economics nowadays. For companies, operating in the service industry, such as the airlines, the high fuel prices coupled with reduced buying powers among customers have significantly reduced their profitability. The paper will critically evaluate the recent financial performance of EasyJet, thus advice investors based on the findings. The paper will also use the latest Annual Report for EasyJet and make a comparison with the financial performance of Ryanair. The target of EasyJet Airline was to compete with traditional airline carriers by undercutting the cost. The firm was one of the first not too expensive airlines in the UK, with flights from Luton to Scotland. Ryanair airline has been characterized by the effectiveness of low-cost business model, rapid expansion and an outcome of the year 1997 deregulation of the aviation industry in Europe.

The hard economic times have forced the two companies to engage in cost cutting measures, one of them including job cuts. In order to advice the investors, among other stakeholders, on the recent performance of EasyJet, it will be crucial to investigate the performance of the company for the last two years. According to the findings it is clear that EasyJet is one of the most profitable investment ventures as a result of high profitability, liquidity, leverage, operational ratios and a healthy cash flow. For the year 2011, Ryanair was able to accommodate 72.1 million passengers booking, at an average fare of £ 39.0. Consequently, the firm was able to obtain $ 565 million (£ 401million) as the net profit after tax, making Ryanair the most profitable low fare airlines globally. From the charts provided, it is evident that both companies have had stable operation, despite the unfavorable economic times. In conclusion, the two companies will remain profitable if they continue to adhere to best practices.

EasyJet Plc and Ryanair

In the recent times, the market environment for most companies across the globe has changed drastically. This can be attributed to technological changes, reduced barriers of entry, increased competition among firms operating in the same field and due to other notable factors. Boru (2007) candidly indicates that the recent global financial crisis, which originated in the developed countries like the United States of America, the European region among others, has drastically reduced the buying powers of most of the existing and potential customers for most companies, especially the multinational ones. Some of the most affected companies are those operating in the service industry, such as airlines. This can be attributed to the high prices of fuel on the international markets, which has almost tripled to approximately $ 130 per barrel if to compare it to the prices in 2006. Consequently, the profitability of the airlines has considerably reduced, forcing the firms to enter into merger or acquisitions, in order to benefit from economies of scale. Based on these arguments, it has become crucial for investors to carefully evaluate the performance of a given firm in relations to the changing economic factors like recession, high fuel prices in the international markets and others. It is notable that the given firm financial situation analysis is one of the crucial yardsticks documenting the existing, as well as the future, financial condition. This is crucial in determining the financial strategy to be adopted in order to achieve the corporate goals (Campbell, Stonehouse & Houstone 2002).

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Franke (2004) argues that financial statements help the stakeholders, such as the investors, to comprehend what is happening to a company in a given period. It is also notable that the majority of the financial statements’ users are mainly concerned with the company’s future gainings like the dividends and earnings. Financial analysis is also crucial to the managers, since it guides them when carrying out strategic planning - a factor that significantly increases the sustainability of a firm, both in the short and long run. For airline companies, such as EasyJet, British Airways, Ryanair among other global airlines, the need to conduct extensive financial analysis, in order to attract and retain investors, cannot be underrated. This paper will carefully analyze the recent financial performance of EasyJet, thus advising investors according to the findings. The paper will also use the latest EasyJet’s Annual Report and make a comparison with the Ryanair’s financial performance. To achieve this, financial ratios and charts will be used to perform the comparison.

Background to EasyJet and Ryanair

EasyJet Airline Company was founded in 1995 by Stelios Haji-loannou, a graduate from London Business School. The development of EasyJet Airline was to compete with traditional airline carriers by reducing fees. The company was one of the first low cost airlines in the UK, providing flights from Luton to Scotland. The company had two Boeing aircrafts with a capacity of 148 passengers each and the cost of one seat was $28.5 one way. In 1998 the company launched a website to improve market (Jones 2008). However, Haji-loannou denounced the use of the Internet in the company, as he suggested it did not improve the overall business development. In August 1999, the site had a turnover of 38% from the sale of tickets, an equivalent to the sale of more than 136 000 seats (Bamber 2009). Currently, EasyJet’s website provides 98% of its bookings. To ensure growth of the online market, the company increased its online discount to $2.51 for one trip, which was higher than any other airline. By September 2000, the Internet sales of the company reached 85% of the total sales made by the company. In 2003 the company had managed to capture 90% of online sales. Additionally, in 2002, EasyJet expanded its routes and fleet by obtaining British Airways low-cost subsidiary (Desiraju & Shugan 1999). EasyJet Company has reduced Boeing fleet from 73 to 30 units and has acquired 106 aircraft Airbuses. The company operates 137 aircrafts with 289 routes in 21 countries. During the establishment of EasyJet a lean operation was required to cut the cost. Haji-loannou established a single sales channel to achieve and survive. Likewise, he was encouraged by different companies like Direct Line insurance that worked in collaboration with the airlines, thus enabling it to meet its short- and long-term plans (Shiller 2008). 

The basic trial was established in 1997, when Haji-loannou observed closely its popularity. The company had telephone reservation system for selling the seats. The number of callers rose daily from the call reservation system. This led to lack of space in the call centre, due to its expansion. This called for a transaction site of $10 million to either build a call centre or let people book tickets via the Internet. The company decided to sell tickets over the Internet due to high demand of passengers. EasyJet’s success was achieved by the founder vision and adaptability as well as market business model. The company had direct sales operations, which boosted the market. In addition, it was easy to integrate the call centre into a central booking system. Some of the low cost propositions for EasyJet were no in-flight meals, no network tie-ups, no travel agents and no tickets. The customers were given personal identification numbers, a factor that significantly customized the products and services offered by the brand. EasyJet has different strengths which makes it stay ahead of the competitors. One of its strengths is strong e-business. Use of the Internet to reserve booking has improved the market of the airline (Gallego & van Ryzen 1997). Flexibility and innovation is another strength possessed by EasyJet. Use of the Internet to book seats has increased convenience and flexibility to the customers. Differentiation on pricing is another strength which boosts EasyJet. EasyJet has different prices depending on the season. The company charges slightly higher fees during profitable seasons and lower fees during unprofitable seasons. Similarly, the company has strong financial position owing to reduction in their operational costs (Lois 2007).

On the other hand, Ryanair, an Irish low-cost airline founded in 1985, is one of the most prosperous airlines in the 21st century. The airline’s head office is based at Dublin Airport, whereas its main operational bases are at London Stansted Airport as well as Dublin Airport. Ryanair operates approximately 300 Boeing and 737-800 aircrafts on more than 1,100 routes around Morocco and Europe from 46 bases. Ryanair airline has been characterized by the effectiveness of the low-cost business model, rapid expansion and an outcome of the year 1997 deregulation of the aviation industry in Europe. The airline operates across the European Union since 1992, when a deregulation of the European airline industry gave right to carriers from one European Union country to provide programmed services to other European Union states. Ryanair has 44 European bases and has significant presence in Italy, Germany, Spain, Poland, and the United Kingdom amongst other European states. The airlines’ biggest market is the United Kingdom and it contains Ryanair’s largest base. Its three biggest British bases encompass Liverpool, London-Stansted, and East Midlands airports. The airline offers transport services to its customers at affordable costs (Ruddock 2007). As noted earlier, the performance of these companies have drastically been affected by the global financial crises as well as the high prices of fuel in the international markets (Capon 2008). For EasyJet, the fuel cost for the year 2010 and 2011 is as indicated below (see Graph 1).

Graph 1. Fuel cost for EasyJet

(EasyJet official website 2012)

Consequently, this has forced the two companies to engage in cost cutting measures, such as job cuts. For instance, since 2008, Ryanair and EasyJet have had more than 750 and 950 job cuts respectively, due to reduced profitability levels (Kothari 2010).

Analysis of the Recent (Financial) Performance of EasyJet

In order to provide the investors and other stakeholders with consultation on the recent performance of EasyJet, it is crucial to investigate the performance of the company for the last two years. Brunnermeier (2009) mentioned that it becomes easy to for investors to have a clear view of the performance and business position through ratios. Ratios are useful as they highlight the financial weaknesses and strengths, although they do not explain why the weaknesses or strengths exist. Furlong and Hannon (2005) note that there are various categories of ratios, essential in analyzing the performance of any firm. These include profitability, liquidity, financial leverage, and asset management. The table below gives a brief EasyJet’s financial performance summary in 2010 and 2011 (see Table 1).

Table 1

Performance of EasyJet at a glance

 

2011

2010

Change

Total revenue (£ million)

3,452

2,973

+16.1%

Reported profit before tax (£ million)

248

154

+60.8%

Return on Capital Employed (%)

12.7

8.8

+3.9 ppt

Basic Earnings per share

52.5

28.4

+84.9%

Proposed divideds-ordinary (pence per share)

10.5

-

-

Proposed Divided- special (pence per share)

34.9

-

-

(EasyJet official website 2012)

Profitability Ratios

In many instances, profit has always been the yardstick for measuring the success of any company. However, it is important to compare the company profits earning capacities in relation to the capital employed. Keeping this in mind financial experts have developed ratios that measure the ability of a company to convert the sales to profits and then earn profit on the asset employed. Further Kangis and O’Reilly (2003) argue that profitability ratios, such as gross profit margin, net profit margin, return on capital employed and return on ordinary shareholders, are used in an effort to clearly evaluate the ability of management to control and manage expense, thus earn profit on all resources committed to the business. The ratio is useful in measuring how efficiently the firm’s assets are utilized in generating net sales and income. Therefore, the higher the ratio, the better the firm is in using its assets (Kirkpatrick & Dahlquist 2006).

It is notable that, in 2011, the profitability of EasyJet has continued to rise, despite the £ 100 million raise in unit fuel costs. The underlying profit for every seat, including fuel, loss, incurred upon the disposal of A321 Aircraft, as well as the volcanic effects in 2011, was £3.97, which represents a 61% increase if to compare it to the year 2010 gainings. The other factor that significantly contributed to improved economic performance was the 11.8% increase in passenger numbers as well as a 0.3% improvement on load factor to 87.3% as compared to 2010.

Gross Profit Margin

Schneiderbauer and Feinsilber (2002) argue that gross profit margin compares the gross profit to the generated total sales during similar periods. Therefore, this is a measure of the profitability in producing (buying) or providing service prior to deducting any expenses. For the year 2011, the total revenue constituted £ 3,452 million, representing a 13.87% increase from the previous year.

Gross profit percentage = (Gross profit/sales)*100

For EasyJet the gross profit ratio in 2011 can be computed as

Gross profit margin (in percentage) = (437/3452)*100

=12.67%.

It is evident the EasyJet’s gross profit margin has decreased by 1.43% from 14.10% in 2010, according to the above ratio. The reduced gross profit margin, as well as the corresponding increases in sales revenues, clearly indicates that EasyJet has drastically lowered it fare prices in an effort to stimulate sales. This is also attributable to reduced buying power of its customers as well as increased competition from well established airlines such as Ryanair (Lo 2008).

Net Profit Margin

Net profit ratio compares the net profit, obtained in certain duration, to the total sales revenues. For EasyJet the gross profit ratio for 2011 can be computed as

Profit margin (as a percentage) = profits after interests and taxations/ sales *100

Profit margin = (225/3452)

= 6.51%  

From the above, it is evident that the net profit margin for EasyJet rose by 1.07% as compared to 2010. This shows that the company has become highly cost efficient in marketing and distribution activities (Gallego & van Ryzen 1994).

 
 
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Return on Capital Employed

This ratio considers all profit that is available for long-term capital suppliers. The 1.91% to 12.74% in 2011, as compared to the previous year, indicates that EasyJet should consider revising its ticket pricing policies, although this is not of major concern to investors and lenders. However, a higher ROCE value shows the ability of EasyJet to utilize it assets in order to generate sales, thus attracting more investors (Done 2004).

Liquidity ratios

Liquidity ratios assist a company in determining whether it can meet the short-term financial obligations. These ratios are of great importance to the company’s creditors, since they can determine the credit worthiness in the short-run. For EasyJet, the current ratio, that is the liquid assets including debtors, stock and cash, compared against the current liabilities, such as production cost (marketing included) indicates that the firm has adequate coverage for all the short-term obligations (Rhoades & Waguespack 2006). For the financial year 2011, the current ratio, was 2.1, indicating a 14.5% increase from 2010. In EasyJet’s case, the quick ratio, which excludes stock, as well as the current ratio are similar, due to the fact that the company does not engage in any form of physical stock production. The ratio of 2.1 indicates that for every  £ 2.10 worth in the current assets the firm has £1 worth of the current liabilities. However, the ratio of 2.1 can be considered highly satisfactory by the potential investors.

Leverage Ratio

For the FY 2011, this company’s debt to equity ratio comprised 0.65. This indicates that for each £1 raised by the equity shareholders in financing the business, creditors and lenders contributed £0.65. This is a clear indication that the company can acquire more credit in order to reinvest in the purchase of new aircrafts as well as expand on route coverage, a factor that will raise customer satisfaction level from the current 79.0% (Porter 2004). Another ratio under this category is the gearing ratio, which increased from 0.62 to 0.67 in 2010 and 2012 respectively.

Cash Flow and Operational Ratios

The graph below compares the cash flow for EasyJet for the years 2010 to 2011 (see Graph 2)

Graph 2. Cash flow for EasyJet for 2010-2011

(EasyJet official website 2012)

Butler and Keller (2000) argue that the increased cash flow ratio of 28.91 suggests that the firm has the capacity to acquire more debt. Although the firm does not engage in any form of manufacturing, indicators such as increase in the number of passengers from 48.8 million in 2010 to 54.5 million in 2011, high RPK (Revenue Passenger Kilometer), increased number of routes and others indicate healthy operational ratios (Gale & Holmes 1993).

Stock Market Indicators

For the year 2011, earnings per share rose by 10.5 pence, a clear indicator that the firm is a profitable investment opportunity. Further, the earning efficiency, as highlighted by the profitability ratio, offers investors a positive signal about the company.

Advice to Investors

According to the above findings, it is clear that EasyJet is one of the most profitable areas of investment. Despite the complex business environment, the company has managed to remain profitable. Consequently, earnings per share offered were 10.5 pence, and this is expected to rise by 215% during the next four years (Kretsch 1995). Unlike other airlines experiencing reduced number of customers, EasyJet has been able to arise the number of passengers by 10.45% to 54.5 million in 2011, and this figure is expected to increase to at least 100 million passengers annually by 2020 (Gernot 2004). For an investor, cash flow is another vital area to be considered prior to making an investment. This is due to the fact that it determines the ability of a firm to finance short term liabilities (Costa, Harned & Lundquist 2002). With an increased cash flow ratio of 28.91, it is evident that EasyJet is more mindful of the emerging short-term issues, as it is to profitability (Johnson, Scholes & Whittington 2006). Generally, this is the best time for investors to commit their resources to EasyJet owing to the sustainable growth path adopted by business (Franke 2004).

The Performance of EasyJet In Comparison To Ryanair

The recent annual report that will be employed in comparing the performance of EasyJet with that of Ryanair is that of FY 2011. As indicated earlier, for the FY 2011, the profitability of most airlines has been highly affected by the high cost of fuel in the international market, reduced buying power of the existing and potential customers, political instability in some routes, such as the Middle East among other notable factors (Siobhán 2004). In 2011, Ryanair was able to accommodate 72.1 million passengers booking, at an average fare of £ 39.0. Consequently, the company was able to obtain $ 565 million (£ 401million) as the net profit after paying taxes, positioning Ryanair as the most profitable low fare airlines globally. EasyJet was ranked fourth with $ 191, 627 as the net profit after tax, after Southwest Airlines and AirAisa Berhad each gaining $459,000 and $346,501 as net profit respectively (Clark 2006). One of the most notable factors, which have made these two airlines to have a high profitability level, is the rapid growth in the passenger bookings.

This is attributable to reduced fair prices as well as the increased route coverage as compared to other airlines, such as the British Airways (Jones 2007). The chart below indicates the rate of passenger bookings in the last four years.

Chart 1. Comparison on passenger numbers for EasyJet and Ryanair between 2008 and 2011

(“CAPA” 2011)

The other notable aspect that compares the financial performance of the two companies is the operating profit margins (%) (Denton 1998). The chart below indicates a stable operating profit margin for EasyJet as compared to that of Ryanair.

Chart 2. Comparison on operating profit margin for EasyJet and Ryanair between 2008 and 2011

(“CAPA” 2011)

From the chart above, it is evident that Ryanair seems to be more vigorous in higher profits generation. This can be attributed to car rental, hotels, among other notable non-flight products sold to customers (Calder 2002). The relatively low profit margin experienced by EasyJet during those four years may be due to price pressure as well as intensive competition from other well established airlines (Ryanair Official website 2012). The earnings per ordinary share, both for the basic and diluted shareholders of the two companies, have been steadily increasing since 2009 as indicated by the table below (see Table 2).

Table 2

Earnings per ordinary share for 2009-2010

 

Ryanair

EasyJet

Earnings per ordinary share (in £ cent)

2011

2010

2009

2011

2010

2009

Basic

25.21

20.68

19.67

10.5

-

9.6

Diluted

25.14

20.60

19.84

11.8

-

10.3

(“CAPA” 2011)

According to the FY 2011, EasyJet have had a higher ROCE value of 12.7% as compared to Ryaniar at 11.82%. This clearly indicates the ability of EasyJet to generate profits for the long-term capital suppliers, which is a key indicator to the possible investors (Grant 2005). For Ryanair, the 1.4% increase on the value of ROCE as compared to the previous year indicates a strong performance. This is due to the fact that returns on assets were higher than the cost of capital.

According to the research, it is clear that EasyJet and Ryanair are some of the low cost airlines globally. EasyJet operates 137 aircrafts within 289 routes in 21 countries. During the establishment of EasyJet a lean operation was required to cut the cost. On the other hand, Ryanair head office is based at Dublin Airpor,t whereas its main operational bases are at London Stansted Airport and Dublin Airport. Ryanair operates approximately 300 Boeing 737-800 aircrafts on more than 1,100 routes around Morocco and Europe from 46 bases.

EasyJet’s improved profitability in the year 2011 can be attributed to 11.8% increase in passenger numbers as well as 0.3% point’s improvement on load factor to 87.3% as compared to 2010. Investors should realize that EasyJet is one of the most profitable areas of investment due to high earnings per share, high current ratio among other notable performance indicators. If to compare with Ryanair, the annual number of passengers served by EasyJet has been relatively low. Generally, the two companies will remain profitable, if they continue to adhere to best practices. 

   

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