British Airways - Case Study Example

Annual Report and Accounts – British Airways Plc. Annual Report and Accounts – British AirwaysPlc. 1. Narrative summary of report 1.1. Reason for narrative summary Annual reports include information other than financial statements of the company mainly for the purpose that there are many areas which are not clearly portrait in financial statements. For example financial statements do not highlight the future plans of company therefore information regarding it is included in narrative summary. Furthermore, investor can be deceived by only looking at the figures in financial statement as a decline in profit can compel investor not to invest in the company without looking at other areas as to why this decline took place. Therefore, this additional information such as the macro environment effects, business performance in comparison to its competitors, etc. generally guide the investor in making the right choice. 1.2. Statements by Chairman and CEO The statements provided by Chairman and CEO are more or less same with both them talking about the performance of British Airways during the year in comparison with last year and the difficulties being faced due to economic downturn, loss of consumer confidence, increasing oil prices and other environmental factors. Furthermore, both the heads highlighted the fact that next year is going to be much tougher in terms of performance due to economic conditions prevailing, yet they are confident that the company will manage to survive and achieve their long term future goals of being a premium airline. However, the main difference among both the statements was the measures highlighted by CEO to survive currently and tackle the future business appropriately with a brief detail about their future development and ways to achieve those (British Airways 2009). 1.3. Issues from CFO’s report The report provided by CFO highlight some of the problems that company is facing and which will be important for investor like Paul. Firstly, the CFO talks about the decline revenue caused by a decrease in passenger traffic especially premium passenger leading to reduction on amount of flying. Furthermore, the report highlights the company’s susceptibility towards fluctuating oil prices and showing an increase in operating expenditure due to this. Moreover the company faced a net unrealized loss on fuel derivatives due to volatile prices. Lastly, company posted a negative EPS which will have an adverse impact on its investors as no dividend was announced (British Airways 2009). 1.4. Risks and uncertainties faced by British Airways The environment in which airline industry operates involves lot of risks and uncertainties which are out of their control and can have severe impacts on their business. Some of the risks involved in their industry are act of terrorism, any changes in government regulations, etc. but those which have direct and long term impact are branding, competitors move, unable to reap the benefits as planned from merger, employee relations with the company, government policy changes, company’s focus towards environment and last but the most important risk is fluctuating oil prices and exchange rate (British Airways 2009) . 2. Audit report 2.1. Role of auditors The auditors are responsible to audit the financial statements of the company and part of directors’ remunerations report. It is their duty to identify that whether financial statements provide a true picture of the company or not and whether the company has maintained accounting records properly or not. Furthermore, they highlight whether directors report is in line with the companies act or not. In addition to these things they point out the company’s compliance with cooperate governance statement and the consistency of other information present in annual report with company’s financial statements. 2.2. External auditors and audit opinion Ernst & Young LLP is the external auditor for British Airways and they provide audit opinion about the company by auditing the company’s financial statement and part of director’s remuneration report. They make sure that financial statements and part of director’s report that is audit is free from material misstatement. A thorough examination of these, result in either positive or negative audit opinion about the company. British Airways received a positive audit opinion as according to them the group’s financial statement reflects a true and fair view in accordance with IFRS and proper preparation of audited part of director’s report and financial statements is conducted in accordance with Companies Act 1985. 2.3. Audit report The report is prepared once the financial statements are formed and issued, therefore the delay of two months period mainly include the audit of these statements once it’s provided by the company. 3. Performance Analysis 3.1. Income statement analysis The company saw an increase in their sales revenue by 2.7% in 2009 and this was mainly because of currency gains benefitting the organization. The rise in revenue was due to an increment in passenger revenue even after declining premium cabin traffic. The organization saw a rise in their operating expenditure by 16.9% to £9212 million mainly due to volatile fuel costs and exchange rate. Among the operating expenditure fuel costs showed an increase of 44.5% whereas its proportion as total operating expenditure showed a rise of 6% from 26% to 32% in 2009. Due to above mentioned reasons group posted a loss of £358 million (British Airways 2009). 3.2. Reasons for changes in fuel and oil cost Oil is one of important component for airline industry and therefore volatility in it can severe hit the company’s bottom line. According to the British Airways CFO’s report oil prices were extremely volatile during 2008-2009. The prices climbed to as high as $146/barrel and as low as $37/ barrel causing company to bear the consequences. This burden was enhanced when the currency was weakened causing companies to pay higher prices for oil imports, thus increase their fuel costs unprecedentedly (British Airways 2009). Furthermore, this variable prices forced the group to bear loss on their derivatives too as it was difficult to forecast the future prices. 3.3. Earnings Per Share Earnings per share (EPS) is important for investors as it measures the profitability of company on per unit basis, therefore it indicate the investor as to how much wealth the company has accumulated for each individual shareholder. If the revenue growth of company is lower than EPS growth then it shows that company has performed well on behalf of shareholders (Harman n.d.). It is an instrument which identifies the income that is available for each shareholder therefore it gives investor a good idea as to whether to invest in the company or not. This year group posted a loss per share of 32.1 pence as compared to last year’s profit per share of 62.1 pence (British Airways 2009). The financial performance of the company cannot be judged by only looking at EPS especially because of the economic slowdown which has affected the industry. It will give a true picture if looked in comparison with competitor of same size. 3.4. Financial ratio analysis Ratio 2008 2009 Current Ratio 3,111/ 3,492 = 0.89 2,346/ 4,142 = 0.57 Debt to Equity Ratio 4,538 + 3,492 /3,262 = 246.17% 4,500 + 4,142) /1,846 = 468.15% Net Profit Margin 726/ 8,758 = 8.29% (358)/ 8,992 = -3.98% Return on Equity 726/3,062 = 23.71% (358)/ 1,646 = -21.75% The above selected four ratios cover the major areas such as profitability of the company, their asset and liabilities condition, debt scenario and income earned from assets. These four selected ratios give a brief overview of almost all areas of business. Looking at these, an investor can judge that the group’s asset backing is not very strong as their current ratios shows that for every liability they have 0.57 assets. Furthermore, the debt ratio explains that company mainly operates on debt as compared to equity. The other two ratios show a deteriorated condition in 2009 due to economic scenario. 3.5. Financial statement comparison Comparing financial statements directly is not a good measure as it misleads the analysis because firstly, the size of the company from which it is being compared also matters. If the company being compared is larger in size, a direct comparison of figures will mislead the investor. Secondly, direct data comparing does not highlight the accounting method being used by the company therefore it deceive the investor. Furthermore, different financial year end of companies can also make it difficult to compare directly. Use of ratio can overcome the problem as it takes into account the percentage or proportion of a factor. 4. Consolidated cash flows The company managed to generate £133 million of cash from operations during 2008/09. The major sources of cash flow for the company during the year were interest received, a reduction in current interest bearing deposits and proceeds from long term borrowings. As far as cash outflows are concern major sources were purchase of property, plant and equipment, interest paid and payment of financial lease liabilities (British Airways 2009). Cash flow statement of a company shows the cash strength as to how much cash is available with the company. This availability of cash highlights the company’s performance which cannot be only judged by looking at profits. There are areas which are not part of profits such as inventory; lot of cash used for the purpose of purchasing inventory is a good sign but it’s not highlighted in profits. Furthermore, income statement might show high profits but if the cash situation is negative there are high chances of company facing trouble in near future. 5. Notes to the financial statements Notes of financial statements provide detail regarding the statement and it is useful for thorough understanding of accounts. For investor one of the important note to look for is note #13 which highlight the earnings available with the company for each shareholder, it will show the investor how much he can get and according to it what should be the share price, Whether the share is overpriced or under will be known. Second important area is explained in note # 16 which discusses about the capital expenditure commitment. This will be helpful information for investor as it will show the future growth and expansion plans of the company which will later on reflect on profits. Information regarding contingent and liabilities can also be important for investor as it will let the individual know about the claims present on company and chances to get clear from it and the affect of these cases on the company. 6. Limitation of annual report The analysis performed on the statements provided by the company lack in some areas which if provided can improve the analysis with more benefits to the investors. Firstly, there was no information regarding the ratios for an individual investor that is a summary of important ratios need to be provided with benchmark industry ratios for a quick review and comparison. Secondly, no specific forecasting figures are provided as to how many sales are expected in future or from which sources do the company expect a regular source of income etc. Furthermore, lack of information regarding the competitors especially their closest competitor which if provided would have made it easier to compare as to where the company stands. References British Airways. British Airways 2008/09 Annual Report and Accounts. London: British Airways Plc, 2009. Harman, Bryn. Investopedia. http://www.investopedia.com/articles/basics/07/eps.asp (accessed March 18, 2010). Read More