British Airways and Emirates Group: Financial Comparisons for 2009-2013 - Research Paper Example

British Airways and Emirates Group: Financial Comparisons for 2009 The British Airlines British Airlines has completed 90 years as being UK’s largest international airline. British Airlines was formed in the year 1974 as a result of a merger between British Overseas Airways Corporation (BOAC) and British European Airways (BEA). It became a private company in 1987, and in 1988 it got merged with Gatwick-based British Caledonian Airways (British Airways: Explore Our Past, 2014). British Airlines which is the world’s most popular airline has set its vision to meet the satisfaction level of both employees and customers. The company’s mission was to become a pioneer in global airways, and to achieve this target British Airlines has focused on making alliances with carefully selected companies (Rao & Krishna, 2004, p.75). During the 1990s, the airlines company emphasized on enhancing its corporate appeal, creativity, business efficiency, competitive position, and training facilities for employees. In the year 2004, the British Airways initiated “a new set of vision, values and goals”. The business strategy of this airlines company along with its values and goals were represented by a new mission which was entitled “The BA Way”, and it was made known to every individual associated with the company. The purpose of this mission was to fulfill non-financial objectives like focusing on safety and satisfaction of customers as well as motivation of employees. This mission was mainly dependent on complete cooperation and support from all the company’s stakeholders (McDonald et al., 2011, pp.91-92). British Airways which has always been a financially successfully company however experiences a severe decline under an inefficient and insensitive leadership. The period between 1996 and 2000 in which Robert Ayling was the Chief Executive of British Airways, the company’s financial performance went through a extremely. Ayling’s policy of undermining customer service and quality was the major reason behind the underperformance of the company’s shares by 40 percent. During his first year, Ayling was almost faced with a pilot’s strike which was narrowly avoided. In his second year, there was strike called by the cabin crew which lasted for three days which resulted in a loss of £ 125 million. During this time, motivation level of the employees of British Airways dropped and a negative environment prevailed among the staff due to Ayling’s tactless approach. It was argued that Ayling’s leadership to a large extent destroyed the brand image and service quality of the British Airways which was always an envy for its competitors (Thomas, 2006, p.15). The Emirates The Emirates Group is a Dubai based international airline company. It is one of the most favored airlines in the world and is known for its innovative outlook. This company strives towards delivering excellence in every aspect of the airlines industry. Passengers of this airline are ensured warm welcome by the cabin crew which is another reason for the company’s excellent reputation across the world (The Emirates Group, 2014). This airlines company is a huge organization with numerous business activities that covers every aspect of the market. The Emirates Group and its subsidiary firms together employ more than 62,000 people across its 50 business units. It is estimated that the company has the largest number of employees in its region (The Emirates Group: Our Company, 2014). The Emirates Group was launched in the year 1984 by Sheikh Mohammed bin Rashid Al Maktoum. The initial business planning was conducted by a ten member team and was considered to be named as either Dubai Airlines or Emirates airline. The initial investment was $ 10 million with the goal of establishing the company within five months. In the beginning the flight routes extended to Karachi, New Delhi and Bombay. In 1985, Sheikh Mohammed provided two Boeing 727-200s as gifts to the airline. The Emirates had witnessed loss for the first and last time in the year 1986 when there were excessive investments made in infrastructure and expansion. In 2012, the company launched its 1000th 777 aircraft which became the 102nd aircraft to join Emirates’ Boeing 777 fleet (The Emirates Group: Our History, 2014). The year 2012-13 was marked as being the 25th consecutive year of profitability for the Emirates Group. In the same year, the company made several achievements like “opening of Concourse A, the world’s first ever dedicated A380 facility and an Emirates history-making delivery of 34 aircraft to our fleet” (The Emirates Group: Annual Report 2012-13, p.8). However, during this period the airlines company experienced financial difficulties due to soaring fuel prices and fluctuations in the marketplace. While high fuel price reduced the profit margin, on the other hand political turbulences and continuous economic downturn in the eurozone also exerted pressure on the financial stability of the Emirates. At the end of the year 2012-13, the company’s revenue was US $ 19.9 billion which was 17.4 percent higher than the previous year. The reason of greater revenue can be attributed to the increase in the number of passengers in 2012-13 by 16 percent over the previous financial year (The Emirates Group: Annual Report 2012-13, p.8). Comparative analysis British Airways and Emirates Group are both high fare international airlines and therefore they are important players within the global aviation industry. This paper has made financial analysis and comparisons between these two airlines. Aviation industry is largely ruled by political, economical, environmental and technological frameworks. While all airlines have similar characteristics and make similar responses to situations, yet each airline has some distinctive features and characteristics in order to main competitiveness in the national or global aviation industry. Accounting techniques The objective of this paper is to make a comparative analysis of the financial position of the British Airways and the Emirates Group in the five years from 2009 to 2013. For this purpose, various ratio analyses have been done by information gathered from annual reports of the airlines. The analysis methods used in this paper has been explained in brief in the following section. 1. Profitability ratios were considered in this paper. First, gross profit ratio has been calculated which indicates the financial condition of a company. This ratio gives the information about how well labor and other materials are used in the production process and subsequently the cost of production as well as pricing of finished goods is also indicated. This ratio reveals the difference between a company’s sales revenue and the attached direct costs like labor costs and costs of raw materials. Gross profit ratio discloses the relation between gross profit and revenue earned from net sales. Higher ratio means a company earns more profit from each monetary unit of sales thereby having more funds to invest in other aspects of the business. The formula is gross profit / net sales (Gildersleeve, 1999, p.9; Gross profit ratio, n.d.). Second, net profit ratio has been calculated as this indicates a company’s ability to recover cost of production and sales from the revenue earned from sales. Also, this ratio indicates the margin of returns to shareholders who take risks by investing their money. A high net profit ratio means the company is efficient in transforming sales revenue into profit. During periods of crisis, a company can remain stable with high net profit ratio. On the other hand, a low net profit ratio means the company is not garnering sufficient revenue from sales or cost of operations is not managed efficiently. The formula is net revenue (after interest and tax) / net sales (Khan & Jain, 2011, p.21; Net profit margin ratio, n.d.). Third, return on assets has been calculated for both airlines as this ratio assesses the financial effectiveness of a company. It indicates the efficiency with which assets of a company are managed with respect to earnings. Return of assets varies between two companies since each company may need different level of assets for manufacture products. A higher ratio means the company is financially strong since more revenue is earned with fewer assets. The formula is net income / total assets (Lafferty & Lauer, 2011, p.127; Return on assets, n.d.) 2. Liquidity ratios like quick ratio and current ratio were also considered in this paper. Quick ratio or liquidity ratio has been calculated as this determines a company’s ability to repay its short term loans with its liquid assets. Liquid assets are current assets minus inventory and prepaid expenses. As liquid assets can be readily available as cash therefore quick ratio ascertains valuation of liquid assets against current liabilities. A higher quick ratio means a company is in a good position to repay its short term loans. The formula is liquid assets / current liabilities (Gallagher & Andrew, 1968, p.94). Current ratio has also been calculated for both the airlines as it indicates a company’s short term assets available to pay short term loans and obligations. A low current ratio indicates there are not enough current assets to meet short term loans. The formula is total current assets / current liabilities (Baker & Powell, 2009, p.48; Gibson, 2010, p.229). 3. Gearing ratio was next considered. Gearing ratio has been calculated for both the airlines to understand the relation between capital invested and debt finance. A company with high gearing ratio will be in an unstable position and will find it difficult to acquire loans from financial institutions. The formula is long term loan / equity capital (Dransfield et al., 2004, p.351). 4. Debt to equity ratio has been next considered. Debt to equity ratio has been calculated for both the airlines to understand the proportion of equity capital or debt that is used to manage assets. The formula is total liabilities / shareholders’ equity (Porter & Norton, 2010, p.738). Table 1: Profitability ratios 2009 2010 2011 Gross profit ratio Net profit ratio Return on assets Gross profit ratio Net profit ratio Return on assets Gross profit ratio Net profit ratio Return on assets BA -0.05 0.04 0.03 -0.07 0.06 0.04 0.07 0.07 0.06 Emirates 0.02 0.02 0.02 0.09 0.09 0.07 0.11 0.11 0.08 Profitability ratios 2012 2013 Gross profit ratio Net profit ratio Return on assets Gross profit ratio Net profit ratio Return on assets BA 0.004 0.01 0.01 0.03 0.03 0.02 Emirates 0.03 0.03 0.02 0.04 0.04 0.03 Fig.1: Gross profit ratio (2009 – 2013) Fig.2: Net profit ratio (2009 – 2013) Fig.3: Return on assets (2009 – 2013) Table 2: Liquidity ratios 2009 2010 2011 Quick ratio Current ratio Quick ratio Current ratio Quick ratio Current ratio BA 0.54 0.57 0.69 0.71 0.72 0.75 Emirates 1.02 1.1 0.95 1.01 1.003 1.07 Liquidity ratios 2012 2013 Quick ratio Current ratio Quick ratio Current ratio BA 0.57 0.60 0.61 0.63 Emirates 0.95 1.01 1.07 1.12 Fig.4: Quick ratio (2009 – 2013) Fig.5: Current ratio (2009 – 2013) Table 3: Gearing ratio 2009 2010 2011 2012 2013 BA 2.73 2.26 3.86 6.53 2.15 Emirates 1.14 1.12 1.13 1.42 1.76 Fig.6: Gearing ratio (2009 – 2013) Table 4: Debt to equity ratio 2009 2010 2011 2012 2013 BA 5.25 3.89 6.43 11.6 4.2 Emirates 2.05 2.18 2.11 2.59 3.12 Fig.7: Debt to equity ratio (2009 – 2013) Financial comparisons Profitability ratios As can be seen in Fig. 1, gross profit ratio has increased from 2009 to 2010 by 28.6 percent and then again in 2011 by 22.2 percent for the Emirates. However, the British Airlines has seen a decline in gross profit ratio from 2009 to 2010 and then a steep increase by almost 200 percent from - 7 percent in 2010 to 7 percent in 2011. This was a sign of good performance in the year fiscal year 2010-2011, with much cash in hand for the airlines to make payments to creditors, suppliers etc. Since the growth rate of British Airlines has been much greater than Emirates from 2010 to 2011, hence it can be said that British Airlines had shown more effectiveness in planning their activities in a more economic way than the Emirates. However, in the fiscal years 2011- 12 and 2012- 13, gross profit ratio trend has been almost similar for both the airlines. There has been a steep decline in 2012 and then an increase in 2013 indicating fluctuating performance of the airlines in recent years. Therefore, it can be observed that both the airlines experienced a setback in their gross profit margin in the fiscal year 2011- 12. The fluctuating pattern of net profit ratio for both British Airways and Emirates has been similar in the last 5 years as can be observed from Fig. 2. Both the airlines have experienced a steady rise in net profit ratio from 2009 to 2011 after which there has been a steep decline in 2012. Again in 2013, there has been an increase in the ratio for both the airlines. Emirates has seen a heavy increase in net profit margin from 2 percent in 2009 to 9 percent in 2010 indicating the airline group has been extremely efficient in converting the revenue earned from transporting passengers, cargo and excess baggage into profit. The fiscal year 2011- 12 has seen heavy decline of net profit ratio for both the airlines with British Airlines witnessing 85.7 percent decline and Emirates seeing 72.7 decline in the ratio. In the next fiscal year 2012 -13, both the airlines recovered net profit ratio to some extent with British Airlines showing increase from 1 percent in 2012 to 3 percent in 2013, and Emirates showing 3 percent in 2012 to 4 percent in the same year. The return of assets ratio has been similar for both the airlines from 2010 to 2013 as can be seen from Fig. 3. For both the airlines this ratio has been in a steep decline from 2011 to 2012; 83.3 percent for British Airways and 75 percent for Emirates. This means in the fiscal year 2011- 12 the airline companies did not earn as much revenue as is optimum to the valuation of their assets. However, in the fiscal year 2012- 13 British Airways saw an increase in return of assets ratio from 1 percent in 2012 to 2 percent in 2013, and Emirates saw an increase from 2 percent to 3 percent in the same period. Liquidity ratios A higher quick or acid test ratio and current ratio means the company has enough cash to pay all short term and long term debts and obligations, while a low ratio can also indicate insolvency possibility. British Airways and Emirates had their quick and current ratios fluctuating in similar manner from 2009 to 2013 as can be seen from Fig. 4 and Fig. 5. Current ratio has been very fluctuating for both the airline companies in the last 5 years from 2009 to 2013. While British Airways saw decline in both ratios in 2012, Emirates has seen decline in both ratios in 2010 and 2012. However, in the last year 2013, both airlines have experienced increase in quick and current ratios which is a good thing since when these ratios exceed it means the company is in a strong position financially. It is necessary to see that liquidity ratios do not decline below a certain level as this can lead to difficulty in meeting short term and long term debts and obligations. In this regard, British Airways has seen 7.02 percent increase in quick ratio and 5 percent increase in current ratio in the fiscal year 2012- 13 while Emirates has seen 12.6 percent increase in quick ratio and 10.9 percent increase in current ratio in the same fiscal year. It can be here observed that Emirates has shown stronger financial performance that British Airways considering the former’s rate of increase in liquidity ratios has been higher than the latter’s rate. Gearing ratio Gearing ratio can assess the company’s financial position in the long run. For British Airways, gearing ratio has been steeply rising and falling in the last 5 years, while for Emirates this ratio has maintained level in the fiscal years 2009- 10 and 2010- 11 and a slight increase in the next two fiscal years as can be seen from Fig. 6. Higher ratio means risks are greater. Keeping this in view, it can be said that British Airlines is in a better position than the Emirates as the former has gearing ratio fallen by 67.1 percent in the year 2013 while the latter’s gearing ratio has increased by 23.9 percent in the same year. It is important that Emirates controls the decline of its gearing ratio which has been steadily increasing from 2010. Debt to equity ratio The pattern of debt to equity ratio for both the airlines has been almost same to that of gearing ratio for the last 5 years as can be observed from Fig. 7. Since debt to equity ratio measures short and long terms loans committed by suppliers and creditors with what the shareholders have invested, therefore a lower ratio means a company has a stronger equity position. Keeping this in view, it can be said that British Airlines is in a better position than the Emirates as the former has gearing ratio fallen by 63.8 percent in the year 2013 while the latter’s gearing ratio has increased by 20.5 percent in the same year. Next, a horizontal analysis of the balance sheet of British Airways and Emirates has been done for the last 5 years from 2009 to 2013. For this purpose the 2 principal elements of balance sheet like assets and liabilities have been considered. Total assets, current assets, total liabilities and current liabilities, and also sales volume have been tabulated below for the last 5 financial years. Table 5: Balance Sheet of British Airways from the year 2009 to 2013 Total Assets Current Assets Total Liabilities Current Liabilities 2009 10,488 2,346 8,642 4,142 2010 10,677 2,674 8,564 3,740 2011 10,856 2,774 9,222 3,683 2012 11,136 2,634 10,068 4,398 2013 11,921 2,915 9,446 4,627 Table 6: Balance Sheet of the Emirates from the year 2009 to 2013 Total Assets Current Assets Total Liabilities Current Liabilities 2009 47,449 15,530 31,878 14,125 2010 55,547 18,677 38,072 18,520 2011 65,090 21,867 44,188 20,498 2012 77,086 25,190 55,620 25,046 2013 94,803 34,947 71,771 31,319 Fig.8: Total assets and total liabilities of British Airways (2009 – 2013) Fig.9: Current assets and current liabilities of British Airways (2009 – 2013) Fig.10: Total assets and total liabilities of Emirates (2009 – 2013) Fig.11: Current assets and current liabilities of Emirates (2009 – 2013) Table 7: Sales BA Emirates 2009 8,509 40,395 2010 7,530 40,172 2011 9,460 50,511 2012 10,236 58,828 2013 10,818 68,211 Fig.12: Sales from 2009 – 2013 Horizontal analysis Comparing the 2 principle elements of Balance sheet (assets and liabilities) of both the airline companies, it can be observed that valuation of assets has increased every year from 2009 to 2013. On observing Table 5 and Table 6, it can be seen that asset management has been much better in Emirates than in British Airways. In British Airways there has been 13.6 percent increase in total assets from 2009 to 2013 while in Emirates there has been approximately 100 percent increase in total assets during the same period. However, Emirates has shown a heavy increase in its total liabilities compared to British Airways. While British Airways has shown only 9.3 percent increase in total liabilities on the other hand Emirates has displayed 125.1 percent increase in total liabilities from 2009 to 2013. Such heavy increase in liabilities makes Emirates a greater vulnerable company that British Airways. It can be seen that in British Airways, total liabilities formed 82.4 percent of its total assets in 2009, and the same figure was 79.2 percent in the year 2013. Although there has been a decrease in the figure by 3.2, the problem is still grave since the company’s total liabilities constitute such high percentage of its total assets. On the other hand, in Emirates, total liabilities formed 32.8 percent of its total assets in 2009, and the same figure was 24.3 percent in the year 2013. Comparably, Emirates is in a stable financial position since not only the figure has decreased by 8.5, but also total liabilities constitute only about quarter of the valuation of total assets as per 2013 balance sheet record. Loan management can be considered as a more serious problem in Emirates compared to British Airways. In the context of short term loans and obligations, current assets and current liabilities have been considered. In British Airways there has been 24.3 percent increase in current assets from 2009 to 2013 while in Emirates there has been 125 percent increase in current assets during the same period. However, Emirates has shown a heavy increase in its total current liabilities compared to British Airways. While British Airways has shown only 9.3 percent increase in current liabilities on the other hand Emirates has displayed 121.7 percent increase in current liabilities from 2009 to 2013. Such heavy increase in current liabilities means Emirates has delved heavily into short term loans and obligations as compared to British Airways. It can be seen that in British Airways, total current liabilities exceed current assets by 76.6 percent in 2009, and the same figure was 58.7 percent in the year 2013. On positive note, there has been a decrease in the figure by 17.9. However, the problem is still grave since the company’s total current assets cannot cover its total current liabilities. On the other hand, in Emirates, total current liabilities formed 91 percent of its total current assets in 2009, and the same figure was 89.6 percent in the year 2013. Comparably, Emirates is in a stable financial position since not only the figure has decreased by 1.4, but also total current assets have the capability to cover the company’s total current liabilities as per 2013 balance sheet record. Conclusion There has been a tremendous growth in the European aviation industry in the last few years. However, the financial performance of any airline company thrives on many factors. Airline services can be drastically disrupted by natural calamities, for instance the 2010 Eyjafjalla volcanic eruption in Iceland disrupted European air space for several days. Massive proportion of flight cancellations led to heavy loss for British Airways between £15m and £20m a day (Wearden, 2010). The price of petroleum and other fuels affect any airline company. Therefore, high fuel price can adversely affect the economic structure of the company. In 2011, it was predicted that airlines would lose 50 percent of their profit due to increasing fuel price, and British Airway would bear the brunt (Milmo, 2011). The rate of unemployment in Europe is very high which means a major portion of European population cannot afford to travel by air. The pervasive risk of terrorism means airlines have to emphasize on strict security measures which will require high financing. The ongoing global recession which has no probable solution in the near future induces business travelers to reduce their travel expenses. One positive factor is globalization which can increase flight demand in the long run. This is because globalization has enhanced alliance between nations for trade, technology, labour purposes. Recommendations Sales volumes of both the airlines have been in an increasing trend in the last four fiscal years, and this is a good sign. However, as can be seen from Fig.12, Emirates has seen a more steep increase compared to British Airways. Therefore, the focus of the latter should be on enhancing customer satisfaction and employee motivation. Their asset management has been good, but Emirates has been showing greater percentage of increase of assets. So, British Airways must strive for better asset management to maintain competition in the industry. For both the airlines, liquidity ratios have been fluctuating in the last 5 years and therefore they should strive towards maintaining good positions for payment of dues. This can be done by regularly reviewing the accounts of creditors and suppliers so that bills are paid on time. Also, since airline industry is one sector that is highly dependent on technologies, therefore to maintain competitiveness in the market both the airlines need to keep an eye on the technological updates regarding aircraft manufacture. 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