Due to the differences in nominal values of shares of different companies, it is not very useful to compare the EPS of one company to another. However in terms of monitoring the changes over a period of time, it enables the performances of the companies to be examined. Looking at all the companies together, it is apparent that although there have been ups and downs, generally the EPS of BA, Flybe and Ryanair have increased.
All three companies suffered at some point during 2006 and 2007. But Virgin on the other hand has found the changes in EPS to be most volatile. With the highest EPS being 14.59p in 2006, the other years it has remained around 3.00p. For the first four years, easyJet saw a gradual increase in EPS; however in 2008 this fell slightly to 22.10p. Therefore comparing all the companies shows that apart from Virgin, the other companies are increasingly growing in profit performances. However it must also be considered that whilst some companies may have increased the number of shares issued, others may have reduced the shares or remained constant.
Price/Earnings Ratio: Considering that the P/E ratio allows investors to interpret the valuations of each share in comparison to the net income received, it can be said that a high P/E ratio indicates that one share of a company is more expensive than that of a company with a low P/E ratio, consequently showing a current investor’s demand of a company share. When looking at the chosen companies, volatilities in the ratio can be seen, however when considering the two long-haul airlines BA and Virgin, it can be seen that overall Virgin has a higher ratio than BA. The P/E ratio of BA has been following a unstable trend of decline from 2004 to 2008, whilst Virgin has remained relatively stable in the region of 20, aside from fluctuations experienced in 2004 and 2006, pning from 204.08 to 6.85 respectively.
When looking at the budget airlines it can be seen that the P/E ratios for all three companies have been much lower. Although all three companies have been showing declining trends, Flybe has suffered the most with ratios falling to negative figures in 2006 and 2007. Ryanair and easyJet on the other hand have been able to stay in the region of 10 – 20, however have fallen behind Virgin who overall has had the most consistently high P/E ratio, as one of the larger and more established companies, Virgin’s performance in terms of P/E shows that it is performing well. But like Virgin, BA has not followed the pattern; instead Ryanair is leading BA with a higher cumulative P/E. Therefore in general all five companies have shown that there is a demand for the company shares to some degree.
Dividend Yield: When looking at the dividend yield for the five chosen companies, it can be seen that all five companies have not been paying out dividends throughout the last five years; however for BA the dividend yield in 2004 was 2.10%, but the subsequent years showed no dividend payout. However this does not mean that the companies were not operating effectively. One reason for not paying out dividends may be due to the companies reinvesting their funds instead of making dividend payments; this subsequently enables a company to increase their market value by undertaking new projects, purchasing new assets and acquiring new companies. Although paying dividends gives the investor a stream of income, it is unstable in terms of fluctuating dividend distribution from year to year. This can adversely affect the price of a security in the company. Therefore by eliminating dividends, all five companies are able to invest in other areas.
Industry Specific Ratios Ratios which are related only to the aviation industry must all be looked at together. Looking at the Available Seat Miles and Revenue Passenger Miles, the operating capacity of the airlines can be distinguished by considering the number of seats available for purchase, this is then further analysed by considering the number of seats which are actually occupied by revenue paying passengers. Expressing these ratios as percentages makes comparisons between the airlines more appropriate, due to the differences in the sizes of the companies.
Looking at the overall performance in relation to the airlines’ capacity, BA has been consistent throughout with ASM lying between 74.43% and 76.70%, this has continued with RPM, although it was 66.48% in 2004, from 2005 onwards it has been relatively stabilised to stay in the region of 55%, showing customer loyalty. So comparing the RPM and ASM in terms of the load factor, it can be seen that of the available seats around 75% of the seats have been purchased, with consistency over the years. The same trend has been followed by easyJet, with the ratios remaining constant over the last five years, the load factor for easyJet however showing that there are more revenue paying passengers for the amount of available seats. Ryanair on the other hand, although has similar ASM and RPM to the other two companies, has a load factor which has been decreasing over the last four years, but is still relatively high at 80.63%.
But unlike the consistency experienced by the other companies, Virgin and Flybe have seen unstable results. With decreasing ASM and unpredictable RPM ratios, the load factor for Flybe has seen a gradual increase to 68.32% in 2008. Virgin however has had irregular load factors throughout the last five years.
The load factor can be used as an important measure of efficiency, but it does not take into consideration the pricing and profitability at which the capacity is sold. It also assumes that the airlines’ are fully utilising their aircraft in terms of kilometres flown.
Taking all this in to consideration it can be said that some companies have suffered due to falling customer demands, whilst other have benefited from this in respect of cheaper travel. The companies which have performed well in comparison to the others are easyJet and Ryanair, both low cost carriers, with Flybe seeing an increase in its load factor, whereas Virgin has experienced instability.
Ratios are a useful tool, if used in the correct context; they provide information on a company’s overall economic situation, giving values which are easier to interpret than that of financial statements alone. They facilitate the understanding of how certain variables could influence each other, helping to determine a range of financial aspects. By studying the relationships of various financial factors in a company, a trend can enable a detailed analysis to be prepared.
However there are disadvantages to this method if not used correctly, with limited comparability, there is an inability to correctly analyse the relevance of a ratio. Companies within different industries apply different accounting policies, which can therefore lead to distortions to the analysis. Some industries, such as the aviation industry, may be highly cash generating, which would require the analysis to be interpreted with regard to this additional information. When considering the limitations, some scepticism must be applied to using ratios. With the use of historical data and qualitative data ignored, the results obtained can be misleading. A single ratio can not provide a complete picture of performance, and factors such as cost and inflation can distort the information collected. (Universal Teacher 4u, 2009)
Therefore other measures must also be considered in order to get a detailed understanding of the performance of the chosen companies. Determining the Best and Worst Company To enable one to determine the performances of the chosen companies, which will in turn allow for establishing the best and worst company, the current state of the aviation industry and UK economy as a whole must be considered and analysed.
With the problems of sub-prime mortgages in the US causing a global credit crisis in August 2007, recession filtering into the UK economy was ominous. In January 2009, after months of speculation, recession was finally confirmed when statistics showed a decline in GDP, showing negative growth in the UK for two consecutive quarters. (BBC, 2009)
This ongoing decline in the economy has put many sectors under financial strain, and this has had a knock on effect on other sectors, one being the aviation industry. This reduction in income has meant that consumer spending has also followed suit, which is proving to be extremely damaging to businesses. With a fall in the number of passengers by 8% in December 2008 from 2007, many airlines have been grounded and routes cut as they struggle with the decreasing passenger numbers. (Telegraph, 2009)
A fall in passengers has for many airlines led to drastic cuts in an attempt to save costs wherever possible, as revenues continue to go down, with more than 30 airlines already going bankrupt as a result of the recession in the past 12 months. (Business Week, 2009) After considering the economy as a whole and how the UK’s recent entry into a recessionary climate has affected the aviation industry, the position of the chosen companies in respect of this must also be considered. When looking at the ratio analysis conducted for the companies, they were looked at in terms of their individual performance, but to determine the performances of the companies in unison, a ratio comparison of all five companies can be done. (Appendix 8.2)
When looking at the liquidity ratios, it can be seen that where Ryanair is excelling, by employing current assets effectively so as to cover the current liabilities, British Airways is not doing as well as the other companies, scoring the lowest in terms of liquidity. However when looking at the efficiency ratios Ryanair is the worst performing in terms of asset turnover, with Flybe generating the most in terms of the assets it has employed. There could be many reasons for this, where Ryanair may have an extensive range of fleets, which were not fully utilised, Flybe may have a small fleet, which were utilised fully.
When looking at the profitability ratios of all five companies it can be seen that Ryanair is again scoring the highest, with high net profit margin and ROCE, its performing exceptionally well in terms of the revenue generated and the effective use of the capital employed. But Virgin however is performing the worst in terms of profitability over the last five years. The reason for this maybe because of the low-cost carrier hype, with many customers now choosing to fly with budget airlines as recession continues to affect both consumers and businesses. Since the economic downturn, many airlines such as Qatar Airways have had to reduce the number of business flights as passengers are opting for economy seats instead. (RTE Business, 2009)
Considering the solvency of the chosen companies, it can be said that Flybe is at the most risky position in terms of gearing. With much higher debt to equity ratios in comparison to the other companies, it has been struggling with finances throughout the last five years; on the other hand easyJet has been the most effective, with the lowest gearing throughout the last five years. This gearing issue can be seen in its EPS ratio, with Flybe having a very low EPS throughout the last five years, along with Virgin. Amid plans to float their shares on the stock market, Flybe’s poor performance on gearing is risky and can be very unattractive to potential shareholders. However as BA is the UK’s largest long-haul carrier, it has performed the best in terms of its consistency by having very high EPS over the last five years, whereas Ryanair and easyJet, have both been performing equally as well as each other.
When looking at the aviation industry specific ratios, it can be therefore seen that, in terms of passengers flown and revenue generated, easyJet has performed extremely well, followed closely by Ryanair, efficiently using the seats available and generating revenue paying passengers to fill them. However Flybe has performed the worst out of the five companies.
When looking at all the ratios together, it can be seen that overall easyJet is performing most productively with Ryanair being second out of the five companies. The reason for easyJet performing better than the two long-haul carriers BA and Virgin maybe due to the cost savings which are experienced by customers when flying with the low-cost airlines easyJet and Ryanair. Flybe however is performing the worst, and this could be due to the fact that they are struggling to compete with the two large low-cost carriers’ easyJet and Ryanair, whether this is in terms of competing with prices, or other costs associated with the airline.
But using ratios alone to determine the success or failures of a company does not provide users with enough relevant information. Further analysis is required into the non-financial aspects of a company, considering the internal and external factors which could affect it. By using a SWOT analysis, these additional factors relating to the individual companies can be explored. A SWOT analysis is a planning method which is implemented when consideration is required about a proposed project or business venture. It enables the users to evaluate the Strengths, Weaknesses, Opportunities and Threats related to a specific objective. It enables the identification of the internal and external factors which may be favourable or unfavourable in order to achieve the set objective. (Tutor 2u, 2009) In order to determine the strongest and weakest company, a SWOT analysis for each individual company has been compiled (Appendix 8.3.1 – 8.3.5)
The aviation industry is global in its day to day dealings, and even with the recession becoming an international crisis, there are numerous strengths which the companies in the industry possess. BA and Virgin are the two largest international scheduled airlines operating from the UK. With years of aviation experience, both the long-haul carriers are better equipped in terms of exceptional customer service experience. Both airlines also provide Club house experiences with fully flat beds in their first class cabin, and through code sharing, where one airline puts its identification code on the flights of another airline and operates them on their behalf, and airline alliances they are able to provide an extensive range of destinations to fly to.
The low cost-carriers on the other hand have the advantage of low costs, through ‘virtual’ administration, from online tickets to check-ins; they are able to pass these low cost benefits on to their customers through very competitive flight prices. In this respect, the long-haul airlines have the advantage of being the largest international scheduled airlines; however the low-cost carriers easyJet and Ryanair are the largest budget airlines, who in the recession will benefit from being able to provide low-cost services.
The weaknesses of the companies help to determine the problems which are being faced, especially considering the current economic climate. The main issue faced by the long-haul carriers BA and Virgin is the increased competition from the low-cost airlines, where easyJet, Ryanair and Flybe are able to provide low-cost package holidays; BA and Virgin may be unable to cut their costs as low as the budget airlines, hence losing potential customers to the budget competition.
As the better established airlines, BA and Virgin are better facilitated to be able to survive the recessionary period, with stable relations with customers and suppliers. Low-cost airlines such as Flybe, who are the more newly established airlines, could also face difficulties in maintaining low prices in times of recession as costs are initially high for new companies. The low-cost carriers are also faced with the fact that they do not provide transatlantic services, and unable to provide such a service means that customers that seek to fly internationally will not be able to use their services.
But considering the opportunities which are available to the companies, the three low-cost carriers Ryanair, easyJet and Flybe can all branch out into the low-cost transatlantic market, which has not been explored yet. In doing so, during the recession the low-cost carriers will be able to provide a low-cost service to compete with the long-haul carriers. BA and Virgin also have many opportunities to contend with as the UK slips further into recession, by looking to open hubs in foreign markets, they are well established enough to be able to capture the markets where other airlines maybe suffering. However this will be a long term goal in order to be beneficial.
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