Financial Report Analysis of British Airways

Running Head: CORPORTATE FINANCIAL MANAGEMENT
0
CFM
Financial Report analysis of British
Airways
(Student Details: )
1/15/2020

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Part A
Executive Summary
In this era, business world has become more challenging and competitive than it was before
because of the advancement of the modern development of technologies, modern economic
recessions. The major aim of this report is to produce a financial analysis of the company
British Airways Plc. (BA) over the last past years. It has been found that, BA is the UK’s
leader within airline operations as it has faced a hike in competition during the last 10 years
while contending an improved amount of the market share shared by so many modern firms.
The report has been carried out for evaluating the financial-performance of the chosen firm
with ratio analysis. In addition to that, the report has used risk profile analysis while
exploring the different risks sources as well as actions taken by the company for mitigating
those risks for recommending best to the company’s future. Besides, BA has a goal of
maximization of their shareholders’ wealth which can be achieved by understanding financial
analysis. It is clear that in order to achieve such goal company require to create several
competitive advantages in the modern airline market. Thus, through implementing proper
strategies BA can always stay on the correct track of the business all across the globe. Thus,
this report has been written to find out which financial strategies and methods should be used
by BA to be fit in the today’s airline market as a successful organization. With the help of
analysing BA’s financial performance, risk profile, dividend policy, optimality of capital
structure selections and prospects by using valuation model, this report has been able to
analyse the stability as well as current market position of the BA within recent airline
industries.

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Contents
Part A.........................................................................................................................................1
Executive Summary...................................................................................................................1
British Airways..........................................................................................................................3
Introduction................................................................................................................................3
A brief description of the company............................................................................................4
Corporate Governance...........................................................................................................4
Financial performance............................................................................................................5
Risk profile.............................................................................................................................8
Optimality of capital structure choices................................................................................10
Dividend policy....................................................................................................................10
Prospects and fair valuation of the firm using a valuation model........................................11
Conclusion................................................................................................................................12
Part B........................................................................................................................................13
Introduction..............................................................................................................................13
Capital budget calculations......................................................................................................13
Conclusion................................................................................................................................16
References................................................................................................................................17
Appendix..................................................................................................................................20

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British Airways
Introduction
The paper is contained an analysis of the financial reports of British Airways. The company
belongs to the airline industry which is an ever-changing industry all across the globe. It has
been found that globalization, market conditions and novel technologies have given all
support to the airline industry of this era. Apart from this, it has been seen that the airline
industry is being protected by so many international and national policies and agreements.
The chosen industry is a competitive market where comfort and cost are always balanced for
greater customer satisfaction as well as revenue. The international airline market is hugely
cost-sensitive because of the competitors, fuel rate surge and customer demands (Chang et
al., 2019).
In general, British Airways Plc. (BA) is the leading airways in Europe and Britain. Moreover,
BA is the largest airways of the UK while also being the leading luxury airways of the whole
world. It is worth knowing that BA is operating their major businesses in Gatwick, Heathrow
and London (IAG, 2019). Apart from this, the airline company BA is serving more than 1000
destinations all over the 500 nations. In addition, BA is the alliance member while serving a
network of more than 600 airports across the globe. The BA was first founded in 1974 and
later than spent millions of dollars on launching a new plan as well as strategies for serving
global customers in the best possible way. In this report, financial analysis is going to be
demonstrated being an effective way of evaluating the company’s performance prior making
decision in business (Zenwealth.com, 2019).
Financial analysis is often used by creditors, stakeholders and investors worldwide. Thus, it
has been found that there is a need for investigating the financial statements of the airline
company BA (Yahoo Finance, 2020). As we know, several methods can be used for doing
financial analysis whereas most common methods are common size analysis as well as ratio
analysis. It is because, both the aforementioned analyses provide a clear image of the
organization’s market position while considering its position post one year of operation
(British Airways, 2020). Apart from this, financial analysis of the BA will state stability as
well as the health of the company in the airline industry. However, there is a limitation of
financial analysis suggesting that info and data used in this analysis are majorly based on

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external info offered by the organization. Thus, this financial reporting analysis is containing
all possible desirable characteristics of BA while summarizing key findings in the later
section.
A brief description of the company
In the financial reporting, the chosen organization for the detailed analysis is BA which is a
leading airline company currently. The BA is based on Heathrow Airport of the UK and it is
the largest global airline of the native country. In this context, this company deals with both
international and domestic carriage of freight, mail and ancillary services. The company was
privatized in the year 1987 (Tsui et al., 2019). It is known as the UK’s biggest global
scheduled airline as well as the globe’s leading international airline services. It is worth
knowing that BA’s hub of business in London and specifically at London City and Heathrow,
Gatwick airports. According to the IAG reports, BA is indulged into codeshare, joint business
and franchise partners while operating as the most extensive scheduled airline network of the
world. Apart from this, BA is typically operating as the founding member of the Oneworld
alliance. The BA’s member airlines presently serve around 1000 destinations all over the 150
countries. During the year ended 31st December 2018, BA operated on average 294 aircraft
while carrying around 46 million consumers to all across 200 destinations worldwide (Yahoo
Finance, 2020). Moreover, it has been observed that BA employs an average of 42,000
people worldwide. In addition to that, BA’s vision is to become the airline of choice with
personalized airline services, unique British style, exceptional stability and a digital mindset.
Recently, the airline company has celebrated its 100th anniversary on 25th August 2019. In
this way, the chosen airline is capable to trace their origins back to the birth of civil aviation
(Tsui et al., 2019).
In the context of management review, it can be said that the total revenue of the BA was
£13,021 million, up 6.1% (2017: £12,271 million). It has been found that BA always invests
in the processes for improving cost competitiveness, customers’ experiences, capital
efficiency, reliable and safe operations, and developing employees. In this context,
connectivity and inflight connectivity are the qualities that are emerging as an increasingly
critical factor for the modern passengers and it is vital for driving BA’s passengers' loyalty
(Yahoo Finance, 2020). In addition to that, during 2018, BA has welcomed the millionth
customer with the first wing at the Terminal 5. Apart from this, BA has recently opened

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innovative and completely new lounges in Aberdeen, Rome and New York’s JFK Airport
(Cashflow, 2019).
Corporate Governance
From the corporate governance perspective, BA is highly committed to high standards of
sustainable practices and quality standards. Generally, corporate governance includes a set of
connections that are focusing on a business’s investors, panel, management and stakeholders
(Anum, 2018). The BA is well-managed and it shows a decent corporate governance level.
Moreover, BA’s corporate governance is a combination of several processes, practices and
rules of the company that are directed as well as controlled by the company. It has been found
that the corporate governance of the company depends on the policies in relation to society
and the environment of an organization. Thus, in relation to BA, policies available in the
annual report have been assessed which explained well-planned strategies and planning in
favour of the environment and society (Beck et al., 2010).
Financial performance
In this context, generally financial performance is known as the act of accomplishing
financial activities. Apart from this, financial performance is used to analyse the degree to
which financial objectives have been achieved (Assetratio, 2019). Thus, financial
performance is the process of measuring the results of an organization’s policies as well as
operations into monetary terms. In this context, financial statements are the formal records of
the financial activities along with the position of any business, individual or any other entity.
In a financial performance, all the relevant financial information is available in a structured
manner which is well-illustrated. There are some basic measures of financial performance
include accounting ratios. In this financial reporting, ratio analysis will be used for showing
the financial performance of the BA Company (British Airways, 2020). Here, financial ratios
are the major indicators of the financial performance of the BA. Thus, financial ratios are
getting derived by using the three statements including cash flows, income statement and
balance sheets. In this context, financial ratios will be helping for analysing the BA’s
liquidity, financial stability, assumed risks and profitability in an effective manner (Baxter,
2019).
British Airways Financial Ratio Analysis for the years 2014-2018
Description Formula British Airways Financial Ratio Analysis

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2018 2017 2016 2015 2014
Profitability analysis
Net margin
Net
profit/revenues
10.34
% 8.77% 5.18% 5.39% 6.00%
Return on equity Net profit/Equity
16.62
%
13.22
%
558.15
%
80.91
%
61.96
%
Liquidity analysis
Current ratio
Current
assets/current
liabilities
1.08 1.16 1.25 1.35 1.20
Quick Ratio
Current assets-
Inventory/curren
t liabilities
0.14 0.33 0.33 0.38 0.33
Efficiency analysis
Receivables collection
period
Receivables/
Total sales*365
14.21 38.16 30.12 30.39 28.34
Payables collection
period
Payables/ Cost
of sales*365 46.62 47.69 43.19 41.01 42.9
Asset turnover ratio
Total sales/ Total
assets .86 1.01 1.05 1.02 .91
Solvency
Debt to Equity Ratio Debt/ Equity 285.24 223.11 101.62 13.76 10.29
Debt to assets
Debt/ Total
assets 0.997 0.996 0.990 0.932 0.911
This financial ratios analysis of British Airways expresses so many changes to the whole
valuation of the company during the last years. For instance, profitability ratios of the
company always explain the position of the net profit in the company. In this case, two
rations include return on equity and net margin are used for analysing the profitability of the
Company BA. From 2017 to 2018, BA has increased its net profit due to which company’s
profitability, as well as valuation, has been increased (Ball et al., 2014). The ratio of net
margin has been increased to 10.34% from 8.77% which is showing a good hike in the

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company’s valuation. Moreover, the return on equity ratio has been increased to 16.22% from
13.22 % that is showing an enhanced valuation of the chosen firm. Furthermore, the liquidity
position of the company always used to express the quick and current ratios (Burghouwt,
2016). In this case, both ratios are competitive hence BA has managed a balance between
their investment and risks (Yahoo Finance, 2020). Here, the current ratio has been used to
measure whether the BA had adequate resources to meet their short time obligations. This
ratio analysis has successfully compared BA’s current assets with their current liabilities. In
general, current ratios are considered healthy in the range of 1.5-3 hence BA’s current ratio is
1.08 and 1.16 for the years 2018 and 2017 respectively. This ratio analysis is clearly
indicating that BA is having current assets equal to current liabilities. It means that BA is just
able to cover its short-term obligations not more than that. Thus, the company needs to
expand its resources and assets effectively so that the current ratio can be further increased
which is suggested after the liquidity position analysis of British Airways. In addition to that,
the quick ratio has been found as 0.32 and 0.52 for the years 2018 and 2017 respectively.
Here, the quick ratio is that financial ratio which is often used to compare the total available
cash with cash equivalents with the current liabilities. This is also known as acid-test ratio,
used to measure the capability of BA for using their cash as well as quick assets for further
extinguishing their current liabilities on an immediate basis (Yahoo Finance, 2020). In the
given case, the quick ratio is not so good hence BA needs to put the focus on quick assets of
the company. It is because an organization having a quick ratio of less than 1 sometimes not
able to effectively pay off its current liabilities in the context of shier duration. On the other
hand, if BA will enhance their quick assets then the quick ratio will get improved and the
higher quick ratio will allow British Airways to instantly get rid of their current liabilities in
an effective manner. Based on acceptable quick ratio guidelines, BA needs to improve its
quick ratio by investing and expanding more on resources as well as quick assets immediately
(Droog, 2018).
Now, switching to efficiency analysis, three ratios include asset turnover ratio, receivables
collection period, and payable collection period have been calculated for the chosen company
BA. In this context, the efficiency ratio is generally utilised to analyse whether the company
is utilising its assets effectively or not (Mak et al., 2009). In addition to that, efficiency ratios
can also calculate the turnover of payables, receivables, the usage and quantity of equity, the
repayments of liabilities as well as the use of machinery and inventory. As there is a decline
in the efficiency ratios from the year 2017 to 2018, thus the company is having decent