Financial Reporting and Analysis of Ryanair and Air Arabia

Financial Reporting and Analysis
Name of the Student
Name of the University
Author’s Note

Executive Summary
The study has performed financial comparison of Ryan Air and Air Arabia. The methodology
used in the report is a range of profitability ratios, liquidity ratios, efficiency ratios and gearing
ratios. The study has also used the technique of horizontal and vertical analysis for a more vivid
description of changes in the key areas of income statement and the balance sheet. This section
of the study has included the investigation of five main areas of financial statement ranging from
total Noncurrent assets, total current assets, total current liabilities, total long-term liabilities and
total shareholder. The overall evaluation has suggested that when comparing financial
parameters such as profitability, leverage and loans to capital employed Air Arabia performed
better than Ryan Air. When the income statements of both the airlines are compared for three
years, it could be stated that lower revenue fluctuations are observed in Ryanair and its
performance is deemed to be more consistent than Air Arabia. This is mainly owing to a range of
factors such as the operations of Ryanair in a stable geopolitical environment, favorable brand
image in the market. On the other hand, the regions of Air Arabia are reliant on the fuel sector
and hence, it is highly sensitive to changes in the prices of fuel. However, when parameters such
as efficiency are considered, Ryan Air has clearly excelled in performance. Some of the major
recommendations for improving the financial perspective is identified with optimizing the costs
incurred for the airlines. In addition to this, the achievement of targets is related to plane leasing
cost and seat revenue. This can be improved by standardizing the models of the planes used by
both the airliners.

Table of Contents
Introduction..........................................................................................................................3
Profitability Ratios...............................................................................................................4
.............................................................................................................................................6
Efficiency Ratios.................................................................................................................6
Liquidity Ratios...................................................................................................................6
Gearing Ratios.....................................................................................................................7
Horizontal Analysis (Please use 2015 as the base year)......................................................8
Vertical Analysis.................................................................................................................9
Evaluation of Business Performance of Air Arabia..........................................................10
Structuring of the Airline...............................................................................................10
Identification of business success measured in the airline industry..............................10
Focus most applicable to the airline..............................................................................11
Examining financial and non-financial measure of performance..................................12
Using direct competition as a means of evaluating the performance............................21
Comparative Analysis between the airlines.......................................................................21
Conclusion.........................................................................................................................23
Recommendations..............................................................................................................24
References..........................................................................................................................26
List of Appendix................................................................................................................32
Ratio Analysis................................................................................................................32
Horizontal Analysis.......................................................................................................36
Vertical Analysis...........................................................................................................38

Introduction
The report presents a comparative analysis of two chosen airlines. It investigates their
financial positions in the aviation industry of Europe and the Middle East. The two airlines that
have been chosen for this paper include Ryanair and Air Arabia. Ryanair is a low-cost Irish-
based airline established in 1984 having primary operational bases at London Stansted and
Dublin airports. It has become the largest European airline in 2016 in terms of passengers carried
and more precisely, it has carried more international passengers than any other airline
(Ryanair.com 2018). On the other hand, Air Arabia provides offers global commercial air
transportation, passenger transport, cargo services and aircraft rental. The airline is involved in
providing its passenger transport services via buses, cars, air travel and limousine to 130
destinations in Africa, Europe and the Middle East (Airarabia.com 2018). Although the financial
year ends for Ryanair and Air Arabia fall on different times during the year, for standardization
purposes, this report assumes the historical periods (2015-2018) for each organization to be the
same.
The analysis looked comparatively at three significant financial ratios, which include
profitability ratio, liquidity ratio and efficiency ratio for the two airlines. The business strategies
are evaluated as well by using the balanced scorecard approach for understanding the sustainable
ground for future prosperity. This analysis would assist the stakeholders in undertaking decisions
regarding the financial conditions of the airlines.
Profitability Ratios
Net and Gross Profit Margins
According to the profitability ratio table provided below, Ryanair’s net and gross profit
ratios follow a similar trend. The year 2016 yielded the highest ratios although it did not yield

the highest revenue. From the notes attached to the 2016 Ryanair financial report, this is credited
to the fact that Ryanair sold its holding in Aer Lingus in that year. This led to an increase in the
gross and net profits. Excluding this fact, Ryanair continued to show a steady growth in revenue
for the 3- year period. This was due to fuel prices going down worldwide while Ryanair’s market
share was getting bigger due to expansion and customer focus through launching the “Always
Getting Better” program.
Ryanair’s revenue in 2017 is higher than the previous year but this increment is marginal
when compared to the growth in revenue between 2015 and 2016. 2017 was a difficult year for
the aviation industry in Europe due to different terror attacks in the region and large charters
taking a large market share in Portugal and Spain, Ryanair’s lead markets (Ryanair-FY2017-
Annual-Report.pdf, 2018).
In contrast to Ryanair, Air Arabia has its worst financial performance within the 3-year
period in 2016. The drop in fuel prices negatively impacted the Middle East as it is an oil
producing region. The price drop led to a general regression in the region’s economy and
specifically hit the aviation sector, as it made it more challenging to obtain better yields per unit.
Added to this was the overcapacity of the Middle East’s aviation market when compared to the
demand on air travel. The Middle Eastern carriers continued their fleet expansion during difficult
economic times based on previous demand forecasts (Air Arabia Annual Report 2016, 2017).
This is reflected on Air Arabia’s financial statements for the year 2016 as its revenues went
down while its assets kept growing.
On the other hand, 2017 was a good year for Air Arabia as it succeeded in achieving an
all-time record profit. Although the revenue for this year was lower than that of 2016, Air Arabia
managed to substantially lower its costs thus resulting in bigger gross and net profits.

Return on Equity
Return on equity denotes the portion of return that an organization makes from the
investment of the shareholders (Barr and McClellan, 2018). Similar to the previous Ryanair’s
(ROE) was at its highest in 2016. Along with growth in revenue and in profit, 2016 showed a
decrease in equity for Ryanair due to the sale of its shareholder equity in Aer Lingus. According
to csimarket.com, the average ROE for the airline industry falls at 23.3%. Ryanair has recorded a
higher than market average ROE for all the 3 years.
For Air Arabia, 2016 is again the year with the weakest performance. Reasons for this are
discussed above. The ROE values for Air Arabia fall below the industry average. This could be
attributed to the fact that Air Arabia has been in existence only since 2003 and still relies heavily
on the capital invested rather than the investments from equity. Whereas in Ryanair 30 years of
successful operations means that it can rely less on capital invested and is thus is able to generate
more income from investments made on shareholders’ equity.
Return on Capital Employed (ROCE)
Return on capital employed is used for illustrating the ways through which an
organization uses its long-term investments for generation of income (Bekaert and Hodrick,
2017). Although Ryanair has increased market share, Ryanair has not been able to use its long-
term investment supplies for generating income due to minimized return on capital employed.
On the other hand, the ratio has remained stagnantly low for Air Arabia in all three years due to
lower market share.

Profitability Ratios:
Particulars 2017 2016 2015 2017 2016 2015
$m $m $m $m $m $m
Profit for the year A 1316.0 1559.0 867.0 631.0 490.0 511.0
Revenue B 6648.0 6536.0 5654.0 3739.0 3778.0 3826.0
Total Assets C 11990.0 11218.0 12185.0 12964.0 12513.0 11399.0
Total Equity D 4423.0 3597.0 4035.0 6036.0 5443.0 4962.0
Gross Profit I 1856.0 1753.0 1277.0 349.0 262.0 366.0
Capital Employed J 1694 1452 2396 993 559 282
Net Profit Margin E= A/B 19.80% 23.85% 15.33% 16.88% 12.97% 13.36%
Return on Equity (ROE) F=A/D 30% 43% 21% 10% 9% 10%
Return on Capital Employed (ROCE) G=A/J 78% 107% 36% 64% 88% 181%
Gross Profit Margin H=I/B 28% 27% 23% 9% 7% 10%
Ryanair AirArabia
Efficiency Ratios
The efficiency ratios that have been considered for both airlines include fixed asset
turnover ratio, total asset turnover ratio, debtor turnover ratio and revenue per passenger
kilometers (Refer to Appendix for detailed calculations). Asset turnover ratio denotes the
amount of revenue per unit value of assets used. A higher ratio is always favorable for an
organization, since it implies that the organization is making more money from every asset
utilized (Brigham et al. 2016). Despite the fact that both the airlines have lower asset turnovers
because of operating costs like additional security measures, Ryanair has recorded slightly
greater asset turnover ratio. This describes that Ryanair has been able of generating additional
money than Air Arabia. On the other hand, debtors’ turnover ratio denotes the amount of time
taken by an organization in collecting lent amounts from the debtors (Buehlmaier and Whited
2018). For both Ryanair and Air Arabia, the amounts are collected from the debtors at almost
same rates; however, Air Arabia has been collecting amounts from the debtors at a slightly
increased rate. Finally, in terms of revenue per passenger kilometers, Ryanair is observed to be
placed in a favorable position, as it has greater market share and international reputation.

Liquidity Ratios
For analyzing the liquidity position of Ryanair and Air Arabia, the two liquidity ratios
that have been taken into consideration include current ratio and cash ratio. In the words of
Edwards (2014), current ratio implies the ability of an organization in transforming its assets into
liquid money. The standard current ratio is considered to be 2. In case of Ryanair, the ratio has
fallen from 1.72 in 2015 to 1.43 in 2016; however, it has increased to 1.56 in 2017. On the other
hand, for Ryanair, the ratio has slightly increased from 0.24 in 2015 to 0.25 in 2016 and there is
further slight increase to 0.27 in 2017. This implies that Ryanair has performed better in this
front by being able to convert its assets into cash for covering short-term liabilities rapidly. On
the other hand, Air Arabia has significantly lower current ratio signifying that it does not have
sound performance.
As commented by Erdogan, Erdogan and Ömürbek (2015), the cash ratio signifies the
ability of an organization in paying off its short-term liabilities with cash and cash equivalents.
More precisely, this ratio denotes cash and cash equivalents as a percentage of current liabilities.
In terms of cash ratio, the trend is observed to be increasing for both the airlines, as they have
managed to increase its cash base over the years.
Gearing Ratios
For analyzing the financial leverage position of Ryanair and Air Arabia, the three ratios
that have been taken into account include debt-to-equity ratio, debt ratio and equity ratio. As
stated by Finkler et al. (2016), debt-to-equity denotes the percentage of financing, which comes
from investors as well as creditors. When the ratio is higher, more bank loans are used than
shareholder funds. The ideal debt-to-equity ratio is considered to be 1 (Frias‐Aceituno,
Rodríguez‐Ariza and Garcia‐Sánchez 2014). In this case, the ratio for both the airlines has been