Recent Developments in International Finance and its Impact on British Airways

This article discusses the recent developments in the international financial environment and their impact on British Airways. It covers topics such as risk management strategy, sources of finance, dividend policy, and financial performance analysis. The article also provides an overview of the current financial situation of British Airways and its future prospects.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student
Name of the University
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Table of Contents
Introduction:..........................................................................................................................................2
Recent developments in international financial environment & its impact on British Airways:............2
Risk management strategy:....................................................................................................................3
Sources of Finance:...............................................................................................................................4
Debt and Equity:...............................................................................................................................4
Dividend Policy:................................................................................................................................5
Financial Performance Analysis (Ratio Analysis):................................................................................5
Profitability Ratios:...........................................................................................................................5
Liquidity Ratios:................................................................................................................................7
Efficiency Ratios:..............................................................................................................................9
Investment Ratios:...........................................................................................................................11
Conclusion:..........................................................................................................................................13
References:..........................................................................................................................................15
Appendix:............................................................................................................................................17

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Introduction:
British Airways Airline is the flag carrier and it is regarded as the UK’s largest airline
on the basis of the size of its fleet. It is one of the world’s leading premium airline company.
The company has the principle business place at London and has the significant business
existence at London City Airports, Heathrow and Gatwick. During the year 2011, British
Airways merged with the Iberia to form an International Airline Group (Iairgroup.com 2019).
As the part of joint business with IAG, British Airways operates as one of the most
widespread international airline schedule. British airways is regarded as the founder of one
world alliance, whose member airlines provides services to greater than 1000 destinations in
more than 150 nations.
During 2017 the company announced a five year deal of £4.5 billion investment
programme so that it can enhance the experience of customers in all its cabins (Iairgroup.com
2019). In the upcoming five years the company aims to introduce 70 more aircrafts for
passenger services. British airways is also working to enhance its services and segmentation
in order to boost its sales revenue. The report would address the recent development in the
international financial environment that have impacted the performance of British Airways.
Special emphasis will be paid on the sources of finance and dividend policy of British
Airways. An in depth ratio analysis will be performed to assess the financial performance in
terms of profitability, liquidity, efficiency and investment.
Recent developments in international financial environment & its impact on British
Airways:
The two recent development in the financial environment that have created an impact
on the British Airways is the weakening of Sterling Pound and the negative movements of the
pension assets.

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Weaker Pounds: Financial factors such as the weakening of sterling pound have created a
impact on the British Airways reported revenues. Furthermore, weaker pounds have
contributed to the effect of fuel hedging activities that have created a negative impact on the
operating profit of the company (Srovnalikova and Razinskaite 2017). The sterling weakness
had resulted in a £145 million blow to the operating profit of the company in the quarter
ending month of September. As a result of weakness in the pound, British Airways operating
profit before exceptional items have come shy of the company’s anticipations as it fell by 3.6
percent to £1.2 billion in the third quarter, a fall from £1.25 billion for the similar period in
the last year. These results were impacted by the tough operating environment with the
significant effect on the currency (Broadbent and Policy 2017). The volatility in the sterling
pound have created a material impact on the operational results of the British Airways.
Negative movements in pension assets: Another factor that has impacted the financial
performance of the British Airways is the negative movements in the values of the pension
assets and financial returns from these assets which have increased the pension deficit. The
deficit in the pension funds is sensitive to the small change in the bond yields (Castle 2019).
Due to the negative movements in the pension assets there is an environment of volatility in
the NAPS schemes and resulted in the funding deficit of £2.8 billion.
Risk management strategy:
The company is exposed to financial risks relating to foreign exchange and fuel price.
The potential risks and the risk management strategy is given below;
Foreign exchange and slow moving cash: The Company is open to the risk relating to
currency on its income, purchases and borrowings in overseas currencies together with the
currency depreciation of cash that is held in the monies apart from the airline’s domestic
currency (sterling) (Hameed and Rose 2018). The company minimises the risks whenever

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possible by holding cash in sterling however the exchange control is few markets from time
to time delays the translation and deportation of the funds. Upon such deferrals, the risks are
mitigated based on the assessment of commercial policy.
Fuel Price: Instability in the price of oil and petrol products may create a substantial effect
on the operational outcomes of the business. This kind of risks is partly hedged by the
company through the purchase of oil derivatives in the forward markets (Iairgroup.com
2019). The purpose of hedging program is to enhance the cash flow and profitability
predictability.
Sources of Finance:
Debt and Equity:
The sources of finance for the British Airways is the equity share capital and debt
capital. The equity capital comprises of common equity shares amounting to 996,016,317
euros, divided into 1,992,032,634 ordinary shares of the identical class and series having the
nominal value of 0.50 euro each. The company also holds the treasure shares and issued
capital which consist of 1,983,310,799 shares (Iairgroup.com 2019). The debt capital
comprises of large proportion of British Capital structure. The external borrowings, capital
lease obligations and commercial papers makes up the debt capital for the company.
Figure 9: Sources funds used by the British Airways

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(Source: As Created by Author)
Table 1: Table representing Debt Structure of British Airways
Source: (As created by Author)
Dividend Policy:
The dividend policy of British Airways involves paying out 25 percent of the
underlying profit after tax as the dividends. It also includes that if British Airways pays the
dividend to the IAG greater than 35 percent of the after tax profit then it would either offer a
scheme which would include the guarantee for 100 percent of the total amount beyond the 35
percent or the 50 percent amount as the added cash distribution (Iairgroup.com 2019). The
board of British Airways has also decided of not recommending the imbursement of final
dividend in relation to the year ended 31st December 2017.
Financial Performance Analysis (Ratio Analysis):
Profitability Ratios:
The profitability ratio helps in evaluating the capability of the business to produce
revenue in comparison to its spending and other costs related with the generation of profits in
a specific period (Khan 2015).

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Operating Profit Ratio: The operating profit ratio is the profitability ratio which evaluate
the total proportion of revenues that is made up of the operating profit (Macve 2015).
2016 2017
11.50%
12.00%
12.50%
13.00%
13.50%
14.00%
12.40%
13.74%
Operating Profit Ratio
Figure 1: Figure representing Operating Profit Ratio of British Airways
Source: (As Created by Author)
The operating profit ratio is representing a gradual rise in 2017 from the previous year
figures of 12.40% in 2016. The ratio have been positive which portrays a good pricing and
operational strategy. The company reported an operating profit of £1,680 million (2016:
£1,413 million) for the year in spite of functioning in the challenging business environment
that are characterised by the industrial actions, violent fuel prices and extreme weather
events. The company faces intense competition from the low cost carriers to develop its
operations. The financial factors namely the weakening of pound sterling have created a
positive impact on the operational proceeds of the company.
Net profit Ratio: The net profit ratio is regarded as the profitability margin which assess the
percentage of every dollar earned by a company ends up in a net profit by the end of year
(Weygandt, Kimmel and Kieso 2015).

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2016 2017
11.30%
11.40%
11.50%
11.60%
11.70%
11.80%
11.90%
11.80%
11.48%
Net Profit Ratio
Figure 2: Figure representing Net Profit Ratio of British Airways
Source: (As Created by Author)
The net profit ratio for British Airways represents a gradual declining trend in 2017
from the figures of 11.80% in 2016. Despite the sales have increased following the merging
with Iberia the operational expenses of the company has also increased particularly the
selling, general and administrative costs. The marginally declining outcomes can be justified
in terms of the exponential growth of the business in the last four years. Furthermore, the
impact of fuel hedging activity has also contributed to the fall in the reported outcomes.
Liquidity Ratios:
Liquidity ratios is referred as the class of financial metrics that is used to judge the
capacity of the debtors to meet its current obligations of debt without raising any external
capital (Trotman and Carson 2018). The current liabilities are assessed in respect of liquid
assets to evaluate the coverage of short-term debts in crisis.

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Current ratio: The current ratio is regarded as the liquidity ratio which assess a company’s
capability to meet its short term liabilities with the help of its current assets (Hoyle, Schaefer
and Doupnik 2015).
2016 2017
0.71
0.72
0.73
0.74
0.75
0.76
0.77
0.78
0.74
0.77
Current Ratio
Figure 3: Figure representing Current Ratio of British Airways
Source: (As Created by Author)
British Airways Airline is not higher than the current ratio thumb rule of 2:1 as the
current ratio for the company in 2016 and 2017 stood 0.74 and 0.77 respectively. In spite of
the ratio remaining below the thumb rule, the liquidity position of the company continues to
be strong with £2.8 billion of cash, cash equivalents and other interest-bearing deposits. The
figures represents that the company has sufficient ability of paying its creditors. The current
ratio of British Airways also sheds light on the overall position of debt burden as it has made
a net debt payment of £1.5 billion which reflects that British Airways has sufficient amount
of cash and cash equivalents to pay its liabilities.
Acid Test- Ratio: The quick ratio is regarded as the liquidity ratio which evaluates the
capability of the organization in paying its current liabilities when they fall due with the help

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of its quick assets (Nilsson and Stockenstrand 2015). Quick assets are usually referred to
those assets that can be converted into cash within a span of 90 days or during the short term.
2016 2017
0.69
0.70
0.71
0.72
0.73
0.74
0.75
0.76
0.71
0.75
Acid Test Ratio
Figure 4: Figure representing Acid-Test Ratio of British Airways
Source: (As Created by Author)
As evident from the graph above the quick ratio for British Airways is less than 1:1
during the year 2016 and 2017 which implies that if the short-term creditors makes the
request for immediate payments, the company may face the difficulties or may not have the
sufficient liquidity assets to pay them. This represents that British Airways also to some
extent is dependent on its inventories. British Airways does not has sufficient quick assets
that covers its total current liabilities, the firm however with the strong cash and cash
equivalents would be able to meet its quick debt obligations without selling its any long term
or capital assets.
Efficiency Ratios:
The efficiency ratio is mainly used to assess how well an organization is making use
of its assets and liabilities internally (Kanapickienė and Grundienė 2015). Organizations that

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are efficient has minimized its net investment in the assets and requires lesser amount of
capital as well as debt to be in operation.
Accounts turnover ratio: The accounts turnover ratio is regarded as the efficiency ratio
which assess the number of times a company can turn its accounts receivable in cash all
through the period of accounting year (Brigham et al. 2016).
2016 2017
22.05
22.10
22.15
22.20
22.25
22.30
22.35
22.40
22.45
22.19
22.42
Trade Receivables Period
Figure 5: Figure representing Accounts Receivables Turnover Ratio of British Airways
Source: (As Created by Author)
The accounts receivables turnover period for British Airways in 2016 stood 22.19
while in the financial year of 2017 it stood marginally high at 22.42. This implies that the
accounts receivable turnover period for British Airways averages 22 days. Businesses usually
have their preference of having the fund as quick as possible but without risking to lose its
customers (Weygandt, Kimmel and Kieso 2015). As a change, in case of British Airways the
accounts receivable turnover for the company is short and this can be the reason for a shorter
collection period. British Airways is better able to collect its receivable more frequently all
through the year and from the cash flow point of view this could be considered as highly

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efficient for the company. Sooner cash collections implies that the British Airways is able to
make use of its cash to pay the bills and other commitments more readily.
Total Assets Turnover Ratio: The asset turnover ratio is one of the efficiency ratio that
assess the capability of a corporation to create sales from the given assets by matching the net
sales with the average amount of total assets (Grant 2016).
2016 2017
0.68
0.71
Total Asset Turnover Ratios
Figure 6: Figure representing Total Asset Turnover Ratio of British Airways
Source: (As Created by Author)
The total asset turnover for the British Airways in 2016 stood 0.68 while it marginally
increased to 0.71 in 2017. The above stated graphs shows that the ratio is below the thumb
rule of 1 and it can be assumed that the company has not been using its assets more
efficiently.
Investment Ratios:
Investment ratios are used to judge the overall financial performance of the company
shares. In addition to this, the ratio is of high importance among the ordinary shareholders
and potential investors (Chandra 2017).

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Price Earnings Ratio: The price earnings ratio or the P/E ratio is regarded as the market
outlook ratio which figures out the market value of the stock in relative to its incomes in
association to its market price per share by the earnings per share (DeFusco et al. 2015).
2016 2017
20.00
20.20
20.40
20.60
20.80
21.00
21.20
21.40
21.60
20.49
21.38
Price Earnings Ratio (P/E)
Figure 7: Figure representing P/E Ratio of British Airways
Source: (As Created by Author)
The price earnings of British Airways reflects an important increase from the year
2016 to 2017. The ratio during the year 2016 stood 20.49 while in 2017 it gradually increased
to stand at 21.38 times. This result can be explained as the outcome of higher market price in
comparison to the earnings per share. The P/E ratio for the company is positive which implies
that the investors have greater confidence in the future of British Airways than in the
preceding years.
Dividend Yield Ratio: The dividend yield is regarded as the investment ratio which
measures the sum of cash dividends distributed among the common shareholders in respect to
the market value per share (Warren and Jones 2018).

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2016 2017
3.50%
3.55%
3.60%
3.65%
3.70%
3.75%
3.80%
3.85%
3.61%
3.80%
Dividend Yeild
Figure 8: Figure representing Dividend Yield Ratio of British Airways
Source: (As Created by Author)
The dividend yield ratio for the British Airways has represented a gradually
increasing trend in the last two years. The dividend yield for the financial year 2016 stood
3.61% while in 2017 it increased to 3.80%. This implies that the shareholders would benefit
more from the cash return on investment. British Airways has higher dividend yield pays to
its investors in comparison to its fair value of stock. This implies that the investors at British
Airways are getting compensated highly for their investment in comparison to the low
dividend yield stock of other companies operating in the airline industry.
Conclusion:
On a conclusive note the analysis clearly lays down that the recent turbulence in
financial environment of weaker currency and negative movements in the values of the
pension assets have created a negative impact on the financial performance of the company.
The volatility in the fuel price and petroleum products have created a material impact on the
operating results of British Airways. The analysis evidently portrays that the company carries
the substantial amount of debt which urgently requires repayment or refinancing. This

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portrays that the ongoing operations and commitment of future development plans appears to
be vulnerable because of volatile market conditions and financial market capacity.
The review of financial performance also provides the current the major acquisition of
Iberia have contributed to the overall costs and declining operational profit. As a result the
company has been less profitable than before based on the operating profit and net profit
ratios. However, a higher P/E and dividend yield ratios have attracted the confidence of
investors in the forthcoming progress of the company.

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References:
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Broadbent, B. and Policy, D.G.M., 2017. Brexit and the pound. Bank of England, Speech, 23.
Castle, J.L., 2019. Modelling and forecasting the dollar-pound exchange rate in the presence
of structural breaks.
Chandra, P., 2017. Investment analysis and portfolio management. McGraw-Hill Education.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E.,
2015. Quantitative investment analysis. John Wiley & Sons.
Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Hameed, A. and Rose, A.K., 2018. Exchange rate behaviour with negative interest rates:
Some early negative observations. Pacific Economic Review, 23(1), pp.27-42.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Iairgroup.com. 2019. IAG - International Airlines Group - Annual Reports. [online]
Available at: http://www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-reportsannual
[Accessed 11 Feb. 2019].
Iairgroup.com. 2019. IAG - International Airlines Group - Share capital and treasury stock.
[online] Available at: http://www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-
capitalstock [Accessed 11 Feb. 2019].

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Kanapickienė, R. and Grundienė, Ž., 2015. The model of fraud detection in financial
statements by means of financial ratios. Procedia-Social and Behavioral Sciences, 213,
pp.321-327.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder
Ready Version. John Wiley & Sons.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Nilsson, F. and Stockenstrand, A.K., 2015. Financial accounting and management
control. The tensions and conflicts between uniformity and uniqueness. Springer, Cham.
Srovnalikova, P. and Razinskaite, J., 2017. THE EUROZONE CRISIS AND THE EFFECT
OF BREXIT. Journal of Management, (1), p.30.
Trotman, K. and Carson, E., 2018. Financial accounting: an integrated approach. Cengage
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Warren, C. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
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John Wiley & Sons.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.

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Appendix:
Profitability Ratios
Years 2016 2017
Operating Income 1413 1680
Net Sales 11398 12226
Operating Profit Ratio 12.40% 13.74%
Net Profit Ratio
Years 2016 2017
Sales Revenue 11398 12226
Net Profit After Tax 1345 1403
Net Profit Ratio 11.80% 11.48%
Liquidity Ratios - Current Ratio
Years 2016 2017
Current Assets 4174 4341
Current Liabilities 5674 5633
Current Ratio 0.74 0.77
Acid Test Ratio
Years 2016 2017
Current Assets 4174 4341
Less: Inventories 131 128
Current Liabilities 5674 5633
Acid Test Ratio 0.71 0.75
Efficiency Ratios
Trade Receivables Collection Period
Years 2016 2017
Trade Receivables 693 751
Total Sales 11398 12226
Trade Receivables Period 22.19 22.42
Total Assets Turnover Ratios
Years 2016 2017
Net Sales 11398 12226
Average Total Assets 16827 17249
Total Assets Turnover Ratios 0.68 0.71

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Investment Ratios
Price Earnings Ratio (P/E)
Years 2016 2017
Market Value Per Share 590 573
EPS 28.8 26.8
Price Earnings Ratio (P/E) 20.49 21.38
Dividend Yield Ratio
Years 2016 2017
Dividend Paid 21.3 21.8
Market Value Per Share 590 573
Dividend Yield 3.61% 3.80%