Research on Financial Performance of Airlines

PROJECT PROPOSAL FOR EASYJET
The aviation market in the European Common Aviation Area was formally
liberalized in April 1997 (Kinnock, 1996). In practice, this meant that every airline
that was established within the European Union (EU) could offer transportation at
prices of their own choosing, between any airports located in EU. However, this
was subject to rules established by the European Union with regards to
competition, financial solvency and licensing. Prior to 1997, European airlines
operated in a regulated market. Governments decided which routes airlines could
operate, as well as the price the airline could charge for the tickets (Vasigh, et al.,
2014). Because of the regulation of the civil aviation industry, airlines were
typically protected against competition. The national government’s protected
incumbent airlines by only allowing a limited number of airlines operate certain
routes. The national government’s generally priced based on a formula known as
cost-plus formula. Basically, the cost-plus formula was based on the airlines cost
of flying a certain route, and whereby the government merely added a profit
margin. During the period of regulation, carriers tended to earn a healthy and stable
profit. In fact, many European airlines was controlled and owned by governments.
The deregulation, or liberalization, of the European aviation industry changed the
competitive market dramatically. On one hand, airlines could operate routes
between airports of their choosing within the European Union. This gave airliners
an opportunity to generate larger profits. On the other hand, popular routes would
be exposed to more competition. As a consequence of increased competition in the
aviation industry, airlines have become more concerned with decreasing their costs
at a time where competition has put downward pressure on ticket fares. According
to Vasigh (et al., 2014), the airline industry have been transformed to a more risky
industry, riskier than the case was prior to the deregulation. Since the deregulation,
many major airlines have struggled to compete and make a profit.
Airlines were on average able to earn a net profit margin of 1.5 % in 2013. (IATA,
2014 A). International Air Transportation Association (IATA) has reported historic
net profit margins from 2004. During the ten year period between 2004 and 2013
airlines worldwide have had an average negative net profit margin in four out of
ten years. Airlines have delivered these profit margins in a period where the
number of passengers has increased from approximately 2.1 to 3.1 billion,
representing an increase of approximately 50%. Apparently, the increase of
travellers should be good business for airlines, but many airlines have showed poor
financial results during this period.

Research Question and Delimitation
Surely, some airlines were indeed able to earn a profit the last years. Airlines like
Ryanair and easyJet have generated relatively good profits, whereas Air France-
KLM has struggled. This leads to my research question; 1.What have separated top
performing airlines from bad performing airlines the past years? I have focused on
three separate aspects in order to answer the research question. The first aspect is
concerned with the financial performance of the relevant airlines and how they
compare to one another. The second aspect is concerned with the characteristics
that distinguish low cost carriers from full scale carriers. The third and last aspect
is concerned with the external factors that have influenced the airline industry the
past years and the external factors that will influence the industry going forward.
Financial results from 2014 will not be included in this thesis, due to the fact that
most of the airlines have not published their result for the year. The timeline will
be the ten years between 2004 and 2013. However, the airlines chosen for this
thesis will be chosen at a passenger basis by the year end 2014.
Structure of the Thesis
The first part of this bachelor’s thesis is an introduction to the recent developments
in the airline industry. It includes description of the changes the airline industry has
experienced lately, and airlines struggle to earn a profit. Furthermore, it includes
my research question and the methods I have applied to answer it. The second part
of this thesis is the literature review. This part is included to explain more closely
the methods I have chosen to answer the research question, and more specifically
why I have chosen them. These methods include the financial ratios such as EBT
margin, operating expense ratio, current ratio and debt to equity ratio. Furthermore,
it provides definitions of low cost carriers and full scale carriers, and a description
of the PESTEL framework I have applied, in order to identify external factors that
influence the industry. The third part addresses the methods, principles and
techniques I have used to collect analyse and present the data. The fourth part is
concerned with the financial performance of the relevant airlines and how internal
and external factors have influenced it, and how these factors will continue to do
so.
Methodology
The purpose of this work is to give the reader an overview of the methodology I
have chosen to apply in this thesis. This work includes the research philosophy,

research approach, research design, sample, data collection, data analysis and
research quality of this thesis.
Research philosophy
A realistic research philosophy tells us that our senses represent the reality as it is,
and there exist a reality independent of our mind.
(Saunders, et al., 2009). Furthermore, realism can be separated into direct and
critical realism. While the philosophy of direct realism tells us that senses show the
world in an accurate manner, the philosophy of critical realism see the world as
illustrations of what is real, according to our perception, which can deceive us.
Moreover, critical realism may provide more detailed and accurate analysis when
looking for relationships between Firms and how they develop
(Eriksson & Kovalainen, 2008). Critical realism is also suiting when the goal is to
understand the social context surrounding the field of subject, and the phenomenon
I try to develop an understanding for. With this paper I try to gain an understanding
of which factors have caused some airlines to perform better than others, and how
these factors have influenced them. I will identify internal and external factors, and
analyse how they have influenced the performance of various airlines. By doing so,
I will assess the relationships between internal and external factors, and how they
have affected airlines performance. The philosophical position of critical realism
and the phenomenon I am trying to develop an understanding of suggest that this
research philosophy is the suiting one.
Research approach
There are two approaches on how to conduct social science research-a deductive or
an inductive approach (Eriksson & Kovalainen, 2008). A deductive research
approach begins with an existing theory, which is considered to be the first source
of knowledge. From the existing knowledge about the theory, the researcher is able
to derive and build hypotheses. Furthermore, the hypotheses are subject to an
empirical study which either accept or reject the hypotheses. As the deductive
approach is considered to be a top-down approach, the inductive approach is
considered to a bottom-up approach. In inductive research, theory is the outcome
of empirical study, and not the initial starting point. An inductive approach is also
concerned with the context of the study and why things develop as they do. In
many ways, I have adapted to an inductive research approach. This thesis does not
start with an hypothesis, where the purpose of the empirical analysis is to reject or
confirm it. However, the theory can be considered to be the outcome of this study.