Financial Performance Analysis of UK Airlines: A Case Study

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CASE STUDY
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Table of Contents
INTRODUCTION........................................................................................................................3
SECTION A................................................................................................................................ 4
SECTION B.............................................................................................................................. 17
CONCLUSION.......................................................................................................................... 19
REFERENCES........................................................................................................................... 20
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INTRODUCTION
This case study is based on the airline industry; this industry is a huge contributor in
the UK economy around £20 Billion per annum and this company also contributes by
providing 230,000 jobs in the UK. The analysis is to be done on three companies’
easy jet, Flybe and Ryan Air and since these companies are listed in London stock
exchange so the evaluation of company’s financial health is to be evaluated and then
comparing the financial performance and financial health with the other two
companies is the aim of this report. Also, the investment appraisal strategies and
methods and stages for investment appraisal are to be analysed.
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SECTION A
Q1 (A) COMPARING THE PERFORMANCES OF THE THREE COMPANIES –
Financial ratios-
1. Current ratio-
Company/ year 2017 2016 2015
Easy Jet 1.04 0.92 0.72
Flybe 0.96 1.06 1.20
Ryan air 1.56 1.43 1.72
easy jet Flybe Ryan air
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2018
2017
2016
The current ratio is calculated to identify the ratio of current assets over current
liabilities. The ideal ratio is 2:1 and none of the above companies can achieve the
ideal ratio an if the ideal ratio is not achieved than at least the ratio should be 1:1
means the current assets should be equal to pay off its current liabilities. The best
performer of the current ratio is Ryan Air which has maintained the ratio above 1:1 in
all the three years. The second performer is Easy jet as its ratio has been increasing,
unlike Flybe whose current ratio is decreasing (Mahesh and Prasad, 2012).
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2. Profit margin Ratio -
Company/ year 2017 2016 2015
Easy Jet 7.63 10.86 14.62
Flybe -6.68 0.43 -5.22
Ryan air 22.12 26.35 17.38
Easy jet Flybe Ryan air
-10
-5
0
5
10
15
20
25
30
2018
2017
2016
The higher the profit margin rate the higher the performance of the company. So this
ratio is higher the better, as every company has the aim to earn maximum profit, the
profit rate should always be increasing. The Ryan Air Company is the best performer
which has the highest profit but its profit from the past year is reduced from 26 to 22
which is an unfavourable point for investment but very much better than the
company easy jet as its profit is decreasing from 2 years continuous. The company
Flybe is having negative profits and thus the company is having a very poor
performance from the past two years. This shows that if the investor will invest in this
company as a shareholder he will not get any returns (Gill et al., 2010).
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3. Net Assets Turnover ratio-
Company/ year 2017 2016 2015
Easy Jet 1.17 1.19 1.53
Flybe 1.86 2.08 2.28
Ryan air 0.74 0.83 0.64
Easy jet Flybe Ryan air
0
0.5
1
1.5
2
2.5
2017
2016
2015
This ratio is used to measure the ability of the company to generate sales from its
assets this ratio should be higher for better performance. The company that has the
highest ratio is Flybe so this company is ranked first as compared to the other two
companies. The company Flybe has a negative effect too as the company its asset
turnover ratio is decreasing from its previous year. The second performer is easy jet
and last is Ryan limited. This means that Ryan air is generating 0.74 sales from
asset employed 1, which should be more than one (Lee et al., 2012).
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4. Interest coverage ratio-
Company/ year 2017 2016 2015
Easy Jet 14.07 39.46 62.55
Flybe -10.78 1.73 -9.33
Ryan air 22.83 20.54 14.06
Easy jet Flybe Ryan air
-20
-10
0
10
20
30
40
50
60
70
2017
2016
2015
Interest coverage ratio helps to measure the capability of a company to pay off its
interest on loan amount on its revenue earned. The higher the interest coverage ratio
the better but up to a limit if there is extra profit and the interest coverage ratio is so
high that means the company has the capacity to take more long term loans. Flybe is
the worst performer and to be ranked last this company is unable to pay off its yearly
interest because of the negative profits since its ratio is going negative, this ratio of
interest coverage is depended on the profit earning capacity of the company. Like
always the Ryan air is having the highest performance and is able to earn 22.83
times more than its annual interest. The second-ranked is easy jet as its interest
coverage ratio is decreasing the reason may be an increase in loans or the
decreasing profits it is still performing very good as the easy jet is able to earn 14
times more than its interest on loans annually (Mahesh and Prasad, 2012).
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5. Return on equity ratio -
Company/ year 2017 2016 2015
Easy Jet 13.74 18.82 30.46
Flybe -38.83 1.75 -25.79
Ryan air 33.24 47.87 24.35
Easy jet Flybe Ryan air
-60
-40
-20
0
20
40
60
2017
2016
2015
The ratio Return on equity defines how much the company is able to earn on its
equity share capital. the higher the better for the equity shareholders as they are the
investors and owners who earn through dividend this is possible when the company
earns good profits and so they will earn the more the revenues the higher their
dividend. The 1st ranked company is Ryan air as its return on equity ratio is the
highest but its return on equity ratio has declined from the past year so the company
because of its declining profits. The company ranked second in the Easy jet as this
company have a 13.7 % return on its equity share capital. The company Flybe is
ranked last as its return on equity ratio is negative because its profit is negative (Kang
et al., 2010).
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6. Solvency ratio asset-based-
Company/ year 2017 2016 2015
Easy Jet 46.93 49.13 46.58
Flybe 19.04 27.11 24.99
Ryan air 36.89 32.06 33.11
Easy jet Flybe Ryan air
0
5
10
15
20
25
30
35
40
45
50
2017
2016
2015
Solvency ratio is the ratio that defines the debt and profit ratio means whether the
company’s cash flow is able to pay off its short term and long term liabilities. This
ratio is calculated by dividing the company's profits by the company's debt of
liabilities. This ratio includes actual cash flow not the profits as profit involves
deprecation which is not the outflow of cash and we are determining the paying
capacity of the company. As the industry rate suggests that the solvency ratio higher
than 20% is termed as the good performance of the company. In this ratio the
company having a higher solvency ratio is easy jet and is to be ranked first and the
second position is taken over by Ryan air as its solvency ratio is above satisfactory
and Flybe is ranked last as its ratio is below the standard ratio and also its ratio has
been decreasing from previous year (Bhamorasathit and Katawandee, 2014).
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7. Collection period (days)-
Company/ year 2017 2016 2015
Easy Jet 6 4 4
Flybe 25 21 18
Ryan air 3 4 4
Easy jet Flybe Ryan air
0
5
10
15
20
25
2017
2016
2015
This ratio defines the days in which the company's debtors pay off. The late the
payment will be received from the debtors the late will take to pay the company’s
creditors or the suppliers. This ratio should be lower so that fewer days it takes to
pay off the creditors. This increases the credibility ratio of the company in the market
and the industry. Ryan Air is the best performer as its debtor pays off in just 3 days
and the second position is taken by Easy jet which takes double the days from Ryan
air and also its debtor’s payment period has increased from the previous year. Last
ranked in this ratio is Flybe whose debtors take 25 days to pay. This ratio of Flybe
is unacceptable and will have a huge effect on its credibility.
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8. Return on capital employed-
Company/ year 2017 2016 2015
Easy Jet 7.77 11.49 18.24
Flybe -12.90 3.55 -11.28
Ryan air 15.41 20.77 10.64
Easy jet Flybe Ryan air
-15
-10
-5
0
5
10
15
20
25
2017
2016
2015
Return on capital employed is the ratio that defines how much the company is able
to build its revenues from the capital invested by both shareholders and loan
providers. The more the ratio the better the performance. The best performer is Ryan
air with highest 15.41 times the capital employed and second, is the easy jet and
with a negative return, Flybe is ranked at last because of its negative profits (Yuan et
al., 2010),
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9. Gearing ratio-
Company/ year 2017 2016 2015
Easy Jet 53.50 48.44 39.97
Flybe 228.66 106.62 125.79
Ryan air 113.29 130.73 128.97
Easy jet Flybe Ryan air
0
50
100
150
200
250
2017
2016
2015
This ratio is used to measure the company’s borrowed capital to its equity capital. A
higher gearing ratio means the higher leverage which indicates that company is
using its current profits to pay off its long term liabilities and which is dangerous, a
low gearing ratio means high equity and low debt leverage. Here the high
performance is of Easy Jet Company that has the lowest ratio of gearing and then
comes the Ryan air and lastly the Flybe which is so indebted that it has to use its day
to day cash flows to pay off its long term liabilities (Morrell, 2013).
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