Financial Reporting: British Airways and KLM During Financial Crisis

This report evaluates the financial performance and risk position of British Airways and KLM Royal Dutch Airlines during a period marked by financial crises. It employs financial ratio analysis over five years, comparing the companies' performance against industry averages. The analysis covers profitability ratios (Return on Assets, Return on Equity, Return on Capital Employed, Gross Profit Margin, Net Profit Margin), liquidity ratios (Current Ratio, Quick Ratio), industry-specific ratios (Available Seat Kilometers, Revenue Passenger Kilometers, Passenger Load Factor), asset efficiency ratios (Average Inventories Turnover Period, Average Settlement Period for Receivables/Payables), gearing ratios (Debt to Capital Ratio, Interest Cover Ratio), and investment ratios (Earnings per Share, Price/Earnings Ratio, Dividend Payout Ratio, Dividend Cover Ratio). Additionally, cash flow analysis is performed, examining operating cash flow relative to sales and investments. The report aims to provide insights into the strategies used by British Airways and KLM to sustain profitability during challenging economic times.

1
Financial reporting assignment

2
Executive Summary
The period of financial crises has impacted most of the businesses worldwide and
cause the need for developing the business strategies that help them to sustain the robust
profitability during the period of crises. The civil aviation market is most important as it is
the prime movers in the economic growth and the strategic element for employment
generation. Aim of this report is to evaluate the case of British Airways and KLM Royal
Dutch Airlines in order to report on the financial performance and risk position of these
companies. Financial analysis through use of ratio analysis has been carried out for both the
companies for last two years and it has also been compared with industry average.

3
Contents
Executive Summary...................................................................................................................2
Part 1: Introduction....................................................................................................................4
Case of British Airways..........................................................................................................4
Case of KLM Royal Dutch Airlines.......................................................................................5
Part 2: Analysis of financial statements for last 5 years............................................................5
Financial Ratio analysis – Comparison of the two companies and industry..........................5
2.1: Profitability Ratios..............................................................................................................5
2.1.1: Return on assets............................................................................................................5
2.1.2: Return on Equity (ROE)...............................................................................................6
2.1.3: Return on Capital Employed (ROCE)..........................................................................7
2.1.4: Gross Profit Margin......................................................................................................9
2.1.5: Net profit Margin........................................................................................................10
2.2: Liquidity Ratios.................................................................................................................11
2.2.1: Current ratio...............................................................................................................11
2.2.2: Quick Ratio.................................................................................................................12
2.3: Industry Ratio....................................................................................................................13
2.3.1: Available seat kilometers (ASK)................................................................................13
2.3.2: Revenue passenger kilometers (RPK)........................................................................14
2.3.3: Passenger load factor..................................................................................................15
2.4: Asset efficiency Ratios......................................................................................................16
2.4.1: Average inventories turnover period..........................................................................16
2.4.2: Average settlement period for receivables.................................................................17
2.4.3: Average settlement period for payables.....................................................................18
2.5: Gearing Ratio....................................................................................................................19
2.5.1: Debt to capital ratio....................................................................................................19
2.5.2: Interest cover ratio......................................................................................................20
2.6. Investment ratios...............................................................................................................21
2.6.1: Earnings per Share......................................................................................................21
2.6.2: Price/Earnings ratio....................................................................................................23
2.6.3: Dividend payout ratio.................................................................................................24
2.6.4: Dividend cover ratio...................................................................................................25

4
3. Cash-Flow Analysis.............................................................................................................26
3.1: Operating Cash-Flow / Sales.........................................................................................26
3.2: CF from borrowings / Sales...........................................................................................27
3.3: Operating CF after tax/ (Fixed assets investment +Dividends)....................................28
Part 4: Recommendations........................................................................................................29
Part 5: Conclusion....................................................................................................................29
Part 6: References....................................................................................................................30
Appendixes...............................................................................................................................32

5
Part 1: Introduction
The global financial crises of year 2008 and 2009 have emerged because of the failure
of some of major financial banks and institutions and it has impacted the world economy.
United Kingdom and Europe aviation sector is the most important part of world economy and
it also impacted heavily. Some of financial implication of global financial crises on aviation
sector of United Kingdom and Europe are negative growth rate, high operating cost and huge
debt. The two most valuable companies of the aviation sector of Europe and UK that have
been worst affected are British Airways (BA) and KLM Royal Dutch Airlines (KLM).
The main purpose of this report is to evaluate the case of British Airways and KLM
Royal Dutch Airlines in order to report on the financial performance and risk position of
these companies. Financial performance and risk position has been evaluated through use of
financial ratios and through using the information provided in the annual report. In this
regards financial ratios of last 5 years has been calculated for both the companies and they
have been compared with industry average in order to evaluate their business strategies
during the period of financial crises. During the financial crises period both companies have
make use of management accounting concepts and techniques such as value for money
concept, drive to reduce cost, technological innovation and other techniques to survive the
period of financial crises and to stand for future possibilities. In regards to this, report aims to
explore the potential of strategic management accounting and costing concepts and
techniques that both companies used for survival during the financial crises period and to
make strong base for future in order have comparison with similar companies.
Case of British Airways
The business of British Airways is largely impacted due to the period of global
recession due to occurrence of financial crisis in the year 2007. The sales and profit margins
of the company have depicted a major decline during the financial crisis period. It was unable
to pay nay dividend to its shareholders largely due to its negative profitability position and
operating at loss. The airline was able to overcome from the negative impact of the economic
recession by continued reinvestment in its profits and focusing on long-term growth. This is
largely on account of large-scale investment in launching crisis programs for reducing its
operational costs and aiding quick financial recovery for the company (Hunter, 2019). The
use of effective cost management strategies by the airline has enabled it to reduce its

6
operating costs and thus it was able to improve its profitability position and improve the
market share in the highly competitive airline industry.
Case of KLM Royal Dutch Airlines
KLM Royal Dutch Airlines has also effectively responded to the global recession by
the use of adequate cost management strategies. The company operating efficacy has been
largely negatively impacted by the impact of the downturn in the global economy due to the
occurrence of global financial crisis in the year 2007. The reduction in the operating costs has
enabled the company to overcome the decline in its revenue that has occurred mainly due to
the significant impact of the global financial crisis. The airline is also striving to preserve
cash by delaying the investment in the new aircraft and minimizing its capital expenditure.
This is largely done from the perspective of reserving cash and reinvesting in profit for
promoting long-term growth of the company (Done, 2009).
Part 2: Analysis of financial statements for last 5 years
Financial Ratio analysis – Comparison of the two companies and industry
In this section of the report financial analysis of British Airways (BA) and KLM
Royal Dutch Airlines (KLM) has been examined through use of ratio analysis and
comparison has also been made to investigate company’s performance with respect to
industry. The analysis of both the companies have been evaluated from the annual report of
the financial year 2013, 2014, 2015, 2016 and 2017. Financial ratios are the key tools which
is implemented in order to understand the overall financial strength of the company.
Comparison based on the last five years of both the company gives far better picture of the
financial position as a whole.
2.1: Profitability Ratios
Profitability ratios refers to class of financial metrics that is used to evaluate ability of
entity to generate the earnings in relation to some metrics such as sales, capital employed,
assets and equity. These ratios are important from the point of view of investors as well as
from the point of management because it helps with company profitability position during the
relative year (Brigham and Michael, 2013). This ratio helps to measure the effectiveness in
generating the return for both the company for the last five years.

7
2.1.1: Return on assets
Return on assets is the popular profitability ratio that provides the percentage of profit
earned on the average total assets of the company. This ratio measures the amount of profit
generated by the company from the assets utilized in the business. It further evaluates the
efficiency of the management system of the company in generating earning from the
available economic resources or assets from the balance sheet. Operating profit of both the
company is obtained from the income statement and further the asset is obtained from the
balance sheet.
Return on Assets (ROA) =Operating profit (EBIT)/Total assets *100
2013 2014 2015 2016 2017
BA 5.94 7.26 8.06 8.58 10.07
KLM 2.60 10.01 5.21 7.58 (10.52)
Industry
average 4.00 7.86 8.97 9.19 6.26
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
(15.00)
(10.00)
(5.00)
-
5.00
10.00
15.00
Return on Assets
On the basis of calculation of return on assets of both companies together with
industry average clearly reflects that there was increasing trend in this ratio from year 2013 to

8
2017. Return on assets ratio of BA from year 2013 to 2017 have increased each year from
5.94% in year 2013 to 10.07% in year 2017. It means BA has used assets more precisely as
compared to KLM. The return on assets ratio of KLM was above industry average during the
last five years and on the other hand, return on asset of KLM was below industry average. So,
BA has provided better return on assets as compared to KLM in all the five years under
review.
2.1.2: Return on Equity (ROE)
This ratio measures the percentage of profit earned on total book value of equity
invested by the company during the year. This ratio is significant for investors as they want to
have information on holding period return earned by them on their investment. However this
ratio is not the correct measure of total return earned by the investors, so this ratio is
moreover depicts the use of equity capital to generate the profit.
Return on equity (ROE) =Net profit/Total equity*100 (Damodaran, 2011)
2013 2014 2015 2016 2017
BA 11.45 33.43 54.55 31.71 23.49
KLM 8.26 3,788.89 13.64 52.53 (75.84)
Industry
average 45.50 44.40 52.27 40.08 27.96
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

9
2013 2014 2015 2016 2017
(1,000.00)
-
1,000.00
2,000.00
3,000.00
4,000.00
BA
KLM
Industry average
Return on Eeuity
It has been seen that there has multiple changes has made in equity capital structure of
the both the companies that has caused in shift in return on equity every year. Return on
equity ratio of KLM was far better than the BA due to optimum use of equity capital by
KLM. In year 2017, return on equity of KLM was negative due to abnormal expenses
occurred in that period. If abnormal expenses is ignored that KLM would have positive return
on equity as compared to BA. Overall, return on equity of both companies is lower than the
industry average that reflects poor profitability performance as compared to other competitors
in similar business.
2.1.3: Return on Capital Employed (ROCE)
This ratio is important from the management point of view and it provides percentage
of profit earned on total capital employed during the year. This ratio evaluates the
profitability position as well as the efficiency of the company for the last five years. The ratio
actually measures the ability of the company in order to generate profit out of the capital
utilized by the business. The investors of the company uses this ratio as the profitability ratio
in order to take decision in the investment process. The operating profit of the company is
obtained from the income statement of the annual report where the equity and non-current
liabilities is obtained from the balance sheet.
Return on capital employed (ROCE) = Operating profit (EBIT)/ (Total equity + Non-current
liabilities)*100
2013 2014 2015 2016 2017
BA

10
9.71 12.30 12.80 12.69 14.99
KLM 4.05 19.88 9.63 12.93 (19.21)
Industry
average 5.60 6.10 11.60 11.20 9.50
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
(25.00)
(20.00)
(15.00)
(10.00)
(5.00)
-
5.00
10.00
15.00
20.00
25.00
Return on Capital
Employed
There was increasing trend in return on capital employed in case of BA Airline and on
the other hand, there was mix trend in this ratio in case of KLM. When return on capital ratio
of BA was compared with the KLM as well as with industry average it has been seen that BA
has outperformed both of them. Management at BA had used optimum mix of capital to
finance the business and has made sure that return on capital employed ratio does not fall
below the previous year ratio. Return on capital employed of KLM was also above industry
average in most of the years except in year 2017 where it has suffered loss due to abnormal
losses.
2.1.4: Gross Profit Margin
Gross profit ratio provides percentage of gross profit earned on total sales and this
ratio helps management to know expenses they occur on cost of sales to earn every dollar of
sales.
Gross profit margin=Gross profit/Net sales*100 (Davies and Crawford, 2011)

11
2013 2014 2015 2016 2017
BA 6.20 8.32 10.93 12.40 13.74
KLM 2.58 8.83 4.59 6.98 (9.08)
Industry
average 6.48 8.69 15.71 14.58 11.83
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
(15.00)
(10.00)
(5.00)
-
5.00
10.00
15.00
20.00
Gross Profit Margin
It has been observed from the above graph that gross profit margin of BA had been
increased positive every year and there was no trend in gross profit margin of KLM during
the last five years. When gross profit ratio of both the companies have been compared with
the industry average it has been found that this ratio was below the industry average in case
of the both the companies. In year 2017, KLM has suffered the loss and has failed to provide
positive gross profit margin and on the other hand, gross profit margin of BA has crossed the
average industry mark.
2.1.5: Net profit Margin
This ratio is very important as it reflects percentage of profit earned on total sales
after meeting all the expenses.

12
Net profit margin=Net profit/Net sales*100
2013 2014 2015 2016 2017
BA 2.46 5.99 22.13 11.80 11.48
KLM 1.37 3.54 0.55 5.30 (6.80)
Industry
average 13.07 3.69 14.80 7.60 8.32
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
(10.00)
(5.00)
-
5.00
10.00
15.00
20.00
25.00
Net Profit Margin
Overall analysis of net profit margin reflects that BA has earned very good percentage
of net profit as compared industry average and KLM Company. In year 2015, both KLM and
BA have outperformed the industry average and had generated maximum return when
compared with all the years under review.
2.2: Liquidity Ratios
2.2.1: Current ratio
The current ratio depicts the measure of current assets as compared with current
liabilities.

13
Current ratio=Current assets/Current liabilities (Krantz, 2016)
2013 2014 2015 2016 2017
BA 0.63 0.65 0.60 0.76 0.83
KLM 0.70 0.55 0.58 0.70 0.71
Industry average 0.72 0.72 0.80 0.74 0.63
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Current Ratio
It can be analyzed from the current ratio calculated for British airways over the
financial period 2013-2017 that its ability to meet its financial obligations from the current
base has been improved. On the other hand, KLM has also depicted an increase in its
liquidity position from 2013-2017 as depicted from the calculation of its current ratio. The
ratio has depicted a decreasing trend from the year 2013-2014 but has been improved
significantly from 2015-2017. Both the companies are however able to meet the industry
average for the ratio which is also significantly low. The analysis of the liquidity position of
both the companies and the industry as a whole depicts a shortage of liquidity for meeting the

14
financial obligations. This implies that exist a need for improving the cash flow for reducing
the risk of not meeting the financial obligations as they become due.
2.2.2: Quick Ratio
The quick ratio or acid test ratio provides a measurement of the ability of a company
to meet its short-term financial obligations with its most liquid asset base such as cash
inflows, accounts receivable and marketable securities. This ratio measures the instant use of
the near cash assets in order to pay the current liabilities of the company on the other hand it
is also known as the acid test ratio.
Acid test ratio= (Current assets-(Inventories + Prepaid expenses))/Current liabilities (Moles
and Kidwekk, 2011)
2013 2014 2015 2016 2017
BA 0.55 0.58 0.49 0.66 0.73
KLM 0.62 0.49 0.53 0.62 0.63
Industry
average 0.41 0.43 0.45 0.50 0.39
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

15
2013 2014 2015 2016 2017
-
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Acid Test Ratio
The quick ratio of both BA and KLM has shown a positive trend during the financial
year 2013-2017. However, the ratio for the company BA has depicted a higher growth for the
selected financial period as compared with KLM. Both the companies have maintained a
higher ratio base as compared with the industry average and this depicts that they are placing
large emphasis on improving their cash flow position to meet their financial obligations.
However, it can be said after analyzing the ratio that there exist a high need for the companies
and the overall industry to improve the cash reserves as the quick ratio is less than 1.
2.3: Industry Ratio
2.3.1: Available seat kilometers (ASK)
2013 2014 2015 2016 2017
BA 161,444 170,917 174,274 177,756 179,077
KLM 103,793 105,755 107,851 112,065 117,066
Industry
average 133,825 154,815 159,993 172,348 175,630
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

16
2013 2014 2015 2016 2017
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Available Seat
Kilometres (ASK)
mln.
On the basis of observation of it can be said that total number of seats available on the
single fight with BA was much greater than KLM and industry average. It means BA has
much greater number of seats per mile with BA as compared with KLM and industry
average.
2.3.2: Revenue passenger kilometers (RPK)
2013 2014 2015 2016 2017
BA 131,333 138,431 142,016 146,561 144,399
KLM 89,039 91,477 93,228 97,737 103,487
Industry
average 112,386 131,041 137,144 147,001 151,102
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

17
2013 2014 2015 2016 2017
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Revenue Passanger
Kilometres (RPK)
mln.
It has been found that BA was much successful in turning passengers into their
customers during the year as its revenue was much greater than KLM as well as with industry
average. Revenue passenger kilometer is an important metric from the point of investors as it
provide revenue entity is making per flight on the basis of total passenger travelling.
2.3.3: Passenger load factor
2013 2014 2015 2016 2017
BA 81.3 81.0 81.5 81.2 81.8
KLM 85.8 86.5 86.4 87.2 88.4
Industry
average 80.6 81.1 81.9 82.4 83.3
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

18
2013 2014 2015 2016 2017
76.0
78.0
80.0
82.0
84.0
86.0
88.0
90.0
Passanger Load
Factor (%)
On the basis of above graph and calculation it can be said that KLM had been using
most of its passenger load during the year and it has reached 88.4 % in year 2017, whereas
BA has still 19 % of load factor remained to be utilized that can be utilized with some sort of
promotion or any new airline advantage to customers.
2.4: Asset efficiency Ratios
2.4.1: Average inventories turnover period
The ratio provides a depiction of the number of times a company has sold and
replaced its inventory during a given financial period.
Average inventories turnover period=Average inventories held/Cost of sales*365 days
(Krantz, 2016)
2013 2014 2015 2016 2017
BA 3.83 4.13 4.94 5.06 4.65
KLM 7.89 7.61 6.79 7.08 7.16
Industry average 25.57 20.06 16.18 14.54 10.41
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

19
2013 2014 2015 2016 2017
-
5.00
10.00
15.00
20.00
25.00
30.00
Average Inventories
Turnover Period
The ratio for the airline BA has depicted an increasing trend while that for KLM has
depicted a decreasing trend for the selected financial period. However, the ratio for BA is
significantly lower as compared for the KM which depicts that British Airways need to
improve its ability to replace the inventory levels for reducing the development of excessive
inventory in comparison to sales. However, both the companies’ ratios’ are significantly
lower as compared with industry average and therefore they need to improve their ability of
releasing sales from inventory level to meet the industry expectations.
2.4.2: Average settlement period for receivables
The ratio provides a depiction of the amount of time taken by a company to gain
payments in terms of its receivable. This ratio measures the effectiveness of the company in
collecting the receivables of the company or the money which is owned by the client. This
ratio also evaluates the number of times the receivables of the company are converted into
cash in a [particular period of time.
A high receivables turnover ratio of the company indicates that collection of the
accounts receivables of the company is effective which further means that high proportion of
the customers pay off their debts quickly. High receivables turnover ratio of the company
operates on the basis of cash operation. Higher ratio of the company is conservative credit
policy which is valuable and in this case the company avoid the method of extending credit to
the customers who is unable to pay their debt on time. On the other hand, low turnover ratio
of the company means that the company have a poor collection process or further it can be

20
said that the company is having bad credit policy which suggest that the ratio is not
financially sound or credit worthy.
Average settlement period for receivables=Average trade receivables/Credit sales
revenue*365 days (Damodaran, 2011)
2013 2014 2015 2016 2017
BA 16.31 16.57 17.26 20.03 22.03
KLM 33.14 33.46 32.08 33.69 38.69
Industry average 22.44 27.33 29.83 30.39 26.26
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Average Settlement
Period for
Receivables
The ratio for both BA and KLM has depicted an increasing trend for the financial
period 2013-2017. This implies that time taken by both the companies are incurring large
time to collect the amount they owe to debtors or creditors. This cannot be regarded as good
for their future growth and development. The ratio for KLM is above the industry average
and this implies a significant potential risk for the company to realize the payments owned by
it that can negatively impact its potential of future growth and development.

21
2.4.3: Average settlement period for payables
The ratio provides a depiction of the amount of time taken by a company to gain
payments in terms of its receivable.
Average settlement period for payables= Average trade payables/Credit purchase*365 days
(Moles and Kidwekk, 2011)
2013 2014 2015 2016 2017
BA 84.03 89.48 78.89 63.04 64.13
KLM 69.78 69.20 67.76 74.71 80.32
Industry average 28.43 27.73 28.50 24.96 25.85
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
20.00
40.00
60.00
80.00
100.00
Average Settlement
Period for Payables
The ratio for both BA and KLM has depicted an increasing trend for the financial
period 2013-2017. This implies that time taken by both the companies are incurring large
time to collect the amount they owe to debtors or creditors. This cannot be regarded as good
for their future growth and development. The ratio for KLM is above the industry average
and this implies a significant potential risk for the company to realize the payments owned by
it that can negatively impact its potential of future growth and development.

22
2.5: Gearing Ratio
2.5.1: Debt to capital ratio
The ratio provides a measurement of the proportion of debt resources used by a
company in its overall capital.
Debt to capital ratio=Long term liabilities/ (Total equity + Long term liabilities)*100
(Phillips and Stawarski, 2016)
2013 2014 2015 2016 2017
BA 66.34 73.50 52.48 61.92 46.71
KLM 73.87 99.79 91.62 81.33 81.03
Industry
average 73.96 76.66 73.01 73.47 71.92
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
20.00
40.00
60.00
80.00
100.00
120.00
Gearing Ratio
The ratio for BA has depicted a decreasing trend over the financial period of 2013-
2017 while that for KLM has shown an increasing trend. This implies that KLM is
increasing the proportion of debt in its capital structure and also the ratio is higher as
compared with the airline BA. The ratio for both the companies meets the industry

23
expectations and therefore it can be said that they are incorporating leverage in the capital
structure in reference to the industry standards.
2.5.2: Interest cover ratio
The ratio provides a measurement of the ability of a company to meet its debt
payments in a timely manner.
Interest cover ratio= (Operating profit (EBIT) +Finance income)/Interest expenses
(Reilly and Brown, 2011)
2013 2014 2015 2016 2017
BA 4.24 7.04 8.59 9.76 15.45
KLM 1.78 6.07 3.53 6.03 (9.10)
Industry
average 8.50 9.70 12.30 15.20 14.70
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
(15.00)
(10.00)
(5.00)
-
5.00
10.00
15.00
20.00
Interest Cover Ratio
The ratio for BA has depicted a rapid improvement for the selected financial period
while that for KLM has depicted a gradual decrease and is also reported negative for the year

24
2017. This implies that KLM is having higher financial risk of not meeting effectively its
debt obligations with its earnings realized. Also, the ratio for both the companies is below the
industry average which implies that they need to improve their ability to cover up their
inertest expenses on account of their financial leverage.
2.6. Investment ratios
2.6.1: Earnings per Share
The ratio provides a measurement of the profit allocated to each share of the
outstanding stock of the company.
Earnings per Share = (Net profit-Preferred dividends)/Number of ordinary shares
(Zimmerman and Yahya-Zadeh, 2011)
2013 2014 2015 2016 2017
BA 131.06 327.43 1,169.78 627.33 654.38
KLM 2.37 5.74 0.84 9.32 (13.29)
Industry average 1.06 0.92 1.63 1.67 1.70
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

25
2013 2014 2015 2016 2017
(500.00)
-
500.00
1,000.00
1,500.00
BA
KLM
Industry average
Earnings per Share
The ratio for BA is higher as compared to KLM and has also depicted an increasing
trend for the selected financial period as compared with the KLM airline that has shown a
decreasing trend. The EPS for the company KLM has also depicted a negative trend for the
year 2017 which depicts that it is not able to generate earnings for its shareholders which
present a large financial risk for its future growth prospects. BA has outperformed within the
market as depicted by comparing its EPS with that of industry average.
2.6.2: Price/Earnings ratio
The ratio provides a measurement of the amount of money an investor can invest
within a company for realizing one dollar of its earnings.
Price/Earnings ratio=Market value per share/Earnings per share (Arnold, 2013)
2013 2014 2015 2016 2017
BA 3.33 1.49 0.52 0.70 0.99
KLM 3.77 1.11 6.09 0.47 (0.94)
Industry
average 14.2 17.2 12.3 9.2 11.3
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

26
2013 2014 2015 2016 2017
(5.00)
-
5.00
10.00
15.00
20.00
Price/Earnings Ratio
The ratios for both the companies have depicted a declining trend over the selected
financial period of 2013-2017. This implies that both the companies are not able to gain the
trust of the investors for investing within the company which cannot be regarded as good for
promoting its future growth and development. The ratio’s are below the industry average
which implies that they are not able to meet the expectations of the investors as compared
with their competitors.
2.6.3: Dividend payout ratio
The ratio provides a measurement of dividend paid to the shareholders by a company
in comparison to the net income.
Dividend payout ratio=Dividend announced for the year/Earnings for the year available for
dividends*100 (Baker and Powell, 2009)
2013 2014 2015 2016 2017
BA - 37.04 13.96 34.20 -
KLM 6.02 0.29 1.85 3.47 -
Industry

27
average 57.00 70.00 41.00 55.00 44.00
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
Dividend Payout
Ratio
The ratio for both the companies cannot be regarded as good as they have not paid
regular dividends during the financial period 2013-2017. The ratio’s are below the industry
average which depicts that it needs to improve the profit distributed to the shareholders for
gaining their trust and improving their competitive position.
2.6.4: Dividend cover ratio
The ration provides a measurement of the ability of a company to pay off its required
preferred dividend payment.
Dividend cover ratio=Earnings for the year available for dividends/Dividend
announced for the year (Bragg, 2010)
2013 2014 2015 2016 2017
BA - 2.70 7.17 2.92 -
KLM

28
16.63 341.00 54.00 28.83 -
Industry
average 11.10 5.50 6.00 5.70 6.60
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
Dividend Cover
Ratio
The ratio for the company BA and KLM has shown an irregular trend which depicts
that they are not able to adequately meet their dividend requirements in a regular manner. The
overall industry has not depicted a consistent performance in relation to earning dividend for
generating profits to shareholders on a constant basis.
3. Cash-Flow Analysis
3.1: Operating Cash-Flow / Sales
This ratio provides cash flow earned from the operating activity on the total sales
made during the year.
Operating CF/Sales*100 (Gibson, 2011)
2013 2014 2015 2016 2017
BA

29
9.03 11.71 10.50 13.40 16.06
KLM 6.46 5.22 7.55 11.56 12.43
Industry
average 13.00 13.00 19.00 18.00 17.00
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)
2013 2014 2015 2016 2017
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Operating Cash
Flow vs. Sales
The level of operating cash collected by both companies were lower than the industry
average but British Airlines was much successful in converting the sales into net operating
cash during the year as compared to KLM.
3.2: CF from borrowings / Sales
This ratio compared level of cash, management gathers from the borrowing as
compared to sale made in that particular year.
CF from borrowings/Sales*100 (Bragg, 2010)
2013 2014 2015 2016 2017
BA 7.03 10.42 3.23 2.84 (0.99)
KLM (3.34) (2.91) (4.57) (0.96) (3.29)
Industry average 17.00 17.00 16.00 17.00 15.00
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

30
2013 2014 2015 2016 2017
(10.00)
(5.00)
-
5.00
10.00
15.00
20.00
Cash Flow From
Borrowings Ratio
On the basis of above graph it can be said that Airline industry was mostly dependent
upon the borrowings to finance the business operations but KLM has been seen paying back
the borrowing during the last five years. On the other hand, BA has used borrowing in all the
years except in year 2017.
3.3: Operating CF after tax/ (Fixed assets investment +Dividends)
This ratio provides information on cash available with company after tax from
operating activity to pay for cash dividends and fixed assets investments.
CAPEX+ Cash dividends coverage ratio=Operating CF/ (Fixed assets investment +
Dividends)
2013 2014 2015 2016 2017
BA 0.75 0.92 0.89 0.73 1.90
KLM 1.17 1.03 1.45 1.28 1.27
Industry
average 1.64 0.73 1.06 0.76 0.96
(British Airways, 2013 to 2017 and KLM Royal Dutch Airways, 2013 to 2017)

31
2013 2014 2015 2016 2017
-
0.50
1.00
1.50
2.00
CAPEX+Cash
Dividends Coverage
Ratio
Cash flow position of KLM was far better than BA cash position as KLM has free
cash flow operating activity greater than total capital investments and dividend. Only in year
2017, BA had better CAPEX and cash dividend coverage ratio than KLM. If the operating
cash flow of the company is better, it will be possible for the company to run the day to day
activities as the working capital management of the company is effective.
Part 4: Recommendations
On the basis of overall analysis it can be said that financial position of BA had been
very strong as compared to KLM financial position. It is recommended to that management
of BA to continue with same level of growth but must look after the capital structure and
keep more focus on equity capital. It is advised to KLM Airlines to make some changes in
asset management policies and also invest more capital in expansion program so that more
and more customers can be served.
Part 5: Conclusion
It has been concluded that British Airways has been much successful in delivering
value to their customers through their cost reduction program and value in use coast initiative
tool at the time of recession. Their plan investment has benefited them in long run and they
are now the powerful airline company in the modern world. From the conducted analysis it is
clear that the financial status of British airways is better than the other company and in the
long run the sustainability and efficiency of the company is better than the other one.

32
Part 6: References
Arnold, G., 2013. Corporate financial management. USA: Pearson Higher Ed.
Baker, K. and Powell, G. 2009. Understanding Financial Management: A Practical Guide.
USA: John Wiley & Sons.
Bragg, S. 2010. Business Ratios and Formulas: A Comprehensive Guide. US: John Wiley &
Sons.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Canada:
Cengage Learning.
British Airways. 2013. Annual report. [Online]. Available at: [Accessed on: 12 April 2019].
British Airways. 2014. Annual report. [Online]. Available at: [Accessed on: 12 April 2019].
British Airways. 2015. Annual report. [Online]. Available at: [Accessed on: 12 April 2019].
British Airways. 2016. Annual report. [Online]. Available at: [Accessed on: 12 April 2019].
British Airways. 2017. Annual report. [Online]. Available at: [Accessed on: 12 April 2019].
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Done, K. 2009. Air France-KLM targets costs as revenues drop. [Online]. Available at:
[Accessed on: 12 April 2019].
Gibson, C. 2011. Financial Reporting and Analysis: Using Financial Accounting
Information. Australia: Cengage Learning.
Hunter, P. 2019. The British Airways story: How to survive the recession, and then fail the
recovery. [Online]. Available at: [Accessed on: 12 April 2019].
KLM Royal Dutch Airways. 2013. Annual Report. . [Online]. Available at: [Accessed on:
12 April 2019].
KLM Royal Dutch Airways. 2014. Annual Report. . [Online]. Available at: [Accessed on:
12 April 2019].

33
KLM Royal Dutch Airways. 2015. Annual Report. . [Online]. Available at: [Accessed on:
12 April 2019].
KLM Royal Dutch Airways. 2016. Annual Report. . [Online]. Available at: [Accessed on:
12 April 2019].
KLM Royal Dutch Airways. 2017. Annual Report. . [Online]. Available at: [Accessed on:
12 April 2019].
Krantz, M. 2016. Fundamental Analysis for Dummies. USA: John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. USA: John Wiley &sons.
Phillips, P.P. and Stawarski, C.A. 2016. Data Collection: Planning for and Collecting All
Types of Data. USA: John Wiley & Sons.
Reilly.F.K. and Brown.K.C. 2011. Investment analysis & portfolio management. UK: South
western Cengage learning.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.

34
Appendixes
Profitability Ratios
1. Return on Assets (ROA)=Operating profit (EBIT)/Total assets
*100
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP)
Operating profit
(EBIT) 708.00 975.00 1,239.00 1,413.00 1,680.00
BA (GBP) Total assets 11,921.00
13,426.0
0 15,376.00 16,471.00 16,678.00
KLM
(EUR)
Operating profit
(EBIT) 250.00 851.00 455.00 684.00 (939.00)
KLM
(EUR) Total assets 9,609.00 8,499.00 8,725.00 9,028.00 8,924.00
BA ROA (%) 5.94 7.26 8.06 8.58 10.07
KLM ROA (%) 2.60 10.01 5.21 7.58 (10.52)
Industry
average
2. Return on equity (ROE)=Net profit/Total
equity*100
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP) Net profit 281.00 702.00 2,508.00 1,345.00 1,403.00
BA (GBP) Total equity 2,455.00 2,100.00 4,598.00 4,241.00 5,974.00
KLM
(EUR) Net profit 133.00 341.00 54.00 519.00 (703.00)
KLM
(EUR) Total equity 1,611.00 9.00 396.00 988.00 927.00
BA ROE (%) 11.45 33.43 54.55 31.71 23.49
KLM ROE (%) 8.26 3,788.89 13.64 52.53 (75.84)
Industry
average
3. Return on capital employed (ROCE)=Operating profit (EBIT)/(Total equity + Non-
current liabilities)*100
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP)
Operating profit
(EBIT) 708.00 975.00 1,239.00 1,413.00 1,680.00
BA (GBP) Total equity 2,455.00 2,100.00 4,598.00 4,241.00 5,974.00
BA (GBP)
Non-current
liabilities 4,839.00 5,824.00 5,078.00 6,896.00 5,236.00

35
KLM
(EUR)
Operating profit
(EBIT) 250.00 851.00 455.00 684.00 (939.00)
KLM
(EUR) Total equity 1,611.00 9.00 396.00 988.00 927.00
KLM
(EUR)
Non-current
liabilities 4,555.00 4,272.00 4,328.00 4,303.00 3,960.00
BA ROCE (%) 9.71 12.30 12.80 12.69 14.99
KLM ROCE (%) 4.05 19.88 9.63 12.93 (19.21)
Industry
average
4. Gross profit margin=Gross profit/Net
sales*100
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP) Gross profit 708.00 975.00 1,239.00 1,413.00 1,680.00
BA (GBP) Net sales 11,421.00
11,719.0
0 11,333.00 11,398.00 12,226.00
KLM
(EUR) Gross profit 250.00 851.00 455.00 684.00 (939.00)
KLM
(EUR) Net sales 9,688.00 9,643.00 9,905.00 9,800.00 10,340.00
BA
Gross profit
margin (%) 6.20 8.32 10.93 12.40 13.74
KLM
Gross profit
margin (%) 2.58 8.83 4.59 6.98 (9.08)
Industry
average
5. Net profit margin=Net profit/Net
sales*100
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP) Net profit 281.00 702.00 2,508.00 1,345.00 1,403.00
BA (GBP) Net sales 11,421.00
11,719.0
0 11,333.00 11,398.00 12,226.00
KLM
(EUR) Net profit 133.00 341.00 54.00 519.00 (703.00)
KLM
(EUR) Net sales 9,688.00 9,643.00 9,905.00 9,800.00 10,340.00
BA
Net profit
margin (%) 2.46 5.99 22.13 11.80 11.48
KLM
Net profit
margin (%) 1.37 3.54 0.55 5.30 (6.80)
Industry
average

36

37
Asset Efficiency Ratios
Company
BS & PL
items 2013 2014 2015 2016 2017
BA (GBP)
Inventories
(previous
year) 117.00 110.00 133.00 139.00 133.00
BA (GBP)
Inventories
(current
year) 110.00 133.00 139.00 133.00 131.00
BA (GBP) Cost of sales 10,827.00 10,744.00 10,044.00 9,817.00 10,358.00
KLM (EUR)
Inventories
(previous
year) 204.00 202.00 193.00 161.00 193.00
KLM (EUR)
Inventories
(current
year) 202.00 193.00 161.00 193.00 177.00
KLM (EUR) Cost of sales 9,387.00 9,468.00 9,521.00 9,119.00 9,430.00
BA
Avrg
invntrs
trnvr prd
(days) 3.83 4.13 4.94 5.06 4.65
KLM
Avrg
invntrs
trnvr prd
(days) 7.89 7.61 6.79 7.08 7.16
Industry
average
2. Average settlement period for receivables=Average trade receivables/Credit sales
revenue*365 days
Company
BS & PL
items 2013 2014 2015 2016 2017
BA (GBP)
Trade
receivables
(previous
year) 488.00 533.00 531.00 541.00 710.00
BA (GBP)
Trade
receivables
(current
year) 533.00 531.00 541.00 710.00 766.00
BA (GBP) Revenue 11,421.00 11,719.00 11,333.00 11,398.00 12,226.00
KLM (EUR)
Trade
receivables
(previous
year) 887.00 872.00 896.00 845.00 964.00

38
KLM (EUR)
Trade
receivables
(current
year) 872.00 896.00 845.00 964.00 1,228.00
KLM (EUR) Revenue 9,688.00 9,643.00 9,905.00 9,800.00 10,340.00
BA
Avrg
sttlmnt
rcvbls prd
(days) 16.31 16.57 17.26 20.03 22.03
KLM
Avrg
sttlmnt
rcvbls prd
(days) 33.14 33.46 32.08 33.69 38.69
Industry
average
3. Average settlement period for payables=Average trade payables/Credit purchase*365
days
Company
BS & PL
items 2013 2014 2015 2016 2017
BA (GBP)
Trade
payables
(previous
year) 2,365.00 2,620.00 2,648.00 1,694.00 1,697.00
BA (GBP)
Trade
payables
(current
year) 2,620.00 2,648.00 1,694.00 1,697.00 1,943.00
BA (GBP)
Credit
purchase 10,827.00 10,744.00 10,044.00 9,817.00 10,358.00
KLM (EUR)
Trade
payables
(previous
year) 1,784.00 1,805.00 1,785.00 1,750.00 1,983.00
KLM (EUR)
Trade
payables
(current
year) 1,805.00 1,785.00 1,750.00 1,983.00 2,167.00
KLM (EUR)
Credit
purchase 9,387.00 9,468.00 9,521.00 9,119.00 9,430.00
BA
Avrg
sttlmnt
rcvbls prd
(days) 84.03 89.48 78.89 63.04 64.13
KLM
Avrg
sttlmnt
rcvbls prd
(days) 69.78 69.20 67.76 74.71 80.32
Industry

39
average
4. PPE turnover=Sales revenue/PPE
Company
BS & PL
items 2013 2014 2015 2016 2017
BA (GBP)
Sales
revenue 11,421.00 11,719.00 11,333.00 11,398.00 12,226.00
BA (GBP) PPE 7,487.00 7,990.00 8,120.00 8,124.00 7,938.00
KLM (EUR)
Sales
revenue 9,688.00 9,643.00 9,905.00 9,800.00 10,340.00
KLM (EUR) PPE 3,999.00 3,672.00 3,526.00 3,783.00 4,319.00
BA
PPE
turnover
(times) 1.53 1.47 1.40 1.40 1.54
KLM
PPE
turnover
(times) 2.42 2.63 2.81 2.59 2.39
Industry
average
Liquidity Ratios
1. Current ratio=Current assets/Current liabilities
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP) Current assets 2,915.00 3,583.00 3,400.00 4,071.00 4,518.00
BA (GBP)
Current
liabilities 4,627.00 5,502.00 5,700.00 5,334.00 5,468.00
KLM (EUR) Current assets 2,418.00 2,314.00 2,321.00 2,617.00 2,862.00
KLM (EUR)
Current
liabilities 3,443.00 4,218.00 4,001.00 3,737.00 4,037.00
BA
Current ratio
(times) 0.63 0.65 0.60 0.76 0.83
KLM
Current ratio
(times) 0.70 0.55 0.58 0.70 0.71
Industry
average
2. Acid test ratio=(Current assets-(Inventories + Prepaid expenses))/Current
liabilities
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP) Current assets 2,915.00 3,583.00 3,400.00 4,071.00 4,518.00
BA (GBP) Inventories 110.00 133.00 139.00 133.00 131.00
BA (GBP) Prepaid

40
expenses (notes
19 or 20) 238.00 255.00 454.00 443.00 415.00
BA (GBP)
Current
liabilities 4,627.00 5,502.00 5,700.00 5,334.00 5,468.00
KLM (EUR) Current assets 2,418.00 2,314.00 2,321.00 2,617.00 2,862.00
KLM (EUR) Inventories 202.00 193.00 161.00 193.00 177.00
KLM (EUR)
Prepaid
expenses (note
7) 86.00 72.00 59.00 92.00 134.00
KLM (EUR)
Current
liabilities 3,443.00 4,218.00 4,001.00 3,737.00 4,037.00
BA
Acid test ratio
(times) 0.55 0.58 0.49 0.66 0.73
KLM
Acid test ratio
(times) 0.62 0.49 0.53 0.62 0.63
Industry
average
Gearning Ratios
1. Debt to capital ratio=Long term liabilities/(Total equity + Long term
liabilities)*100
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP)
Long term
liabilities 4,839.00
5,824.0
0 5,078.00 6,896.00 5,236.00
BA (GBP) Total equity 2,455.00
2,100.0
0 4,598.00 4,241.00 5,974.00
KLM (EUR)
Long term
liabilities 4,555.00
4,272.0
0 4,328.00 4,303.00 3,960.00
KLM (EUR) Total equity 1,611.00 9.00 396.00 988.00 927.00
BA
Debt to capital
ratio (%) 66.34 73.50 52.48 61.92 46.71
KLM
Debt to capital
ratio (%) 73.87 99.79 91.62 81.33 81.03
Industry
average
2. Interest cover ratio=(Operating profit (EBIT)+Finance income)/Interest expenses
Company BS & PL items 2013 2014 2015 2016 2017
BA (GBP) Operating profit 708.00 975.00 1,239.00 1,413.00 1,680.00
BA (GBP) Finance income 13.00 17.00 24.00 22.00 35.00

41
BA (GBP)
Interest expenses
(note 9) 170.00 141.00 147.00 147.00 111.00
KLM (EUR) Operating profit 250.00 851.00 455.00 684.00 (939.00)
KLM (EUR) Finance income 30.00 29.00 21.00 16.00 11.00
KLM (EUR)
Interest expenses
(notes 26 or28) 157.00 145.00 135.00 116.00 102.00
BA
Interest cover
ratio (times) 4.24 7.04 8.59 9.76 15.45
KLM
Interest cover
ratio (times) 1.78 6.07 3.53 6.03 (9.10)
Industry
average
Cash flow ratios
1. Operating CF/Sales*100
Company CFS & PL items 2013 2014 2015 2016 2017
BA (GBP) Operating CF 1,031.00 1,372.00 1,190.00 1,527.00 1,964.00
BA (GBP) Sales 11,421.00 11,719.00 11,333.00 11,398.00 12,226.00
KLM
(EUR) Operating CF 626.00 503.00 748.00 1,133.00 1,285.00
KLM
(EUR) Sales 9,688.00 9,643.00 9,905.00 9,800.00 10,340.00
BA
Operating
CF/Sales (%) 9.03 11.71 10.50 13.40 16.06
KLM
Operating
CF/Sales (%) 6.46 5.22 7.55 11.56 12.43
Industry
average
2. CF from
borrowings/Sales*100
Company CFS & PL items 2013 2014 2015 2016 2017
BA (GBP)
CF from
borrowings 803.00 1,221.00 366.00 324.00 (121.00)
BA (GBP) Sales 11,421.00 11,719.00 11,333.00 11,398.00 12,226.00
KLM
(EUR)
CF from
borrowings (324.00) (281.00) (453.00) (94.00) (340.00)
KLM
(EUR) Sales 9,688.00 9,643.00 9,905.00 9,800.00 10,340.00
BA
CF from
borrowings/Sales
(%) 7.03 10.42 3.23 2.84 (0.99)
KLM CF from

42
borrowings/Sales
(%) (3.34) (2.91) (4.57) (0.96) (3.29)
Industry
average
3. Operating CF after tax/(Fixed assets investment +
Dividends)
Company CFS items 2013 2014 2015 2016 2017
BA (GBP)
Operating CF
after tax 1,031.00 1,372.00 1,190.00 1,527.00 1,964.00
BA (GBP)
Fixed assets
investment (1,378.00)
(1,494.00
) (1,073.00)
(1,755.00
) (575.00)
BA (GBP) Dividends - - (259.00) (351.00) (460.00)
KLM
(EUR)
Operating CF
after tax 626.00 503.00 748.00 1,133.00 1,285.00
KLM
(EUR)
Fixed assets
investment (536.00) (480.00) (514.00) (881.00) (996.00)
KLM
(EUR) Dividends (1.00) (8.00) (1.00) (1.00) (18.00)
BA
Operating CF
after tax/(Fixed
assets +
Dividends)
(times) 0.75 0.92 0.89 0.73 1.90
KLM
Operating CF
after tax/(Fixed
assets +
Dividends)
(times) 1.17 1.03 1.45 1.28 1.27
Industry
average

43