Financial Analysis and Investment Recommendation: EasyJet vs Ryanair

This report presents a comprehensive financial analysis of EasyJet and Ryanair, two major UK airlines. It examines the competitive environment of the UK aviation industry, including trends in fleet size, cost control, and route expansion. The analysis includes a detailed ratio analysis comparing the two airlines' financial performance, focusing on metrics like current ratio, debt-equity ratio, earnings per share (EPS), and price-to-earnings (P/E) ratio. Furthermore, the report critically evaluates the corporate strategies of both airlines, highlighting their approaches to slots, capacity building, and network expansion. Based on the financial fundamentals, management strategies, and valuation metrics, the report recommends investing in Ryanair due to its stronger financial position, aggressive approach, and undervalued shares. The report concludes with an investment recommendation, supported by a balance score card and a comparative analysis of both companies. The analysis is based on the financial data and annual reports of both airlines, and provides insights into their strategies and future prospects. It is designed to help investors in making informed decisions.

FINANCIAL ANALYSIS AND
MANAGEMENT

EXECUTIVE SUMMARY
On the behalf of research and analysis of EasyJet and Ryanair, it has been found that both
firms are performing well in the respective industry. But Ryanair is more aggressive and
visionary then EasyJet and its management is also sound as relative to EasyJet. On the basis of
financial fundamentals, Ryanair is stronger than EasyJet in terms of profit, EPS and PE ratio.
However, Ryanair has shown high amount of debt in the balance sheet but by using derivative
contracts, it has successfully hedged itself against currency fluctuation and interest rate risks as
indicated in its annual report. Hence, on the behalf of good performance, sound management and
undervaluation of shares, it is recommended that entire corpus must be invested in Ryanair from
the available two alternatives.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
CRITICAL ANALYSIS..................................................................................................................1
1. Competitive environment and current and forecasted trends in UK aviation industry......1
2. Ratio analysis......................................................................................................................2
3. Critical evaluation of corporate strategy of EasyJet and Ryanair......................................4
4. Recommendations on investment.......................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INDEX OF TABLES
Table 1: Ratio analysis of EasyJet and Ryanair...............................................................................2
Table 2: Balance score card.............................................................................................................6

INTRODUCTION
Making investment is a very tough task because an investor needs to look after various
factors before investing target corpus on specific share or group of shares. In order to make
investment in specific company, knowledge about its fundamentals and the ways in which
management is running a business is necessary to have. Therefore, in this report, ratio analysis is
done and management strategies that are implemented by EasyJet and Ryanair are discussed. At
the end of the report, recommendations regarding investment of corpus are also given in this
report.
CRITICAL ANALYSIS
1. Competitive environment and current and forecasted trends in UK aviation industry
Ryanair and EasyJet are two major airlines of UK that offers services at lower prices. The
major drivers of change in the firm’s growth rate in lower price segment of aviation industry are
fleet size, new networks and cost control measures. Ryanair and EasyJet are operating in
competitive environment and some of the core factors that make this environment competitive
are discussed below:
1. Fleet size- In the UK and European nations, most of the firms increase their fleet size. It
is seen that in FY 2015, fleet size has increased by 5.2% on year-on-year basis. This
elevation in the UK’s major low cost airline is observed due to growth of legacy and low
cost or budget airlines (Turnbull, Blyton and Harvey, 2004). In future, the growth in GDP
and PMI leads to increase in the fleet size.
2. Cost control- Revenue of low cost airlines such as EasyJet and Ryanair depends on the
price that they charge from their customers. All firms that are operating in the low cost
fare segment are focusing on reducing their cost. In this regard, all of the organizations
are adopting cost control and curtailment measures. This trend is expected to continue in
future since it is going to determine the organization’s success or failure.
3. New flights/ network – In order to grow in this highly competitive segment, firms like
EasyJet and Ryanair are not relying on low cost and brand recognition. They are also
focusing on adding new routes on their network. In order to make grip on new route, firm
charges low fares relative to those routes in which they are already established (Bows and
Anderson, 2007). Introduction of new routes also elevate the firm’s advertisement costs.
1 | P a g e

Hence, this leads to low revenue in the specific year. In future also, firms will adopt new
networks in order to expand their business.
2 Ratio analysis
Table 1: Ratio analysis of EasyJet and Ryanair
EasyJet Ryanair
Gross profit 1690 1884
Net sales 4527 5037
Gross profit ratio 37.33% 37.40%
Net profit 450 523
Net sales 4527 5037
Net profit ratio 9.94% 10.38%
Current assets 1261 3444
Current liabilities 1420 2275
Current ratio 0.89 1.15
Debt 299 2706
Equity 2172 3286
Debt equity ratio 0.14 0.82
Net profit 450 523.00
Outstanding shares 393 283
EPS 1.15 1.33
2 | P a g e

Share price 27.22 13.22
EPS 1.15 1.33
PE ratio 23.77 9.93
Industry PE ratio 10 10
Interpretation of ratios
1. Current ratio- Standard current ratio is 1:1 and ratio above one indicates that the firm has
sufficient amount of current assets to meet its current liabilities on time (Garrison,
Noreen and Brewer, 2003). Ryanair’s current ratio is above one which shows that from
firm’s point of view, its liquidity position is very strong. On the other hand, current ratio
for EasyJet is below and near to one. This in turn indicates that the firm is able to pay
current liabilities on time. This ratio reflects firm’s ability to meet its working capital
requirements. So, EasyJet may face some problem in paying its current liabilities on time.
On the basis of performance of this ratio, Ryanair is fundamentally stronger then EasyJet.
2. Debt equity ratio- This ratio reflects the firm’s capital structure and proportion of equity
and debt in same. Moreover, the firms with more equity relative to debt are considered
fundamentally stable from long term point of view. Debt equity ratio of both firms is
lower than one and this reflects that proportion of equity is higher than debt. This is good
from both the firm’s point of view. EasyJet’s debt is very low relative to equity which
indicates comparatively a sound capital structure. There is little difference between debt
and equity amount in case of Ryanair. If majority of debt is on floating interest rate then
negative change in exchange rate may erode the firm’s profitability and can make the
situation worse for company.
3. Earnings per share- This ratio indicates the amount of earnings generated by
shareholders on each and every share (Werner and Brand, 2001). There is not any big
difference between EPS of both the organizations. However, Ryanair is considered to be
stronger then EasyJet on the basis of this parameter. Nevertheless, any retail or
institutional investor cannot solely take its investment decision on the basis of
performance of firm through this ratio.
3 | P a g e

4. Price/earnings ratio- PE ratio indicates valuation of the firm by comparing current
market price to earnings of the organization. This ratio helps investor in identifying that
whether the current market price of firm’s stock is according to its earnings or not. In this
regard, equity research analyst uses DCF (Discounted cash flow technique) in order to
identify the fair value of company’s share. By using PE ratio, an investor identifies that
whether the share of a company in which he/she intends to invest is overvalued or
undervalued. If for certain specific firm, PE ratio is higher relative to industry PE ratio,
then it will be termed as overvalued share. Further, the analyst does not suggest long
position for shares into consideration. Contrary to this, if firm’s PE ratio is lower than
industry’s PE ratio then it is termed as the undervalued share and it is assumed that
specific firm’s share have a lot of growth potential. PE ratio of aviation industry of UK is
estimated to be 10 and of EasyJet, it is calculated as 23.77. Therefore, share of EasyJet is
overvalued in nature. Whereas, share of Ryanair is undervalued because its PE ratio is
lower than industry standards. The ratio for Ryanair is estimated at 9.93. Hence, on the
basis of this ratio, Ryanair is performing better than EasyJet.
5. Gross margin ratio- This indicates the part of sales that is covered by the gross profit of
firm. This also reflects the firm’s capacity to control its direct expenses (Nissim and
Penman, 2001). There is a slight difference between both firm’s gross profit margin ratio.
However, Ryanair is proved to be better than EasyJet on the basis of higher gross profit
margin ratio.
6. Net profit margin ratio- Net profit ratio indicates the firm’s ability to control its indirect
expenses. Net profit of Ryanair is higher than EasyJet. Hence, Ryanair is considered to be
more profitable than EasyJet.
3. Critical evaluation of corporate strategy of EasyJet and Ryanair
Corporate strategies of EasyJet and Ryanair are as follows:
EasyJet:
 Slots- EasyJet has valuable portfolio of slots in primary airports. Primary airports refer to
airports that are located in large cities like London Geneva, etc. Slot indicates authority of
the firm to take off or land a particular aeroplane on the specific airport. In future,
EasyJet has planned to buy slots on other primary airports. These slots can also be
4 | P a g e

purchased by one firm from the other (Making travel easy and affordable, 2014). At
London Gatewick, EasyJet has increased its passenger carrying capacity by 10% due to
purchase of slot from Flybe.
 Building capacity- EasyJet is focusing on enhancing its capacity and in current financial
year, its capacity grew by 6.8%. EasyJet is the UK’s largest low fare airline and it is
enjoying a commanding position in the relevant industry. In order to maintain this
position, EasyJet will certainly elevate its capability in terms of capacity.
 New networks- EasyJet is planning to start its airlines on new routes. Normally, it has
been seen that catering services to new routes is a very difficult task. Apart from this,
getting acceptance from local people is also a very difficult task. In future, EasyJet is
going to continuously strive for starting its airlines on new routes in order to maintain a
leading position in the relevant industry.
Ryanair: New routes- Ryanair is aggressively following this strategy and is successfully
commencing its airlines on 143 new routes. Due to this reason, Ryanair earns good profit
in its business. In this regard, Ryanair expanded its market segments through primary
airports like Athens, Bratislava, Brussels, Cologne, Glasgow, Lisbon and Rome. In
future, it is expected that Ryanair will start giving services on new routes. Advertisement- Ryanair is running a campaign “Always getting better” in order to
enhance its brand memory retention value (Contents, 2015). Under this program, it is
improving its services, reducing fees and implementing digital developments on its
current infrastructure. Under digital program, it develops its own mobile application. By
using this application, users can find flights, check tickets and can manage their bookings
as well. This also does word of mouth advertising for Ryanair. It is expected that in
future, Ryanair will initiate such kind of advertisement programs. Fleet size- Ryanair is consistently focusing on increasing its fleet size. In upcoming
years, it will elevate its fleet size both on existing routes and new routes. Commencing
services on untouched routes is the priority of Ryanair’s growth strategy and due to this
reason; it will certainly enhance its fleet size in the upcoming years.
5 | P a g e

 Enhancing number of flights to primary airports- Low fares and current business model
allow Ryanair to win significant new traffic in comparison to competitors (Contents,
2015). Due to this reason, Ryanair is completely focusing on building its strong
command on primary airports. Slots- Ryanair understands the importance of slots in elevating its profitability level and
its management is strongly committed towards enhancing number of slots portfolio in its
airline business.
Evaluation on future prospects
It is expected that in future, both firms will continuously follow the strategy in terms of
fleet size and new networks. This is because; by ignoring these factors, no firm can survive in
low budget segment of aviation industry. However, on the basis of evaluation of strategies of
both the firms, it can be said that in future, Ryanair will remain more aggressive then EasyJet.
4. Recommendations on investment
Balance score card is a table that measures the firm’s performance on the basis of
financial, customer, innovation and internal factors (Summary of the balanced scorecard
concepts, 2015).
Table 2: Balance score card
Financial Customer Innovation Internal
Ryanair Financial
analysis indicates
fundamentally
strong position of
Ryanair in terms
of meeting short
term liability. Its
gross profit and
net profit margin
ratio are also
higher than
Ryanair is
consistently
attempting to
provide low cost
services to its
customers
especially on new
routes. Due to this
reason, company
is performing
well in relevant
Ryanair is
bringing up
innovation in its
services by
following an
“Always getting
better” campaign
at its workplace.
Through the
mentioned
program, it is
simplifying its
service delivery
procedure.
6 | P a g e

EasyJet. Apart
from this, the
share is
undervalued.
Moreover, there
is strong growth
potential due to
strong
fundamentals and
focus on all areas
of businesses.
This will certainly
play a decisive
role in the firm’s
growth. It is
expected that with
positive
movement in
economy in terms
of GDP, PMI and
IIP, good upside
can be observed
in Ryanair’s
share.
industry.
EasyJetEasyJetPe
rformance of
EasyJet is below
of Ryanair in
terms of gross
and net profit
EasyJet is
providing low
cost service to its
customers and
due to this reason;
it is UK’s second
EasyJet is
bringing up
innovations in its
services and it is
using innovative
technology to
EasyJet is also
focusing on
improving its
internal service
process.
7 | P a g e

margin ratio.
However, there is
not any big
difference in the
performance of
both companies.
Debt equity ratio
of EasyJet is quite
impressive.
However, its
share is
overvalued and
there is little
chance of growth
in the share price
of EasyJet. In
case of stock
market’s
volatility, its
share price is
expected to fall
rapidly due to
overvaluation of
shares.
largest Airline
after British
airways.
bring cost
effectiveness in
its operations.
Along with this, it
has also done
maintenance
innovation by
using telemetric
technology. As a
result, it can plan
cost-efficient
repair schedules
for its aeroplanes.
Recommendations
On the basis of analysis, it is recommended that from available alternatives, entire corpus
must be invested in Ryanair because it is financially sound. Apart from this, it is working on
several areas (Mentioned strategies) in order to consistently improve its position in highly
competitive segment of aviation industry. This creates belief on the management of Ryanair.
However, Ryanair has high amount of debt in its balance sheet. Negative change in exchange
8 | P a g e

rates can appreciate the value of debt and may erode the firm’s profitability. However, Ryanair is
using derivative contracts to hedge its position and it effectively hedges its position against the
exchange and interest rate risks. Therefore, this again creates reliability on the management of
Ryanair.
CONCLUSION
On the basis of above discussion, it is concluded that before making investment, an
investor must check firm’s fundamentals and must try to access the efficiency of management.
While making investment, economic scenario of domestic and international economy must be
fully understand. Thereafter, an investor must understand the industry in terms of factors that
affects its profitability level. On the basis of economic, industry and company information, an
investor must make investment on specific share.
9 | P a g e