Financial Decision Making, Easyjet in comparison with Ryanair

fiscal end Making, Easyjet in comparison with Ryan broadcastThe purpose of this report is to prep atomic number 18 an analytic thinking of the pecuniary execution of instrument and position of Easyjet plc in comparison with that of Ryanair plc.The CORE model onward motion was practised in preparing a review of apiece air lanes annual accounts with selected ratios apply to evaluate comp ar, transmission line their pecuniary feat. An analysis of Easyjet plc process and position against Ryanair plc confirms the by-line key findings.The principal finding from this report is that the latest finance dodge for Ryanair plc is non sustainable in the long shape. Easyjet plc diversification into adjuvant activities has incurred exist which al wiped out(p) be recouped every last(predicate) all over a catamenia of prison term and gleam a positive enthronization strategy during and after the economic downturn. Furthermore, Easyjet will achieve additional savings if a n optimum hedging policy is apply during the authorized economic downturn.IntroductionAn appreciation of the European airway industriousness was considered in relation to Easyjet plc accepted fiscal positioning and chump knowledge as the preferred low comprise skyway provider. The financial performance and position of Easyjet plc was appraised against Ryanair plc through application of the CORE (Context, Overview, proportionality, Evaluation) model.Context upholdes the market comp whiznt part and European air duct environment from an internal and external billet that the cardinal plcs operate and compete at heart.Overview is an appraisal of the financial performance between the 2 Plcs in relation to similar operational activities and qualifying their accounts and strategic nest during the current economic downturn.Ratio analysis strengthenes the relationship between utter centres inwardly the Balance Sheet, Cash f subroutine Statement and Income Statement to establish the base of Evaluation for financial performance between Easyjet plc (Easyjet) and Ryanair plc (Ryanair).Evaluation of the two accounts is an integrative component of the CORE address based upon the three preliminary stages to incite with seeing an overall conclusion from the analysis.The overall conclusion whitethorn and so be drawn as to the degree of success of the boldness in terms of the implementation of the corporate strategy for client, competitors and suppliers according to the specific counselling of the analysis (Moon Bates, 1993).Context (Internal)Each respiratory tract as their primary action provides international and regional low speak to airline business sets at bottom the European airline industry. both airlines are recognised indoors the market and operationally commissioningsed towards a low- coiffe strategy. Sustainability and success of providing low approach airline derives is critically dependent upon curbing a low cost base espe cially during the current economic downturn to protect long-term viability.The global duopoly of Boeing and Airbus within the European airline industry influences the high fixed cost relative to uncertain be that is inherent to airline pricing and reachs the operational focus towards retaining a low cost base. Reducing operational cost provides each airline with flexibility to offer displace ticket fares, issue dividend shares or retain earnings for future investing as part of their belligerent favour over a rival (Brassinton Pettit, 1997).From a media perspective and operational approach, Ryanair has boffo introduced a low cost base through staff optimisation and promoting www.ryanair.com for online ticket sales. Application of the airlines website fucking provide an integrated marketing communications strategy as thoroughly as introducing an effective counseling development system to co-ordinate tax taxation activities. Ryanair is reputed to swallow achieved 22 one million million pounds in reduced sales and distribution costs through application of their web-based vigilance culture system (Done, 2008).Additional operational savings to establish a low cost base consent been generated through Ryanairs metreisation of their airline fleet to Boeing 737s. Standardisation provides lower staff training and maintenance costs out-of-pocket to familiarity and inventory considerations. some(prenominal) airlines target the European short-haul metropolis look at market segment and utilize a system termed yield management to allow seating to be priced according to supply and demand (Ryanair Plc, 2008).Ryanair and Easyjet focus upon an optimum turnaround time at each collectible to acquit planes being non-revenue generating. To maximise wages, fixed and variable costs are regularly challenged to introduce further savings which establishes the rationale as a low cost airline provider not to be forthcoming with fee to riders for escapis m digestcellations. It is thusly an operational priority to ensure do oral communication with minimal lost baggage claims and flight reliability exceeds the industry standard in relation to key performance indicators.Dependent upon the size of the aircraft procured or leased from Boeing and Airbus, economies of scale stinker be achieved to attach the direct utility edge of the airline. Establishing a sustainable low cost base can change magnitude the intercommunicate operating proceeds, increasing the airlines purchasing power to bring off preferential commercial arrangements with suppliers. Furthermore financial success in one industry field provides opportunity to develop activities in other sector using adjunct partners. In relation to each airline generating ancillary revenue, Easyjet activities have diversified into conglomerate market segments and achieved higher revenue returns beyond that of Ryanair, as minute within each airlines Income Statement. twain th e airlines have spread out their ancillary activities with Easyjet achieving a 115% improvement for ancillary serve ups including machine rentals, Hotels, apartments, Travel Insurance and Airport Parking as recorded within their respective company accounts.Ultimately, Easyjet is expanding the portfolio of activities during the economic downturn to develop the brand and establish complimentary ancillary services to mitigate against revenue loss in a specific sector such as Passenger flights. In contrast, Ryanair has generated a 23% improvement in their ancillary services with rider service the primary focus to achieve revenue (Easyjet Plc, 2008).As a short term strategy, this has possibly generated the concern that Ryanair performance has improved over Easyjet, yet as a long term approach the approach is not sustainable. This is repayable to all operational activities having a specific cost threshold and in a fare war contest it may become necessary to subsidise activities from o ther more expediencyable ancillary activities. The current approach by Ryanair in the economic downturn is on that pointfore considered prejudicial against their long-term viability.Each airline primary summations are critical within the Income statement that reflects the substantial superior outlays in relation to the purchase of aircraft fleet for both providers. In the long term this approach can be beneficial due to reduced future costs associated with leasing as well as minimising interference from external financing companies concerning pricing tactical manoeuvre with possible withdrawal of finance due to sensed negative forwarding of the airline.Ownership of aircraft establishes a tangible asset and brand platform that can be applied to accession shareholders and investors confidence. The accumulation of assets establishes a long-term investment strategy that requires operational maintenance and management depreciation consideration. Ownership of the asset ultimately provides each airline with the opportunity to select without constraint their service partners for maintenance, cleaning and insurance queerage. As antecedently mentioned both airlines target the short-haul city break markets and utilise the yield management system to allow seats to be priced according to supply and demand thereof exercising right control of their marketing mix to the consumer (Airlines, 2006).Recorded revenues of 2,171 million was achieved by Ryanair during the financial year ended on evidence 2008, representing an add-on of 21.3% over 2007 and generating 37.6% of the total revenues in 2008(Ryanair, 2008) in comparison recorded revenue was 2,362.8 million in September 2008 generating an increase of 31.5% compared to their performance in 2007 and reflective of a sustainable corporate strategy to protect the viability of Easyjet during the economic downturn(Easyjet Plc, 2008).Easyjet completed the achievement of GB Airways in January 2008 with Ryanair attemptin g a similar corporate attainment that was rejected by Aer Lingus. Currently no progress has been achieved from the Aer Lingus rejection of the offer yet the collapse of buget airlines turn over Europe in 2009 with previous budget airlines alike going into cheek does not provide the consumer with confidence in low cost fare providers (PIGNAL, 2008).Context (External)According to Datamonitor (2008) by 2011 the airline industry is forecast to have a value of 89 billion with 773.5 million passengers anticipated to use airline travel on an annual basis. Competition amongst the two airline providers is increasingly foc employ towards cost and brand marketing. Various management cost diminution initiatives with provision of solo one class of service have developed each airlines reputation as a no-fill providers due to costs being charged for all non-essentials.To assess the external profile of Easyjet in comparison to Ryanair a SPECTACLES approach is applied with consideration toward s the various categories as well as applying Porters five forces model (1980).Social considerations embrace credit rating of both airlines as market leaders with strong brand identification for low cost fares. Furthermore, both airlines have developed a reputation for reliability through punctuality of flight times, minimal flight cancellations and reduced lost luggage claims.Political considerations overwhelm all regulative constraints that may apply to both providers such as airport charges which are generally levied through regulation preferably than commercial negotiation.Economic considerations implicate the economic downturn, reduced disposable income and expenditure of customers together with increasing furnish costs due to global conflict and fear of terrorism attacks. In addition, global events have change magnitude insurance provisions and requirements within the airline industry.Cultural considerations include the perception that low cost airlines provide an su bstandard service in comparison to traditional flag carrier and take aim airlines that concentrate upon a differentiation competitive advantage.Technological considerations include the recognition that safety is a main consideration and cost aspect with all aircraft parts have a defined life-span in the lead permutation is required. The replacement of prop aircraft to jet engines as part of fleet modernising as well as increasing safety requirements requires airlines to a continual review of their projected superior and maintenance allowances.Aesthetic considerations include the preference for one airline over another with Easyjet achieving a global focus due to broader activities in comparison to Ryanair. twain airlines provide the same class of service on all flights with emphasis upon low costs.Customer considerations include ease of on-line booking together with ticket costs unite with reliability of each airline operating the prescribed flights and minimal loss baggage cla ims. Against Easyjet, Ryanair has achieved meaning(a) short-term success in this category at the depreciate of generating a love/hate relationship with the public.Legal considerations include the regulatory constraints for passenger safety, security provisions, make noise reduction, and environmental issues. In addition, to employment and aviation law, there is competition and liability legislation that restricts the operating activities of each airline.Environmental considerations include all regulatory constraints that may apply such as noise reduction, emissions and force out efficiency, reduced energy, water and material consumption and air trading congestion.Sectoral considerations include review of competitors and future regulatory considerations to enable a competitive advantage to be developed over rival airlines. In legion(predicate) respects review and implementation of Porters (1980) competitive forces provides the sector framework for analysing the gaudiness of co mpetition to the profitability and attractiveness within an industry. The below five forces diagram illustrates the relationship between the different competitive forces (Porter, 1980).Adapted from Porter (1980) quintet Forces ModelThreat of new entrants lowThe preference for lower air fares generated the business opportunity for Easyjet and Ryanair to compete against traditional flag carrier and lease airlines. A high swell investment and legislation requirement combined with competition for additional airport slots/positions creates physical and financial barriers for new operators within the airline industry. talk terms power of customers increasingAvailability of constant information through the World Wide Web provides information of which airline has the cheaper fare and within an economic depression, the preference of the customer is generally towards the cheaper service provider.Bargaining power of suppliers strong but limitedThe price of aviation discharge is directl y related to the cost of oil, as an individual company Easyjet and Ryanair does not have the power to alter this. The impact of the supplier depends on the accessibility of alternative suppliers and product substitutes (Dibb Simpkin, 2001). The more these airlines expands the more power it will receive over its suppliersThreat of the substitute products or services low in that respect are no tenable threats from other modes of transport as distances are too great except from London to Paris, which can be reached by Euro Star.Current competitorsEasyjet and Ryanair sustain a cost leadership advantage over all other operators including traditional flag carrier and charter airlines that utilise a differentiation rather than a low cost base.OverviewBoth Ryanair and Easyjet have membership of the European Low Fares Airline Association (ELFAA) to assistance with their equal representation within the airline industry. According to ELFAA (2009) statistics Ryanair provides 1,200 daily fl ights in contrast to the 1,000 daily flights provided by Easyjet. As a consequence of providing a higher volume of daily flights than Easyjet, the passenger load factor for Ryanair is lower at 81.4% according to the June 2009 ELFAA statistics. The passenger load factor of 85.2% for Easyjet identifies on norm their passenger occupancy per flight which can be compared to the break-even point to identify the profitability of a specific flight (ELFAA, 2009).The below table provides an perceptivity of each presidential term in relation to their operations and company profile.RYANAIREASYJET naturalised19851995ANNUAL TURNOVER2171 million2,362 millionOWNERSHIP STRUCTURERyanair Holdings PlcEasyjet PlcNO OF AIRCRAFT220165MAJOR FLEET TYPEBOEINGA320 BOEINGMAIN HUBLONDON, STANSTEDLONDON, LUTON AIRPORTH/QDUBLIN, IRELANDLONDON,UNITED KINGDOMNO OF ROUTES cover950400NO OF COUNTRIES COVERED147 COUNTRIES28 COUNTRIESEMPLOYEES59206107PASSENGER VOLUME60 MILLION43 millionPASSENGERS5.12 million3.53 mill ionPUNCTUALITY FLIGHTS ON TIME88%80%ACQUISITION MERGERSFAILED TO ATTEMPT AER LINGUSACQUIRED GB AIRWAYSEXTERNAL AUDITORSKPMGPRICEWATER COOPERSAIRLINE PASSENGERS PER EMPLYOEE96796772Source Easyjet plc 2009 Ryanair plc 2009.Both the airlines follow the going concern basis in preparing their financial statements which have been certified by independent respective external auditor as being a true and fair status of the companys financial overview. The financial statements are inclined(p) in accordance with the International Financial describe standards (IFRS) as adopted by European Union (EU) and effective from March 2008 as applied in accordance with the prevailing Companies Act legislation. Both airlines amended their accounting policy in 2005 from UK GAAP to International Financial Reporting Standard (Ryanair Plc, 2008 Easyjet Plc, 2008).Both airlines are successful in strategising for revenue generation with Ryanair maximising its profit through effective control of operating e xpenses in comparison to Easyjet. An example is Ryanairs effective fuel hedging policy which allows the airline to allocate fixed fuel costs without surcharge to the customer whereas Easyjet varies their fuel surcharge to the customer.The turnover for Easyjet is 2,362 million (2008) from 1,797 million (2007) which is a 20% increase in the turnover. Unfortunately due to the change magnitude system expenses incurred profit margins have not been maximised due to staff, marketing and fuel costs. These costs cumulatively represent a total cost increase of 28% in 2008. The final outcome was a subside in profit margin from 11.23% from 4.66%, which trails far behind Ryanairs profit margin (Easyjet plc, 2008).Ryanair in comparison to Easyjet has increase its turnover to 2,171 million (2008) from 1,789 million (2007) which is a 13% increase whereas their administration costs increased by 13% from last year. This has led to Ryanair capitalising on the increase in turnover to profit (Ryanair plc, 2008). Airline passenger per employee for Ryanair is great in comparison to Easyjet and reflects an optimum utilisation of resources. Ryanairs punctuality of flights on time is 88% when compared to 80% of Easyjet which demonstrates the operational efficiency of staff. The customer base has increased for both airlines with Ryanair achieving greater customer retention through market mastery of the short haul flights.The addition of 16 more aircrafts through Easyjets acquisition of GB airways to 165 aircrafts amounted to a capital expenditure of 118 million (Easyjet plc, 2008). Ryanair took the pitch of 30 new aircrafts bringing its total to fleet of 220 aircraft which amounted to 97.1 million towards capital expenditure incurred for the year. Both the airline has an expansion plan which clearly shows in their adding of more aircrafts to their existing fleet. Ryanair has raised finance through the mortgage of their aircraft, with a book value of 3,061.5 million as collateral se curity for finance generated through loans for purchase of next generation 737-800 Boeing aircrafts (Ryanair plc, 2008).RatiosThe calculated ratio analysis establishes the relationship between stated totals within the Balance Sheet, Cash Flow Statement and Income Statement to establish the base of Evaluation for financial performance between Easyjet plc (Easyjet) and Ryanair plc (Ryanair). The three main areas of Strategic analysis include kaleability, liquid and Efficiency as well as Gearing and Investment. Consideration of the ratios reflects the performance of Easyjet in achieving strategic goals in comparison to Ryanair and other rivals. The ratios are in the table format and the implications are discusses below (Moon Bates, 1993).RatiosRYANAIREASYJET2008200720082007ProfitabilityROCE9.20%9.86%5.78%12.08%Net Profit Margin16.17%20.16%4.66%11.23%Goss profit margin19.79%21.09%3.85%9.57%ROSF15.61%17.15%6.51%13.22%LiquidityCurrent Ratio1.53 generation2.02 quantify1.56 Times1.88 T imesAcid Test Ratio1.53 Times2.02 Times1.56 Times1.88 TimesGearing Ratio47.55%44.47%41.53%39.19%Interest carry on Ratio5.53 Times5.09 Times3.36 Times6.70 TimesEfficiency RatioEarnings per share20.6722.5619.8436.61Wage Cost (%)10.51%10.13%11.14%11.36%Other ratiosDebtors Collection eld4.6 geezerhood3.82 days21.55 days34.2 daysCreditors Payment days17.39 days8.94 days11.97 days8.04 daysSource Easyjet Plc.2008 Ryanair Plc, 2008.The financial ratios provide a quick and relatively simple means of assessing the financial health of the organisation (Atrill Eddie, 2006).EvaluationTo complete the CORE model an evaluation of the two airlines has been prepared with a succinct thickset of the main findings of the report including key recommendations identified.Both airlines have reduced profit margins with Easyjets profit margin gap is meaning(a) in compared to Ryanair. The decline in the profit is mainly due to an increase in administration cost as previously reported. The main bring fa ctor is 66% increase in the fuel cost when compared to 2007 whereas Ryanair had exclusively 14% in increase in fuel cost due to its effective (73%) hedging policy on fuel charges. Neither airline released dividend payments for 2008.To reduce short-term earnings volatility Easyjet has put the following fuel and currency hedging positions in place66% of anticipated 2009 financial backing requirement is tabled at 1.96/,an additional 5% of requirement are hedged with collars with bonny floors of 1.73/ (of what Shinde per sq metre)56% of 2009 capital expenditure relating to aircraft deliveries hedged at 1.97/81% of anticipated 2009 euro surplus hedged at 1.24/.(Easyjet plc, 2008).Easyjet has also achieved a positive trend through reduced wage costs in comparison to Ryanair, which is a consistent consideration to maintain during an economic downturn to ensure competiveness with Ryanair. The operating profits for Easyjet were lower due to incurred advertising costs which were high in c omparison to minimal advertising costs incurred by Ryanair and recorded as zero within the Income Statement. Online booking for Ryanair is greater than 90% which results in a small operating expense towards marketing. In contrast to Ryanair, Easyjet is applying a long term strategic approach to maximise revenue through advertising in the media and other channels to inform customers of their service value with competitive low fares.The acquisition costs for integrating GB Airways costed at 12.9 million in 2008 which is going to reflect as an expense on next years income statement will assist Easyjet to increase profit margins. Easyjet has also increased ancillary revenue which will assist the company to mitigate its corporate risks through diversification of activities.Both airlines use the straight line method for calculating depreciation due to which Easyjet is presentation 33% increase in its depreciation cost versus Ryanair 22% increase in depreciation. In relation to Easyjet th e depreciation cost is high due to the acquisition of GB Airways with additional assets to be depreciated.The gratify cover ratio, which is used to determine how easily either airline can pay fill on outstanding debt, was calculated by dividing each airlines revenue before hobby and taxes with ratio. The interest cover ratio has declined dramatically for Easyjet by 3.34 times when compared to Ryanair which increased by 0.44 times. Thus the decline in Easyjets interest cover ratio can be explained through an increase in get and combined with a dramatic decline in profitability in 2008.The lower the level of operating profit coverage, the greater the risk to lenders that interest payments will not be met, and the greater the risk to the shareholders that the lenders will take action against the business to recover the interest rate. Whilst Ryanair has its maintained a favourite(a) interest cover ratio in comparison to Easyjet due to the profit 429,664 achieved despite high borro wings. Easyjets Interest cover ratio was not as favourable due to their profit margins of 910,000 despite achieving a preferred string ratio in comparison to Ryanair.The gearing ratio refers to the relationship between the amount of fixed interest capital and the amount of equity within each airline. Ryanair has increased from 44% (2007) to 47% (2008) primarily due to an increase of long term debts at 13% in 2008. When the value of debt capital is more than the value of equity as in Ryanairs situation the organisation is passing geared due to large borrowings of 1,814.57 increasing the risk of bonny insolvent in the medium to long term particularly if the economic downturn continues.Ryanair is raising finance for operational activities at the expense of an increased gearing ratio from 9.32% in 2007 compared to 39.96% in 2008 due to a decrease in profit margins (Ryanair Plc, 2008). Whilst, the gearing ratio for Easyjet increased to 41.53 % (2008) from 39.19 % (2007) this is prima rily attributed to the acquisition of GB Airways. The future gearing for Easyjet will reduce due to consolidation of activities whereas Ryanair increased gearing is attributed to the intended acquisition of Aer Lingus, purchase of market shares and investment within operational activities.It would therefore appear that Ryanair have exhausted the military posture to achieve future funding due to their current gearing ratio whereas Easyjet focus is towards consolidation of activities with an increase in profit margins anticipated in 2009/10.Easyjet have increased current liabilities in terms of aircraft maintenance cost and differential financial instruments (hedging losses) that have generated a reduction in the current ratio combined with the acquisition of GB Airways. Whilst Easyjet can access significant money and liquid investments to mitigate the risk of business disruption events of or so 863 million as at 30 September 2008 this excludes restricted cash of 66 million for short-term liabilities. Whereas the cash balance for Ryanair has improved it is only through analysis of the ratios that a downward trend is developing due to an increase in current liabilities within derivative financial instruments.Ryanair utilises derivative financial instruments to hedge against losses by anticipation of future price increases concerning predicted variability in cash flows of an asset, liability or a highly probable forecasted transaction. A significant contribution for an increase in the current ratio for Ryanair is the increase in maturity of debts. Both Ryanair and Easyjet have a similar acid ratio due to absence of stock or inventories within their published balance sheets.The sales revenue per employee ratio identifies how each airline is utilizing their employee productivity with an increase generally reflective of efficiency with management establishing additional key performance indicators for staff to achieve. As previously detailed on the ratio compari son table, Ryanair has increased sales revenue per employee. egress on capital employed identifies the relationship between the operating profit and average long term capital invested and is significantly reduced for Easyjet due to long term liabilities yet this is recognised as a fugacious phase following the GB Airways acquisition as well as undertaking airline operations within a competitive market. Achieving a profit within an economic downturn combined with adjustment of the hedge reserve will enable Easyjet to improve their effectiveness in 2009/10.In contrast, the capital redemption reserve for Ryanair has increased due to purchasing previously released equity shares as well as increasing long term liabilities with various financial institutions and established primarily on the basis of guarantees tending(p) by Export-Import strand of the United States to finance the acquisition of 107 Boeing 737-800 as a next generation aircraft.Whilst having slight favourable ratios tha n Easyjet the funding provided by the Export-Import Bank of the United States for Ryanair is attributed to the bank emphasis to support the financing of U.S. goods and services (Trade Finance, 2004). It could also be suggested that the purchase of previously released shares by Ryanair was implemented to prevent another airline purchasing Ryanair shares due to their perceived vulnerability since the continued reduction of operational costs is not a sustainable activity.The Debtors Ratio identifies the effectiveness of a debt collection routine and within the competitive low fare airline industry, efficient ratios would be anticipated especially when the focus is towards cost reduction measures and borrowing finance is a chargeable activity. Ryanair has an excellent debtor collection policy with a minimal increase 0.78 days in 2008. This could also be reflective of the absence of available liquid reserves within a business to increase the availability of work capital and reduce finan ce borrowings. In contrast, Easyjet debtor ratio can be optimised from 12.65 days in 2008 to improve the availability of working capital within the business and limit borrowings. In comparison of the two airlines, Easyjet could improve their debtor ratio to seven days for efficiency purposes whereas Ryanair requires a constant focus on their debtor ratio analysis due to availability of working cash and requirement to minimal all non-essential costs.The Creditors Ratio provides an alternative perspective on how the two airlines consider their debt considerations. Ryanair creditor payment period is 8.45 days and therefore due to the volume of activities there is the availability of finance for other activities for an average of 8.45 days until payment/settlement is issued. Through utilising the credit payment period as a temporary borrowing option there is the perceived high risk that funds for payment could become committed and rather than generating revenue growth, funds are being j uggled. In contrast the creditor payment period for Easyjet is 3.93 days restricting the availability of working capital to be paid to creditors rather than using it for day to day operations.In summary of the ratios selected for comparison the creditor and debtor ratios is reflective in general of how each airline is approaching their activities. Ryanair is quick to require settlement from debtors due to their restricted borrowing availability and uses a period of 8.45 days as an opportunity to generate additional revenue prior to settlement. Depending upon the volume of finance available within this period, Ryanair is anticipating the generation of additional revenue through hedging activities and received interest returns. In contrast, Easyjet is quick to make settlement as a creditor and less e