Escolar Documentos
Profissional Documentos
Cultura Documentos
Topic number 8:
Page 1
List of contents
Page
Introduction
Information Gathered
Financial Analysis
10
Business Analysis
25
Conclusion
28
Appendix 1
30
Appendix 2
32
Appendix 3
35
Appendix 4
39
42
Page 2
INTRODUCTION
This research report contributes towards the Research and Analysis Project for submission
to the Oxford Brookes University. This research report, in all respects, is prepared in
accordance with the codes and guidelines prescribed by the University and does not breach
confidentiality and anonymity of the organisation(s) involved and the industry being
analysed.
THE TOPIC
Having read all the research topics approved by the University, one of them sounded like a
familiar choice among all and seemed the most interesting. Therefore I chose to work on
The Business and Financial Performance of an Organisation over a three year
period.
The reason I chose this topic was that being an ACCA student I have always been interested
in analysing the published Annual Reports of companies and I took this research work as an
opportunity to exploit my technical and professional skills. The other reason for choosing this
topic was that there was a vast amount of financial and business-related information
available from many different sources.
THE ORGANISATION
For the purpose of this research work I have chosen RYANAIR HOLDINGS PLC. The
reason I chose this organisation was simply because of my familiarity with the airline
industry. Even in the European Airline Industry there was a vast choice of airlines which
could be strategically categorised as:
Scheduled Airlines (Flag carriers)
Charter Airlines
Low Cost Airlines (Budget airlines)
RYANAIR is strategically placed in the Low Cost Airlines industry. To me RYANAIR was the
best choice for this analysis because of its rapid expansion, profitability, the success of it low
cost business model and its capture of the market share Europe-wide. According to the
figures provided by International Air Transport Association (IATA) in 2009, RYANAIR is the
largest airline in terms of annual international passenger numbers. And secondly in terms of
information, taking the fact that RYANAIR is the market leader, I was able to find a vast
amount of published information on this particular airline.
Page 3
Profitability
Liquidity
Gearing
Investor
2) Industry Comparison
Comparison of the financial ratios and market-share of RYANAIR with that of a
competitor in the same industry, EASYJET Airline Company Ltd.
2) SWOT Analysis
Analysing and identifying:
o
o
o
o
Strengths
Weaknesses
Opportunities
Threats
Page 4
INFORMATION GATHERED
For any research process the information is vital and it is quite a task to gather relevant
information for analysis and evaluation. The nature of the information gathered for an
analysis depends largely upon the purpose. The information sources can be categorised as:
Primary Sources
This is the data collected by the researcher by means of questionnaires, interviews, surveys
etc.
Secondary Sources
This is the data collected by other people but which can be used by the researcher for his
own purpose.
To carry on with this project I decided to take into account only the secondary information
sources to obtain relevant organisation and industry data. The main secondary sources used
are listed below:
o
Page 5
During the process of information gathering, I came across many sources that were subject
to copyright and that material could not be used or copied without the express consent of the
organisation involved. This proved to be a barrier to the analysis as I decided not to use any
of the copyrighted material. Therefore in this project, all of the data gathered is free to use
and is publicly available. All the data is from the secondary sources and no primary sources
were used and so no other ethical issues arose during the data collection process. During
the process there was no access to confidential information, data was free from financial
inducements and the research complied fully with the ethical standards published by the
University.
Page 6
In this section the underlying principles of the financial techniques and business analysis
models have been elaborated. It is important to highlight the issues and the body of
knowledge that underpins each concept and the principles followed throughout this report.
These are dealt as under:
The two types of financial analysis techniques listed under the approach heading are
taken as standard and are self explanatory. They are used as indicators and can be
calculated from the information available from the financial statements. There are
many uses of the financial ratios but these uses come with certain limitations which
are as follows:
o
o
o
o
o
Page 7
2) SWOT Analysis
This is one of the easiest to understand and most effective of the strategic
analysis frameworks.
Page 8
RYANAIR is a low cost airline having its headquarter at the Dublin Airport, Ireland.
RYANAIR is floated on the Dublin and the NASDAQ Stock Exchanges.
It serves over 150 destinations in 26 countries and operates over 1000+ routes.
RYANAIR has a fleet size of 210 aircrafts (233 as of March 2010).
RYANAIR serves routes across Europe and has a well-established market share
particularly in the UK and in the EU.
It continues to operate from over 40 bases Europe-wide and has a long history of
growth and rapid expansion after the deregulation of the European airspace in 1997.
Until the end of December 2009, RYANAIR had captured 40.18% of the market
share of the total European passengers making it a market leader in its strategic
group (i.e. 65.3 million passengers travelled with RYANAIR out of the total 162.5
million European passengers that travelled on low cost airlines.)
(ELFAA, 2009)
In terms of international passengers carried per year, RYANAIR is the largest airline
of the world.
(IATA, 2009)
(Ryanair PLC, 2009)
In its early years, RYANAIR operated as a secondary carrier in Ireland but later as a
result of the deregulation of the European airspace in 1990s it diversified into the
Low-Cost Carriers Industry.
RYANAIR has a no-frills low-cost strategy and has a standard fleet, provides just
the very basic services and charges its customers for whatever it can, saving
company the costs and generating revenues.
(Osborne A., 2009)
Page 9
Trend Analysis
This is the comparison of the Financial Ratios of RYANAIR for 2007, 2008 and 2009. Please
see Appendix 2 for calculations and Appendix 3 for the Financial Statements.
PROFITABILITY RATIOS
It measures a firms use of its assets and its cost control to generate an acceptable
return.
(Groppelli, A. et al.2000)
Profitability Ratios
Percent (%)
25.0
20.0
15.0
10.0
5.0
0.0
2009
2008
2007
Operating Margin
3.1
19.8
21.1
3.6
17.7
17.9
Return on Capital
Employed
1.8
11.3
10.3
Page 10
At 21.1%, the Operating margin was highest this year, 1% lower compared to 2006.
There was an overall 32% increase in sales.
Scheduled passenger revenue was up by 31% to 1874.8m reflecting a 7%
increase in average fare to 44.
Ancillary revenue increased by 44% due to growth in on-board sales and nonflight scheduled revenues.
There was an increase of 33% in total operating expenses partially due to:
The growth of the airline.
Other contributing factors were higher fuel prices which rose by 50% due to
28% increase in cost per gallon
Rising route and airport charges at some sectors which increased by 21%
and 27% respectively.
2008
o
Page 11
Fuel cost rose by 14% to 793.1m. This was due to the increase in hours
flown. This was offset by fuel hedging and making aircrafts fuel efficient. Fuel
accounts for 37% of the total operating expenses.
o
2009
o
o
There was an overall increase of 30.9% in the total operating costs. This was due to
the following:
Increase in the number of passenger and sectors flown.
There was a 21% increase in the number of employees which was partially
offset by a decrease in the average rates of pay.
The cost of fuel increased by 59% from 791m in 2008 compared to 1257m
in 2009.
An increase of 11% in the fleet size.
45.6% rise in depreciation and amortisation due to additional aircrafts.
A 10.5% increase in route charges and 11.9% increase in airport charges was
another cause.
Page 12
2008
o
o
o
o
o
2009
o
o
o
o
o
Fall of 14% reported this year, bringing the net profit margin to 3.6% of sales
(excluding exceptional items).
From 2008s profit for the year of 390.7m, a 143% decline was reported; making it a
loss for the year 2009 of 169.2m.
Adjusted net profit decreased by 78% to 104.9m from 480.9m.
Finance income fell 10.9% due to lower deposit rates, offset by higher cash
balances.
Finance expense increased 34.5% to 130.5m due to increase in debts.
2007
o
o
o
ROCE was 10.3% which was about 0.4% higher than 2006.
Operating profit increased by 28%
The shareholders equity increased by 547.8m, this increase can be justified by:
Adjusted profits of 401.4m transferred to retained earnings.
11.2m exercised as share options.
And 99m merely because of the treatment of items according to IFRS.
o
o
2008
o
There was a 14% rise in operating profits this year and the airline showing stable
growth and returns.
Page 13
2009
o
There was a decline of 9.5% in ROCE this year bringing the 11.3% return in 2008
to1.8% in 2009.
This is mainly attributable to a lower operating profit this year due to rapid increase in
operating costs of the business.
There was a 3% fall in the shareholders equity mainly because of the reported loss
for the year of 169.2m transferred to retained earnings.
Long-term debt increased by 14% mainly due to debts drawn to finance the purchase
the non-current assets.
LIQUIDITY RATIOS
These ratios measure the ability of a company to meet its short-term debt. These indicate
the short-term financial stability of the company.
Liquidity Ratios
2.5
Times
2.0
1.5
1.0
0.5
0.0
2009
2008
2007
Current Ratio
1.8
1.5
2.1
Quick Ratio
1.8
1.5
2.1
Page 14
Current Ratio
It is the rule of thumb that the current ratio be at least 2.0 times, meaning that a company
should have current assets that are twice the current liabilities.
2007
o
A ratio of 2.1 times suggests that the current assets were twice the amount of current
liabilities. Although a drop of 12.5% as compared to 2006, yet it was stable.
Total current assets increased by 300.7m (14.6%) to 2354.3m in 2007, this change
was mainly due to:
164% increase in Other Assets which includes prepayments, interest
receivable etc.
A 22% decrease in Trade Receivables was reported.
There was a 180% increase in Derivative Financial Instruments consisting of
cash deposits, fuel derivatives and interest rate swaps.
There was a 6.5 %( 93m) decrease in cash.
There was a 32% decrease in current liabilities. This was due to:
31% (i.e. 24.5m) decrease in trade payables.
Accruals and other liabilities increased by 237m (41.6).
There was a 100% increase in the Derivative financial instruments.
Current tax rose by about 5m (33%) in 2007.
2008
o
In 2008, the current ratio decreased by 28.5% to 1.5 times. This is a continued trend
from the year 2006/2007 when the ratio decreased 0.3 times. If such a trend
continues, then the company could be in severe liquidity problems.
Current liabilities increased by 439m, a rise of 39%. This was mainly due to the
following:
Trade payables increased by 136% to 129.3m.
Page 15
A 105%, about 188m, rise in current maturities. And 85.6% (85.6m) rise in
financial instruments. These were the borrowings falling within one year.
These were the main reasons for a falling current ratio.
o
A drop in the ratio of current assets/current liabilities concludes that RYANAIR had to
borrow more and more to finance its sales growth of 21%.
2009
o
Current ratio in 2009 increased by 20% to 1.8 times. Although the ratio was lower
than in 2007 (2.1 times), RYANAIR showed signs of financial stability.
There was a 7% rise (156m) in the total current assets which is attributable to:
Increase in cash balances of 112m (8% change).
Derivative financial instruments increased by 119.7m. This increase was due
to the gains on cash-flow hedging instruments.
The total current liabilities decreased by 11.4% to 1379m i.e. a change of 178m.
This change was mainly due to:
A 1% decline of 13.6m in Accrued expenses and a 3% decrease in Trade
payables.
A decrease of 164m in current maturities of debt.
A rise in the current ratio this year shows a stable financial position of RYANAIR.
Quick Ratio
A quick ratio is similar to the current ratio but the current assets in the numerator do not
include inventories in the calculation. RYANAIR carried an average inventory of 2.2m in
each of the three years. This amount is relatively immaterial to the balance sheet and
therefore does not bring any change to the quick ratio.
Thus, an analysis of the quick ratio will be exactly same as of the current ratio.
Page 16
GEARING RATIOS
Debt to Equity
Percent (%)
150.0
100.0
50.0
0.0
Debt to Equity
2009
2008
2007
106.5
90.6
80.1
Times
Interest Cover
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Interest Cover
2009
2008
2007
0.7
5.5
5.7
Interest Cover
It is a measure to determine the ability of a company to meet its interest payments on its
debts.
2007
o
o
o
o
o
There was a12% rise in the ratio in 2007 as compared to 2006 and the interest cover
ratio was 5.7 times.
This was due to 26% rise in operating profits to 471.7m.
A 100% increase in lease financing to 183.1m.
To finance the aircrafts and simulators, the company drew 185m (net of
repayments) in loans.
Bank loans increased by 12% to 82.4m.
Page 17
Due to the above, the total interest charge increased by 12.2% to 82.8m.
2008
o
o
o
o
o
2009
o
o
o
o
o
This year, interest cover ratio decreased drastically by 87% to 0.7 times.
The operating profit was in steep decline and reduced by 82.7% to 92.6m. This was
mainly due to some exceptional items and rising fuel prices.
Finance lease liabilities increased by 32% to 435m.
Loans raised to finance the assets increased 5.8%, a change of 132m.
Therefore the total interest charge increased 34% to 130.5m.
2007
o
o
o
The debt to equity ratio was 80.1% in 2007, indicating that the debt was 80.1% of the
total shareholders equity. This is a decrease of 11.2% compared to the previous
year.
The total non-current debt increased by 13% to 2033.7m. (The reasons of its
increase have been outlined in the Interest Cover ratio of the same year).
The total shareholders equity increased by 27.5% to 2539.7m due to:
The share capital and premium accounts increased by 1.8%. This was due to
the issue of new ordinary shares and the exercise of the share-options.
The change in Other Reserves was due to the changes in accounting
policies (adoption of IFRS in the prior year).
The remaining increase was in the retained earnings i.e. profits for the year.
Page 18
2008
o
o
o
The D/E ratio increased by 13% to 90.6% this year, reflecting an increase in the
financial risk to the company.
The total non-current debt increased by 12% to 2268.2m.
Shareholders equity decreased this year by 1.0% to 2502.2m. This decrease was
due to the net effect of:
The issue of 3.2m new shares and the cancellation of 59.5m shares relating
to a share buyback.
The change in reserves was due to the net effect of the addition of the profit
for the year to retained earnings and a loss on the fair value of available for
sale financial assets.
2009
o
o
o
This year the D/E ratio increased 17.5% to 106.5% as the total non-current debt of
RYANAIR was more than the shareholders equity. This year the company was very
highly geared representing a very high financial risk.
The total non-current debt increased by 14% to 2583.6m. (Reasons outlined in the
Interest Cover ratio).
The shareholders equity decreased by 3% due to the effect of the following:
The issue of 0.7m new shares and the cancellation of 18.1m shares through
buyback.
Losses of 169.2m suffered during the year, reducing the retained earnings.
Other Reserve changed due to the gains on the fair valuation of financial
assets, i.e. the impairment of investment in AerLingus.
Page 19
INVESTMENT RATIOS
Euro Cents
2007
2008
2009
28.2
25.84
-11.44
2007
o
o
o
2008
o
o
o
2009
o
o
o
Page 20
Price-Earnings Ratio
It is the valuation of the companys share price compared to its per-share earnings.
(Investopedia ULC, 2010)
P/E Ratio
40.0
Times
20.0
0.0
-20.0
-40.0
P/E Ratio
2007
2008
2009
20.7
10.8
-25.3
2007
o
P/E ratio increased by 5.6% to 20.7 times, this was due to:
A 48% (1.91) increase in the share price of RYANAIR in 2007.
Increased EPS by 41% to 28.2 Euro cents.
2008
o
2009
o
A fall of 334% was recorded in the P/E ratio this year, due to:
A 144% decrease in the EPS to -11.44 Euro cents this year.
Although the share-price went up by 9.0 Euro cents (a 3% rise), it could not
accommodate the heavy fall in the EPS and therefore a falling P/E ratio.
Page 21
(2)
Industry Comparison
This is the comparison of the financial ratios of RYANAIR with that of its biggest
competitor EASYJET, for the financial year 2009.
Comparison of Market-Share
In the year 2009, the European Low-Cost Airline Industry showed a modest growth of 8.7%
in passenger numbers. An analysis by passenger numbers and market share can be done
as under:
Passengers (millions)
Norwegi
an
Ryanair
vueling
Wizz Air
Others
46.1
10.8
65.3
8.2
7.8
24.3
PASSENGERS
easyJet
28%
5%
Norwegian
Ryanair
5%
vueling
7%
40%
Wizz Air
Others
(ELFAA, 2009)
(ELFAA, 2008)
Page 22
RYANAIR
EASYJET
2009
2009
3.1
3.6
1.8
2.3
2.3
2.3
1.8
1.8
1.4
1.4
0.7
106.5
2.2
99.7
11.44
18.20
PROFITABILITY RATIOS
Operating Margin (%)
Net Profit Margin (%)
Return on Capital Employed (%)
LIQUIDITY RATIOS
Current Ratio (Times)
Quick Ratio (Times)
GEARING RATIOS
Interest Cover (Times)
Debt to Equity (%)
INVESTOR RATIOS
Basic Earnings per Share ( Cents)
Basic Earnings per Share( Pence)
P/E Ratio
25.26
16.62
24.98
SUPPLEMENTARY INFORMATION
1,478,472
-
289.00
428,300,000
415.2
379.2
Page 23
Percent (%)
4.0
3.0
2.0
RYANAIR
1.0
EASYJET
0.0
Operating Margin Net Profit Margin Return on Capital
(%)
(%)
Employed (%)
Comparison of Profitability Ratios
In 2009, although there was severe loss of profitability for RYANAIR yet its profit margins
were higher than that of EasyJet. This indicates RYANAIRs better cost control techniques
such as fuel hedging, interest rate swaps and a 3% cut down on other related costs.
EasyJets revenue increased by 12.9% as compared to 8% of RYANAIRs which was due to
lowering of average fares by 8%, but this was in-line with the industry growth of 8.7%.
RYANAIRs financial risk in 2009 was more than that of EasyJet as it was financed more by
the non-current debts than equity. This is a very high-risk capital structure adopted by
RYANAIR and is primarily due to the capital intensive nature of the industry. Investors may
perceive RYANAIR a high-risk investment as the Interest Cover is relatively low.
108.0
20.00
106.0
15.00
104.0
10.00
102.0
5.00
RYANAIR
EASYJET
100.0
Cents
Percent (%)
RYANAIRs EPS fell by 144% while EasyJet sustained the downturn with only a 14.6% drop
avoiding a loss this year. RYANAIRs loss was due to heavy losses on investments which
can be treated as exceptional and therefore the company has very bright future prospects for
investors taking in view its market dominance, profitability and growth potential. Through this
comparison we can conclude that RYANAIR is a relatively high-risk investment with lower
returns and its shareholders suffering capital losses.
RYANAIR
98.0
-5.00
96.0
-10.00
Debt to Equity
(%)
EASYJET
Basic Earnings
per Share (
Cents)
-15.00
Page 24
European airspace is de-regulated and air lines can fly freely among the EU
countries, eliminating any political constraints.
The industry requires very high capital-injection which acts as a high barrier.
Airlines already operating and the new-comers have to seek authorisations from the
Civil Aviation Authorities.
Availability of landing rights and slots at airports also acts as a barrier to entry.
New entrants have to cope with immediate price-wars with existing firms who have
already experienced the Experience Curve.
2) Power of Customers
The customers of RYANAIR are powerful because:
o
o
o
o
3) Power of Suppliers
The suppliers bargaining powers were moderate because:
Page 25
o
o
o
o
o
The industry is served only with two main aircraft suppliers, Boeing and Airbus, who
are rivals themselves.
Boeing is the main supplier to RYANAIR and there are very high switching costs.
RYANAIR only uses secondary airports that are relatively low in power.
There is no control over fuel suppliers as it is an international market issue.
The low cost business model needs very high negotiations with suppliers.
4) Threat of Substitutes
The substitute products/services threat was moderate due to:
o
o
o
Other means of travel in the Europe, e.g. Eurostar, Ferries, by road etc.
Lack of loyalty in customers and no switching costs.
RYANAIR calls only to secondary airports which may increase the threat as
customers may use alternate transport.
5) Industry Competitors
o
o
o
o
The market is very competitive with different airlines operating on the same
segments.
There was growth in customer numbers, indicating very high competitive
environment.
The competitors imitate the factors of competitive advantage to a firm.
But having the highest market-share, RYANAIR remained dominant throughout.
o
o
o
Tendency to decrease costs through hedging of risks and lowering fares and
providing customers with value-for-money.
All online bookings and being most efficient in terms of punctuality, lost baggage etc.
Creative reductions on costs.
Page 26
o
o
A uniform Boeing 737 fleet with high seat-density, high load factor, lower turn-around
times and lower training and maintenance costs.
A non-unionised labour force with lowest rates of pay in the industry.
WEAKNESSES
o
o
o
o
o
o
o
o
OPPORTUNITIES
o
o
o
o
Orders of new aircrafts reflect tremendous growth potential of the airline and can be
seen as an opportunity.
Being a dominant firm, RYANAIR still has potential to capture more of the European
market-share.
Launch of long-haul routes in 2014 with a complete diversification towards
Differentiation rather than Cost-based can prove to be very fruitful for RYANAIR.
The current and continuing economic downturn has been good for the low-cost
carriers profitability.
THREATS
o
o
o
o
o
o
o
Page 27
CONCLUSION
The European airline industry is very dynamic and is growing at a moderate pace.
RYANAIRs current business strategy based on the low-cost operating model has been
adapted from the Southwest Airline Company (USA) and since the early 1990s, it has been
aggressively implemented. And as a result of this successful implementation of the low-cost
business model, RYANAIR has emerged to be the largest airline in Europe with
achievements such as the best in punctuality, Europe coverage, traffic growth, highest
market capitalisation (5.3bn until May 2009), lowest average fares and highest number of
international passengers carried are just to name a few. RYANAIR is currently the dominant
firm in the European industry and If the current growth rate in the number of passengers
continue, then in a few years time RYANAIR will probably face a monopoly situation.
FINANCIALS
RYANAIR has a history of growth in profitability and records an annual increase in the
amount of assets held, thus a strong balance sheet. But at this point it should be noted that
the future operating results of the company are dependent on the following factors:
Passenger volume
Fuel prices
Competitive pricing
Seasonal fluctuations
Availability of finance
Relations with suppliers
Availability of airports (for growth)
Economic and political conditions
Terrorist threats
(Ryanair PLC, 2009)
As far as the financial position and past performance of the company is concerned, from
2007 through to 2009, RYANAIRs total operating revenues (scheduled and ancillary) has
been increasing (2007: +32%, 2008: +21%, and 2009: +8%). This increase is not in line with
the rising number of annual passengers or even the rate of decrease in the average fares.
Implementing the low-cost business model, RYANAIR tends to lower its fares to make itself
attractive to the price sensitive customer which explains the falling scheduled revenues. But
a significant proportion of the revenues are attributable to Ancillary Revenues generated
from non-scheduled services, in-flight sales of beverages, foods and merchandise etc.
RYANAIRs reliance on such revenues is vital and its slowing growth rate (2007: + 40%,
2008: +35% and 2009: +22%) could be a factor for the airline to place its focus on.
Page 28
The adjusted net profit figures (excluding exceptional items such as accounting for tax
provisions, accelerated depreciations, investment fair value write-offs etc.) showed growth in
2007 and 2008, but in 2009, due to the rise in fuel costs (a 59% total increase) and other
costs led RYANAIR to record a loss on operating activities affecting its Earnings per share
and ultimately reducing its share prices.
Such a performance, as compared to another firm operating in the same industry and faced
with the same business environment, is almost in line with the industry averages as the
financial performance and position of RYANAIR Holdings PLC was in many aspects very
similar to those of EASYJET Airline Company Ltd. Such a comparison indicated that
RYANAIR, as compared to EasyJet, was more profitable due to economies of scale leading
to lower unit costs but the investment in EasyJet showed higher rates of return, lower
associated financial risk, better longer-term solvency and rewarded its shareholders with
higher capital gains.
BUSINESS
The Global Airline Industry in general and the European Low-cost Airline Industry in
particular will continue to remain attractive for the firms already operating in it or other firms
trying to enter it through market/product diversification. The analysis of RYANAIR reflected
its strong dominance in the EU market and how it enjoyed its strategic position in such a
competitive environment where there are many competitors.
The competitive advantage to RYANAIR is its recognition (brand name), its economies of
scale due to its being the largest international carrier, and its negotiation powers due to its
relative size in the industry. Most of the Porters Five Forces remained in favour of
RYANAIR as it enjoys a near monopoly market in Europe and has potential to cope with
each of the five forces of competition in a positive way reflecting its current and very
successful low-cost business strategy.
Since the early 1990s, when RYANAIR was re-structured strategically (to a low-cost nofrills airline) by the current CEO Michael OLeary, the airline has continued to grow from a
very small scale operation to a very large network serving across 26+ countries with 1000+
routes. If RYANAIR continues to grow as planned, exploits its strengths, overcomes its
weaknesses and take full advantage of the opportunities, its success will be inevitable.
End of Report.
Research And Analysis Report: Ryanair Holdings PLC
Page 29
Page 30
Page 31
Page 32
Page 33
Page 34
Page 35
Page 36
Page 37
Page 38
Page 39
Page 40
Page 41
End of Statement.
Page 42