Finance Essay
I.
Corporate BackgroundEasyjet is a well known corporation in the low lost airline industry. The company has turned 10 years old last 2005 and has been taking over increasing market shares from its competitors. By the end of 2005, Easyjet has already 100 airplanes and served more than 100 million passengers worldwide. Within the year itself, the company carried no less than 30 million passengers to destinations all over Europe (‘Easyjet plc’, 2006).Within its financial report, Easyjet stated that the company has three core strategies, which are: ‘focus on customers’, ‘owning markets’ and ‘reducing costs’. ‘Focus on customers’ refers to corporate emphasis to maintain vision of consumer value and to design products and services accordingly. ‘Owning the market’ means that Easyjet is very much aware of the high level of competition within the airline industry.The company strives to stay ahead of their competitors by providing more routes with multiple frequencies, expanding the network, managing price policies and other means to establish strong brand in the market.
The final and core strategy is reducing costs.The strongest focus in the company is to deliver increasing return on equity. The cost reduction is performed by taking advantage of their market of scale, habits of local markets and design corporate products and services to gain profit from those opportunities (‘Easyjet plc’, 2006).
II. Key Financial IndicatorsII.1 Financial PositionEasyjet and RyanAir are the top two leaders of the low cost airline industry (Cambron, 2001). However, the Easyjet is recorded to take more and more market share off RyanAir as the company grew. With the exception of several seasonal downturn (‘Tough Outlook’, 2004), Easyjet’s share prices experienced a considerable growth within the last few years.II.2 Financial PerformanceII.2.
1 Financial RecordsAccording to EasyJet’s five years summary, the company experienced considerable growth since 2001. Revenues quadrupled during the 5 years period and assets grew almost as intense.However, profit was recorded to be relatively constant with regard to the significant increase in revenues. This reflects the high increase of expenditure level for financing daily operations as well as investment activities.
Nevertheless, 2005 was recorded to be a good year for Easyjet, with:§ total revenue increased by 23%,§ total revenue per seat increased by 2%,§ ancillary revenue per seat increased by 17%§ cost per sear before goodwill amortisation and fuel was down by 4% and§ basic earning per share increased by 0.34 pence(EasyJet Plc, 2006)However, there are several notes regarding the positive remarks on the company’s performance during 2005. The company still strives for recovering its past financial downturn caused by the September 11th incident.
This is reflected by the Return on Equity ratio (ROE) which dropped significantly in 2002 a rising slowly until today (‘Easyjet plc, 2006).II.2.2 Factors Contribute to the Rise of EasyJet’s Price EasyJet does not only experience the increase in the number of passengers but also the rise of its share price. Within the past several years, EasyJet share price has experienced a significant increase. In the first three quarters in 2005 alone, the EasyJet’s share price has been more than doubled into 300p (Morgan 2005).Morgan (2005), an analyst in The Observer, says that the attractiveness of flight services that EasyJet offer such as the efficiently digested Go program, many landing slots, and a sound business model are those responsible of the rise in the EasyJet’s share price.
In addition, in 2005, there are rumours saying that FL Group was to acquire EasyJet also help to lift the EasyJet’s share price.In addition, relation with the economic conditions of the western (US and Europe) economy also favours the increase share price of EasyJet. As we have all understand, the western economy suffered considerably after the September 11th tragedy.II.2.3 Financial AnalysisFinancial analysis is commonly used to describe current condition of company’s financial condition.
Nevertheless, managers and investors also use them as tools of financial forecast. In both purposes, financial analysis often starts by observing financial ratios. There are several basic groups of financial ratios, they are: liquidity, asset management, debt management and profitability ratios (Weston, 1990).§ LiquidityLiquidity is one of the main concerns of stakeholders.
It represents corporate ability to pay-off its short term loan. There are two significant ratios representing this quality, they are the current ratio and quick ratio. Current Ratio of EasyJet in 2004 and 2005· Current ratio (2005) = current assets/current liabilities = (495.1/97.5) = 5.077· Current ratio (2004) = current assets/current liabilities = (370/63.1) = 5.
86According to EasyJet financial report within the past two years, the company experiences good liquidity ratios in which EasyJet always records liquidity ratios (current ratios) performance almost 100% annually.Generally, financial ratio analysis must be accompanied with information regarding industrial average. From the comparison between corporate ratio and industrial average, we could then assess performance of the company. Nevertheless, it is generally acknowledged that current ratio should not be under the number 1.
If current ratio drops below 1, it means current assets are smaller than current liabilities, and thus, the company does not have the ability to meet its current financial obligations to creditors (Weston, 1990).§ Asset ManagementAsset management ratios consist of inventory turnover, receivable turnover, and asset turnover. Below is the data of asset management of EasyJet in 2004 and 2005.
Asset Turnover of EasyJet in 2004 and 2005· Asset turnover (2005) = revenue/assets (in millions) = 1,341/495 = 2.709· Asset turnover (2004) = revenue/assets (in millions) = 1,091/370 = 2.948The asset turnover shows EasyJet’s efficiency in employing assets to generate sales and in fact, revenue. The figure also shows that there is a decline of asset turnover from 2.948 in 2004 to 2.709 in 2005. This figure may indicate the pricing strategy of EasyJet in which the lower asset turnover indicates that EasyJet has high profit margin and vice versa.
§ Debt ManagementThere are actually several ratios within the debt management analysis. However, due to limited information in EasyJet financial report, we can only take advantage of the debt to asset ratio, which is counted by dividing liabilities by total assets.Debt/Asset Ratio of EasyJet in 2004 and 2005· Debt/asset ratio (2005) = liabilities/assets = (97.5/495.1) = 0.
1969· Debt/asset ratio (2004) = liabilities/assets = (63.1/370) = 0.1705Unfortunately, in this ratio, debt/asset ratio of EasyJet also indicates an increase performance from 0.1705 in 2004 into 0.1969 in 2005. This is because the higher debt/asset ratio, the higher leveraged the company is. However, since the debt/asset ratio of EasyJet is still under 1, it suggests that EasyJet is still well-performed.§ ProfitabilityProfitability is the second most important ratios after liquidity.
Some investors even look at these ratios first, before looking at any other ratios to get information on the value of a corporation. The profitability ratios consist of profit margin, return of asset and return on equity. In terms of Return of Equity, the EasyJet performances are as following:Return of Equity of EasyJet in 2004 and 2005· Return of Equity (2005) = Net Income/Equity = ((Revenue – cost of sales – operating expense – taxes)/(total assets – total liabilities)) = 42.6/ 397.
6 = 0.107· Return of Equity (2004) = Net Income/Equity = ((Revenue – cost of sales – operating expense – taxes)/ (total assets – total liabilities)) = 41.1/ 306.
9 = 0.134Return of Equity shows how well a company used reinvested earnings to generate other earnings in the following period. Income is obtained through subtracting revenue with cost of sales, operating expense, and taxes. Equity is obtained by subtracting total assets minus total liabilities.III. Easyjet’s StrengthsThere have been considerable changes within the western airline industry. Legacy airlines are loosing market shares and low cost travel services gain significant attention from the market.
Low cost airlines grew significantly over the years and experts even considered that the low cost carriers are the future of the western airline industry. This brought powerful sentiment that Easyjet will continue to display the high rate of growth it has displayed in several of the last years and brought high rate of return for shareholders.The second factor comes from Easyjet’s competitive advantage. Eayjet is a well-known airline among most western markets. It possesses a strong appeal toward budget travelers all over Europe.
Compare to Ryanair, its number one competitor, the company has considerably different strategy. The strategy involves performing more aggressive pricing campaigns and focus on attracting business and leisure travellers by its two main weapons, cheap prices and punctuality.However, the company has also outperformed Ryanair in terms of image, because Ryanair has been recorded to receive criticism due to its over-aggressive and false advertising campaigns.
IV. Managing the UnforeseenThe airline industry, as many others, is subject to considerable uncertainty in managing its operations. The uncertainty could come from natural causes like lasting bad weather, environmental disaster, etc. It could also come from incidental but influencing occurrences, like terrorism and other security issues. However, the rising concern of the recent years is about fuel prices and other operating costs. Businesses in the global economy today face increasing risk in managing its operations due to uncertainties in economic factors.
The prices of fuel, prices of airplane logistics, demands on salaries and foreign exchange are unstable, causing the unforeseen to be important topics of discussion today.In the case of Easyjet, the company displayed its method of facing the unforeseen within its financial statements. The board of directors is generally responsible for setting treasury policy and objectives. They are also in charge of determining the parameters in which various aspects of risk management are operated.In short, the Board of Directors designed corporate approach to asset financing, interest rate risk, fuel price risk, foreign exchange risk, etc. Through the board of directors (BoD) policies, Easyjet ensures that the company has sufficient liquidity to§ Meet its day-to-day needs.
Superior cash flow is the answer in this condition in which BoD of EasyJet is committed to maintain the company cash flow so that it would not experience cash shortage in the future.§ Fund its capital commitments. As a low cost carrier, EasyJet is commited to serve the air traveller at best while reducing costs. Therefore, EasyJet should have enough funds to deploy new fleets that are cost efficient.§ Managing currency, fuel, interest rate and credit exposures and managing corporate worldwide relationship with banks and financial institution. Easyjet’s fuel management policy aims to provide protection against sudden and significant increases in jet fuel prices.
This is performed by using a limited range of hedging instruments traded on the over-the counter markets with approved counterparties. Easyjets policy is to hedge a maximum of 80% of estimated exposures up to 12 months in advance and to hedge a smaller percentage of estimated expense up to 36 months in advance. However, during exceptional market conditions, the board could change the implementation of the hedging policy by limiting it or accelerating it (Easyjet plc, 2006)BibliographyCambron, Joe.
2004. ‘The Airline News’. Joe Cambron [online]. Available at: http://www.theairlinenews.com/Archive/a20040709.
html‘Easyjet plc Annual Reports and Accounts’. 2006. Easyjet [online]. Available at: http://www.
easyjet.com/common/img/annual_report_2005j.pdfMorgan, Oliver. 2005, ‘BE aims to beat burnout on FTSE’, The Observer, August 14, 2005‘Tough Outlook Hit Easyjets Shares’. 2004, BBC News [online], Available at: http://news.bbc.
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