Financial Performance EasyJet Plc Vs Flybe Group Plc - Sample

Question: Discuss about theFinancial Performance of EasyJet Plc Vs Flybe Group Plc. Answer: Introduction Easyjet and Flybe Plc are both airline companies based in UK. The report aims to compare the financial performance of the two companies for the year 2014-2015 using tools like ratio analysis. The annual report of both the companies was used to do the financial analysis and comment on the performance. This report would be useful to various stakeholders like investors, creditors and management. Even though the report captures most of the events of both companies for the said financial year, yet the stakeholders may completely be not dependent on the report alone for their decisions as the report possesses some limitations with respect to qualitative factors which have not been taken into consideration. Easyjet is the second largest airline that operates in Europe. The company has a fleet of 241 aircrafts and operates on 735 routes.(yahoo. Finance, 2016). The company is known for providing affordable flying for short haul distance. Other than flying the passengers, it also engages in leasing and trading of aircrafts. The airline is also a provider of graphic design services. The company is headquartered in Luton, UK. Flybe Plc is also a provider of airline services. The company carries its operations through two segments Flybe UK and Flybe Aviation services. The Flybe UK segements offers passengers transportation services in the United Kingdom and also passengers transportation services from UK to the rest of Europe. The company has a fleet of 74 aircrafts. (yahoo.finance, 2016). The Flybe Aviation services indulges in providing aviation services like repair and maintenance, services to third party customers and overhaul services in Western Europe. The company is based in Exeter, UK. Financial Statement Analysis The financial analysis of a company can be carried with the help of ratios. A comparison of the above two companies for the year 2014-2015 has been done. The ratios can be dividend into five categories i.e. profitability, liquidity, capital structure, efficiency and market performance. Profitability Easyjet Plc Flybe Plc Particulars 2014 2015 2014 2015 Operating profit margin 12.8% 14.7% 0.2% -2.2% Net profit margin 9.9% 11.7% 1.3% -6.2% Return on assets 13.0% 14.3% 0.2% -2.3% Return on equity 20.7% 24.4% 4.1% -25.5% (Easyjet, 2015) (Flybe, 2015) Easyjet has an increasing trend in all the profitability ratios. The companys operating profit margin has increased to 14.7% in 2015. This is mainly due to an increase in revenue by 3.5% in 2015. The increase in revenue is on account of increase in passenger volumes and increase in price. The airline majorly operates in Western and Northern Europe which has a strong demand for airline given its rich and need based customers. With a strong economic growth, the demand for both personal and business travel increased resulting in higher revenue. Also due to its quality service and network, the airline has loyal customers. Another reason is a fall in operating costs due to a fall in fuel price which is the major cost contributor. Even the currency was stable resulting in low costs. Even though other cost pressures, the company mitigated the same with its previous savings. The return on asset increased by 1.3%. The total assets have increased in plant equipment as the company acquired 20 aircrafts in 2015 as part of its strategy to increase the network. Even though the total assets have increased, still there in an increase in the return due to an increased EBIT more than the increase in assets. The return on equity has increased by 4% as the profits available to shareholders have increased with no change in share capital. Flybe Plc has had a bad year in 2015. The company profits have turned into losses. This is as a result of a fall in revenue and an increase in costs. The company undertook a turnaround strategy in 2013 where it decided to become a regional airline as a result of which it has changed its fleet of aircrafts from expensive E-jets to more reasonable turboprops. The revenue fell in 2015 due to a fall in capacity. The cost has increased manifold including reasons like loan revaluation loss of 10 million, loss on discontinued operations of the Finland joint venture. The company still has 7 E-jets to be divested which have huge maintenance costs, thus draining the profits. The company has not been able to cash on the falling fuel prices as the fuel price is forward hedged by Flybe, thus current low prices do not impact them. Therefore all above reasons led to incurring losses for the company in 2015. The return on assets and return on equity have reduced significantly mainly due to falling p rofits. both total assets and equity have not changed much. Easyjet has a higher profitability as compared to Flybe. Liquidity Easyjet Plc Flybe Plc Particulars 2014 2015 2014 2015 Current ratio 0.89 0.72 1.41 1.20 (Easyjet, 2015) (Flybe, 2015) The current ratio of Easyjet has decreased in 2015 signifying low liquidity. Moreover the ratio is less than 1 which means the current assets are not sufficient to pay for the companys current obligations. The companys payables are much higher than its receivables and also it has increased borrowings in 2015 along with derivative financial instruments. Flybe has a reasonable liquidity above 1 in both the years. The current ratio has decreased in 2015 as the liabilities have increased whereas the current assets have not increased in the same proportion. Flybe has better short term liquidity. Efficiency Ratios Easyjet Plc Flybe Plc Particulars 2014 2015 2014 2015 Receivables turnover 22.6 22.7 7.2 5.8 Total asset turnover 1.01 0.97 1.13 1.03 (Easyjet, 2015) (Flybe, 2015) Easyjet has a impressive receivables turnover ratio which means the company is efficient in collecting its receivables on time and thus will not face any cash crunch. The company has a positive cash flow in 2015. The total assets turnover is equal to 1 has decreased further in 2015 which means the efficiency with which the assets are being used to generate sales has reduced. FLybe has a very low receivables turnover because receivables have increased and sales have decreased. This shows inefficient working capital management. However, the company has a better assets turnover ratio. Flybe is efficiently utilizing its assets to generate sales whereas Easyjet has a better working capital management. Capital Structure Easyjet Plc Flybe Plc Particulars 2014 2015 2014 2015 Debt ratio 0.52 0.53 0.65 0.75 Debt to equity ratio 1.1 1.1 1.8 3.0 (Easyjet, 2015) (Flybe, 2015) Easyjet has a low debt ratio which has remained unchanged in 2015. The company has low gearing with lower cost of funding and a higher operational flexibility. The company has a capital structure where equity and debt are in equal proportions. This makes the company less risky. Flybe has a higher debt and debt to equity ratio which means it has a riskier capital structure where there is more debt than owners funds in the companys funding. The debt ratio has increased in 2015 due to a higher increase in total liabilities than an increase in total assets. Most of companys assets have been financed through debt. The debt equity ratio has increased considerably from 1.8 to 3, this is because of a decrease in equity and an increase in total liabilities. There is no change in share capital; however the equity has decreased due an increase in deficit in retained earnings as the company is incurring consecutive losses in these years. Easyjet has a more stable capital structure. Market Performance Easyjet Plc Flybe Plc Particulars 2014 2015 2014 2015 EPS 114.5 139.1 10.2 -10.93 Dividend yield 3.42 3.06 0 0 Price/earnings ratio 12.43 12.77 12.89 -5.31 (LSE, 2016) The EPS of Easyjet has increased in 2015 due to an increase in return available for shareholders as there is no change in the issued capital. The dividend yield has remained more or less the same which means the company has a stable dividend payment policy. The company has an increasing PE ratio of 12.5 approx. This means the share price of the company has increased more than the increase in EPS. This shows positive sentiments of investors with respect to the shares of Easyjet making them a valuable investment. The increasing profit margins year on year have led to increase on the share price making it a sought after investment. Flybes EPS has become negative in 2015 due to losses incurred. There is no change in the share capital. The company has not paid dividends in the last two years, hence the dividend yield is 0 for both the years. The company has a good PE ratio in 2014 but the ratio has become negative in 2015 due to losses incurred which have resulted in a negative EPS. The companys share price has fallen to its lowest in 2015-16. (Strang, 2016). As a result the PE ratio has also fallen. Easyjet has a way better market performance even in a tough environment in the UK as a result of the Brexit vote. All airlines have suffered but since Easyjet is a strong competitor, the companys profits have fallen only to some extent in 2016. The market performance of Flybe is very poor with negative returns. However, since the company has completed the three year transformation strategy in 2016, it has become profit making from a loss making airline. The market sentiments are still negative. Performance Factors There may be various performance factors which may be taken into consideration to assess the overall performance of the airline. Easyjet Plc The financial performance of the company has been good in both 2014 and 2015. Other factors which have affected the companys performance are discussed below: a) Disruption in operations there was a disruption in operations in the year 2015 due to French ATC strike in April and a fire broke out at the Rome Fiumicino airport. As a result of this, the flights got delayed and caused inconvenience to the customers resulting in low customer satisfaction. (BBC, 2015) b) Constant currency there was a fall in the price of fuel during 2015 as a result of constant currency. The fall in fuel prices led to a decrease in operating costs and thus the profit margins of the company increased. Flybe Plc a) Three year transformation program The new CEO Saad Hammad in 2013, introduced a new transformation strategy for the company. The aim of the strategy was to place Flybe as a regional airline. As a result of this, the company has replaced its E-jets with turboprops. The company has been able to replace all its E-jets except seven ones remaining which are a big drain on profits, thus reducing the profits. The company has also recruited new employees in the company. Though the current financial performance of the company has been hindered, but it is believed that the company is now better aligned to its strategic objectives. (Flybe, 2015) b) Forward hedging the fuel prices have gone down but the company did not benefit from that because it has forward hedging on oil prices and as such the benefits will be achieved in the future. Thus the operating costs have increased. (Flybe, 2015) Conclusion From the above discussion, we see that Easyjet has a better overall financial performance as compared to Flybe group. From the investor point of view, Easyjet has a better profitability and market performance and a stable dividend payment policy thus maximizing returns for the shareholders. Flybe is not an attractive option for a potential investor as the company is making losses and has more debts than equity. The market performance is poor. From the creditor point of view, Easyjet has a better stability as it has a stable capital structure as compared to Flybe. From management point of view, efficiency ratios and liquidity ratios are important. Flybe has a better working capital management which means that the company may be on the right path to achieving its objectives as per its strategy. Easyjet has low liquidity. References EasyJet Plc, (2015), How 20 Years Have Flown, EasyJet Plc Annual Report and Accounts Flybe Plc, (2015), Continuing Our Transformation, Flybe Group Plc Annual Report 2014/15 Strang, A., (2016), Can This Share Avoid a Crash Landing, accessed online on 16th November, 2016, available at https://www.iii.co.uk/articles/365755/can-share-avoid-crash-landing?context=LSE:FLYB BBC, (2015), Chaos at Rome Fiumicino Airport after Terminal Fire, accessed online on 16th November, 2016, available at, https://www.bbc.com/news/world-europe-32622652 Yahoo.finance, (2016),Easyjet Plc (EZJ.L), accessed online on 16th November, 2016, available at https://uk.finance.yahoo.com/q/pr?s=EZJ.L Yahoo.finance,(2016) Flybe Group Plc(FLYB.L), accessed online on 16th November, 2016, available at https://finance.yahoo.com/quote/FLYB.L/profile?p=FLYB.L LSE, (2016), FLYBE GROUP PLC ORD 1P, accessed online on 16th November, 2016, available at https://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB00B4QMVR10GBGBXSSMM LSE, (2016), EASYJET PLC ORD 27 2/7P, accessed online on 16th November, 2016, available at https://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?fourWayKey=GB00B7KR2P84GBGBXSET1