Financial Comparison of Ryanair and British Airways Essay

Ryanair is deemed as the pi maviner of the afford able cable example, date British Airways is constantly ranked amongst the worlds better legacy carriers. both of these respiratory tracts ar dominant companies in their segment with elevated passenger numbers and conceiveable cyberspacework coverage. Therefore the fol depressive disordering inquire rises how these air passages ar contrary in depots of pay and which melody model is more fruitful in the kernel of an economic downswing? In lay to find the answer a thorough pecuniary investigating has been conducted relying on the data outlined in the respiratory tracts annual states. In the starting section of the report the emphasis is put on the limit pecuniary situation of the air passages, while outlining the animate sources of finance. These sources ar investigated thoroughly in the support part. The final section evaluates the possible or available sources to finance incoming investments.Review o f Ryanairs and British Airways current fiscal situation Ryanair in the fiscal dozenmonth of 2012 has gene sum upd a agree of 4,390.2m in operation(p) r sluiceue mainly d wizard scheduled revenues. The companion has accessiond its in operation(p) revenues since 2010 by 1,2bn primarily callable to f atomic number 18 increases. In 2012 the total direct expense was 3,707m. This is in like manner the peak in the last three years, by and large attri al one(a)able to fuel and oil costs, which have almost doubled since 2010. therefrom the net gelt for the 2012 fiscal year was 560.4m, the full(prenominal)est in the history of the friendship. British Airways in the fiscal year cease 2011 December 31 accounted a addition of 672m after paying the taxes. This lay approximately be considered as a noteworthy melioratement after 2010s profit of 170m. These figures do non provide enough in-depth entropy on the airlines real situation. In order to identify the sources of finance and the real position of BA and Ryanair further investigation with the utilise of ratios is required.LiquidityCurrent ratio is a liquidity step that compares the liquid or current assets of the airline with its current liabilities. (Atrill, McLaney 2002)For the fiscal year of 2012 Ryanairs CR was 2.1355, which represents high liquidity. Gener anyy the high ratio is considered to be the better. According to Morrell the industry general ratio is 1.00. This put forwards that Ryanair is capable of support its piddling limit commitments towards banks and suppliers However, it mustiness be noticed that the airline has signifi offertly high cash militia, namely 2.7bn. Such rate suggests for the banks and suppliers that the company is low venture for investment and has high liquidity, that withal proposes that the cash is existence store to finance prox aircraft orders or natural(prenominal) investments. The fact that the cash reserves has grown with 1.2bn in the last i i years in addition underpins these assumptions.(Morrell 2007)British Airways has a low current ratio of 0.7531. It points out the riddle that BA cannot finance its current assets from its current liabilities. Thus, it can be fake that the picayune term debts are financed by means of the more expensive long term loans. The companys cash reserves are 1.7bn, which is considerably tear down in comparison to Ryanairs reserves. This can result in higher relate place as the airline is not considered as a safe investment for lenders. According to Moodys credit range company BAs credit ratings were B1 and BB in 2011. Also being a legacy airline BA works with more 3rd party suppliers like travel agents and these issues can mean that the pay-outs are delayed. It is all important(predicate) to note that Ryanair and the low-cost business model do not usage travel agents.Performance and earningThe operating(a)(a) margin gives an indication of management might in controlling costs and increasing revenues as it represents the operating profit as the voice of total revenues.Comparing to last years results, both airlines ratios have remained flat, namely 14% for Ryanair and 5.2% for BA. It heart and soul that on every pound or euro BA makes 0.05 profit, while Ryanair 0.14. However, the low-cost model seems to be more profitable, alone it must be interpreted into account that they are also operating in a bring down cost grammatical construction. Also, BA has managed to generate a positive useable margin as in 2008 and 2009 its values were negative. Return on Equity (RoE) is the net profit after fire and tax expressed as percentage of shareholders property.BA has achieved a 26.2% RoE in 2011, while the same value for Ryanair was 16.9%. It means that BA is making more profit from the shareholders cash. The shareholders money is only the one-third of BAs asset, while Ryanair is half(a) founded by the investors.SolvencyGearing ratio is a measurement of the contri neverthelession of long-run lenders to the long term slap-up structure of a business.Ryanairs gearing ratio was 53.98% in 2012, which is considerably high for a low-cost airline. In opposite words it means that the company is financed half from borrowing and half from own capital. The lower the gearing ratio of the airline the greater the firms capacity to borrow more money at a lower interest rate, due to the lower guess to banks and lenders. Oppositely, BA has an even higher gearing ratio of 65.5%. Around one third of British Airways capital is caudexed by the shareholders, while the be is sourced from long-term loans and debts.The following table summarises the previously outlined performance and liquidity ratios of the airlines. BA() air lane Ryanair() 9,987 sum total revenue 4,390.2m 672m Profit after tax 560.4m 0,7531 Current symmetry 2,135 63,80% Gearing Ratio 53,98% 570m property Reserve 2708m 26.2% ROE 16.9% 5.2% operate delimitation 14% languish commitm entsRyanairReplacing the aircrafts is not only increases the airlines prestige but can mean a significant reduction in operating costs as the impertinently generation of aircrafts are much more fuel efficient or can necessitate more passengers than the predecessors. As the core of the LCC business model Ryanair only move Boeing 737-800s thus simplification the tending costs significantly. The carrier has one experience contract from 2005 with the American aircraft manufacturer that covers the procurement of 197 brand new 737800s for which the social unit cost is $51m. (Ryanair 2012) Ryanairs long-term debt for aircraft commitments, including current maturities was 3,625.2m at March 31, 2012. The airline has stocked a significant portion of its learnedness of new aircraft and equipment done borrowings under facilities provided by international financial institutions on the basis of guarantees issued by Ex-Im Bank.At the end of fiscal year 2012 the carrier had a communicat e of 294 Boeing aircraft of which 199 were funded by Ex-Im Bank guaranteed finance. Other sources to cover aircraft costs are Japanese Operating Leases with call options (30 aircrafts) and commercial debt financing (6 aircrafts). According to the declareings, 235 aircraft are owned by Ryanair, which are financed through long-term bank loans. Operational leases funded 59 aircrafts at March 31, which means that Ryanair operate these aircrafts, but does not own them.The aircrafts are leased to provide flexibility within the aircraft delivery programme. 55 aircrafts is being financed through fix-rate debts, while for the remain 4 aircraft Ryanair is paying variable term of a contract payments. Out of the 25 aircraft, which has been delivered in the 2012 financial year, 11 were funded through sale-and-leaseback financing and the remainder through Ex-Im Bank guaranteed financing. To convert a portion of the floating-rate debts into the icy rate debts, Ryanair has used interest rate s waps and cross currency rate swaps. As a result 1,314.7m of the aircraft loans are remained at floating rates. The remaining 2,310.5m is in fixed-rate euro-denominated debts with the maturities of 7 to 12 years. On all of the above mentioned borrowings the dull average interest rate was 2.9%.The effective rate is the rough prognosticate for the weighted average cost of capital. It is calculated by dividing the interest paying(a) for the year with the long term borrowings. For Ryanair it is 3.01%, which is really close to their given figures. whence their cost of long term borrowings is 109.2m, which can be considered as low. The low rate also represents trust from the lenders and investors. But, on the other hand it must be noted that at March 31, 2012 aircrafts with a net book value of 4.8bn were mortgaged to lenders as security for loans. This may be the interpretation for the low interest rates. In general, Ryanair has been able to generate sufficient funds from operations t o meet its nonaircraft acquisition-related working capital requirements.Between 2008 and 2012 March Ryanair had interchange and re-delivered a total of 39 aircrafts and also the company plans to dispose 8 supererogatory before March 2014. Ryanair may choose to dispose of aircraft through sale and or non-renewal of the operating leases as they expiree between 2012 and 2013. In the adjoining year the company has a total obligations of 1,143.3m out of which the third, some 571.8m is barter for obligations, i.e. buying the remaining 15 aircrafts. Each of the aircraft loans have similar equipment casualty maturity of 12 years from drawdown date and being secured by a first priority mortgage. The overall aircraft debts (3,625.2m) represent around 80% of all long-term liabilities, hence if the airline is capable of paying these commitments Ryanair should be able to preserve its current financial status in the upcoming years.As it can be seen the low cost carrier Ryanair has built u p a surface-functioning system to finance all its aircrafts, including the 15 Boeing 737s that give be delivered in the future. Furthermore by currency swapping and low interest rates the company is in total control of its costs.British AirwaysThe transparency of BAs financial situation is significantly lower comparing it to Ryanairs. This can be explained in dickens ways, either they prefer not to strike their financial strategy and sources as it can provide valuable information for the competitors or the company does not have the adequate financial solid ground to finance its long term commitments. British Airways has a completely distinguishable fleet to cover both its short- and long-haul routes. The fleet is owned by the company or held in finance and operational leases. The 245 aircrafts take up two thirds (5.7bn) of the companys total non-current assets. Also, 95% of the overall revenue is generated through the fleet.The aircrafts comprise disparate sized jets from va rious manufacturers making the operational and maintenance costs higher. In the annual report of year ended in December 31, 2011 BA outlined its current fleet and future aircraft deliveries and options. These let in 50 firm orders and 84 options. The new fleet is made up from A320s, A380s, Boeing 777-300s and 787s, which are expect to enter service between 2012 and 2017. Furthermore, in tear down 13 the airline states that the cost of these aircrafts is going to be 4.1bn. But, no other information is provided about the sources that will cover these expenditures, thus it can be fictional that the future cash flows endure relevant information on these funds, but they have not been published yet. (British Airways 2012)The non-current liabilities of loans, finance- and operational leases add up to 4.904, which is 30% more than Ryanairs 3.8bn total long-term commitments. According to BA the bank and other loans at the end of 2011 equalled 1,324m, comprised of fixed- and floating rate loans. 693m is in floating-rate debts, while the remaining 823m is in fixed rate loans and bonds. The average interest rate for the fixed rate debts is around 6.5%, which is significantly higher than Ryanairs 2.9%. The floating rate loans are generally determined to be 0,5%+LIBOR. The lenders consider the airline as a higher risk firm that is why the interest rates are higher. Generally, the loans are requiteable between 2014 and 2018, with one exception none of the loans need to be repaid until 2014 and on. Such conditions allow BA to use the debt to generate cash in the next 2-4 years.BA uses finance leases and hire contracts to acquire aircraft. These leases have both renewal options and barter for options. The total finance lease contracts worth 2.227bn and similarly like Ryanair, it consist of different currencies namely US dollar, Euro, Japanese yen and Sterling. The non-current side of these contracts are 1.12b, but around half of this is due obligatory in five or more year s. Four of the new 777-300s are being leased through GE Commercial Aviation Services (GECAS). The finance lease agreements are mainly in place to fund the existing fleet. Therefore additional leases are required, if the new fleet is wished to be funded through such construction.The operating leases for BAs aircraft range from five years and some leases bear options for renewal. However, this type of contract accounts for only 316m of which is 253 is not payable within one year. Comparing to 2010 BA has halved its operational leases from 635m, it can be assumed that company took the lease contract for an aircraft or more, which was expected to be delivered in 2011, but it has been delayed so the company terminated the contractual agreement until the new aircrafts are delivered. Accordingly, it can be assumed that operational lease commitments are going to rise in the next two financial years. impertinent Ryanair, British Airways does not provide any kind of information about the str ucture of the leases. The following assumption can be made though BA offered worse interest terms with the loan contracts than Ryanair because of its weaker liquidity and performance. British Airways effective rate shows the same trend as its 4.301%. The company paid 161m in 2011 as cost for long term borrowings.Financing in the short runAs it has been outlined above, Ryanair has a current ratio of 2.1, which provides a solid base for the assumption that the airline is financing its short-term liabilities from its current assets and operational profit. In fact Ryanair could repay all its short term liabilities from its 2.7bn cash reserve and would still be left with 0.9bn cash. Moreover, Ryanairs current liabilities are half of BAs short run commitments. In less than 1 year Ryanair will need to finance 1,1bn for obligations, like current maturities of long term debts and purchase obligations. But then again, Ryanair has the capacity to pay these.BA is more raise in the short run as the airlines current ratio is 0.75. Logically the top dog arises if the short-term liabilities cannot be covered from the operating revenue then how is it financed? Possibly the long-term loans are used in such case which is leading to future liquidity issues. The main problem is the trade and other payables entry which accounts for 3,117m within current liabilities. But, from this total come up the real credit is 1,457m, which is the money BA owes to creditors like suppliers and travel agents. The remaining are mostly prepaid flights that the airline will accomplish in the new financial year. Having the suppliers wait for their money is a way to improve cash flow.The cash operating cycle for the company has been calculated by dividing the trade payables with operation expenses (less employee costs and depreciation). The average pay out degree for British Airways is 80.1 days, which can be considered as high and nevertheless it also shores up the liquidity problems of the airli ne. On the other hand, Ryanair makes these to the creditors payments within 22.1 days. Note 28 describes BAs liquidity risk in more detail. The results suggest that within the next 12 months British Airways is going to need around 2.203bn to finance all its commitments for that period. Where the money is coming from? This chief remains unanswered, but it can be presumed that BA is going to need new sources to fund this 2.203bn short-term liability combined with the 4.1bn commitments for the new fleets.Shareholders equity and dividend indemnityRyanair has significant retained earnings, namely 2.4bn, even though there was a 500m dividend pay-out in 2010 October and also a similar sized one is planned in 2012 November. Seeing the results and pay-outs it can be assumed that the shareholders are happy with the dividend policy and this can serve as a basis for future capital injections, if necessary. On the other hand BAs directors declare that no dividend to be paid for the years of 20 11, 2010 and 2009. Such dividend strategy can be explained by the airlines current liquidity problems.DepreciationBoth companies included their depreciation strategies in the annual reports. Ryanair states accounts the Boeings for 23 years, while British Airways calculate with 18-25 years of lifetime for their aircrafts. From these numbers it can be assumed to lower the depreciation costs the amortisation rates are underestimated by both airlines thus saving millions in the accounts. British Airways 50 2012-2017 4.104bn 4.301% 161m 3.683bn 4.904bn data not disclosed 80.1 days 31 March 2012 Airline Fleet commitments (no. of aircrafts) Delivery date Capital commitments for new aircrafts Effective rate ache term cost of borrowing/year Total current liabilities Total non-current liabilities Total non-current liabilities for fleet Average pay out period monetary year ended Ryanair 193 2007-2014 $10bn 3.01% 109.2m 1.815bn 3.879bn 3,625bn 22.1 days 31 December 2011Future financingRyanai rThrough the analysis of the financial statements it has been revealed that Ryanair has a stable financial structure that is capable to fund the various liabilities in the short- and long-run. The remaining aircraft deliveries are funded through operational revenues and cash reserves. But, it must be kept in estimation that the latest fleet contract is from 2005 and all aircrafts will be delivered by 2014. The next couple of months are going to be important in terms of long term strategy for Ryanair. The accumulated cash reserves point that the airline is preparing for some sort of investment. It can be the acquisition of Aer Lingus or the procurement of new aircrafts. The acquisition of the Irish carrier is presently delayed by the EU, but Ryanair is putting all the effort to buy become major shareholder in the firm, which would enable them to appear on the long-haul market through Aer Lingus.It also has been outlined in the annual report that Boeing has granted to give significa ntly lower prices for Ryanair in return of pot orders, promotional and other activities. In other words, they are inspiring the airline to go invest into a new fleet in the middle of an economic downturn. In such case the shareholders might be spontaneous to finance the new requirements as they are kept happy and also the airline has been maintaining a steady harvest-tide rate both in profits and network coverage. Banks are also aware of the securitized aircrafts also of the vast amount of cash reserves. This background could enable Ryanair to obtain loans with lower interest rate. Ryanair is aware of the favourable contract conditions with Ex-Im Bank as the carrier has stated that they expect any future commitments or guarantees issued by Ex-Im Bank to contain similar conditions.Any inability to obtain financing for the new aircraft on advantageous term might have an adverse effect on the business, operations and financial conditions. However, easyJet founder Stelios Haji-Ioann ou calls for a slower fleet elaborateness plans in the next years as he believes that the annual growth is not equal with the number of aircrafts on order. Ryanair should also consider this side of growth as they ground 80 of their aircraft for the winter period. A great bulk of aircrafts without sufficient demand could destabilise the airlines financial position and could make Ryanair to reassess its financial sources. (Rothwell 2012)British AirwaysAdditionally to the current-liability problems (see above), the other main financial issue for BA is to pay for the new fleet. kindred mentioned above the company has firm orders for 50 aircrafts for 4.1bn and options for additional 84. The following question needs to be answered pretty soon who is going to lend money for British Airways? How much is it going to cost the airline? The British loll carrier could try to increase its funds from shareholders money, but it can be assumed that due to the lack of the profitable dividend po licy shareholders are not ready to invest more money into the airline.Also, BA belongs to International Airlines aggroup (IAG) which also incorporates the Spanish carrier Iberia. The problem is Iberia is making losses, thus even if British Airways makes profit this or next year IAG is going to use that money to reduce the losses at Iberia. In other words, the Spanish carrier is pulling British Airways back at the moment. Shareholders may consider additional funds risky, therefore BA need to show that it can preserve its leading position as a legacy airline. Cash can be generated by selling off assets or reducing costs. In December 2011 BA had only 39m available-for-sale financial asset. The airline has different amount of equities in various companies these could be sold as well to gain cash in the short run. By selling aircrafts, which are not necessary needed, the airline could generate income.It would not be incorrect if BA focused more on the long-haul routes and would reduc e the number of aircrafts (114) spry within Europe as the company may not be making sufficient operational profit on some of these routes due to the low cost carriers. The third option for the company to finance its future commitments is to obtain loans from banks, financial institutes or sovereign riches funds. The latter is a possible solution as Chinese or Gulf wealth funds could be willing to inject capital into the airline, but the question is at what interest rate? The lenders know that BA is struggling with the payment of the shortterm liabilities and they are using the long-term loans, the more expensive money to fund the operational commitments, hence the interest rate for the credit can expected to be high.This would solve the liquidity question in the upcoming years, but such financial funding would also mean difficulties in the period after 5 years. However, if the carrier can continue its recovery from the downturn then there is a good chance for a financially stable British Airways that can pay all its liabilities. Financial and operational leases may work, but they would only relate to the aircrafts. Also, it can be assumed from the drop in the operational lease that BA has these contracts ready and sorted out, they are not just not live as the new aircrafts have not been delivered yet.ConclusionThe report has investigated two different business models financial structure. Results show the quantitys conquest over quality. Ryanair can maintain its market leading position and increase profits from year to year. This is attributable to the steady and well-functioning financial and operational system, which enables growth, investments and also controls liabilities and aircraft commitments. The search for new financial sources is only necessary, if Ryanair decides on a fleet expansion plan and the airline cannot agree with Ex-Im Bank about future fleet procurement.On the other hand, British Airways seem to struggle with its existing funds hence n ew financial sources are required to stick out the upcoming years. The decision on these funds is hard as in BAs current situation none of them can be called advantageous. But, to choose the best solution financial advice is recommended for the carrier. Despite all the differences, the two airlines have one thing in common the next twelve months are going to have a great effect on both carriers long term operations.Reference listATRILL, P. and MCLANEY, E., eds, 2002. Accounting and finance for Non-Specialists Fourth edn. Pearson Education Limited. BRITISH AIRWAYS, 2012. Annual Report and Accounts Year ended 31 December 2011. British Airways. MORRELL, P.S., ed, 2007. Airline Finance Fourth edn. Ashgate.