Financial And Strategic Analysis Of British Airways And KLM Royal Dutch Airlines Essay.

Upon completion of this piece of coursework, a student will be able to:

Understand the nature of the financial accounting problem and proposed solution / structures for assisting policy makers in their deliberations and choices,

read and understand the components of financial statements, such as balance sheets, income statements, statement of changes in shareholders equities and cash-flow statements,

evaluate their implications into businesses through efficient financial reporting and thus appreciate the use of published financial information for decision making such as investment decision making and performance evaluation,

Analyse and evaluate company performance and financial position of company by use of financial tools such as financial ratio analysis,

Acquire a basic awareness of impact of IAS and IFRS on financial statements and financial ratios,

realize the crucial role of management accounting in the decision making process of the modern organization,

Have the basic required understanding of the mechanics of various managerial and cost accounting methods and techniques, like full and absorption costing, ABC, ABB, CVP analysis, etc, that will allow appropriate interpretation of performance and results, thereby facilitating efficient and effective decision-making,

understand the crucial role of budgets and their practical application in the modern 
 

Airline industry is an ever changing industry in the world. Market change, Globalization, new technology has given wings to this industry. The airline industry is protected by many national and international agreement and policies.The airline industry is a very competitive market where cost and comfort are always balanced for higher revenue and customer satisfaction. The market is also very cost sensitive due to the surge in Fuel rates, competitors and customer demands.

British Airways Plc is among the most sought after airways in Britain and Europe. British Airways Plc is the UK’s one of the largest airways and also the world’s leading luxury airways. The major business is in London, Heathrow and Gatwick. BA operates the most international schedule airline in the world. It serves more than 1000 destination in over 500 countries. BA is the member of world Alliance which serves a network of 600 airports allover the world.  It was founded in year 1974. It spends millions of dollar to launch new plan and strategies to delight the customer.

The second most sought after airlines in Europe is KLM Royal Dutch’s.  It the oldest schedule airline in the world operating today. KLM also holds subsidiaries ‘Transavia and Martinair’. Transaviar is the one of the leading cost effective airlines .In 2004 the KLM merged with Air France both company became the biggest air companies serving more than 1 million passenger in a year. The company lead the motto to keep the customers happy and makingthem their brand for the company. KLM works towards sustainable growth.

The financial analysis is used by the investors, creditors and stakeholder to evaluate the company before making any decision.  Thus there is a major need to investigate the financial statements of the company. There are several methods to do the analysis and the most commonly used are the ratio analysis and the common size analysis. These analysis gives a clear picture of company’s positionand what is its performance after 1 year of operation. Financial analysis states the health and stability of the company in that particular industry. The only limitation in these analysis is that the information used is totally based on the external information provided by the company. The data is publically available and is secondary data form.

Financial assessment is done to understand the position and value of the company. The assessment is done based on the data in the balance sheet, financial statement and cash flow statement. The asset and liability is assessed by the financial assessment. It is the responsibility of the company to follow the GAAP system so that nothing remains hidden which might give false representation of the company to the stakeholders.

Introduction to British Airways

The management assessment is the second most important factor to assess the strength of the company. The leadership quality that the management of the company is efficient and how the company takes into the account all cost efficiency. The skills include the decision making of the company. Motivation factors of the employees and the customer satisfaction level that the company can give to its customer at any period of the time.

The financial data issued by the company needs some of the key points to include in it. Fundamental objective of the corporate report is to communicate the economic measurements taken by company.  It gives a clear picture of the resources and performance of the company. 

The characteristics are:

• Relevance: the financial report should not put information’s which are irrelevant to the investors and the stakeholders. This helps the stakeholders, bankers and investors to understand the accountability of the organization. This is why it is important to follow the GAAP and IFRS guideline so that the details are properly utilized and summarized.
• Understandability: This characteristic is to make the financial report easy to be interpreted. It should be understandable and comprehensible for the readers. It should have adequate amount of information about the business and the economic information. The complex items are also included and this can’t be eliminated just to me it simple for the lay man.  
• Timeliness: The information should be made available to the user in time. The information presented should up to date and fresh. Old datas should not insert in the report unless it is required to be done. The information should be accurate and true about any decision made by the management.
• Comparability: This helps to do the comparison between companies in same industry and also across the years. This helps the users to identify the similarity and differences between two sets of financial and economic phenomena’s. The information of any one time should be present for the analysis for anyone to make decision about the progress or stagnancy of the business.
• Verifiability:It tell the user that the information used are well supported by the true evidences and anyone willing to check the faithfulness of the information can be done. This is used for the audit purpose. The information’s should be reliable so that the investors can depend on it to analysis the economic condition.
• Neutrality:the information should not be influenced by any pre-determined results . The preparer of the report should not be biased towards anyone. All figures included in the report should be based on some basic measurement and should be followed year on year. The information represented in the report should be unbiased no false information to be provided just to influence the investors.
• Consistency:The company needs to present the information in constancy. So that the results can be compared or tallied from period to period. This is required for the updated if any change is done. This is required as the comparison between period to period. 

AllListed companies has to issue their annual report every year to the investors. The report consists of the Directors mission vision, year-end performance figure and the risk position of the company.The report is the primary source for the investor to understand the performance and earning of the company.

The desirable Characteristic of British Airways:

Annual report gives true facts and figure that can be analyzed by the audited report of the company. British Airways director Alex Cruz sent message through its annual report the year ended in 31 Dec, 2017. The company delivered excellent operating profit of £1774 mn even when the environment was not favorable. The marked revenue for 2017 was noted to be £12226 mn almost 7.3% high from the last years.

Company has announced a 5 year plan for 2017 of investing 4.5 billion pounds in customer experience programme. The company wants to launch 70 new aircraft well equipped with Wifi, inset power, new entertainment systems and also a new club world seat on long-haul flights. The use of the advance aircraft shall reduce the carbon emission safe the environment. Amount shall also be invested in the old aircrafts for safety and co2 less emission purpose. The company wants to do partnership with renewal fuels company “Velocys” to develop a system which will convert the household waste into the jet fuel. It shall be environment favorable.

Company paid a dividend of460mn. First interim dividend paid was of £ 100mn in April, 2017. Second interim was also 100mn and 3^rd and 4^th dividend paid was £ 200 and £ 60 mnrespectively.

Over all the company releases its annual report every year end. The Auditor for British Airways is Ernst & Young LLP.  The facts are not oversized or fake representation it can be stated by looking at the 10k form on Sec.  There is no misrepresentation of any facts. The company follows the to section 489 of the companies act 2006, and GAAP, IFRS standards and is very easy for anyone to understand the report.  Thus the company follows the desirable characteristic of the accountings.

Introduction to KLM Royal Dutch Airlines

The company has made the strategic plans to promote customer satisfaction, safe operation, reliable outcome to the customer, and maintain a capital efficiency. The investment shall be done towards increasing the customer satisfaction and decreasing the boarding time and enable touch screen system to be updated and fast. The company claims to be the most punctual and customer centric airlines in comparison to it’s competitors. The company increased it’sengineering reliability by 99%. It has implemented a new technology of the “Mototok” which is a high-tech electrical aircraft pushback that uses radio remote control. BA is the first European airlines to trail biometric boarding for international departures.

In 2017 the first wing was opened at Heathrow terminal 5 and new-York JFK. Investments have been done in opening new lounges and restaurants across the major airports for customer delight. The company is working on the data utilization enhancement programme to better utilize it for high sales. The company is moving towards the digital empowerment to the cabin crew and the data collected shall be used by the company to increase the sales.

The message from the director of the company Pieter Elberstells about the mission and the vision of the company. The company is focusing on keeping the marginal profit high and to maintain a positive free cash flow and also lower unit cost. Today KLM is maintaining a number one position in the airline market. They are moving towards the digital solution to the customers. KLM is going to be century old in 2019 and the company is preparing high to mark the 100th years of the company to be successful.

The company’s revenue reached to 10.3 billion Euros and the operating income rose to Euro 910 mn.  KLM has worked towards upgrading the product. It has invested around EUR 925mn in ability to keep the customers happy.  The company added two new Boeing aircrafts. This has increased the confidence of the investors as Boeing is most expensive plans. To make the company more assessable for the employee they have removed most of the management layers and empowered their staff with the digital services. To be ahead in operation and profit revenue the Air France and KLM along with India based Jet airways and along with Delta Airlines and China eastern airlinessigned a corporation agreement and all acquiring 10% stake in the Air France KLM.

The company is fully prepared for any risk positions. It has started to work for enhancing its cargo service and focusing on small and medium loads for increased profitability. The company is investing on the ecommerce platform for easy and increased sell and purchase.Ultimately KLM has a policy to protect the rights of the passengers. As Customer is GOD for KLM. 

Financial Analysis

Strategic planning and analysis is a process by which the company make plans to safe guard any precarious situation or to eliminate loopholes. It helps the company to stand strong in any crisis situation and live a high profit and happy customer company.

An effective analysis of the present and future scenario of any firm list downs the main risk and opportunities their firm has ever taken into the account or are prepared to take into the future.Airline industry has a huge demand and thus has a huge amount of players in to it. The industry is full of demand and supplies. The airways carrier divide into the high class and low class carrier.

The figure1.shows the Average Fuel Efficiency

BA as well as KML royal are a strong brands and has always benefited from their high standards services. The companies have more than 2/3 of its revenue generated from the UK, America and Europe. The companies faces the threat from low cost carrier in their areas every year. The excessive capacity of the US market sometime make the competitors to tap the new markets of Europe.

Both the companies has a work force as large as 3500 employees all over the world. Whereas KLM has slight high Employees around 5000. Both the company being a customer oriented service sector makes it their major priority to keep the customer satisfied and happy. New investments in purchasing new units of space for lounge or adhering to new technology or investing in human resource is their investment for the customer interface.

To analysis the financial position of the any company one needs to understand the sales, revenue and the cash in hand of the company. The values directly sometimes not very clear so to understand the position of the company we use ratio analysis. There are many ratios which compares the value of the financial data given to conclude the position of the company at the end of the year. Generally 5 years of gap is considered to understand the comparison. The analysis is limited to the financial data available in the annual report.

 This data helps the investor to understand the profitability and liquidity of the company. It evaluates the profitability of the company how good it is in converting the sales in to the income. Ratios used are return on equity, return on assets, gross profit margin, net profit margin.

Management Assessment

The ratio computes the profitability of the company how much a company is going to return to the investors. 

The British airways has decreased its return in the year 2017 although the revenue has increased by 7%. Even the operating profit of British airways has increased by 19% recorded at 1,680 £ million as compared to 1,413 £ million in previous year. There was an increase of 1% in the return ratio.

During the year 2017, the KLM royal Dutch’s Company registered total revenue of EUR 10,340 million as compared to EUR 9,800 million in previous year. The total revenue increased by 5 % in 2017. Earning Before Interest Depreciation and Taxes (EBITDA) of the Company has increased by 25% and was recorded at EUR 1,496  million as compared to EUR 1,189 million in previous year. Income from operating activities has however, reduced drastically to (-) EUR 939 as compared to that of last year EUR 684 million. This has impacted the ratio to fall from 54% to -75.84%. But in 3014 the shareholder equity was so low that the ROE shows to be very high.

It shows how profitable is the company in comparison to the asset.  It explains how well the company is going to be using the asset in comparison the sales the company is generating. 

The graph here represents ROA for both the company. British Airways has shown a decrease of the ROA chart from the past performance. The 2017 ROA is 10.17% and 2016 it was 9.17% but if seen for 2015 it is noted that the company was doing well. Operating profit is constantly increasing which is 14%, 12% and 11% in 2017, 2016 and 2015 respectively. The Company managed to reduce its Finance cost which is 106 £ million as compared to 145 £ million in the previous year.  Also the Finance income of 35 £ million has been achieved which was (-) 147 £ million in 2015.

For KLM Royal Dutch Operating profit stood at (-) 9.80 % which does not provide a healthy sign for the Company’s operation. The Company has been constantly managed to reduce its Finance cost which is EUR 91 million, EUR 145 million and EUR 114 million in the year 2017, 2016 and 2015 respectively.  Net Profit for the year has decreased to (-) EUR 703 million as compared to EUR 519 million. Although the company shows a positive ROA as it is increasing year on year from 3% to 16 %. 

Corporate Reporting

It tells about the financial health of the company. It tell how much does the company is making profit on each penny of sales done. It tell how beneficial a company is on how much the company is active in converting the sales revenue in to the profit.

Analyzing the data of British Airways there is decrease in the Net profit margin from 2015. Whereas same trend is seen for KLM royal Dutch. It has increased in 2016 and decreased to negative digit in 2017. Profit after Tax (PAT) is at 1,403 £ million as compared to 1,345 £ million which is 4 % higher than that of last year. However, the PAT is 44% less as compared to the year 2015 which is mainly due to sale of financial assets amounting to Rs.1,502 £ million in 2015. The Net profit margin stood at 11.48% in 2017. Company is moving up wards to give return to its investors.

Whereas for KLM Royal Dutch Net Profit for the year has decreased to (-) EUR 703 million as compared to EUR 519 million. Further Net profit of the Company in the year 2015 was at EUR 54 million. It shows that the Company has inconsistent profitability / operation over years. The Net profit margin stood at (-)6.58% in 2017 which is not a good sign of operations of the Company. Earning per share stood at (-) EUR 15.04 million as compared to EUR 11.03 million in 2016.  

The formula is stock price of the company share by the earning per share that the company is paying back. It calculates the market value of a stock to its earning by valuing the market price per share by the earnings per share. In simple price earnings ratio shows what the market will be paying for a stock on its current earning. 

The P/E ratio of British Airways is increasing from year 2015 from 15.03 to 86.19. The higher the P/E ratio means that the company is having a growth stock. This indicates a positive future performance. It can be risky also because it can be an over value stock value.

Whereas the KLM royal Dutch shows that the P/E ratio is decreasing from year 2015 to 2017 from 79.71 to 8.97. A low P/E ratio means that it is a value stock because they are trading lower from their fundamental and investors invests here before the market corrects.

Strategic Planning and Analysis

It is a ratio which measures how much the company pays its investors for 1 rupee of the cash flow. Both cash flow and earning of the company is closely related. Generally it is seen that the cash flow and earning closely follow each other.The ratio can be examined and it is seen that the highest P/CF ratio is for year 2014 for KLM royal dutch and the ratio has come down till now. The cash flow was low for year 2014 which has raised the ratio.

Trend for British Airways the chart is rising from the previous years. This trend is common if the cash flow and the earning is going hand in hand. In same ratio. The cash flow ratio can be seen to be 451.3 which is also a good sign that the company is performing good.

This ratio is useful in comparison format. This is a ratio where the company’s ability to pay its current liability. And also the long term liability as they may become the current soon. The current asset tell how much the company is having to meet it current liability.

The British Airways has increased current ratio the asset has increased in comparison to the liability. The current ratio is 3.04 and the change form 2016 is not much for British Airways. During the year 2017, the non-current assets has reduced to 12,810 as compared to 13,173 in the previous year. The current assets of the Company has increased to 2,726 £ million as compared to 2,428 £ million in the previous year.

KLM in the year 2017, property, plant and equipment increased from EUR 4,319 million as compared to EUR 3,783 million which is 14% higher. It reflects that the Company is investing into its fixed assets and positive for its long term growth. During the year the Trade and other receivables has increased to EUR 1,228 million from EUR 964 million which is 27% higher. There is not much change in the graph as well.

This ratio is used to assess the liquidity status of the firm. How much of liquid asset it has that can give a whole health of the company. 

Both the have similar current acid test ratios. This is a closer trend in these industries. The British Airways has increased It’s acid ratio and same ways the trend for KLM Royal dutch goes. The companies are doing well they have adequate amount of current asset for immediate liquidation. The ratio is closer and had less changes from 2016 to 2017.  

Here is seen how much the company’s asset has been supported by the debt. Any part of ratio showing more than 100% that the company has more debt than the asset. If the company has more debt than the asset than it becomes clear for investors to judge the risk level. 

It determines the how much the company is surviving on the debt. How much the asset is financed by the debt. This ratio helps in determine the loan the investors can be given. 

The debt for British airways is higher than the equity for 2017 and that was not the case in 2016 where the company was having more debt of 6985mn. The ratio changed by double the amount. The financing cost decreased by £39 million as the company paid the related debt. The company also gained 21 euro mn from then on operating sale and cash transition.

KLM capital structure changed due the net cost of financial debt reduced from EUR 100 million to EUR 91 million, as a result of the reduction of net debt and lower interest rates. KLM’s ratio for year 2014 was very high as 474.67.

The asset/equity ratio is a relationship of the total assets of the firm to the part owned by shareholders. This ratio is an indicator of the company’s debt used to finance the firm. 

It indicates the proportion of total asset financing of the company in terms of equity funded and debt funded approach. A higher ratio is itself not good for the company and neither a lower ratio as it does not indicates good financial prospective.

The higher the ratio indicates that the company is more of equity funded i.e. more burden of profit sharing in form of dividend to shareholders. The lower ratio indicates more burden of interest obligation on the company which is a charge against the profit.  

Efficiency ratios is a ratio between the assets and liabilities of a company and how is it being used. The calculation uses the value of inventory, repayment of liabilities, usage of equity, and turnover of receivables. The most commonly used efficiency ratios are fixed assets turnover, assets turnover, inventories turnover, day’s inventories.

It is turnover ratio telling how efficiently the company is producing sales with the assets of the company. The Plant, equipment and property is how efficiently paying back to the company.

The ratio are less than one for British Airways. This indicates that the company has more asset and the sale revenue is not much as affected by the sales.

The KLM Royal Dutch has ratio higher than one it is producing more the sales covering the year on year cost of the asset.

The cash flow margin measures how efficiently a company converts its sales dollars to cash. It's also a margin ratio. The higher the percentage, the more cash is available from sales.

Cash flows Margin for operating = Cash Flow from Operations / Net Sales 

Both companies are having good amount of Cash from operating operations to be around 1,981mn for British Airways and 1230mn for KLM royal Dutch. The ratio are less than one which is equally good as the company is doing more sales and generating more sales revenue.

The activity ratio measures how well is the company performing. It is also called the Assets management ratio. How well the company is doing in producing the revenue from the asset.

Creditors Payment Period = Trade creditors / credit purchases Number of days)

Creditors Payment Period indicates the time (in days) in which the current liabilitiesis outstanding. The ratios are very high after the calculation. The company is showing a stable trend when analyses the difference over the period of year is not very high. The company gets a good amount of time to pay its payable.

Price to cash flow ratio: 

According to the above figure, it could be seen that the price to cash flow ratio has been higher for KLM Royal Dutch and this implies that the stock price of the organization is costlier for the investors. 

Conclusion

The analysis gives a very strong picture that both the companies are faring well in this competitive market and have a strong asset based. The expenditure on the customer based services are well received by the customer. As the company is making a good profit year on year. Being a listed company both the companies are following the accounting standards and no discrepancy was found.

Both the company has fared well from the financial crisis of 2008 and other crisis of fuel price increasing etc. Both the companies are doing excellent business if seen over the period of 5 years. Although KLM is giving negative revenue for year 2017. The company has done a good business if other factors are considered. The dividend paid to the investors are also in good amount in comparison to the industry competitors and the investors can rely on performance of the company. 

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