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Introduction of the Airline Industry

Discuss about the Financial Analysis for Singapore Airlines and New Zealand Airways.

With the tremendous development in the global aviation transportation, the international aviation industry has been able to cover almost each and every part of the world since 1950s. As of today the international aviation industry consist of more than 2000 airlines which are providing their services to over 3700 airports with a fleet size of  more than 23000 aircrafts.

As per the report of International Air Transport Association, in next 2 decades, air traffic is expected to double. However, the percentage of growth will vary region to region especially the developing economies will show the fastest growth hence it is essential for the airlines to evaluate the financial performance in comparison to other competitive airlines and strengthen themselves to garb the highest opportunities in the near future (Pearce, 2015).

All the above aspects sated that if a company is financially stable then it can face the unexpected changes of the market conditions. All the aspects increase the role of financial analysis with an aim of accessing a company's position. The financial analysis results are important to the tax authorities, creditors, stockholders, investors, suppliers, owners and managers. The relevance of the study can be understood from the fact that financial stability plays an important role in development of organization in this competitive market. If a company has a strong financial report card then it has many advantages over the other rival companies in terms of attracting choice of suppliers, investors and qualified personnel (Fedosova, 2016).

Airline industry is one of the major economic forces for every country as it influences the travel and tourism of a country. A part from this it influences the aircraft manufacturing and other operations. Liberalization is considered as the main leading force in the airline industry that came into effect after the deregulation in 1978 in Sarthe main driver for the air travel demand is the economic growth. After the deregulation in the aviation industry the competitiveness in the industry has reached to its pinnacle. Currently, industry is facing the challenges of low cost carrier, operating performance, transparency of pricing, etc. Apart from this various travel distribution channels has initiated the war of minimum fares. In this era of price competition, it has become essential for every airline company to continuously analyze and maintain its financial position to face these challenges.

Singapore Airlines

Singapore Airlines was founded in 1947 as a flag carrier airline of Singapore. The airlines base hub is situated at Changi Airport. Total Fleet size of the Airline is 107 and it flies to more than 64 destinations all over the world. In the last 20 years, the company has broadened its market. At present, it is one of the world's leading passenger and cargo carrier airline. Singapore Airlines has young and modern fleet of aircraft. The base airport of the Singapore Airlines is voted as the world's best airport every year. As per International Air Transport Association, on the basis of market capitalization, Singapore Airlines is the 2nd largest airline globally. The total market capitalization of the company is 14 billion US dollars.  Currently in the financial year 2015 the airline has reported an improved profit for the first quarter. The profit of the airline has been recorded relatively modest for the four consecutive years. Singapore Airline is continuously accelerating its expansion capacity in the FY2016 (CAPA, 2015).

In the year 1940 New Zealand Airlines was originated with the name of Teasman Empire Airways Limited (TEAL) which initially operated its flights between New Zealand and Australia. In 1965 New Zealand Government took over Teasman Empire Airways Limited and renamed it as Air New Zealand. After the takeover, government merged the Domestic New Zealand National Airways Corporation with Teasman Empire Airways Limited in the year 1978. Currently, the national airline of New Zealand is Air New Zealand Airline based on Auckland and it flies to 29 international and 22 domestic destinations. It covers Pacific Rim and United Kingdom. New Zealand Airways launched its annual results with normalized earnings. The company's statutory earning before taxation was 474 million dollars and its net profit after taxation was 327 million dollars, which 24 percent higher in comparison to previous year (Airnewzealand, 2015).

The financial analysis helps in knowing the financial standing of a firm in the market. Basically, financial position of any company can be judged on the basis of Income Statement, Balance Sheet and Cash Flow Statement. Before taking investment decision, the investors analyze the financial position of the organization and its competitors in order to avoid any risk. They prefer to invest in company that has good financial position thereby increasing their chances of profit making. The financial statements of Singapore Airlines and New Zealand Airlines will be analyzed and compared on the basis of the various the key ratios.

New Zealand Airlines

Finance is a broad term and measurement of the financial analysis of the company ensures the proper use of economic resources to successfully operate both long term and short term perspectives. In case of Airlines industry, financial management is significant to stay profitable and sustain airline operations for long term. The financial analysis of a company is important as it affects the strategic planning and short term decisions. This study is undertakes comparison of financial performance of two major airlines. Feng and Wang argued that it is important to measure the financial performance of a company in terms of profitability, solvency, and liquidity. These all factors are important as these factors ultimately affect the long term survival of an airline (Feng & Wang, 2000).

Important ratios in airline industry

Some key principal ratios are discussed here which were popularly used by the researchers to compare the financial performance of the airline companies.

Profitability Ratio

Return on Assets (ROA): Mathematically, it is calculated by dividing company’s net income or earning by its total assets.

Formula: Net Income / Average Total Assets

ROA shows the ability of organization to effectively manage its assets in order to generate profits during an accounting period. The return on assets ratio shows how airlines utilize their assets and the efficiency of utilization. This ratio is important for the airlines as the acquisition of the aircrafts creates high capitalization cost instead of leasing aircrafts.(Heikal et al., 2014).

Net Profit Margin: Mathematically, it can be obtained by dividing the net earnings of the company with its revenue.

Formula: Net Profit / Total Revenue

This ratio enables investor in identifying the capability of a firm for translating its total sales into the total income (Eriotis et al., 2016).

Liquidity Ratio

George Loizides conducted a study in 2011 to examine the key financial ratios amongst various scheduled carriers. In his study he selected two Southwest European airlines named Aegean and Cyprus. The study calculated the liquidity ratio for both the airlines to analyze the company's ability to cover its short term liability using its current assets. In terms of airline industry short term assets are: account receivables, cash, prepaid expenses etc. and short term obligations are: account payable, bank debt, deferred revenue etc. In case of airline industry c deferred revenue consist of derivative financial instruments, ticket payments, bank overdrafts and borrowings (Loizides, 2011).

Current Ratio: In this ratio the association between the short term liabilities and short term assets is examined. For any company, 2:1 is considered as the best current ratio. Current ratio shows the short term financial standing of the firm during an accounting period. (Tugas, 2012).

Financial Analysis

Formula: Current Assets / Current Liabilities

Quick Ratio: Investors uses quick ratio to evaluate the cash flow and short term liquidity of an airline. This ratio discloses whether or not organization can realize its short term debt with its liquid assets. Current liquidity position of the firm is depicted by Quick Ratio. It also determines the firm's ability to maintain its short term liabilities and quick assets. Quick assets are those assets that can be liquidated immediately as per their present book value. This financial ratio is important to analyze the financial condition of an airline industry as they are capital intensive and they have debt in significant amount. If a company shows higher quick ratio then it is considered better (Kirkham, 2012).

Formula: (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Liquidity and Solvency

As per Morrell, if any crisis occurs like the terrorist attack or any resent financial crisis, then it is important to evaluate the Airlines liquidity and its access to finance. Infect they are essential for the endurance of the airline also they finance aircraft deliveries. Hence, it is important to access the liquidity and solvency of the airlines at the time of financial comparison. The liquidity ratio and solvency ratio consists of components such as short term liabilities, current assets, shareholder's equity and total liabilities. These all elements are necessary to calculate debt to equity ratio and current ration (Morrell, 2011).

Debt to Equity Ratio - Long Term Solvency: This ratio helps in measuring the long term wealth of a firm. It analyses the association between the capital contributed by the owners of the firm and creditors of the firm. It also analyses the extent to which the shareholders can satisfy the obligations of the company towards its creditors. For example, if a firm is using more equity and less debt then it reflects lower equity ratio. On the other hand, if a firm is considering higher debt in order to grow its current position then it reflects the high debt to equity ratio (AL-Shubiri, 2012).


Formula:
Total debt / Total equity

It measures a firm's ability to cover its short term obligations. This ratio investigates the association between the short term liabilities and short term assets of a firm. It measures the total value of assets funded by the investors during the comparison of total assets to equity in the company. The purpose of calculating this financial ratio is to analyze a company's working capital to know whether or not organization can meet its operations requirement. Strong financial position of the company can be indicated with high current ratio and thereby it adds value to the company's performance within the industry in the market (Bhandari, 1988).

Importance of Financial Analysis

Formula: Total Equity / Total Assets

Market Performance

Earnings per Share: Earnings per share show the company’s profit which is allocated to shares of common stock. It calculates the portion of profit to each shareholder (Livnat & Segal, 2000).

Formula: (Net Income - Preferred Dividend) / Weighted Average Outstanding shares

Dividend per Share: DPS is the part of dividend which each shareholder receives and it is declared by the company on per share basis(Gordon, 1959).

Formula: Dividend / Number of Shares

A study was conducted by Ahati (2008) to compare the financial performance of Merck &Co. and Pfizer Inc. for this study. He analyzed the past three annual reports of both the companies. Growth ratio was calculated to measure the investment growth rate of both the companies. Liquidity indicators showed that Pfizer has a much higher current ratio as compared to Merck's. This clearly indicates that Pfizer has higher capability to pay off its current liabilities because short term assets and short term liabilities were two times than the current ratio. The price sales ratio of both the companies was calculated to know the revenue of the companies and the results showed that price sales ratio of Merck was higher than the price sales ratio of Pfizer, and this indicated that investors pay more for Merck than Pfizer. The results of this study calculated the return on assets ratio for both the companies to identify their efficiency of managing resources. On the basis of the comparison, it was concluded that Merck showed higher efficiency in maintaining a more efficient use of the assets in order to make a great profit as compared to Pfizer (Ahati, 2008).

As per the study conducted by Loizides (2011)Aegean has the potential to cover its liabilities almost two times as compared to Cyprus hence Aegean is in better position. In terms of asset turnover ratio, both the airlines show a similar pattern over the three years. In terms of debt ratio, Cyprus airline's debt ratio was high and this shows that the proportion of its liabilities relative to its assets is 95 percent and it is a bad sign to come in the coming years. On the other hand the debt ratio of Aegean was stable and around 50percent of this indicated the good portion of the assets of the company to be attributed to its liabilities. Aegean will not face any leverage risk in the coming years (Loizides, 2011).

Literature Review

Mergers and Acquisitions (M&A) in aviation industry have been popular from the decades. However, M&As in the airline industry has become quite common in recent years. Kabi and Sajnani conducted a study on merger and acquisition in aviation industry in India to identify impact of M&A on airlines. They aimed at determining whether or not merged airlines are able to attain financial performance efficiency particularly in terms of leverage, liquidity, and many more parameters.  The results of the study revealed that no improvement were noticed in the return on equity, interest coverage, net profit margin, dividend per share and earnings per share of the surviving company after the merger & acquisition. This study analyzed the financial performance of Kingfisher Airlines and Air Deccan after their merger in 2006. The analysis of the ratios depicted that the earning per share and market price both were decreased after the merger. Decline in earnings per share indicated reduction in the sales revenue, rise in operating expenses and rise in the interest payments. The current ratio was decreased after the merger by 35 percent which indicated the scarcity of resources to pay its current debts and difficulty in meeting the current obligations (Kabi & Sajnani, 2014).

The financial analysis comparison of British Airways (BA) and Air France-KLM (AF) was conducted for the period of 2009 to 2012 on four standards that is, efficiency, profitability, financial gearing, and liquidity. The results of the study stated that both the airlines were highly volatile and AF showed worse results than BA. In the year 2012 the profitability of the AF fell deeper due to increasing costs. In terms of liquidity both the airlines were suffering from low liquidity as their current liabilities exceeded their current assets. The reason behind the low liquidity was the burden of aircrafts leasing payments, interest payments and debt payments (Riha, 2013).

Research Methodology

This research study will be performed to evaluate the financial performance of Singapore Airlines and New Zealand Airlines. Both sources of the primary and secondary data will be used in this study. Secondary source of data will be conducted in the form of literature review. (Saunders et al., 2009).

A research design is concerned with the better understanding of a less understood topic. It is an approach to apply better appropriate research method on the study with a view to answering the questions of the research. An appropriate research design is decided on the basis of the research questions. This research study can be categorized into the exploratory research as it will explore the financial conditions of the airlines and it will address the "what" element in the research questions (Saunders et al., 2009).

Research can be broadly categorized as Secondary research and Primary Research. In primary research, usually data is collected directly from the source of information. This research is performed by the researcher itself. There are various methods of collecting data in the primary research such as interviews, focused group, etc. The choice of the suitable method depends upon many factors such as research type, population size, and many more. The secondary research on other hand is based on the previous data wherein facts and information is gathered from the previous reports and articles. This research will be totally based on secondary research as the ratios will be calculated on the basis of the financial statements of both the companies. Various facts and figures will be taken from the annual reports and ratios will be calculated to identify their current financial position (Saunders et al., 2009).

There are two types of data: quantitative data and qualitative data. Qualitative data consists of non-numeric data while quantitative data consists of numbers and figures. As this research will compare the financial performance of two airlines hence, to perform all the ratios the data will be taken from the official annual reports of both the companies from their official website. The data taken from the annual report of the companies will be in the quantitative form as ratios are calculated in quantitative form and their values are compared in the same way (Eriksson & Kovalainen, 2008).

The data will be analyzed on two approaches. The first approach is based on theoretical claims. Theoretical concepts from the prior researches will be used to interpret the final results and to achieve the objectives of the study while the second analysis will be based on interpretation of the research materials wherein relationship between the airlines and its influencing factors will be interpreted. This method will be beneficial to answer the questions of the study (Eriksson & Kovalainen, 2008).

References

Ahati, T., 2008. Financial Analysis: Merck & Co., Inc. vs. Pfizer Inc. Wordpress.

Airnewzealand, 2015. Air New Zealand Announces Record Annual Result. [Online] Available at: https://www.airnewzealand.com/press-release-2015-air-new-zealand-announces-record-annual-result.

Al-Shubiri, F.N., 2012. Debt Ratio Analysis and Firm Investment: Evidence from Jordan. International Journal of Economics and Financial Issues, 2(1), pp.21-26.

Bhandari, L.C., 1988. Debt/ Equity Ratio and Expected Common Stock Returns: Empirical Evidence. The Journal of Finance, 43(2), pp.507-28.

CAPA, 2015. Singapore Airlines outlook brightens as profits, yields improve. New connectivity strategies emerge. [Online] Available at: https://centreforaviation.com/analysis/singapore-airlines-group-improves-as-profits-yields-improve-new-connectivity-strategies-emerging-224825.

Eriksson, P. & Kovalainen, A., 2008. Qualitative Methods in Business Research. SAGE.

Eriotis, N.P., Frangouli, Z. & Ventoura-Neokosmides, Z., 2016. Profit Margin And Capital Structure: An Empirical Relationship. The Journal of Applied Business Research , 18(2), pp.85-88.

Fedosova, A., 2016. Comparison between Low-cost and Traditional Airlines.

Feng, C.M. & Wang, R.T., 2000. Performance evaluation for airlines including the consideration of. Journal of Air Transportation Management, 6(3), pp. 133-142.

Gordon, M.J., 1959. Dividends, Earnings, And Stock Prices. The Review of Economics and Statistics , 41(2), pp. 99-105.

Heikal, M., Khaddafi, M. & Ummah, A., 2014. Influence Analysis of Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Debt To Equity Ratio (DER), and current ratio (CR), Against CorporateProfit Growth In Automotive In Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), pp.101-14. [Accessed 2016].

Kabi, B.K. & Sajnani, M., 2014. Mergers And Acquistions In Aviation Industry. International Journal of Mgt. And Science, 4(2).

Kirkham, R., 2012. Liquidity Analysis Using Cash Flow Ratios and Traditional Ratios: The Telecommunications Sector in Australia. Journal of New Business Ideas & Trends, 10(1), pp.1-13.

Livnat, J. & Segal, D., 2000. The Calculation of Earnings per share and Market Value of Equity: Should common stock equivalents be included?.

Loizides, G., 2011. Examining Key Financial Ratios amongst scheduled carriers.

Madrigal, D. & McClain, B., 2016. Strengths and Weaknesses of Quantitative and Qualitative Research. [Online] Available at: https://www.uxmatters.com/mt/archives/2012/09/strengths-and-weaknesses-of-quantitative-and-qualitative-research.php [Accessed 8 june 2016].

Morrell, P., 2011. Current challenges in a "Distressed" industry. Journal of Air Transport Management, 17(1), 14-18.

Pearce, B., 2015. “The shape of air travel markets over the next 20 years. International Air Transport Association (IATA).

Riha, S., 2013. BA & FA financial analysis 2009-2012.

Saunders, M., Lewis, P. & Thornhill, A., 2009. Research methods for business students. Pearson Education.

Tugas, F.C., 2012. A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011. International Journal of Business and Social Science , 3(21), pp.173-90.

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