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Introduction
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The assignment has been prepared to develop an understanding on financial aspects of the company Ryanair Holdings. It is done to develop an understanding on how airlines maintain costs and revenue to generate sufficient profits for the company. It is also used to enhance better perspective for the organization. The report has been prepared to interpret and assess air transport organizations financial statements. The cost and revenue drivers that would influence the commercial positions of the air transport organizations. The sources of finance available are used for air transport organizations. The models of supply and demands and the application of same to airlines is also seen.
Aviation Organizations and financial performance
Overview
Airline industry is among the highest contributors of FDP of the country. It is one of the highest revenue generating industry. The generation of revenue is quite uncertain in the industry. New markets and strategic partnership are the main cause of profits and revenues in the industry. Leading airlines are continuously improving their service offerings around the world. The profitability of the country is correlated and remains profitable. The company is delivering strong performance to the whole world. The economic growth of the country is highly depends on the service industry. It is important to determine the revenue generated by the industry and financial planning simultaneously (Dicle et al., 2018).
Ryanair Holdings
Ryanair Holdings are the largest airline group and it is the parent company of Buzz, Lauda, Malta Air and Ryanair DAC. It has largest skilled professional airline employees. The services delivered by the company are best to a record of keeping all the safety measures. It is the greenest and the cleanest group of Europe. All the measures are taken for delivering the best services to the customers. The company runs 2100 daily flights from more than 77 bases. It shows number one performance in the world. It is one of the low cost airlines based on the best financial planning model.
Financial Statements
Balance Sheet
The balance sheet of the company is being strong from the last two years with increase in assets and capital from 2018 to 2020. The assets of the company are increased from € 8,173 m to € 10,253 m in 2020. The shareholders equity does not show much increase in the value. But there is continuous increase in the current liabilities of the company. As per the annual reports of the company 2020, the balance sheet is strongest in the industry with the flow of current cash being €3.9bn. The steps have been taken by the company to right size the cost base of the organization. The management of the company will continue to deliver best output with favorable results for the customers, families and shareholders. The management of the company will continue to deliver favorable results for the customers, their families and the shareholders of the company (Dicle et al., 2018).
Income Statement
The profits of the company have been reduced from last three years as per the income statement of the company. The revenue is increased but there is simultaneous increase in the cost that reduces profits to sustainable level. It is important to maintain effective controls in order to recognize effective controls in a company. It is required to maintain profitability to increase effects and controls of same in an organization. The tax has been charged in the income statement to maintain reliability of facts in an organization. It has been increased from the last year due to increase in fuel expenses. There is rise in demand of flights as the revenue and the consumption of fuel has been increased simultaneously. The ex fuel costs has also been increased in the last two years. The income are exempted from the taxes on distribution (Dicle et al., 2018).
Ratio Analysis
It is the method to gain insight of the company’s financial statements and recognize its liquidity, efficiency and profitability by maintaining and studying the financial statements of the company. It is the basic tool to analyze financial benefits of the company. It is calculated by applying formulas to certain piece of financial statements.
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Profitability ratios |
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2020 |
2019 |
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Net Profit Margin |
PAT/Revenue*100 |
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648.7/8494.8*100 |
885.0/7,697.4*100 |
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|
7.636436408 |
11.49738873 |
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Return on Assets |
Net Income/Total Assets |
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Net Income |
648.7 |
885 |
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Total Assets |
14,747.20 |
13,250.70 |
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4.398801128 |
6.678892436 |
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Return on Equity |
Net Income/Equity |
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Net Income |
649 |
885 |
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Equity |
4,914.50 |
5,214.90 |
|
13.19971513 |
16.97060346 |
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Liquidity Ratio |
||
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Current Ratio |
Total Current Assets / Total Current Liabilities |
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Total Current Assets |
4,493.90 |
3,804.00 |
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Total Current Liabilities |
5,508.20 |
4,096.60 |
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0.81585636 |
0.928574916 |
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Quick Ratio |
(Total Current Assets - Inventory) / Total Current Liabilities |
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Total Current Assets |
4,494 |
3,804 |
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Inventory |
3.3 |
2.9 |
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Total Current Liabilities |
5,508 |
4,097 |
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0.815257253 |
0.927867012 |
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Long-term risk |
||
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Interest coverage ratio |
EBIT / Interest expense |
|
|
EBIT |
1,127.40 |
1,016.80 |
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Interest Expense |
480.1 |
59.1 |
|
2.348260779 |
17.20473773 |
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Debt to Equity |
Total Debt / Total Equity |
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Total Debt |
4,324.50 |
3,939.20 |
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Equity |
4,914.50 |
5,214.90 |
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0.879947095 |
0.755374024 |
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Profitability
The ratio above has been calculated to analyze profitability of the company. It is important to ascertain long term profitability in the business. It is used to assess the business ability to generate earnings for the company. The return on assets is calculated by dividing net income with total assets of the company (Bachmann et al., 2017).
The profitability of the company is reduced from the previous year as in the year 2020; there is outbreak of covid-19 that affected revenues of the company to a great extent. The returns on assets and equity are also reduced to certain levels.
Liquidity
Liquidity ratio is used to determine ability of the company to pay short term liabilities of the company. Current assets and current liabilities form part of the working capital of the company. Quick Ratio shows the highest liquid assets that can be converted into cash. Quick ratio is calculated to determine how well company can able to meet its cash requirements to operate day to day course of operations.
The liquidity is also reduced from the year 2019 to 2020. The current assets and the current ratio have been reduced to determine long term efficiency in the company. It is important to maintain relative balance in order to maintain operating aspects of the company.
Long term risk
The ratio is calculated to determine long term sustainability of the company. The investors can use the information to take investment decisions of the company. The ratio is beneficial to the shareholders of the company to make investment plans. The favorable ratios make the clear picture of an opportunity of investment in the company.
The ratio is drastically affected by the interest expense of the company. It is important to maintain and sustain reliable efforts so that investors get the value they have been invested for.
Stock Market Performance
The company is listed on the London Stock Exchange. Due to covid there is significant reduction in the prices and the value of stock.
Supply and demand characteristics
The two concepts i.e the airline ticket pricing and seats offered determine the demand and supply factors in the industry. The two factors are interrelated. The same has been associated with the change in the behavior of the customer. It is recognized as an important tool in maintaining airline response to a change. The factors that would influence the demand and supply behavior are crucial for any organization. Demand for airline is based on the concept that decreases in price can cause increase in demand for air tickets that will increase the prices of the company (E-finance management, 2017).
There is specific demand in the client that required being travel with particular flights. It is required to establish appropriate relation so that realistic targets can be set out. It is the rule of demand that lower the price the more attractive would be the eservice is. The requirements are different with the different fares being offered. The same has been found on the principles of demand and supply. There are also several factors affecting the demand of airways- these may include State of the economy, frequency, customer income, safety features, price of service. The airline demand is also called traffic that is measured by the number of passengers, weight carried by freight, revenue passenger miles, revenue tonnes miles (E-finance management, 2017).
Revenue
Revenue has been calculated from normal business operations that include deductions and discounts. It is the sales that have been contributed to the income of the company. In the airline industry’s the major source of revenue if the revenue earned from the sale of tickets to the passengers. The revenue of the company is achieved by increasing the sales of air tickets as compared to the revenues of the company. The company can able to establish appropriate aspects in organizing more revenues in the industry. Money brought in to the business by conducting certain business activities (Ramon et al., 2018).
Pricing
The pricing strategy includes deciding prices based on demand. At the time of occasions, the demand has been increased that lead to increase in the prices of the tickets and more collection of revenues. The airlines have many divisions from the ultimate goals of carriers (E-finance management, 2017).
Revenue Management
Revenue management is the process of understanding, influencing and anticipating in order maximizing the profits from the perishable resources. The profitability of airline business depends on unit cost, unit revenue and load factor. The sources of revenues in airline industry are the collections made from passenger revenue, Cargo and Mail revenue, Commission based components, Advertising, other revenue i.e. sub charter, Frequent flyer programme activities. The revenue resources are considered with the cost implications. It is the profitability in the revenue management that matters most. The products and services are charges with respect to the ticket prices (Ryanair, 2020).
To increase the revenue there are certain ways that could be implemented that are crew sales training, product visibility, magazine images, the price points are compared with competitors. It involves retailing products and services by third parties. The products offered by airlines greatly vary. It involves the combination of travel related, consumer based, entertainment, retail (Ryanair, 2020).
Determinants of airline costs
The main determinants of cost are direct and indirect costs that are incurred to establish profitability. The advantage in the cost and is considered to be an important strategy for diminishing prices. This can result in attracting more people towards the company. This can help the cost center to predict results well and apply strategies in reducing costs (Ryanair, 2020).
Direct Cost
Direct operating costs are related to flight operations, maintenance and overhauling, depreciation and amortization. The flight operations involve flight crew salaries, fuel and oil, aircraft insurance, lease of equipment, The maintenance and overhauling charges involve Engineering staff costs, spare parts consumed, maintenance of administration. The depreciation and amortization include flight equipment, property and ground equipment.
Indirect operating costs
The indirect costs are associated with non operating activities of the company. These activities include station and ground expenses that would include ground staff, handling fees that is being paid to others, buildings and equipments. The passenger services include Cabin crew salaries and expenses, passenger service costs, passenger insurance. The ticketing, sales and insurance would include general and administration (E-finance management, 2017).
The effective relation between the cost and the level of production is important to be kept in order to expand the cost control strategies in the business organization. The variable losses are reduces by cancelling flights. The costs incurred on the salary of the employees must be incurred on the basis of salary quality. It is also based on productivity generated by the employees (Ugoani, 2019).
Analysis of Cost and Risk Management
The decisions on the aircrafts must be taken on the basis of older and cheaper aircraft having high DOC. The basic principle lies in this is based on larger the aircraft, there will be more cost per black hour, per cost seat mile is also lower, labor economies of scale (lo Storto, 2020).
The operating costs of the airline are affected by marketing and product policy of the company, financial policy, corporate strategy, and the quality of management (Dube et al., 2021).
There are several factors that can help in controlling the cost of fuel in the industry. These could be fleet modernization by replacing the older aircraft with the new one so that all the technological up gradations can be there in that. The weight of the aircraft must also be reduced so that costs can be reduced in that. The electronic flight bags can also help in reducing the cost of the flights (Ugoani, 2019).
The identification and analysis of the risk associated with hazards of the flight operations is settled under risk management. Under the same it can be management well, and reduces the chances of any risk to sustainable levels. There could not be the complete elimination of risk but the same can be reduced by identifying hazards, assessing the risk in that and mitigating it to levels. It should be well implemented in a consistent manner so that maintenance in the organizations can be done accordingly. It is important to keep effective controls in order to determine reliability (Ryanair, 2020).
Sources of Finance in aviation sector
All airlines need funding to be required to continuously be in operations. It is important to maintain the same so that there is no shortfall of funds and the operations of the company cannot be hampered.
Debt
It is borrowed from outside the business organization at a fixed rate of interest. It has been paid to determine the costs and services involved in the industry. The day to day operations would involve inventories and expenses. The bank loans taken and the bank line of credit are a source of debt capital in the organization. It is generally used to purchase fixed assets of the company that include aircraft, buildings and land and machinery. The benefit of tax deduction can be received with the same (Nava et al., 2018).
In Rayanair, there is sustainable amount of debt capital being invested in the company. It has material adverse effect on the financial position of the company. The future commitments will be continue to be carry forward. Debt capital markets are used to enhance the requirements of the company to retain investment for the long run. The key risk areas are identifies by organizing relatively better developments in the company (Nižeti?, 2020).
Equity
There are several classes of shares being issued by company to make funding from equity capital. These are considered as the owners of the business. It is important to maintain well defined targets in order to organize capital structure of the company. There are different classes of equity shares that include private individuals and financial institutions. These are the owners of the company. The initial public offers are made to the general public to make investment in the company. The price is adjusted according to the general market conditions and the market sentiments (E-finance management, 2017).
In Rayanair, the shareholder equity has been reduced from 2018 to 2020. It is essential to the extent it is effective. The ordinary share has been classified as the equity capital of the company. In the year 2020, the company has purchased the stake in the company Lauda for €15m consideration. The equity method is used for the purpose of accounting (Ugoani, 2019).
Retained Earnings
The concept behind retained earnings is equal to no dividends that are equal to reinvestment. The retained earnings have been used to invest funds in aircraft. These could be reflected as the cost to the investors that no dividend has been paid and the investment that is collected is used back in the business itself (Iacus et al., 2020).
The concept that Ryanair follow is based on that since the organization is based on the ordinary shares so no dividends are being paid to the equity holders of the company. The company anticipates for the near future. It is based on acquisition of additional aircraft. It will help in replacing an older aircraft with new and upgraded one (Ugoani, 2019).
The retained earnings has been increased from 2018 to 2020. The rise is not much high. It has been increased from € 4077.90 to € 4,245.0. The shareholders of the company can able to manage and ascertain efficient cause of the company.
Impacts and forecasts of Covid-19 on Aviation Industry
The outbreak of pandemic has proven to have drastic affect on the aviation industry. It has issues with the sustainability of the company. The aviation sector affected the most among the sectors. The drop in the demand of the passengers has affected the revenue of the aviation sector. The aviation industry is the key enabler of other industries. The viability of the aviation firms is at risk along with many jobs at stake. Many travel restrictions had been imposed by almost all the countries of the world. The revenue has been almost down by 90% in April 2020 to 75% in august. The aviation industry was facing the challenges with the health measures of the company (Ugoani, 2019).
Since all the commercial activities has been almost stopped so there is danger in the recovery of commercial flights. The commercial flights contribute the major source of revenue in the industry. The uncertainties for the company have been increased with the negative demands and supply of the industry. Before Covid outbreak the sector was effectively growing that lead to large dispersion of productivity of the company. Various firm specific and sector specific measures are taken for the purpose of determining cost and effect relationship (Iacus et al., 2020).
Due to the outbreak of pandemic, the government has imposed passenger or flight restrictions on Ryanair. The company has suffered major financial loss and cash crunch due to such restrictions (Iacus et al., 2020). The announcement has provided positive messages for the stakeholders of the company. The company has issued several refunds of the pre bookings to the customers. The prices of oil has been reduces to drastic levels that has increased financial losses of the company (Abu-Rayash, 2020).
Conclusion
From the above analysis it has been seen understood that Ryanair Holdings have earned sufficient earnings in the year 2018, 2019 and 2020. The investors can found a profitable opportunity to invest funds in company. The company is also having plans for future growth and development. The study also helps in providing the economic analysis of the company. The sources of finance are also help in determining the ability to enhance long term efficiency in an organization. The perspective of airlines with respect to profit is different from any other industry. This could be got by analyzing financial structure of the company.
References
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- Bachmann, J., Hidalgo, C. and Bricout, S., 2017. Environmental analysis of innovative sustainable composites with potential use in aviation sector—A life cycle assessment review. Science China Technological Sciences, 60(9), pp.1301-1317.
- Dicle, Mehmet F., Meyer, Jean, 2018. Financial Statement and Ratio Analysis: A Classroom Perspective
- Dube, K., Nhamo, G. and Chikodzi, D., 2021. COVID-19 pandemic and prospects for recovery of the global aviation industry. Journal of Air Transport Management, 92, p.102022.
- E-finance management, 2017 Income statement (online) E-finance managementAvailable at:https://efinancemanagement.com/financial-accounting/income-statement Accessed on: 07/04/2021
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- Ramon, E., Sguazzo, C. and Moreira, P.M., 2018. A review of recent research on bio-based epoxy systems for engineering applications and potentialities in the aviation sector. Aerospace, 5(4), p.110.
- Ryanair, 2020. Annual report, 2020, (online) Available at: https://investor.ryanair.com/wp-content/uploads/2020/07/Ryanair-Holdings-plc-Annual-Report-FY20.pdf, Accessed on: 07/04/2021
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