RESEARH & ANALYSIS PROJECT

An Evaluation of business and financial performance

of British Airways (BA)

STUDENT NAME:
ID:
PERIOD: 32
Contents
PART A: PROJECT OBJECTIVE AND RESEARCH APPROACH...........................................................................3
1.1 REASONS FOR CHOOSING THE TOPIC:...............................................................................................3
1.2 REASON FOR CHOOSING THE COMPANY:..........................................................................................3
1.3 RESEARCH OBJECTIVES:.....................................................................................................................3
1.4 RESEARCH QUESTION:.......................................................................................................................4
1.5 RESEARCH APPROACH:......................................................................................................................5
PART B: INFORMATION GATHERING AND ACCOUNTING TECHNIQUES.......................................................6
2.1 SOURCES OF INFORMATION:.............................................................................................................6
2.1.1 PRIMARY SOURCES:...........................................................................................................6
2.1.2 SECONDARY SOURCES:....................................................................................................6
2.2 LIMITATION OF INFORMATION GATHERING.....................................................................................7
2.3 ETHICAL ISSUES:.................................................................................................................................7
2.4 ACCOUNTING AND BUSINESS MODEL:..............................................................................................8
2.4.1 SWOT ANALYSIS:..................................................................................................................8
2.4.1.1 LIMITATION OF SWOT ANALYSIS:.................................................................................8
2.4.2 Porter Five Forces Analysis:..................................................................................................8
2.4.2.1 Limitations of Porter Five Forces Analysis:......................................................................9
2.4.3 RATIO ANALYSIS:.................................................................................................................9
2.4.3.1 LIMITATIONS OF RATIO ANALYSIS:..............................................................................9
Part C:........................................................................................................................................................10
3.1 Introduction of Industry:............................................................................................................10
3.2 Introduction of British Airways:.................................................................................................10
3.3 Introduction of Virgin Atlantic:..................................................................................................11
3.4 SWOT analysis................................................................................................................................11
3.4.1 Strengths:...............................................................................................................................11
3.4.2 Weakness...............................................................................................................................12
3.4.3 Opportunities.........................................................................................................................12
3.4.4 Threats...................................................................................................................................13
3.5 Porter’s Five Forces....................................................................................................................13
3.5.1 Supplier Power................................................................................................................13
 3.5.2 Buyer Power....................................................................................................................14
3.5.3 Rivalry among the market players................................................................................14
3.5.4 Threat of New Entrants...................................................................................................15
3.5.5 Threat of Substitutes.......................................................................................................15
3.6 Financial Analysis.......................................................................................................................15
3.6.1 Sales Analysis.................................................................................................................15
3.6.2 Operating Profit...............................................................................................................17
3.6.3 Net profit...........................................................................................................................19
3.6.4 Liquidity Analysis.............................................................................................................20
3.6.5 Gearing Ratio...................................................................................................................22
3.6.6 Investor Ratio...................................................................................................................24
Part D: Conclusion:....................................................................................................................................25
4.1 SWOT.........................................................................................................................................25
4.2 Porter Five Forces......................................................................................................................25
4.3 Ratios Analysis...........................................................................................................................26
PART A: PROJECT OBJECTIVE AND RESEARCH APPROACH
1.1 REASONS FOR CHOOSING THE TOPIC:
In order to conduct my research and analysis project, the chosen topic by me is the
topic no.8. Identifying the financial position of the organization is the main purpose of
the topic. Understanding the utilization of the tools to evaluate the financial position of
the organization is another aim of selecting this topic. Since I have studied about these
tools in various papers of ACCA like P2 “Corporate Reporting: and p3 “Business
analysis”, I have a little prior knowledge about these tools. I will be able to practically
implement the knowledge and skills with the help of this research analysis project and
will help me is in deeper understanding of the subject. This project in also enhance my
professional skills and my confidence level will be boosted.

1.2 REASON FOR CHOOSING THE COMPANY:

Once the topic is selected then selecting the organization on which the research topic
will be conducted is the most significant and primary step for the researcher. To assess
the financial position of the business I have opted for the Airline industry. A major
contribution in the economy of UK is from the organizations of the Airline industry.
British Airways (BA) is the organization I selected for my project, it is one of the well-
known and well-reputed organization of UK’s airline industry. The necessary information
and data required for the project is easily available at the organization is listed on
London stock exchange (LSE) is the main purpose behind the selection of this
organization.

1.3 RESEARCH OBJECTIVES:

 The main objective is to Understand and enlighten about the tools of the financial
analysis is the purpose and target of this research analysis project, enumerated
below are the various ratios used in financial analysis.
 In order to accomplish the objectives of the research analysis project I also
applied few essential models.
  To collect the data related to the internal and external factors that can influence
the organization in order to perform business analysis such as SWOT analysis..
 To identify the external factors that can influence the organization I also
conducted the Porter Five Forces analysis in this research project.

1.4 RESEARCH QUESTION:

The questions that will be answered through this research analysis project are as
follows:

 In the domestic and international market of British Airways what is the market
share?
 What are the main qualities of British Airways that distinguish BA from other
airlines companies and what are the weakness that can affect the company
position?
 Is new entrant threat is high or completion among rival is high?
 What are reasons behind the profitability of the company despite of decrease in
the sales revenue?
 Why company’s profitability margin is better than Competitor Company?

1.5 RESEARCH APPROACH:

If the researcher implements the right research style or method for conducting the
research only then it is possible to gain better results and information which is the main
aim of every research or study conducted. In order to prevent any issues or problem I
have decided to collect all the data and information in a systematic and organized way.
This will help me in gaining better and more information that will needed to conduct the
research analysis project and will also consume less time. First of all, I decided to
choose the industry and company for my selected topic. Then, I applied different
techniques to collect the data and information in order to conduct business and financial
analysis models. I used SWOT analysis and Porter five forces analysis tools in the
business analysis section. Then, I utilized a wide range of ratios in order to assess the
financial position of British Airways. To understand the concepts of these rations I
referred some books. To successfully evaluate the business performance I used various
resources like newspaper, internet, websites, articles and journals to accumulate the
necessary data. All the resources mentioned earlier are the secondary resources types
for the data collection. I also had some awareness of the resource from which I can get
appropriate and accurate data.
PART B: INFORMATION GATHERING AND ACCOUNTING TECHNIQUES
2.1 SOURCES OF INFORMATION:
The methods that will be used to accumulate the data needed to conduct the research
analysis project is the literal meaning of source of information. The researcher can
collect all the relevant and significant information related to the research analysis project
with the assistance of these sources. These sources can be classified in to two major
types which are

1. Primary source
2. Secondary source

2.1.1 PRIMARY SOURCES:

The primary source is when the researcher directly accumulates the data. It is also
known as original source or evidence. These sources includes paper recording,
interviews, questionnaires and so on. The information presented in not condensed or
valuated by other researchers (SC College, n.d.).

2.1.2 SECONDARY SOURCES:

The secondary source of information or data provides the information that has been
collected for the research/study conducted in the past (SC College, n.d.).

The reliability of secondary source is not as must as the reliability of primary source
although secondary source is an easier method of data collection. The types of
secondary source are textbooks, articles, internet and expert reports etc.

The source of information used by me to collect the information and data is the
secondary resource and I strived to accumulate the best information available and is
accurate and reliable.

I collect the information in following way

 I referred the audited annual reports for three years to perform the evaluation of
financial position of BA, annual report guarantees that data available is up to date
and will provide better results.
  To collect appropriate and important information related to my research I also
used web, business records and other websites of finance and business.
 With the help of newspapers, magazines and latest edition of my course books I
was able to enhance and upgrade my knowledge.
 I also studied appropriate journals and articles that were related to my research
project in order to produce better results.

2.2 LIMITATION OF INFORMATION GATHERING

During the process of data collection I had to confront few challenges and problems.
These limitations are enumerated below:

 The main source of information and data collection is internet. The data available
on the internet can be accessed by any one at any time. Since every individual
can easily publish the information on internet so the reliability is doubtful. The
unreliable data can result in wrong analysis and poor outcomes.
 Since I was in the process of completing by ACCA while I conducted the
research analysis. It was often troublesome to handle the work responsibility and
comprehend the problem in a timely manner. Performing both responsibilities at
the same time served as a limitation for me.
 Although accessing the data through secondary source is easier, but at times the
companies’ websites used for data collection does not provide sufficient
information or the information is not up to date.

2.3 ETHICAL ISSUES:

I took into consideration the ethical issues during the process of performing my research
analysis project. That is all the information that I have accumulated form various
sources are not plagiarized and I have placed the essential references at the end of my
report. During my studies of ACCA I was made well aware of the issues related to
ethics. The data I accumulated mostly from internet consisted few relevant information
as well as irrelevant information. After a thorough study of the information I separated
the relevant and irrelevant information. The irrelevant data and information was deleted
by me.

The confidentiality of the research analysis report is another ethical issue. I therefore
guarantee that all the results and outcomes that I obtained from this research analysis
project will not be disclosed to any other individual other than my mentor and OXFORD
BROOKES University

2.4 ACCOUNTING AND BUSINESS MODEL:

2.4.1 SWOT ANALYSIS:
This tool is used to evaluate the internal strengths and weaknesses and external threats
and opportunities of the organization. The internal factors of the organization can be
controlled by it and can differ from time to time. Whereas external factor are out of the
control of the organization but the organization can minimize the effect of these factors
be developing and implementing effective strategies (Small Business, n.d.).

2.4.1.1 LIMITATION OF SWOT ANALYSIS:

 The methods of differentiating threats and opportunities is not proposed by this

analysis.
 Although the analysis helps in identifying the SWOT yet it does not offers any
information regarding which element must be prioritized by the organization.
 No information is provided to determine the factors by SWOT analysis as the
analyser may not have all the needed information to identify the SWOT factors
(Tim Berry, n.d.).

2.4.2 Porter Five Forces Analysis:

The M. Porter establishes this business model in 1979 assessing the competition in
between the companies in the market. This business model is based on five forces
which include barraging power of the suppliers, bargaining power of the buyers,
competition, threat of new entry and threat of substitute products. Porter suggested that
all these forces have great impact on the competitive advantage of any company. In
simple way these models assume that when there is strong porter force in any industry
than it will be difficult for the companies of any industry to earn huge profits. (Jurevicius,
2013)

2.4.2.1 Limitations of Porter Five Forces Analysis:

There are some of the weaknesses and flaws in Porter Five Forces model because the
concerns of this business model reduce the capabilities of management to increase the
competitive edge by implementing attractive strategic system in company in order to
achieve more profits in environment of strong porter’s forces. This model is just focus on
the analysis on industry level. The contexts of the Porter model are considered as
complex to implement in the large companies which are under operations of portfolio.
Porter’s model considers lack of collusion in the industry which is one of the great
limitations of this business model. (Wilkinson, 2013)

2.4.3 RATIO ANALYSIS:

Financial ratio analysis can be defined as a tool of mathematical measurement which

compare the organizations financial position in different times. The information about
the performance level of the organization is provided to the stakeholders by this
analysis along with the areas that can be focused for development and improvements.
To evaluate the financial standing of the organization ration analysis the most
convenient and widespread method available (Jim Roley, 2015).

2.4.3.1 LIMITATIONS OF RATIO ANALYSIS:

 The outcomes of this analysis is determined using the previous information, this
analysis does not take in to consideration that whether the information is update
or not but the stakeholders, creditors and investor need the outcomes that are
obtained by using latest information.
 Another limitation of this analysis is that it does not take in consideration the
accounting policies. The accounting policies differ from organization to
organization for instance if straight line method of depreciation is utilized by one
 organization and the other organization utilizes the declining balance method,
this will result in varying profits for both the organization due to these varying
accounting policies.
 Since the ration analysis do not take into consideration the modifying business
operation or changing market environment it can generate misleading results
when comparing the outcomes of the organizations (Jim Roley, 2015).
Part C:
3.1 Introduction of Industry:
After the USA and China the third largest aviation network in the world is in UK and the
members of the company play the major part in developing and maintain the
economically beneficial and the world class status. All the airlines in UK contributed
more than £11 billion to the economy and around 200,000 jobs were supported.
Benefits were provided to the UK economy by aviation through contributing directly to
employment, gross domestic product (GDP), manufacturing supply chains, skills
development and tourism and by facilitating trade and investment. (BATA, n.d.)

3.2 Introduction of British Airways:

One of the world leading global airline is British Airways. A major location of the
operation of BA is London with considerable presence at London city, Gatwick and
Heathrow. A business of air cargo worldwide is also operated by BA, mainly in
collaboration with BA scheduled passenger services. The passengers can fly worldwide
to more than 300 destinations and BA carried approx. 32million passengers in year
2009-2010. By providing major routes for trade and investment, fulfilling the demands
for business travel and vocation travel for holidays and family reunion. BA earned the
revenue of £8 billion. 87% of this revenue was generated by the passenger services, &
% generated from cargo services and 6% generated from other activates. A cargo to the
destination in Europe, America and other nation worldwide weighing 76,000 were
carried by BA. BA had in service 238 aircraft by the end of March 2010 (British Airways,
n.d.)

3.3 Introduction of Virgin Atlantic:

Richard Branson is the president of the Virgin Group and is considered in United
Kingdom as one of the most intelligent businessman. One of the industries in which
Virgin Group successfully operates is Virgin Atlantic Airways. It is at present the second
largest airline in United Kingdom and was found in 1984. It provides services in long-
distance. The airline was able to form the reputation for its good services and taking risk
in innovation. The airline has increased its air network around the globe. The main aim
of the airline is to provide high quality services. (Travel guide, 2011)

3.4 SWOT analysis

3.4.1 Strengths:
 As British Airways is one of the well reputed brand in UK and it is on the top
position of the airline industry of the UK. This well reputation of the brand is the
attractive strengths of the company and due to this reputation, the company has
gained huge market share in the industry because customers have the
satisfaction about the services provided by the company (Smithers, 2015)
 Another main strength of the British Airways is establishment of the subsidiary
with name of open skies which is providing airline service to the people who
travel form UK to USA. The establishment of this high class airline services can
give the opportunity to the British airways to increase armlet share in niche
market.
 Due to huge air base the company has the ability to operate huge number of
airplanes, so this is het reason that British Airways can enhance the market
position by merging with other well reputed companies in UK. (Winch, 2014)
 The company has implemented attractive advanced programs which eventually
increase the capability of the company to attract more customers which
eventually enhance the more marker share for British Airways. (Finder, 2016).

3.4.2 Weakness
 It can be seen that the company is facing some noticeable issues and problems
in respect of the openness of new terminal at Heathrow airport. Company was
facing problems due to recruitment of untrained people for management of these
terminals operations. This can impact in the loss of customers of the company.
(British Airways, 2012)
  Due to less efficient management skills, the company has suffered loss during
the economy recession period in UK and also in USA. This financial instability of
the British Airways can affect the reputation of the company. (Charette, 2014)
 The most important weakness which is observed in regard of the British Airline is
that unstable economic condition of the country can be costly for the company
because key passengers may leave the company due to cancelation of tickets.
(Lucky, 2015).

3.4.3 Opportunities
 The management of the company can enhance the profitability ratio by correcting
and minimizing the weaknesses which are faced by the company at the time of
openness of new terminal of company at Heathrow airport. The company can
attract the customers by providing good quality services at new terminal which
eventually enhance the market share of the company. (CAPA, 2012)
 There is a great opportunity for the British Airways that company can acquire
Iberia by 100% shareholding which eventually will increase the reputation of the
brand of the company.
 Environment is that factor which is considered as very important by the people,
so this is the reason that of British Airways can attract the customers by use of
good quality fuel in the aircrafts. There is an opportunity for the company to
reduce the cost of company because use of high quality fuel can reduce the
expanse of the company and in this way company will be able to charge lower
prices in order to attract customers. (Economist, 2015).

3.4.4 Threats
 The company is facing huge threat regarding the increase in the rates of the fuel
due unstable political conditions in the Iraq. The increase in the fuel prices in Iraq
can be very costly for the British Airways due to costly fuel. This can impact the
profit ability ratio of the company. (Egan, 2016).
 The management of the company has to fulfil all the legal and regulatory
requirements which if not fulfilled by the management of the company than
company has to bear problems in respect of the health and safety issues face by
 the general people. It is the fact that emission of the gases from the airplanes
can pollute the air and creating health problems of the people (DAVENPORT,
2015)
 There are some other companies in the market which are providing same quality
services to the customers, so these airlines are consider threat for the British
Airways because they are providing at lower prices I comparison to British
Airways. This can impact the company by loss of those customers who are very
possessive in regard of the prices of the travelling services. (Cederholm, 2014).
 The polices of the trade union is a possible threat for the British Airways
company because it has been seen that during the period of 2004 and 2005,
strikes by the Trade union has affected the flight schedules of British Airways.
(BBC, 2010)

3.5 Porter’s Five Forces

In the airline industry this model is very helpful in analysing the business position and
the competitive nature of the business. In the business environment the organizations
position are assessed and considered by the following forces:

3.5.1 Supplier Power

In the UK airline industry the bargaining power of supplier is higher and the main reason
behind this is the essential inputs in regard to the fuel, aircrafts and the labour. These
are the external environments affect the main inputs like the changes in the prices of the
fuel. This change in the prices is supported by the dollar prices fluctuation in the global
oil markets. The oil market can rotate globally due to the geopolitical and the other
factors. It is the fuel cost mainly because the 30% of total operating cost is account for
by this cost of fuel (Aviation Knowledge, n.d.) At the second place it is the labour that is
accounted to the trade union who bargain costly for the unreasonable and costly
concession. So due to this reason the bargaining power is increased significantly. In the
airline business customers have to face some issues as they do not want any labour
strike. Boeing and airline are the aircrafts that are required by the airline business. The
aircrafts suppliers have the high bargaining power due to the high competitiveness in
the industry (Airlines, 2015)

3.5.2 Buyer Power

The value creation of the industry is effected significantly due to the buyer power, as
this force is considered as the one of the horizontal power. The bargaining power of the
customers is very high due to the ticketing systems and the online distribution. It is the
internet which has created expansion in the customer’s interaction and the products and
services awareness (Videcom, 2011). The requirement of the intermediaries has been
reduced due to the online ticketing system development. So there is no need of the
agents for booking the tickets. The competition in the UK airline industry is very
competitive so due to this competition the bargaining power of the buyers has been
increased. And in the atmosphere where the competition is higher the prices would also
competitive. Moreover the switching cost of customers is also reduced while offering the
competitive prices (White, 2012).

3.5.3 Rivalry among the market players

There is intense rivalry among the market players that are operating the airline industry
of UK. The bargaining power of buyers is very high due to which the margin for the
changes in the high prices has been reduced. The organizations in the industry are
offering and the competitive prices for expanding the market share. British Airways
provide the facility of both long and short prices so different strategies have been
adopted by the British Airways in the case of long flights so they could provide the good
and quality services. While in case of short flights, this market of airline is more
fragmented due to the presence of many other small airline companies (Cederholm,
2014)
3.5.4 Threat of New Entrants
Due to the competitive nature of the airline business the threat of new entrants is very
low in the UK airline industry. There is need of the capital for initiating the business so it
is considered as the huge barrier for initiating the business in the airline industry
(Cederholm, 2014)

3.5.5 Threat of Substitutes

There are few substitutes that exist for short haul flights like bullet trains and
underground metro so threat of the threat of substitute product is very marginal in terms
of travelling in the In the airline business and in case of the long haul flights no
substitute exists (Adam Brown, 2009)

3.6 Financial Analysis

3.6.1 Sales Analysis
British Airways Virgin Atlantic
Sales Analysis
FY 15 FY 14 FY 13 FY 15 FY 14
Net Sales £ 11,333 £ 11,719 £ 11,421 £ 2,782 £ 2,828
Growth in Revenue -3.29% 2.61% 5.49% -1.61%
(Annual report BA & VA 2015, 2014 and
2013)

Sales Growth
BA VA
5.49%

2.61%

2015 2014 2013

-1.61%

-3.29%
There was a decline in the growth in the sales revenue of the British Airways in the year
of 2015 and net revenue was reduced by 3.29%. This reduction in revenue to
£11,333m from £11,719m was preceded by the overall decline in the passenger
revenue, cargo revenue and other revenue by 2.8%, 8.5% and 7% respectively during
the financial period (LEPITAK, 2016). The revenue from passenger was reduced due to
the increased competitors’ capacity and intensified competition on key North Atlantic
routes, while the cargo revenue was reduced due to the withdrawal of freighter program
on the long term basis and the softening of key markets. This softening of key markets
impacted the yield of the full year 2015. As the British Airways Executive Club Loyalty
Scheme was discarded by the British Airways so this decline in the revenue due to
loyalty redemption was the main reason at the decline of other revenue by 7% (CAPA,
2015)

The British Airways was concentrating more on improving the operation activities for
satisfying the customers leading towards increase in the revenue growth. As compared
to last year sales growth, British Airways revenue was increased to £11,719 that was
more than 2.6% over the previous year. This increase in revenue was backed by the
increase in the number of passengers due to the increase in available capacity as new
aircrafts were added which eventually contribute in increasing the sales revenue by
£323 million (World airlines, 2015) New aircrafts were being introduced with the
increased customer’s capacity and this capacity increased by 5% and the number of
passengers increased to 42 million form 40 million. In the financial year 2014, the
strategic decision was the replacement of long-haul freighter service so as the result of
this replacement the cargo revenue was reduced by 13.2 per cent (Statista, 2015).
This decrease can be off set against the increase in the performance of the premium
product like load factors expansion. The other revenues were enhanced due to the
improvement in the performance of BA Holidays and contributed in the revenue by 11%
enlargement (Titcomb, 2014)

The sales revenue was increased in the fiscal year of 2013 to £11,421m from the
£10,827m. This significant growth in the year of 2013 in the 5.5% in sales revenue was
the mixture of growths of the increase in the passenger revenue by 6.6% along with the
expansion in the other revenue by 2% and decline in the revenue from cargo by 6.5%.
These increase and decrease in revenue was backed by different reasons as revenue
from passengers was preceded by the yield and volume expansion strongly. This
expansion happened possible due to the capability of increasing the capacity by 6.5%
(BBC, 2014) The strategies of the British Airways were revised and cargo market was
also weak in the financial year of 2013 so due to these factors the revenue form cargo
was declined in this financial year. The main factor behind the increase in the other
revenue by £12m was the BA Holidays and the customer loyalty growth (JONES, 2013)

During the financial period 2015 sales revenue of Virgin Airline was bearing the
declining trend as there was reduction in its revenue from £2,828m to £2,782m. There
was intense competition in the industry that affected the market share and the sales
revenue and they reduced eventually. It has also been indicated by the sales analysis
that market share of British Airways is greater as comparing with the Virgin Airline.
Sales revenue of British Airways was times greater as compare to Virgin Airline.
(Annual report, VA, 2015)
3.6.2 Operating Profit
Profitability British Airways Virgin Atlantic
Analysis FY 15 FY 14 FY 13 FY 15 FY 14
£ £ £ £ £
Operating Profit 1,239.0 975.0 708.0 200.9 30.2
Operating Margin 10.93% 8.32% 6.20% 7.22% 1.07%
(Annual report BA & VA 2015, 2014 and
2013)

Operating Profit
BA VA

10.93%

8.32%
7.22%
6.20%

1.07%

2015 2014 2013

In FY 2015, there was significant increase in the operating profit margin of British
Airways to 10.93%. That was 8.32% in the previous year of 2014. The organization is
concentrating on enhancing its profitability by making the financial stoutness and
utilizing the investment of the group efficiently. So as the results of these efforts the
increment of £264m in operating profit of British Airways was recorded achievement.
There was a certain positive factors that lead to this recorded achievement and that was
the control over operations due to reduction in oil, fuel and emission cost by £484m
(IAG, 2014). As the prices of the fuel were reduced and moreover there are different
techniques and the heading techniques that are used by the British Airways for the
protection purpose that if there is sudden increase in the fuel rates they could survive
easily. So both these factors form a basis of reduction in the fuel and oil expense. In this
fiscal year British Airways introduced the next generation fleets so it also contributed
towards increasing the operating profitability. Due to the addition of the Boeing 777 and
Airbus A320 under the operating lease agreement, lease cost was increased by 41%
and in addition to this, there was a decline in the selling cost by 11% due to sales
revenue decline (British airways, 2007)

British Airways experienced the impressive increase in the operating profit to £975m
form £708m in the financial year 2014. The increase by 37.7% was mainly attributed to
the decline in the oil and fuel cost by £240m. The oil prices have reduced in the
international market so the fuel and oil cost has been reduced (GADD, 2014) While
regarding to the sales revenue other operating cost was also increased that was
ultimately due to the sales volume expansion. There was increase in the catering and
handling cost due to the sales volume expansion. The depreciation policies were
changed and as the result the depreciation, amortization and impairment cost was also
increased (Trend, 2015)

In the fiscal year of 2013 British Airways experienced significant growth in the sales
revenue so due to this increase the profitability was increased by 2.5%. There was
significant increase in the fuel and the oil cost by £43m in the financial year of 2013.
This enlargement in oil and fuel cost primarily backed by the increase in passenger
volume and foreign exchange impact while British Airways tried to offset this increment
by enhancing the fuel efficiency using new crafts based on fuel consumption. As the
volumes of the passengers were also increased so the landing fee was increased to. So
this increase in passenger’s volume leads towards increasing the handling, catering and
other operating cost. Expansion in the activities of BA Holidays was another reason of
increase in the operating cost (Sophie Jamieson, 2016)

It was revealed by the competitor’s analysis that that Virgin Airline operating
performance was increased to £200.9m form £30.2m. This increase in the operating
profit showed that the performance of the Virgin Airline is becoming strong. The main
factor that was considered the reason of this increase in the operating profit was the
utilization of the available resources efficiently. The fuel prices were reduced in the
international market so the fuel cost was also declined. The sales volume of the
company was reduced due to reduction in competition which automatically reduced the
maintenance and aircraft cost. The operating profit of Virgin Airline is 6 times lesser in
comparison with the British Airways (Stuart, 2009).

3.6.3 Net profit

British Airways Virgin Atlantic
Profitability Analysis
FY 15 FY 14 FY 13 FY 15 FY 14
£ £ £ £ -£
Net Profit Margin 2,508.00 702.00 281.00 80.10 138.80
Net Profit Margin % 22.13% 5.99% 2.46% 2.88% -4.91%
(Annual report BA & VA 2015, 2014 and
2013)

Net Profit
BA VA

22.13%

5.99%
2.88% 2.46%

2015 2014 2013

-4.91%

During the financial year of 2015, the financial performance of the British Airways was
improved significantly due to the extensive increase in sales revenue and eventually net
profit. Net profit margin increased to 22.13% from 5.99% and the overall growth in the
net profitability was around 257% in financial year of 2015. There was increase in the
finance income and finance cost by 41.17% and 4.3% respectively. But there was a
gain of £1502m form the disposal of property plan and equipment that immensely
contributed in the net profitability increase (Post, 2016)
The British Airways financial performance was increased in the financial year of 2014,
and net profitability was increased impressively by 150% in comparison with the
previous year’s net profitability. This increase was backed by the significant control over
the operating expenses and sales revenue growth. So by efficiently cutting down the
expenses the company became able to increase the profit so impressively (Prokesch,
2014) in the last year the company controlled the finance cost that was declined to
£141m from £176m. Some part of the long term finance was repaid so this decline in
finance cost occurred. Moreover British Airways is capable enough to convert its
previous year’s loss from associates into post-tax profits to £39m (Business zone, 2015)

In the financial year of 2013, the net profitability margin of British Airways was increased
to 2.46% as it was less than 1% in the year of 2012. It was the growth in the sales
revenue that increased the profit margin and the net profitability. The growth was
caused by expansion in the passenger’s capacity (IAG, 2011) In addition to this, the
operating cost of the British Airways was controlled which also contribute in increasing
the operational profitability and then finally the net profitability. In this year there was a
gain of £58m from the bargain purchase of BMI in 2012, this gain was offset against the
liability of the convertible bold and the charges of £164m occurred (British airways,
2015)

Virgin Airline improved is financial performance very impressively as it converted its net
loss of 4.91% into the net profit of 2.88% in the financial year of 2015. As the sales
revenue of the company declined but still it converted the loss into the profit which is an
indication that the company performed very well in the financial year. This profit was
mainly attributed to the gain on disposal of 62.2m along with the reduction in the loss of
derivative that was further attributed to the reduction in finance expenses. The profit
margin and the profitability of the British Airways were much higher in comparison with
the Virgin Airline. (Thomson, 2016)
3.6.4 Liquidity Analysis
British Airways Virgin Atlantic
Liquidity Analysis
FY 15 FY 14 FY 13 FY 15 FY 14
£ £ £ £ £
Current Assets 3,400 3,583 2,915 970.10 709.30
£ £ £ £ £
Current Liabilities 5,700 5,502 4,627 1,371.50 1,371.30
Current Ratio (Times) 0.60 0.65 0.63 0.71 0.52
(Annual report BA & VA 2015, 2014 and
2013)

Current Ratio
BA VA

0.71
0.65 0.63
0.60
0.52

Times

2015 2014 2013

The ratio that measures the company’s ability to pay off the current liabilities (Short-
term) from its liquid (Current) assets is termed as the Current ratio. It is inferred by the
1.0 Time that there are equal current assets in the organization for meeting the current
liabilities. In the fiscal year of 2015 there was faintly decline in the British Airways
current ration by 7.7% as compared with the last year. The current ration of British
Airways is 0.60 which demonstrates that for meeting its short term liabilities the
organization has 0.60 times current assets. This current ratio is declined due to increase
in current liabilities or decrease in in current assets. The “current interest bearing
deposit” was declined by 35% so the current assets were also declined and in the same
year the other items were increased. While considering the c current liabilities were
increased significantly due to the 70% in “current portion of long-term borrowings”
(Charts, 2016)

In the fiscal year of 2014 the current ratio of British Airways was increased marginally to
0.65 Times form 0.63 Times. The fundamental reason behind this increase was higher
increase in current assets in comparison to the in current liabilities expansion. There
was increase in the current assets by 22.9% in the fiscal year of 2014 while the increase
in current liabilities was 19.9%. Due to increase in “cash and cash equivalents” current
assets were increased by 7%. While on the basis of short term deposit at market
interest rates there was a huge enlargement in “Interest-bearing deposits” by 51.5%.
But on the other hand the current liabilities were increased due to the enlargement in
trade payable and the derivatives of the financial instruments by 3.6% and 1255%
during the years. (Annual Report BA, 2014)

During the fiscal year 2013, the British Airways current ratio was increased slightly but
still it was below the ideal level. In the fiscal year 2012 it was 0.60 times and increased
to 0.63 times in 2013 so there was overall increase by 5%. This increase was backed by
the 10.7% increase in current assets and 5 .2% increases in current liabilities. This
increase in current ratio was mainly due to the higher increase in the current assets in
relation to the current liabilities. (Annual Report BA, 2013)

Virgin Airline experienced the considerable increase in the current ratio and that was
form 0.52 Times to 0.71 Times. The reason that why this ratio was increased was the
expansion in the current assets but there was slight increase in the current liabilities in
the financial year of 2014. An increase in the current assets by 36.8% was mainly due
to the substantial increase in cash and cash equivalent. While comparing the
competitors, the current ratio of Virgin Airline is 0.71 times which shows that this
company has the capacity to pay off its short term liabilities while the current ratio of
British Airways is 0.60 times (Annual Report VA, 2013)

3.6.5 Gearing Ratio

British Airways Virgin Atlantic
Gearing Ratio
FY 15 FY 14 FY 13 FY 15 FY 14
£ £ £ £ £
Finance Cost 147 141 176 6.3 28.0
Profit before interest and £ £ £ £ £
Tax 1,239 975 708 200.9 30.2
Interest coverage ratio 8. 6. 4. 31. 1.
(Times) 43 91 02 89 08
(Annual report BA & VA 2015, 2014 and
2013)

Interest Coverage Ratio

BA VA

31.89

Times
8.43
6.91
4.02
1.08

2015 2014 2013

The ratio used for measuring the ability of the organization for paying off the finance
cost out of its profit before interest and tax is known as interest cover ration. British
Airways has 8.43 times interest cover ratio which shows that there are 8.43times current
assets for meeting its current liabilities. The interest cover ratio of the British Airways
was increased by se in the interest cover ratio 22% in the financial year of 2015. The
main reason behind this increase of the interest cover ratio is the increase in the finance
cost by 4.2% and increase in the profitability before tax and interest by 27%. The reason
behind increase in profitability was due to efficient control over the operating activities
during the financial year 2015 while the finance cost was increased due to the addition
in the finance lease (ADVFN, 2015)

The gearing performance of the British Airways was so proficient in the financial period
of 2014. In this period its finance cost was decreased while there was increase in the
operating profit before interest and tax. While comparing with the previous year in
which interest cover ratio was 4.02 time while it has increased by 71.89% and in the
financial period of 2014 it stands for 6.91 Times (FT, 2014). The reason behind this
increase in the interest cover ratio was increase in the operating profit before interest
and tax and this increase in the operating profit was backed by the growth in sales
revenue by expanding the passenger capacity. While in case or finance cost it was
declined due to the repayment of some part of its long term borrowings which leads
towards decline in the finance cost (BBC, 2015).

British Airways has the interest cover ratio of 4.02 Times that shows that the
organizations profitability is 4.02 Times greater operating profitability so that it can meet
the expense of the finance cost. The operating profitability of the British Airways was
increased by 203% and it was an impressive increase while on the other hand the
finance cost was increased by 1.7% in the financial period of 2013. The interest cover
ratio was increased by 200% as in was improved to 4.02 times form 1.34 times and this
increase in the interest cover ratio was backed by the large increase in the operating
profitability while in comparison with the finance cost. The operational activities were
improved efficiently and mainly due to this control in the operating sector the improve d
the operating profitability (Annual Report BA, 2013)

There was an increase in the interest cover ratio form .08 times to 31.89 times of the
Virgin Airline in the fiscal period of 2015. Some of the portion of the finance lease and
the bank loan was paid back by Virgin Airline due to which the finance cost was reduced
which eventually caused the impressive performance of the Virgin Airline. The
management of the organization also contributed by controlling the operational expense
and the activities effectively, which increased the profitability before interest and tax. If
comparison is mad the capacity of the Virgin Airline to meet the finance cost out of the
profit before interest and tax is much higher as per the British Airways whose finance
cost is very higher (Annual Report VA, 2013)

3.6.6 Investor Ratio

British Airways Virgin Atlantic
Investor Ratio
FY 15 FY 14 FY 13 FY 15 FY 14
£ £ £ £ -£
Net Earnings 2,508.00 702.00 281.00 80.10 138.80
Number of Ordinary 2,14 2,14 2,14 5 5
Share 4,000 4,000 4,000 0,000 0,000
£ £ £ £ -£
EPS 1.170 0.327 0.131 1.602 2.776
(Annual report BA & VA 2015, 2014 and
2013)

EPS
BA VA

£1.602

£1.170

£0.327
£0.131

2015 2014 2013

The earning from share of the British Airways was increased considerably in the
financial year of 2015 to £1.169 per share from £0.327 per share. This massive
increase in the earnings per share of British Airways was mainly receded by the major
increase in the net earnings which was 257.3% with the same number of ordinary
shares in the financial year of 2015. The British Airways utilized all the available
resources efficiently and this efficient use made this huge increase in earnings.
Although there was slight decline in the revenue of the British Airways but the
management controlled the operating and non-operating activities effectively which
shows the ability of the efficiently utilizing the available resources. (WALL, 2015)

The EPS of British Airways Company was enlarged from £0.131/share to 0.327/share.
This increase in EPS of British Airways in the financial period of 2014 was due to
effective management skills of company because good control on operating expenses
enable management to increase the revenue generation capability of company which
eventually increased the net earnings of the company. The number of ordinary shares
remains the same in the finical year 2014 with the financial year 2013 (Schram, 2015)

Due to the considerable changes in the equity portion of the British Airways, its earning
per share was £0.131 per share in the financial year of 2013. The increase in earnings
per share to £0.131 per share form £0.0420 per share was due to the enormous
expansion in net earnings along with increase in the number of shares. The share
premium portion of British Airways was increased from £937m to £1,512m due to issue
of 148,000 ordinary shares to the IAG with the consideration of £575m. It was the
conversion of the 5.8% convertible bond principals that made this issue of shares
(Annual Report BA, 2013)

In the last year Virgin Atlantic has suffered loss so during the financial year 2015, the
earning per share was improved. This loss was converted in to profit by controlling the
operational activities cost due to which the earning per share was improved and
became £1.6 per share. While comparing with British Airways, the earning per share is
higher but the net earnings of British Airways is higher (Annual Report VA, 2013)

Part D: Conclusion:
4.1 SWOT
In regard of the business expansion and reputation of the British Airways, it can be
observe that the British Airways is one of the largest airline business in UK because the
company has strong financial stability but the most important thing which have been
seen that the performance of the company is effected by the union environment at the
workplace of the company. The group system in company is affecting eth productivity of
company. The British airways can enhance the market share by merging with small
airlines in UK. If company is focusing on small countries than other competitive
companies can reduce the market share of British Airways in developing countries.

4.2 Porter Five Forces

In regard of the fuel and aircraft the bargaining power of the supplier is strong because
some level of the variation in the prices can have impact of the prices of the oil. All the
companies are facing high competition among each other, so on the basis of strong
competition among the companies the bargaining power of the customers is high. The
threat of the other substitute options also increases in this industry. The threat of new
entrance in this sector is low because high capital requirements create barriers for new
business.

4.3 Ratios Analysis

Gross profitability of British Airways was increased despite of 3.3% decline in sales of
the company during the year and this can happened only due to effective control on the
operational expenses of company. Non-operating expenses also controlled efficiently
due to which the net profitability of the company increased. There was 22%
improvement in interest coverage ratio to increased operating profitability. Strong and
increased profitability result in increase of Earning per share because the average
number of shares were remain similar in comparison to last year.