Table of Contents Table of Contents..................................................................................................1 1. EXECUTIVE SUMMARY..............................................................................2 .............................................................................................................................2 2. INTRODUCTION............................................................................................3 3. DIFFICULTIES FACED BY BA.....................................................................3 4. BRITISH AIRWAYS FINANCIAL ANALYSIS............................................

4 4.1 RATIOS.......................................................................................................5 4.1.1 Gearing ratio........................................................................................5 4.1.2 Interest Cover.......................................................................................6 4.1.3 Operating Margin.................................................................................6 4.1.4 Current ratio.........................................................................................7 4.1.5 Quick ratio...........................................................................................7 5 BA AT LOSS WHILE RYANAIR SHOWS A PROFIT..................................7 6. STEPS TAKEN BY BA MANAGEMENT.....................................................8 7. FUTURE STRATEGIC DEVELOPMENTS:..................................................9 8. RECOMMENDATIONS:.................................................................................9 9. CONCLUSION...............................................................................................10 10. APPENDICES..............................................................................................11 Appendix 1 - Issues faced by BA (in detail)....................................................11 Appendix 2 Financial position and performance for nine months ended Dec 31, 2009...........................................................................................................12 11 REFERENCES..............................................................................................13

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1. EXECUTIVE SUMMARY
British Airways is one of the worlds leading scheduled premium international airlines. It operates both international and domestic scheduled air services for the carriage of passengers, freight and mail and the provision of ancillary services. The oil prices during the first half year has hit a record high of $146 a barrel, forcing up the fuel costs of all carriers to unprecedented levels and putting margins under enormous pressure. This is forcing many airlines into a financial loss. The most significant impact of the downturn has been on premium passengers, with businesses looking to cut back sharply on travel to save money. The recent economic downturn has affected the operations of BA with respect to profit and revenue. The company has shown loss for the last two years and profit for the first time since in 3rd quarter of 2009. Though the result showed profitability for the quarter it is expected to announce loss for the financial year 2009-2010. To report on the BAs current financial situation and future performance, a group of independent shareholders have chosen ms consultants. This report contains a detailed analysis of British Airways historic and current performance, difficulties faced by the company, the steps taken by the management to improve performance, future strategic developments and the recommendations.

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2. INTRODUCTION
British Airways, the largest airline of the United Kingdom along with its subsidiaries, is engaged in the operation of international and domestic scheduled air services for the carriage of passengers, freight and mail. The Company operates international scheduled airline route and flies to more than 300 destinations worldwide. During the fiscal year ended March 31, 2009 (fiscal 2009), the Company carried more than 33 million passengers. For the first nine months ended 31 December 2009, British Airways plc's revenues have decreased 12.9% which is 6.14B. The net loss has increased to 93% which is 245M. There is a decrease in income from passengers and cargo which are reflecting in the revenues. The airline lost 400m in the last full financial year and 342m in the nine months to December 2009. Business passengers, which traditionally generate the bulk of the airline's profits, have fallen dramatically since the recession broke and are showing no signs of returning (The independent, 2010). This report focuses on the current financial situation and the future performance of British Airways. It also provides comprehensive financial information on the companys performance, position and cash flow over the past two years including the interim data.

3. DIFFICULTIES FACED BY BA
The economic crisis has hit the demand for air travel significantly. British Airways has been experiencing staggering losses. Some of the difficulties faced by BA have the most significant impact on the long-term value of British Airways. These are as follows: Trade union pressure The threat of fuel and oil prices Depreciation of UK sterling pounds Decreasing business class travelling

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 Rise of airport handling charges Reduction in customers flying abroad for holidays due to recession Highly competitive airline industry Competition from high speed trains The detailed explanation is given in Appendix 1.

4. BRITISH AIRWAYS FINANCIAL ANALYSIS

The total revenue generated by BA in 2009 is 8992 million which is up 2.7% when compared to 8758 million in 2008. BA has performed well in managing and reducing costs. Operating costs have risen steadily over the past 5 years and this is in-line with the increase in fuel prices and increase in landing fees/enroute charges as the company expands. BA experienced an operating loss of 220 million for the year 2008/09 which is down by 1,098 million and a pre-tax loss of 401 million which is down by 1,323 million from the previous year. This is particularly due to premium business, customers switching to low cost airlines and high fuel prices. The revenue for the year 2008/09 was 8,992 million which is up by 2.7 per cent compared to previous year 8753 million. This is supported significantly by currency gains. Though the demand in the UK weakened during the year, the British Airways plc A financial analysis Page 4

overseas sales were encouraged due to the strength of sterling and this benefited BAs revenue. The passenger revenue was up by 3.1 percent which is 7,836 compared to year ago despite the increasing weakness in the premium cabins. Due to lower passenger volumes the amount of flying during the year was reduced by cutting the total amount of capacity by 0.7 per cent. BA managed to reduce costs through a reduction in the number of employees by 0.7 % to 42,094. Due to the impact of adverse exchange, lower marketing activity and lower selling and commission costs the selling costs went up by 2.2%. BA had a basic loss per share of 32.6 in 2008/09 whereas earnings of 61.9 pence in 2008. The total capital expenditure in 2008/09 was 712 million which is down 22 million when compared to 2007/08. This was because of the reduced spend on property related to terminal 5 and no further investments on associates. BAs total current assets and receivables is at 2,346 million, compared to 3,111 million (restated) at March 31, 2008 (Annual report, 2009). This is due to adverse movements on fuel derivatives and lower trade receivables as a result of reduced credit card processing and also due to general economic crisis. The total current liabilities as on March 31, 2009, were 4,142 million, which is up by 650 million from March 31, 2008. 4.1 RATIOS The gearing ratios as on March 31, 2009 and 2008 are as follows: 4.1.1 Gearing ratio
million (except ratios) Net debt (a) Total capital (b) Gearing ratio a/b 2009 2,382 4228 56.3 2008 1310 4572 28.7

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BA gearing ratio in 2009 is 56.3% which is high when compared to year ago which was at 28.7%. The increase in the gearing ratio shows that more debt is being taken on by the firm. It has also resulted from decreased equity due to adverse market to market adjustments on fuel derivatives and foreign currency borrowings. It was also impacted by increased borrowings relating to the delivery of nine Airbus A320s and one Boeing 777 aircraft (Annual report, 2009). 4.1.2 Interest Cover
million (except ratios) (Loss)/profit before tax Net interest payable (a) (Loss)/profit adjusted for interest payable (b) Interest cover (b)/(a) 2009 (401) (87) (3.14) (3.6) 2008 922 (64) 986 15.4

Interest cover is defined as the number of times (loss)/profit before tax excluding net interest payable covers the net interest payable. The interest cover ratio in 2009 is (3.6) which is very low compared to 15.4 in 2008. This means that the company is not generating sufficient revenues to satisfy interest expenses. 4.1.3 Operating Margin
% Operating margin 2009 (2.4) 2008 10

Operating margin is defined as operating (loss)/profit as a percentage of revenue. The operating margin can be calculated as operating income divided by the total revenue. The BAs operating margin in 2009 is (2.4%) whereas in 2008 it was 10%. Since the operating margin is low it means that BA is not doing better than its competitors.

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4.1.4 Current ratio The current ratio is the ratio of current assets to current liabilities.
Year 2009 2008 Current Current Current assets liabilities Ratio 2346 4142 0.57 3111 3492 0.89

The current ratio of BA in 2009 is 0.57 when compared to 0.89 in 2008. Since the current liabilities are more than the current assets it means that the company is having problems in meeting its short term obligations. 4.1.5 Quick ratio It is an indicator of a companys short term liquidity.
Year 2009 2008 Current Current Quick assets liabilities Inventories Ratio 2346 4142 127 0.54 3111 3492 112 0.86

The quick ratio is calculated as:

The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. Since the ratio is less it indicates that BAs ability to satisfy current liabilities with its most liquid assets is low. It also means less liquid current position.

5 BA AT LOSS WHILE RYANAIR SHOWS A PROFIT

BA is the biggest airline company aims to provide superior service for the complete flight experience from air to ground. The fare structure is very complex and prefers to use primary airports. The short haul flights are utilized low. In March 2010 traffic, measured in Revenue Passenger Kilometres, fell by 11.4 per cent on March 2009. Passenger capacity, measured in Available Seat

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Kilometres, was down 13.7 per cent. This resulted in a passenger load factor increase of 2.0 points versus last year, to 74.7 per cent (Bloomberg.com, 2010). The main strategy of Ryanair is to reduce all of their costs. They prefer direct booking via Internet. Their ticket price structure is very simple and check-in process is ticketless. They prefer countrys secondary airports, which are charging lower than primary airports. For the 12 months ended March 31, the total passenger number is 66.5M which represents a load factor of 82% (Contrails, 2010). This is the result of Ryanair strategy reducing all of their costs, valuation, and ability to generate cash. This was achieved by cutting cost during the third quarter, 2009 mainly from staff and airport charges which resulted in less passenger yield and Ryanair could report an expected profit of 275 (Financial Times, 2010). A pre-tax loss of 401m in the 12 months to 31 March 2009 on revenue of 8.99bn, it expects to make a record loss for the year to 31 March 2010, with analysts forecasting a pre-tax loss of about 595m (Gaurdian, 2010).

6. STEPS TAKEN BY BA MANAGEMENT

To be the airline of choice for longhaul premium customers. Reducing the manpower by 3000 by 2010. I have always sought to improve BA's efficiency and there will be job losses because of that, but this is about securing the jobs of thousands of people (Sky news, 2009). To deliver an outstanding service for customers at every touch point. Encourage 10% of customers to offset their carbon on ba.com by 2012 (British Airways, 2009). Change in business strategy of the operations of BA (Moneyweek, 2009). 75% of corporate customers use corporate responsibility as decision criteria by 2010 (British Airways, 2009).

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 Capacity this winter has been reduced by 6 % to be in line with demand (British Airways, 2009) Audit 100% of our strategic suppliers for ethical practices by 2012 (British Airways, 2009). Merger with the airline giant Iberia.

7. FUTURE STRATEGIC DEVELOPMENTS:

1. The European Commission (EC) has started formal market testing to seek the views of interested parties about British Airways' transatlantic joint business with American Airlines and Iberia (Bloomberg.com, 2010). 2. British Airways has concluded consultations with its joint trade unions (BALPA, GMB and Unite) on the future benefits of its defined benefit pension (Bloomberg.com, 2010). 3. The airline has signed a five-year contract with Boeing for the latest version of its real time aircraft health and performance monitoring service. The technology allows British Airways to monitor performance data transmitted from aircraft in-flight and will be used to proactively maintain and manage its fleet of Boeing long haul aircraft (Bloomberg.com, 2010).

8. RECOMMENDATIONS:
BA should focus on reducing the plane ground time. The planes are spending more time on ground due to baggage loading. This can be minimized by allowing the passengers to carry their luggage inside the cabin. BA should stop providing entertainment and food for short haul flights as the travel time is less. This will reduce their overhead costs.

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 BA should cultivate good relationships with staff and the union to avoid any future disruptions. BA should minimize their flight cancellations and baggage losses as it is a major concern to the customers. Proper training & strict instructions needs to be provided to staff and security to be tightened. BA should reduce the ticket price for short haul flights to compete with other low cost airlines. The merger of British Airways and Iberia will expand the networks of both airlines and enhance their revenue-raising opportunities (Times Online 2009).

9. CONCLUSION
Though the company has been experiencing losses, it has delivered some 300 million of cost savings in the year to December 2009. The savings have come from management reductions, Terminal 5 changes, reduced supplier costs, improved engineering productivity, pilot pay changes and improved productivity, cabin crew complement changes and reduced overseas costs. By cutting costs & improving efficiency BA can achieve high levels of customer satisfaction ratings and excellent operational performance.

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10. APPENDICES
Appendix 1 - Issues faced by BA (in detail) Staff British Airways staffing overheads are too high (The independent, 2010) as the staff is highly paid compared to other airline industries. The collective bargaining with staff becomes complex and may lead to disrupted operations and affect the business performance. The recent industrial action is an example of the breakdown in the bargaining process which has been illustrated below. Since BA lost 401 million last year, they wanted to reduce their cabin crew budget. Unite, the union that represents cabin crew was unhappy with the proposed cuts and its members decided for strike action. BA was affected by seven days of industrial action in March 2010 where 80% of its 12,000 cabin crew members walked out and half of British Airways plc's 250 planes were grounded. BA said that the strikes in March cost it 45 million and resulted in 200,000 fewer passengers flying with the airline (Times Online, 2010). Fuel price BA uses approximately six million tonnes of jet fuel every year (Annual report, 2009). As the price of oil and petroleum products keep fluctuating, it will have a great impact on BAs operating results. The fuel and oil price for year the 2008/09 is 2.9million. As the fuel price increases, the companys overhead and operational costs will also increase resulting in a loss. Debt funding BA has taken substantial debts which they need to repay or re-finance. Given the current financial market conditions it becomes difficult for BA to finance their ongoing operations, committed aircraft orders and future fleet growth. BA might not be able to provide attractive security for its future lenders as the assets have already been financed.

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Competition The airline industry is highly competitive. BA faces direct competition from other airlines as well as from indirect flights. As BA is known for its premium quality the ticket price is high compared to other low cost airlines. Due to economic crisis, the customers of BA have reduced travelling in the business class and are instead opting for low cost airlines. Appendix 2 Financial position and performance for nine months ended Dec 31, 2009.
Nine months ended December 31 2009 2008 Change Revenue m 6140 7046 -12.90% Operating (loss)/profit m -86 89 Nm Loss before tax m -342 -70 Nm Loss after tax m -245 -127 -92.90% Earnings before interest, tax, m 570 745 -175 depreciation,amortisation and rentals (EBITDAR) Net debt m 2,310 2,209 -101 Cash & cash equivalents m 1,587 1,586 1 Basic earnings/(loss) per share P -22.4 -12 86.70% Cash in from operating activities m 94 283 -189 Passenger revenue per RPK P 6.18 6.95 -11.10% Table 1: Comparison of 2008 and 2009 Interim performance of BA first 3 quarters (British Airways, 2010)

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11 REFERENCES
Bloomberg.com (2010) British Airways PLC BAY Traffic And Capacity Statistics - March 2010 Available at: http://www.bloomberg.com/apps/news? pid=conewsstory&tkr=BAY%3ALN&sid=aZZ2jYTZGVoA (Accessed: 15 April 2010) British Airways (2009) Interim Management Statement Available at: http://phx.corporate-ir.net/External.File? item=UGFyZW50SUQ9MjkzODd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 (Accessed: 15 April 2010) British Airways (2009) 2008/09 Annual Report and Accounts. Available at http://www.britishairways.com/cms/global/microsites/ba_reports0809/pdfs/BA_ AR_2008_09.pdf (Accessed: 13 April 2010) British Airways (2009) Market Place Avaliable at: http://www.britishairways.com/travel/csr-marketplace/public/en_gb (Accessed: 13 April 2010) Contrails (2010) Ryanair passenger figures for March. Available at: http://www.flightglobal.com/airspace/blogs/contrails/archive/2010/04/07/ryanai r-passenger-figures-for-march.asp (Accessed: 15 April 2010) Financial Times (2010) Ryanair, Proquest [Online]. Available at: http://www.proquest.com/ (accessed 14 April 2010) Guardian (2010) British airways Iberia merger Available at: http://www.guardian.co.uk/business/2010/apr/08/british-airways-iberia-merger http://www.digitallook.com/cgi-bin/dlmedia/security.cgi? username=&ac=&csi=10015 (Accessed: 12 April 2010)

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Money week (2009) British Airways posts record 292m loss money week [Online]. Available at: http://www.moneyweek.com/news-and-charts/companynews/british-airways-posts-record-292m-loss-091106-0732-69082.aspx (Accessed: 14 April 2010) Sky news (2009) BA Jobs To Go As A Result Of Iberia Merger Available at: http://news.sky.com/skynews/Home/Business/British-Airways-Iberia-Deal-BAChief-Executive-Willie-Walsh-Confirms-Job-Losses-AtCompany/Article/200911215452683? lpos=Business_First_Buisness_Article_Teaser_Region_0&lid=ARTICLE_1545 2683_British_Airways_Iberia_D (Accessed: 14 April 2010). The independent (2010) Leading article: Industrial action will be a disaster for British Airways. Available at: http://www.independent.co.uk/opinion/leadingarticles/leading-article-industrial-action-will-be-a-disaster-for-british-airways1921849.html (Accessed: 14 April 2010) Times Online (2009) More routes but less class Available at: http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6 916739.ece (Accessed: 14 April 2010). TimesOnline (2010) Strike-hit British Airways only airline to award pay rises. Available 095777.ece (Accessed: 14 April 2010) at: http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article7

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