Profitability analysis

This paper would intend to evaluate the financial performance of EasyJet Plc for the period 2013 to 2017. It is a leading British airline organisation providing domestic and global services on over 820 routes in more than 30 nations. It is headquartered in London Luton Airport having employee base of around 12,280 in 2017 (Corporate.easyjet.com 2018). For better evaluation of its financial performance, it is contrasted with its major competitor in the UK market, which is Ryanair. It is an Irish low-cost airline established in 1985 and it is one of the biggest airlines in the world having staff base of around 13,000 (Corporate.ryanair.com 2018). In order to analyse the financial condition of the two chosen organisations, the following ratios are taken into consideration and their detailed analysis is provided as follows:

In order to conduct profitability analysis of EasyJet Plc and comparison with Ryanair, the two ratios considered include net margin and return on capital employed.

Table 1: Profitability ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

Figure 1: Profitability ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

From the above table and figure, it is evident that the net margin of EasyJet Plc after increasing from 2013 to 2015 has experienced a steady decline in net margin in the next two years. With the help of net margin, the profitability position of an organisation could be determined, as it signifies the amount remaining after deduction of all business expenses (Vogel 2014). The reasons behind the declining net margin are due to the aggressive pricing strategy adopted by the organisation and inability to improve load factor. On the other hand, the ratio for Ryanair has increased from 10.38% in 2013 to 19.80% in 2017, although there is a decline from the previous year. The reason that Ryanair has managed to increase its net margin is due to the capacity growth of its aircrafts.

The trends are observed to be similar in case of both organisations for return on capital employed. This ratio helps in denoting the efficiency of an organisation in generating profits from capital employed (Shah 2015). The main reason behind the decline in this ratio for EayJet Plc is due to the injection of share capital in the form of investments, while Ryanair has maintained identical share capital and reserves. Hence, from the profitability viewpoint, Ryanair is holding competitive edge over EasyJet Plc in the UK market.

The liquidity analysis of the two organisations is conducted by using two ratios, which current ratio and cash ratio. Quick ratio is not considered, as none of them hold inventories at the end of the year.

Table 2: Liquidity ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

Figure 2: Liquidity ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

As per the above table and figure, it is evident that the current ratio of both airlines has been fluctuating over the years; however, the ratio has always remained higher for Ryanair. Current ratio helps in signifying the ability of an organisation to settle its existing assets by using short-term assets (Omar et al. 2014). Ryanair supports its trade payables, accrued expenses and short-term debts with the help of its cash and cash equivalents and net receivables much better than Ryanair, which is lagging in case of the latter.

Liquidity analysis

On the other hand, in terms of cash ratio, the position is better for EasyJet Plc than Ryanair in 2017 due to adequacy of cash, which is more than Ryanair. However, this might have negative effect on cash usage and return analysis, which has been deliberated in the past. Thus, in terms of liquidity, Ryanair is observed to be in a better position than EasyJet Plc in the UK aviation industry.

Working capital efficiency of EasyJet Plc and Ryanair is analysed with the receivables turnover and payables turnover ratios. Due to the absence of inventory, inventory turnover ratio could not be considered for them.

Table 3: Working capital efficiency ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

Figure 3: Working capital efficiency ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

The above figure and table clearly indicate that the receivables turnover of EasyJet Plc is observed to increase from 2013 to 2017; however, there has been a significant decline in the ratio for the same period. The reason behind such drastic decline for Ryanair is due to more relaxed payment terms offered to the buyers, which mainly include travel agencies and other grouped buyers (Miller-Nobles, Mattison and Matsumura 2016). On the other hand, even though EasyJet Plc has allowed relaxation, it has been restricted to a certain extent due to which it has collecting more quickly from its buyers.

In terms of payables turnover ratio, the ratio is observed to increase for EasyJet Plc over the years, while the same trend is followed in case of Ryanair until 2016, after which a decline could be observed in 2017. This is because the airline has delayed in clearing its payments to the suppliers due to which they are not willing to extend the credit terms. Hence, from the efficiency perspective, EasyJet Plc is observed to be in a better position than Ryanair in the UK aviation sector.

In order to assess the solvency or financial structure position of both airlines, the ratios that are considered include debt-to-equity ratio and interest cover ratio.

Table 4: Solvency/financial structure ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

Figure 4: Solvency/financial structure ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

It is apparent from the above table and figure that the debt-to-equity of both the organisations have shown fluctuating trend over the five-year period; however, the ratio is deemed to be significantly higher for Ryanair compared to EasyJet Plc. When the ratio is above 1, it implies that the organisation has high financial leverage or contains more investment risk and vice-versa (Enekwe 2015). In this case, both organisations are observed to have high financial leverage; however, the position is better for EasyJet Plc. This is because it has managed to minimise its short-term as well as long-term borrowings along with minimisation of finance costs for interest bearing loans, while the situation is just the opposite for Ryanair.

Working capital efficiency analysis

Interest cover ratio evaluates the capability of an organisation in settling off its finance costs with the help of operating profit (Almamy, Aston and Ngwa 2016). In case of EasyJet Plc, the ratio after increasing from 2013 to 2015 has declined drastically in both 2016 and 2017. On the other hand, the ratio has increased over the years for Ryanair and in 2017; it has been more than EasyJet Plc. The reason is due to the increased indirect costs incurred by EasyJet Plc than Ryanair and injection of capital to support borrowings has assisted the latter to increase its interest cover ratio. However, the ratio of both airlines is above the ideal standard of 1. Hence, in terms of solvency, EasyJet Plc is enjoying competitive supremacy over Ryanair owing to lower investment risk than Ryanair.

In order to gain an understanding of the perspective of the investors, the two ratios taken into account include return on assets and dividend payout ratio.

Table 5: Investors’ perspective ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

Figure 5: Investors’ perspective ratios of EasyJet Plc and Ryanair for the years 2013-2017

(Source: Corporate.easyjet.com 2018: Investor.ryanair.com 2018)

In accordance with the above table and figure, it could be observed that EasyJet Plc has experienced a decline in return on assets from 2013 to 2017, while the trend is increasing for Ryanair although a decline could be observed from 2016 to 2017. This ratio assists in measuring the ability of an organisation to generate profit from the asset base (Greco, Figueira and Ehrgott 2016). Ryanair has leased its unutilised space to small business owners, while EasyJet Plc has not employed its asset base effectively for generating income.

In terms of dividend payout ratio, stability could be observed in EasyJet Plc in paying regular dividends to its shareholders, while there is absence of payment of regular dividends to the shareholders by Ryanair. This is because Ryanair has focused on increasing its retained earnings to cover up the injection of capital made in equity shares due to which its focus has shifted from maximisation of shareholder wealth (Brigham et al. 2016). Therefore, from the perspective of the investors, the position of EasyJet Plc is deemed to be favourable than Ryanair in the aviation industry of UK.

The above evaluation of different classes of ratios makes it evident that EasyJet Plc is lagging behind Ryanair when it comes to profitability. However, in terms of liquidity, working capital efficiency, solvency or financial structure and investors’ perspective, EasyJet Plc is placed in a favourable position in the UK market in comparison to Ryanair. Profitability is not the sole factor for undertaking investment decisions. It is observed that both airlines have high investment risk; however, the risk is closer to the ideal level for EasyJet Plc. In addition, the organisation pays regular dividends to its shareholders in all the years. Hence, by considering all these aspects, the investors of EasyJet Plc are suggested to hold their shares for short-term after which they could buy additional shares for generating better return on investment.

Supply chain approaches and philosophies of EasyJet Plc:

EasyJet Plc undertakes different philosophies and approaches associated with its supply chain management so that competitive advantage could be maintained in the UK airline industry. For example, it has managed to experience immense growth by positioning itself in the form of a low-cost carrier. By incorporating lean supply chain management, the organisation has categorised its materials into three classes, which include the following:

• Consumable expendables
• Consumable repairable
• Rotables

The initial category in the model is self-explanatory, while the second category is material that it considers re-usage based on whether the repairs are promising and economical (Sturman 2018). It concentrates on overhauling or repairing its entire asset base until obsolescence and they are not economical and repairable anymore. This model that EasyJet Plc has followed has become popular over the passage of time, since it has gathered necessary knowledge for providing exceptional services. In order to maintain this strategy, the organisation is involved in monitoring the material usage significant to its airline operations through constant supervision and vigilance. By maintaining lean strategy in its operations, EasyJet Plc is estimating a rise of 30% in its profit along with steady rise in shares in 2018. Hence, by following this approach, the organisation would become the leader in the UK aviation industry by providing quality services to its customers (Dresner and Zou 2016).

Another lean approach that EasyJet Plc has maintained is optimisation, which evaluates turnaround time of the elements from repairs back to the state, in which assets are serviceable. In addition, it has enforced AMOS by aligning its supply chain management for better maintenance of its business operations (Varley 2014). The contracts of the organisation are structured in a way that it anticipates the inclusion of aircrafts and for managing repair management and logistics functions. For example, it has entered into a contract with AJW that deals with buying materials required for aircraft in relation to the existing operations. Finally, it takes into account the repair management of its relatable. Hence, it has made several partnerships in its lean supply chain for assuring material and maintenance activities.

EasyJet Plc has adopted the supply chain management philosophy of “alert system for deviations”, which concentrates on forming an ability of alerting the stakeholders when there are variations in the model or developed standards (Christopher 2016). In addition, the philosophy focuses on the following aspects as well:

• The first aspect is stability, in which the airline detects causes for changes and it undertakes attempts to minimise them
• The second aspect is fluidity, in which the bottlenecks are recognised for easing the flow of materials
• The third aspect is smoothness, in which the consumer-centric variations are identified in order to maintain smooth product form as well as pull production across the organisation
• The final aspect is synchronisation, in which the airline concentrates on minimising batch size for ensuring smooth flow of its different lean operations (Mangan, Lalwani and Lalwani 2016).

Application of lean supply chain model adopted by EasyJet Plc in other industries:

The lean model that EasyJet Plc uses has become popular over the years considerably, as the organisation has acquired needed knowledge for offering superior services. This model is applicable in case of other industries as well that constitute of engineering, service, food, manufacturing, travel and healthcare sectors (Coyle et al. 2016). The lean supply chain management philosophies assist in raising competitive supremacies for organisations in majority of the industrial sectors by providing superior value based on the customer preferences. Thus, with the application of the lean chain model, consumer demand could be estimated effectively along with minimum use of resources.

Moreover, this model is observed to deal with different uses in the different industries. These issues mainly include variability, volatility and rising pressure of cost in maintaining supply chain operations (Jacobs, Chase and Lummus 2014). For example, in manufacturing sector, this is assured by implementing controls of short intervals for evaluating counter measures in order to deal with anticipated variability. In the food industry, lean supply chain is related to develop a continuous improvement culture in its operations. In case of healthcare sector, the lean supply chain model is used for obtaining continual improvement through assessment of value added planning activities and minimisation of waste in supply chain operations and functions (Grant, Trautrims and Wong 2017).

Although there are several beneficial implications of incorporating models of supply chains like Six Sigma and lean management in the aviation sector, certain risks are associated with these models as well. Among such risks, one of them is lack or absence of strategic focus in incorporating lean models. This is because these models are dependent on total quality management, just-in-time and information technology systems, which could lead to increased time errors (Fernie and Sparks 2014). Lean is beyond a tool, which identifies that the current manufacturing procedures of the organisation have been overhauled completely. Due to this reason, it bears the risk of taking more time coupled with increasingly disruptive processes. Therefore, all these risks need to be monitored appropriately and measures need to be undertaken by the business organisations in order to maintain efficiency in supply chain operations and functions.

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