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2. British Airways (BA)
British Airwavs (BA) went Irom a record proft in 2008 to its biggest ever loss in 2009. Sales revenue
dropped by 8 Irom US$9863 million. The company identifed three Iactors Ior this change:
x frstly. there was a Iall in demand Ior its most important market segment: the business traveller
x secondly. the global banking crisis resulted in a dramatic increase in BAs cost oI borrowing
x fnally. the aviation Iuel bills. which make up the largest percentage oI variable costs Ior BA.
rose by 13 .
To address its fnancial problems. BA executives decided on several cost reduction methods.
They will not award any pay increases. Managers will not receive any Iringe payments.
Furthermore. the airline imposed a retrenchment oI 2500 iobs. resulting in a monthly labour cost
saving oI US$180 million. Unions* have already complained about these cost reduction measures.
and several workers and managers have also expressed their dissatisIaction. BA announced that it
would be reducing the number oI fights. and orders Ior fve new planes have been cancelled.
There is. however. one piece oI good news Ior BA passengers; the company announced that there will
be no ticket price increases. 'Demand has become so Iragile that any increase in ticket prices would
damage our sales revenue. The airline is now being Iorced into oIIering special deals; a position that
was unthinkable only two years ago.
|Source: adapted Irom http://www.guardian.co.uk/. Guardian News and Media Limited 2009. 22 May 2009|
Table 1: selected items Irom BAs proft and loss account Ior the year ended 30 April 2009
(US$ millions)
Aviation Iuel costs 3000
Cost oI goods sold X
Direct labour costs 2160
Dividends 0
Expenses 100
Gross proft 120
Interest 180
Net proft aIter interest and tax 400
Net proft beIore interest and tax 220
Other operating costs 4034
Retained proft 400
Sales revenue 9074
Tax 0
* unions: organizations oI workers ('labour unions) that deIend or saIeguard workers` interests
(This question continues on the following page)
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Turn over
(Question 2 continued)
Table 2: selected items Irom BAs balance sheet as at 30 April 2009 (US$ millions)
Fixed assets 8142
Current assets 4508
Current liabilities 11 204
Loan capital 800
Retained proft 400
Share capital 1046
(a) Defne the Iollowing terms:
(i) variable costs [2 marks]
(ii) retrenchment. [2 marks]
(b) (i) Using the inIormation in Table 1. calculate the cost oI goods sold
(fgure X) and construct a proft and loss account Ior BA Ior 2009. [4 marks]
(ii) Using the inIormation in Table 1 and Table 2. calculate the return on
capital employed (ROCE) and net proft margin (NPM) Ior BA (show all
vour working). [4 marks]
(iii) Comment on your results Irom part (ii). using inIormation Irom the
stimulus material. [3 marks]
(c) Examine the impact oI not awarding pay increases and managerial Iringe
payments Ior BA. [5 marks]