Kale em

ACCOUNTING AND CORPORATE GOVERNANCE
Analytical report comparing the financial position of

British Airways and Easy-Jet
Sabina Dhorat - 04012115

Kaleemullah Khan - 03012211
Royal Luthra -
Arooj Masud - 03003709
Ayesha Saleem - 03014702
Contents Page
Introduction
Page 03 - Relevance
Page 04 - Comparability
- Understandability
Strengths and Weaknesses
Profitability Ratios
Page 05 - Return On Capital Employed
Page 06 - Net Profit Margin (NPM)
Page 07 - Gross Profit Margin (GPM)
Liquidity Ratios
Page 08 - Curent Ratio
Page 09 - Quick Ratio
Stability Ratios
Page 10 - Gearing Ratio
Page 11 – Interest cover ratio
Efficiency Ratios
Page 12 - Assets Turnover
Page 12 - Stock Turnover
- Debtors Collection Period
Page 13 - Creditors Payments
UK Market Analysis
Page 14 - Earnings per Share

Page 15 - Comparison of share prices
Page 17 - UK market analysis
Page 18 - Conclusion
Appendices
Page 19 - Appendix 1 British-Airways Profit Loss Accounts

Page 20 - Appendix 2 British-Airways Balance Sheet
Page 21 - Appendix 3 Easy-Jet Profit Loss Accounts
Page 22 - Appendix 4 Easy-Jet Balance Sheet
Page 23 - Appendix 5 Financial ratios within the report
Page 24 – Bibliography/References
Sabina Dhorat, Kaleemullah Khan, Royal Luthra, Arooj Masud, Ayesha Saleem. 2
Accounting & Corporate Governance
Executive Summary
The following report will reveal the position of British-Airways and Easy-Jet derived
from their financial and reporting statements. Both companies are in the airline
market.
The two companies will be compared with the peer group, which includes all other
competitors such as Jet.2 and Quantas. What is to be realised is British-Airways and
easy-jet are on very different levels of customer base. British-airways is a national
carrier whereas easy-jet is a low cost carrier, therefore making it difficult to compare
The way we are comparing the market share is through the turnover of an
organisation. This process gave evidence on which of the two carriers were more
profitable and therefore more successful. British Airways have a turnover of 7,813
million. Easy-Jet on the other hand has a turnover of 1,092.4 million.
The profitability of both companies is very contrasting. With Easy-Jet increasing its
profitability with ROCE 4.11% compared to British-Airways which is only 1.6% in
2005.
The liquidity of Easy-Jet are fluctuating from 1% to 2% and then back down again,
which is close to the peer group average. This shows that they are unable to manage
the day to day running of the business very effectively hence the fluctuations. British
Airways are consist ant but with slow increases.
Baring in mind that the above statements are on turnover and do not explain the full
picture. The airline industry has vastly changed from previous years. There is an
increase in low cost airlines now; putting national carriers at risk.
By looking at the share prices there does seem to be an improvement in the airline
market.
Overall the airline industry is increasing in terms of the number of companies within
the market but there are low-cost carriers who are dominating this sector.
Accounting and Corporate Governance – Assessed Group Assignment British
Airways and Easy-jet (2500 Words)
A financial report is a review of an organisation’s past year operations and the

financial position it stands at. Within this assignment the standard of financial
reporting achieved by British-Airways and Easy-Jet will be compared, concentrating
on how clear and concise the reports are to the end user. The financial strengths and
weaknesses, along with the position of the organisations within the airline industry
will also be analysed.
British Airways is the UK's largest international scheduled airline, flying to over 550
destinations at convenient times, to the best located airports. The British Airways
group consists of British Airways Plc and a number of subsidiary companies
including in particular British Airways Holidays Limited and British Airways Travel
Shops Limited.
Easyjet is a low cost airline officially known as EasyJet Airline Company PLC. The
company is based at London Luton Airport. It operates frequent scheduled services
for leisure and business passengers and serves more than 200 routes between more
than 60 European airports. It was founded by easyGroup entrepreneur Stelios Haji-
Ioannou, but it is now listed on the London Stock Exchange and easyGroup owns
only a minority stake.
Relevance
The information from both companies shows their performance over the past four
years. They are accurate as the information is checked by neutral regulatory bodies to
make sure a true and honest view is given. Prior to easy-jet publishing their accounts,
the preliminary figures are drawn up. This has found to be very good technique to use
as it allows a forecast to be made.
Preliminary revenue and profit
year to end revenue

profit (£m)
September (£m)
1998 77.0 5.9
1999 139.8 1.3
2000 263.7 22.1
2001 356.9 40.1
2002 552.0 71.6
2003 932.0 52.0
2004 1,091.0 62.2
http://www.easyjet.com/EN/About/Information/infopack_financialinfo.html
Comparability
When comparing with other organisations; methods must be consistent so each time it
is exactly the same. We have used the financial results for year ending 2005 for both
companies. An external organisation such as the stock market gives a reflection of the
performance and position of an organisation. These results are published annually,
and day-to-day business is also conducted through this market. This information is
key to potential investors for example, price per share. It will show the worth of the
company and then it can be decided as to whether its worth investing in.
Both companies are consistent in their timing as the use the same time period of 12
months and the same day. . The statements for Easyjet are fully informative where as
British Airways have missed out on their liabilities which is a bad point; as this is
required to work out their gearing ratio. It leaves the statements incomplete
Understandability
British Airways and Easy jet set their accounts in exactly the same way (see appendix
1-4) which is both relatively fluent and coherent. However, Easy jets have put in a lot
of useless information onto the statements which would be time consuming for the
accountants therefore wasting the company’s finances which would be better used
elsewhere in the business.
Analysis Of The Strengths And Weaknesses Revealed By The Financial
Statements
Profitability Ratios
These can be used to measure the profitability of the businesses. The ratios are ROCE,
NPM and GPM.
Return on capital employed (ROCE)
This ratio is used as a primary measure of profitability. Capital invested is compared

with profit, this is vital in assessing the effectiveness with which funds have been
deployed. The formula for calculating ROCE is as follows:
ROCE = net profit before interest and taxation

x 100
share capital + reserves + long-term liabilities
Comparison of ROCE (%) between EasyJet Plc and

British Airways Plc
700
650
600
550
500
Percentage (%)
450 EasyJet (%)

400
350 BA (%)
300
250
200
150
100
50
0
2001 2002 2003 2004 2005
Year
Comparison of ROCE (%)

Year EasyJet BA
31/03/2005 4.11 1.6
31/03/2004 6.16 2.65
31/03/2003 5.94 0
31/03/2002 8.89 199.71
31/03/2001 10.17 636.8
EasyJet clearly has a greater ROCE than British Airways (BA). The ROCE for BA
has decreased since 2001 by 635.2%. EasyJet have had an increase of 0.22% in 2004
since the previous year but also have seen a decrease of 6.06% since 2001 till 2005.
BA does not have a ROCE for the year 2003 whereas EasyJet show a ROCE of
5.94%. For the year 2004 it is shown that EasyJet’s ROCE was greater than BA’s by
3.51%. For the year 2005 BA has shown a decrease of 1.05%.
The peer group average for ROCE was 7.37% and this means both company’s are
below the peer group average. This is due to poor performances as the return on assets
is less than the rate the business is paying back its borrowed funds.
Net profit margin (NPM)
This indicates how effective a company is at cost control. As the net profit margin
increases this shows the company is becoming more effective at converting revenue in
to actual profit. The formula for calculating net profit margin is as follows:
Net profit margin = net profit before interest and taxation

x 100
sales
Comparison of net profit margin between EasyJet

and British Airways
15
Percentage (%)
10
EasyJet
5 BA
0
2001 2002 2003 2004 2005
Year
Comparison of Net Profit Margin (%)

Year Easy-Jet BA
31/03/2005 5.63 5.31
31/03/2004 5.7 5.06
31/03/2003 5.53 8.11
31/03/2002 12.97 0.26
31/03/2001 11.25 1.52
From the graph and results table it is clear to see that currently Easy-Jet is in a better
position than BA. Easy-Jet has slightly decreased by 0.7% this year but this is still
higher than BA’s results that are on 5.31% for 2005. 2002 saw the best NPM for
Easy-Jet it has since declined by 7.34%. BA on the other hand seems to be improving
having increased by 3.79% since 2001.
The peer group average is 2.76%, both Easy-Jet and BA are above the average
proving that they are generating a greater profit than their peers.
Gross profit margin (GPM)
This is what remains from the sales after a company pays out the costs of goods sold.
The formula for calculating gross profit margin is as follows:
Gross profit margin = gross profit

x 100
sales
Comparison of gross profit margin between

EasyJet and British Airways
30
25
Percentage (%)
20
EasyJet
15
BA
10
5
0
2001 2002 2003 2004 2005
Year
Comparison of Gross Profit Margin (%)

Year EasyJet BA
31/03/2005 4.11 8.67
31/03/2004 14.82 5.06
31/03/2003 16.83 8.1
31/03/2002 25.12 0.25
31/03/2001 25.56 1.51
Easy-Jet has a greater GPM compared to BA up until this year. BA has a GPM which
has increased by 7.16% since 2001 whereas Easy-Jet has declined by 21.45%. The
GPM fluctuates each year for BA for example in 2004 it was down to 5.06% but the
year before it was 8.1%. The fluctuations must be due to the companies paying out for
the costs of goods sold.
Liquidity Ratios
These measure the extent to which the company can liquidate assets and cover short-
term liabilities. The two main ratios to consider are the current ratio and the quick
ratio.
Current ratio (CR)
This is an indication of a company’s ability to meet short-term debt obligations by

liquidating current assets. The ratio increases as the company becomes more liquid.
The current ratio formula is as follows:
Current ratio = current assets

x 100
Current liabilities (creditors due within one year)
Comparison of current ratio between Easyjet and

British Airways
3
2.5
2
Value
EasyJet
1.5
BA
1
0.5
0
2001 2002 2003 2004 2005
Year
Comparison of current ratio

Year EasyJet BA
31/03/2005 1.9 0.95
31/03/2004 2.18 0.04
31/03/2003 1.83 0.14
31/03/2002 2.01 0.73
31/03/2001 2.57 0.66
Even though BA has become more liquid compared to 2004 it still has a lower CR
than Easy-Jet which seems to be more liquid. From 2001 to 2005 BA has increased by
1:0.29 but Easy-Jet has decreased by 1:0.67 from 2001 to 2005.
The peer group average is 1:0.89 which means both companies are doing well and are
able to liquidate their current assets more effectively than their peers.
Quick Ratio (QR)
This is a measure of a company’s liquidity and the ability to meet its obligations. It is
often referred to as acid test ratio. The quick ratio is viewed as a sign of a company’s
financial strength or weakness (higher number means stronger and the lower number
means weaker). The formula for calculating the quick ratio is as follows:
Quick ratio = current assets (excluding stock)

x 100
Current liabilities (creditors due within one year)
Comparison of quick ratio between Easyjet and

British Airways
2 EasyJet
Value
1 BA
0
2001 2002 2003 2004 2005
Year
Comparison of quick ratio

Year Easy-Jet BA
31/03/2005 1.9 0.93
31/03/2004 2.18 0.04
31/03/2003 1.83 0.14
31/03/2002 2.01 0.73
31/03/2001 2.57 0.66
Again Easy-Jet is doing better than BA, so this means Easy-Jet is financially stronger
than BA. From 2001 to 2005 Easy-Jet has seen a decline of 1:0.67 but BA has seen an
increase of 1:0.27.
Stability Ratios
Measures the financial stability of the company
Gearing Ratio
Gearing Ratio is the ratio of a company's long-term funds with fixed interest to its
total capital. It measures the contribution of long-term lenders to the long-term capital
structure of the business. A high gearing is generally considered very risky for the
company.
The calculation used to work out a companies gearing ratio is:
Gearing Ratio = long term liabilities x100
share capital + reserves + long term liabilities
Gearing Ratio (% )
90
80
70
60
Ratio (%)
50 british airways
40 easyjet
30
20
10
0
30.03.2005 30.03.2004 30.03.2003
Year End
The gearing ratio for British Airways is a lot higher than that for Easyjet. This shows
a greater risk for British Airways, and rather than this continuing it would be better
for the company to make changes in the way they borrow, and the amount they
borrow.
The gearing ratio for Easy-jet has increased from 2003 to 2005 by 11.41%.
The ratio for British Airways has varied over the past three years, but there has been a
decrease from 2003 to 2005 of 10.87% which is good for the company overall.
Interest Ratio
Interest ratio is a calculation of a company's ability to meet its interest payments on

outstanding debt. Interest coverage ratio is equal to earnings before interest and taxes
for a time period, often one year, divided by interest expenses for the same time
period. The lower the interest coverage ratio, the larger the debt burden is on the
company, and the higher the Interest Cover Ratio then the better the company is
performing.
The calculation used to work out a company’s interest coverage ratio is:
Interest Ratio = Profit before interest and taxation

x 100
Interest payable
Interest Cover Ratio
60
50
40
british airways
Ratio
30
easyjet
20
10
0
30.03.2005 30.03.2004 30.03.2003
Year End
The interest coverage ratio for British Airways is a lot lower than the ratio for Easyjet,
which means that there is a larger debt burden on the company.
However, the ratio for Easyjet has decreased significantly over the past three years as
they have gone from 53.4% to 14.86% which shows a decrease of 38.54%. Easyjet
need to make sure that this does not continue.
Between the two companies there is a difference in percentage for 2005 of 12.67
which as explained earlier is due to Easyjet having a higher ratio compared to British
Airways.
Efficiency Ratios
Asset turnover ratio
The total asset turnover is a measure of how efficiently and effectively a company
uses its assets to generate sales. The figure is similar to the fixed assets turnover but
includes all assets. The higher the total asset turnover ratio, the more efficiently firm’s
assets have been used. USBR calculates the total asset turnover ratio as follows:
Total Asset Turnover = Sales / Total Assets
The total turnover and assets of British Airways PLC in year 2004 were 7813 million
pounds and 11829 million pounds respectively. So the asset turnover of British
airways PLC for the year 2004 is:
7813
11829
= .66 times or 66%
The total turnover and assets of Easyjet PLC for twelve months, till 30th September
2004 were 1019 million pounds and 1324.9 million pounds respectively. So the asset
turnover of Easyjet PLC for twelve months, till 30th September 2004 is:
1091
1324.9
= .82 times or 82%
Stock turnover ratio
The stock turnover ratio measures the number of times during a year that a company
replaces its stock. The turnover is only meaningful when comparing other firms in the
industry or a company’s prior stock turnover. Differences in turnover rates result from
differing operating characteristics within an industry. USBR calculates the inventory
turnover rate as follows:
Stock Turnover = Cost of Goods / total stock
In year 2004 total stock of British airways PLC was 7136 million pounds and the cost
of goods sold was 84 million pounds. So the stock turnover ratio of British airways
for the year 2004 will be
7136
84
= 84.9 times
The total cost of goods sold by easyjet PLC in twelve months, till 30th September
2004 was 929.3million pounds, but the company has not declared any information
about their stock in the last 7 years so it is not possible to calculate the stock turnover
ratio of easyjet PLC.
Debtor’s collection period
DCP = debtors x 365 / credit sales.
The Debtor Collection Period or Debtors Days tells you the length of time it takes you
to collect payment following a credit sale. As credit is given in days this ratio is
expressed in days. The speed at which bills are collected has a significant impact on a
business' cash flow.
The total debtors of British airways PLC in year 2004 were 1078 million pounds and
total sales were 7813 million pounds (all the sales are assumed to be on credit). So the
debtor turnover ratio of British airways PLC for the year 2004 will be
1078 x 365
7813
=50.36 days
The total debtors of Easyjet PLC in twelve months, till 30 th September 2004 were
174.4 million pounds and total sales were 1091 million pounds (all the sales are
assumed to be on credit). So the debtor turnover ratio of Easyjet PLC in twelve
months, till 30th September 2004 will be:
174.4 x 365
1091
= 58.3 days
Creditor’s payment period
CPP= Creditors x 365/Sales
The Creditor Payment Period measures the average time it takes you to pay your
creditors. This ratio may highlight difficulties in paying creditors and the loss of
creditor discounts by not paying on time.
The total creditors of British airways PLC in year 2004 were 2980 million pounds and
total sales were 7813 million pounds (all the sales are assumed to be on credit). So the
debtor turnover ratio of British airways PLC for the year 2004 will be:
2980 x 365
7813
= 139.2 days
The total creditors of easyjet PLC in twelve months, till 30th September 2004 were
314.7 million pounds and total sales were 1091 million pounds (all the sales are
assumed to be on credit). So the debtor turnover ratio of easyjet PLC in twelve
months, till 30th September 2004 will be:
314.7 x 365
1091
=105.2 days
Review Of The Market Perception Of The Companies As Evidenced By Analysts

Comments And Market Share Price Movements
Earning per share is calculated as
(http://www.investopedia.com/terms/e/eps.asp)
EARNINGS PER SHARE

2001 2002 2003 2004 2005
(13.2)
BRITISH AIRWAYS 6.2p p 6.7p 12.1p 23.4p
13.47 10.34
EASY JET p 14.61p 8.24p p
(www.britishairways.com)
(www.easyjet.com)
We have compared the earnings per share of British airways and easy jet with the last
four years to interpret the trends and it is quite obvious from the table that easy jet is
quite consistent from British airways. They are not only more consistent but also
show higher values than British airways which are positive sign for easy jet.
Here is the graph chart showing the past 5-years trend of Earning per share.
EARNINGS PER SHARE
30
20
PERCENTAGE
10 BRITISH AIRWAYS
0 EASY JET
-10 2001 2002 2003 2004 2005
-20
YEARS 2000 - 2004
This trend is also shown by a line graph which gives a more clear idea of this trend.
Earnings per share
30
20
Percentage
BRITISH
10 AIRWAYS
0 EASY JET
-10 2001 2002 2003 2004 2005
-20
Years 2000 - 2004
Comparison of Share prices
Fig.1 shows the share prices for British airways during the past five years. Year 2002
shows the most adverse figures for the company whereas the most favourable results
were shown by the year 2001.
FIG 1: Share price for British airways
(http://www.axl.co.uk/LSE/EQUITIES/BAY.asp)
We can see many ups and down for the easy jet company and compared to the British
airways the most adverse figures for easy jet was in the year of 2004 whereas 2004
was quite favourable for British airways. The luckiest year for the easy jet was end of
2001 and the start of 2002 where their share price went more than 500. By comparing
both figures we can see more consistency for British airways than the Easy jet but it is
evident from the charts that easy jet has higher share prices from the British airways.
Fig 2: Share price for Easy jet

(http://www.axl.co.uk/LSE/EQUITIES/EZJ.asp)
The Total Market
The UK market for air travel is broadly the same as the revenue generated by UK
airlines. Although UK airlines also generate revenues for overseas airlines, this is
compensated for by the revenues generated by overseas operators selling tickets to
UK passengers. In 2003, the percentage of overseas terminal passengers at UK
airports was 30%.
Key Note estimates that, in 2003, the revenue generated by UK airlines reached
£13.5bn. This represents an increase of 6.3% on 2002 and is 5.5% higher than the
value recorded in 2000. Between 1999 and 2003, revenue increased by only 3.1%,
which is a reflection of the slowdown in the world economy, the events of 11th
September 2001 and concerns relating to political stability in various parts of the
world.
Conclusion
Overall, the airline industry is well established and is expanding at the moment
despite the recent incidents of 9/11. For this reason, there are many new entrants
trying to establish themselves within the industry. There are companies in this market
who are diversifying into other markets as well and Easy-Jet have adapted well to it.
The third best performing European airline after Ryanair and Easy-Jet was British
Airways, with a much improved performance over 2002 (www.trl.co.uk). Leading the
way in the Asia Pacific region were Thai Airways, Malaysian Airlines and Cathay
Pacific.
The accounts of British Airways and Easy-jet adhere to the required accounting
standards. We have used the group accounts for both companies.
As we have calculated earnings per share and share price for both companies. We
have a clear idea about which company is doing better or having a good position. By
looking at the graphs and figures we conclude that easy jet is doing better as
compared with British airways as they are more consistent with their earnings per
share than British airways and having high share prices. The share price determines
the value of investment and the amount of capital that have been invested. Easy jet
looks in a strong position in terms of share prices than the British airways.
Appendices
APPENDIX 1
BRITISH AIRWAYS PROFIT & LOSS ACCOUNT
APPENDIX 2
BRITISH AIRWAYS BALANCE SHEET
APPENDIX 3
EASY JET PROFIT AND LOSS ACCOUNT
APPENDIX 4
EASY JET BALANCE SHEET
Appendix 5
Financial Ratios Used Within The Report
Operating Profit
Return On Capital Employed = ×100
Capital Employed
Operating Profit
Net Profit Margin = ×100
Turnover
Gross Profit
Gross Profit Margin = ×100
Turnover
Current Assets
Current Ratio =
Current Liabilitie s
Current Assets - (Stock + Prepayment s)

Quick Ratio =
Current Liabilitie s
Long term Loans

Gearing Ratio =
Equity + Long term Loans
Operating Profit
Interest Cover =
Interest
Turnover
Asset Turnover =
Capital Employed
Debtors
Debtors Collection Period =
Credit Sales
Bibliography/References
Books
J Elliott, B Elliott, “Financial accounting and reporting” 10th edition (2005)
P Atrill, E McLaney, “Accounting for non-specialists” 4th edition, F T Prentice Hall
Websites
www.easyjet.com
www.ba.com
www.fame.bvdep.com
www.investorword.com
http://www.investopedia.com/terms/e/eps.asp
http://www.axl.co.uk/LSE/EQUITIES/BAY.asp
http://www.axl.co.uk/LSE/EQUITIES/EZJ.asp
www.trl.co.uk
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ACCOUNTING AND CORPORATE GOVERNANCE

Analytical report comparing the financial position of

Sabina Dhorat - 04012115

Strengths and Weaknesses

Page 14 - Earnings per Share

Page 19 - Appendix 1 British-Airways Profit Loss Accounts

A financial report is a review of an organisation’s past year operations and the

Preliminary revenue and profit

year to end revenue

Return on capital employed (ROCE)

This ratio is used as a primary measure of profitability. Capital invested is compared

ROCE = net profit before interest and taxation

Comparison of ROCE (%) between EasyJet Plc and

450 EasyJet (%)

Comparison of ROCE (%)

Net profit margin (NPM)

Net profit margin = net profit before interest and taxation

Comparison of net profit margin between EasyJet

Comparison of Net Profit Margin (%)

Gross profit margin = gross profit

Comparison of gross profit margin between

Comparison of Gross Profit Margin (%)

Current ratio (CR)

This is an indication of a company’s ability to meet short-term debt obligations by

Current ratio = current assets

Comparison of current ratio between Easyjet and

Comparison of current ratio

Quick ratio = current assets (excluding stock)

Comparison of quick ratio between Easyjet and

Comparison of quick ratio

Measures the financial stability of the company

Gearing Ratio = long term liabilities x100

share capital + reserves + long term liabilities

Interest ratio is a calculation of a company's ability to meet its interest payments on

Interest Ratio = Profit before interest and taxation

Interest Cover Ratio

Asset turnover ratio

Total Asset Turnover = Sales / Total Assets

Stock turnover ratio

Stock Turnover = Cost of Goods / total stock

Debtor’s collection period

DCP = debtors x 365 / credit sales.

Creditor’s payment period

CPP= Creditors x 365/Sales

Review Of The Market Perception Of The Companies As Evidenced By Analysts

Earning per share is calculated as

EARNINGS PER SHARE

Earnings per share

Comparison of Share prices

Fig 2: Share price for Easy jet

The Total Market

Financial Ratios Used Within The Report

Current Assets - (Stock + Prepayment s)

Long term Loans

J Elliott, B Elliott, “Financial accounting and reporting” 10th edition (2005)

P Atrill, E McLaney, “Accounting for non-specialists” 4th edition, F T Prentice Hall

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