The UK airline industry is easily one of the most competitive in the world, and one that struggles against numerous strategic challenges. While fuel prices have fallen dramatically over the past year, the industry faces increasing airport charges and air travel taxes, tighter regulatory environments, and increasing trends towards industry consolidation (which could impact the individual players financial standing). Other than the intense oligopolististic competitive forces characterized by fierce price discounting and non-price competition, many large companies are frequently forced to ground their fleets due to adverse changes in the operating environment. Key industry players such as Ryanair Plc. and EasyJet Holdings Plc. enjoy strong positions in important markets both in the UK and across the EU, but are not immune from the tough strategic environments in which they operating. To these players, as indeed many other businesses in other industries, careful financial management is critical to success. This paper compares the financial performance of EasyJet Plc. and Ryanair Holdings Plc., two of the most dominant low cost carriers in the UK (and in Europe), and assesses how effectively they leverage their resources to create and sustain competitive advantages. Particularly, the paper seeks to determine how financially prepared these two companies are to take advantage of the expected growth in tourism and air travel in the UK (as well as other opportunities) and deal with important threats in the short term.
EasyJet and Ryanair
EasyJet and Ryanair are pan-European low cost, short haul airline carriers, headquartered in Londons Luton Airport and Dublins Dublin Airport, respectively. With a fleet of 241 aircrafts (including 153 Airbus A319s), EasyJet operates 735 routes across 30 countries (mainly in the UK and Southern Europe) and employees upwards of 9500 fulltime employees. In 2014, it served 64.8 million passengers, 43% of whom were from the UK. Founded in 1995, the company operates from more than 135 primary airports, putting it within one hours driving distance of 300 million people (MarketLine, 2015). Its rapid growth over the past decade has largely taken the form of increased destinations, with the latest routes including Croatias Pula and Greeces Preveza Airports from Gatwick Airport, in addition to other destinations in Italy, Portugal, Holland, and Switzerland (EasyJet Plc., 2015). EasyJet prides itself with its cost advantages, which it leverages to extend lower prices to its customers (EasyJet Plc., 2015).
On the other hand, Ryanair operates scheduled, point-to-point passenger airline operating 185 routes across Ireland, continental Europe, the UK and Morocco. With a single fleet of 300 Boeing 737-800 aircrafts, the company operates 1600 flights every days, translating to more than 103 million passengers a year (Ryanair Holdings Plc., 2015). By the close of 2014, the company is projected to ferry upwards of 160 million passengers annually. In addition, Ryanair offers ancillary services, including travel insurances, in-flight beverage sale, and non-flight scheduled services, Internet-related services, as well as accommodation and non-air transport/tourist marketing services (including rail and bus tickets, car parking, and travel destinations). In 2014 alone, Ryanair booked passenger load factor of 83% and recorded revenues passenger miles and available seat miles of 64,470.4 million and 77,916.5 million, respectively (MarketLine, 2015; Ryanair Holdings Plc., 2015).
This assesses the capacity of the firm to generate sufficient cash to meet its maturing payments in the short-term i.e. the ease with which it can liquidate its assets to meet its obligations without losing value. Both companies have seen a steady increase in operating revenues over the past five years, in part because of the recovery of the global economy from the 2007/8 economic crisis as well as the rebounding of global tourism. However, in 2013 and 2014, EasyJet posted a 5.94% and 3.39% reduction in sales, while Ryanair posted a 3.04% and 10.93% fall over the same period, even when the global industry posted a more than 5% increase in revenues (CSIMarket, 2015).
While the airline industry takes considerable cash in revenues (air fares) and spends the same on wages, fuel and other operating costs, these companies have also invested lot in aircrafts and other assets that strikes a delicate balance between current and non-current assets. In the short term, Ryanair and EasyJet must maintain sufficient liquidity to survive frequent industry shocks, such as sudden fuel price hikes and falls in demand.
The current ratio measures a companys current liability coverage. The higher the current assets relative to the current liabilities, the greater the probabilities that a firm can cover repay its liabilities. It also represents the firms buffer against losses and hence a lower risk. The current ratio represents a firms margin of safety to cover sudden reductions in the cash flows, especially in the face of uncertain demand movements, high losses, or other impairment of inflows. The ratio is simple to compute and use, despite the fact that its value includes non-monetary values and does not distinguish among different current assets. In 2014, Ryanair and EasyJets current ratio falls to 1.51 and 0.89, respectively. Both ratios are acceptably good, even though EasyJet should struggle in the event of severe short-term industry shocks (e.g. emission controls, airport fees increases, and terrorism-induced fall in demand), given its low current ratio.
The working capital measures the dependency of the companys operations on its ability to raise revenues from the sale of inventories. Ryanairs working capital in 2013 is 1170 million, while EasyJets is 69 million, but this reduces to 1170 million and -159 million, respectively. Once again, this is fairly comfortable for Ryanair, but means that EasyJet had to find alternative liquid assets, other than its operations, to meet its maturing obligations. However, EasyJets low and even negative working capital can be explained by the fact that the airline industry highly leveraged, given the long-term debt repayment, accrued liabilities (particularly benefits and salaries), air traffic liability or unearned revenues, high and continuous capital investments (especially in buying or leasing aircrafts), and low cash flows from operations. However, these obligations appear to be worse for Ryanair, which means EasyJet should have a relatively superior working capital, but this is not the case.
This assesses the ability of these companies to use their quick assets i.e. cash/cash equivalents, accounts receivables and marketable securities to meet their maturing current liabilities. According to CSIMarket (2015), the industry quick ratio in the third quarter of 2014 was 0.56, and so EasyJets ratios of 1 and 0.82 in 2013 and 2014, respectively, as well as Ryanairs 1.97 and 1.51, over the same period are healthy. Ryanair is in a better position, but this may also indicate that it is holding too many assets in liquidate-able forms, when these could be sunk into revenue-generating assets such as aircraft leases. According to MarketLine (2015b), Ryanair has been forced on numerous occasions to ground its fleets to meet the strict safety requirements, besides that it is highly limited by its small network, which it could better exploit by investing in more aircrafts. A look at the average collection period, days inventory held, days payable outstanding ratio show that payments (mostly in cash) should be expected in a fairly short period, and therefore there is no need for keeping a lot of resources in liquid form is not desirable. However, this may also show that the highly liquid state may be due to many payments being received by the companies. Activity ratios for the year 2014 also point to the same conclusion.
Cash Flow Liquidity
The cash liquidity ratio measures the total amount of cash assets available in the firm at from sales of securities, receipts from customers, and any other cash with which it can cover the short term liabilities. Even without cash receipts from its sales activities, this ratio is best suited in assessing whether firm can still raise cash to pay its maturing debts. Ryanair has a higher ratio over the two-year period, even though the ratio falls slightly for both companies in 2014.