Analysis of the business and financial performance of Ryanair

TABLE OF CONTENTS

1.INTRODUCTION
1.1 PROJECT TOPIC AND SELECTED ORGANIZATION
1.2 REASONS FOR CHOOSING THE TOPIC
1.3 OBJECTIVES OF THE REPORT
1.4 RESEARCH APPROACH

2.INFORMATION GATHERING.
2.1 SOURCES USED AND REASONS
2.2 METHODS OF INFORMATION COLLECTION
2.3 CONSTRAINTS OF INFORMATION GATHERING
2.4 ETHICAL ISSUES

3.ACCOUNTING AND BUSINESS TECHNIQUES8
3.1 ACCOUNTING AND BUSINESS TECHNIQUES USED
3.2 CONSTRAINTS OF ACCOUNTING AND BUSINESS TECHNIQUES

4.ANALYSIS AND PRESENTATION10
4.1 COMPANY BACKGROUND
4.2 REVENUE ANALYSIS
4.2.1 GEOGRAPHICAL BREAKDOWN
4.2.2 SEGMENTAL BREAKDOWN
4.3 FINANCIAL PERFORMANCE ANALYSIS
4.3.1 GROSS PROFIT ANALYSIS
4.3.2 NET PROFIT ANALYSIS
4.3.3 ANALYSIS OF OPERATING EXPENSES
4.4 LIQUIDITY
4.4.1 CURRENT RATIO
4.4.2 CASH AND CASH EQUIVALENTS
4.4.3 CASH FLOW FROM OPERATIONAL ACITIVITIES TO CURRENT LIABILITIES
4.4.4 CASH FLOW ANALYSIS
4.5 RETURN
4.5.1 RETURN ON CAPITAL EMPLOYED
4.5.2 EBITDA
4.6 CONTROL MEASURES
4.6.1 RECEIVABLE DAYS
4.6.2 PAYABLE DAYS
4.6.3 TURNOVER PER EMPLOYEE
4.6.4 PROFIT PER EMPLOYEE
4.7 FINANCIAL RATIO
4.7.1 GEARING RATIO
4.7.2 INTEREST COVER
4.7.3 EARNING PER SHARE
4.8 SWOT ANALYSIS
4.8.1 STRENGTHS
4.8.2 WEAKNESSES
4.8.3 OPPORTUNITIES
4.8.4 THREATS
4.9 PESTEL ANALYSIS
4.9.1 POLITICAL
4.9.2 ECONOMICAL
4.9.3 SOCIAL
4.9.4 TECHNOLOGICAL
4.9.5 ENVIRONMENTAL
4.9.6 LEGAL

5.CONCLUSION

6.APPENDICES

7.REFERENCES

1. Introduction

1.1 Project topic and selectedorganization

Before I started to work on my research and analysis project, I downloaded the information pack from Oxford Brookes University and read it thoroughly to know about all the necessary information and applicable guidelines. Then I choose topic number 8 which is - ‘Analysis of the business and financial performance of an organization over a three-year period’.

I have selected Ryanair (Ryanair Holdings plc) to concentrate my research on. Ryanair is a low-fare scheduled passenger airline serving short-haul, point-to-point routes between Ireland, the UK and Continental Europe.

1.2 Reason for choosing the topic

When I was doing financial reporting and financial performance as part of my ACCA studies, I wanted to gain experience of analyzing financial performance of companies from both present and potential shareholders’ view and hence it is my favourite topic.

We can evaluate internal and external performance of an organization by means of financial analysis. A proper analysis of business and financial performance helps to identify success and failure of organizational policies, risks and rewards of skilled management and also assess the wealth of its shareholders.

Since I have come to the UK for my studies, I have come to know about low-cost airlines like Ryanair and EasyJet. I have read about them in news papers and I have always been interested to know how they keep their costs so low in comparison to other airlines. Therefore, I have chosen Ryanair, which is one of the major low cost airlines and I would like to find out how they guarantee low fare and no fuel surcharge in a time of high fuel price and economic recession by means of a financial and business analysis. A three year analysis on Ryanair is a great opportunity for me to know about a major airline and also apply my knowledge acquired through my ACCA studies to real life.

1.3 Objectives of the report

The main aim of my research is to analyze the business and financial performance of Ryanair by focusing on financial and non-financial performance such as financial management, business strategy, future prospects and ways of achieving its objectives in its competitive environment from a stakeholder point of view.

The objectives of the report are to assess:

1) How Ryanair manages its profit and other financial performance.
2) How Ryanair plans its business strategy and operates successfully in its competitive environment.
3) How Ryanair manages its cash flow efficiently.
4) How Ryanair satisfies its stakeholders by providing an adequate return and operate profitably on a going concern basis.

1.4 Research approach

After choosing my project topic and organization, I established a time schedule to complete my RAP on time. Then in order to gather necessary information, I started to read relevant news and searched different websites to collect data including company website for financial statements of last three years.

For financial performance analysis, ratios are the first point of interpreting financial statements and then to assess the financial performance of the company in depth. I read my ACCA text books to refresh my knowledge of ratio analysis and decided on the relevant ratios to consider for a meaningful financial performance analysis. In accordance to my academic knowledge, I have decided to calculate key ratios such as profitability, liquidity and other financial and investment ratios.

To analyze Ryanair’s business performance, I found that I have to focus on different operational performance measures that will indicate its foreseeable future operation within its competitive environment. For this purpose, a SWOT (Strengths, Weaknesses, Opportunities and Threats) and PESTEL (Political, Economical, Social, Technological, Environmental and Legal) analysis will be conducted to evaluate Ryanair’s strategic position

2. Information gathering

2.1 Sources used and reasons

Annual reports

The primary source of information for my report is audited annual reports of Ryanair from 2008 to 2010. I have collected the annual reports from the company website. The financial statements were the basis of calculating different ratios and indicated the company’s financial health. Besides the financial statements, the financial highlights and chairman’s reports included in the annual reports also gave me vital knowledge of Ryanair’s current position and future prospects. I have chosen easyJet to compare Ryanair against. easyJet is another well known low cost airline and a close competitor of Ryanair. I have downloaded easyJet’s annual reports for the same three years and used them to calculate the same ratios against which to measure Ryanair’s performance.

Analysts’ reports

To gather information about Ryanair and also on the airline industry in general, I have researched professional analysts’ reports from analysts’ websites. This information is normally used by shareholders and other users to make financial decisions and to gain knowledge about the company’s current and future prospects.

Textbooks and Magazines

To refresh my knowledge of ratios and analytical techniques, I read my ACCA F7 (Kaplan) and F9 (Kaplan) books. To refresh my knowledge of SWOT and PESTEL analysis, I read my ACCA P3 (Kaplan) book. I also read different articles from Student Accountant magazine published by ACCA which helped me a lot to conduct this research project properly.

Libraries

I also used British Library and The Idea Library which are very good sources of information. I read different newspaper articles and magazines to gather information which were very valuable for me to write this report.

2.2 Methods of information collection

As Ryanair is a listed company, its website contains important information for its stakeholders. I have collected most of the information from its website. I also visited libraries as discussed above. I also took advice from professional analysts about how to prepare my report and deliver it properly.

2.3 Constraint of information gathering

I faced the following limitations while collecting information for my report:

Primary research

To conduct this report, I have used publicly available information such as annual reports from company website. As I have already mentioned, my report would have benefited if I had access to more authenticated websites such as Bloomberg.

Time constraints

There was a time constraint due to the fixed deadline to submit this report. As a result I was not able to collect all the information that I wanted to collect and use in my report.

Access to resources

Reuters and Bloomberg are great sources of financial information. However, I did not have full access to them as they are available to companies on a subscription basis.

Ratio calculation

There are some ratios which can be calculated in different ways and as a result would give different results. For example, ROCE = EBIT / Capital employed. Now, capital employed can be calculated in the following two ways:

Capital employed = Total Assets (fixed assets + current assets) - current liabilities

Capital employed = total fixed assets + current assets - (current liabilities + long term liabilities + provisions)

Difference in currencies

Euro is the functional currency of Ryanair whereas easyJet uses Pound Sterling. To avoid conversion of numbers in the financial statements and to avoid exchange rate bias, I have used percentages and ratios to compare these two companies.

2.4 Ethical issues

I read the ethical guidance of OBU in details and took proper caution to acknowledge difference resources that I have used in the reference section of my report. I am an ACCA student and I completed my ethics module before starting to work on this research report. I am bound by ACCA ethical guidelines. I used different articles, books and magazines and websites to gather information for my report. I have acknowledged them properly to avoid taking others ideas as mine. I understand that this RAP is also a test my ethical behavior. This report is the result of my own work and I have not simply copied from others.

3. Accounting and business techniques

3.1 Accounting and business techniquesused

To analyze and interpret a company’s financial statements, ratio analysis is a useful and meaningful technique. In my report, to analyze Ryanair’s financial statements for last three years, I will use the following ratios:

Liquidity ratios – These ratios appraise short-term financial position the company. Liquidity is directly related to and reflects a company’s cash flow position and nature of its short term assets.

Profitability ratios – These ratios reflect a company’s ability to generate earning compared to its costs and works as a performance indicator if the company is doing well or not.

Financial ratios – These ratios are used to assess the degree of financial risks and measure the relation between different internal and external finance.

Investment ratios – These ratios are used to assess risks and rewards of shareholders’ investments.

For strategic evaluation, I will conduct SWOT (Strength, Weaknesses, Opportunities and Threats) and PESTEL (Political, Economic, Social, Technological, Environmental and Legal) analyses. SWOT analysis helps to assess internal strengths and weaknesses in terms of resources and capabilities, as well as opportunities and threats which are external to the organization such as industry environment. Though SWOT analysis gives us a good understanding of an organization, PESTEL analysis gives us a more detailed analysis of environment within a specific industry.

3.2 Constraint of accounting and business techniques

Accounting techniques

Difference in allocation of expenses: Different companies use different policies to allocate their expenses which may make it difficult to draw any comparison between them.

Difference in financing policies: Due to the attitude to risk, companies may use different financing policies and cost structure, which is related to return on investment and return to the shareholders.

Difference in accounting policies – Sometime companies use different accounting policies which may result in the comparison between them not being fully consistent and reliable. For an example, Ryanair uses an average depreciation of 20% on a straight-line basis for fixtures and fittings where as easyJet’s expected useful life for fixtures, fittings and equipment is three years or the length of the lease on property where the equipment is used.

Business techniques

Results obtained from SWOT analysis may prove less reliable as different internal and external factors proposed are not properly verified and discussed. Sometimes it depends on individual judgment as to the selection of strengths, weaknesses, opportunities and threats. They may not be fully appropriate. Moreover, SWOT analysis is mostly conducted on the immediate past situation of an organization which may not be very meaningful if there is a significant change in the organization’s environment is imminent.

(http://www.westga.edu/~bquest/2000/swot1.html)

4. Analysis and presentation

4.1 Company background

In 1985, Ryanair was set up by the Ryan family with a share capital of just £1, and a staff of 25. The company launched its first route in July with daily flights from Waterford in the southeast of Ireland to London Gatwick. Since then, the company has grown considerably and became one of Europe’s largest low-fare airlines.

In the current year, Ryanair expects to carry 73.5 million passengers across 27 countries. Ryanair has got a fleet of 250 new Boeing 737-800 aircraft with firm orders for a further 64 new aircraft (after accounting for planned disposals), which will be delivered over the next 2 years. Ryanair currently has a team of more than 8,000 people comprising over 25 different nationalities.

(http://www.ryanair.com/en/about)

In the financial year 2009-10, Ryanair’s adjusted net profit was €318.8million which was a 204% increase than the previous year. Ryanair also managed to reduce its average fare by 13% to €35. The company achieved these successes despite a difficult year due to economic downturn, rising fuel costs and airport charges.

4.2 Revenue analysis

Net Revenue 2008-10

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Between 2008 and 2010, Ryanair’s recorded sales revenue increased from €2713.82m to €2988.10m. However, between this three year period, sales growth gradually decreased from 8.4% in 2009 to only 1.5% in 2010. The increase in sales revenue came from a 14% increase in schedule passenger number. Ryanair was able to increase its passenger volume as it increased its investment in fleet by 28% in 2010 and lowered its average fare by 13% to €35. In the financial year 2009-10, Ryanair could not reach the sales growth rate like the previous year as there was a decline in passenger volume by 6% and others matters such as Icelandic ash disruptions and rising fuel costs also played a part. It is worth mentioning that even during this difficult period, Ryanair still did not charge any fuel surcharge to its passengers.

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Sources: Ryanair Annual Report 2008 - 2010 easyJet Annual Report 2008 - 2010

4.2.1 Geographical breakdown

Ryanair also organizes its operation by a geographic segment (as the UK and other European countries). In 2008, 2009 and 2010, revenue generated from the UK was €1021m (37.62% of total revenue), €954.6m (32.44% of total revenue) and €838.7m (28.06% of total revenue) respectively. The revenue from European countries were €1692.8m in 2008 (62.37% of total revenue), €1987.4m in 2009 (67.55% of total revenue) and €2149.4m in 2010 (71.93% of total revenue). These statistics goes with Ryanair’s strategy of expanding in Europe. In 2010, Ryanair opened 8 new bases in Europe.

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Source: Ryanair Annual Report 2010

4.2.2 Segmental breakdown

Ryanair’s revenue can be divided in two segments such as scheduled revenues and ancillary revenues. From 2008 to 2010, scheduled revenue increased from €2225.692m to €2324.5m although the percentage of revenue fell to 82.01% in 2008, 79.67% in 2009 and 77.8% in 2010. Ancillary revenue reached from €448.13m in 2008 to €663.6m in 2010 representing 22.2% of total revenue.

Ryanair’s ancillary revenue comes from sale of rail and bus tickets, hotel reservations, car hire, in flight sales, excess baggage charge etc.

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Source: Ryanair Annual Report 2010

4.3 Financial performance analysis

4.3.1 Gross profit margin

Gross Profit 2008-10

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In 2010, Ryanair’s gross profit went up by 116.4% in comparison to 2009 and gross profit margin (before depreciation and amortization) also increased to 26.18% which was 12.29% in the previous year. Between 2008 and 2009, Ryanair’s gross profit margin decreased from 27% to only 12.29% mainly due to an increase in the fuel price. Between this period, fuel price increased by 59% which accounted for 45% of the operating cost. However in 2010, Ryanair’s financial condition improved mainly due to a decrease in fuel cost by 29%. In 2010, fuel costs represented 35% of the total operating cost which was 45% before. It also resulted in an 8% decrease in operating expenses. The other main reasons were an increase in ancillary revenue by 11% and decrease in depreciation by 8%.

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