April 9, 2016 at 4:47 pm
The airline I’m using was loss-making in 2012 & 2013.
Should I still calculate the ratio analysis for ROCE, Net profit margin and EPS?April 12, 2016 at 12:43 am
darkangel5ParticipantApril 12, 2016 at 4:12 am
i have been working on Air canada and west jet until today when i saw your post. could you please explain why the two companies are not good comparators.
I have another question: which one of the basic or diluted EPS should i use for RAP purposes and what is the best approach to get market price say for 2014:
1) end of 2014?
2) average between the price at the beginning and at the end of the respective year?
thank you very much
NBApril 12, 2016 at 4:34 am
If i use operating margin and net margin and ignore gross profit margin because no wider information is available, is that okay? Also i’m not able to find inventory days or payable days ratios due to lack of information on these in the annual report. What alternative ratios should i use?April 12, 2016 at 5:52 am
@traphena, thank you for your reponse, however i have doubts about choosing easy jet and ryan air because both have different year ends and i don’t want to put myself in that situation.
Just like @nbobu asked, why aren’t Air Canada and Westjet good comparators? I see many websites comparing them and there is alot of comparative information available online. Why do you think they are not good companies?April 12, 2016 at 8:00 am
@coco78 – the fact that your company or its comparator has been making a loss is an important part of your analysis -what factors caused the loss? How has it turned this around? Answering these questions and including good graphs to show the trends is ESSENTIAL. The key here is producing good graphs and researching well to explain exactly what has gone on over the 3yearsApril 12, 2016 at 8:30 am
@nbobu – the purpose of a comparator is to assist your evaluation and analysis. The latter is about relating how a company has (or has not as the case may be) exploited strategic strengths, seized opportunities in its business environment and overcome weaknesses and how environmental factors (I.e. PESTLE factors) have influenced management decisions and direction. Differences in performance between the 2 come down mainly to this.
If you choose companies that operate in different markets then their strategies are going to be different as well as their business environments. I suspect if you look at Westjet their mission statement is to be the best low cost carrier in North America. I doubt very much that this is Air Canada’s mission statement (or that low cost even enters it). So straightaway the strategic direction of the 2 companies will be angled differently. If you look at their route maps then you will see Westjet has very few destinations outside N.America and the Caribbean whereas Air Canada operates globally. Their target markets, customers and business environments are not therefore the same.
It is entirely up to you which companies you choose but if your analysis revolves mainly about talking about ratios and you ignore strategic and environmental factors you will not fare very well at the hands of the marker. Comparing like with like makes it easier to avoid this pitfall.
You can of course continue with your two companies but in answer to the direct question of which to choose at the very beginning I think Ryanair and Easyjet are better comparator as they have more similar strategies, markets and business environments
With EPS again a comparison should be like with like. Share prices are normally available on the stock exchange where the company is listed.April 12, 2016 at 8:54 am
@MahinAdnan. You really need to read previous posts on here and apply things in context.
I have mentioned many times on our forums how you should tailor ratio analysis to the relevant industry and why it is totally pointless calculating any inventory ratios or trying to differentiate between the current ratio and quick ratio for any service industry (which by definition includes airlines).
I have now explained above the inherent problem of matching Westjet with Air Canada (two North American low cost carriers would be better) or for Air Canada another GLOBAL N. American airline.
Kellann achieved an A and chose Ryanair and Easyjet and thanked me for my advice in helping her achieve this. I am not saying an A for Westjet and Air Canada is not possible but it would be harder to do a good objective evaluation and valid comparison which is very necessary for a higher grade and a student is more likely to produce a RAP which markers describe as ‘death by numbers’ if their comparators are not well matched. This is because they can’t find any valid reasons to account for performance differences beyond looking at the financial statements.April 12, 2016 at 12:43 pm
Thank you very much Trephena. I looked at west jet mission St-t: it says by 2016 they want to be 5 most successful international airline in the world. They pride themselves in being canada preferred airline and put lots of focus on customer experience. Which is different from low cost carrier- they do not put so much focus on that. And it looks like they do aim at being international
Would United airline out of USA be a good comparator. Both fly global, based out of North America and are part of star alliance. Usd Currency impact will be limited only on air canada cost side and revenue pick up.
The ifrs vs Us gaap will differ- I will note that in limitations.
I would prefer to stay out of Europe as I live in NA and expect I will need to spend lots of time working on pestle if European airlines are chosen etc. I am kind of running out of time.
NbApril 12, 2016 at 1:19 pm
I get what you’re saying @trephena but again i wonder that how come Air Canada is compared everywhere with WestJet. if they are not competitors, why compare them? if you search, everywhere Air Canada is compared with WestJet and that makes me question why WestJet cannot be compared with Air Canada. Their mission statement is different which is “Connecting Canada and the World” but currently Air Canada is aiming at lowering their costs as their costs are increasing and their profit margins are not as high compared to other companies including WestJet. whereas WestJet is performing great and expanding their business slowly.April 12, 2016 at 1:55 pm
I was doing Ratio analysis for QANTAS and Virgin airways, problem is couldn’t find some figures for some ratios. Like, Cost of Sales figures is not given in FSs, so i cant calculate Gross profit accurately, similarly i cant calculate inventory days ratio and creditors days ratio coz cost of sales figures isn’t shown in FS. Although there is a long list of Expenditures mentioned there, still i don’t know exactly at this stage what accurately is included in cost of sales figure. Need some helpful suggestions.
Also do suggest if not these ratios, what other ratios can be used instead. Thanks!April 12, 2016 at 2:18 pm
April 12, 2016 at 2:23 pm
I also read that west jet has code sharing or interlink travel with 49 airlines.April 12, 2016 at 2:37 pm
GoodApril 12, 2016 at 4:53 pm
As far,as ratios go you need to include the sort of KPIs the industry uses – load factors, revenue/profit per passenger mile/kilometre and get away from the whole idea of inventory and a general ‘text-book approach -it just doesn’t work that way for airlines! Aircraft utilisation is another important one -no money is made by keeping aircraft on the ground.
Yes I can understand if you live in N.America you would prefer to avoid European airlines Westjet stating they are global is a bit wishful thinking given they only have a handful of destinations in Europe however it does emphasise how important links to transatlantic partner airlines are to their strategic ambitions- something you could focus on.
As for the comments about comparisons being constantly made between Air Canada and Westjet – that’s fine but bear in mind the people making them are not attempting a RAP! (And a RAP is not just about financial ratios and a comparison of increases/ decreases in them and just whether one is better than the other). A RAP as I have tried to point out is as much about business strategy and environment as it is about actual figures I.e. it is what the figures represent rather than what they mean in absolute terms.April 12, 2016 at 5:12 pm
so to quote @nobu again, would united airlines be okay to use with air canada?April 12, 2016 at 6:27 pm
Okay so @trephena i just read your comment that it’s “best off choosing a company from a different partner alliance.” United Airlines and Air Canada both are alliances of Star Alliance which is not okay. I know I have mostly been asking “typical questions” but i have not been able to search for them here so i ask them where ever you have replied latest. (sorry for that)
So my question is: Can you tell me which is a good comparator for Air Canada then? Can i use Lufthansa or United Airlines (which are both member of star alliance) as comparator for Air Canada or i should use KLM to compare it with Air Canada?
I was almost done with the project till your guidance moved me. So i don’t want to change my main company which is Air Canada. what should i do?April 13, 2016 at 1:10 am
If you have already done a lot of work then don’t abandon it – just ensure you have really used appropriate ratios (some of the usuals + the KPIs as mentioned) and ensure the focus is on strategies. Look at pronouncements made by the CEO and the directors’ reports and see how they have guided decisions and how those decisions link back to the SWOT & PESTLE
You are more likely to pass if your business and financial analyses are good and well researched even if the comparitor companies are not an ideal match than if you have perfectly matched companies but you don’t really explain what has influenced the strategic direction and the factors that have impacted on performance. So don’t panic – instead refocus on what is really important.
As for matching Air Canada another N. American airline with transatlantic routes but not in the same partner alliance would be appropriate ( but faling that one of the major European carriers would be fine). However as I said at the start don’t ditch Westjet if your work is nearing completion – rework the analysis and refocus iinsteadApril 13, 2016 at 6:49 am
Thank you so much for the vast response @trephena. Here’s a question: how do i know that i am covering all the aspects when i am doing the financial and business analysis? What extra details would i have to look into when performing my ratios and business analysis? From the appendices that i made, westjet is performing great. It has lower revenue and costs in comparison to air canada definately (where air canada has its amounts in millions and westjet in thousands) but it is growing and growing. It has good financial stability. Air Canada on the other hand, even being the best airline in north america is not performing so well. It’s growing but not at the pace westjet is growing. Nor does it give dividends to its shareholders. I read the director’s message of both the companies. Air canada’s director wants to focus on lowering costs to gain high revenues and westjet’s director wants to focus on achieving targets and growing internationally. From google research, westjet is a better airline than air canada and preffered more. So what details would i have to put in to make my project stand out? How do i have to change my strategic direction? Can you guide me? I’d be really greatful!April 13, 2016 at 8:27 am
You spend time on doing a really thorough PESTLE and SWOT. Read ALL the CEO and directors’ reports starting with the one for the year preceding the first year you are starting with as reports often set out future plans. Try to outline these plans (in your draft notes) and see how they have built up. You hopefully should see in part how the companies are building on strengths, overcoming weaknesses (essentially you are determining the SWOT factors) and identify what environmental factors have been particularly relevant. For example if you have read through this forum you will see I have mentioned the falling cost of oil in 2014 and 2015 (gradually rising now though) – which will have decreased costs considerably. When it comes to this cost (again as I have pointed out elsewhere) newer planes tend to be more fuel efficient but longer flights proportionally use less fuel per mile / kilometre flown (like long car drives are cheaper per mile than short trips).
Although the requirements and word count probably only allow for SWOT & PESTLE in depth analysis of the main company in your main report if you do a draft one for the comparator (much of the PESTLE should be the same) in your notes or as an appendix you will get a much better ‘feel’ overall for both companies operations. Then, when you do your written financial and ratio analysis you try to link the results to these models to really show how they have affected and influenced the performance and results. You will have to use references to support your statements so look at articles about your companies in the business press (Forbes, Huffington Post, New York Times etc.)
If you do this sort of research analysis and evaluation and refer to some relevant KPIs you will build up a ‘quality’ analysis (and you won’t feel the need to cite a bucketful of numbers either!) as you will really be starting to understand what your companies have been up to in the last 3 years, the opportunities they have seized and challenges encountered -one of which for Air Canada will be Westjet’s growth. Also for this pair consider how they have chosen to finance their fleets – lease or buy? How has this affected operating costs? – depreciation and lease payments and the amount of capital actually employed in the business, balance sheet strength, gearing etc.
As I said several posts back a text-book approach is not appropriate for this industry as it requires a more sensible foundation!April 13, 2016 at 9:39 am
Is it ok to compare BA and Lufthansa? and how much ratios are enough? and wha about using porters 5 forces than PESTEL? Can i use Porters five forces?April 13, 2016 at 11:06 am
@ricko – please read the posts on here from the beginning as I don’t have the time (or energy) to repeat everything (and also because a degree is about working somethings out for yourself)
Regular readers will know that I am not a great fan of Porter’s 5 Forces as a T8 model. If you read my posts on this page you will see how I have suggested that SWOT and PESTLE are very useful and usually lend themselves better when exploring and explaining the changes in the trends (not so obvious and easy to do with the P5Fs model).April 14, 2016 at 9:50 am
I am preparing to write on topic 8. My choice of companies are american and delta airlines. With regards to the Industry Classification Benchmark (ICB) requirement by oxford brookes, I do not know what this is all about or how to applies to my work.
JibaoApril 14, 2016 at 10:27 am
@jbao – please see this link helpfully supplied by the Learning Luminarium which was originally posted on our forum about choosing a topic for T8 &T 15 from P32 onwards
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