Using an AIRLINE for T8

sir can u guide me in net profit interpretation?

Can limitations be included in part 3 as well? Limitations like why im not using quick ratios or why i had difficulty finding ratios only relevant to airlines etc or why im using something different to elaborate a point about my airline? Should all these limitations be included in part two; limitations of information gathering or i can include limitations in my conclusions in part 3?

I've been much much better than this situation :p

@trephena, When considering airline at group level for financial and business analysis, should the focus be only on passenger segment and subsidiary airlines or whole group which include segments like cargo, catering, maintenance etc as well? Thank you.

@trephena and @ehsan Can limitations be included in part 3 as well? Limitations like why im not using quick ratios or why i had difficulty finding ratios only relevant to airlines etc or why im using something different to elaborate a point about my airline? Should all these limitations be included in part two; limitations of information gathering or i can include limitations in my conclusions in part 3?

@trephena I am doing T8 with Emirates Airline as the main company. Can you provide some insight into the areas I need to focus on when doing SWOT? Particularly for weakness, since not much data seems to be available... Thanks

@saan - You could start your financial analysis with a discussion of the main company's revenue and include segmental analysis here. For the rest of the analysis you should compare total operating profits etc of the two groups. It may be appropriate then to comment that a particular segment has contributed significantly to this but normally apart from freight, other segments such as catering and maintenance contribute relatively insignificantly to profit as the last two are not the main business.

@mayanisa - I am not sure I totally follow what you are asking here... The limitations section in Part 2 is about limitations in data gathering and the accuracy of the data and information used. It may be appropriate to bring in limitations in Part 3 where you feel that your comparisons may not be totally valid because of differing accounting treatments used by the companies or the way they group expenses in their financial statements. I am concerned about your statement "i had difficulty finding ratios only relevant to airlines etc". This is not what I have said. To reiterate briefly: it is pointless calculating the Quick ratio for ANY SERVICE industry as there is no tangible product and therefore relatively little stock. KPIs for airlines (load factors,and ASKs etc. ) are very useful as the industry uses these themselves as measures of performance. Asset turnover and other such efficiency ratios are useful too especially where an airline buys its aircraft rather than leases them. Various aspects of the current ratio (parables/ receivables) are not so clear cut as in some industries because of the complex operating environment as I explain on the forum topic 15 (and why an airline is not a good choice for this topic) therefore you could explain that it is a limitation in producing reliable meaningful ratios for these and why. Otherwise most of the ratio analysis approach is similar to any other company although the emphasis is different because of the capital intensity i.e. most industries (apart from oil and gas and those involved in heavy capital infrastructure projects) are not faced with such regular high outlays on fixed assets and therefore how an airline manages its funding strategies and the balance of loan capital, equity and cashflows is very important.

@gbtech - The SWOT is all about what a company does well and what (compared with other companies operating in the same sector) it does poorly on. Weaknesses are always the difficulty because normally a well managed company will seek to minimise its weaknesses! Read through the CEO/ directors reports (if necessary going back a few years) and these may give you a clue (I used this approach for example when doing my article on how to evaluate properly when I Iooked at the Laura Ashley CEO report). It would be legitimate to cite previous weaknesses that the company has overcome here -provided there were specific examples (the markers would not just accept that a company has/ had no strategic weaknesses). And remember that it is strategies that are being looked at -what wrong decisions / moves has the company taken and what opportunities has it missed?

Thanks @trephena

@trephena Got it. Thank you very much.

Hi, If an airline carries more passengers than previous year and its Passenger Yield is higher than last year, but its revenue is lower than last year, does this mean that the airline has flown fewer distance than last time? Thanks

Not necessarily although it is a possibility - is it net revenue however that is lower? As that would mean the operating margin was lower than previously i.e. the. costs were higher. You might have to examine the figures in more detail. Higher Passenger yield usually means more revenue per passenger and if there were more passengers it is odd total revenue is lower - what are the load factors like and the breakdown of revenue/ costs per available seat per kilometre (ASK)? Airlines try to maximise load factors as most of the costs of a flight are fixed and only a small proportion is variable,

@trephena said: Not necessarily although it is a possibility - is it net revenue however that is lower? As that would mean the operating margin was lower than previously i.e. the. costs were higher. You might have to examine the figures in more detail. Higher Passenger yield usually means more revenue per passenger and if there were more passengers it is odd total revenue is lower - what are the load factors like and the breakdown of revenue/ costs per available seat per kilometre (ASK)? Airlines try to maximise load factors as most of the costs of a flight are fixed and only a small proportion is variable,

You are correct. The load factor was also lower, and I managed to locate the distance flown. It was indeed lower due to cancellation of long-haul US routes. Thanks Trephena

Hi, Finished with the business analysis and now I am doing my ratio analysis, i have 3 questions to ask and I would be very grateful if someone help me. 1) As i did my Excel file calculations, I start commenting in my company's graphs and then i will do the benchmarking. Is it good to go with this method? 2) The graphs need to be referenced as Appendix X and then write a caption below every graph like 'Figure 1: Operating and Net Profit Margin'? It is a lot of extra words for every graph but still need to do that? 3) In every graph i start with one line with an explanation of every ratio and then combine it with the company. Is it ok to do it like that? Thank you very much, OpenTuition.

anyone to respond me please for my previous post! Thanks again.

Hi Trephena, would be awesome if I can have your advice on this. Marker's comments: "I feel that you have used the annual reports extensively and taken information that has been redrafted. As a result your analysis becomes more of a commentary than an evaluation. For topic 8 you are expected to analyse the financial performance by exploring profitability ratios, liquidity ratios and efficiency ratios in addition to investment ratios that you look at. This ratio analysis then needs to be fully benchmarked to Cathay Pacific. This ratio analysis should replace the discussion of the financials that you currently have. You may be able to use some of this information to help to explain relevant ratios but you will also have to look wider than the financial statements to take into account the economic, legal, political and social environment that the airlines operate in, as well as the impact of corporate strategy and industry effects. Make more connections between the financial analysis and the business analysis." I have tried very hard not to give the statement of the obvious, but I am not sure what it means "my analysis becomes more of a commentary than an evaluation" The marker wants me to link my financial analysis and business analysis where I am using Ratios and PEST model. I am not sure how does Ratios should link to 'Political & Social Factors' for an Airline. Was marker saying that my analysis on company's Net Profit movement (Depreciation, Staff Cost and Fuel Cost) was useless information and should be replaced by more financial ratio and link to PEST ? Ratio in my failed report: ROE, P/E, Gearing, Quick I'm getting more stressful because the next submission period 34 would intrude my preparation for my P4 paper in June and I am still waiting for P2 result to be released in coming April. If I failed P2 again, might need to take 2 papers in June, that comes into this resubmission along with my job. Oh gosh! Thanks!

@Chandon - Normally the financial statements are in the Investor Relations section of a company's website. With private companies they are not obliged to make all of their information public and this can be an issue. However regarding EPS it would be fine to have this for just one company while explaining why you don't have it for the other. You do however need some comparable information for most of your analysis. Apply your models and as you introduce the ratio analysis: start with a discussion of revenue and the importance of the KPIs (load factor followed by the 'ASK' [mile] ratios). You should then be able to link these and the factors from the models to profitability (however you need to find proper reasons why there have been increases/decreases in passenger numbers etc.). Aircraft utilisation is also a measure of efficiency and can be discussed alongside asset utilisation if the company buys its own aircraft

@zhixiang85 - sorry you weren't successful this time. Unfortunately it sounds like your deeper research was lacking. The company's financial performance depends on the strategies it has employed and the decisions taken by its management (these are usually connected with the PEST and SWOT factors). So you need to focus less on what has changed and more on why i.e. the real factors - not statements that staff costs, fuel and depreciation etc. have risen but WHAT has caused them to change. I suggest you read through this whole thread as I have suggested how to approach this topic and I just don't have the time to repeat myself. Also see the article on evaluation if you haven't read it as already.

@Steven - I trust you have read through this thread? If so you will know that this topic is not just about calculating a rato and producing graphs. 1. In principle start each section with a good clear graph which includes both companies' ratios for the 3 years. Then you only have to pick up on what is important. Do NOT just repeat what the graph shows as this is a waste of words and assumes the marker is blind so just get on with job of explaining the real significaces of the trends. See my article on Evaluation and Analysis (parts 1 & 2) on our homepage www.opentuition.com/obu 2. Please read the Open Tuition Ultimate Guide to Referencing your RAP also on our homepage www.opentuition.com/obu as this is covered there. 3. Most of this has either been covered in the Evaluation article or earlier in this thread so please read through as you are also likely to find a lot if other useful information. You may start with a brief definition of each ratio before or straight after the graph each time.

Hi there Trephena, I am in the midst of writing my report and whilst I have finished my business models, I am having a bit of trouble writing the financial bit. I have been trying to 1. relate the financial data back to the models used and 2. focus on WHY they changed and not by how much. Whilst reviewing the revenue section, I noticed that the airline's passenger revenue declined whilst passenger carried increased. What possible factors would cause this? I have been leaning in the direction of their increased competition in the North Atlantic market, hence reduced ticket prices as a competitive strategy. Any thoughts? Any help or tips would be greatly appreciated. P.S Huge thank you for the tip of using the chairman's report before the writing the business analysis. Found some great points in there!

Glad you found the Chairman's report useful - the companies'communications like this give real insight and take away the guesswork! Also pleased you are looking at the bigger picture and relating the models as this is key to passing (read some recent feedback on the OBU marker-speak topic forum where a student was advised by the marker this was why they had failed because they hadn't done this) We had a similar question to yours above -see gbtech I can't give a definitive answer but suggest areas to look at for clues! And competition and having to cut margins on highly competitive routes as you suggest could well be the answer. If there is segmental analysis in the report this might help with this depending on how detailed it is.

As always thank you Trephena. Read the related post, now off to hunt down a segmental analysis and any route specific information available!

@ Trephena, I need a help. I used the Indonesian airline, Garuda, however I'm surprised that it used the USD. While for the comparator company, I used Cathay Pacific, which used the HKD. In this case, is it necessary to translate the HKD from Cathay Pacific into the USD ?

Absolutely not! The whole point about ratios is that even things up. If you translated currencies you are introducing differences that could be based just on your arbitrarily chosen method and this is completely wrong. For example with revenue it is percentage year on year growth you should be comparing not the raw revenue amounts. The only time you cannot do a straight comparison when there are different currencies is in some of the investor ratios e.g. dividend yield per share and earnings per share as the share bases may be expressed in different currencies too, however it is the general trends you need to consider.

@ Trephena Thank you very much for your guidance... I really appreciate it.

other than yield, are the cost available seat kilometres require to convert into same currency? or just compare the ratio?

@ Trephena I am on part 3 of my report but I cannot seem to know where to start. What should be the sequence of the analysis in part 3? And how many annexures do we have to make and is there a proforma/format that we have to follow for them e.g. the excel file for the ratios - is that compulsory or optional? Thanks,

@wynneleong - No, no, no!!!! NEVER translate currencies -the whole point of ratios is that they create a level playing field by producing comparable percentages. Once you start messing around with currency conversions you could introduce some arbitrary differences that are purely made by such conversion. It makes a complete nonsense of dividend per share for example where a company pays a the dividend in its own currency and the value of the share is expressed in that same currency - changing these to a different currency makes no sense at all. There may be a few figures that you just have to accept that you have to compare at face value between the two companies i.e. you won't have a ratio and total revenue (as opposed to revenue per ASK) is one of them but most will be fine. So no need to translate and ASK figures.

@arun - start with the application of the models as these factors should be integrated with the financial analysis. Markers are now insistent that students show how management strategic decisions are based on the SWOT and PESTLE factors. Financial performance is linked to these decisions and demonstrates whether the strategic decisions were good or bad. It is much easier to interpret financial results if you have an appreciation of the strategic direction management were taking (and have actually read the CEO and directors'reports