The topic that I have chosen for my research and analysis project is topic no. 8 which is "the business and financial performance of an organisation over a three years period". As far as the organisation is concerned, I have chosen the British Airways which is a major international airline and is based in United Kingdom. British Airways recently had tied up with Iberia and American Airline to co-operate commercially on flights between Europe and North America after more than a decade's talk. This according to BA's chief executive Willies Walsh will boost the Airlines' footing as compared with their rivals. This will increase the flight destinations of each of the airlines and will give them 20 percent share of the US-Europe market. Airlines expect to have increased $7bn in joint revenues (The Financial Times: October 6 2010).
British Airways is one of the world's leading global premium airlines which is based in United Kingdom with a significant presence at Heathrow, Gatwick and London City. At Heathrow airport the airline has launched a new terminal 5 which aims to give better customer satisfaction. In its last financial year ending 31st March 2010 it carried nearly 32 million passengers. The company has got the largest fleet of aircraft in the whole Europe.
(British Airways, 2010).
Reasons for choosing the topic
The topic is about the financial and business performance of organization. As for the topic like these ratios can be made good use of to show the changes over time in the performance of an airline which can then be used by the investor to make the investment decisions about the company. These changes can be the result of the policies of the company to pursue its chosen strategy; they could be due to the alignment of the company with the industry norms. For the topic like this, it is very useful to compare the company with its past years performance and the industry average which in this case is IATA. The data from the competitor could also be used to understand the comparative performance of the company. I intend to use PEST analysis, Ratio analysis and SWOT analysis to assess the performance of the company. The analysis will reveal the performance of the British Airways management.
As I will observe the annual reports of the company, I will be able to understand the organisational structure and the strategies used by the company. This will also help me to apply the theoretical knowledge of the models studied in my ACCA essential exams.
Aims and Objestives of the report and research approach
Perform a PEST analysis of the company which will enable us to appreciate the Political, Economic, Social and Technological factors which affect the company. This is a macro environmental approach and will also provide a reason for the different strategies that have been adopted by the company under the influence of these factors.
Asses the profitability of the company over a number of years and also in comparison to the other competitors. This will help to understand the changes in the cost structure with a resultant affect on profitability. This may be due to the operational factors for e.g. more costly landing slots than before or it could be due to the recession hit on the premium airline company. Increase of the fuel prices could also be the reason for this.
Examine the liquidity of the company. The liquidity is the ability of the company to pay off its creditors. If the company is not able to pay off its creditors then it is more likely to face problems in near future.
Analyse the financial gearing of the company. Gearing is a ratio of debt to equity of the company. It is an important measure for an airline company as it uses lease agreement to buy most of their aircrafts so financial gearing must be low to get the best lease term possible in the market.
To compare the financial and business performance of the British Airways with that of industry average which in this case is IATA. Through this comparison we would be able to distinguish between the difficulties faced by the British Airways alone and that of the difficulties faced by the overall industry.
To observe the company in the investor's point of view i.e. calculating Price earnings ratio and the earning yields.
To assess the company's cash flow position. It is very important for a company to have available cash when it's needed as company could be profitable but low on cash. If this is the case then company could be facing future problems or it can be a going concern.
To form a chart to show the trend in past performance of the company and the comparison with other main airlines. This will specifically emphasize on the profitability, liquidity, gearing and investor ratios over a period of time in form of charts.
Information gathering and Accounting/Business techniques
Source of Information and Reasons for their choice
The list of sources used for the information purposes is as follows:
Annual Reports of the British Airways for three years 2008, 2009 and 2010 have been used which can easily be accessed from the British Airways investor relation website. Annual reports are used because they are prioritised by the investor for their decisions and they give the true and fair view as they are audited by the independent auditors. As stated the topic chosen is the business and financial performance of the company over the past three years time period so the annual reports could be quiet helpful as they not only provide the financial data but also gives understanding of strategic and business decisions followed by the company in that time frame and gives us awareness of what are the company's future objectives. The published annual report is widely used by stakeholders and credit control companies when authorising any loan or lease agreement. This could be easily accessed through the website and every public limited company is bound to publish its annual report by law which gives true and fair view of the company.(IAS 1)needs amendments reference with books...As the annual reports are of huge volume so only the relevant data has been extracted out and presented in the Appendix 2 to this report.
Figures from International Air Transport Association (IATA) have been used. This is commonly available and airline management can use them to assess their own financial situation by comparing it with the industry average. The industry average is used to assess the performance of British Airways. Again in this case the whole bulky annual report are not attached but only the figures concerned are taken out of the annual reports and shown in Appendix 1 to this report.
Different financial newspapers and magazines such as The Financial Times and The Economist are used to provide the reference and extra knowledge to this report. Some books are also concerned.
Financial data of the competitors of British Airways have also been used to assess the financial performance. The data relating to the competitors has been extracted from their annual reports and is at the Appendix 3 to this report. The flow charts are also used at the appropriate places in this report to make it easier to understand and compare.
Methods used to collect the information
The methods used to gather the information are
The annual reports of the British Airways have been taken from British Airways investor relation website. These reports are available for everyone as there is a requirement of Public Limited Company to publish these audited reports annually so that the investors and users both can make decisions easily by looking at the performance of the company. The information taken from these reports have been briefed at the Appendix 2 to this report. It has also been referenced appropriately in the references section of this report.
The information related to the industry average has been taken from International Air Transport Association (IATA) website. This is also publicly available for the users.
I have also conducted some interviews with the local members of society and have asked about their perception towards the British Airways company. Although these and interviews have not been quoted in this report but the response from these interviews have been very useful for the perception of a company. This also helped to carefully monitor the environmental and ethical issues relating to the company. Having poor ethical stances may mean that some of the passengers don't want to travel through this airline with a resultant factor of decrease in revenue, as now people are more concerned with corporate social responsibility, ethical and environmental issues.
To access different books in relation to this project, I have used the British Library, local library and LSE library. These proved to be very useful but this opportunity is only available to those living near to London.
To access different journals and newspapers such as The Financial Times and The Economist, I have registered with Financial Times, economist and The times to get any updates relating to the report. I have also been visiting the business section of BBC website frequently to keep myself updated in business world and hence it proved to give me better picture of the macro environmental issues related to the British Airways.
I have visited the websites of two major airlines Singapore Airlines and Emirates Airlines to make a comparison with the British Airways as a competitor.
I have also used my ACCA course books to understand and apply the knowledge of different business models that affect the companies. Especially those studied in the paper P3 (Business Analysis) proved to be quiet useful.
Limitations of information gathering
The nature of the topic of this report meant that most of the data used in this report is of secondary in nature. The reasons are that the financial and business performance of the organisation along with the annual reports used to compare the performance of the company is available on their respected website. Due to these reasons it was not difficult to gather the data. The annual report of the competitor is also available publicly on the internet. The annual reports available on internet also discuss the key business and performance issues faced by the airline in their annual period. This also made it easier to understand the competitive advantage which the airline has compared to its competitor. All the information used in the report is referenced appropriately in the reference section of the report.
Accounting / business techniques used and their limitations
The following are the limitations along with the brief description of the accounting / business techniques and models used in the report.
PEST Analysis
This model is used by the company to consider its macro environmental factors that affects the business. This also helps us to assess the growth perspective of the company in the current environment in which they are operating. These factors are Political, Economic, Social and Technological. It is a structured approach for analysing the external environment of the company. A company can understand the trends, anticipate the changes, forecast its own future and measure the impact of its strategies by analysing the external environment. The external environment can be an obstacle in the success of a company and aid in the future of many companies. (CIM Coursebook 06/07 Marketing Planning By Karen Beamish, Ruth Ashford)
SWOT Analysis
This tool can be used to analyse the competitive position of the organisation (Bacon, 1999). SWOT stands for Strength, Weaknesses, opportunities and Threats. These could also be interlinked with each other as user of this model should examine the strategies that use strength to make use of its opportunities and avoid threats. In this way we can say that internal strategy should be strong enough to make use of opportunities and avoid threats. According to this model user should take advantage of the opportunities by overcoming of avoiding weaknesses. Strength and weaknesses could be defined as internal factors so it can be considered as a sort of internal audit. Similarly opportunities and threats could be defined as external factors for the organisation. SWOT analysis can therefore be termed as internal and external scan of an organisation (Cowley, and Domb, 1997). The effectiveness of the SWOT analysis is dependent upon the user of the model and the quality of information available as well. If the user is not competent enough to identify the opportunities and threats posed by the macro environment then the decision that results from the application of models is not likely to be good as well.
Ratio Analysis
Ratio analysis uses different rations to assess the profitability, liquidity and financial gearing of a company. Ratios can also be calculated to assess the suitability of a company for different investors. Usually the ratios are calculated to compare the company's performance of this year to the last to evaluate the differences in the performance and effectiveness of management policies. It is also possible to calculate the ratios of two competitors to compare the performance over a period of time as the environmental conditions for both the competitors are almost the same. So this could be assumed that the ratios will give us the correct and quiet realistic comparison.
But ratio analysis also has its limitations. According to Seigel and Shim (2006), there are many limitations to ratio analysis. Different companies have different accounting policies for e.g. in the case of valuation of assets, some companies revalue assets on yearly basis others value at their historic cost so there could be differentiation created as there is a choice for the accounting policy to follow. Also in case of the industry average that is IATA, they only use the approximation. So this may mean that the ratio analysis will not show the true and fair picture of the comparison between the two companies.
