A ratio of 1.00 is normally considered for industry in general to be broadly sound. Any ratio falling substantially below this level indicates that the business may not be generating adequate cash to meet short-term obligations as they become due. (Morrell, 2007)
Current Ratio for AirAsia decreased from 1.63:1 to 1.09:1 in financial year ended 2008 making the airline less liquid, a comparison with Ryanair which had an increase from 1.58:1 to 1.84:1 in 2008. The decrease for AirAsia was largely due to a huge provision for the unwinding of the fuel hedges the company had entered into due to a speculation that oil prices would increase during the year, in a year of high fluctuations in oil prices, fuel prices by year end 2008 eventually fell. Also there was a huge increase in the amount of trade payables. The company did mention in its annual reports that fuel was being bought at the spot price, which follows the increase in the trade payables. Ryanair on the other hand maintains its own fuel hedges and foreign currency swaps during this period.
2009 saw the airline rebound to a ratio of 1.53:1 with an increase in Current Assets due to rebound of its cash equivalents, the airline was able to generate enough cash inflow from operating activities to cover its investments and repayments of its loans.
AirAsia received scheduled Aircrafts from Airbus for existing operations and also for AirAsia X in the 2007, 2008 and 2009. This has also been responsible for increases in current asset values over the 3 year period.
Although as compared to the industry average AirAsia is still considered to be in a healthy state, while it is less liquid than Ryanair across the 3 year period.
Quick Ratio
Removing the element of inventories which are considered to be very liquid, the liquidity of a company is further put to the test.
There are no rules or targets on the desirable level of this ratio. (Morrell, 2007)
Airlines industry is a service industry therefore, this accounts for the relatively small value of inventory. For AirAsia, it consists of spares and consumables (AirAsia, 2008).
Figure 2: Quick Ratios: AirAsia, Ryanair, and Industry
As shown in figure 2 above, the difference in the liquidity position of both airlines is negligible, as the deduction of the inventories deals almost no impact on AirAsia and none at all to Ryan Air.
Net Working Capital Ratio
This is a very good measure of a company's liquidity position. It shows the liquid assets remaining after deduction of liabilities as a percentage of its total assets. A negative working capital would mean the company is in distress and in a position to default on its short term liabilities. Generally, a higher net working capital ratio for a company means better a position of the company. A regressing ratio shows a worsening liquidity problem.
Figure 7: Net Working Capital: AirAsia vs. Ryanair
As shown above AirAsia is far less liquid than Ryanair, even in 2008 when both companies were making losses, the latter keeps improving its liquidity position, while AirAsia liquidity position fell more than 70% in 2008. Most of its assets are held as fixed assets and would be struggling to keep up with payments of current liabilities.
The raising of capital via share issue in 2009 was therefore imperative to keep afloat.
In 2009, the company stated that it had a cash - rich balance sheet in its analyst presentation in the 4th Quarter, to allay investors' fears. While it has recovered tremendously from 2008 levels and has almost matched 2007 levels, it is still highly illiquid compared to Ryanair
Operating Ratio:
The operating ratio is defined as operating revenue expressed as a percentage of operating expenditure; operating margin is an alternative expression that is similar to margin on sales. The operating ratio or margin gives an indication of management efficiency in controlling costs and increasing revenues (Morrell, 2007)
Figure 3: Operating Ratios: AirAsia, Ryanair.
Both companies had similar figures in 2007 and although revenues increased in 2008 for both companies, especially for AirAsia, as demand for Low Cost Carriers in the Asia Pacific region grew and the AirAsia's total guest carried grew by 20%,(AirAsia, 2008 and Ryanair, 2008) the impact of the economic condition and chiefly oil prices fuelled the decline in Operating profits. Both companies posted huge losses for 2008 (AirAsia, 2008 and Ryanair, 2008). For AirAsia fuel expenses made up 49% of total operating expenditure in 2007 and 42% in 2008, also importantly the loss suffered as a result of unwinding of interest rate swaps relating to term loans on aircraft leases due to uncertainties in the global economy, were reasons for the decline in 2008. For Ryanair, fuel expenses made up 36.1% and 43.8% of total operating expenditure in 2007, 2008 respectively. This was an uncontrollable factor affecting all concerned.
In 2009 however, AirAsia recovered with a high 72% increase in operating ratio while Ryanair pulled a moderate 20%, this was all due to the comparably stable price of oil. AirAsia's decision to unwind its fuel hedges and continue buying at spot price was a good strategic decision which has seen its ratio going up. Both made impressive profits, almost as good as 2007, in the year ended 2009 according to published financial statements as seen in Figure 4 below.
Figure 4: Company Profits: AirAsia, Ryanair
(Source: Company Financial reports)
Profitability
Profit Margin Ratio
AirAsia's profit margin went from 47% in 2007 to 17% in 2009 with losses in 2008, although there was an increase in Revenue levels as a result of increased passenger growth and ancillary income over the period and reduction in net income as compared to 2007 accounts as the airline began to slowly recover from the previous year's losses (AirAsia, 2009)
The trend in Ryanair was from 14% in 2007 with a marginal increase of 1% in 2009, also making losses in 2008 but clearly having a much better result in relation to recovery, as compared to AirAsia due to increases in expenses, but a total reversal from 2008 losses.
Figure 5: Profit Margin Ratio: AirAsia vs. Ryanair
Return on Capital Employed (ROCE)
This percentage gives an indication of how successful the group is in its investment of all the long-term capital under its management (Morrell, 2007).
Result for AirAsia is consistent in 2007 and 2009, 10% and 10% return on its capital employed respectively, with increases in the capital employed as a result in the issue of share capital issued to reduce the companies debt and to fund its working capital requirement, this is coupled with increases in Profit before interest and taxes(PBIT). In comparison to Ryanair, which made a return of 11% in 2007 and 8% in 2009, 2009 figure was due to a reduced PBIT and increased capital as compared to 2007 figures. Both made a negative return in 2008 due to the losses made.
Figure 6: ROCE: AirAsia vs. Ryanair
Return on Equity (ROE)
Return on equity is the net profit after interest and tax expressed as a percentage of shareholder's funds. The numerator is before deducting minority interests and the denominator includes the capital belonging to these interests. This percentage gives an idea of how successful the airline's management is in using the capital entrusted to it by the owners of the company, or equity shareholders. Target rates of return on equity are generally around 15 per cent (Morrell, 2007)
Figure 7: ROE: AirAsia vs. Ryanair
In 2007 AirAsia's return on shareholder's capital was 44%, which means for each Ringgit of capital invested by a shareholder there was a return of 44sen, this is impressive especially when compared to Ryanair which had 16%.
Both entities had a negative return in 2008 due to the economic meltdown.
In 2009, however, AirAsia had a ROE of 21% which was still better than Ryanair on the other hand, which had a return on equity of 13%. Profits were not as good as in 2007 for AirAsia, although there had been increases in ancillary income and volume of passengers carried had increase due to expansion of new and existing routes carried by AirAsia. There was an increase in depreciation charges due to increase in fleet size but lower interest costs from 2008 as the group had paid off a huge amount of borrowings as a result of the influx of cash from a share issue. The effect of all this was that the company was bottom heavy, pulling the ratio down.
In all, the group surpassed its goal of ROE of greater than or equal to 10% as stated in its financial statements of 2007 and better than target mentioned above.
Asset Utilization Ratio
This is a measure of how company assets were utilized in the generation of sales. Generally, the higher the ratio, the better the assets were put to use. This is particularly important in the case of AirAsia, to the expansion of routes and fleet the group is currently undergoing, incurring a lot of debts along the way.
Figure 8: Asset Utilisation Ratio: AirAsia vs. Ryanair
For AirAsia, sales were climbing year to year, so also were the assets at its disposal but as compared to Ryanair, AirAsia's assets were not used as efficiently to generate revenue as that of Ryanair, over the 3 year period as that of Ryanair, although both were increasing there capacity by acquiring new aircrafts. AirAsia had more assets than revenue generated over the years.
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Debt Ratios
Debt to Equity Ratio
A better measure of debt to equity should include all outside liabilities, rather than only long-term ones, and debts should be net of any cash and deposits shown as current assets. In this form it can also be called the solvency ratio. The lower the debt/equity or solvency ratio the greater the firm's capacity for borrowing more outside finance, due to the lower risk to potential lenders. Banks sometimes include a covenant or condition on loans requiring the debt/equity ratio to be kept below a certain ratio (say, 2:1) otherwise the borrower would be in default.( Morrell, 2007)
Debt/Equity
2007
2008
2009
AirAsia
1.87:1
4.83:1
2.96:1
Ryanair
0.94:1
0.98:1
1.06:1
Table 1: Debt/Equity Ratio: AirAsia vs. Ryanair
In 2007, AirAsia's ratio of 1.87 was low to the suggested 2:1, which could explain how it has been able to increase borrowings to support its expansion of routes and aircrafts, but the company is too highly geared in general terms which is 1:1, and when compared to Ryanair's 0.94:1. This is so due to AirAsia's replacement programme to face out its aircraft from Boeing 737 - 300 to the Airbus A320 - 200 due to cost and fuel efficiency (AirAsia, 2007). The airline was using a lot of debt in form of finance leases and loans to fund its replacement, and acquiring new aircrafts for AirAsia X.
In 2008, AirAsia's results got worse due to increases in amount of secured debt on the purchase of its A320s, a provision for liability of unwinding of derivatives relating to term loans on aircraft leases due to uncertainties in the global economy, and losses incurred during the year. Ryanair on the other hand despite the Global economic situation comparatively maintained its position. It started a share buy back programme in 2007 (Ryanair, 2008) which had been depleting its shareholder's equity in 2007 and 2008 which was responsible for the climb from 0.94: 1 in 2007 to 0.98: 1 in 2008.
In 2009 however, AirAsia reduced its gearing position buy raising equity finance and making profits which increase shareholders' equity. The purpose of the share issue as stated by the company, was to fund working capital requirements and also specifically reduce the gearing position of the company, this was the single largest concern of the investment community. (AirAsia, 2009) However, the company was still highly geared as compared to Ryanair whose gearing had increased to 1.06:1
Interest Cover
Interest cover is the profit before net interest payable and tax divided by net interest expenses, showing the ability of the airline to meet the interest payments on its debt. Without a clear margin of cover (well over 1.00), there will be little profit remaining for distribution to shareholders or ploughing back into the company. Banks and investors generally look for interest cover of at least 2.5:1; while an IATA industry capital needs study suggested that it should be not less than 1.5 (Morrell, 2007)
Interest cover
2007
2008
2009
AirAsia
4.36:1
-0.61:1
2.71:1
Ryanair
5.52:1
-0.38:1
8.86:1
Table 1: Interest Cover: AirAsia vs. Ryanair
Based on Bank and Investors, IATA AirAsia was doing very well as its interest cover was well above the average in 2007 and 2009, however there has been increases on interest expense due to AirAsia's continues to take on more debt to fund its expansion of routes and fleet. There was an increase of interest payments by 335%, this was later reduced in 2009 by the issue of shares, and as a result there was a reduction of 31% from 2008 to 2009.
In comparison to Ryanair, whose interest coverage climbed from 5.52:1 in 2007 to 8.86 in 2009, both had negative coverage due to the losses made in 2008. Ryanair on the other hand had increases in interest payments in 2007 to 2008 because it was also expanding its fleet, but had a sharp drop of 59% from 2008 to 2009. The company gave reasons in its 3rd quarter results that this was due to the impact of lower interest rates offset by the drawdown of debt to part finance the purchase of new aircraft.
Stock Market Ratios
Dividend Cover
Both companies did not declare or pay dividends in the 3 year period.
Earnings per Share (EPS)
Profit after tax attributed to the parent company shareholders (i.e. after allowing for minority interests) divided by the number of ordinary shares issued. The absolute value and growth in this ratio has traditionally been a key target for the management of quoted companies, and one of the most important benchmarks for investment analysts (Morrell, 2007)
Figure 4.1: AirAsia Group Vs Ryanair Group EPS
Both companies made losses in 2008, hence the negative earnings figure. AirAsia's earnings figures lower than 2007 figures which was RM0.29 to RM0.22 in 2009. This was because, although earnings were better than 2008, there was an increase in number of shares due to a share issue in 2009 which had a dilutive effect.
On the other hand, Ryanair went from €0.26 in 2007 to €0.25 in 2009, this was due to reduced earnings as compared to 2007, coupled with reducing number of shares from 2007 to 2009 by the share buy back exercise.
The Lack of growth can be attributed to the global economic recession which affected most industries, most especially the aviation industry.
Price Earnings (P/E) Ratio
This measures the relative worth of a share, its values the market's impression of the future worth of a company's shares.
The stock market is always looking ahead, and if earnings are expected to increase strongly over the next few years this will push up the share price and result in higher P/E ratios as measured against current or latest historical figures. (Morrell, 2007)
Figure: AirAsia Group Vs Ryanair Group P/E Ratio
As stated earlier, both companies had losses in 2008; therefore 2008 P/E results can not be compared with 2007 and 2009, however it is worthy of note that, although both companies made losses in 2008, Market values of Ryanair shares at the end of each reporting period kept on growing as seen in the table below. This is also in tandem with increases in Ryanair's P/E ratios after emerging from 2008 losses. While AirAsia shares kept falling.
Market Value/Share
2007
2008
2009
AirAsia (RM)
1.60
0.87
1.38
Ryanair (€)
2.80
2.89
3.30
Figure: Market values/shares at the end of reporting period
As a result, P/E ratio of AirAsia only rose marginally from 5.58 to 6.17, reflecting market confidence in AirAsia's wellbeing was not strong. On the other hand, Ryanair's P/E ratio grew from 10.84 in 2007 to 13.43 in 2009.
Market Share Performance
AirAsia operates out of its main base in Kuala Lumpur International Airport (KLIA), from its Low Cost Carrier Terminal (LCCT) where most of its flights take up from, making Malaysian operations its main source of revenue generation. The group also has bases in Thailand and Indonesia, which is the secondary market, the group has grown in Indonesia and market share at Thailand is still comparatively low.
Figure: AirAsia Market Share (Harbison and McDermott, 2009)
As seen in the chart above, AirAsia's market share has been on a steady climb in Malaysia, despite competition from the national carrier, a Full Cost Service airline, Malaysian Airlines sharing the same domestic market in Malaysia. At KLIA, also the base of Malaysian Airlines, AirAsia's Market share as also grown steadily, as seen in the chart below.
Over the years AirAsia has been increasing in number of passenger's flown most especially in the Malaysian Market, where it's toughest competition lies. In the 2nd quarter of 2009 AirAsia stated that it was the largest customer at KLIA (AirAsia, 2009).
Figure: Market Share at KLIA (AirAsia, 2009)
Balanced Score Card.
The need to link Financial and Non Financial Measures of performance and to identify key performance measures provided the impetus for the development of the balanced scorecard. (BPP, 2009)
The performance of AirAsia would be evaluated under the following headings:
Customer Perspective
As the aviation is a service industry, it is worth evaluating the performance of AirAsia in terms of its quality of service its service to customers.
AirAsia' s Company vision is to be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares. (AirAsia, 2007)
In 2007, the airline was awarded Skytrax Best Low Cost Airline in Asia. This award was also won in 2009. (AirAsia, 2010)
This award was based on customer reviews on their experiences flying AirAsia. Sources included online customer survey, business research group interviews, customer telephone interview, selected passenger interviews. In 2008, it was ranked by customers as the first in Southeast Asia, Asia and worldwide. (Skytrax, 2009)
The Airline's has continued to increase routes travelled and change its fleet to Airbus A320 which it stated was more fuel efficient in its annual reports of 2008. The company further went on to say it would help pass savings to their customers.
In 2008 the company launched an On Time Guarantee programme which was designed to compensate passenger inconvenienced by a substantial delay due to the airline's fault at no additional cost, the compensation was a RM200 gift voucher. (AirAsia 2008) There was no data to actually ascertain how many people benefitted from this, but in the annual reports of 2008 the airline posted a 85% on time performance for 2007, 88% for 2008 and stated that they were aiming for 92% in 2009, as it the time of this report, data on 2009 on time performance was not available. This was aimed to boost retention rates and raise brand equity (AirAsia 2008)
Innovation and Learning
In a bid to remain competitive AirAsia as constantly churned different programmes, aimed at customers for revenue generation and customer growth and retention.
In 2007 alone the more than 3 programmes, among which was Xpress Boarding, by the 3 quarter it had generated RM1.5 million sales it since launch in may of 2007 (Asia, 2007) As AirAsia does not assign seats, the programme offered customers to board first to choose a seat of your liking at a token price, and at no cost to the airline. The airline recorded a take-up rate of 3%, with a potential to triple during festive & holiday season (Asia 2007)
More programmes were launched in 2008, among which was the On Time Guarantee. In 2009, after complaints of AirAsia's free seating policy, it started a seat allocation programme at a price to customers; this strategy was a borrowed from AirAsia X.
AirAsia has been able to secure more market share than its closest rival in Malaysia, Malaysia Airlines as shown above previously, despite the fact that the company also has been using aggressive marketing strategies by also introducing products to boost its performance.
Internal Operations
AirAsia has a zero tolerance to unsafe practices and strive for zero accidents through proper training, work practices, risk management and adherence to safety regulations at all times, setting goals beyond the best and reinforcing high quality performance standards and achieving excellence through implementing best practices.(AirAsia, 2008)
As at the date of this report, there have not been official reports of any accidents with AirAsia in the 2007, 2008 and 2009.
AirAsia operates an in - house academy to train its employee, it is describe in the 2008 annual reports as a comprehensive learning centre that caters to all the necessary training needs for all the employees of the Group - which includes pilots, engineers, crew, ramp support and guest services front-line, it goes on to state that the curriculum undertaken conforms to international standards, Trainees undergo rigorous safety training in line with AirAsia's commitment to high safety standards Staff training.
Another AirAsia goal is to embrace technology to reduce cost. This is being achieved by allowing technology savvy customers to book online via a mobile portal, check themselves in via self check-in machines in some terminals, a transaction takes not more than two minutes to complete, web check-in facility, reducing the need for extra man power.
The AirAsia X Connection
The impact of the long haul flights on the financial performance of AirAsia in 2007 and 2008 was quite difficult to judge because the results of AirAsia X were not disclosed in company reports.
The group has a 16% stake in AirAsia X. Other shareholders include,
AirAsia X was set up as an independent company for long - haul flights. The group has a 5 year option to purchase up to 30% of AirAsia X's shares at par value. It can only be assumed that the group distanced itself from AirAsia X, to reduce its exposure to the risks of floating an untested model; long - haul flights with the LCC model.
In the first quarter 2008 press release, AirAsia stated that AirAsia X is providing long haul connectivity that was previously unavailable to the group and the group has seen tremendous benefit of greater passenger flow through on the group network.
By first quarter of 2009, the 80% of AirAsia X's passengers used AirAsia for connecting flights and by the fourth quarter, AirAsia X had flown over 380,000 passengers since the beginning of the year, with over RM280 million in revenue and produced profits in 2009 (AirAsia, 2009)
Air travel demands fluctuate between peak and weak periods in Malaysia, the primary market. AirAsia X covers other regions such as China and the Northern hemisphere, Australia, whose peak periods coincide with Malaysia's weak periods (AirAsia, 2009) This would provide a boost to group performance during these periods and create more brand awareness for the group.
Conclusion
Passengers Carried
2007
2008
2009
AirAsia (RM)
9.7
11.8
14.2
% Change
-
21.6
20.3
The Asia-Pacific aviation industry faced challenging period over 2007 - 2009, AirAsia also suffered losses, but was able to emerge from the crisis, still managing to increase capacity, routes travelled, and passenger numbers, Market share (both at home and in secondary markets) and remain competitive.
The Launch of AirAsia X is still in the early stages, it is still early to make a more informative evaluation on the effects on group performance. But so far, based on the little information available, it is improving in terms of quarterly performance, as regards to passenger numbers, and revenue, where little can be said in terms of cost control, finance costs.
Areas of Financial strength of the group include cost control as Operating ratio increased dramatically in 2009 from an abysmally low level in 2008; outlook on the company in market terms is quite promising, PE ratio has recovered, although EPS has dropped.
But care need to be taken in respect of liquidity, although the company has a large cash balance at the end of 2009, based on net working capital ratio, this cash balance is low compared to short - term working capital needs.
The company also is highly in geared and this shows no sign of reducing as it still has a lot of firm orders on new airplanes. Interest cover has dropped quite a bit but still at a comfortable 2.71:1 A large part of debt is secured, creditors may lay charge to company assets if interest payments are not met, in the event profit falls.
The company has clearly shown clear signs of recovery; attention should however be paid to weak areas pointed out above.
