Jessica Toogood BA Tourism Management

Management Accounting Assignment 1

Brief: To produce a report on the viability of a client investing her funds into
British Airways and an overview of what an annual report is.

An introduction to British Airways.

“The UKs largest international scheduled airline, flying to over 300 destinations at
convenient times, to the best located airports.”
(Source:
www.britishairways.com/cms/global/microsites/ba_reports/pdfs/BA_Report_2007_08
.pdf)

British Airways, an airline known to the nation as Britain’s largest scheduled airline.
The Airline is based on the grounds of the world’s most popular international airport,
London Heathrow. The ease of accessibility proves to be extremely beneficial to the
business traveller working to tight schedules, and also meeting the needs of the leisure
traveller, particularly those with younger children or travelling in large groups. The
evidential experience and convenience of this airline are major attributes to its
continued success since it first evolved in 1919. Since May 2005, the chief executive
of the company is Willie Walsh, working alongside the chairman (Martin Broughton)
and chief financial officer, (Keith Williams). British Airways fly world wide to more
than 300 destinations and in 2007/08, it carried more than 33 million passengers. It
has currently got 245 aircrafts in service, which most recently accounted to a revenue
of £8.7 billion.

British Airways- an evaluation of the importance of an annual report.

When selecting a company in which to invest shares, it is important to undertake the

relevant research and be able to understand the companies accounting history. To
include an analysis of the profit and loss account, balance sheet and cash flow
statement. These are the key documents in which we can retrieve data and review a
full breakdown of the company’s accounts. Within an organisation, these three items
are often the key to failure or success. They are of huge importance and if used to
their full advantage and monitored correctly a company can use the accounts to
analyse which areas of their business need to be addressed and which areas can be
maximised on. These accounts are useful in measuring performance history and future
predictions. However sometimes by simply scanning through a list of accounts we are
not receiving an accurate insight of the company’s true success. By merely
monitoring these account listings it is very difficult to accurately compare past figures
and also in comparing with other company’s. Therefore within larger companies in
which shareholders are involved a system of ratio analysis is enforced. Ratios analysis
enables us to interpret the company’s accounts, making it easy to closely study the
performance of the company and compare it with that of another and of previous
year’s performance. When comparing the same ratios of different financial periods,
trends in company progression or failure will become apparent, allowing us to predict
future performance. Ratios act as performance indicators, highlighting essential
evidence to the potential investor.
A Ratio analysis of British Airways.

Here is an analysis of nine ratios which I retrieved from British Airways

accounts. I will use these to assess a number of different financial factors within
the company and make prior year comparisons. This process is essential in order
to track the success of a company.

Profitability Ratios: Show how able the company is at generating profit on a long
term basis.

The formula:
Gross Profit Margin- Gross Profit/Sales *100=X%
When we talk about the gross profit within a business we are referring to the profit
left over after all costs of sales are taken away from the original sale figure.
E.G. Sales-Cost of Sales= Gross Profit
Therefore the Gross Profit Margin, which is worked out using the formula above,
indicates the overall profit a company is making on each product or service sold after
all sales expenses are taken away.

British Airways Gross Profit Margin Ratios Since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Gross Profit Margin 8.67 7.30
(%)

Although the most recent Gross Profit figures have not yet been issued it is still
possible to see that the Gross profit margin is increasing. This suggests that the
company is forever improving on the efficiency of its labour and material costs during
the production process.

It is a common trend that retailers generally have a much higher Gross profit ratio
then international airlines (Debenhams-14.99% & 19.47%). This is due to the nature
and diversities of these two separate industries. Airlines work with very high raw
material costs, and much higher wages then that of a retailer. Airlines are highly
reliant on the use of advanced technology and highly trained staff; this inevitably
brings down their gross profit margins. In comparison, retailers are known for cheap
labour and are able to buy stock in bulk made from materials bought in bulk

The formula:
Net Profit Margin- Profit before Interest and Tax/Sales *100 = x%
OR
Net Profit/Turnover * 100

When working out the Net Profit Margin of a company, there are two formulas used;
one used to work out the net profit and the other to work out the profit before interest
and tax. The net profit margin, unlike the gross profit margin gives an indication of
how much the company makes from every £1 generated, with all expenses and
overheads taken into account.
British Airways Net Profit Margin Ratios Since 2004
Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Net Profit Margin 10.09 7.20 7.28 5.31 3.04

By studying the net profit and gross profit margins of British Airways we are able to
see exactly how efficiently they are controlling their expenses ensuring they are
receiving maximum profits from every product and service sold. From looking at
these ratios it is possible to see that since 2004 there has been a 7.05 % increase in the
amount of net profit British Airways make from every £1 generated.
This suggests that the company is forever improving on the efficiency of its labour
and material costs during the production process. The fact that there is an increasing
trend in British Airways Gross Profit Margin means that they are for ever maximising
on their received profit from every sale.

In this case the British airways (7.20% & 7.28%), have a higher net margin
percentage then the retailer Debenhams (6.38% & 3.64%). This gives an insight to the
extremely high administration fees involved with retailers, where as airlines work on
paying the minimum interests and taxes possible.

Both the net and gross profit margins of British Airways have increased since 2004.

Formula:
Return on Total Capital Employed=
Profit before Interest and Tax/ Total Capital Employed * 100=X%

The ROCE, is very important within an organisation. It allows businesses to work out
exactly how much money has been invested in order to succeed in making a profit.
The total profit made is directly linked to the investment of shareholders and long
term loans known as The Total Capital Employed. The ROCE is simply a percentage
which indicates exactly how much money the company has earned based on this
funding.

British Airways Return on Capital Employed Ratios Since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
ROCE (%) 11.21 7.87 7.09 4.97 2.52

From looking at these results it is possible to see that although the ROCE has
increased in the last 5 years British Airways is still only receiving 11.21% profit from
the investment of its shareholders. However this is still a good result considering the
size and nature of its business. Generally speaking the ROCE of international airlines
is always very low when compared with other industries, such as discount airlines,
restaurants, and suppliers. However compared with Debenhams British Airways is
performing exceptionally and in 2007 they both achieved are very similar result with
Debenhams just slightly lower at 7.68% compared with B.A 7.87%. However
Debenhams has only recently received this increase and was receiving a much lower
return on its Capital Employed in the past.

Efficiency Ratios: A presentation of how efficiently assets are utilised within the
business.
The Formula:
Stock Turnover- Cost of Sales/ Average Stock= X No. of Times

It is of great importance that a company manages its stock correctly, ensuring that the
right amount (not too much or too little) stock is available to meet demand. Primarily,
in terms of stock, the lower the investment the better. Stocking should be regularly
assessed and adjusted to meet the increase or decrease in demand. By measuring stock
Turnover we are able to monitor the number of times the companies stock is sold
during a fixed time period. The findings of a stock turnover are always analysed in
terms of the average no. of days that stock has been kept within the organisation.

British Airways Stock Turnover Ratios Since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Stock Turnover 78.15 111.74 102.59 93.01 99.47

The stock turnover results for British Airways show that between 2004 and 2007 their
stock turnover was averaging around 101.07 days. The days in which all stock was
being sold out by were very much the same, with only a very slight increase.
However, most recently in 2008, the stock turnover has dropped to 78.15 days. This is
a very positive move towards higher profit margins for British airways which will
inevitably appear very attractive to potential investors. To meet the needs of this
increased demand, British Airways must increase its stocking levels and comply with
the increase in turnover. The decrease in stock turnover means that less money is
being tied up in un sold stock, and therefore more money is available for other areas
of improvements within the airline.

In comparison to these results it is possible to see the great diversity between

industries. Debenhams stock turnover in 2007 was 7.25 and 8.22 in 2006. Not only is
the stock turnover for Debenhams extremely low compared with British Airways, but
the company has also experienced a decrease. In comparison with another airline
Thomas Cook PLC (2007- 344.50), British Airways stock turnover seems very low.

The Formula:
Total Net Asset Turnover- Sales/Total Net Assets= X no. of times

This formula is used to work out how much turnover is generated from every £1 of
assets within the company. In other words it is a comparison of the link between
turnover and asset usage, and showing how hard the fixed assets are working. This
gives us a clear insight into how effective the company are at using all resources.

British Airways Total Net Asset Turnover ratios since 2004.

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Net Asset Turnover 1.11 1.09 0.97 0.94 0.83

The results show a positive correlation between assets and turnover. We can see that
there has been a 0.28 increase since 2004. Although this is only a small increase it still
suggests that British Airways are continuously taking into account the efficiency of
company asset usage. The most recent calculation tells us that British Airways are
receiving a turnover which is 1.11 times bigger then total assets.
When compared with Debenhams The net asset turnover for B.A 2006/07 was slightly
lower. Debenhams was producing a net asset turnover of 1.20% in 2007. In contrast
Thomas Cook produced a net asset turnover of 2.06, thereby it could be suggested that
in comparison with British Airways, Thomas Cook is working far more efficiently
within the airline industry.
1

The Formula:
Debtors Collection- Debtors/Sales *365 days = X no. of days
Sometimes the credit sales figure is not available; in this case the total sales figure is
used. Where possible the average debtors figure should be used, the ratio must then
be expressed in months or average working days.

The Debtors Collection Ratio relates to the amount of time it takes debtors to pay for
credit sales. This ratio can be used to an organisations advantage, allowing them to
continuously measure the effectiveness of the debt collection routine which has been
enforced. This method of analysis will highlight the efficiency of the debtors chasing
their sales credits due; any flaws in the process can then easily be identified and
improved. This ratio is used to distinguish an affiliation between the debtor and the
collector, highlighting the rate at which customers are repaying their invoices.

British Airways Debtors Collection Ratios since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Debtors Collection 24.44 28.11 29.36 32.00 32.64

The debt collection accounts for British Airways are clearly telling us that the
organisation has got successful debt collection practices enforced. Evidently, British
Airways are continuously monitoring their debtor’s payment dates and time periods,
thereby keeping in control of all the money they are owed, and improving practices
where possible for continued improvements. In the last five years, there has been a
positive decline in the number of days it has taken their debtors to pay the money they
owe. This will only reflect positively on the organisation. The longer a debt is left on
the surface unpaid the more likely it is too go bad.

Although it seems that British Airways have decreased the number of days it takes
them to collect debtors payments, they are no where near performing to the efficiency
of Debenhams, who in 2006, were collecting their debts within 4.60 days, which
slightly increased in 2007 to 5.51 days. Thomas Cook are also proving to have better
debt collection procedures enforced, collecting their debts within 11.71 days.

The Formula:
Creditors Payment- Creditors/ Cost of Sales*365 days= X no. of days

This ratio follows the same structure as the debtor’s collection ratio. This ratio tells
the company exactly how many days it takes them to pay their suppliers (creditors).
Although it is a necessity of the company to keep in control of its creditor payments,
in this case the payment is within the company’s full control, they are the ones
making the payment, not receiving it. Consequently it is not as mandatory for a
company to be as conscious of this. However, evidently it is always more beneficial to
the company, to pay off their creditors as soon as possible. This will allow them to
have a clearer insight into how much money they have left to spend. If a particular
organisation is continuously taking a long time to pay its creditors this could indicate
that it is struggling to break even and meet payments, which can often affect the
willingness of supplies to be involved in the company.

British Airways Creditors Payment Ratios since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Creditors Payment 27.02 31.08 32.23 41.91 40.56

These ratios suggest that British Airways are gradually becoming more efficient in
paying their creditors. Since 2004, British Airways have decreased the number of
days in which it takes them to pay their creditors by 13.54 days. This will display a
positive image to suppliers and will make them more enthusiastic to do business with
them.

In this comparison it is obvious that British Airways may not be as efficient in

collecting their debts, but they are however out performing Debenhams and Thomas
Cook when it comes to making creditor payments. Debenhams were taking 51.71
days in 2007, to pay off their creditors and Thomas Cook was taking 37.42 days.

Solvency Ratio- These ratios provide information to businesses and suppliers, based
on whether the company has substantial cash or cash equivalent assets to maintain its
usual business practices.

The Formula:
Current Ratio- Current Asset/ Current Liabilities

This ratio gives us an insight into the relationship between the proportions of current
assets to current liabilities. The outcome of this study is very much dependant on the
nature of the business and the characteristics of its current assets and liabilities;
however the minimum acceptable is a ratio of 1:1. The current ratio analysis is an
excellent method of financial analysis within a business. If the company has a positive
ratio, such as 2:1, this will suggest that the business is succeeding, and has adequate
current assets to cover all current debts with enough assets left over, used as a safety
barrier to cover any unexpected losses.

British Airways Current Ratios, since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Current Ratio 0.97 0.95 1.07 0.95 0.92

These ratios are often dropping slightly below 1, which gives off bad signals,
suggesting low levels of liquidity to shareholders. However as explained below this
may be due to British Airways having high levels of stock.

In comparison with Debenhams, who are under performing with a ratio of 0.65 in
2007, British Airways are more consistent in covering its debts and thereby has
enough assets to cover its liabilities. In contrast Debenhams will be struggling to
obtain payments with enough assets left over for other expenditures. This is reflected
on their high creditors return turn over days. Thomas Cook is also under performing
with a current ratio of 0.62 in 2007.
The Formula:
Acid Test Ratio- Current Assets Less Stock/ Current Liabilities

The acid test ratio tells us how effectively a firm are meeting payments in order to pay
off its liabilities. It is important within any business that the firm has enough assets to
meet its liabilities. In other words sufficient liquidity is essential in order to pay for
day to day bills and loans. The acid test can give us an even better insight into the
liquidity of a company, working in the exact same way as the current ratio, however
in this ratio stock is excluded from the current assets. The ideal ratio should be above
1, and ratio of 1.5 or 2 is desirable to ensure liabilities are easily being covered.
Companies with a ratio less then 1 are not effectively meeting their current liabilities
and will be viewed by shareholders with extreme caution. The acid test ratio is often
better then the simple current ratio, as it allows shareholders to analyse the company’s
liquidity excluding any over stock (stock which is left in the stockroom and not
selling). This will give a true insight of the firms “cash in the bank”, excluding less
liquid assets, such as stock.

British Airways Acid Test Ratios since 2004

Date 31/03/2008 31/03/2007 31/03/2006 31/03/2005 31/03/2004
Acid Test Ratio 0.94 0.93 1.04 0.93 0.90

A study of both the current ratios and acid test ratios for British Airways implies that
British Airways still have adequate liquidity levels when stock is not included. This
suggests that they have a certain amounts of profits and cash paid into the bank. From
this it is safe to say that British Airways are a liquid company but are not overly
performing.

When compared to other companies, such as Debenhams and Thomas Cook. British
Airways are greatly performing and show that they are unique in that they are the
most liquid orginiasation with a higher value of assets to liabilities. Debenhams acid
test ratio just reached 0.24 in 2007, and Thomas Cook only achieved a ratio of 0.61.

A comparison in ratios of that of an airline: British Airways plc and that of a

retailer: Debenhams plc.
COMPANY B. A COMPANY DEBENHAMS
Date 31/03/2007 31/03/2006 Date 31/03/2007 31/03/2006
Gross Gross 14.99 19.47
Profit Profit
Margin Margin
(%) (%)
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Net Profit 7.20 7.28 Net Profit 6.38 3.64
Margin Margin
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
ROCE 7.87 7.09 ROCE 7.68 4.44
(%) (%)
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Stock 111.74 102.59 Stock 7.25 8.22
Turnover Turnover
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Net Asset 1.09 0.97 Net Asset 1.20 1.22
Turnover Turnover
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Debtors 28.11 29.36 Debtors 5.51 4.60
Collection Collection
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Creditors 31.08 32.23 Creditors 51.71 42.51
Payment Payment
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Current 0.95 1.07 Current 0.65 0.66
Ratio Ratio
Date 31/03/2007 31/03/2006 Date 31/03/2008 31/03/2007
Acid Test 31.08 32.23 Acid Test 0.24 0.21
Ratio Ratio
I will now complete a full analysis into the performance of British Airways in the
last two years, based on its profitability, liquidity and efficiency.

Despite the many obstacles that have ultimately caused concern for the company and
its performance factor within the industry. A study of the company’s ratios for the last
2 years, clearly outline that the company is operating efficiently and that liquidity
levels have most definitely increased, ultimately positively impacting profitability
levels.

The main financial highlights which British Airways have proudly highlighted on its
annual report are: Revenue for 2007/2008 was £8,753 million, compared with £8,492
million in the previous year. Despite the negative impact of exchange rate movement
revenue was up by 3.1%. This was contributed by the rise in passenger revenue up by
3.8%, total passenger revenue of £7,541 million, and capacity up by 0.8%. A rise of
cargo services by 3.0 %, a revenue of 3616 million and other revenue increases.

In accordance to this, the profit before interest and tax also saw an increase with a
rise since 2007/08 a profit of £875 million, compared with £602 million in the
previous year. The last two years display that British airways have recently hit a net
profit margin of a high 10.09% in 2008, a 2.89% increase since 2007. There was also
an increase in the Group operating profit of £875 million in 2008/07, compared with
£602 million in the previous year. This is an indication of the companies continued
efforts in working efficiently towards controlling their expenses and overheads,
working hard to keep these costs to a minimum. This increase in profitability and
liquidity has projected a positive yield on the dividends paid by British Airways. Its
shareholders will ultimately benefit and in 2007/08 they received 59.0 pence group
earning per share, compared with 25.5 pence in the previous year. Current
shareholders involved with British airways will have benefited from a continued rise
in dividend payments, as the return on share holders funds has risen dramatically in
the last five years, from 10.37% to 29.11%, and a recent increase of 1.48%, from
27.63% in 2007 and 29.11% in 2008. This rise in share holder dividends has resulted
in a positive increase in the Return on Capital Employed of 3.34% from 7.87% in
2007 to a current ROCE of 11.21%. This means that the company is continuously
benefiting from the input of its shareholders and investors, which following the
pattern of studies are always escalating.

One of the biggest contributing factors to the success of British Airways success in
the last two years is its continued efforts into minimising operating expenditure.
British Airways expenditure on operations has decreased by 0.7 per cent compared to
last year, also a decrease in unit costs (total expenditure on operations per ATK) by
0.5%. The company also reduced its employee costs by 4.9% to £2,166 million,
reducing operating expenditures further. Taking into account the uncontrollably rapid
increases in fuel prices, and the huge amount of resources that were needed to
construct terminal 5 this is a surprisingly positive manifestation on how successfully
the company is at efficiently managing its operating expenditure. By keeping these
costs to a minimum all other areas where profitability is produced will benefit from
higher outcomes, in particular the net profit margins. The overall decrease in
operating expenditure, excluding fuel costs was 3.0%.

Through a study of British Airways efficiency ratios it is clear that it is very conscious
of operating to its maximum efficiency levels and making full use of its assets. Since
2007 British Airways have seen a 22.92 decrease, from 111.74 to 78.15 in the number
of days it takes them to sell all stock. Thus British Airways are efficiency working in
maximising this quick turnover and increased demand. British Airways are also
receiving an increased asset turn over of 11.1 times, up from 1.09 times, meaning that
they are always working to maximise on the usage of every asset in order to receive
higher turnovers for every 31 spent. Having decreased the amount of time it takes the
debtors to make payments, (from 28.11days to 24.44 days) and the time it takes the
company to pay off its creditors (from 31.08 days to 27.02 days), British Airways are
inevitably enjoying a very beneficial debtors collection and creditors payment
schedule. Thus giving a better insight into how much money the airline is left with for
other expenses.

When looking at the acid test ratio, British Airways are clearly operating to sufficient
liquidity levels. The most recent acid test ratio was 0.94 and the most recent current
ratio is 0.97, this is almost the suggested ratio of 1, which is seen as a liquid company,
this undoubtedly suggests that the company has substantial cash to cover its
immediate debts and is functioning sufficiently in terms of liquidity. Although British
Airways are not quite meeting the ideal ratio (!), they are very close and much closer
in comparison with Thomas Cook and Debenhams.

British Airways Dividend Policy and Movement in Share Price.

“British Airways recuperate dividend payments to their shareholders.”

Shareholders are great assets to a company they transfer shares into the company and
keep the business running to its optimum ability. The shareholders decision in the
amount it invests in the company will be directly related to the profitability and future
growth of the company in terms of the ROCE the dividend cover and dividend yield.
The shareholder may choose to study the history of these ratios and in doing so make
any future predictions and identify any trends. This year has been a very successful
one for British Airways, having achieved its target 10 % operating profit and in the
process of tackling its pension deficit; the company have finally re-introduced
dividend payments. The chairman of British Airways has recently announced in their
annual report that a dividend policy is to be re-instated. Shareholders of British
Airways will now receive a dividend of 5pence per share for the year ended March
31, 2008. The first dividend was paid on July 31, 2008 to all shareholders on the
register at the close of business on May 30, 2008. Debenhams are also paying a
dividend of 5p to their investors. This is an indication that British Airways are closely
competing with other major companies to receive shareholder growth. The ROCE
history for British Airways has seen a steady increase in recent years, and most
recently hit highs of 11.21%. This positive correlation in ROCE, suggests that British
Airways are successfully meeting the right targets and portraying efficient working
business procedures seeming to be attractive to new investors on a yearly basis. In
contrast Debenhams are receiving a lower ROCE of 7.69%.

There is no recent history of dividend payments and yield for British Airways as they
have made no dividend payments in the last 5 years. However this is the first year
where a dividend of 5 pence will be paid with a dividend yield available to each share
holder of 4.03%. In this instance Debanhams dividend yield is 6%, which could lead
shareholders to believe that their stock is under priced or that the company has
slumped in hard times. Often this is more attractive to the shareholder then a lower
dividend yield, such as British Airways, as this may suggest over priced stock.
However a low dividend yield could also be portrayed as a company which is very
efficient with stocking levels and turnover. For the long term share holder to British
Airways figure readings are chaotic, with the price plunging from over 750p back in
May 1997 to below 100p in March 2003, back up over 300p in February 2008, and
now (22 November 2008) a drop to 129.20p. This wavering set of results is a
reflection of the booming trend towards low cost airlines such as EasyJet and Ryanair,
Gulf Wars, Sars viruses, terrorist attacks in New York, the general threat of a global
recession and now relatively high oil prices. However these factors will affect all
industries so shareholders will have to take these into account and will be looking to
the future.

Share prices are currently at their lowest, so although investors will not be making a
high profit, this is the perfect time to buy with a hope that the company will re-launch
itself and thrive when economic activity is more stable. The more shareholders British
Airways can regain during this period of economic crisis, the more likely it is to
flourish after the credit crunch and recession period is through.

Through the eyes of the shareholder, the figures below could signal a positive future
and potentially successful grounds for a profitable investment. It is clear that British
Airways are receiving continued high revenue and profits, the earnings per share
have increased greatly in the last five years and are up by 22p since 2007 (37.20p up
to 59.20p), in comparison to Debenhams who’s earnings per share is only 9p. The
total earnings distributed to shareholders for the year was £680 million, a 131 per cent
increase on last year’s earnings per share of 25.5 pence. This increase is a result of the
higher profit before tax, and a one-off credit to the tax charge, arising from the
reduced corporation tax rate effective from April 1, 2008. However despite this
increase in EPS the Price Earning Ratio has dropped rapidly and has hit its lowest
since 2005 (P/E Ratio of 4). Debenhams have too received their lowest Price Earning
Ratio of 5.50. This suggests that the market have very little confidence in the future of
the share. However this is very much a reflection of the recent economic crisis, which
is affecting businesses world wide. As long as British Airways continues to meet its
target profits, and concentrates on looking after its existing shareholders through
continuing the recently re-instated dividend policy, market confidences should rise.

British Airways Dividend Figures (2004-2008)

Year Revenue Profit EPS P/E PEG EPS Total Dividend
Ending (m) Before (p) Ratio Growth Dividend Yield
Tax (%)
(m)
31/03/2008 8,753.0 883.0 59.2 4.00 0.10 59.00 5.00 2.10
0 0 0
31/03/2007 8,492.0 611.0 37.2 13.1 N/A (7.00) N/A N/A
0 0 0 0
31/03/2006 8,213.0 616.0 40.1 8.80 0.60 14.00 N/A N/A
0 0 0
31/03/2005 7,772.0 513.0 35.2 7.50 N/A N/A N/A N/A
0 0 0
31/03/2004 7,560.0 230.0 N/A N/A N/A N/A N/A N/A
0 0
(Source: http://www.h-l.co.uk/shares/security_research/sedol/0129057)

Debenhams Dividend Figures (2005-2008)

Year Revenue Profit EPS P/E PEG EPS Total Dividend
Ending (m) Before (p) Ratio Growth Dividend Yield
Tax (%)
(m)
31/03/2008 1,839.2 105.9 9.00 5.50 N/A (3.00) 3.00 6.00
0 0
31/03/2007 1,774.4 113.2 9.30 13.0 0.50 (26.00) 6.30 5.20
0 0 0
31/03/2006 1,707.7 62.10 7.40 25.4 N/A (72.00) 2.40 1.30
0 0
31/03/2005 1,608.7 87.60 26.2 N/A N/A N/A N/A N/A
0 0
(Source: http://www.h-l.co.uk/shares/security_research/sedol/B126KH9)

The top ten shareholders for British Airways are:

1. INVESCO HOLDING COMPANY LIMITED
2. INVESSCO, LTD. via its funds
3. STANDARD LIFE PLC
4. IBERIA LÍNEAS AÉREAS DE ESPAÑA S.A.
5. STANDARD LIFE INVESTMENTS LIMITED
6. STANDARD LIFE PLC via its funds
7. BARCLAYS PLC via its funds
8. BARCLAYS PLC
9. AMVESCAP LIMITED
10. AXA via its funds

British Airways Accounting Conventions

British airways follow strict accounting conventions in complying with IFRS

(International Financial Reporting Standards), as adopted by the EU (European
Union), these ensure that the businesses activities match their accounts and that
accounts are consistently updated and are truly accurate. British Airways PLC is a
public limited company and the company’s ordinary shares are traded on the London
Stock Exchange. Some examples of British Airways accounting practices are listed
below:

Basis of Presentation-This is the presentation of accounts and how they are to be

displayed in compliance with the recognition and measurement criteria of IFRS. This
involves reclassifying certain accounts to update them to the current period. All costs
have been prepared on a historical cost convention except or certain assets and
liabilities. All finance are presented in pounds sterling and all values are rounded to
the nearest million pounds (£m), except where indicated otherwise.

Basis of consolidation- This is a period in which accounts may be consolidated and

adjusted in compliance with British Airways accounting policies. This is beneficial to
the company and allows them to govern the financial and operating processes of the
entity.

Segmental Reporting- British airways use to formats of segmental reporting; The

Primary segment being business segmentation i.e. providing short haul flight routes
with up to date business facilities and optimum comfort on flights. This revenue from
this segment can be accounted through the study of this type of flyer, and the
secondary being Geographic segmentation. This is the process of analysing turnover
and allocating revenue from the area in which the sale was made.

Inventories-This include aircraft expenses, valued at the lower of costs and net
realisable values, costs being determined by the weighted average cost.

Taxation-All current tax, assets and liabilities must be measured at the amount
expected to be recovered from or paid to the taxation authorities, based on tax rates
and laws that are enacted from the balance sheet.
How greatly are the effects of recent events impacting the success of British
Airways?

“There is no doubt that the last year has been a turbulent one for our company. There
have been highlights and lowlights- some of our own making, others outside our
control.” (Chairman’s statement).

The recent economic crisis has undeniably put immense pressure on British Airways.
The last year has been considered one of the bleakest in record. This year has brought
some of the worst operating conditions for any organisation to survive successfully,
including the recent banking crisis and record fuel costs which rose by 6.4 per cent in
2007/08 to £2,055 million, compared with £1,931 million in the previous year. The
current economic state has caused a number of airlines to go out of business, which
has launched a battle between the airlines, striving on their customer service
satisfaction in order to receive continued custom through this difficult period.

Nine out of twenty British Airways top corporate customers are banks; this is a great
worry for the organisation and could be the reason for its drop in shareholder interest,
also impacted bookings due to the anxiety amongst the global stock markets.

The credit crunch is affecting all aspects of everyone’s lives. Airlines are indirectly
affected through a decline in consumer disposable income due to rises in food, gas,
and electricity costs, global redundancies and a rise in unemployment. This will
inevitably mean great changes in consumer trends. It has already been reported by
British Airways that Long haul premium traffic has declined and future bookings are
hugely affected by the recent financial difficulties. British Airways economy class
bookings have already fallen 4.1%, their focus is now on business class bookings,
which account for the majority of its profits. However the industry is seeing a trend in
advanced bookings for the summer of 2009, with customers taking advantage of the
advanced booking discounts being announced by airlines in a desperate stride towards
at least minimum revenue generation. The TNS research suggested that approximately
10 per cent of the British travelling population is to take advantage of advance
discounts by booking their 2009 summer holiday before the end of December.

British Airways has also had to overcome its own company crisis. Probably the
biggest fatality which hit the company this year (2008) was the disappointing launch
of terminal 5 in Heathrow airport. Computer log-on failures for baggage handlers and
delays at staff car parks caused complete mayhem for the airline. The airline has seen
a period of public embarrassment, as the media continued to announce that British
Airways, the world’s third biggest carrier is now known for the worst airline for lost
and delayed baggage. Many of the airlines rival carriers including BMI, the second-
biggest user of Heathrow after British Airways, and Virgin Atlantic Airways, the
third-biggest, all saw a rise in bookings because of the problems and mistakes made
by British Airways at Terminal 5, inevitably taking custom away from British
Airways. However British Airways did announce that they will do their up most to
regain their good reputation. An overview of the company’s performance figures for
the last year reflects very positively from this approach.
The International Air Transport Association has forecast that the sector will lose more
than £5bn over 2008 and 2009, with scores of airlines also expected to go bankrupt. In
order to minimise the impacts of this loss in revenue British Airways are working on
maximising their strengths such as first class carriers and are continuing with cost
initiatives in the attempt to minimise on negative impacts.

Conclusion, How worthy is British Airways for investment?

The last few years have clearly been a whirl wind of ups and downs for British
Airways. The company has definitely seen some major down falls, and some major
achievements. However the final outcome to date (2008) has proven to be the most
successful yet, with a general pattern of continued growth obtained from the ratio
analysis. In maximising on the finally established succession of terminal 5, the
company has big plans to maximise on operational performance and enhancing the
customer experience at its Heathrow base. Other future plans include the launch of a
new long haul aircraft, a resolution to the recent pension problems, to continue
running the new dividend payments, saving costs and also working on minimising
environmental impacts. Taking into account the growth of the company despite the
many factors standing in their way and this positive outlook for the future, I feel that
British Airways could potentially be an excellent investment. Share prices are at their
lowest and dividends have been re-instated so now could be an excellent chance of
investment. British Airways offers far more potential for investment then Debenhams,
with higher revenues and profits, it is also succeeding in a much higher Earning per
Share, EPS Growth, and dividend payments to the shareholder.

References

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British Airways., 2008.British Airways 2007/08 Annual Report and Accounts.

Available From:
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Centre For Aviation.,2008. British Airways 1H08/09 results: “incredibly difficult” -

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Guardian.,2008. Credit Crunch puts Squeezes on BA’s Transatlantic Business Class.
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Herald Tribune.,2008. British Airways' Terminal 5 problems at Heathrow spill over

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http://www.iht.com/articles/2008/03/30/business/30heathrow.php[Accessed 21
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