Financial Performance of EasyJet

Introduction

EasyJet was established by Sir Stelios Haji-Ioannou in 1995. He and family hold the majority shares of the company in Easyjet PLC. The headquarters for the company are located in Luton Airport. The company bases its operation on low cost and manages this by elimination of unnecessary costs and other forms of inefficiencies that are common features of the traditional airlines. The company has managed to expand through acquisition through buying interests in companies such as the Swiss Charter, TEA Basel AG, and the GB Airways.

The company is guided by a simple vision to attain the stature as the Europe’s preferred short-haul airline, offering market-leading returns thereby making travel easy and affordable. The whole workforce of EasyJet is focused towards achieving this. On this critical outline, the company has made great leaps but with still more milestones to be achieved.

The company is able to maintain its focus to achieving its goals by maintaining a strong and distinct value in an innovative way. The culture of the company maintains a flat hierarchy that has no unnecessary layers of management. The company utilizes a team approach as a means of delivery for the all on board or in the office. This helps in attaining a major goal of keeping costs and maintains the value of simplicity. The mode of dressing is maintained as casual with no strict dressing code. The working places have no offices thereby maintaining an open culture which helps people work together and share their experiences while supporting each other (EasyJet, 2017).

The goals of Easyjet are guided on developing strategy that focuses on creating strong positions in Europe’s leading airports. This sees the company aim to fly people between airports with optimized frequency. It is within the company’s goals to beat the leading competitor’s airlines which include the legacy airlines and the charter carriers. To attain this goal, easyJet maintains a structural cost advantage relative to these airlines thereby aiming to offer more affordable fares for the clients. The company strives to attain this goal on cost advantage by maintaining a favorable aircraft configuration that enables it to increase the capacity of seats for every aircraft. The company aims to attain higher load factor and aircraft utilization through following its point-point model. The company further strives to reduce ownership and maintenance costs by maintaining younger fleet and advantaged fleet.

The central aim of the company is to drive growth and returns for its shareholders.  To attain this, the company stipulates its goals through six strategic pillars. The company strives to create strong positions for the one and two network, develop a lean cost advantage, maintain excellent customer and operational relations, maintain digital data, increase levels of revenue, and maintain the best people. The company hits its market through customer and digital proposition. One category of clients targeted in the market includes the business passengers. This category of passengers has been the basis for the growth of revenue. The company created more investment in this segment of the market to improve means of reaching out and interacting with these corporate customers. There has been an increase in the number of clients from this market segment by 6% to hit a level of 12.5 million. One way of expanding its tentacles in this market segment is through entering into contracts with corporate. In the last financial year, there was a 25% increase in the number of corporate agreements.

The other segment in the EasyJet market is the Global Distribution Systems. This has experienced growth and has helped increase the level of revenue by channeling movement from web booking to GDS. This is attained through the links with the travel management partners. There has been an expansion in the GDS agreements with partners which have included Amadeus, Sabre and Travelport (easyJet, 2017).

EasyJet conducts the business in the European short-haul aviation market. In this market, the company has managed to record a 25% growth over a time period of 10 years. The company focuses its operations in Western and Northern Europe and operates in a network of primary airports to take advantage of the affluent markets characterized with populations known to have high propensity to travel (easyJet, 2017, p. 8).

Ratio Analysis

Valuation (Market ratios)

P/E Current

9.43

This ratio is appealing to potential investors who views the high P/E ratio stocks as attractive and can thus purchase it shares. EasyJet has a favorable P/E ratio making attractive investors thereby giving it an advantage in the market.

Price to Book Ratio

1.47

This ratio is highly relevant in conducting an analysis of a company by making a comparison between the stick’s market value and the book value. A lower P/B ratio may be a sign of an undervalued stock. This ratio shows the value the market players consider relative to the company’s equity comparative to its book value of equity. For easyJet, the ratio of 1.47 is a likely indication of the market players having faith with the company’s future cash flow

Price to Cash Flow Ratio

6.52

This ratio considers the company’s stock price in comparison to its revenue. This ratio indicates the value attached on each dollar from sales revenue of a company. A low ratio may be an indication of a possible undervaluation.

Enterprise Value to EBITDA

5.34

An enterprise multiple is a necessary ratio used to determine the value of a company. It considers the company as a potential acquirer and in so doing considers the debt of the company. The ratio is relevant to indicate whether the company is undervalued or overvalued. The ratio is highly relevant for takeover potential firms as it includes debt in the determination of enterprise value.

Enterprise Value to Sales

0.77

Liquidity

Current Ratio= current assets/ current liabilities

0.92

This ratio offers a comparison between the levels of the very liquid assets and compares it with the liabilities almost approaching maturity. This ratio is a representation of the ability of the firm to meet the obligation payable in a time frame less than a year. The ratio of EasyJet is below one which implies that the company is likely to experience some shortcomings in meeting the obligations becoming due within a year.

Quick Ratio (Acid-test ratio) = current assets- (inventories + prepayments)/ Current liabilities

0.92

This ratio is acquired through dividing total current liabilities by excluding the stock from the current assets. The elimination of the stock helps in determining the company’s fluid liquidity as stock may at times be not easily converted to cash. The company is thus not suitable placed to meet its short-term financial obligations.

Cash Ratio = cash/current liabilities

0.79

This ratio only considers the most liquid assets being cash and its equivalents as it is the easiest asset that can be used to repay the liabilities. This ratio indicates that the company is not within the safe margin to cater for its short term obligations falling due within a year.

Profitability

Gross Margin= gross margin/net sales 0.901/4.67

19.30

This ratio indicates the results of the firm’s basic pricing decisions and its material costs. In this sense, EasyJet has a high margin which is an indication of a stable margin over time. This stable margin is a likely indication of higher expected profitability level.

Operating Margin = operating income (EBIT)/ net sales 0.495/4.67

10.73

This ratio establishes the relationship between the operating income and the level of sale revenue that the company makes. It indicates how a company is able to keep its operating expenses at bay and achieve higher margin for the operating profit.

Pretax Margin

10.60

This margin aims to examine the relationship between sales and management controllable costs before factoring in interest, taxes, and non-operational expenses. A high margin is an indication of the level of stability of the company.

Return on Assets = net income/ total assets 0.427/5.51

8.26

This ratio investigate the level at which the company makes use of its assets to generate return. For EasyJet company a ratio of 9.15 is a sign that the assets of the company are offering quite a high return and can therefore be considered as productive and well-managed (Bajkowski, 1999).

Return on Equity= EBIT/capital employed0.495/2.71

17.21

This ratio indicates the level at which the stockholders of the firm have acquired earnings from their investments in the company. This ratio is highly influenced by level of debt as indicated in the balance sheet.

Return on Total Capital

13.73

Return on Invested Capital

14.36

Capital Structure

Total Debt to Total Equity =Total Liabilities /shareholder Equity

27.88

This ration determines the proportion of the debt finance in comparison to capital that the company has employed. easyJet has a ratio of 27.88% which indicates that the company is not highly geared. It makes use of owner’s capital as opposed to the debt.

Total Debt to Total Capital

21.80

This is a financial ratio that is useful in accounting for the portion of the non-owner supplied funds as compared to the owner’s contribution to the company. a company is said to be highly geared where the debt equity ratio is higher than 100%. EasyJet can thus be said to operating within safe limit.

Total Debt to Total Assets

13.73

This ratio determines the percentage of assets financed by all types of debts that an organization holds. Higher percentage levels and greater the potential diversifications reflects a greater possibility of default.

Long-Term Debt to Equity

24.48

Long-Term Debt to Total Capital

19.15

This is a favorable measure for determining financial leverage of a firm. A high ratio is an indication of high risk for the company. While easyJet has a ratio of 24.48, which is not necessary very high but makes it vulnerable to financial risks.

Conclusion

The performance of the easyJet at airports where the company serves as number one or two carrier is in line with the strategy geared towards improving the market share. easyJet has been experiencing tremendous improvements in this sector through an increase in the carrying capacity of the company. The company has experienced decreases in the revenue per seat which was associated to factors such as terrorism action and increased competition in the industry.

The company can be said to possess a strong balance sheet balance sheet backed up by the confidence of the board in ensuring the success of the business.  The board approved an increase of the dividend payout from 40% to 50% to offer a final dividend of 54.8 pence.  The liquidity of the company has been found to be slightly above the buffer necessary to cover peak unearned revenue. The return on capital employed that seeks to determine the normal operating profits after deducting tax comparing this against the capital employed in the business.  2016 was marked with a decrease on the level of ROCE. It can be noted that the decrease was enhanced by the reduced levels of profits due to huge capital investments on the acquisition of twenty aircraft.

easyJet is known to utilize its strengths derived from unparalleled network, well-known brand, low-cost model, concentrating on revenue growth, disciplined use of capital and a strong balance sheet. The company is said to achieve this by carrying out a low-cost European point to point airline where the position in the market is attained through low fares and maintaining operational efficiency. In the intra-European market, the company is known to concentrate on the primary airports tapping the high GDP catchment areas. The company is well known for its strong capital base bearing capitalization of four billion pounds and a net cash of 213 pounds (easyJet plc, 2016, p. 4). This puts easyJet among the strongest airlines globally in terms of credit ratings and therefore a worth competitor to be aware of.

References

Bajkowski, J. (1999). Fiancial Ratio Analysis: Putting the Number to Work. AAII Journal.

Campbell, J., & Shriller, R. (1998). Valuation Ratios and the Long-Run Stock Market Outook. Federal Reserve System.

easyJet plc. (2016). Investing in our Strengths. easyJet plc.

easyJet plc. (2017). Our Culture, Vision & Values. Retrieved from https://careers.easyjet.com/why-easyjet/culture-vision-and-value/

Peavler, R. (2017). What are Market Value Ratios and How are they Used?