RESEARCH PROJECT
ANALYSIS OF EASYJET’S BUSINESS AND FINANCIAL PERFOMANCE FOR A PERIOD OF THREE YEARS
1.1 Topic selection
Out of all the topics provided, I chosen to base my research on topic no 8 “analysis of business and financial performance of a company over a period of three years. There are several reasons that influenced my choice. First, the entire ACCA course has so far given me strong theoretical Knowledge in the areas of accounting. As result I have been always eager for an opportunity to apply theoretical knowledge and skill gains through the course. This particular topic gave me such an opportunity and as always I had to take it. Secondly, as a person who is aspiring to assume management role in future especially in the area of accounting and finances, I am well aware that good analytical skills and ability to communicate are vital for success. The selected topic was the only one which I felt would allows me to enhance my analytical and communication even 1.2 Company selection
In order to explore Topic 8 as selected above, easyjet plc was chosen as the main company to be analyzed in this research. There are several reasons as to why easyjet was select to facilitate this research. First, easyjet has experienced significant growth since its inception. Currently, the company has grown to become the second largest low-cost airline in Europe. As a person who is interested in pursuing a career in the field of finance, I believe that analyzing and understanding the reasons behind easyjet growth will help widen my skills and knowledge on the key success factors for any company. Secondly, easyjet operate in the airline industry where competition is stiff. Despite the competition, easyjet has posted very positive results and as such it would be crucial to analyze and understand how the company has managed to stay on the growth path despite such high level of competition. Thirdly, easyjet is limited company which is listed in London stock exchange. One of the requirements of a listed company is that it should publish annual financial report so that public can have access to them (Financial reporting Council 2012). Therefore, in order to ensure I have the access to all information need to facilitate the research, I found easyjet to be a perfect company for me since significant amount of information needed to conduct the research could be easily gathered from its annual financial reports.
1.3 Overview of easyjet
Easyjet is a British airline operating under no frill model i.e. low cost carrier. The company was established in 1995 to challenge the high cost of travel that was being charged by the legacy airlines. Since its inception, the company has been offering lowest-fare to travellers mainly in Europe. Easyjet has it operation base at London’s Luton airport. However, the company operate both domestic and international flight services in over 800 routes in over 30 countries as per 2016. The company was established at a time when the legacy airlines were dominating the market. However, the introduction of low-cost carrier model by easyjet a well as by other low-cost carriers has seen the budget travel segment continue to attract more passengers every year since those who could not initially afford to travel by airline are now able to do so (easyjet 2016).
The main aim of this research is to analyze the business and financial performance of easyjet for the last three years. This aim will be achieved by pursuing the following objectives
- To assess the liquidity of easyjet relative to those of other in the industry
- To assess easyjet’s financial stability relative to other players in the industry
- To assess easyjet’s profitability relative to other in the industry
- To assess easyjet’s efficiency relatively to other players
- To conduct SWOT analysis for Easyjet
- To conduct PEST analysis for easyjet
What is the liquidity position for easyjet? How financially stable is easyjet compares to other in the industry? How profitable is easyjet compared to others in the industry? How efficient is easyjet compared to others players in the industry? What are the strength, weakness, opportunity and threats to Easyjet? How the external environment in which easyjet operates does looks like?
1.6 Research Approach
This research employed two approaches to achieve its objectives. It employed both quantitative and quantitative approach. Qualitative approach is used to assess easyjet business performance through the use of two model i.e. SWOT and PEST analysis. On the other hand quantitative approach is used to assess the financial performances of easyjet. In this case the trend analysis and ratio analysis methods are employed.
2.0 Information gathering and accounting / business techniques
2.1 Information gathering
By the basic definition, information refers to facts that communicate more about something or someone (Dictionary.com 2017). They are two main sources of information; primary and secondary sources. Primary sources provide firsthand evidence about an event, object or a person. Example of primary sources includes results from an experiment, interview, speeches, eyewitness account, and survey among others. On the other hand, secondary sources of information describe, interpret, analyze or process existing information. Example of secondary sources includes, company reports, articles, books, newspapers, website among others (Ithaca College 2017). Based on the aim and objectives of this research, secondary sources were considered to be the best source of information. The research aims to analyzes the business and financial performance of easyjet and compare them with those of others in the industry. To do so, the research has to depend on already existing information. Specifically, the secondary sources used in the research are as explained below. Annual reports- the annual reports published by easyjet as well as by other players in the industry for the last three year from 2014 to 2016 were heavily used in this research. They provided information required to analyze the financial performance easyjet as well as compare it with those of rivals. Books- this research also made good use of books. Books were mainly used to provide theoretical knowledge and backing of the financial analyzed done. Websites- websites have become an essential communication tools for many companies. Many companies are now using websites to communicate with stakeholders. Easyjet and its rivals are not exception and have been communicating to their stakeholder mainly through their websites. These websites provided a significant part of the information needed to analyzes the business and financial performances of easyjet as well as compare to those of its rivals. News articles- There are a numbers of media sources which include financial time, telegraph among others that provided insightful information that helped in analyzing the business performance of easyjet. Specifically, these sources provided information that helps conduct easyjet SWOT and PEST analysis. Despite the above secondary sources being rich of information required to facilitate this research, they do have some limitation. These limitations include;
- Although it a statutory requirement for public company to published verifiable and accurate annual report, Most of the company uses such report to try and create a positive image for their business. They may therefore fail to include negative but necessary information that may damage the image of their business. The information provided is therefore not well balanced (Boundless 2017).
- Websites – as mentioned earlier, most of the companies nowadays uses their website to pass information to their stakeholder. In most of the cases the messages passed is intended to promote their business and as such they are unlikely to give negative information about their business. The websites are therefore not a well balanced source of information.
To ensure the above limitation did not have affected the finding of this research in any negative way. Several strategies were used. First, the use of annuals reports was only limited to analysis of financial performance of the easyjet and its rivals. Under IFRS standard and under financial report laws, public companies are supposed to provide accurate financial statements to the public. These financial statements must be audited by an independent auditor. This therefore leaves no room for the company to manipulate data or cheat in their financial statement. Before data was extracted from the companies’ annual reports, they were subjected to a basic scrutiny to determine whether they were audited or not. Only audited reports were used2.2 Accounting and business techniques used
To achieve the objectives of this research, a number of accounting and business techniques were used. These techniques and the purpose for which they were used are discussed below.
2.2.1 Accounting techniques
In order to analyze and assess the financial performances of easyjet as well as compare it with those of others in the industry, two accounting techniques were used. These techniques are Trend analysis and ratio analysis. Trend analysis Trend analysis is a financial statement analysis techniques used to shows the extent to which each items have changes over a period of time (Dundun 2014). Trend analysis is usually used to show the general performances of the company. Basically, it is used to indicate trend such as increase or decrease in revenue, total expenses, profits, asset, liabilities, capital or any other items in financial statement. For the purpose of this research Trend analysis was used to shows the general performance of easyjet specifically the trend in total revenue, total expenses and net profit. Limitation of trend analysis While trend analysis is a very useful techniques for understanding the general performance of a company over a period of time, the techniques has one major limitation. The technique does not recognize or overcome any inconsistent in accounting policies. It well known that when different accounting policies are adopted there might be changes in the amount of each item reported. Unfortunately trend analysis is unable to overcome such inconsistent and such, the analysis may be misleading in such a case (Rajasekaran 2011). Fortunately, easyjet has adopted consistent accounting policies for the last three years. Trend analysis will therefore be able to give accurate view of the company general performance without being affected by the limitation highlighted above. Financial ratio analysis Financial ratio analysis is an accounting method that is used to assess the financial performance of a company through the use of ratios. Basically, financial ratios are used to assess four aspect of a company financial performance namely, profitability, efficiency, financial stability and liquidity (Robinson et al 2012). Therefore, financial ratios analysis conducted in this research are meant to assess easy jet’s profitability, financial stability, liquidity and efficiency for the last three years and compare them with those of other players in the industry. To do so, four types of ratios were used. These ratios are;
- Profitability ratios- they assess the profitability of a company
- Activity ratios – they assess the efficiency of a company in utilizing it financial resources
- Liquidity ratios- they assess the company ability to meet it short-term obligation
- Solvency ratios- they assess the financial stability of a company (Robinson et al 2012)
Limitation of ratio analysis While ratios analysis is the best techniques to assess the financial performance of any company, it has some limitations. These limitations include; Focus on the past not the future- Ratio analysis measures the past performances of a company and as such it cannot be relied upon to predict future performance since factors that influenced past performance may cease to exist or may change (Rajasekaran 2011). Ratio analysis techniques is therefore not an accurate method of predicting the future performances of a company and such readers of this research should take cautious when using the finding of this study to predict the future performance of easyjet. Window dressing – the input data for ratio analysis always comes from company’s financial statements. Unfortunately, some companies use some techniques called window dressing to make their financial statement looking attractive. For instance, the company may postpone payment to suppliers so that the end-year cash appear higher that it should be or withhold supplier expenses so that they are recorded in future accounting period instead of the current period when they were incurred. Such actions are taken to make the financial statement attractive. Unfortunately, such window dressing activities makes ratio analysis calculation to be incorrect and misleading (Robinson et al 2012).
2.2.2 Business techniques
On top of assessing the financial performance of easyjet, this research also assess the business performance of the company. Two business assessment techniques were used. These techniques are; SWOT analysis SWOT analysis is techniques that evaluate the strength as well as the weakness of the company when compared to other in the industry. The analysis also looks at the opportunities that exist for the company as well as the threats that may negatively affect the company in future (Bensoussan et al 2012). Limitation of SWOT analysis SWOT analysis provides insightful and qualitative information about the business performance of a company. Despite its usefulness in analyzing business performance, it does have some limitations. According to Bensoussan et al (2012), the major limitation with SWOT analysis as a business analysis tool is that it subjective in nature. In addition, the analysis conducted cannot be relied for a long period of time since the micro and macro environment which affects the company’s strength, weakness, and opportunities as well as pose threat keep on changing very fast. PEST analysis PEST is an analysis tools that is used to analyze the external environment of a business and it likely impacts on business performance. This particular technique assesses four external factors namely political, economical, social and technological that usually has the greatest impacts on any business’ performance (Bensoussan et al 2012). In this research, PEST analysis was used to assess the external environment in which easyjet operates and the likely impact on it performance. Specifically, the analysis was used to look into political factors such as government regulation, taxation etc; economical condition such as exchange rate, fuel prices etc; social factor such as changing demographic characteristic of traveller, as well as technological advances that are shaping easyjet performance. Limitation of PEST analysis The external factors which are analyzed using PEST keep on changing overtime. As such PEST analysis may not represent the actual position of a company for a long time. It needs to be reviewed regularly (Bensoussan et al 2012). The readers of this research should therefore acknowledge that the PEST analysis conducted in this paper represents the actual external environment for easyjet by the time of drafting this paper. However, such representation may not be accurate in future due to changing environment.
Ethical consideration While conducting this research ethical standard required of every researcher were adhered to. To start with, the researcher took all necessary action to ensure the information presented herein is accurate and true representation of the fact. Only credible sources were used and where necessary information was crosschecked with other sources to ensure they are reliable and accurate. The researcher also acknowledges the seriousness of plagiarism and as such information extracted from other sources is fully acknowledged through the use of Harvard referencing styles.
3.0 Results, analysis, conclusions and recommendations
As mentioned earlier, the aims of this research was to analyze the business as well as financial performance of Easyjet. Therefore, the finding of the research will be presented less than two section namely financial performance analysis and Business Analysis
In this section the financial performance of easyjet will be analyzed and compared with of other players within the aviation industry. Two broad categories of techniques will be used. These techniques are trend analysis and ratio analysis
3.1.1 Trend analysis
Revenue trend
The graph above shows the revenue trend for easy jet for the last three years. It can be seen that the company recorded a growth of revenue between year 2014 and 2015 at a rate of 3.6 percentages. This growth in revenue is attributed to increase in number of passenger. During that period, easyjet transported 68.9 million passengers which are more than 64.8 million passengers transported during the financial year 2013-2014(Easy jet annual report 2014, 2015). However, the revenue for the financial year ending 2016 was slightly below the one recoded in the financial year 2015. The revenue for 2016 slightly fell by 0.43 percentages when compared to that of 2015. The reason for this decreased are;
- Terrorism activities- During the trading year 2015-206, a number of terrorism activities took place in Egypt, Paris, Brussels, Turkey and Nice some of which happened in airport. These events created fear among traveller resulting to lower demand and yield from those route
- Brexit – the decision by UK to leave the European Union was also partly to blame for the decrease in revenue for eastjet. The decision made euro to become more expensive for British traveller thus affecting the demand for service.
- Competition- competitive environment was also partly to blame for the decrease (easyjet annual report 2016).
Total expenses trend
As it can been seen from the figure above, the total expenses (i.e. Revenue- Net income) for easyjet has been increasing for the last three years. There is always a strong relationship between level of activities and expenses incurred especially when a significant portion of the expenses are variable. An increase in level of activities usually leads to increase in total cost (Bendrey et al 2004). This is exactly what has caused Easyjet’s total expenses to increase for the last three years. Through this period easyjet recorded an increase in level of activities especially the number of passengers transported and routes operate. For instance, the numbers of passengers transported in 2014 was 64.8 million passengers. In 2015 the number increased to 68.6 passengers and as of 2016 the number of passengers had increased to 73.1 million passengers. Also, the numbers of routes served by the company has also increased. In 2014, the company was operating in 400 routes. In 2015, the number of routes operated increased to 735 which increased further in 2016 to reach 806 routes.
Net Income trend
As shown by the figure above, easyjet’s net incomes between 2014 and 2015 Increased by 17.8 percent. This increase was caused by a significant increase in revenue (about 3.56%) which was as results of increased in number of passenger transported and only a slight increase in expenses (about 1.5 percent) which was caused by fuel prices (easyjet annual report 2015). In 2016, the net income however declined by 22%. This declined was caused by decreased in total revenue which was mainly caused by unpredictable environment following Brexit as well as terrorism activities which reduced the demand for the services (easyjet annual report 2016)
3.1.2 Ratio analysis
3.1.2.1 Activity Ratios
One of the objectives of this research was to assess the efficiency of easyjet and compare it to those of it main rival in the industry. To achieve this objective activity ratio was used. The result of the assessment is a below.
Asset turnover ratio
Asset turnover ratio is used to measure how efficiently a company is using it asset to generate revenue. Therefore, the higher the asset turnover ratio the more efficient a company is in utilising it assets to generate revenue (Vasigh et al 2010) As seen from figure above, easyjet’s asset turnover ratio has been on a decline mode for the last three years. In 2014, the ratio was 1 which declined to 0.96 in 2015. It decline further in 2016 to reach 0.87. This decline has been mainly caused by purchase of new assets by the company in 2016 and 2015. As pointed out by Vasigh et al (2010) the age of a company’s asset usually affect the assets turnover ratio over different period of time. Asset turnover ratio tends to be high in accounting period where all of the company assets are old hence low book value due to depreciation. However, when new assets are purchased, the book value of the asset is very high as no depreciation is deducted. When that is the case, the asset turnover ratio decreases. This is exactly what happed to easy jet. In 2015, the company purchased new non-current asset worth £328 Millions. In 2016, the company also purchased new assets worth £ 43 millions. All these purchases have increased the net book value of the company thereby leading to declining asset turnover ratio. As mentioned by Vasign et al (2010), the higher the asset turnover ratio, the more it is efficiently it is using it Asset to generate sale. Therefore, since easyjet has recorded high asset turnover ratio in the last three years than Ryanair, it can be concluded that the company is more efficient that rivals.
3.1.2.2 Liquidity Ratios
The second objective of this research was to assess the liquidity position of easyjet and compare it with those of other players in the industry. Liquidity ratios try to determine the ability of a company to meet it short-term liability without any difficulty (Vasigh et al 2010). There are two commonly used liquidity ratios namely; current ratio and quick or cid –test ratio. These two ratios were used in this research to help achieve the objective mentioned above. The finding of the assessment is as discussed below.
Current ratio
Current ratio is a financial performance metric that is used to measure the company ability to meet it short-term (Vasigh et al 2010). The current ratio helps answer the question; does the business have enough current assets to meet scheduled current liabilities? As it can be seen from the figure above, the current ratio for easyjet has been positive and increasing for the last three year with exception of year 2015. In 2014, the ratio was at 0.89 which mean that current asset at that time was able to cover current liabilities 0.89 times. This ratio decreased from 0.89 in 2014 to 0.72 in 2015. This decrease means that the liquidity position of the company become weaker in 2015 than it was in 2014. This decrease was mainly caused by an increase in the company current liability. In 2014, the company’s total current liability was 1420 Million which increased to 1768 Million in 2015 (esayjet annual report 2014, 2015). A closer look at the figure above also show that the current ratio of easyjet increased in year 2016 to 0.92 from 0.72 as recorded in 2015. This improvement in liquidity position was contributed by both the decrease of the company current liability and increase of it current assets. In year 2015, the esayjet’s Current liabilities stood at 1768 million which decreased to 1573 Millions in 2016. On the other hand, The Company’s total current assets were 1279 millions in 2015 which later increased to 1454 Millions in 2016. As stated by Bensoussan et al (2012), the higher the current ratio the more capable the company is at repaying it current liabilities on time and without any problem. Although the minimum acceptable current ratio varies from industry to industry, it generally accepted across the board that a current ratio that is below 1 is a sign that the company may have difficulties meeting it current liabilities on time (Bensoussan et al 2012). Easyjet is therefore in a not so good liquidity position since it current ratio is weak and below 1. When the easyjet liquidity position through current ratio is compared to that of it main rival, it is clear the company is no doing so well. The current ratio for it rival Ryanair as can be seen from the figure above has been above 1 for the last three years which shows a better liquidity position than that of easyjet.
Quick ratio
Quick ratio (also known as acid test ratio) measure how well a company is able to meet it short-term financial obligation. The higher the ratio, the more able a company is to meet it short-term financial obligation (Bensoussan et al 2012). As it can be seen, easy jet had a quick ratio of 0.89 in 2014 which later decreased to 0.72 in 2015 and then increased again to reach 0.92 in 2016. As mentioned by Robinson et al (2012) fluctuation in quick ratio is usually caused by decrease or increase in a company current asset (less stock) and current liabilities. When current liabilities increase without a propositional increase in Current asset(less stock), the quick ratio decrease. Equally, if current assets (less stock) increase without a proportional increase in current liability the quick ratio improves. In regards to easyjet, the decrease in it quick ratio in 2015 to 0.72 from 0.89 as was in 2014 was mainly caused increase in current liability. During the trading period 2014-2015, easyjet borrowed short-term loan worth £ 91millions while it unearned revenue also increased by £ 47 million. All these lead to increase in the company totals current liabilities from £ 1420 millions as recorded in 2014 to £1768 million while at the same time, it current assets (less stock) remain relatively unchanged. On the other side, the improvement of quick ratio in 2016 was mainly caused by decrease in current liability. During the trading period 2015-2016, easyjet repaid part of it short-term loan. In addition, the tax payable was also less by a half due to declined profit. All these lead to decrease in the company’s current liability from £ 1768 Millions as recorded in 2015 to £ 1454 million in 2016 therefore resulting to improved quick ratio. Usually, a quick ratio of 1 or slightly above is considered to be better and acceptable (Robinson et al 2012). In the case of easyjet, the quick ratio is below one which mean that it current assets (less stock) cannot be able to meet all it current liabilities. When compared to other in the industry it can be noted that easyjet quick ratio is lower than that of it rival Ryanair. This indicates that easyjet is more likely to experience problem meeting it short-term obligation that it rival which is in a better position.
3.1.2.3 Solvency Ratios
The third objective of this research was to assess the financial stability of easyjet and compare it with those of other players in the industry. To achieve this objective solvency ratio were used. The result of the assessment is as below;
Debt-to-equity ratio
The debt –to-equity ratio for easy jet has remained relatively steady as shown by the figure above. In 2014, the ratio was 1.06, in 2015 it was 1.15 and in year 2016 it was 1.03. Is this ratio bad or good? Well according to Robinson et al (2012), the acceptable debt to equity ratio varies from one industry to another. However, as noted by Investopedia (2017), a higher debt/equity ratio indicates that the company has aggressively financed it operation including growth and expansion using debt and this may lead to volatile earning. Therefore, a lower debt/equity ratio is more preferable as it shows low risks and more stability as debt holders have lesser claims on the company’s asset. As it can be seen from figure above, easyjet has a lower debt/equity ratio that it main competitors i.e. Ryanair. This indicates once again that the company is more financially stable than it competitor.
Interest Coverage ratio
Interest coverage ratio is used to assess the company ability to pay interest for all of it debt once they fall due. Therefore, the higher the ratio, the more financially stable a company is (Robinson et al 2012). As it can be seen from the figure above, easyjet had an interest coverage ratio of 52.82 in 2014. This means that at that particular year the company earnings before interest and tax were able to cover the company’s interest expenses 52.82 times. In 2015, the interest coverage ratio increased to 62.55. The increase was caused by an increase in the company’s EBIT while the interest expenses remained the same. During that period, the company’s EBIT rose from 581 Million recorded in 2014 to 688 millions in 2015 (easyjet annual report 2015). In 2016, the interest coverage ratio decreased to 38.3. This decline was mainly cause by both the increase in interest expenses and decrease in the company earnings before tax and interest. During the year, the company’s interest expenses increased from 11 million to 13 million while at the same time it EBIT declined from 688 million to 498 million (Easyjet annual report 2016). Overall, when compared to other players in the industry easy jet has better interest coverage. For instance, in 2015, easyjet’s interest coverage ratio was 62.55 while Ryanair had a ratio of 14.09. Again this shows that easyjet is more financially stable than its rival in the industry since the higher the ratio the more stable a company is (Robinson et al 2012).
3.1.2.4 Profitability ratios The fourth objectives of this research were to assess the profitability of easyjet and compare it with that of other players in the industry. To achieve this objective several profitability ratio are used and the result are as below.
Operating Profit margin
The operating profit Margin is a profitability ratio that shows how much a company makes after paying for variable cost of production such as wages, raw material among other. This ratio shows the efficiency of a company in controlling cost and expenses associated with it operation (Bensoussan et al 2012). The figure above shows the operating profit margin for easyjet as well as that of it main rival, Ryanair. As it can been seen above, the operating profit margin for easyjet increased from 12.83 percent as recorded in 2014 to 14.64 percent in 2015. The increase of operating profit margin in year 2014 – 2015 was mainly because the sale revenues increased at almost an equal rate with the increase in cost of good. Sales revenue increased by a rate of 3.5 percent while cost of good increased at a rate of 3.8 percent. During the period 2015-2016, easyjet’s operating margin declined to 10.67 percent. The main reason for this decrease was mainly because the company sales revenue declined by 0.37 while at the same time the cost of good increased by 9.3 percent. When easyjet operating profit margin are compared to that of it main rival, it can be seen that Ryanair has better margins. This means that easyjet is not as efficient in controlling cost and expenses as it main rivals.
Net profit margin
Net profit margin shows the percentage of revenue remaining after all expenses, taxes, interest and dividend are paid from the company’s total revenue. The net profit margin is usually used to assess the profitability of a business by looking at amount of net income earned from each dollar of sale (Bensoussan et al 2012). The figure below shows the net profit margin for easyjet as well as that of it rival Ryanair. As it can been see from the figure above, the net profit margin for easyjet has been declining for the last three year. In 2014, the company’s net profit margin was 11.87 percent. In 2015, the net profit margins declined to 9.94 percent and in 2016 the margin declined further to 9.15 percent. This means that the percentage of net incomes from each dollars of sale has been declining. As of 2016, only 9.15 percent of each dollar sale was a net profit as compared to 11.87 percent in 2014. Generally speaking, The Company is becoming less profitable for the last three years based on the above net profit margin. On the other side, the net profit margin for other industry players especially that of Ryanair has been increasing. For instance, the net profit margin for Ryanair increased significantly in 2015 from 10.38 percent to 15.33 percent. In 2016, the margin increased furthers to 22.34 percent. This therefore suggests that easyjet is either not efficient in managing it expenses or it has failed to keep up with competition therefore losing significant market share.
Return in equity
Return on equity is a financial performance metric which indicate the amount of income return as percentage of shareholder equity. ROE basically shows how efficiency the management is at utilizing shareholder equity. The figure above shows the return on Equity for easyjet as well as that of other industry player. As it can be seen from the figure above, easyjet ROE in 2014 was 20.72 percent. This later increased to 24.37 percent in 2015. This increase was mainly caused by an increase in revenue as well as net income. During that period revenue and net incomes increased by a rate of 3.5% and 17.6% respectively. In 2016, the ROE declined to 19.66 percent. This decline was caused by decrease in revenue as well as income. During that period, the revenue and net incomes decreased by 0.41 % and 22 % respectively. When easyjet’s ROE is compared to that of Ryanair, it can be seen the ROE is within the same level.
3.2 Business Performance Analysis
The last two objective of this research was to analysis the business performance of easyjet using two of the commonly used model known as SWOT analysis and PESTEL analysis. The two section below, discuss the business performance of easyjet through those two models
3.2.1 SWOT
SWOT is a business analysis Models that look at the strength and weakness of business as well as the opportunities that can be explored by the business and threat that may negatively affect the business operation (Bensoussan et al 2012).
Strength
Current, easyjet has a number of strength. These includes Strong brand, Strong Brand reputation easyjet has been able to create a strong brand as the cheapest carrier in Europe. According to a recent survey by edream which involved a sample of 16000 travellers, easyjet was ranked ahead of its competitors in the low-cost carrier segment. 63 percent of the travellers chose easyjet as their favourite airline against 44 percent who chose Ryanair and 12 percent who chose Norwegian as their favourite airline (CusKelly 2016). This shows that easyjet has a very strong brand as compared to its main rivals in the market. Financially stable Easyjet is one of the low cost carriers that are most financially stable. According to the financial analysis (solvency ratio-see section above), done earlier in this paper, Easyjet has been the most financially stable low cost airline for the last three year. The company debt/asset ratio has remained relatively stables at around 0.5 against that of its rivals Ryanair (around 0.6) and Norwegian (around 0.9). Being financially stables means that the company can be able to finance its debts as well as finance any growth and expansion without many difficulties. Being strong financially stable also caution the company from external shock Modern fleet As of 2016, easyjet had a total of 257 aircrafts all of which are airbus A320 model family (easyjet 2016). In other words, easyjet use only modern fleet which not only gives comfort to customers but also saves the company money because new and modern aircraft requires less money and effort in maintenance. The decision by the company to use only one type of aircraft also help saves on fuels cost. All these lead to low operation cost thereby giving the company a cost leadership advantage. Loyal customer Easyjet is one of the low-cost airlines with most loyal customers. As of 2016, 74 percent of total travellers who use the airline are returning customer (easyjet 2016). It well known in the field of business that loyal customers are the most important intangible assets. A company with loyal customer enjoy a relatively steady earning. In addition, loyal customers are known to play key role in promoting one business. They usually spread positive word of mouth which attracts even more customers to the business (carpenter 2017).
Weakness
Despite having a number of strength as discussed above, easyjet does have some weakness as well. These weaknesses include; High liquidity risk The major weakness with easyjet is that it has high liquidity risk. The liquidity of any business is crucial as it determine the company ability to meet it short-term obligation (vasign et al 2010). Liquidity of a business is usually assessed through two ratios known as current and quick ratio. According to Bensoussan et al (2012), the current and quick ratio must be over 1 for a company to be considered able to meet it short –term obligation. Current ratio and quick ratio that is below 1 is assign that the company may experience some cash flow problems/difficulties paying of it short-term ratio in near future (Bensoussan et al 2012). From the ratio analysis done earlier in this paper, easyjet was found to have had current ratio and quick ratio that is below 1. This means that the company has high liquidity risk i.e. it may be unable to meet in short-term obligation. If such case happens the company operation may stalls.
Opportunities
There are a number of opportunities that easyjet can explore to grow and expand its business. These include; The growth of budget segment For the last few decades, business or fully fledged service segment was the largest segment in the aviation industry. However, the budget service segment has continued to enjoy significant growth to overtake the business segment. The budget travel segment has been growing at a rate of 20 percent per year globally and this growth is expected to continue in future (Easyjet annual report 2016). This growth represents an opportunity for easyjet to grow and expand its business even further. Acquire other low-cost carrier to improve market share The financial analysis earlier done in this paper revealed that esayjet is profitable as well as financially stable as compared to its main rival Ryanair. The company can therefore use it financial strength to acquire or buyout smaller low-cost carriers in Europe in order to increase its market share or perhaps dominate the airline in Europe.
Threat
There are number of factors that pose threat to easyjet business. These include; Stiff competition There is quite a stiff competition in the budget travel segment. Currently, easyjet face stiffs competition from Ryanair, Norwegian as well as other players. This competition is mainly based on ‘price war’ and this pose the greatest threat to easyjet’s revenue and profitability. In addition, the budget travel segment continues to attract new entrants. For instance, the Etihad and TUI group have announced to collaboratively introduce a new low-cost carrier into the European market by April 2017(Haines, 2016). Entry of new low-cost airline is a big threat to easyjet business is they are likely to eat on to the existing low-cost carriers’ market share. Traditional airlines Other than competition from other low-cost carriers, traditional airline (i.e. fully fledged services) also pose the bigger threat to easyjet. Most of the traditional airlines are eyeing the budget travel segment. For instance, in 2014, delta airline a legacy airlines introduced economy offering to compete with the low-cost carriers (Morris 2016). The introduction of economy offering by legacy or fully fledged service carriers is likely to eat into the market share of the low-cost carrier and this may lead to less profit for easyjet in future. Terrorism activities Terrorism continues to be the biggest threat to business today. In the civil aviation airline, terrorism activities have a special kind of impact. It creates fear which in turn affects demand for services. For instance, Europe has recently experiences a number of terrorism activities some of which took place in airports. Such events are likely to create fear among travellers leading to low demand of services. Easyjet is not an exception and the impacts of terrorism activities can at any time affect it operation in a negative way. Employees’ strikes Employees’ strikes in the company as well as in the airports where easyjet operates also pose threat to easyjet business performance. For instance, in 2015 a strike in Gatwick airport lead to the closure of the runway. As result, easyjet was forced to cancel 3,268 flights flight or to delay some of the flight. The led to loss of business as well as decrease in the company’s on-time performance to 77 percent (easyjet annual report 2016).
3.2.2 PEST analysis
Political
There are a number of political activities that has affected the performance of easyjet in the past and are likely to affect it performance in future. Brexit is one of them. The decision by the UK to leave the European Union did have it impact on easyjet performance. Immediately, Brexit took place, the pound become weaker. Given than easyjet operates mainly in Europe where Euro is the main currency, the exchange rate contributed to the decline of revenue for the company in year 2015-2016. The weaker pound also made euro to become more expensive for British travellers and this lead to decrease in demand for easyjet services in Britain something that contributed to decline in profit for the year 2015-2016 (easyjet, 2016). The implementation of brexit is also likely to affect easyjet performance. Brexit will restrict the movement of people between UK and other EU countries. This restriction is likely to lead to a reduction of number of people who travel between UK and EU countries which may translate to reduced demand for easyjet services. Another political factor that is likely to have long-term effect on easyjet business performance is the EU- US air transport agreement. The European Union and the United stated of America entered into an agreement in 2007 which allows airlines in EU and USA to fly directly between any points between the two regions. What this mean is that the European market was opened to the powerful airlines in the United States and this is likely to have negative impact on easyjet market share in the long-run simply because easyjet is no longer entitled to the benefits that comes from the agree.
Economical
There are a number of economical activities that has affected the easyjet business performance. First is the global decline in price of jet fuel. For the last few years, the prices of fuel have been declining. It well know that fuel form a significant part of airline expenses and therefore a decline in fuel prices mean an opportunity to earn big profit margin (Flattou et al 2015). Easyjet has benefits from low price just like any other airline. Specifically, they have been able to charge even low prices for it services hence bringing more customers on board. However, the fuel price has always remained volatile and keeps fluctuating from time to time. These fluctuation will continue to affects easyjet cost of operation hence profitability from time to time
Social
For a very long time, the budget airline has been supported by the baby boomers. However, over the recent years there are social changes being witness. The Millennial is now becoming the largest consumers market for low-cost carrier. According to Boston Consulting Group (2015) the growth recoded by the low-cost carrier globally can be attributed to increase in millennial travellers. What this means is that in near futures, easyjet main customers will be the millennial and such the company need to be prepared to meet their need. Technological Technology has shaped the way business in the aviation industry is conduct. Easyjet has embraced technology in it business. For instance, the Company has moved from the traditional paper ticketing to e-ticketing. As of 2016, it award -winning mobile application which enable customers to book as well as engage with the company has been downloaded by 18.3 million users. As noted in its annual report for the year 2016, almost all of the company’s booking are now done either through the website or it mobiles application. The use of these platforms has provided the customer with a convenient way to book for services as well as engage in with the company thereby increasing customer satisfaction. Again, these platforms has also contributed significantly to the revenue growth recorded by the company (easyjet annual report 2016)
Conclusion
In conclusion, easyjet has recorded impressive financial and business performance. Within the period under consideration, easyjet has recorded improvement on it revenue and net income. In between 2014 and 2015, it revenue increased by 3.5 % net income increased by 17.6 %. Despite the revenue falling slightly in 2016 by 0.4%, the revenue for the period under consideration was way above what the company had previously recorded. In term of profitability, the company had very impressive profits. When compared to other in the industry the margin was almost equal to those of the industry leader and it closed rival Ryanair Also, under the period under consideration, easyjet enjoyed financial stability. It had very impressive and better debt-to asset ratio, debt-to-equity ratio and interest coverage ratio than its competitor’s i.e. Ryanair. In addition, easyjet recorded very impressive efficient performance. Although the asset turnover ratio had declined in the last three year from 1.01 in 2014 to 0.87 in 2016, the ratio was acceptable was significantly higher than that of it rival Ryanair which mean easyjet was more efficient. Despite being profitable, efficient and financially stable, the company liquidity position has not been so good for the period under consideration. Both the quick ratio and current ratio has remained below 1 for the three years which is a sign that the company may face difficulties meeting it short-term obligation. The company is also in a very good SWOT position characterized by a large number of strengths, fewer weakness and threat and quite a number of opportunities to grow. The external environment although pose some challenges to the company, overall it favouring easyjet.
Recommendation In order to continue posting good performance easyjet need to.
- Improves it liquidity position by increasing current assets or by reducing current liabilities.
- Use it financial stability and strength to take advantages of the growing budget travel segment
- Use it financial strength to acquire or buyout other low-cost carriers in Europe in order to increase its market share hence profitability
- should start aligning it services to the need of Millennial which are the future of travel industry
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