financial analysis of EasyJet PLC | My Assignment Tutor

Analysis and Report of EasyJet PLC This report seeks to undertake a financial analysis of EasyJet PLC. It will review the annual accounts covering the period 2018 to 2020, noting that the review and analysis undertaken will have to account for the impact of the Covid19 pandemic. In addition to this the report will undertake a competitor analysis to compare financial The chosen company and industry in question has and will continue to be significantly impacted with the Covid-19 pandemic which has resulted in Industry wide total shut downs of flying. The main objective of the exercise is to analyse EasyJet performance pre pandemic and compare this to the financial fall out that has impacted the company since. It will allow interesting conclusions to be drawn relating to long term viability and prospects for the company itself. Brief History of EasyJet PLC EasyJet first commercial flight was in November 1995 flying between Glasgow and Luton airports. The company was originally founding by Stelios Haji-Loannou. Early planes were leased most notably from British Airways however as profitability was achieved EasyJet began buying its own planes a process that commenced in 1996. Through acquisitions, most notably the British Airways low cost airline “Go-Fly” in 2002 EasyJet has grown into the fourth largest carrier in Europe. (,own%20planes%20in%20April%201996). Evaluation of Sources Of Finance The following extract from the 2019 -2020 audited accounts comments specifically on a number of different sources of finance utilised. “EasyJet’s robust balance sheet enabled rapid access to over £2.4bn of cash since the outset of COVID-19. Liquidity has been raised from a variety of sources including equity, sale and lease back of owned aircraft, the drawing down of a Revolving Credit Facility, Covid Corporate Financing Facility and Term Loans. Additionally, after 30 September 2020, easyJet successfully completed transactions for further sale and leasebacks generating additional liquidity. easyJet has the ability to continue to leverage its owned aircraft for further funding if required.” This was of course in response to the Covid-19 pandemic and the dramatic falls in revenue across all operational areas caused by, but not exclusive to, the closing of air passenger routes in most of the known world. Each of these forms of ‘lending’ will now be assessed in full. 1.             Sale and Lease Back Arrangements.            This is where a company will use an asset that was purchased and shown in the companyaccounts in the ‘fixed assets’ to raise funds sometimes for expansion or, as is the case with‘Easy Jet’, to assist with case flow issues caused by the pandemic. In terms of the cause and effect of this type of finance it sees a large institution forexample pension companies will to advance monies for ownership of an asset, in thiscase planes and then agree to rent them back to the host company for a monthly rentalfee. There is usually an agreement that the host company can repurchase the asset, shouldthey so wish at some point in the future. It has the effect of reducing the strength of the balance sheet, as the company will havefewer assets, and increase costs as the company are now making regular ‘rental payments’.Increased costs will generally 2.            Revolving credit facilities are another term for ‘Bank Overdraft’. This is where a bankarranges for an account that can go overdrawn up the an agreed limited. The balanceon the account may go up and down depending on payments made into and out of thethe account.This type of facility tends to have an higher cost than an alternativebank loan. It is useful to allow companies to navigate fluctuations between receiptsand payments. 3.            Easy jet make note of ‘Covid Corporate Financing Facility. This is a loan facility provideddirectly by the Government/Bank of England and is specific to government led initiativesto negate the effects of the Covid Pandemic The loan in many ways is identical to a normalbank loan in that it will have attached to it both an interest rate and (at some point) arepayment requirement. What makes this different is that both the term of the loanand the rate of interest attached to it is more generous than that being made availableby commercial banks. In this respect it would be fool hardy for Easy Jet not to take suchfunding if it is available in so much that it will overall allow lower costs of financing to beseen. 4.             Finally Easy Jet make note of Term Loans as a form of financing facility. What is not made clear is to the actual source which could come from a variety of sources. It is likely thatdue to the size of Easy Jet and the size of the term loans being taken that these will bein the form of a syndicated loan where several lenders will come together to collaborativelyoffer Easy Jet terms. As above the loan will be at highly competitive rates with a requiredrepayment. It will commit the lender to payment of interest which will be increasing the costs to the company. Repayment is more complicated as it may be that Easy Jet havenegotiated regular repayments or more likely that the loan will be repaid in one amountat the end of the term Easy Jet have been forced  into taking action both from the perspective to cover significant operating losses and having done due diligence in terms of the immediate business environment going forward recognised they will need consider cash flow to cover immediate operating costs whilst income continues to be adversely affected.   Ratio Analysis                                                                 2018                                       2019       % Inc/Fall              2020       % Inc/Fall Sales : Easyjet                                      5,898                                      6,385      7.68%                     3,009      (-52.9%)           : Ryan Air                                   7,151                                      7,697      7.61%                    8,495      10.3% The analysis of this figure is to reflect on the ability of the business to continue to grow. In terms of the figures the following reflections are made i.              Easy jet has seen a 7.68% in revenue between 2018 and 2019. This compares will with a                similar 7.61% increase in revenue seen with Ryan Air one of its major competitors and                it would be reason to assume that this performance is reasonable as this is above                the UK inflation rate which during this period wan average of 1.6%. in            in itself is explained by the effects of Covid 19 from March 2020. What is shown however                is that its competitor has managed to achieve a 10% increase in sales during this period.                 This would require further investigation to understand why Easy Jet has suffered such a                fall in revenue comparted to its competitor. This may be as a result of the variety of                routes that area available to each or they fact that Easy Jet has a significant proportion of                its fleet based in the UK that would have been more adversely affected by the Pandemic                that the Dublin based Ryan Air 2018                                       2019       % Inc/Fall              2020       % Inc/Fall Net Profit: Easyjet                              358                                         349         (-3.18)%                 (1,079)   (-209%)                   : Ryan Air                          1,611                                      948         (-41.7)%               671         (-29.3%) Net Profit: Easy Jet                          358 x 100 = 6.07%            349 x 100 = 5.46%            1079 x 100 = -35%% of                                                       5898                                       6385                                       3009Revenue                      Ryan Air                          1611 x 100 = 22.5%          948 x 100 = 12.3%            671 x 100 = 7.89%                                                                7,151                                     7,697                                     8,495 ii.            Easy Jet is the focus of the study and in absolute terms they have seen falls in profitability                over the three periods in question of 3.18% and 209% respectively. Looking at the figures                2019 in particular they fact that that profitability fell against a backdrop of increasing sales                would indicate that there has been a deterioration in the control of costs.                 In terms of net profit as a % of revenue this has fallen over the period from 6.07% to 5.46%                and then a more serious fall of -35% in 2020. Again this illustrates that there has been a                failure to control costs as a % of revenue Comparing this to the competitor Ryan Air it is noted that the Net Profit % is much higher                at 22.5% (2018 ) and whilst this has fallen in each of the periods in question again illustrating                control of costs as a % of revenue has deteriorated however compared to Easy Jet they must                be operating with a lower cost base. The reasons for this should be fully investigated and                Easy Jet should consider to what extent costs can be reduced to bring them into line with                competitors. iii.                                                            2018                                       2019       % Inc/Fall              2020       % Inc/Fall ROCE: Easyjet                      358 x 100 = 12.61%           349 x 100 = 10.54%           (1,079)   (-35.6%)                                                                2837                                       3311                                       3024                          : Ryan Air                  1,611 x 100 = 36%             948 x 100 = 18.1%             671 x 100 = 13.1%                                                                4469                                       5215                                       4914                 Even at 10.54% (2019) the return on capital employed is greater than could be achieved                if money was invested in a typical savings account. That said there has been a significant                deterioration in the performance during the Pandemic which may be considered                understandable however in a wider context if losses continue at this rate for Easy jet then                the business has only three years left to survive.                 In comparison to its competitor Ryan Air, who’s ROCE has also fallen over the period, it                compares poorly and again explanations should be sought. Again whilst the cause and                effect of the pandemic are dually noted questions over how the rate of decline for Easy Jet                is so profound compared to that of its rival. iv.                                                           2018                                       2019       % Inc/Fall              2020       % Inc/Fall EPS  : Easyjet                        0.90p                                      0.887p                                   -178.1    (35.6%)                                                                                      : Ryan Air                     1.21p                                     0.77p                                     0.582p Easy Jets earnings per share remained reasonably stable between 2018 and 2019 falling just                0.02p before a significant fall between 2019 to 2020. This does however compare favourably with its competitor Ryan Air who’s EPS is some 10p                less than Easy Jet in 2019 which given the relatively lower profitability of Easy Jet compared                to Ryan Air suggests that Easy Jet has a lower number of shares issued compared to                its competitor.                Audited accounts for Easy Jet in 2020 suggest the number of share in circulation are                407 million whilst that of Ryan Air is 1,089,181,737 or 2.5 times higher. As the figures in (iii) above                show this shows that Easy Jet has much lower shareholder funds as part of its capital structure                compared to that of its rival. iv.                                                           2018                                       2019                                       2020       Liquid Ratio: Easyjet          1373 =  1.405:1                  1576  = 0.82:1                     2316       = 0.84:1                                                                977                                     1902                                       2731                               The liquid ratio of a company measures the ability of a company to meet its normal                day to day commitments as they fall due or to put it simply its ability to pay its                day to day bills. Easy Jet has seen a deterioration of its position from 1.405:1 where                it has enough ‘cash’ to meet bills as they fall due to 0.82/0.84:1 in the years                2019 and 2020. This is not necessarily a point of immediate concern in 2019 given                that the company has good turnover in the form of regular cash coming in from                the sale of flight seats. As the annual accounts have shown in 2020 the company                has reshaped its balance sheet so that the amount of cash and cash assets has                increased from 1576 to 2316 and whilst this is not reflected in an improvement in its                liquid ratio questions should be asked as to when and how some of the debt is due to                be repaid. If this is long term debt or debt that can be rolled over then they liquid                position may be stronger than first seen. v.                                                             2018                                       2019                                       2020       Gearing:Easyjet                   1373 =  1.405:1                  1576  = 0.85:1                     3441       = 0.84:1                                                                2837                                   1834                                       3024                                               Gearing measures the amount of debt that has been taken out in relation to the amount                of equity investments in the company. It is expressed as X:1. Generally speaking if the                figure is greater than one it represents a situation where the company is financed by                means other than the capital invested. Equally the higher the figure the greater the                burden of repayment is on the company itself.                 In terms of Easy Jet there has been a deterioration between 2018 and 2019 however                this is explained in the accounts by a change in the law and the introduction of new rules                in the way operating leases are accounted for. The period thereafter whilst static                does show in 2020 both an increase in the capital position and the amount of debt that                the company has both of which are shown in the accounts as increases in funding                that was undertaken to cope with the pandemic.                 The issue for the company is that the increase in the amount of debt will incur                the need for interest charges and repayment. This can result in issues for the company                should trading probe problematic. Recommendations From analysis of the company accounts over the period in question and in comparison to the main competitor in the market it is clear that the effects of the Pandemic have had a severe and detrimental affect on Easy Jet. This is shown particularly in the collapse of revenue leading tosignificant falls in profitability. This requires a number of actions to be taken. 1.             It is noted that the company has altered the structure of its balance sheet to free up cash                resources to allow it to trade over the immediate period (probably defined as 12 months)                whilst the ongoing effects of the Pandemic are seen. 2.             As  the net profit comparison with its main competitor shows Easy Jet appears to                have significantly higher costs and this is an area that should be investigated with                immediate effect including the need to undertake a cost cutting exercise. Whilst the                effect of the Pandemic is being felt this will allow the company to conserve the cash                of the company to see it over this difficult trading period. 3.             In terms of capitalisation Easy Jet should consider some further reconstruction of its                balance sheet. If should for example consider the issue for further ordinary shares the                proceeds of which should be used to pay down the debt that has been taken on. This                should repay the term loans first given that the Covid loans from the government                are at a more advantageous rate. This will have the effect of reducing the payment                of interest rates which will allow reduction in costs which as noted is something that                needs to be seen. 4.             The company must seek to align the size of the company in relation to what it seen                as the market place going forward. At the time of writing May 2020 the immediate                travel landscape continues to be uncertain and therefore Easy Jet must take steps                to align capacity with the market place, the net effect will be to reduce the size                and cost base of the company. Thereafter it must seek to identify the likely size of the                market going forward for example with people want to travel in the numbers that                were there in the past. 5.             Easy Jet will have to ensure that the commitments it may have can be adapted                in line with its needs for example if it has orders for planes going forward are these                required if the market place is not as big as expected.


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