Ratio Case Study Analysis of Malaysian Airlines (Case Study Sample)

Ratio Analysis of Malaysian Airlines
Table of Contents TOC \o "1-3" \h \z \u 1.EXECUTIVE SUMMARY PAGEREF _Toc450237686 \h 32.INTRODUCTION PAGEREF _Toc450237687 \h 3i.About the Company PAGEREF _Toc450237688 \h 3ii.Airlines Industry overview PAGEREF _Toc450237689 \h 33.CRITICAL ANALYSIS OF MALAYSIA AIRLINES PAGEREF _Toc450237690 \h 4i.RATIO ANALYSIS PAGEREF _Toc450237691 \h 54.MARKET POSITION ANALYSIS PAGEREF _Toc450237692 \h 125.RECOMMENDATIONS & CONCLUSION PAGEREF _Toc450237693 \h 126.LIMITATIONS PAGEREF _Toc450237694 \h 137.REFERENCE PAGEREF _Toc450237695 \h 138.ANNEXURE PAGEREF _Toc450237696 \h 16
EXECUTIVE SUMMARY
This report provides a critical analysis of the Malaysia Airline’s financial performance over the past 5 years i.e. 2009-2014. The company was able to turn around itself from making loss on several occasions, however with the accidents of its two flights in 2014, the overall market value by the investors of the company was hurt. This loss is reflected in the financial statements as well, which is discussed in this report.
INTRODUCTION
About the Company
Malaysia Airlines Berhard (Malaysia Airlines) is the flag carrier of Malaysia and has its home base at Kuala Lumpur International Airport. It is one of the largest airlines in Asia, with around 330 flights to over 50 destinations and serves 40,000 guests on a daily basis. It is a member of oneworld® group, which increases its connectivity to 900 destinations across 150 countries (Malaysia airlines.com, n.d).
After the tragic accidents of flight MH370 and MH17 in 2014, the company’s market value fell down by more than 40% in first 7 months of 2014. This resulted in Khazanov Nasional, a state-owned investment firm, which also owned 69.4% of the shares, to acquire the remaining shares as well. As part of this restructuring, the public trading of the shares was suspended (BBC, 2014).
Airlines Industry overview
Past few years have been traditionally good for the airlines industry in general. Due to the low oil prices and increasing operational efficiencies, the global airlines achieved a profit of USD20 billion in 2014. The fuel costs average approx. 25% of the total airlines cost. The decrease in oil prices does not only decreases the expenditure, but indirectly increase the revenue as well. The low oil prices, also increase the consumer income thus creates an opportunity for the airlines to start operations at new routes and increase the frequencies at existing routes (Boeing, 2015).
The demand for the airlines industry is driven by multiple factors as shown below:
Figure 1: Drivers of Air Travel demand (Source: Boeing, 2015).
Due to these drivers, it is expected that Airlines based out of Asia Pacific region will purchase/ lease approximately 40% of the new planes produced over 2015-2034. This upward trajectory is due to the rise in the income level and change in consumer spending pattern in Asia (Boeing, 2015).
Despite the oil prices being low, the prices are volatile. This reduces the certainty with which the airlines can strategise. In addition, the strengthening of USD is also a concern for many airlines as it decreases their receivables and increase their payables (Boeing, 2015).
CRITICAL ANALYSIS OF MALAYSIA AIRLINES
The financial analysis for a company is done with the aid of financial ratios. The financial ratios enables the assessment of the financial health of a business (Atrill & McLaney, 2006). The financial data is available in the annual report of the company in the form of Income Statement, Balance sheet & Cash Flow statement, which is then used for computing various ratios (Sinha, 2009).
The ratios are very helpful in understanding both intra and inter business financial strength or weakness. However, the mere computation of the ratios does not explain the reason behind the existence of a strength or a weakness. So, a detailed investigation is required to reveal the underlying reasons (Atrill & McLaney, 2006).
Since the concerned company was de-listed in 2014 from the Kuala Lumpur Stock Exchange, so the last publicly available financials corresponds to 9 months ending on 30th September 2014. So, in order to bring uniformity to the analysis, annual financials for the year ending on 31st December 2014 were estimated. This will be discussed in the annexures.
RATIO ANALYSIS
Growth ratios
In this sub-section the performance growth (year on year) is analysed. The growth of revenue, operating profit, profit after tax and earning per shares is expressed in percentages as below:
The revenue over the observation period was generally constant. It infers that the company did not expanded its operations. However, in 2011 a 20% increase was witnessed in the operating expenditure and 40% decrease was witnessed in other operating income. The higher expenditures were driven by 33% increase in the fuel cost. In addition, the hedging policy of the company was not effective as the foreign exchange losses increased by 208%. This reduced the PAT and EPS. From 2012 onwards, the overall operating expenses varied little as much as + 10% as the fuel costs also varied in the same range. However during the same period, other operating income varied as much as 189% in 2012, 122% in 2013 and -85% in 2014. This other operating income although not significant as percentage of the revenue, but due to the operating expenses being marginally more than the operating revenue, thus the impact of other operating income became significant. In addition, the fair value of derivatives changed drastically as well- 73% decrease in 2011, 130% decrease in 2012, 175% increase in 2013 and 90% decrease in 2014. The unrealised foreign exchange loss increased by 300% in 2011, decreased by 270% in 2012, increased by 200% in 2013 and decreased by 105% in 2014. The financing cost also varied drastically over the observation period- 15% increase in 2011, 50% in 2012, 90% increase in 2013 and 10% increase in 2014.
The above-mentioned parameters are generic in nature. There are few parameter which are exclusive to the airlines industry, which give a clearer picture of the airlines performance. The parameters chosen are PSK (Passenger Seat Kilometres) and ASK (Available Seat Kilometres). PSK is the measure of the traffic of an airlines. It is calculated by multiplying the number of revenue paying passengers by the distance travelled in kilometres (MIT, n.d). ASK is the measure of the passenger carrying capacity of a flight. It is calculated by multiplying the number of passenger seats by the distance travelled in kilometres (Centre for Aviation, n.d).
The growth is expressed in percentages as below:
The RPK and APK for the airlines demonstrated similar patterns. The growth decreased in 2012 and increased drastically in 2013. However, it decreased again in 2014. This shows the airlines was using its fleet more efficiently in 2013.
Profitability ratios
In this sub-section the profitability of the company is analysed.
The profitability with respect to the revenue is demonstrated below:
All the profitability ratios follow a similar pattern. The company has constantly struggled in order to maintain profit at all the levels after 2011. The profitability was lowest in 2011, improved in 2012, remained almost flat in 2013, but detoriated again in 2014. 2010 was a better year for the company in comparison to the later years. However, in 2010, the company made losses at the gross level, but made profit at the operating, PBT and PAT level. This was observed in other years as well when sometimes the losses at gross level were increased or reduced at other levels. This could be attributed to the low difference between the operational revenue and operational expenses. The other activities were not significant when compared with the revenue, but were significant when compared with the gross margin difference. So, the impact by the other activities was significant.
The profitability with respect to the availed resources is demonstrated below:
Based on the above ratios, the performance from an investors’ point of view is not good. None of the return ratios, were positive for the company. As discussed earlier, the revenue was almost constant over the observation period. This was despite the additional resources deployed in the company in form of the assets. In 2013 the equity capital was halved due to the rights issue, which should have made ROE higher, but simultaneous increase in the long term borrowing, maintained the total value of the company. This accompanied by the flat revenue, reduce the ROE even more. As discussed with the profitability ratios 2010 was the best year over the observation period, while 2011 was a bad period. The conditions improved in 2012, but in 2014, the returns detoriated drastically.
Solvency ratios
In this sub-section the long term solvency of the company is analysed as below:
The airlines industry in general, is characterised by the high debt. This high debt not only facilitates the operations of the airlines, but is used extensively for purchase/ lease of the aeroplanes. This financing despite being expensive, airlines have to opt for it. The debt ratios are increasing in general over the observation period. This is driven by the increase in the long term debt which increased by a 25% in 2011, 89% in 2012, 30 % in 2013 and decreased by 4% in 2014. The debt was taken to finance the lease of fixed assets- aeroplane. This is evident by the simultaneous increase in the fixed assets over the observation period- 18% increase in 2011, 42% increase in 2012, 14% increase in 2013 and 1% in 2014. Thus, it can be seen that a significant proportion of the debt was used for asset acquisition and remaining to manage the operations for the airlines. Apart from 2010, the company was in a strong position to meet its interest expense throughout the...