Annual Reports for Two British-Based,

¶ … annual reports for two British-based, publicly traded airlines, British Airways and Ryanair, the latter by virtue of its trade on the London Stock Exchange rather than its corporate headquarters which remains in Dublin. This paper will analyze the annual reports of these firms in a number of contexts. The relevance of different components of the reports to different stakeholders will be discussed. The financial performance of Ryanair will then be analyzed, including a financial ratio analysis.

The information contained in the annual reports is, for the most part, mandated by law. The annual report contains both financial and non-financial data that pertain to the performance of the company in the past year, and to the expectations that the company has for its future. Financial statements are prepared in accordance with International Finance Reporting Standards and so are relatively consistent in format across all companies.

There are four major stakeholders for whom the annual reports are produced. They are the existing shareholders, potential shareholders, lenders and suppliers and employees. A fifth group is comprised of securities regulators, although the relevance of the reports to that group is not going to be discussed here.

The typical annual report is broken down into a number of sections. There is usually a discussion from management about the firm's performance as well as the businesses and the risk factors inherent in those businesses. Some discussion is usually made about the firm's challenges and the strategies it intends to adopt to meet those challenges. There are financial statements presented -- an income statement, a balance sheet, a statement of changes in cash flow, a statement of changes in equity. There are note to the financial statements, and a significant amount of valuable information is contained in these notes.

For the existing shareholder, the annual report serves two distinct purposes. The first is as an explanation of past performance. Existing shareholders have experienced fluctuation in the value of their shares, and may use the annual report to gain insight into the reasons for that part performance. The underlying assumption of the efficient market hypothesis is that equity markets have perfect information. This implies that all of the factors that have contributed to the stock price fluctuations are already publicly known. However, the annual report serves as a compilation of this data, making it useful for the purposes of understanding past performance. Most elements of the report can contribute to this knowledge, in particular the statements that management makes about past performance, the financial statements and the notes to the financial statements.

Both existing and potential shareholders are concerned with future performance. These stakeholder groups can gain a substantial amount of information about a company from the annual reports than can be used to make predictions of future performance. Management's discussion, while typically stopping short of making outright predictions, does tend to offer insight into the firm's future by explaining future strategy and tactics, responses to the expected future operating environment and by providing insight into management's view of the business and its prospects. The financial statements are also used by potential investors to provide insight into the current financial position of the company and what trends the company may be experiencing. The notes to the financial statements are also valuable because they provide insight into the underlying causes of the firm's current financial position.

For lenders and suppliers, the annual report lends insight as well. Lenders typically require the financial statements prior to making the lending decision. The financial statements, and the notes to the financial statements, are therefore useful because they illustrate the company's current financial position. This position is often used as the basis for the company's overall creditworthiness, a key element in the lending decision. At the level of British Airways or Ryanair, the lending decision will be made by institutional bond-buyers and underwriters, who need the financial statements less to provide information about creditworthiness and more for the purposes of pricing the bond issue. Suppliers will be more concerned about creditworthiness if they are deciding to extend credit.

For employees, the financial statements may bear some relevance, particularly if the employees are entitled to an equity position either directly or through a firm-sponsored retirement scheme. However, management's discussion is generally more important. This section is relevant to employees because it places the past year and some of the strategic decisions undertaken by management into their broader context. Management's discussion can also give employees a better sense of what to expect for the coming year as well. In addition, management's discussion can also set a tone for the employees. It is relevant because it can be used to convey optimism about the future and help to share the corporate culture by emphasizing certain ideals, for example in a statement of corporate social responsibility or ethics, or in the communication of a vision or mission statement. It should be noted, however, that the use of annual reports to communicate with employees is on the decline (Pethokoukis, 2008).

b) the information contained in the annual reports in general meets these criteria. The financial information in particular does, largely as a result of stringent accounting guidelines that roughly standardize the types of information gathered, the methods by which it is gathered and the methods by which it is presented. The statements of both Ryanair and British Airways are largely consistent as a result of the accounting standards, and therefore provide roughly equivalent value to current and potential investors, as well as to lenders. The notes to the financial statements are also constructed in line with accounting standards, and therefore can be expected to demonstrate consistency between the two companies.

Many elements of the managerial discussion provide valuable information to all relevant stakeholder groups as well. With British Airways, the annual report contains detailed management discussion that covers many critical topics -- strategy, performance indicators, risk factors, and expectations of future strategies and operating environment. The discussion also explains in significant detail, for the benefit of potential investors, the nature of the company's business. Fleet information is provided, as is information with regards to the destinations served. There is also data provided on the unique measures of success that are used in the airline business. This is important for both present and potential investors because it allows them to gain insight into the key drivers of the results in the financial statements. The BA report allows the reader to understand not just the end numbers of corporate performance, but the different variables that contributed to that performance.

With Ryanair, there is also a considerable depth of information provided in the manager's notes and strategic overview. As with BA's annual report, this information conveys the key success measures in the business and the degree to which Ryanair meets those measures. The notes explain the key drivers of Ryanair's success and how the firm is differentiated from its competition. The target market for this detailed operational information is again the present and potential investors, and the degree of insight that can be gained from the Ryanair report is just as high as for the British Airways report. Both airlines provide ample insight in their managerial discussion to shed light into both their successes and failures, and how they intend to deal with the challenges and opportunities of the future.

c) Ryanair has been one of the most impressive growth stories in aviation of the past couple of decades. Their current situation, however, can be evaluated through ratio analysis of their financial statements. There are several types of ratio analysis, including liquidity ratios, profitability ratios, debt ratios and investment valuation ratios.

The key liquidity ratios are the current ratio, the quick ratio and the cash ratio. The current ratio measures the current assets compared to the current liabilities. The other two ratios break down the current assets into component parts. These ratios serve to measure the ability of the firm to meet its short-term liability requirements. The current ratio for Ryanair is 1.84 for 2009, up from 1.53 in 2008. The quick ratio is 1.47 and the cash ratio is 1.44. These figures indicate that Ryanair has a high degree of liquidity. The cash ratio in particular is strong, as this figure is rarely above 1. That there is a low spread between the current ration and the cash ratio indicates that the bulk of Ryanair's current assets are held in cash, which reduces the liquidity risk. If the bulk of current assets are held in inventory or receivables, those may not be able to be converted to cash as easily in order to meet the company's liquidity needs.

The key profitability ratios are the return on assets, the return on equity, the gross margin and the net margin. These ratios indicate the degree to which the company is able to convert its assets, equity and revenues into profits. Ryanair lost money in 2009, while it turned a profit in 2008. Thus, the return on assets in 2009 was -2.6%, versus 6.1% in 2008. The return on equity was -6.1% in 2009 and was 15.5% in 2008. The asset and equity levels were relatively stable for the two years, so most of the changes can be attributed to changes in the net income. To investigate those net income changes, the margins can be analyzed. The gross margin for 2009 was 3.14%; for 2008 it was 19.8% and for 2007 it was 21.1%. The net margin for 2009 was -5.7%; for 2008 it was 14.3% and for 2007 the net margin was 19.4%. What this indicates is that the decline in the profits and therefore in the ROE and ROA stems from a decline in operating profit.

For Ryanair, the operating revenues increased 8.4%, but the operating expenses increased 30.9%, leading to the sharp decline in operating profit. This focuses attention on the key cost drivers that contributed to this unusually large increase in operating costs. In this situation, the primary culprit is the fuel charge, which increased 58.9%. The dollar value increase of the fuel and oil expense was around two-thirds of the total increase in operating expenses. The managerial report to shareholders explains this increase. Fuel costs increased for all airlines but unlike other airlines Ryanair does not pass along such increases in the form of a fuel surcharge. This is a strategic decision that the company uses to maintain its position as the lowest-cost carrier in all of its markets. Not imposing a fuel surcharge, however, means that the company must absorb all of the increase in fuel prices. As a result, the profitability margins suffered in 2009. The company attempted to mitigate the impact of high fuel costs through hedging, but lost that gamble in late 2008 (part of fiscal 2009) when fuel prices crashed after management had locked in a price of $124 per barrel (Robertson, 2009).

The debt ratios are an indicator of the company's long-term financial position. This information is crucial both to potential shareholders and to lenders (and potential lenders). The debt ratio, debt-to-equity ratio and the interest coverage ratio are all used as indicators of the firm's long-term financial position. For Ryanair, the debt ratio in 2009 was 34.3% and in 2008 was 30.0%. The debt-to-equity ratio in 2009 was 90.5% and in 2008 it was 75.9%. These figures indicate that Ryanair has increased its gearing in the past year. The gearing ratio is not abnormal for an airline, nor is it cause for concern among shareholders or bondholders either. However, if a long-term trend emerges that the company is steadily increasing its gearing without having sufficient strategic motivation to do so, that could be an indicator of financial distress. Of more concern, however, is the decline in the interest coverage. As the operating profit has declined, so too has the value of this ratio. Interest coverage in 2008 was 5.5 times, while in 2009 it was .70 times. This indicates that the company is barely making enough money at present to cover its interest obligations, whereas in 2008 it was easily making enough money.