British Airways Is the Largest International Scheduled

British Airways is the largest international scheduled airline in the United Kingdom. It was founded in 1974 through the nationalization of four UK carriers. The company is strictly focused on the airline business, with different segments being domestic, shorthaul and longhaul, the latter two reflecting international routes. In these businesses, BA competes against a wide range of carriers. EasyJet, Ryanair, Virgin and bmi compete for a large share of the business to and from Europe. Other international airlines with landing rights in London compete for longhaul business. In the 2008/09 report, BA indicated that carriers from the U.S., Africa and India had all established slots at Heathrow. The London longhaul market is also served by charters and by low-cost longhaul operators such as Air Asia. British Airways combats this by entering into alliances that allow it to draw passengers from partner airlines around the world, with the objective of maximizing longhaul capacity in particular (British Airways 2008-09 Annual Report).

The most important recent news concerning BA is the merger with Iberia. It was announced in early 2012 that the first year of the combined airline, which operates under the name International Consolidated Airlines Group, saw profits of €485 million, compared with €225 million in profit in fiscal year 2010. Iberia suffered losses, so this profit derived from strength at British Airways (Rothwell, 2012). British Airways' traditional strength in the Trans-Atlantic market has helped to drive this success.

The annual report online outlines some of the key accounting policies. Depreciation of plant, property and equipment is calculated as the cost of the equipment less the estimated residual value on a straight-line basis. The carrying value is revisited periodically when events or changes indicate that the carrying value may not be recoverable. Cabin interior investments are depreciated on a straight line basis over five years or the remaining life of the aircraft, whichever is lower.

Inventories are "valued at the lower of cost and net realisable value, using the weighted average cost method. Allowances are made for doubtful receivables. Pension benefits are recorded in line with IAS 19 'Employee Benefits.' Foreign currency translation, which caused a significant negative impact on the current years' earnings, are based on the spot exchange rate at the time of the transaction, and translated at the rates ruling at the balance sheet date. Derivatives are valued in accordance with IAS 39 'Financial Instruments -- Recognition and Measurement.'

In 2009, British Airways saw a 3.1% improvement in passenger revenue and an improvement of 9.4% in cargo revenue, for a total revenue improvement of 2.6%, given that "other revenue" slipped for the year. The airline saw its £726 million profit in 2007-08 turn into a £358 million loss in 2008-09. The airline noted that higher fuel prices were a contributor to this, and indeed that appears to be the case. Whereas employee costs were almost the same, fuel and oil costs rose from £2.055 billion to £2.969 billion, an increase of 44.7%. The real value increase of £914 accounts for most of the swing between the two years in terms of profits. There were modest increases in most costs, and the company took an additional £101 million in currency charges.

On the balance sheet, total group assets declined by 7.1% in the year. Because of the loss, equity declined 43.4% in the same period. While non-current liabilities declined by £38 million, the amount of current liabilities increased significantly, by 18.6%. The biggest increase was in derivative financial instruments. Overall, the company increased its long-term borrowings slightly for the year, again partly due to the losses incurred.

With respect to the financial measures, the comparison is going to be against EasyJet.

British Airways

EasyJet

Current ratio

0.6

1.4

Cash ratio

0.1

0.7

Gross margin n/a

8.4%

Operating margin

-2.4% (loss)

2.3%

A/R turnover

17.1x

11.0x

Fixed asset turnover

1.3x

0.7x

ROE

(loss)

5.5%

ROA

(loss)

5.2%

CFFO/Cash for LT Debt

2.0

1.9

CFFO/Cash for non-current assets

0.24

0.26