Finance assignment providing comparative ratio analysis of British Airways and Virgin Atlantic
Task: In your finance assignment critically analyze the financial performance and position of the Companies. You areexpected to select and calculate exactly 10 ratios of your choice over each of the three-year periods for thispurpose (2019-2020-2022). Explain, with reasons, if the airline you have chosen to analyze and compare with British Airways is a worthy prospective investment.
This finance assignmentshows the financial analysis of British Airways as its parent organization, International Airlines Group (IAG) is planning to acquire another airline. The company chose Virgin Atlantic as the targeted company as it is one of the competitors in the UK market. Virgin Atlantic is a Crawley-based British airline that flies across 32 destinations within the UK. IAG strives to acquire Virgin Atlantic, but before that wants to explore the different financial ratios. The financial ratio analysis in the finance assignmentwill determine whether IAG can benefit from such an acquisition or needs to look somewhere else.
Ratio analysis in the finance assignment
This particular section of the finance assignmentruns a comparative ratio analysis of British Airways and Virgin Atlantic for three consecutive years – 2021, 2020, and 2019. Accordingly, the report explores the financial ratios based on profitability, liquidity, solvency, leverage, and investment ratios.
The profitability aspects take the relevance of the operating margin, net margin, and return on equity.
Operating margin –
It is found in the finance assignment that the operating margin of both airlines is in a dire state owing to financial losses in 2020 and 2021 owing to the pandemic. British Airways suffered an operating loss of 47.90% and 97% in 2021 and 2020 while the losses amounted to 30.92% in 2021 and 80.63% in 2020 for Virgin Atlantic. In 2019, both airlines witnessed a profit which is 10.07% for British Airways and 1.86% for Virgin Atlantic.
Net margin –
The net margin of British Airways was pathetic as per the finance assignment analysis as the airlines suffered net losses of 44.62% and 87.48% in 2021 and 2020 while in 2019, it got a positive figure of 8.34%. Similarly, Virgin Atlantic suffered net losses of 99.65% in 2020 and 55.14% in 2021 but in 2019, it barely managed to get a profit of 0.95%. Amidst the given scenario, it seems that the worst is over as the losses are reducing as the flying operation resumes .
Return on equity –
It is found in the finance assignment that the return on equity (ROE) of British Airways stood at a loss in 2020 and 2021 having the figures of 190.84% and 91.96% respectively while in 2019, it was 18.32%. Comparatively, the losses for Virgin Atlantic were a little less with 82.23% in 2021 and 130.17% in 2020 and it barely got a profit of 9.63% in 2019. The recent pandemic paved the scope to operate in the market declining organizational revenue .
The liquidity of the aviation players will be explained in terms of the current ratio and the cash ratio.
Current ratio –
The current ratio of a firm determines its capability to pay off its liabilities within a short deadline . British Airways got a current ratio of 0.45, 0.36, and 0.74 in 2021, 2020, and 2019 respectively. It is found in the finance assignment again, Virgin Atlantic managed to get a current ratio of 0.59 in 2019, 0.5 in 2020, and 0.74 in 2021. So, Virgin Atlantic is in a better position than British Airways to pay off the debts and stay away from bankruptcy risk. Cash ratio –
The cash ratio is a conservative outlook to determine whether the firm can meet its obligations by using cash resources only. British Airways has a lower cash ratio of 0.2, 0.22, and 0.27 in 2019, 2020, and 2021 respectively. Again, Virgin Atlantic fares well having 0.26, 0.15, and 0.41 in 2019, 2020, and 2021 respectively. It is found in the finance assignment that Virgin Atlantic has a better cash reserve than British airways to seek liquidity .
The solvency aspect is to be justified in terms of the receivable days.
Receivable days –
The receivable days show how efficiently the firm collects the dues from the market . British Airways have better efficiency having receivable days for 33.01 days in 2019, 32.48 days in 2020, and 44.87 days in 2021. It is found in the finance assignment that Virgin Atlantic has around 35.95 days, 68.12 days, and 97.98 days in 2019, 2020, and 2021 respectively. It indicates that comparatively British Airways is more efficient than Virgin Atlantic to collect the dues from the market.
The leverage element will be explored in the finance assignmentin terms of debt-to-equity ratio, debt ratio, and the times interest earned ratio.
Debt-to-equity ratio –
The debt-to-equity (D/E) ratio determines the financial leverage of the company and the lower the figure, it is healthy for the business . As per the finance assignment findings, British Airways substantially increased its leverage from 2.12 in 2019 to 7.79 in 2020, and 8.91 in 2021. Virgin Atlantic is quite debt-laden as it had a figure of 11.88, 5.10, and 6.64 in 2019, 2020, and 2021 respectively. Though both the airlines are debt-laden and the pandemic added fuel to the crisis, Virgin Atlantic seems to be in bigger trouble as its leverage was higher even during pre-pandemic times.
Debt ratio –
As per the finance assignment the debt ratio determines the proportion of assets financed by debts . British Airways encountered a debt ratio of 67.95% in 2019, 88.63% in 2020, and 89.91% in 2021. Virgin Atlantic got a debt ratio of 105.88%, 120.45%, and 128.08% in 2019, 2020, and 2021 respectively. It shows that Virgin Atlantic carries high leverage despite the impact of the pandemic.
Times interest earned –
It determines the businesses’ ability to pay off the interests against the debt obligations . British Airways got a figure of 6.11, -14.43, and -4.12 in 2019, 220, and 2021 respectively. Similarly, apart from 0.51 in 2019, Virgin Atlantic experienced negative figures both in 2020 and 2021 with 4.64 and 1.43 respectively. It is analyzed in the finance assignment that Virgin Atlantic has lower profitability compared to British Airways making it problematic to pay off the loan interests effectively.
The investment ratio will be described through the EPS of British Airways. Virgin Atlantic is not yet listed on the London Stock Exchange (LSE).
It is found in the finance assignment that the earnings per share (EPS) of British Airways got negative figures of £0.59 and £1.96 in 2021 and 2020, but in 2019, it got around £0.86. It shows that the earnings are not satisfactory and the pandemic played a prime role in leaving the airlines in tatters . Similarly, Virgin Atlantic is also suffering owing to losses for two consecutive years in 2020 and 2021.
Interpretation of the finance assignment
As per the finance assignment analysis, the financial ratios of both British Airways and Virgin Atlantic are not at all satisfactory because the recent pandemic took a toll on the aviation segment. British Airways has been struggling with its finances and so does Virgin Atlantic. The latter has lower profitability even in 2019 when British Airways was keeping its profitability up to the mark. Its liquidity aspect is slightly better than British Airways but lacks in efficiency as the company takes much time to recover its dues from the market. Lastly, the leverage shows that Virgin Atlantic is a debt-laden organization and lacks the financial strength to support the debt payments.
Conclusion and recommendation
The finance assignmentconcludes thatthe aviation industry is reeling under the heavy losses suffered in the past years due to the pandemic. Both British Airways and Virgin Atlantic are struggling with their issues, so it is not suitable for British Airways to acquire Virgin Atlantic at the moment . The performance of Virgin Atlantic is not satisfactory and the airline lacks in every aspect from profitability to solvency and leverage. Thus, it is recommended in the finance assignment to not to acquire a debt-laden company like Virgin Atlantic, rather British airways should look for other options.
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