Financial Statement Analysis Assignment: Air New Zealand Key Performance Drivers

Question

Assignment 1 – Individual Application paper
Assessment brief: Discuss the revenue sources and cost structures, the importance of ancillary (non-flying) revenues, and the general level of annual profitability and identify key performance drivers of Air New Zealand as a major full service network carrier (FSNC) over the period 20122017 (five financial years).

Objectives: The objectives of this assignment are that you will be able to:

• Identify and clearly communicate the revenue sources and cost structures of a major full service network carriers (FSNC) – Air New Zealand for the period 2012 to 2017 (five financial years)
• Assess and report on the growing importance of ancillary revenues (non-flying) for Air New Zealand for the period 2012 to 2017
• Assess the annual profitability of air New Zealand for the period 2012 to 2017
• Identify and explain the key financial performance drivers of Air New Zealand over the period 2012 to 2017

Task scope

• Analyse and describe the revenue and cost structures (by the reported cost categories) of Air New Zealand over the period 2012 to 2017
• Analyse and discuss the annual trends as well as the and importance of non-flying (ancillary) revenues for Air New Zealand over the period 2012 to 2017
• Identify the key factors that have affected the revenue sources and costs for Air New Zealand over the period 2012 to 2017 (five financial years).
• Analyse and discuss the annual profitability trends of Air New Zealand over the five-year period 2012 to 2017. Calculate and predict the profitability trend for the next-five period to 2022.
• Identify and explain the key financial performance drivers of Air New Zealand during the forthcoming five-year period to 2022.

Answer

Abstract
Financial statement analysis is a tool that helps in the determination of and financial performance of the company. Financial statement analysis has become one of the most important management tools to determine the internal growth of the company and this analysis tool is also used by shareholders to determine whether to invest in a particular company or not (Alin-Eliodor, 2014). In this report, the financial statements of Air New Zealand will be evaluated. Air New Zealand is a company that is operating in New Zealand's airline industry and it’s headquarter is situated in Auckland. New Zealand is operating in around 20 domestic destinations and 31 International destinations in 19 countries around the world. This report will analyze the financial statement of Air New Zealand for the past 6 years that is 2012 to 2017 to analyze the profitability of the company. This report will also analyze the key factors that have contributed to the success and growth of Air New Zealand.

Task 1- Revenue sources and Cost structure
There is two major component in the financial statement of any company that are revenue sources and cost of production of goods and services. Revenue sources are the component that shows resources which company has generated revenue for its shareholders. Cost can be defined as the expenses that are incurred for generation of revenue for the company. In this part of the report, various sources of revenue will be analyzed for the last 5 years of operation in Air New Zealand.

Sources of revenue

In all five financial years that are under consideration, main sources of revenue for the company are as follows

Passenger revenue- This is the main source of revenue and it accounts for most of the revenue generated by Air New Zealand. This category of revenue accounts for at least eighty percent of total revenue generated by the company this is a common source of revenue for any airline company as ticket fees are charged from every passenger that is traveling through airline from one location to another location.

Cargo- These are the services in which goods are transferred from one place to other with the help of airlines. In this type of services, contracts had been made by airline companies with different international parcel service companies such as FedEx in which airlines companies air freight to transfer goods from one destination to another destination. It is also an important source of revenue for the company as it accounts for around 6.48 percentage of total revenue generated by the company over the last five financial years (Wahlen, Baginski and Bradshaw, 2014).

Contract services- Revenue from these services are generated by making contact with passengers for booking small airplanes or private planes to travel from one destination to another destination. A number of such bookings are not very high therefore revenue generated from these sources are also not very substantial birthday also count for 4.83% total revenue generated by the company in all financial year under consideration.

Other revenue- These are the revenue that is not covered by any of the above-mentioned sources of revenue. Other revenue accounts for around 4.79% of the total revenue generated by airlines.

Total revenue of the company over the last 5 years has been increasing except in the year 2017 where total revenue generated has decreased from 448 1 million in 2016 to 4376 million in 2017. The main reason behind such a decrease is less number of the customer has traveled in 2017 as compared to 2016 (Thomas et.al, 2016). Other than that in all the financial year the revenue has been increasing and it shows the brand value of the company in the market. Overall revenue growth in the Year 2015 and 2016 has been substantial as overall revenue has grown by approximately 6 % in both of this financial years.

Cost structure
Cost is the expense that is incurred by a business organization for the production of goods or providing services to its customers. All the expenses of the company can be divided into three major categories operating variable expenses, operating fixed expenses, finance cost, and tax cost (Palepu, Healy and Peek, 2013). The cost structure of the company can be defined by variable expenses and fixed expenses incurred by the company on the production of goods and services. The ratio between fixed and variable operating expense will define the constructor of the company.

On an average ratio between variable expenses and fixed expenses of the company is 85:15. This ratio shows that the majority of the expenses of the company are variable which is common for an organization working in the airline industry. This cost structure should be maintained by the company in future also.

Task 2- Growing importance of ancillary revenue
Ancillary services can be defined as the services that are provided in addition to the core business services of the company. In the case of an airline industry facility services include the services of drinks, movies, a hot meal, extra legroom, faster boarding etc. provided on flights to the customers. Extra money charged for each of the services and it increases the overall revenue of the company. After the introduction of these services, the total revenue of the companies is not only dependent on the low fare segment of the airline. Proper segmentation has been done by all the airline companies on the basis of service provided to each of the class of passengers traveling on the flight. Today all business organization working in the airline industry has classified the various type of class flights such as the economy, business economy, first class, business class etc. (Brigham et.al, 2016). All of these classifications are done on the basis of ancillary services provided to each of these class flights.

It can be said that please ensure little services provided will be in favor of the airline as they are providing world class services to customer and customer has an option to avail the services or not. If these services are provided to every passenger on the flight then it will increase the per passenger cost which will affect the flight ticket price collected from the passenger (Mahadevan, 2015). Therefore it can be said that the current system of providing internet services to customers is effective and it will increase the overall profitability of Air New Zealand.

Task 3- Annual profitability
Profitability is one of the key factors that shows the overall financial performance of the company. The main objective of any business organization is to increase its profitability and return as much as money possible for shareholders in exchange for the investment done by them. Return provided to the Shareholders can be increased only if the net profitability of the company has increased over the period of time.

In the above statement, it can be seen that the profitability of the company has been increasing in the year 2013 to 2016 but there is a drastic decrease in the profitability of the company in the year 2017. In the year 2014, 2015 and 2016 operating profitability of the company has increased by 25%, 31%, and 43% respectively but in the year it’s has decreased by 33%. In the year 2017, the total revenue generated by the company has decreased and total operating expenses have also increased that has resulted in decreased profitability. Net profits of the company have also shown a similar trend over the period of five years under consideration (Horngren et.al, 2012).

Task 4- Key financial performance drivers of Air New Zealand
Key financial performance drivers can be defined as the factors that contribute toward financial success and achievement of business goals and objectives of a company. Following are some of the key financial performance drivers of Air New Zealand-

Brand value- Air New Zealand started its operations in the year 1965 and over the period of times, it has established a reputation and brand value in the airline industry. It is considered one of the most profitable airline companies in New Zealand. Experience and brand value in the airline industry has contributed toward the success of the company.

Quality of service- Quality of services provided by Air New Zealand is also an important factor that has contributed to its success. Quality of services is one of the most important factors that is focused on management in their operations (Parmenter, 2015).

Customer satisfaction- The Main objective of the company is to provide customer satisfaction and management of the company is working to satisfy their customers through its operations.

Setting targets- Achievable goals and objectives are set by the organization at the beginning of the financial years. The setting of these goals and objectives helps management to give a sense of direction to their operations.

Conclusion
It can be said that the financial position of the company was efficient in the first four financial years but in the year 2017 it has not been impressive. Revenue, net profit, and operating profit have decreased in the year 2017 as compared to all the four preceding financial years. It is expected that this set back in the financial performance of the company is temporary and it will recover in the year 2018. According to the interim financial statement published by the company on 22nd Feb 2018, overall profits for the first six months have been impressive and it is expected that same nature of operations will continues in next six months of the year 2018. Net profit earned by the company in the first six months of 2018 was $256 million whereas profit for the first six months in the year 2017 was $232 million. It can be said that the increase in net profit for the first six months is a positive indicator for the company and it can be expected that profits of the company will increase in the coming financial years.

References
Alin-Eliodor, T., 2014. Financial Statements Analysis. Journal of Knowledge Management, 4(5), pp.62-73.

Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Horngren, C.T., Bhimani, A., Datar, S.M., Foster, G. and Horngren, C.T., 2012. Management and cost accounting. Harlow: Financial Times/Prentice Hall.

Mahadevan, B., 2015. Operations management: Theory and practice. Pearson Education India.

Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition. Cengage learning.

Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning KPIs. John Wiley & Sons.

Thomas, R.R., Van Greuning, H., Henry, E. and Michael, A.B., 2016. International financial statement analysis.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.