BRITISH AIRWAYS Oneworld is a global alliance that brings together ten of the world's biggest and best airlines,

all committed to providing world-class service and value. Oneworld founder member British Airways launched the world's first daily scheduled international air service and remains the world's leading international airline. Throughout its history, it has been a pioneer - the first airline to offer jet passenger services, the first to operate weather-beating auto landings, the first to offer supersonic passenger services and the first in the modern era to offer fully-flat beds. British Airways' earliest predecessor was Aircraft Transport & Travel, Ltd., founded in 1916. On August 25, 1919 this company inaugurated the world's first scheduled international air service, with a converted de Havilland 4A day bomber leaving Hounslow (later Heathrow) Airport for London and also Le Bourget in Paris. Eight days later another company, Handley Page Transport, Ltd., started a cross-channel service between London's Cricklewood Field and both Paris and Brussels. In 1985 British Airways was made a public limited company, but all its stock was retained by the government until such time that it could be offered to the public. The privatization of British Airways (which was limited to a 51 percent sale) was delayed by a number of problems. The company's chief domestic rival, British Caledonian, opposed British Airways' privatization claiming that the company already controlled 80 percent of the domestic market and was too large to compete against. But British Airways' most significant obstacle to privatization involved reducing the debt that it accumulated during the 1970s, and increasing the company's profitability. In February 1987 the privatization was finally consummated when 720.2 million shares of British Airways stock were sold to the public for one billion pounds ($1.47 billion) Principal Subsidiaries: British Airways Capital Ltd. (89%); British Airways Finance BV; British Airways Holidays Ltd.; Caledonian Airways Ltd.; Qantas Airways Ltd. (25%, Australia); TAT European Airlines S.A. (49.9%, France); Deutsche BA L.m.b.H. (49%, Germany); Air Russia (31%); Bedford Associated, Inc. (U.S.); British Airways (U.S.); Galileo International Partnership (14.6%, U.S.); USAir Group, Inc.(24.6%, U.S.).

CAPITAL STRUCTURE
AIRLINES British Airways (LIBOR Rate = 2) 1.40 9.65% 3.5 2283.06

BETA COST OF EQUITY MARKET PREMIUM MARKET CAPITAL

CAPM will allow us to estimate the expected returns on BA. Using the data available to us we can estimate that. The UK risk free rate of return = 4.75 %( treasury bills) The UK equity risk premium (over the T-Bill rate) = 3.5% Britsh airways beta = 1.4 Ke= Rf + B (E(rm)-Rf) Ke=4.75%+1.4*3.5% Ke=9.65% The cost of equity for the airline industry is 8%. The beta 1.4 for BA implies an expected return of 9.65%. However, the observed historical return is slightly higher than 13.5%.As the return is inversely related to price. The slightly higher the return than expected suggests that the share is undervalued in the market and the price should rise until the return drops to the level we expect the companys exposure to market risk.

PROFITABILITY RATIOS YEAR NET INCOME TOTAL ASSET TOTAL DEBT TOTAL EQUITY SALES 2004 130 11336 5451 2465 7560 2005 377 11671 7005 1185 7712 2006 451 12174 6668 1861 8213 2007 290 11384 5348 2211 8492 2008 712 11292 4538 3062 8758 2009 -375 10488 4500 1646 8992

YEAR PROFIT MARGIN RETURN EQUITY RETURN ASSET

2004 1.719%

2005 4.888%

2006 5.4912%

2007 8.129%

2008 3.414%

2009 -4.17%

ON 5.27%

31.8%

24.23%

13.11%

23.25%

-22.7%

ON 1.146%

3.231%

3.71%

2.5%

6.31%

-3.75%

PROFIT MARGIN We can infer from the above table that the profit margin increased at a constant pace till 2007 but in 2008 and 2009 there is a big dip. The decline is due to the decline in net income and sales during the year as during 2009 British Airways suffered a big loss because of the recessionary economic scenario. Revenue also fell down by 13.7 percent. ROA The ROA has been constantly increasing till 2008 but in 2009 it goes negative this is due to the reported losses during that year.

ROE The ROE had increased till 2006 than there was a sharp decline in 2007 than again it increased during 2008 but due to recession in later 2008-2009 they suffered a loss and thus the ROE is negative. The fourth quarter indicated a decline since 2007, as no sign of economic recovery is there 2009-2010 will also be difficult year for the company. The companys main focus is on cash. They reported record profitability 12 months ago in 2007-2008, their financial strength had significantly improved over recent years and they were in a good position to deal with the extremely difficult economic scenario faced by the industry caused by economic slowdown and record fuel prices. The economic recession that followed was severe, far more than, had been predicted. It hit the demand for air travel significantly, particularly premium business. That, coupled with record fuel prices in the early part of the year, led to an operating loss of 220 million for the year, down 1,098 million and a pre-tax loss of 401 million, down 1,323 million from the previous year. They incurred costs of 78 million, mainly redundant cost, associated with restructuring the business to make it more competitive for the future. Depreciation, amortization and impairment costs include an impairment of 5 million on the goodwill which arose on the acquisition of LAvion. Also, fuel and oil cost increased by 44.5% because of the high oil price. The finance income for the year was 95 million, down 16 million from the previous year this was due to both lower average interest rates and cash balances.

The stock curve

http://www.guardian.co.uk/business/britishairways

The stock curve clearly depicts that the stock price was highest in the year 2007-08 and declined to more than half in 2009.

WORKING CAPITAL MANAGEMENT YEAR CURRENT ASSET TOTAL ASSET CURRENT LIABILITY SALES 2004 2765 11336 2996 2005 2844 11671 3269 2006 3666 12174 3432 2007 3431 11384 3625 2008 3148 11292 3492 2009 2346 10488 4142

7560

7712

8213

8492

8758

8992

The reduction in total assets reflects adverse movements on fuel derivatives and lower trade receivables as a result of reduced credit card processing and a general decline in the economic environment. The change in current assets primarily reflects reductions in short term derivative financial assets, current interest bearing deposits and cash and cash equivalents. The increase in current liabilities primarily reflects the provision for settlement of the competition investigations, partially offset by lower accruals and deferred income. According to our analysis, their working capital is sufficient for their current requirements. YEAR 2004 2005 -425 2006 234 2007 -194 2008 -344 2009 -1796

NET WORKING -231 CAPITAL CURRENT RATIO ROA CURRENT ASSET TURNOVER .92

.87

1.068

.95

.901

.566

1.146% .365

3.231% .368

3.71% .446

2.5% .4040

6.31% .359

-3.75% .261

Net Working Capital

500

0 YEAR -500 2003 2004 2005 2006 2007 2008

-1000

-1500

-2000

As the NWC is negative this implies that BA consists of lower level of Current Asset than Current Liabilities. The NWC for BA is negative for a long period of time this does not necessarily mean that BA cannot pay off their short term liabilities as a negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivable which in case is true for BA. In the year 2009 the Net Working Capital has declined also the Current Ratio, ROA, Current Asset Turnover have decreased thus the company has a very aggressive approach and thus fall under the higher risk-return policy. Also the level of current asset is low. The R2 coefficient gives us the correlation between the security and index returns. For BA the R2 value is 0.4743 which implies that 47.43% of the risk is driven by market factors and 52.57% comes from other sources. http://beginnersinvest.about.com/od/analyzingabalancesheet/a/negative-working-capital.htm
ANNEXURES http://www.britishairways.com/cms/global/microsites/ba_reports0809/financial/balance.html http://www.britishairways.com/cms/global/microsites/ba_reports0809/pdfs/BA_AR_2008_09.pdf http://www.britishairways.com/cms/global/microsites/ba_reports/pdfs/BA_Report_2007_08.pdf http://media.corporate-ir.net/media_files/irol/69/69499/Annual_Report_and_Accounts.pdf http://media.corporate-ir.net/media_files/irol/69/69499/Report_2006.pdf http://media.corporate-ir.net/media_files/irol/69/69499/AnnualReportandAccounts2004-2005.pdf http://media.corporate-ir.net/media_files/irol/69/69499/downloads/Report_and_Accounts_2003-2004.pdf

Cash flow Their cash, cash equivalents and other current interest-bearing deposits at March 31, 2009, were 1,381 million. There was a reduction of 483 million when compared with the preceding year. The reduction was mainly due to the operating loss sustained by the significant downturn in the economy, resulting in cash flow from operating activities being insufficient to cover cash used in investing and financing activities.

LEVERAGING
YEAR 2003 2004 2005 2006 2007 2008 2009

NET INCOME

72

130

377

451

290

712

-375

TOTAL ASSET

12900

11336

11671

12174

11384

11292

10488

LONGTERM DEBT

3074

2751

2929

3602

4045

5374

6441

TOTAL DEBT

7722

5451

7005

6668

5348

4538

4500

TOTAL EQUITY

2058

2465

1185

1861

2211

3062

1646

SALES

7688

7560

7712

8213

8492

8758

8992

YEAR LONG TERM DEBT RATIO DEBT/EQUITY EQUITY MULTIPLIER TOTAL TURNOVER ASSET

2003 0.598 3.752 6.26

2004 1.89 2.211 4.6

2005 1.404 5.911 9.84

2006 1.516 3.58 6.54

2007 0.6466 2.41 5.14

2008 0.637 1.48 3.68

2009 0.7964 2.73 6.37

0.595 0.94%

0.667 1.72%

0.661 4.89%

0.6746 5.49%

0.745 8.13%

0.7755 3.41%

0.857 -4.17%

PROFIT MARGIN

The debt-equity ratio is declining till 2008 but has a sudden increase in the year 2009 this is due to the increase in long term debt and a sharp decline in equity. Till the year 2007

company is a highly levered company by debt but it declines in 2008 as they had a record profit in the year 2007 but again in 2009 the long term debt and the debt-equity ratio increase. In the First half of 2009, BA earned a revenue of 1,983 million but made an operating loss of 94million.The overall cost incurred by BA is down by 6%.As of latest the fuel costs are down by 15.6 % and non-fuel costs are down by 2.4%.The BA is focussing on raising cash to improve liquidity. These results are reflective of market conditions across Europe. BA is still continuing to experience unprecedented trading conditions and thus they are stressing on reducing costs as far as possible. They have been successful in reducing costs and improving operational performance, but these actions on their own are not enough. To secure the long term future of the business, they must introduce more permanent structural change (like in talks with UNITE, merger with IBERIA)
http://media.corporate-ir.net/media_files/irol/69/69499/Annual_Report_and_Accounts.pdf http://media.corporate-ir.net/media_files/irol/69/69499/Report_2006.pdf http://media.corporate-ir.net/media_files/irol/69/69499/AnnualReportandAccounts2004-2005.pdf http://media.corporate-ir.net/media_files/irol/69/69499/downloads/Report_and_Accounts_2003-2004.pdf http://www.britishairways.com/cms/global/microsites/ba_reports0809/financial/balance.html http://www.britishairways.com/cms/global/microsites/ba_reports0809/pdfs/BA_AR_2008_09.pdf http://www.britishairways.com/cms/global/microsites/ba_reports/pdfs/BA_Report_2007_08.pdf http://media.corporate-ir.net/media_files/irol/69/69499/Annual_Report_and_Accounts.pdf http://media.corporate-ir.net/media_files/irol/69/69499/Report_2006.pdf

DU PONT ANALYSIS ROE= PROFIT MARGIN * TOTAL ASSET TURNOVER * EQUITY MULTIPLIER Our ROE is depended upon three factors as we can see from the profitability ratios that ROE is declining this is due to the huge decline in our operating efficiency but our equity multiplier and total asset turnover has increased this implies that we are getting good return on our assets and also The firm uses 27.3% debt to finance itself in the year 2009.BA mainly uses Long term sources for financing.
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTE3NzB8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

EPS-EBIT ANALYSIS YEAR EPS EBIT 2003 12.1 390 2004 23.4 417 2005 35.2 558 2006 40.4 527 2007 59 482 2008 61.9 811 2009 -32.6 306

EPS ANALYSIS

80 60 40 20 0 YEAR -20 -40 2003 2004 2005 2006 2007 2008

EBIT ANALYSIS
900 800 700 600 500 400 300 200 100 0 YEAR 2003 2004 2005 2006 2007 2008

The EPS increases as the level of EBIT increases it is at peak when the EBIT is at 800 in year 2007 this is the year they recorded a record profit. In 2008 although there is a huge decline in the EBIT level from 800 to 300 thus they faced loss per share of 32.6 in 2008 this is due to the recession and economic turmoil in the market. DIVIDEND POLICY After the terrorist attack in USA in 2001, the international flights of British Airways suffered a large decline in demand. In early October 2001, in response to the financial pressure, it took an unprecedented step of suspending its interim dividend which it normally paid in December. It also announced that the full year dividend for the fiscal year 2002 was in

serious jeopardy. This decision was very traumatic for BA as it took great pride in paying a dividend every six months since its privatization in 1987.Over the years its dividend payment had increased steadily and stood at 17.8 pence per share in 2001. In line with the norms, this represented over 57% of companys net profit. But due to massive financial losses and job cuts BAs managers had no alternative but to eliminate dividend payment. This dividend cut allowed the company to retain 193 million pounds which it otherwise would have paid out each year. The company although suffered a net loss of 142million in 2002 but was able to rebound in 2003 with a profit of 72million.The price per share declined by half i.e. 150 pence/share in the fiscal year 2002 from 300 pence/share in 2001.In the year 2003 it went to a real low of 95 pence/share, but again doubled in 2004 to 237 pence/share. This implied that the company was regaining its financial strength but the official did not promise to resume dividend payment anytime soon. In 2007, the director proposed a dividend of 5 pence per share (totalling 58 million) for the year ended March 31, 2008. Although the financial statements did not reflect the dividend payable, this would be accounted for as a reduction in shareholders equity in the year ending March 31, 2009. No interim dividend was paid during 2007. In 2008-2009, the conditions had deteriorated so much, that it was decided, it would be wrong to recommend either a dividend to shareholders or a bonus to the senior executives. Both these issues were considered on the same level as their long-term aim is to provide the shareholders with a consistent and growing dividend stream and to pay meaningful executive and employee bonuses but none could be justified at the moment. DIVIDEND HISTORY
Type Final Final Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Final Payment Date 31-07-2009 31-07-2008 31-07-2007 31-01-2007 31-07-2006 31-01-2006 31-07-2005 31-01-2005 31-07-2004 31-01-2004 31-07-2003 31-01-2003 31-07-2002 31-01-2002 31-07-2001 Dividend 0p 5p 0p 0p 0p 0p 0p 0p 0p 0p 0p 0p 0p 0p 12.8 p

Interim Final Interim Final Interim

31-01-2001 31-07-2000 31-01-2000 31-07-1999 07-04-1999

5.1 p 12.8 p 5.1 p 12.8 p 5.1 p

Dividend
14 12 10 8 6 4 2 0 01/04/1999 01/12/1999 01/08/2000 01/04/2001 01/12/2001 01/04/2003 01/12/2003 01/08/2004 01/04/2005 01/12/2005 01/08/2006 01/04/2007 01/12/2007 01/08/2008 01/04/2009 Dividend

The Dividend history clearly indicates that BA had a constant payout ratio dividend policy before it stopped giving dividend in year 2002.
http://www.northcote.co.uk/company_links/by_Index.asp?SIT=1&IID=ftse%20100&SDL=NI00443

CONCLUSION The few highlighted changes that we can see in the balance sheet of 2009 are, firstly, the improvement in cash, which increased to GBP126 million, this is largely due to a convertible capital bond that was announced in August. Secondly, the gross debt has increased , as a substantial amount of BAs borrowings are in foreign currencies, and sterling was weak at the beginning of the year, thus these currency benefit can be seen in gross debt. And the last is the movement on reserves which, again, is benefitted from the currency revaluation of debt, and also fuel mark-to-markets and currency mark-to-markets. British Airways had its best ever network punctuality, with 90 per cent of flights departing on schedule according to industry standards, and a record baggage performance. It is clear that their liquidity at this stage is appropriate for the challenges that BA faces in future. According to me, they have benefited by the smart investments they made in 2007. As the financial markets started to weaken in mid '07, they put funding in place for the aircraft deliveries out to 2013, and thus they're based on funding rates that existed back in 2007 which are clearly well below the rates that would be available today. Thus with liquidity at about 50% of revenue, British Airways is at a very comfortable position, but clearly not a position that they should be complacent about. But certainly relative to many of their competitors, it's a strong position.

01/08/2002